<PAGE>
DRAFT 3/13/98
- --------------------------------------------------------------------------------
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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 YEAR ENDED DECEMBER 31, 1997
1-2360
(COMMISSION FILE NUMBER)
------------------------
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-0871985
(State of incorporation) (IRS employer identification number)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
</TABLE>
914-499-1900
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
VOTING SHARES
OUTSTANDING
AT NAME OF EACH EXCHANGE
TITLE OF EACH CLASS MARCH 9, 1998 ON WHICH REGISTERED
- ------------------------------------------------------------------------- ------------- -----------------------------
<S> <C> <C>
Capital stock, par value $.50 per share 956,659,096 New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary shares each representing one-fourth of a share of 7 1/2% New York Stock Exchange
preferred stock, par value $.01 per share
6.375% Notes due 2000 New York Stock Exchange
7.25% Notes due 2002 New York Stock Exchange
6.45% Notes due 2007 New York Stock Exchange
7.50% Debentures due 2013 New York Stock Exchange
8.375% Debentures due 2019 New York Stock Exchange
7.00% Debentures due 2025 New York Stock Exchange
6.22% Debentures due 2027 New York Stock Exchange
6.50% Debentures due 2028 New York Stock Exchange
7.00% Debentures due 2045 New York Stock Exchange
7.125% Debentures due 2096 New York Stock Exchange
</TABLE>
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 9, 1998, was $92.0 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended
December 31, 1997, into Parts I and II of Form 10-K.
Portions of IBM's definitive Proxy Statement dated March 13, 1998, into
Part III of Form 10-K.
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<PAGE>
PART I
ITEM 1. BUSINESS:
IBM develops, manufactures and sells advanced information processing
products, including computers and microelectronic technology, software,
networking systems and information technology-related services. The company
offers value through its North America, Europe/Middle East/Africa, Asia Pacific,
Latin America, Global Services and Worldwide Client Server business units, by
providing comprehensive and competitive product choices.
The value of unfilled orders is not a meaningful indicator of future
revenues due to the significant proportion of revenue from services, the volume
of products delivered from shelf inventories, and the shortening of product
delivery schedules. Therefore, the company believes that backlog information is
not material to an understanding of its business.
IBM owns or is licensed under a number of patents relating to its products.
Licenses under patents owned by IBM have been and are being granted to others
under reasonable terms and conditions. IBM believes its business as a whole is
not materially dependent upon any particular patent or license, or any
particular group of patents or licenses.
The following information is included in IBM's 1997 Annual Report to
Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of similar products or
services--Page 75.
Financial information by geographic areas--Pages 76 and 77.
Amount spent during each of the last three years on research and development
activities--Page 64.
Financial information regarding environmental activities--Page 61.
The number of persons employed by the registrant--Page 48.
The management discussion overview--Page 40.
Forward Looking and Cautionary Statements:
Certain statements contained in this Annual Report may constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("Reform Act"). The company may also make forward looking
statements in other reports filed with the Securities and Exchange Commission,
in materials delivered to stockholders and in press releases. In addition, the
company's representatives may from time to time make oral forward looking
statements. Forward looking statements provide current expectations of future
events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Words such as "anticipates,"
"believes," "expects," "estimates," "intends," "plans," "projects," and similar
expressions, may identify such forward looking statements. In accordance with
the Reform Act, set forth below are cautionary statements that accompany those
forward looking statements. Readers should carefully review these cautionary
statements as they identify certain important factors that could cause actual
results to differ materially from those in the forward looking statements and
from historical trends. The following cautionary statements are not exclusive
and are not in addition to other factors discussed elsewhere in the company's
filings with the Securities and Exchange Commission and in materials
incorporated therein by reference.
New Products and the Pace of Technological Change:
The company's results of operations depend upon the continued successful
development and marketing of new and innovative products and services. The
development of new products and services requires significant capital
investments by the company's various businesses and the success of these
products and services depends on their acceptance by customers and business
partners. Further, the company's businesses are characterized by rapid
technological changes and corresponding shifts in customer demand, resulting in
unpredictable product transitions and shortened life cycles. There can be no
assurance that the company will successfully introduce new products and
services, that these products and services will be
1
<PAGE>
accepted by customers, or that the company's businesses will recoup or realize a
return on their capital investments. In addition, from time to time the company
may experience difficulties or delays in the development, production or
marketing of new products and services.
Competition:
The company operates in businesses that are subject to intense competitive
pressures that could affect prices or demand for the company's products and
services, resulting in reduced profit margins and/or loss of market opportunity.
Unlike many of its competitors, the company has a portfolio of businesses and
must allocate resources across these businesses while competing with companies
that specialize in one or more of these product lines. As a result, the company
may not fund or invest in certain of its businesses to the same degree that its
competitors do and these companies may be devoting more of their resources to a
specific business than the businesses of the company against which they compete.
Intellectual Property Rights:
The company's proprietary intellectual property rights are important to its
success and it protects these rights in a variety of ways. These protections may
not prevent competitors from independently developing products and services
similar to or duplicative of the company's nor can there be any assurance that
these protections will adequately deter misappropriation or improper use of the
company's technology. The company also relies on intellectual property that it
licenses from others and there can be no assurances that it will be able to
obtain the licenses it needs in the future.
Quarterly Fluctuations in Revenues and Volatility of Stock Prices:
The company's revenues are affected by such factors as the introduction of
new products, the length of the sales cycles and the seasonality of technology
purchases. As a result, the company's results are difficult to predict and these
factors have historically resulted in first quarter revenues lower than revenues
for the immediately preceding fourth quarter. In addition, the company's stock
price is affected by a number of factors, including quarterly variations in
results, the competitive landscape, general economic and market conditions and
estimates and projections by the investment community. As a result, like other
technology companies, the company's stock price is subject to significant
volatility.
Dependence on Key Personnel:
Much of the future success of the company depends on the continued service
and availability of skilled personnel, including technical, marketing and staff
positions. Experienced personnel in the information technology industry are in
high demand and competition for their talents is intense. There can be no
assurance that the company will be able to successfully retain and attract the
key personnel it needs.
Currency and Customer Financing Risks:
The company derives a significant percentage of its non-U.S. revenues from
its affiliates operating in local currency environments and its results are
affected by changes in the relative values of non-U.S. currencies and the U.S.
dollar. For example, the continued strength of the U.S. dollar in 1997 had an
adverse impact on the company's non-U.S. results. Further, inherent in the
company's customer financing business are risks related to the concentration of
credit risk and the creditworthiness of the customer, interest rate and currency
fluctuations on the associated debt and liabilities and the determination of
residual values. The company employs a number of strategies to manage these
risks, including the use of derivative financial instruments. Derivatives
involve the risk of non-performance by the counterparty. In addition, there can
be no assurance that the company's efforts to manage these risks will be
successful.
Dependence on Suppliers:
Certain of the company's businesses rely on components or supplies from
either a single supplier or a limited number of suppliers and the company's
demand for certain components and supplies will change
2
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from time to time. There can be no assurance that sources for these components
or supplies will be available in a timely or cost effective manner.
Distribution Channels:
The company offers its products directly and through a variety of third
party distributors and resellers. Changes in the financial or business condition
of these distributors and resellers could subject the company to losses and
affect its ability to bring its products to market.
Acquisitions and Alliances:
The company has made and expects to continue to make acquisitions or enter
into alliances from time to time. Acquisitions and alliances present significant
challenges and risks relating to the integration of the business into the
company, and there can be no assurances that the company will manage
acquisitions and alliances successfully.
Legal, Political and Economic Changes:
The company operates in more than 150 countries worldwide and derives more
than half of its revenues from sales outside the United States. Changes in the
laws or policies of the countries in which the company operates could affect the
company's business in that country and the company's results of operations. The
company's results of operations could also be affected by economic conditions
and changes in those countries and by macroeconomic changes, including
recessions and inflation. For example, weakness in some Asian markets has had an
adverse impact on the company's business in 1997.
ITEM 2. PROPERTIES:
At December 31, 1997, IBM's manufacturing and development facilities in the
United States had aggregate floor space of 43.4 million square feet, of which
35.9 million was owned and 7.5 million was leased. Of these amounts, 3.7 million
square feet was vacant and 2.1 million square feet was being leased to non-IBM
businesses. Similar facilities in 19 other countries totaled 17.5 million square
feet, of which 13.7 million was owned and 3.8 million was leased. Of these
amounts, .6 million square feet was vacant and .5 million square feet was being
leased to non-IBM businesses.
Although improved production techniques, productivity gains, and
restructuring actions have resulted in reduced manufacturing floor space,
continuous upgrading of facilities is essential to maintain technological
leadership, improve productivity, and meet customer demand. For additional
information on expenditures for plant, rental machines and other property, refer
to "Investments" on page 45 of IBM's 1997 Annual Report to Stockholders which is
incorporated herein by reference.
3
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EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 27, 1998):
<TABLE>
<CAPTION>
OFFICER
AGE SINCE
--- -----------
<S> <C> <C>
Chairman of the Board of Directors and Chief Executive Officer
Louis V. Gerstner, Jr.(1)....................................................... 56 1993
Senior Vice Presidents
J. Thomas Bouchard, Human Resources............................................. 57 1994
Nicholas M. Donofrio, Group Executive........................................... 52 1995
J. Bruce Harreld, Strategy...................................................... 47 1995
Paul M. Horn, Research.......................................................... 51 1996
Ned C. Lautenbach, Group Executive.............................................. 54 1987
Samuel J. Palmisano, Group Executive............................................ 46 1997
Lawrence R. Ricciardi, General Counsel and Chief Financial Officer.............. 57 1995
Robert M. Stephenson, Group Executive........................................... 59 1995
David M. Thomas, Group Executive................................................ 48 1998
John M. Thompson, Group Executive............................................... 55 1989
Dennie M. Welsh,................................................................ 55 1997
Vice Presidents
John E. Hickey, Secretary....................................................... 54 1994
John R. Joyce, Controller....................................................... 44 1996
Jeffrey D. Serkes, Treasurer.................................................... 39 1994
</TABLE>
- ------------------------
(1) Member of the Board of Directors.
All officers are elected by the Board of Directors and serve until the next
election of officers in conjunction with the annual meeting of the stockholders
as provided in the By-laws. Each officer named above, with the exception of J.
Thomas Bouchard, Louis V. Gerstner, Jr., J. Bruce Harreld, Lawrence R. Ricciardi
and Jeffery D. Serkes, has been an executive of IBM or its subsidiaries during
the past five years.
Mr. Bouchard was senior vice president, human resources, of U.S. West, Inc.,
a telecommunications company, from 1989 until joining IBM in 1994. Prior to
1989, he spent 15 years with United Technologies Corporation in a variety of
executive positions, including senior vice president of human resources.
Mr. Gerstner was the chairman of the board and chief executive officer of
RJR Nabisco Holdings Corporation, an international consumer products company
from 1989 until joining IBM in 1993. From 1985 to 1989, he was president of
American Express Company, and from 1983 to 1989, he was chairman and chief
executive officer of American Express Travel Related Services Company, Inc.
Mr. Harreld was president of Boston Chicken, Inc., a company which operates
and franchises foodservice stores, from 1993 until joining IBM in 1995. Prior to
that he was senior vice president, marketing and information services, at Kraft
General Foods, Inc. where he also served as the company's chief information
officer from 1989 to 1992.
Mr. Ricciardi was president of RJR Nabisco, Inc., an international consumer
products company, from 1993 until joining IBM in 1995. From 1989 to 1993, he
also served as executive vice president and general counsel at RJR Nabisco, Inc.
Prior to 1989, he was executive vice president and general counsel of American
Express Travel Related Services Company, Inc.
Mr. Serkes was vice president and deputy treasurer at RJR Nabisco, Inc., an
international consumer products company, from 1993 until joining IBM in 1994.
From 1987 to 1993, he also served as vice president and assistant treasurer,
corporate finance; director, capital markets; and manager, foreign exchange at
RJR Nabisco, Inc.
4
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ITEM 3. LEGAL PROCEEDINGS:
Refer to note M "Contingencies" on page 61 of IBM's 1997 Annual Report to
Stockholders which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:
Refer to pages 78 and 79 of IBM's 1997 Annual Report to Stockholders which
are incorporated herein by reference solely as they relate to this item.
IBM common stock is listed on the New York Stock Exchange, Chicago Stock
Exchange and Pacific Stock Exchange. There were 622,092 common stockholders of
record at March 9, 1998.
Effective November 1, 1997, the company created an employee benefits trust
to which the company contributed 10 million treasury shares of its common stock
in a private placement under Section 4(2) of the Securities Act of 1933, as
amended. Refer to Note V "Employee Benefits Trust" on page 71 of IBM's Annual
Report to Stockholders which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA:
Refer to page 78 of IBM's 1997 Annual Report to Stockholders which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Refer to pages 40 through 49 of IBM's 1997 Annual Report to Stockholders
which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Refer to the section titled "Market Risk" on page 46 of IBM's 1997 Annual
Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Refer to pages 38 and 39, and 50 through 77 of IBM's 1997 Annual Report to
Stockholders which are incorporated herein by reference. Also refer to the
Financial Statement Schedule on page S-1 of this Form.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Refer to pages 5 through 7 of IBM's definitive Proxy Statement dated March
13, 1998, which are incorporated herein by reference. Also refer to Item 2
entitled "Executive Officers of the Registrant" in Part I of this Form.
5
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ITEM 11. EXECUTIVE COMPENSATION:
Refer to pages 14 through 24 of IBM's definitive Proxy Statement dated March
13, 1998, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners:
Not applicable.
(b) Security Ownership of Management:
Refer to the section entitled "Common Stock and Total Stock-Based
Holdings of Management" appearing on pages 12 and 13 of IBM's definitive
Proxy Statement dated March 13, 1998, which are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Refer to the section entitled "Other Relationships" appearing on page 10 of
IBM's definitive Proxy Statement dated March 13, 1998, which is incorporated
herein by reference.
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. Financial statements from IBM's 1997 Annual Report to Stockholders
which are incorporated herein by reference:
Report of Independent Accountants (page 39).
Consolidated Statement of Earnings for the years ended December 31,
1997, 1996 and 1995 (page 50).
Consolidated Statement of Financial Position at December 31, 1997 and
1996 (page 51).
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995 (page 52).
Consolidated Statement of Stockholders' Equity at December 31, 1997,
1996 and 1995 (page 53).
Notes to Consolidated Financial Statements (pages 54 through 77).
2. Financial statement schedules required to be filed by Item 8 of this
Form:
<TABLE>
<CAPTION>
SCHEDULE
PAGE NUMBER
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<S> <C> <C>
10 Report of Independent Accountants on Financial Statement Schedules.
S-1 II Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted as the required matter is not
present, the amounts are not significant or the information is shown
in the financial statements or the notes thereto.
6
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3. Exhibits:
Included in this Form 10-K:
I-- Computation of Ratio of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
II-- Parents and Subsidiaries.
III-- Consent of Independent Accountants.
IV-- Additional Exhibits
(a) Supplemental Consolidated Statement of Earnings--1997 and
1996.
V-- The By-laws of IBM as amended through January 27, 1998.
VI-- Second Amendment to Employment Agreement for L.V. Gerstner,
Jr., dated as of November 17, 1997.
VII-- IBM's 1997 Annual Report to Stockholders, certain sections of
which have been incorporated herein by reference.
VIII-- Powers of Attorney.
IX-- Financial Data Schedule.
Not included in this Form 10-K:
-- The Certificate of Incorporation of IBM is Exhibit VI to Form
10-K for the year ended December 31, 1993, and is hereby
incorporated by reference.
-- The IBM 1997 Long-Term Performance plan, a compensatory plan,
is contained in Registration Statement No. 333-31305 on Form
S-8, filed on July 15, 1997, and is hereby incorporated by
reference.
-- The 1994 Long-Term Performance Plan, a management
compensatory plan, is contained in Registration Statement No.
33-53777 on Form S-8, filed on May 24, 1994, and is hereby
incorporated by reference.
-- Board of Directors compensatory plans, as described under
"Directors' Compensation" on pages 10 and 11 of IBM's
definitive Proxy Statement dated March 13, 1998, which is
incorporated herein by reference.
-- IBM Board of Directors Deferred Compensation and Equity Award
Plan is Exhibit X to Form 10-K for the year ended December 31,
1996, and is hereby incorporated by reference.
-- The employment agreement for L.V. Gerstner, Jr. is Exhibit 19
to Form 10-Q dated March 31, 1993, and is hereby incorporated
by reference.
-- Amendment to Employment Agreement for L.V. Gerstner, Jr.
dated as of January 1, 1996 is Exhibit XI to Form 10-K for the
year ended December 31, 1996, and is hereby incorporated by
reference.
-- The instruments defining the rights of the holders of the
7.25% Notes due 2002 are Exhibits 4(a) through 4(l) to
Registration Statement No. 33-33590 on Form S-3, filed on
February 22, 1990, and are hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
6.375% Notes due 2000 and the 7.50% Debentures due 2013 are
Exhibits 4(a) through 4(l) to Registration Statement No.
33-49475(1) on Form S-3, filed May 24, 1993, and are hereby
incorporated by reference.
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-- The instruments defining the rights of holders of the 8.375%
Debentures due 2019 are Exhibits 4(a)(b)(c) and (d) to
Registration Statement 33-31732 on Form S-3, filed on October
24, 1989, and are hereby incorporated by reference.
-- The instruments defining the rights of holders of the 7.00%
Debentures due 2025 and the 7.00% Debentures due 2045 are
Exhibit 2 and 3 to Form 8-K, filed on October 30, 1995, and
are hereby incorporated by reference.
-- The instrument defining the rights of holders of the 7.125%
Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on
December 6, 1996, and is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
6.45% Notes due 2007 and the 6.22% Debentures due 2027 are
Exhibits 2 and 3 to Form 8-K, filed on August 1, 1997, and is
hereby incorporated by reference.
-- The instrument defining the rights of the holders of the
6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on
January 8, 1998, and is hereby incorporated by reference.
-- The IBM Supplemental Executive Retirement Plan is Exhibit IX
to Form 10-K for the year ended December 31, 1994, and is
hereby incorporated by reference.
-- The IBM Extended Tax Deferred Savings Plan is Exhibit X to
Form 10-K for the year ended December 31, 1994, and is hereby
incorporated by reference.
-- IBM's definitive Proxy Statement dated March 13, 1998,
certain sections of which have been incorporated herein by
reference.
(b) Reports on Form 8-K:
A Form 8-K dated October 20, 1997, was filed with respect to the
company's financial results for the periods ended September 30, 1997, and
included unaudited consolidated financial state-ments for the period
ended September 30, 1997.
A Form 8-K dated December 15, 1997, was filed to incorporate by
reference into Registration Statement No. 333-40669 on Form S-3,
effective December 12, 1997, the Agency Agreement dated December 12,
1997, among International Business Machines Corporation, Credit Suisse
First Boston Corporation, Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and
Salomon Brothers Inc. No financial statements were filed with the Form
8-K.
8
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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.
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant)
By: /s/ LOUIS V. GERSTNER, JR.
------------------------------------------
(Louis V. Gerstner, Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER)
Date: March 27, 1998
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 and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ LAWRENCE R. RICCIARDI Senior Vice President,
- ------------------------------ General Counsel and Chief March 27, 1998
(Lawrence R. Ricciardi) Financial Officer
/s/ JOHN R. JOYCE Vice President and
- ------------------------------ Controller March 27, 1998
(John R. Joyce)
<TABLE>
<S> <C> <C>
CATHLEEN BLACK Director
HAROLD BROWN Director
JUERGEN DORMANN Director
NANNERL O. KEOHANE Director
CHARLES F. KNIGHT Director
MINORU MAKIHARA Director
LUCIO A. NOTO Director By: /s/ JOHN E. HICKEY
JOHN B. SLAUGHTER Director -----------------------------------------------
ALEX TROTMAN Director (JOHN E. HICKEY)
LODEWIJK C. van WACHEM Director ATTORNEY-IN-FACT
CHARLES M. VEST Director March 27, 1998
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of
International Business Machines Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 19, 1998, appearing on page 39 of the 1997 Annual Report to
Stockholders of International Business Machines Corporation, (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, N.Y. 10036
January 19, 1998
10
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SCHEDULE II
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31:
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING NET END
DESCRIPTION OF PERIOD CHANGE(A) OF PERIOD
- ------------------------------------------------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
1997
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 787 $ (12) $ 775
----- --- -----
----- --- -----
--Non-current............................................................. $ 164 $ 0 $ 164
----- --- -----
----- --- -----
1996
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 790 $ (3) $ 787
----- --- -----
----- --- -----
--Non-current............................................................. $ 174 $ (10) $ 164
----- --- -----
----- --- -----
1995
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 719 $ 71 $ 790
----- --- -----
----- --- -----
--Non-current............................................................. $ 166 $ 8 $ 174
----- --- -----
----- --- -----
</TABLE>
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(A) Includes additions charged to costs and expenses less accounts written off
and translation adjustments.
Note--
The receivables upon which the above allowances are based are highly
diversified by geography, industry and individual customer. The allowances for
receivable losses for the year ended 1997 approximate less than three and
one-quarter percent of the company's current receivables and less than one and
one-half percent the company's non-current receivables. The allowances for
receivable losses for the year ended 1996 approximate less than three and
one-half percent of the company's current receivables and less than one and
one-half percent of the company's non-current receivables. The allowances for
receivable losses for the year ended 1995 approximate less than three and
one-half percent of the company's current receivables and one and one-half
percent of the company's non-current receivables.
S-1
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EXHIBIT INDEX
<TABLE>
<CAPTION>
REFERENCE
NUMBER PER
ITEM 601 OF EXHIBIT
REGULATION NUMBER IN
S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K
- ------------- ----------------------------------------------------------------------------------- ----------------
<S> <C> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not applicable
(3) Certificate of Incorporation and By-laws.
The Certificate of Incorporation of IBM is Exhibit VI to Form 10-K for the year
ended December 31, 1993, and is hereby incorporated by reference.
The By-laws of IBM as amended through January 27, 1998. V
(4) Instruments defining the rights of security holders.
The instruments defining the rights of the holders of the 7.25% Notes due 2002 are
Exhibits 4(a) through 4(l) to Registration Statement No. 33-33590 on Form S-3,
filed February 22, 1990, and are hereby incorporated by reference.
The instruments defining the rights of the holders of the 6.375% Notes due 2000 and
the 7.50% Debentures due 2013 are Exhibits 4(a) through 4(l) to Registration
Statement No. 33-49475(1) on Form S-3, filed on May 24, 1993, and are hereby
incorporated by reference.
The instruments defining the rights of the holders of the 8.375% Debentures due
2019 are Exhibits 4(a)(b)(c) and (d) to Registration Statement No. 33-31732 on
Form S-3, filed on October 24, 1989, and are hereby incorporated by reference.
The instruments defining the rights of the holders of the 7.00% Debentures due 2025
and the 7.00% Debentures due 2045 are Exhibits 2 and 3 to Form 8-K, filed on
October 30, 1995, and are hereby incorporated by reference.
The instrument defining the rights of the holders of the 7.125% Debentures due 2096
is Exhibit 2 to Form 8-K/A, filed on
December 6, 1996, and is hereby incorporated by reference.
The instruments defining the rights of the holders of the 6.45% Notes due 2007 and
the 6.22% Debentures due 2027 are Exhibits 2 and 3 to Form 8-K, filed on August
1, 1997, and is hereby incorporated by reference.
The instrument defining the rights of the holders of the 6.50% Debentures due 2028
is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by
reference.
(9) Voting trust agreement. Not applicable
(10) Material contracts.
The IBM 1997 Long-Term Performance Plan, a compensatory plan, is contained in
Registration Statement No. 333-31305 on Form S-8, filed on July 15, 1997, and is
hereby incorporated by reference.
A copy of the IBM 1994 Long-Term Performance Plan is contained in Registration
Statement No. 33-53777 on Form S-8, filed on May 24, 1994, and is hereby
incorporated by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REFERENCE
NUMBER PER
ITEM 601 OF EXHIBIT
REGULATION NUMBER IN
S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K
- ------------- ----------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Board of Directors compensatory arrangements as described under "Directors'
Compensation" on pages 10 and 11 of IBM's definitive Proxy Statement dated March
13, 1998, and is hereby incorporated by reference.
The IBM Supplemental Executive Retirement Plan is Exhibit IX to Form 10-K for the
year ended December 31, 1994, and is hereby incorporated by reference.
The IBM Extended Tax Deferred Savings Plan is Exhibit X to Form 10-K for the year
ended December 31, 1994, and is hereby incorporated by reference.
The IBM Board of Directors Deferred Compensation and Equity Award Plan is Exhibit X
to Form 10-K for the year ended December 31, 1996, and is hereby incorporated by
reference.
The IBM Non-Employee Directors Stock Option Plan is Appendix B to IBM's definitive
Proxy Statement dated March 14, 1995, and is hereby incorporated by reference.
The employment agreement for L.V. Gerstner, Jr. is Exhibit 19 to Form 10-Q dated
March 31, 1993, and is hereby incorporated by reference.
Amendment to Employment Agreement for L.V. Gerstner, Jr. dated as of January 1,
1996 is Exhibit XI to Form 10-K for the year ended December 31, 1996, and is
hereby incorporated by reference.
Second Amendment to Employment Agreement for L.V. Gerstner, Jr., dated as of VI
November 17, 1997.
(11) Statement re computation of per share earnings.
The statement re computation of per share earnings is Note R "Net Earnings Per
Share of Common Stock" on page 67 of IBM's 1997 Annual Report to Stockholders,
which is incorporated herein by reference.
(12) Statement re computation of ratios. I
(13) Annual report to security holders. VII
(18) Letter re change in accounting principles. Not applicable
(19) Previously unfiled documents. Not applicable
(21) Subsidiaries of the registrant. II
(22) Published report regarding matters submitted to vote of security holders. Not applicable
(23) Consents of experts and counsel. III
(24) Powers of attorney. VIII
(27) Financial Data Schedule. IX
(28) Information from reports furnished to state insurance regulatory authorities. Not applicable
(99) Additional exhibits. IV
</TABLE>
<PAGE>
EXHIBIT 3.(II)
BY-LAWS
of
INTERNATIONAL BUSINESS MACHINES CORPORATION
Adopted April 29, 1958
As Amended Through
January 27, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE I PAGE
<S> <C> <C>
Definitions............................ 1
</TABLE>
<TABLE>
<CAPTION>
ARTICLE II
MEETINGS OF STOCKHOLDERS
<S> <C> <C>
SEC. 1. Place of Meetings.......... 1
SEC. 2. Annual Meetings............ 1
SEC. 3. Special Meetings........... 2
SEC. 4. Notice of Meetings......... 2
SEC. 5. Quorum..................... 2
SEC. 6. Organization............... 3
SEC. 7. Items of Business.......... 3
SEC. 8. Voting..................... 3
SEC. 9. List of Stockholders....... 4
SEC. 10. Inspectors of Election..... 4
</TABLE>
<TABLE>
<CAPTION>
ARTICLE III
BOARD OF DIRECTORS
<S> <C> <C>
SEC. 1. General Powers............. 5
SEC. 2. Number; Qualifications;
Election; Term of
Office..................... 5
SEC. 3. Place of Meetings.......... 5
SEC. 4. First Meeting.............. 5
SEC. 5. Regular Meetings........... 5
SEC. 6. Special Meetings........... 5
SEC. 7. Notice of Meetings......... 5
SEC. 8. Quorum and Manner of
Acting..................... 6
SEC. 9. Organization............... 6
SEC. 10. Resignations............... 6
SEC. 11. Vacancies.................. 6
SEC. 12. Retirement of
Directors.................. 6
</TABLE>
- i -
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
<S> <C> <C>
SEC. 1. Executive Committee........ 7
SEC. 2. Powers of the Executive
Committee.................. 7
SEC. 3. Meetings of the Executive
Committee.................. 7
SEC. 4. Quorum and Manner of
Acting of the Executive
Committee.................. 8
SEC. 5. Other Committees........... 8
SEC. 6. Changes in Committees;
Resignations; Removals;
Vacancies.................. 9
</TABLE>
<TABLE>
<CAPTION>
ARTICLE V
OFFICERS
<S> <C> <C>
SEC. 1. Number and Qualifications.. 9
SEC. 2. Resignations............... 9
SEC. 3. Removal.................... 10
SEC. 4. Vacancies.................. 10
SEC. 5. Chairman of the Board...... 10
SEC. 6. Vice Chairman of the
Board...................... 10
SEC. 7. President.................. 10
SEC. 8. Designated Officers........ 11
SEC. 9. Executive Vice
Presidents, Senior Vice
Presidents and Vice
Presidents................. 11
SEC. 10. Treasurer.................. 11
SEC. 11. Secretary.................. 12
SEC. 12. Controller................. 13
SEC. 13. Compensation............... 13
</TABLE>
<TABLE>
<CAPTION>
ARTICLE VI
CONTRACTS, CHECKS, DRAFTS,
BANK ACCOUNTS, ETC.
<S> <C> <C>
SEC. 1. Execution of Contracts..... 13
SEC. 2. Loans...................... 13
SEC. 3. Checks, Drafts, etc........ 14
SEC. 4. Deposits................... 14
SEC. 5. General and Special Bank
Accounts................... 14
SEC. 6. Indemnification............ 14
</TABLE>
- ii -
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VII
SHARES
<S> <C> <C>
SEC. 1. Stock Certificates......... 15
SEC. 2. Books of Account and
Record of
Stockholders............... 15
SEC. 3. Transfers of Stock......... 15
SEC. 4. Regulations................ 16
SEC. 5. Fixing of Record Date...... 16
SEC. 6. Lost, Destroyed or Mutilated
Certificates............... 16
SEC. 7. Inspection of Records...... 17
SEC. 8. Auditors................... 17
</TABLE>
<TABLE>
<CAPTION>
ARTICLE VIII
OFFICES
<S> <C> <C>
SEC. 1. Principal Office........... 17
SEC. 2. Other Offices.............. 17
</TABLE>
<TABLE>
<CAPTION>
ARTICLE IX
<S> <C>
Waiver of Notice....................... 17
</TABLE>
<TABLE>
<CAPTION>
ARTICLE X
<S> <C>
Fiscal Year............................ 18
</TABLE>
<TABLE>
<CAPTION>
ARTICLE XI
<S> <C>
Seal................................... 18
</TABLE>
<TABLE>
<CAPTION>
ARTICLE XII
<S> <C>
Amendments............................. 18
</TABLE>
- iii -
<PAGE>
BY-LAWS
OF
INTERNATIONAL BUSINESS
MACHINES CORPORATION
-------
ARTICLE I
DEFINITIONS
In these By-laws, and for all purposes hereof, unless there be something
in the subject or context inconsistent therewith:
(a) 'Corporation' shall mean International Business Machines Corporation.
(b) 'Certificate of Incorporation' shall mean the restated Certificate of
Incorporation as filed on May 27, 1992, together with any and all amendments and
subsequent restatements thereto.
(c) 'Board' shall mean the Board of Directors of the Corporation.
(d) 'stockholders' shall mean the stockholders of the Corporation.
(e) 'Chairman of the Board', 'Vice Chairman of the Board', 'Chairman of
the Executive Committee', 'Chief Executive Officer,' 'Chief Financial Officer',
'Chief Accounting Officer', 'President', 'Executive Vice President', 'Senior
Vice President', 'Vice President', 'Treasurer', 'Secretary', or 'Controller', as
the case may be, shall mean the person at any given time occupying the
particular office with the Corporation.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders of the
Corporation shall be held at such place either within or outside the State of
New York as may from time to time be fixed by the Board or specified or fixed in
the notice of any such meeting.
SECTION 2. Annual Meetings. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such other
<PAGE>
business as may properly come before the meeting shall be held on the last
Tuesday of April of each year, if not a legal holiday, or, if such day shall be
a legal holiday, then on the next succeeding day not a legal holiday. If any
annual meeting shall not be held on the day designated herein, or if the
directors to be elected at such annual meeting shall not have been elected
thereat or at any adjournment thereof, the Board shall forthwith call a special
meeting of the stockholders for the election of directors to be held as soon
thereafter as convenient and give notice thereof as provided in these By-laws in
respect of the notice of an annual meeting of the stockholders. At such special
meeting the stockholders may elect the directors and transact other business
with the same force and effect as at an annual meeting of the stockholders duly
called and held.
SECTION 3. Special Meetings. Special meetings of the stockholders, unless
otherwise provided by law, may be called at any time by the Chairman of the
Board or by the Board.
SECTION 4. Notice of Meetings. Notice of each meeting of the stockholders,
annual or special, shall be given in the name of the Chairman of the Board, a
Vice Chairman of the Board or the President or a Vice President or the
Secretary. Such notice shall state the purpose or purposes for which the meeting
is called and the date and hour when and the place where it is to be held. A
copy thereof shall be duly delivered or transmitted to all stockholders of
record entitled to vote at such meeting, and all stockholders of record who, by
reason of any action proposed to be taken at such meeting, would be entitled to
have their stock appraised if such action were taken, not less than ten or more
than fifty days before the day on which the meeting is called to be held. If
mailed, such copy shall be directed to each stockholder at the address listed on
the record of stockholders of the Corporation, or if the stockholder shall have
filed with the Secretary a written request that notices be mailed to some other
address, it shall be mailed to the address designated in such request.
Nevertheless, notice of any meeting of the stockholders shall not be required to
be given to any stockholder who shall waive notice thereof as hereinafter
provided in Article IX of these By-laws. Except when expressly required by law,
notice of any adjourned meeting of the stockholders need not be given nor shall
publication of notice of any annual or special meeting thereof be required.
SECTION 5. Quorum. Except as otherwise provided by law, at all meetings of
the stockholders, the presence of holders of record of a majority of the
outstanding shares of stock of the Corporation having voting power, in person or
represented by proxy and entitled to vote thereat, shall be necessary to
constitute a quorum for the transaction of business. In the absence of a quorum
at any such meeting or any adjournment or adjournments thereof, a majority in
voting interest of those present in person or represented by proxy and entitled
to vote thereat, or, in the absence of all the stockholders, any officer
entitled to preside at, or to act as secretary of, such meeting, may adjourn
such meeting from time to time without further notice, other than by
announcement at the meeting at which such adjournment shall be taken, until a
quorum shall be present thereat. At any adjourned meeting at which a quorum
shall be present any business may be transacted which might have been transacted
at the meeting as originally called.
<PAGE>
SECTION 6. Organization. At each meeting of the stockholders, the Chairman
of the Board, or in the absence of the Chairman of the Board, the President, or
in the absence of the Chairman of the Board and the President, a Vice Chairman
of the Board, or if the Chairman of the Board, the President, and all Vice
Chairmen of the Board shall be absent therefrom, an Executive Vice President, or
if the Chairman of the Board, the President, all Vice Chairmen of the Board and
all Executive Vice Presidents shall be absent therefrom, a Senior Vice President
shall act as chairman. The Secretary, or, if the Secretary shall be absent from
such meeting or unable to act, the person whom the Chairman of such meeting
shall appoint secretary of such meeting shall act as secretary of such meeting
and keep the minutes thereof.
SECTION 7. Items of Business. The items of business at all meetings of the
stockholders shall be, insofar as applicable, as follows:
-- Call to order.
-- Proof of notice of meeting or of waiver thereof.
-- Appointment of inspectors of election, if necessary.
-- A quorum being present.
-- Reports.
-- Election of directors.
-- Other business specified in the notice of the meeting.
-- Voting.
-- Adjournment.
Any items of business not referred to in the foregoing may be taken up at
the meeting as the chairman of the meeting shall determine. The chairman of the
meeting shall determine all matters relating to the efficient conduct of the
meeting, including but not limited to the maintenance of order and decorum.
SECTION 8. Voting. Except as otherwise provided by law, each holder of
record of shares of stock of the Corporation having voting power shall be
entitled at each meeting of the stockholders to one vote for every share of such
stock standing in the stockholder's name on the record of stockholders of the
Corporation:
(a) on the date fixed pursuant to the provisions of Section 5 of Article
VII of these By-laws as the record date for the determination of the
stockholders who shall be entitled to vote at such meeting, or
<PAGE>
(b) if such record date shall not have been so fixed, then at the close of
business on the day next preceding the day on which notice of such meeting shall
have been given, or
(c) if such record date shall not have been so fixed and if no notice of
such meeting shall have been given, then at the time of the call to order of
such meeting.
Any vote on stock of the Corporation at any meeting of the stockholders
may be given by the stockholder of record entitled thereto in person or by proxy
appointed by such stockholder or by the stockholder's attorney thereunto duly
authorized and delivered or transmitted to the secretary of such meeting at or
prior to the time designated in the order of business for turning in proxies. At
all meetings of the stockholders at which a quorum shall be present, all matters
(except where otherwise provided by law, the Certificate of Incorporation or
these By-laws) shall be decided by the vote of a majority in voting interest of
the stockholders present in person or represented by proxy and entitled to vote
thereat. Unless required by law, or determined by the chairman of the meeting to
be advisable, the vote on any question need not be by ballot. On a vote by
ballot, each ballot shall be signed by the stockholder voting, or by the
stockholder's proxy as such, if there be such proxy.
SECTION 9. List of Stockholders. A list, certified by the Secretary, of
the stockholders of the Corporation entitled to vote shall be produced at any
meeting of the stockholders upon the request of any stockholder of the
Corporation pursuant to the provisions of applicable law, the Certificate of
Incorporation or these By-laws.
SECTION 10. Inspectors of Election. Prior to the holding of each annual or
special meeting of the stockholders, two inspectors of election to serve thereat
shall be appointed by the Board, or, if the Board shall not have made such
appointment, by the Chairman of the Board. If there shall be a failure to
appoint inspectors, or if, at any such meeting, any inspector so appointed shall
be absent or shall fail to act or the office shall become vacant, the chairman
of the meeting may, and at the request of a stockholder present in person and
entitled to vote at such meeting shall, appoint such inspector or inspectors of
election, as the case may be, to act thereat. The inspectors of election so
appointed to act at any meeting of the stockholders, before entering upon the
discharge of their duties, shall be sworn faithfully to execute the duties of
inspectors at such meeting, with strict impartiality and according to the best
of their ability, and the oath so taken shall be subscribed by them. Such
inspectors of election shall take charge of the polls, and, after the voting on
any question, shall make a certificate of the results of the vote taken. No
director or candidate for the office of director shall act as an inspector of an
election of directors. Inspectors need not be stockholders.
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by the Board. The Board may exercise all such authority and
powers of the Corporation and do all such lawful acts and things as are not by
law, the Certificate of Incorporation or these By-laws, directed or required to
be exercised or done by the stockholders.
SECTION 2. Number; Qualifications; Election; Term of Office. The number of
directors of the Corporation shall be twelve, but the number thereof may be
increased to not more than twenty-five, or decreased to not less than nine, by
amendment of these By-laws. The directors shall be elected at the annual meeting
of the stockholders. At each meeting of the stockholders for the election of
directors at which a quorum is present, the persons receiving a plurality of the
votes at such election shall be elected. Each director shall hold office until
the annual meeting of the stockholders which shall be held next after the
election of such director and until a successor shall have been duly elected and
qualified, or until death, or until the director shall have resigned as
hereinafter provided in Section 10 of this Article III.
SECTION 3. Place of Meetings. Meetings of the Board shall be held at such
place either within or outside State of New York as may from time to time be
fixed by the Board or specified or fixed in the notice of any such meeting.
SECTION 4. First Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other business, on
the same day the annual meeting of stockholders is held. Notice of such meeting
need not be given. Such meeting may be held at any other time or place which
shall be specified in a notice thereof given as hereinafter provided in Section
7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board shall be held
at times and dates fixed by the Board or at such other times and dates as the
Chairman of the Board shall determine and as shall be specified in the notice of
such meetings. Notice of regular meetings of the Board need not be given except
as otherwise required by law or these By-laws.
SECTION 6. Special Meetings. Special meetings of the Board may be called
by the Chairman of the Board.
SECTION 7. Notice of Meetings. Notice of each special meeting of the Board
(and of each regular meeting for which notice shall be required) shall be given
by the Secretary as hereinafter provided in this Section 7, in which notice
shall be stated the time, place and, if required by law or these By-laws, the
purposes of such meeting. Notice of each such meeting shall be mailed, postage
prepaid, to each director, by first-class mail, at least four days before the
day on which such meeting is to be held, or shall be sent by facsimile
transmission or comparable medium, or be delivered personally or by telephone,
at least twenty-four hours before the
<PAGE>
time at which such meeting is to be held. Notice of any such meeting need not be
given to any director who shall waive notice thereof as provided in Article IX
of these By-laws. Any meeting of the Board shall be a legal meeting without
notice thereof having been given, if all the directors of the Corporation then
holding office shall be present thereat.
SECTION 8. Quorum and Manner of Acting. A majority of the Board shall be
present in person at any meeting of the Board in order to constitute a quorum
for the transaction of business at such meeting. Participation in a meeting by
means of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other shall constitute
presence in person at a meeting. Except as otherwise expressly required by law
or the Certificate of Incorporation and except also as specified in Section 1,
Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article
XII of these By-laws, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present thereat may adjourn such meeting from time to time until a quorum shall
be present thereat. Notice of any adjourned meeting need not be given. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called. The
directors shall act only as a Board and the individual directors shall have no
power as such.
SECTION 9. Organization. At each meeting of the Board, the Chairman of the
Board, or in the case of the Chairman's absence therefrom, the President, or in
the case of the President's absence therefrom, a Vice Chairman, or in the case
of the absence of all such persons, another director chosen by a majority of
directors present, shall act as chairman of the meeting and preside thereat. The
Secretary, or if the Secretary shall be absent from such meeting, any person
appointed by the chairman, shall act as secretary of the meeting and keep the
minutes thereof.
SECTION 10. Resignations. Any director of the Corporation may resign at
any time by giving written notice of resignation to the Board or the Chairman of
the Board or the Secretary. Any such resignation shall take effect at the time
specified therein, or if the time when it shall become effective shall not be
specified therein, then it shall take effect immediately upon its receipt; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 11. Vacancies. Any vacancy in the Board, whether arising from
death, resignation, an increase in the number of directors or any other cause,
may be filled by the Board.
SECTION 12. Retirement of Directors. The Board may prescribe a retirement
policy for directors on or after reaching a certain age, provided, however, that
such
<PAGE>
retirement shall not cut short the annual term for which any director shall have
been elected by the stockholders.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Executive Committee. The Board, by resolution adopted by a
majority of the Board, may designate not less than four of the directors then in
office to constitute an Executive Committee, each member of which unless
otherwise determined by resolution adopted by a majority of the whole Board,
shall continue to be a member of such Committee until the annual meeting of the
stockholders which shall be held next after designation as a member of such
Committee or until the earlier termination as a director. The Chief Executive
Officer shall always be designated as a member of the Executive Committee. The
Board may by resolution appoint one member as the Chairman of the Executive
Committee who shall preside at all meetings of such Committee. In the absence of
said Chairman, the Chief Executive Officer shall preside at all such meetings.
In the absence of both the Chairman of the Executive Committee and the Chief
Executive Officer, the Chairman of the Board shall preside at all such meetings.
In the absence of the Chairman of the Executive Committee and the Chief
Executive Officer and the Chairman of the Board, the President shall preside at
all such meetings. In the absence of all such persons, a majority of the members
of the Executive Committee present shall choose a chairman to preside at such
meetings. The Secretary, or if the Secretary shall be absent from such meeting,
any person appointed by the chairman, shall act as secretary of the meeting and
keep the minutes thereof.
SECTION 2. Powers of the Executive Committee. To the extent permitted by
law, the Executive Committee may exercise all the powers of the Board in the
management of specified matters where such authority is delegated to it by the
Board, and also, to the extent permitted by law, the Executive Committee shall
have, and may exercise, all the powers of the Board in the management of the
business and affairs of the Corporation (including the power to authorize the
seal of the Corporation to be affixed to all papers which may require it; but
excluding the power to appoint a member of the Executive Committee) in such
manner as the Executive Committee shall deem to be in the best interests of the
Corporation and not inconsistent with any prior specific action of the Board. An
act of the Executive Committee taken within the scope of its authority shall be
an act of the Board. The Executive Committee shall render in the form of minutes
a report of its several acts at each regular meeting of the Board and at any
other time when so directed by the Board.
SECTION 3. Meetings of the Executive Committee. Regular meetings of the
Executive Committee shall be held at such times, on such dates and at such
places as shall be fixed by resolution adopted by a majority of the Executive
Committee,
<PAGE>
of which regular meetings notice need not be given, or as shall be fixed by the
Chairman of the Executive Committee or in the absence of the Chairman of the
Executive Committee the Chief Executive Officer and specified in the notice of
such meeting. Special meetings of the Executive Committee may be called by the
Chairman of the Executive Committee or by the Chief Executive Officer. Notice of
each such special meeting of the Executive Committee (and of each regular
meeting for which notice shall be required), stating the time and place thereof
shall be mailed, postage prepaid, to each member of the Executive Committee, by
first-class mail, at least four days before the day on which such meeting is to
be held, or shall be sent by facsimile transmission or comparable medium, or be
delivered personally or by telephone, at least twenty-four hours before the time
at which such meeting is to be held; but notice need not be given to a member of
the Executive Committee who shall waive notice thereof as provided in Article IX
of these By-laws, and any meeting of the Executive Committee shall be a legal
meeting without any notice thereof having been given, if all the members of such
Committee shall be present thereat.
SECTION 4. Quorum and Manner of Acting of the Executive Committee. Four
members of the Executive Committee shall constitute a quorum for the transaction
of business, and the act of a majority of the members of the Executive Committee
present at a meeting at which a quorum shall be present shall be the act of the
Executive Committee. Participating in a meeting by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other shall constitute presence at a meeting of the
Executive Committee. The members of the Executive Committee shall act only as a
committee and individual members shall have no power as such.
SECTION 5. Other Committees. The Board may, by resolution adopted by a
majority of the Board, designate members of the Board to constitute other
committees, which shall have, and may exercise, such powers as the Board may by
resolution delegate to them, and shall in each case consist of such number of
directors as the Board may determine; provided, however, that each such
committee shall have at least three directors as members thereof. Such a
committee may either be constituted for a specified term or may be constituted
as a standing committee which does not require annual or periodic
reconstitution. A majority of all the members of any such committee may
determine its action and its quorum requirements and may fix the time and place
of its meetings, unless the Board shall otherwise provide. Participating in a
meeting by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other shall
constitute presence at a meeting of such other committees.
In addition to the foregoing, the Board may, by resolution adopted by a
majority of the Board, create a committee of indeterminate membership and
duration and not subject to the limitations as to the membership, quorum and
manner of meeting and acting prescribed in these By-laws, which committee, in
the event of a major disaster or catastrophe or national emergency which renders
the Board
<PAGE>
incapable of action by reason of the death, physical incapacity or inability to
meet of some or all of its members, shall have, and may exercise all the powers
of the Board in the management of the business and affairs of the Corporation
(including, without limitation, the power to authorize the seal of the
Corporation to be affixed to all papers which may require it and the power to
fill vacancies in the Board). An act of such committee taken within the scope of
its authority shall be an act of the Board.
SECTION 6. Changes in Committees; Resignations; Removals; Vacancies. The
Board shall have power, by resolution adopted by a majority of the Board, at any
time to change or remove the members of, to fill vacancies in, and to discharge
any committee created pursuant to these By-laws, either with or without cause.
Any member of any such committee may resign at any time by giving written notice
to the Board or the Chairman of the Board or the Secretary. Such resignation
shall take effect upon receipt of such notice or at any later time specified
therein; and, unless otherwise specified therein, acceptance of such resignation
shall not be necessary to make it effective. Any vacancy in any committee,
whether arising from death, resignation, an increase in the number of committee
members or any other cause, shall be filled by the Board in the manner
prescribed in these By-laws for the original appointment of the members of such
committee.
ARTICLE V
OFFICERS
SECTION 1. Number and Qualifications. The officers of the Corporation
shall include the Chairman of the Board, and may include one or more Vice
Chairmen of the Board, the President, one or more Vice Presidents (one or more
of whom may be designated as Executive Vice Presidents or as Senior Vice
Presidents or by other designations), the Treasurer, the Secretary and the
Controller. Officers shall be elected from time to time by the Board, each to
hold office until a successor shall have been duly elected and shall have
qualified, or until death, or until resignation as hereinafter provided in
Section 2 of this Article V, or until removed as hereinafter provided in Section
3 of this Article V.
SECTION 2. Resignations. Any officer of the Corporation may resign at any
time by giving written notice of resignation to the Board, the Chairman of the
Board, the Chief Executive Officer or the Secretary. Any such resignation shall
take effect at the time specified therein, or, if the time when it shall become
effective shall not be specified therein, then it shall become effective upon
its receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
<PAGE>
SECTION 3. Removal. Any officer of the Corporation may be removed, either
with or without cause, at any time, by a resolution adopted by a majority of the
Board at any meeting of the Board.
SECTION 4. Vacancies. A vacancy in any office, whether arising from death,
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of office which shall be vacant, in the manner prescribed in these
By-laws for the regular election or appointment to such office.
SECTION 5. Chairman of the Board. The Chairman of the Board shall, if
present, preside at each meeting of the stockholders and of the Board and shall
perform such other duties as may from time to time be assigned by the Board. The
Chairman may sign certificates representing shares of the stock of the
Corporation pursuant to the provisions of Section 1 of Article VII of these
By-laws; sign, execute and deliver in the name of the Corporation all deeds,
mortgages, bonds, contracts or other instruments authorized by the Board, except
in cases where the signing, execution or delivery thereof shall be expressly
delegated by the Board or these By-laws to some other officer or agent of the
Corporation or where they shall be required by law otherwise to be signed,
executed and delivered; and affix the seal of the Corporation to any instrument
which shall require it. The Chairman of the Board, when there is no President or
in the absence or incapacity of the President, shall perform all the duties and
functions and exercise all the powers of the President.
SECTION 6. Vice Chairman of the Board. Each Vice Chairman of the Board
shall assist the Chairman of the Board and have such other duties as may be
assigned by the Board or the Chairman of the Board. The Vice Chairman may sign
certificates representing shares of the stock of the Corporation pursuant to the
provisions of Section 1 of Article VII of these By-laws; sign, execute and
deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or
other instruments authorized by the Board, except in cases where the signing,
execution or delivery thereof shall be expressly delegated by the Board or these
By-laws to some officer or agent of the Corporation or where they shall be
required by law otherwise to be signed, executed and delivered; and affix the
seal of the Corporation to any instrument which shall require it.
SECTION 7. President. The President shall perform all such duties as from
time to time may be assigned by the Board or the Chairman of the Board. The
President may sign certificates representing shares of the stock of the
Corporation pursuant to the provisions of Section 1 of Article VII of these
By-laws; sign, execute and deliver in the name of the Corporation all deeds
mortgages, bonds, contracts or other instruments authorized by the Board, except
in cases where the signing, execution or delivery thereof shall be expressly
delegated by the Board or these By-laws to some other officer or agent of the
Corporation or where they shall be required by law otherwise to be signed,
executed and delivered, and affix the seal of the Corporation to any instrument
which shall require it; and, in general, perform all duties incident to the
office of President. The President shall in the absence or incapacity of the
Chairman of the Board, perform all the duties and functions and exercise all the
powers of the Chairman of the Board.
<PAGE>
SECTION 8. Designated Officers. (a) Chief Executive Officer. Either the
Chairman of the Board, or the President, as the Board of Directors may
designate, shall be the Chief Executive Officer of the Corporation. The officer
so designated shall have, in addition to the powers and duties applicable to the
office set forth in Section 5 or 7 of this Article V, general and active
supervision over the business and affairs of the Corporation and over its
several officers, agents, and employees, subject, however, to the control of the
Board. The Chief Executive Officer shall see that all orders and resolutions of
the Board are carried into effect, be an ex officio member of all committees of
the Board (except the Audit Committee, the Directors and Corporate Governance
Committee, and committees specifically empowered to fix or approve the Chief
Executive Officer's compensation or to grant or administer bonus, option or
other similar plans in which the Chief Executive Officer is eligible to
participate), and, in general, shall perform all duties incident to the position
of Chief Executive Officer and such other duties as may from time to time be
assigned by the Board. (b) Other Designated Officers. The Board of Directors may
designate officers to serve as Chief Financial Officer, Chief Accounting Officer
and other such designated positions and to fulfill the responsibilities of such
designated positions in addition to their duties as officers as set forth in
this Article V.
SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents. Each Executive and Senior Vice President shall perform all such
duties as from time to time may be assigned by the Board or the Chairman of the
Board or a Vice Chairman of the Board or the President. Each Vice President
shall perform all such duties as from time to time may be assigned by the Board
or the Chairman of the Board or a Vice Chairman of the Board or the President or
an Executive or a Senior Vice President. Any Vice President may sign
certificates representing shares of stock of the Corporation pursuant to the
provisions of Section 1 of Article VII of these By-laws.
SECTION 10. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, and may invest the same in any securities, may
open, maintain and close accounts for effecting any and all purchase, sale,
investment and lending transactions in securities of any and all kinds for and
on behalf of the Corporation or any employee pension or benefit plan fund or
other fund established by the Corporation, as may be permitted by law;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
<PAGE>
(c) deposit all moneys and other valuables to the credit of the
Corporation in such depositaries as may be designated by the Board or the
Executive Committee;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of
its funds, taking proper vouchers therefor;
(f) render to the Board, whenever the Board may require, an account of all
transactions as Treasurer; and
(g) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned by the Board or the
Chairman of the Board or a Vice Chairman of the Board or the President or an
Executive or Senior Vice President.
SECTION 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the Executive Committee and
other committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the provisions
of these By-laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation and affix and
attest the seal to all other documents to be executed on behalf of the
Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned by the Board or the
Chairman of the Board or a Vice Chairman of the Board or the President or an
Executive or Senior Vice President.
<PAGE>
SECTION 12. Controller. The Controller shall:
(a) have control of all the books of account of the Corporation;
(b) keep a true and accurate record of all property owned by it, of its
debts and of its revenues and expenses;
(c) keep all accounting records of the Corporation (other than the
accounts of receipts and disbursements and those relating to the deposits of
money and other valuables of the Corporation, which shall be kept by the
Treasurer);
(d) render to the Board, whenever the Board may require, an account of the
financial condition of the Corporation; and
(e) in general, perform all the duties incident to the office of
Controller and such other duties as from time to time may be assigned by the
Board or the Chairman of the Board or a Vice Chairman of the Board or the
President or an Executive or Senior Vice President.
SECTION 13. Compensation. The compensation of the officers of the
Corporation shall be fixed from time to time by the Board; provided, however,
that the Board may delegate to a committee the power to fix or approve the
compensation of any officers. An officer of the Corporation shall not be
prevented from receiving compensation by reason of being also a director of the
Corporation; but any such officer who shall also be a director shall not have
any vote in the determination of the amount of compensation paid to such
officer.
ARTICLE VI
CONTRACTS, CHECKS, DRAFTS,
BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts. Except as otherwise required by law or
these By-laws, any contract or other instrument may be executed and delivered in
the name and on behalf of the Corporation by any officer (including any
assistant officer) of the Corporation. The Board or the Executive Committee may
authorize any agent or employee to execute and deliver any contract or other
instrument in the name and on behalf of the Corporation, and such authority may
be general or confined to specific instances as the Board or such Committee, as
the case may be, may by resolution determine.
SECTION 2. Loans. Unless the Board shall otherwise determine, the Chairman
of the Board or a Vice Chairman of the Board or the President or any Vice
President, acting together with the Treasurer or the Secretary, may effect loans
and advances at any time for the Corporation from any bank, trust company or
other institution, or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other certificates or evidences of indebtedness of the Corporation, but in
making such loans or advances no officer or officers shall mortgage, pledge,
hypothecate or transfer any securities or other property of the Corporation,
except when authorized by resolution adopted by the Board.
<PAGE>
SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or
other orders for the payment of money out of the funds of the Corporation, and
all notes or other evidences of indebtedness of the Corporation, shall be signed
in the name and on behalf of the Corporation by such persons and in such manner
as shall from time to time be authorized by the Board or the Executive Committee
or authorized by the Treasurer acting together with either the General Manager
of an operating unit or a nonfinancial Vice President of the Corporation, which
authorization may be general or confined to specific instances.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositaries as the Board or the Executive
Committee may from time to time designate or as may be designated by any officer
or officers of the Corporation to whom such power of designation may from time
to time be delegated by the Board or the Executive Committee. For the purpose of
deposit and for the purpose of collection for the account of the Corporation,
checks, drafts and other orders for the payment of money which are payable to
the order of the Corporation may be endorsed, assigned and delivered by any
officer, employee or agent of the Corporation.
SECTION 5. General and Special Bank Accounts. The Board or the Executive
Committee may from time to time authorize the opening and keeping of general and
special bank accounts with such banks, trust companies or other depositaries as
the Board or the Executive Committee may designate or as may be designated by
any officer or officers of the Corporation to whom such power of designation may
from time to time be delegated by the Board or the Executive Committee. The
Board or the Executive Committee may make such special rules and regulations
with respect to such bank accounts, not inconsistent with the provisions of
these By-laws, as it may deem expedient.
SECTION 6. Indemnification. The Corporation shall, to the fullest extent
permitted by applicable law as in effect at any time, indemnify any person made,
or threatened to be made, a party to an action or proceeding whether civil or
criminal (including an action or proceeding by or in the right of the
Corporation or any other corporation of any type or kind, domestic or foreign,
or any partnership, joint venture, trust, employee benefit plan or other
enterprise, for which any director or officer of the Corporation served in any
capacity at the request of the Corporation), by reason of the fact that such
person or such person's testator or intestate was a director or officer of the
Corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein. Such indemnification shall be a contract
right and shall include the right to be paid advances of any expenses incurred
by such person in connection with such action, suit or proceeding, consistent
with the provisions of applicable law in effect at any time. Indemnification
shall be deemed to be 'permitted' within the meaning of the first sentence
hereof if it is not expressly prohibited by applicable law as in effect at the
time.
<PAGE>
ARTICLE VII
SHARES
SECTION 1. Stock Certificates. The shares of the Corporation shall be
represented by certificates, or shall be uncertificated shares. Each owner of
stock of the Corporation shall be entitled to have a certificate, in such form
as shall be approved by the Board, certifying the number of shares of stock of
the Corporation owned. To the extent that shares are represented by
certificates, such certificates of stock shall be signed in the name of the
Corporation by the Chairman of the Board or a Vice Chairman of the Board or the
President or a Vice President and by the Secretary and sealed with the seal of
the Corporation (which seal may be a facsimile, engraved or printed); provided,
however, that where any such certificate is signed by a registrar, other than
the Corporation or its employee, the signatures of the Chairman of the Board, a
Vice Chairman of the Board, the President, the Secretary, and transfer agent or
a transfer clerk acting on behalf of the Corporation upon such certificates may
be facsimiles, engraved or printed. In case any officer, transfer agent or
transfer clerk acting on behalf of the Corporation ceases to be such officer,
transfer agent, or transfer clerk before such certificates shall be issued, they
may nevertheless be issued by the Corporation with the same effect as if they
were still such officer, transfer agent or transfer clerk at the date of their
issue.
SECTION 2. Books of Account and Record of Stockholders. There shall be
kept at the office of the Corporation correct books of account of all its
business and transactions, minutes of the proceedings of stockholders, Board,
and Executive Committee, and a book to be known as the record of stockholders,
containing the names and addresses of all persons who are stockholders, the
number of shares of stock held, and the date when the stockholder became the
owner of record thereof.
SECTION 3. Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made on the record of stockholders of the Corporation only
upon authorization by the registered holder thereof, or by an attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed, provided such shares are
represented by a certificate, or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. The person in whose names shares of
stock shall stand on the record of stockholders of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation. Whenever
any transfers of shares shall be made for collateral security and not absolutely
and written notice thereof shall be given to the Secretary or to such transfer
agent or transfer clerk, such fact shall be stated in the entry of the transfer.
<PAGE>
SECTION 4. Regulations. The Board may make such additional rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificated or
uncertificated shares of stock of the Corporation. It may appoint, or authorize
any officer or officers to appoint, one or more transfer agents or one or more
transfer clerks and one or more registrars and may require all certificates of
stock to bear the signature or signatures of any of them.
SECTION 5. Fixing of Record Date. The Board shall fix a time not exceeding
fifty nor less than ten days prior to the date then fixed for the holding of any
meeting of the stockholders or prior to the last day on which the consent or
dissent of the stockholders may be effectively expressed for any purpose without
a meeting, as the time as of which the stockholders entitled to notice of and to
vote at such meeting or whose consent or dissent is required or may be expressed
for any purpose, as the case may be, shall be determined, and all persons who
were holders of record of voting stock at such time, and no others, shall be
entitled to notice of and to vote at such meeting or to express their consent or
dissent, as the case may be. The Board may fix a time not exceeding fifty days
preceding the date fixed for the payment of any dividend or the making of any
distribution or the allotment of rights to subscribe for securities of the
Corporation, or for the delivery of evidences of rights or evidences of
interests arising out of any change, conversion or exchange of capital stock or
other securities, as the record date for the determination of the stockholders
entitled to receive any such dividend, distribution, allotment, rights or
interests, and in such case only the stockholders of record at the time so fixed
shall be entitled to receive such dividend, distribution, allotment, rights or
interests.
SECTION 6. Lost, Destroyed or Mutilated Certificates. The holder of any
certificate representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Corporation may, in its discretion, require such owner or the owner's legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties as the Board in its
absolute discretion shall determine, to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss or destruction
of any such certificate, or the issuance of such new certificate. Anything to
the contrary notwithstanding, the Corporation, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of New York.
<PAGE>
SECTION 7. Inspection of Records. The record of stockholders and minutes
of the proceedings of stockholders shall be available for inspection, within the
limits and subject to the conditions and restrictions prescribed by applicable
law.
SECTION 8. Auditors. The Board shall employ an independent public or
certified public accountant or firm of such accountants who shall act as
auditors in making examinations of the consolidated financial statements of the
Corporation and its subsidiaries in accordance with generally accepted auditing
standards. The auditors shall certify that the annual financial statements are
prepared in accordance with generally accepted accounting principles, and shall
report on such financial statements to the stockholders and directors of the
Corporation. The Board's selection of auditors shall be presented for
ratification by the stockholders at the annual meeting. Directors and officers,
when acting in good faith, may rely upon financial statements of the Corporation
represented to them to be correct by the officer of the Corporation having
charge of its books of account, or stated in a written report by the auditors
fairly to reflect the financial condition of the Corporation.
ARTICLE VIII
OFFICES
SECTION 1. Principal Office. The principal office of the Corporation shall
be at such place in the Town of North Castle, County of Westchester and State of
New York as the Board shall from time to time determine.
SECTION 2. Other Offices. The Corporation may also have an office or
offices other than said principal office at such place or places as the Board
shall from time to time determine or the business of the Corporation may
require.
ARTICLE IX
WAIVER OF NOTICE
Whenever under the provisions of any law of the State of New York, the
Certificate of Incorporation or these By-laws or any resolution of the Board or
any committee thereof, the Corporation or the Board or any committee thereof is
authorized to take any action after notice to the stockholders, directors or
members of any such committee, or after the lapse of a prescribed period of
time, such action may be taken without notice and without the lapse of any
period of time, if, at any time before or after such action shall be completed,
such notice or lapse of time shall be waived by the person or persons entitled
to said notice or entitled to
<PAGE>
participate in the action to be taken, or, in the case of a stockholder, by an
attorney thereunto authorized. Attendance at a meeting requiring notice by any
person or, in the case of a stockholder, by the stockholder's attorney, agent or
proxy, shall constitute a waiver of such notice on the part of the person so
attending, or by such stockholder, as the case may be.
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall end on the thirty-first day of
December in each year.
ARTICLE XI
SEAL
The Seal of the Corporation shall consist of two concentric circles with
the IBM logotype appearing in bold face type within the inner circle and the
words 'International Business Machines Corporation' appearing within the outer
circle.
ARTICLE XII
AMENDMENTS
These By-laws may be amended or repealed or new By-laws may be adopted by
the stockholders at any annual or special meeting, if the notice thereof
mentions that amendment or repeal or the adoption of new By-laws is one of the
purposes of such meeting. These By-laws, subject to the laws of the State of New
York, may also be amended or repealed or new By-laws may be adopted by the
affirmative vote of a majority of the Board given at any meeting, if the notice
thereof mentions that amendment or repeal or the adoption of new By-laws is one
of the purposes of such meeting; provided, however, that if any By-law
regulating an impending election of directors is adopted or amended or repealed
by the Board, there shall be set forth in the notice of the next meeting of the
stockholders for the election of directors the By-law so adopted or amended or
repealed, together with a concise statement of the changes made.
<PAGE>
INTERNATIONAL BUSINESS
MACHINES CORPORATION
I, the undersigned, Secretary of International Business Machines
Corporation, do hereby certify that the foregoing is a true and complete copy of
the By-laws of said Corporation, including all amendments thereto, and the same
is in force at the date hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said Corporation, this ___ day of 19 .
----------------------------
Secretary
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
Agreement made and entered into as of the 17th day of November, 1997 by
and between International Business Machines Corporation, a New York Corporation
(the "Company"), and Louis V. Gerstner, Jr. (the "Executive").
Pursuant to Section 17 of the Employment Agreement dated as of March 26,
1993 between the Company and the Executive, and as amended on January 1, 1996,
said Agreement is further amended as follows:
1. Section 2 shall be amended by adding at the end thereof: "The Executive
agrees that he will continue to serve as Chairman of the Board and Chief
Executive Officer of the Company until the date on which he attains age
60, subject to the provisions of this Agreement."
2. Section 3 shall be amended by adding a new Subsection 3(c): "If the
Executive reaches Retirement (as defined in Section 8 below), then he (i)
shall be retained for a period of ten years to provide consulting services
to the Company under appropriate terms and conditions; (ii) during said
ten year period, shall refrain from engaging in "Detrimental Activity" as
defined in the IBM 1997 Long-Term Performance Plan, and shall be subject
to the Company's then existing employment rules governing confidentiality,
non-competition and non-solicitation of employees; and (iii) during said
ten year period shall be provided with continued access to Company
facilities and services comparable to those provided to him prior to his
Retirement, including access to Company aircraft, cars, office,
apartments, and financial planning services. For such consulting services,
the Executive shall be paid a daily consulting fee, for each partial or
full day he renders services, equal to the daily equivalent of his Base
Salary rate at the time of his Retirement, and shall receive reimbursement
for reasonable expenses he incurs in providing such services."
3. Section 8 shall be amended by adding at the end thereof: "; provided,
however, that any benefit payable to the Executive under the
non-tax-qualified defined benefit plans of the Company shall be offset by
the benefit payable by the Company under Section 9 below. If the Executive
reaches Retirement (defined as occurring at the time the Executive
terminates employment (i) having remained continuously employed as an
active, full time employee of the Company until he has attained age 60;
(ii) at such earlier time as the Board may determine (other than for
Cause) in its sole discretion; or (iii) pursuant to a Constructive
Termination Without Cause or Termination Without Cause), he shall be
entitled to the same rights and privileges as a retired Regular Employee
of the Company (as such term is defined in the IBM Retirement Plan)
including for the purposes of all awards under any long-term performance
plan, and the cost (on an equivalent after-tax basis) of participation in
the Company's retiree medical plan."
4. Section 9 shall be amended by restating the fourth sentence thereunder
to read: "The Company's obligation under this Section 9 shall be offset by
any other pension benefit paid to the Executive from the tax-qualified
defined benefit plans of the Company. Any pension benefit otherwise
payable under this Section 9 shall be paid in accordance with its terms,
whether or not pension benefits are paid or payable under Section 8."
<PAGE>
Additional amendments are made as follows:
5. Section 1(b) shall be amended by adding at the end thereof: "For
purposes of Sections 3, 11(b), 11(c), 11(d) and 11(e), "Base Salary" shall
be $2,000,000 plus any increase in annual salary rate made subsequent to
the amendment of January 1, 1996 to this Agreement."
6. Section 1(e) shall be amended by adding after "Change" in the caption,
the following: "in Control".
7. Section 1(f)(i) shall be amended by adding after "1989 Long-Term
Performance Plan" the following: "or any successor long-term performance
plan of the Company".
8. Section 5 shall be amended by deleting "1989 Long-Term Performance
Plan" and by substituting therefor the following: "annual incentive
program".
9. Section 9 shall be further amended by (a) deleting "(i.e., $2,447,867)"
and substituting therefor "(i.e., $2,332,000)", (b) deleting "(i.e.,
approximately $1,180,000)" and substituting therefor "(i.e., $1,196,000)",
and (c) deleting "$1,267,000 ($2,447,000 minus $1,180,000)" and
substituting therefor "$1,136,000 ($2,332,000 minus $1,196,000)".
10. Section 11(a)(vi) of the Agreement shall be amended by changing
"Section 9" to read: "Sections 8 and 9."
11. Section 11(b)(i) shall be amended by deleting said Section 11(b)(i) in
its entirety and by substituting therefor the following: "(i) an amount,
when combined with disability benefits provided to the Executive by the
Company under its Long-Term Disability Plan, equal to at least the sum of
50% of Base Salary, at the annual rate in effect at termination of his
employment, for a period ending with the end of the month in which he
becomes 60;"
12. Sections 11(b)(vi) and 11(b)(viii) of the Agreement shall be amended
by changing "Section 9" to read: "Sections 8 and 9."
13. Section 11(d) shall be amended by restating the first sentence
thereunder to read: "In the event the Executive's employment is terminated
without Cause (other than due to Disability or Death), in the event there
is a Constructive Termination Without Cause, or in the event of any other
Retirement by the Executive prior to his attaining age 60, the Executive
shall be entitled to: ", and Section 11(d)(viii) shall be amended by
adding "s" after "benefit" and inserting "Section 8 and" before "Section
9".
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first written above.
INTERNATIONAL BUSINESS MACHINES CORPORATION
By: /s/ J. Thomas Bouchard /s/ Charles F. Knight
-------------------------- -------------------------
J. Thomas Bouchard Charles F. Knight
Senior Vice President, Human Resources Chairman, Executive
Compensation and Management
Resources Committee
Agreed to and accepted by:
/s/ Louis V. Gerstner, Jr.
- ------------------------------
Louis V. Gerstner, Jr.
Chairman of the Board and Chief Executive Officer
<PAGE>
EXHIBIT I
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIVIDENDS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and change in accounting
principles(1)............................................... $ 9,054 $ 8,599 $ 7,910 $ 5,253 $ (8,432)
Add:
Fixed charges, excluding capitalized interest............... 2,000 1,942 1,972 2,450 2,853
--------- --------- --------- --------- ---------
Earnings as adjusted.......................................... $ 11,054 $ 10,541 $ 9,882 $ 7,703 $ (5,579)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed charges:
Interest expense............................................ $ 1,573 $ 1,545 $ 1,591 $ 2,025 $ 2,291
Capitalized interest........................................ 32 31 23 20 46
Portion of rental expense representative of interest........ 427 397 381 425 562
--------- --------- --------- --------- ---------
Total fixed charges........................................... $ 2,032 $ 1,973 $ 1,995 $ 2,470 $ 2,899
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Preferred stock dividends(2).................................. 29 32 37 144 47
--------- --------- --------- --------- ---------
Combined fixed charges and preferred stock dividends.......... $ 2,061 $ 2,005 $ 2,032 $ 2,614 $ 2,946
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges............................ 5.4 5.3 5.0 3.1 (A)
Ratio of earnings to combined fixed charges and preferred
stock dividends............................................. 5.4 5.3 4.9 2.9 (A)
</TABLE>
- ------------------------
(1) Earnings before income taxes and changes in accounting principle excludes
both amortization expense of capitalized interest as well as the company's
share in the income and losses of less-than-fifty-percent-owned affiliates.
(2) The company reported preferred stock dividends of $20 million for year-end
1997 and 1996. The company reported preferred stock dividends and
transaction costs of $62 million for year-end 1995. Excluded from the ratio
computation for year-end 1995 are transaction costs of $42 million relating
to the repurchase of Series A 7 1/2 percent preferred stock depositary
shares. Included are preferred stock dividends of $20 million, for 1997 and
1996 or $29 million and $32 million representing the pre-tax earnings which
would be required to cover such dividend requirements based on the company's
effective income tax rate for year-end 1997 and 1996, respectively. For the
1995, 1994 and 1993 year ends, preferred stock dividends are also on a
pre-tax basis.
(A) No ratios are shown for 1993 as earnings were insufficient to cover fixed
charges and combined fixed charges and preferred stock dividends. As a
result of the net loss incurred for the year ended December 31, 1993,
earnings were inadequate to cover fixed charges and combined fixed charges
and preferred stock dividends by $8,478 million and $8,525 million,
respectively.
<PAGE>
<TABLE>
<CAPTION>
financial
report
<S> <C>
Report of Management 38
Report of Independent Accountants 39
Management Discussion 40
Consolidated Financial Statements 50
Earnings
Financial Position
Cash Flows
Stockholders' Equity
Notes to Consolidated Financial Statements 54
- --------------------------------------------------------------------------------
A Significant Accounting Policies 54
B Accounting Changes 55
C Common Stock Split 56
D Inventories 56
E Plant, Rental Machines and Other Property 57
F Investments and Sundry Assets 57
G Debt 58
H Interest on Debt 59
I Lines of Credit 59
J Financial Instruments 59
K Sale and Securitization of Receivables 61
L Other Liabilities and Environmental 61
M Contingencies 61
N Taxes 62
O Selling and Advertising 64
P Research, Development and Engineering 64
Q Global Financing 65
R Net Earnings Per Share of Common Stock 67
S Rental Expense and Lease Commitments 68
T Stock-Based Compensation Plans 68
U Stock Repurchases 70
V Employee Benefits Trust 71
W Retirement Plans 71
X Nonpension Postretirement Benefits 73
Y Segment Information 75
Z Geographic Areas 76
- --------------------------------------------------------------------------------
Five-Year Comparison of Selected Financial Data 78
Selected Quarterly Data 78
Stockholder Information 79
</TABLE>
37
<PAGE>
report of management
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with IBM management. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part, of
organizational arrangements with clearly defined lines of responsibility and
delegation of authority, and comprehensive systems and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management authorization, and that they are
appropriately recorded, in order to permit preparation of financial statements
in conformity with generally accepted accounting principles and to adequately
safeguard, verify and maintain accountability of assets. An important element of
the control environment is an ongoing internal audit program.
To assure the effective administration of internal control, we carefully select
and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels, and foster an
environment conducive to the effective functioning of controls. We believe that
it is essential for the company to conduct its business affairs in accordance
with the highest ethical standards, as set forth in the IBM Business Conduct
Guidelines. These guidelines, translated into numerous languages, are
distributed to employees throughout the world, and reemphasized through internal
programs to assure that they are understood and followed.
Price Waterhouse LLP, independent accountants, is retained to examine IBM's
financial statements. Its accompanying report is based on an examination
conducted in accordance with generally accepted auditing standards, including a
review of the internal control structure and tests of accounting procedures and
records.
The Audit Committee of the Board of Directors is composed solely of outside
directors, and is responsible for recommending to the Board the independent
accounting firm to be retained for the coming year, subject to stockholder
approval. The Audit Committee meets periodically and privately with the
independent accountants, with our internal auditors, as well as with IBM
management, to review accounting, auditing, internal control structure and
financial reporting matters.
/s/ Louis V. Gerstner, Jr. /s/ Lawrence R. Ricciardi
Louis V. Gerstner, Jr. Lawrence R. Ricciardi
Chairman of the Board Senior Vice President, General Counsel
and Chief Executive Officer and Chief Financial Officer
38
<PAGE>
report of independent accountants
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors of International Business Machines
Corporation:
In our opinion, the accompanying consolidated financial statements, appearing on
pages 50 through 77, present fairly, in all material respects, the financial
position of International Business Machines Corporation and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
January 19, 1998
39
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Overview
IBM's financial results in 1997 increasingly reflect the successful
implementation of the company's strategic priorities: revenue growth, stable net
income margins and leveraged growth in earnings per share.
The company reported revenue of $78.5 billion--a record for the third
consecutive year; while net earnings of $6.1 billion yielded a record $6.18
earnings per share of common stock. Strategic spending continued in 1997 as the
company funded investments of approximately $20 billion in its high-growth and
advanced technology businesses, research and development, and repurchases of its
common stock.
The growth in revenue reflects the continued shift toward the company's
high-growth businesses. Revenue from both services and storage products grew
strongly year over year. While shipments of System/390 products were higher by
30 percent when measured in computing power, revenue was down slightly as a
result of continued price reductions and the effects of currencies. Overall, the
weight of the adverse currency movements lowered year-to-year revenue growth
from approximately 8 percent to the "as reported" 3 percent.
Challenges
While excellent progress was made in 1997, there are a number of challenges
facing the company in 1998. The continued adverse effects of a strong dollar on
our non-U.S. results, weakness in some Asian markets and the continued price
pressures in the information technology marketplace all contribute to this
challenge. The company is prepared to meet its objectives--and to grow
revenue--in this difficult environment. The breadth of the company's geographic
presence, its portfolio of products and services, and its ability to work with
customers of all sizes to help integrate information technology into their
business strategies will provide the basis for success in the coming year.
Forward-looking and Cautionary Statements
Certain statements contained in this Annual Report 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, as discussed more fully elsewhere in this Annual Report and in the
company's filings with the Securities and Exchange Commission, including the
company's Form 8-K filed on July 21, 1997, and the company's 1997 Form 10-K to
be filed on or about March 23, 1998.
<TABLE>
<CAPTION>
Results of Operations
(Dollars in millions except per share amounts)
1997 1996 1995
<S> <C> <C> <C>
Revenue $78,508 $75,947 $71,940
Cost 47,899 45,408 41,573
------- ------- -------
Gross profit 30,609 30,539 30,367
Gross profit margin 39.0% 40.2% 42.2%
Total expense 21,582 21,952 22,554
------- ------- -------
Net earnings before
income taxes $ 9,027 $ 8,587 $ 7,813
======= ======= =======
Net earnings $ 6,093 $ 5,429 $ 4,178
======= ======= =======
Net earnings
per share
of common stock $ 6.18 $ 5.12 $ 3.61
======= ======= =======
Net earnings
per share of
common stock-
assuming dilution $ 6.01 $ 5.01 $ 3.53
======= ======= =======
</TABLE>
Revenue in 1997 grew 3.4 percent as reported and 8.3 percent when currency
impacts are removed. This increase was primarily driven by the high-growth areas
of the company's product portfolio: services, hard disk drive (HDD) storage
products and distributed software offerings including those from Tivoli Systems,
Inc. (Tivoli).
The following table provides the company's percent of revenue by category:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Hardware sales 46.1% 47.8% 49.5%
Services 24.6 20.9 17.7
Software 16.4 17.2 17.6
Maintenance 8.1 9.2 10.3
Rentals and financing 4.8 4.9 4.9
------- ------- -------
Total 100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
The overall gross profit margin at 39.0 percent decreased 1.2 points from 1996,
following a 2.0 point decrease in 1996 over 1995. The declines were primarily
the result of the company's continued shift to the higher growth sources of
revenue, most notably, services in 1997 and services and personal computers in
1996. These businesses have lower gross profit margins than the company's
high-end hardware offerings (System/390 and AS/400), which declined as a percent
of total revenue.
40
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Net earnings per share of common stock were $6.18, $5.12 and $3.61 in 1997, 1996
and 1995, respectively.
The following information, which is provided for informational purposes only,
excludes the effects of a $435 million non-tax deductible charge for purchased
in-process research and development in connection with the Tivoli and Object
Technology International, Inc. acquisitions in March 1996. The 1995 results
exclude the effects of the third quarter charge of $1,840 million for purchased
in-process research and development in connection with the Lotus Development
Company (Lotus) acquisition.
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
1997 1996 1995
<S> <C> <C> <C>
Adjusted net
earnings $ 6,093 $ 5,864 $ 6,018
Adjusted net earnings
per share of
common stock $ 6.18 $ 5.53 $ 5.23
Adjusted net earnings
per share of
common stock-
assuming dilution $ 6.01 $ 5.41 $ 5.10
</TABLE>
Hardware Sales
Information on revenue by classes of similar products or services is included in
note Y, "Segment Information," on page 75. The product trends addressed in this
discussion and in that disclosure are indicative, in all material respects, of
hardware sales activity.
<TABLE>
<CAPTION>
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Revenue $36,229 $36,316 $35,600
Cost 23,538 23,396 21,862
------- ------- -------
Gross profit $12,691 $12,920 $13,738
======= ======= =======
Gross profit margin 35.0% 35.6% 38.6%
</TABLE>
Revenue from hardware sales was essentially flat (up about 4 percent in constant
currency) from 1996, following an increase of 2.0 percent in 1996 from 1995.
Gross profit dollars from hardware sales decreased 1.8 percent from 1996,
following a decrease of 6.0 percent in 1996 from 1995.
Client revenue was flat versus 1996, following an increase of 9.8 percent in
1996 over 1995. Although revenue was flat in 1997, commercial personal computer
revenue grew, as did general-purpose monitors. These increases were offset by
lower revenue associated with consumer personal computers and RS/6000 products.
The 1996 increase over 1995 was driven by higher revenue from personal
computers, especially consumer products, partially offset by lower revenue from
RS/6000.
Revenue from servers decreased 4.5 percent from 1996, following a decrease of
1.4 percent in 1996 versus 1995. The 1997 decrease was primarily driven by lower
revenue from System/390, AS/400 and RS/6000 servers. While System/390 revenue
declined, total delivery of mainframe computing power increased 30 percent as
measured in MIPS (millions of instructions per second) versus last year. AS/400
and RS/6000 revenue was impacted by a major product transition during the year,
as new models of these products were announced late in the third quarter of
1997. These decreases were partially offset by higher revenue from personal
computer servers and large-scale systems (SP) servers. The decrease in 1996 from
1995 was driven by lower revenue from System/390 servers, partially offset by
higher revenue from AS/400, RS/6000 and personal computer servers.
Storage products revenue decreased 1.9 percent versus 1996, following a decline
of 15.9 percent in 1996 from 1995. The declines were driven by lower revenue
from high-end storage products, due to continuing price competition, partially
offset by revenue growth from tape products.
Original Equipment Manufacturer (OEM) hardware revenue increased 22.9 percent
over 1996, following a 1.3 percent increase in 1996 versus 1995. The 1997
increase resulted from strong growth in HDD storage products and custom logic
products, partially offset by continuing lower DRAM revenue, due to
industry-wide pricing pressures.
The decrease in the 1997 hardware sales gross profit dollars was driven by the
continued shift in the company's mix of revenue to lower gross profit products,
such as personal computers and OEM semiconductors, partially offset by higher
margins for System/390 servers and storage products. The overall hardware sales
margin continues to be adversely impacted by pricing pressures across all
products.
41
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Services
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Revenue $19,302 $15,873 $12,714
Cost 15,281 12,647 10,042
------- ------- -------
Gross profit $ 4,021 $ 3,226 $ 2,672
======= ======= =======
Gross profit margin 20.8% 20.3% 21.0%
</TABLE>
Services revenue increased 21.6 percent in 1997 (up about 28 percent in constant
currency) from 1996 and 24.8 percent in 1996 over 1995. The increases were
driven by continued strong growth in professional services, which includes
managed operation of systems, as well as systems integration design and
development. Network services, which includes managed operation of networks, and
product support services continued to experience good growth in revenue year
over year. In 1997, the company signed service contracts worth $24 billion. The
company continued to meet this growing demand for its services business by
hiring over 15,000 employees in both 1997 and 1996, while maintaining a
consistent gross profit margin.
<TABLE>
<CAPTION>
Software
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Revenue $12,844 $13,052 $12,657
Cost 3,784 4,082 4,428
------- ------- -------
Gross profit $ 9,060 $ 8,970 $ 8,229
======= ======= =======
Gross profit margin 70.5% 68.7% 65.0%
</TABLE>
Software revenue decreased 1.6 percent in 1997 (up about 4 percent in constant
currency) from 1996, following an increase of 3.1 percent in 1996 over 1995. The
revenue decrease in 1997 was a result of lower host-based computer software
revenue primarily associated with System/390 products. This decrease was offset
by revenue growth for systems management software from Tivoli. While down for
the year, software revenue performance strengthened over the course of the year
with fourth quarter 1997 revenue increasing 1.4 percent versus the fourth
quarter of 1996. The increase in 1996 revenue was driven by distributed software
offerings from Lotus and software products from Tivoli, partially offset by
lower host-based computer software revenue from System/390 and AS/400.
Software gross profit dollars increased 1.0 percent in 1997 from 1996, following
an increase of 9.0 percent in 1996 from 1995. The improvement in gross profit
dollars was the result of more software development spending being expensed in
the period incurred and less being capitalized in relation to prior historical
levels, which in turn yielded less amortization of previously deferred costs.
These lower amortization costs were partially offset by higher vendor royalty
costs.
<TABLE>
<CAPTION>
Maintenance
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Revenue $ 6,402 $ 6,981 $ 7,409
Cost 3,394 3,659 3,651
------- ------- -------
Gross profit $ 3,008 $ 3,322 $ 3,758
======= ======= =======
Gross profit margin 47.0% 47.6% 50.7%
</TABLE>
Maintenance revenue decreased 8.3 percent in 1997 (down about 3 percent in
constant currency) from 1996, following a decrease of 5.8 percent in 1996 versus
1995. Gross profit dollars decreased 9.5 percent, following a decrease of 11.6
percent in 1996 from 1995. Revenue and gross profit dollars continue to be
affected by price reductions on maintenance offerings.
<TABLE>
<CAPTION>
Rentals and Financing
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Revenue $ 3,731 $ 3,725 $ 3,560
Cost 1,902 1,624 1,590
------- ------- -------
Gross profit $ 1,829 $ 2,101 $ 1,970
======= ======= =======
Gross profit margin 49.0% 56.4% 55.4%
</TABLE>
Rentals and financing revenue was essentially flat (up about 4 percent in
constant currency) in 1997 versus 1996, following an increase of 4.6 percent in
1996 from 1995. Although revenue was essentially flat versus 1996, operating
lease activity grew, but was offset by lower dealer financing. Gross profit
dollars decreased 12.9 percent from 1996, following an increase of 6.6 percent
in 1996 from 1995. The decrease was primarily a result of a trend towards
financing a greater volume of low-end products and faster growth in the more
competitive U.S. market. The increase in 1996 over 1995 was primarily a result
of higher margins on operating leases and lower interest rates. The financing
results are discussed in more detail in note Q, "Global Financing," on pages 65
and 66.
42
<PAGE>
<TABLE>
<CAPTION>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Operating Expenses
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Selling, general and
administrative $16,634 $16,854 $16,766
Percentage of revenue 21.2% 22.2% 23.3%
Research, development
and engineering $ 4,877 $ 4,654 $ 4,170
Percentage of revenue 6.2% 6.1% 5.8%
Purchased in-process
research and
development $ -- $ 435 $ 1,840
</TABLE>
Selling, general and administrative (SG&A) expense declined 1.3 percent in 1997
versus 1996 and remained essentially flat in 1996 compared to 1995. The company
continued its focus on reducing fixed infrastructure costs, while increasing its
investments in advertising, business partner programs and emerging markets.
These actions yielded a 1.0 percentage point improvement in the
expense-to-revenue ratio in 1997 and a 1.1 percentage point improvement in 1996.
The company continues to focus on productivity, expense controls and
prioritization of spending in order to achieve a more competitive
expense-to-revenue level.
Research, development and engineering expense increased 4.8 percent in 1997 from
1996, following an increase of 11.6 percent in 1996 from 1995. The increases
reflect the company's continued investments in high-growth opportunities like
Java, network computing and e-business, as well as the impact of additional
expenses associated with new acquisitions. Also, ongoing activities of Lotus and
Tivoli are included in 1996 and 1997 results, as compared to 1995, which only
included Lotus activity between July and December 1995.
The benefits of the company's ongoing research and development have resulted in
the company being granted 1,724 patents in 1997, placing it number one in the
U.S. for the fifth consecutive year. The application of these technological
advances has enabled the company to transform this research and development into
several significant new product breakthroughs that will be found in products
beginning in 1998. Examples of these efforts are the use of copper in place of
aluminum in the making of integrated circuits and the manufacturing of HDDs
using giant magnetoresistive head technology that delivers a maximum areal
density of about 2.6 billion bits per square inch.
Purchased in-process research and development expense in 1996 and 1995 was
primarily associated with the Tivoli and Lotus acquisitions, respectively.
On a constant currency basis, SG&A expense would have increased approximately
2.7 percent in 1997 versus 1996, and research, development and engineering
expense would have increased approximately 5.9 percent.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 33 percent
for 1997, as compared to the 1996 effective tax rate of 37 percent and a 1995
effective tax rate of 47 percent. Adjusting for purchased in-process research
and development which had no corresponding tax effect, the 1996 and 1995
effective tax rates would have been 35 percent and 38 percent, respectively. The
reduction in the 1997 tax rate reflects the company's continued expansion into
markets with lower effective tax rates. The reduction in the 1996 tax rate was
also due to the company's continued expansion into markets with lower effective
tax rates, as well as the use of foreign tax credits to offset the tax effect of
dividend repatriation from non-U.S. affiliates.
The company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) 109, "Accounting for Income Taxes," which provides that a
valuation allowance should be recognized to reduce the deferred tax asset to the
amount that is more likely than not to be realized. In assessing the likelihood
of realization, management considered estimates of future taxable income, which
are based primarily on recent financial performance.
Fourth Quarter
For the quarter ended December 31, 1997, the company had revenue of $23.7
billion, a 2.5 percent increase over the same period of 1996. Net earnings in
the fourth quarter were $2,093 million ($2.16 per common share), compared with
net earnings of $2,023 million ($1.97 per common share) in the fourth quarter of
1996.
Fourth-quarter revenue from the United States was $9.5 billion, an increase of
8.9 percent from the same period of 1996. Asia Pacific revenue was essentially
flat at $4.4 billion, while revenue from the company's Europe, Middle East and
Africa units declined 4.4 percent to $7.7 billion. Revenue in Latin America was
$1.2 billion, an increase of 4.4 percent and revenue from Canada increased 14.2
percent to $.9 billion.
43
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Currency had an approximately 6 percentage point negative impact on the
company's revenue results in the fourth quarter. At constant currency in the
fourth quarter of 1997, Asia Pacific revenue would have increased about 10
percent, European revenue would have grown approximately 5 percent and revenue
from Canada would have increased about 19 percent.
Total hardware sales declined 1.3 percent year over year to $11.5 billion.
RS/6000, storage and semiconductor revenue increased, while overall personal
computer, AS/400 and System/390 revenue declined. On a constant currency basis,
hardware sales increased in all key hardware lines, except for System/390 and
consumer personal computers.
Services revenue totaled $5.9 billion, a 17.5 percent increase compared to the
year-earlier period. Approximately $8.5 billion in new services contracts was
signed in the quarter. Services margins were essentially flat year over year at
22.5 percent.
Overall software revenue was $3.8 billion, an increase of 1.4 percent compared
with the fourth quarter of 1996. Maintenance revenue declined 9.2 percent to
$1.6 billion in the fourth quarter when compared with the year-earlier period,
and rentals and financing fell 3.5 percent to $1.0 billion.
The company's overall gross profit margin in the fourth quarter was 40.1
percent, compared to 40.3 percent in the year-earlier period.
Total fourth-quarter 1997 expenses increased 1.1 percent year over year. The
expense-to-revenue ratio in the fourth quarter of 1997 was 27.4 percent compared
to 27.8 percent in the year-earlier period.
The company's tax rate was 30.5 percent in the fourth quarter, compared to 29.9
percent in the fourth quarter of 1996.
The company spent approximately $2 billion on share repurchases in the fourth
quarter. The average number of shares outstanding in the fourth quarter of 1997
was 964.8 million, compared to 1,026.8 million in the year-earlier period.
Financial Condition
During 1997, the company continued to make significant investments to fund
future growth and increase shareholder value, expending $6.8 billion for plant,
rental machines and other property, $5.5 billion for research, development and
engineering, and $7.1 billion for the repurchase of the company's common shares.
The company had $7.6 billion in cash, cash equivalents and marketable securities
on hand at December 31, 1997.
The company has access to global funding sources. During 1997, the company
issued debt in a variety of geographies to a diverse set of investors.
Significant funding was issued in the United States, Japan and Europe. Funding
was obtained across the range of debt maturities, from short-term commercial
paper to long-term debt. More information about company debt is provided in note
G, "Debt," on page 58.
In December 1993, the company entered into a $10 billion committed global credit
facility to enhance the liquidity of funds. This facility was amended in
February 1997, and extended to February 2002. As of December 31, 1997, $9.2
billion was unused and available.
At year-end 1997, the company had an outstanding balance of $.9 billion of
assets under management from the securitization of loans, leases and trade
receivables, compared to the year-end 1996 level of $1.1 billion. The company
has access to additional funds through securitization, as discussed in note K,
"Sale and Securitization of Receivables," on page 61.
The rating agencies continued their review of the company's financial condition.
In January 1997, Standard and Poor's revised its outlook on the company and its
rated subsidiaries to positive from stable and affirmed its ratings of senior
debt as A, commercial paper as A-1, and preferred stock as A-.
Moody's Investors Service rates the senior long-term debt of the company and its
rated subsidiaries as A1, the commercial paper as Prime-1, and the company's
preferred stock as "a1."
Fitch Investors Service rates the company and its rated subsidiaries' senior
long-term debt as AA-, commercial paper as F-1+, and preferred stock as A+.
Duff & Phelps rates the company and its rated subsidiaries' senior long-term
debt as A+, commercial paper as Duff 1, and the company's preferred stock as A.
44
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Cash Flows
The company's cash flows from operating, investing and financing activities as
prescribed by generally accepted accounting principles and reflected in the
Consolidated Statement of Cash Flows on page 52, are summarized in the following
table:
<TABLE>
<CAPTION>
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
Net cash provided from (used in):
Operating activities $ 8,865 $10,275 $10,708
Investing activities (6,155) (5,723) (5,052)
Financing activities (3,090) (3,952) (6,384)
Effect of exchange
rate changes on cash
and cash equivalents (201) (172) 65
------- ------- -------
Net change in cash
and cash equivalents $ (581) $ 428 $ (663)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Working Capital
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Current assets $40,418 $40,695
Current liabilities 33,507 34,000
------- -------
Working capital $ 6,911 $ 6,695
======= =======
Current ratio 1.21:1 1.20:1
======= =======
</TABLE>
Current assets decreased slightly due primarily to aggressive inventory
management. The company's overall net inventories declined $.7 billion driven
substantially by inventory management process improvements, particularly in
personal computers. At December 31, 1997, the company's inventories stood at
$5.1 billion, their lowest level since year-end 1983.
Current liabilities were lower primarily due to a decrease in taxes payable and
liabilities for prior restructuring actions.
Investments
The company's investments for plant, rental machines and other property were
$6.8 billion for 1997, an increase of $.9 billion from 1996. The increase
reflects continued investment in the company's rapidly growing services
business, principally in the management of customers' information technology,
and manufacturing capacity for hard disk drives and microelectronics.
In addition to software development expenses included in research, development
and engineering, the company capitalized $.3 billion of software costs during
1997 and 1996. Amortization of capitalized software costs amounted to $1.0
billion for 1997, a decrease of $.4 billion from 1996.
Investments and sundry assets were $21.9 billion at the end of 1997, an increase
of $.3 billion from 1996, and were primarily the result of increases in prepaid
pension assets and noncurrent sales type leases, offset by decreases in other
investments and sundry assets. See note F, "Investments and Sundry Assets," on
page 57 for additional information.
<TABLE>
<CAPTION>
Debt and Equity
(Dollars in millions)
1997 1996
<S> <C> <C>
"Core" debt $ 3,102 $ 2,202
Global financing debt 23,824 20,627
------- -------
Total debt $26,926 $22,829
======= =======
Stockholders' equity $19,816 $21,628
======= =======
Debt/capitalization 57.6% 51.4%
"Core" debt/capitalization 16.1% 10.7%
Global financing debt/equity 6.5:1 6.3:1
</TABLE>
Total debt increased $4.1 billion from year-end 1996, driven by an increase of
$3.2 billion in debt to support the growth in global financing assets and $.9
billion in "core" debt. The company's balance sheet is leveraged with a "core"
debt to capitalization of 16.1 percent and global financing debt to equity at
6.5 to 1.
Stockholders' equity declined $1.8 billion to $19.8 billion at December 31,
1997. The company's ongoing stock repurchasing program (see note U, "Stock
Repurchases," on page 70) and the creation of an Employee Benefits Trust (see
note V, "Employee Benefits Trust," on page 71) offset the $6.1 billion of net
earnings for the year. The translation effect of the stronger dollar on the
company's non-U.S. net assets contributed $1.6 billion to the year-to-year
decline.
45
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Currency Rate Fluctuations
Since approximately 81 percent of the company's non-U.S. revenue was derived
from affiliates operating in local currency environments, the company's results
are affected by changes in the relative values of non-U.S. currencies to the
U.S. dollar. Most worldwide currencies weakened versus the U.S. dollar in 1997,
which resulted in assets and liabilities denominated in local currencies being
translated into fewer dollars. The currency rate changes also resulted in an
unfavorable impact on revenue of approximately 5 percent and 3 percent,
respectively, in 1997 and 1996, compared to a favorable impact in 1995 of 4
percent.
In high-inflation environments, primarily parts of Latin America, translation
adjustments are reflected in period income, as required by SFAS 52, "Foreign
Currency Translation." Generally, the company limits currency risk in these
countries by linking prices and contracts to U.S. dollars, by financing
operations locally and through foreign currency hedge contracts.
The company uses a variety of financial hedging instruments to limit specific
currency risks related to global financing transactions and the repatriation of
dividends and royalties. Further discussion on currency and hedging appears in
note J, "Financial Instruments," on pages 59 through 61.
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 and currency rate movements on outstanding debt and
non-U.S. dollar denominated assets and liabilities, 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 in these areas.
The company's debt in support of the global financing business (see note Q,
"Global Financing," on pages 65 and 66) and the geographic breadth of the
company's operations contain an element of market risk from changes in interest
and currency rates. The company manages this risk, in part, through the use of a
variety of financial instruments including derivatives, as explained in note J,
"Financial Instruments," on pages 59 through 61.
For purposes of specific risk analysis, the company uses sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
the company's debt and financial instruments.
The financial instruments included in the sensitivity analysis consist of all of
the company's cash and cash equivalents, marketable securities, long-term
non-lease receivables, investments, long-term and short-term debt and all
derivative financial instruments. Interest rate swaps, interest rate options,
foreign currency swaps, forward contracts and foreign currency option contracts
constitute the company's portfolio of derivative financial instruments.
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 on market interest and foreign currency
exchange rates in effect at December 31, 1997. The market values that result
from these computations are compared with the market values of these financial
instruments at December 31, 1997. The differences in this comparison are the
hypothetical gains or losses associated with each type of risk.
The results of the sensitivity analysis at December 31, 1997, are as follows:
Interest Rate Risk:
A 10 percent decrease in the levels of interest rates with all other variables
held constant would result in a decrease in the fair value of the company's
financial instruments by $369 million. A 10 percent increase in the levels of
interest rates with all other variables held constant would result in an
increase in the fair value of the company's financial instruments by $341
million.
Foreign Currency Exchange Rate Risk:
A 10 percent movement in the levels of foreign currency exchange rates against
the U.S. dollar with all other variables held constant would result in a
decrease in the fair value of the company's financial instruments by $809
million or an increase in the fair value of the company's financial instruments
by $981 million.
46
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Financing Risks
Global financing is an integral part of the company's total worldwide offerings.
Financial results of global financing can be found in note Q, "Global
Financing," on pages 65 and 66. Inherent in global financing are certain risks,
including credit, interest rate, currency and residual value. The company
manages credit risk through comprehensive credit evaluations and pricing
practices. To manage the risks associated with an uncertain interest rate
environment, the company pursues a funding strategy of substantially matching
the terms of its debt with the terms of its assets. Currency risks are managed
by denominating liabilities in the same currency as the assets.
Residual value risk is managed by developing projections of future equipment
values at lease inception, reevaluating these projections periodically, and
effectively deploying remarketing capabilities to recover residual values and
potentially earn a profit. In 1997, 1996 and 1995, the remarketing effort
generated profits. The following table depicts an approximation of the
unguaranteed residual value maturities for the company's sales-type leases, as
well as a projection of net book value of operating leases at the end of the
lease terms as of December 31, 1995, 1996 and 1997. The following table excludes
approximately $49 million of estimated residual value associated with
non-information technology equipment.
<TABLE>
<CAPTION>
Total Run Out of 1997
Residual Value Balance
(Dollars in millions) 2001 and
1995 1996 1997 1998 1999 2000 beyond
--------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales-type leases $ 470 $ 471 $ 563 $120 $205 $205 $ 33
Operating leases 295 480 701 247 266 166 22
----- ----- ------ ---- ---- ---- ----
Total residual value $ 765 $ 951 $1,264 $367 $471 $371 $ 55
===== ===== ====== ==== ==== ==== ====
</TABLE>
Acquisitions
On April 16, 1997, IBM and NetObjects, Inc. announced that IBM had purchased a
majority interest in NetObjects, a leading provider of website development tools
for designers and intranet developers. In September 1997, the company acquired
the 30 percent equity interest held by Sears in Advantis, the U.S. network
services arm of the IBM Global Network. Advantis is now 100 percent owned by
IBM. In December 1997, the company acquired Eastman Kodak's share of Technology
Service Solutions (TSS), which was formed in 1994 by IBM and Eastman Kodak. TSS
is now a wholly owned subsidiary of IBM, offering comprehensive services
solutions to its customers. In addition, the company acquired Unison Software,
Inc., a leading developer of workload management software, and announced plans
to acquire Software Artistry, Inc., a leading provider of both consolidated
service desk and customer relationship management solutions for distributed
enterprise environments.
On March 1, 1996, the company acquired all outstanding shares of Tivoli for
approximately $800 million ($716 million in net cash). On July 5, 1995, the
company acquired all outstanding shares of Lotus for approximately $3.2 billion
($2.9 billion in net cash). The company engaged a nationally recognized,
independent appraisal firm to express an opinion on the fair market value of the
assets of each of the acquisitions to serve as a basis for allocation of the
purchase price to the various classes of assets. The company allocated the total
purchase prices as follows:
<TABLE>
<CAPTION>
1996 1995
(Dollars in millions)
Tivoli Lotus
<S> <C> <C>
Tangible and intangible
net assets $ 140 $ 1,157
Purchased in-process
research and development 417 1,840
Goodwill 280 540
Deferred tax liabilities related
to identifiable intangible
assets (37) (291)
------- -------
Total $ 800 $ 3,246
======= =======
</TABLE>
Purchased in-process research and development represents the value of software
products still in the development stage and not considered to have reached
technological feasibility.
47
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
In addition, the acquisition of Object Technology International, Inc. in 1996
resulted in a valuation of purchased in-process research and development
amounting to $18 million, bringing the total amount of purchased in-process
research and development in 1996 to $435 million. In accordance with applicable
accounting rules, the $435 million was expensed upon acquisition in the first
quarter of 1996, and the $1,840 million was expensed upon acquisition in the
third quarter of 1995.
Employees
<TABLE>
<CAPTION>
Percentage Changes
1997 1996 1995 1997-96 1996-95
--------------------------- ------------------
<S> <C> <C> <C> <C> <C>
IBM/wholly owned subsidiaries 269,465 240,615 225,347 12.0 6.8
Less than wholly owned subsidiaries 20,751 28,033 26,868 (26.0) 4.3
Complementary 43,000 37,000 38,000 16.2 (2.6)
</TABLE>
As of December 31, 1997, employees of IBM and its wholly owned subsidiaries
increased 28,850 from 1996, mainly from hiring in high-growth areas of the
business--services, storage, Tivoli and Lotus, as well as from continued
expansion in emerging geographic markets and acquisition of business entities,
such as Unison Software. In 1997, Advantis, with approximately 5,000 employees,
and Technology Service Solutions, with approximately 5,100 employees, previously
less than wholly owned subsidiaries, were acquired from Sears and Eastman Kodak,
respectively.
The decline in employees in less than wholly owned subsidiaries reflects the
acquisition of the minority interests in Advantis and TSS, offset by growth in
the company's rapidly expanding global services business, as well as in emerging
geographic markets, such as China.
The company's complementary work force is an approximation of equivalent
full-time employees hired under temporary, part-time and limited-term employment
arrangements to meet specific business needs in a flexible and cost-effective
manner.
48
<PAGE>
management discussion
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Year 2000
What is commonly known as the "Year 2000 issue" arises because many computer
hardware and software systems use only two digits to represent the year. As a
result, these systems and programs may not calculate dates beyond 1999, which
may cause errors in information or systems failures.
With respect to its internal systems, the company is taking appropriate steps to
remediate the Year 2000 issues and does not expect the costs of these efforts to
be material. In addition, in the ordinary course of its product development
efforts, the company has designed its current hardware and software offerings to
be Year 2000 ready. (However, the Year 2000 readiness of the company's customers
and the hardware and software offerings from the company's suppliers,
subcontractors and business partners may vary.) The company is also aware of the
potential for claims against it and other companies for damages from products
and services that were not Year 2000 ready. The company believes that any such
claims against it will be without merit. While the company does not believe that
the Year 2000 matters discussed above will have a material impact on its
business, financial condition or results of operations, it is uncertain whether
or to what extent the company may be affected by such matters.
49
<PAGE>
consolidated statement of earnings
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
For the year ended December 31: Notes 1997 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Hardware sales $36,229 $36,316 $35,600
Services 19,302 15,873 12,714
Software 12,844 13,052 12,657
Maintenance 6,402 6,981 7,409
Rentals and financing Q 3,731 3,725 3,560
- --------------------------------------------------------------------------------------
Total revenue 78,508 75,947 71,940
- --------------------------------------------------------------------------------------
Cost:
Hardware sales 23,538 23,396 21,862
Services 15,281 12,647 10,042
Software 3,784 4,082 4,428
Maintenance 3,394 3,659 3,651
Rentals and financing 1,902 1,624 1,590
- --------------------------------------------------------------------------------------
Total cost 47,899 45,408 41,573
- --------------------------------------------------------------------------------------
Gross profit 30,609 30,539 30,367
- --------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative O 16,634 16,854 16,766
Research, development and engineering P 4,877 4,654 4,170
Purchased in-process research
and development P -- 435 1,840
- --------------------------------------------------------------------------------------
Total operating expenses 21,511 21,943 22,776
- --------------------------------------------------------------------------------------
Operating income 9,098 8,596 7,591
Other income, principally interest 657 707 947
Interest expense H 728 716 725
- --------------------------------------------------------------------------------------
Earnings before income taxes 9,027 8,587 7,813
Provision for income taxes N 2,934 3,158 3,635
- --------------------------------------------------------------------------------------
Net earnings 6,093 5,429 4,178
Preferred stock dividends and transaction costs 20 20 62
- --------------------------------------------------------------------------------------
Net earnings applicable
to common shareholders $ 6,073 $ 5,409 $ 4,116
======================================================================================
Net earnings per share of common stock C & R $ 6.18 $ 5.12* $ 3.61*
Net earnings per share
of common stock - assuming dilution C & R $ 6.01 $ 5.01* $ 3.53*
======================================================================================
</TABLE>
Average number of common shares outstanding:
1997 - 983,286,361; 1996 - 1,056,704,188*; 1995 - 1,138,768,058*
*Adjusted to reflect a two-for-one stock split on May 9, 1997.
The notes on pages 54 through 77 of the 1997 IBM Annual Report are an integral
part of this statement.
50
<PAGE>
consolidated statement of financial position
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: Notes 1997 1996
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,106 $ 7,687
Marketable securities J 447 450
Notes and accounts receivable - trade, net of allowances 16,850 16,515
Sales-type leases receivable 5,720 5,721
Other accounts receivable 1,256 931
Inventories D 5,139 5,870
Prepaid expenses and other current assets 3,900 3,521
- -----------------------------------------------------------------------------------------
Total current assets 40,418 40,695
- -----------------------------------------------------------------------------------------
Plant, rental machines and other property E 42,133 41,893
Less: Accumulated depreciation 23,786 24,486
- -----------------------------------------------------------------------------------------
Plant, rental machines and other property - net 18,347 17,407
- -----------------------------------------------------------------------------------------
Software, less accumulated amortization
(1997, $12,610; 1996, $12,199) 819 1,435
Investments and sundry assets F 21,915 21,595
- -----------------------------------------------------------------------------------------
Total assets $ 81,499 $ 81,132
=========================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Taxes N $ 2,381 $ 3,029
Short-term debt G & J 13,230 12,957
Accounts payable 5,215 4,767
Compensation and benefits 3,043 2,950
Deferred income 3,445 3,640
Other accrued expenses and liabilities 6,193 6,657
- -----------------------------------------------------------------------------------------
Total current liabilities 33,507 34,000
- -----------------------------------------------------------------------------------------
Long-term debt G & J 13,696 9,872
Other liabilities L 12,993 14,005
Deferred income taxes N 1,487 1,627
- -----------------------------------------------------------------------------------------
Total liabilities 61,683 59,504
- -----------------------------------------------------------------------------------------
Contingencies M
Stockholders' equity:
Preferred stock, par value $.01 per share -
shares authorized: 150,000,000
shares issued: 1997 - 2,597,261; 1996 - 2,610,711 U 252 253
Common stock, par value $.50* per share -
shares authorized: 1,875,000,000*
shares issued: 1997 - 969,015,351; 1996 - 1,018,141,084* C & U 8,601 7,752
Retained earnings 11,010 11,189
Translation adjustments 791 2,401
Treasury stock, at cost (shares: 1997 - 923,955;
1996 - 2,179,066*) (86) (135)
Employee benefits trust, at cost (10,000,000 shares) V (860) --
Net unrealized gain on marketable securities 108 168
- -----------------------------------------------------------------------------------------
Total stockholders' equity 19,816 21,628
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 81,499 $ 81,132
=========================================================================================
</TABLE>
*Adjusted to reflect a two-for-one stock split on May 9, 1997.
The notes on pages 54 through 77 of the 1997 IBM Annual Report are an integral
part of this statement.
51
<PAGE>
consolidated statement of cash flows
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions)
For the year ended December 31: 1997 1996 1995
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings $ 6,093 $ 5,429 $ 4,178
Adjustments to reconcile net earnings to cash provided from operating
activities:
Depreciation 4,018 3,676 3,955
Amortization of software 983 1,336 1,647
Effect of restructuring charges (445) (1,491) (2,119)
Purchased in-process research and development -- 435 1,840
Deferred income taxes 358 11 1,392
Gain on disposition of fixed and other assets (273) (300) (339)
Other changes that (used) provided cash:
Receivables (3,727) (650) (530)
Inventories 432 196 107
Other assets (1,087) (980) (1,100)
Accounts payable 699 319 659
Other liabilities 1,814 2,294 1,018
- --------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 8,865 10,275 10,708
- --------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Payments for plant, rental machines and other property (6,793) (5,883) (4,744)
Proceeds from disposition of plant, rental machines
and other property 1,130 1,314 1,561
Acquisitions of Tivoli Systems, Inc. and Lotus
Development Corporation - net, 1996 and 1995, respectively -- (716) (2,880)
Investment in software (314) (295) (823)
Purchases of marketable securities and other investments (1,617) (1,613) (1,315)
Proceeds from marketable securities and other investments 1,439 1,470 3,149
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,155) (5,723) (5,052)
- --------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from new debt 9,142 7,670 6,636
Short-term borrowings less than 90 days - net (668) (919) 2,557
Payments to settle debt (4,530) (4,992) (9,460)
Preferred stock transactions - net (1) -- (870)
Common stock transactions - net (6,250) (5,005) (4,656)
Cash dividends paid (783) (706) (591)
- --------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,090) (3,952) (6,384)
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (201) (172) 65
- --------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (581) 428 (663)
Cash and cash equivalents at January 1 7,687 7,259 7,922
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 7,106 $ 7,687 $ 7,259
========================================================================================================
Supplemental data:
Cash paid during the year for:
Income taxes $ 2,472 $ 2,229 $ 1,453
Interest $ 1,475 $ 1,563 $ 1,720
========================================================================================================
</TABLE>
The notes on pages 54 through 77 of the 1997 IBM Annual Report are an integral
part of this statement.
52
<PAGE>
consolidated statement of stockholders' equity
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
(Dollars in millions) Employee Gain on
Preferred Common Retained Translation Treasury Benefits Marketable
Stock Stock Earnings Adjustments Stock Trust Securities Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Stockholders' equity, January 1, 1995 $ 1,081 $ 7,342 $12,352 $ 2,672 $ (34) $ -- $ -- $23,413
Net earnings 4,178 4,178
Cash dividends declared - common stock (572) (572)
Cash dividends declared - preferred stock (20) (20)
Common stock purchased and retired
(101,812,600* shares) (655) (4,209) (4,864)
Preferred stock purchased and retired
(8,534,289 shares) (828) (42) (870)
Common stock issued under employee
plans (8,543,896* shares) 279 279
Purchases (9,324,094* shares) and sales
(9,413,928* shares) of treasury stock
under employee plans - net (57) (7) (64)
Conversion of debentures
(13,306,242* shares) 471 471
Tax effect - stock transactions 51 51
Other 364 57 421
==================================================================================================================================
Stockholders' equity, December 31, 1995 253 7,488 11,630 3,036 (41) -- 57 22,423
1996
Net earnings 5,429 5,429
Cash dividends declared - common stock (686) (686)
Cash dividends declared - preferred stock (20) (20)
Common stock purchased and retired
(97,951,400* shares) (710) (5,046) (5,756)
Common stock issued under employee
plans (19,694,458* shares) 811 (13) 798
Purchases (8,914,332* shares) and sales
(7,584,432* shares) of treasury stock
under employee plans - net (105) (94) (199)
Tax effect - stock transactions 163 163
Other (635) 111 (524)
==================================================================================================================================
Stockholders' equity, December 31, 1996 253 7,752 11,189 2,401 (135) -- 168 21,628
1997
Net earnings 6,093 6,093
Cash dividends declared - common stock (763) (763)
Cash dividends declared - preferred stock (20) (20)
Common stock purchased and retired
(68,777,336 shares) (565) (5,455) (6,020)
Preferred stock purchased and retired
(13,450 shares) (1) (1)
Common stock issued under employee
plans (19,651,603 shares) 985 (2) 983
Purchases (3,850,643 shares) and sales
(5,105,754 shares) of treasury stock
under employee plans - net (32) 49 17
Employee benefits trust (10,000,000 shares) (860) (860)
Tax effect - stock transactions 429 429
Other (1,610) (60) (1,670)
==================================================================================================================================
Stockholders' equity, December 31, 1997 $ 252 $ 8,601 $11,010 $ 791 $ (86) $ (860) $ 108 $19,816
==================================================================================================================================
</TABLE>
*Adjusted to reflect a two-for-one stock split on May 9, 1997.
The notes on pages 54 through 77 of the 1997 IBM Annual Report are an integral
part of this statement.
53
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
A Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of International
Business Machines Corporation and its controlled subsidiary companies, which are
generally majority owned. Investments in business entities in which IBM does not
have control, but has the ability to exercise significant influence over
operating and financial policies (generally 20-50 percent ownership), are
accounted for by the equity method. Other investments are accounted for by the
cost method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions the company may undertake in the
future, actual results ultimately may differ from the estimates.
Revenue
Revenue from hardware sales or sales-type leases is recognized when the product
is shipped. Revenue from one-time-charge licensed software is recognized when
the program is shipped with a deferral for post-contract customer support. This
deferral is earned over the support period. Revenue from monthly software
licenses is recognized as license fees accrue; from maintenance and services
over the contractual period or as the services are performed; from rentals and
operating leases, monthly as the fees accrue; and from financing at level rates
of return over the term of the lease or receivable. Revenue is reduced for
estimated customer returns and allowances.
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 income tax purposes. In accordance with Statement of Financial
Accounting Standards (SFAS) 109, "Accounting for Income Taxes," these deferred
taxes are measured by applying currently enacted tax laws.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the year. Translation adjustments are accumulated in a separate component of
stockholders' equity.
Inventories and plant, rental machines and other non-monetary assets and
liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars,
or whose economic environment is highly inflationary, are translated at
approximate exchange rates prevailing when acquired. All other assets and
liabilities are translated at year-end exchange rates. Inventories charged to
cost of sales and depreciation are translated at historical exchange rates. All
other income and expense items are translated at average rates of exchange
prevailing during the year. Gains and losses that result from translation are
included in earnings.
Financial Instruments
In the normal course of business, the company uses a variety of derivative
financial instruments for the purpose of currency exchange rate and interest
rate risk management. Refer to note J, "Financial Instruments," on pages 59
through 61 for descriptions of these financial instruments, including the
methods used to account for them.
In assessing the fair value of its financial instruments, both derivative and
non-derivative, the company uses a variety of methods and assumptions that are
based on market conditions and risks existing at each balance sheet date. Quoted
market prices or dealer quotes for the same or similar instruments are used for
the majority of marketable securities, long-term investments and long-term debt.
Other techniques, such as option pricing models, estimated discounted value of
future cash flows, replacement cost and termination cost, are used to determine
fair value for the remaining financial instruments. These values represent a
general approximation of possible value and may never actually be realized.
54
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Cash Equivalents
All highly liquid investments with a maturity of three months or less at date of
purchase are carried at fair value and considered to be cash equivalents.
Inventories
Raw materials, work in process and finished goods are stated at the lower of
average cost or market.
Depreciation
Plant, rental machines and other property are carried at cost, and depreciated
over their estimated useful lives using the straight-line method.
Software
Costs related to the conceptual formulation and design of licensed programs are
expensed as research and development. Costs incurred subsequent to establishment
of technological feasibility to produce the finished product are capitalized.
The annual amortization of the capitalized amounts is the greater of the amount
computed based on the estimated revenue distribution over the products'
revenue-producing lives, or the straight-line method, and is applied over
periods ranging up to four years. Periodic reviews are performed to ensure that
unamortized program costs remain recoverable from future revenue. Costs to
support or service licensed programs are charged against income as incurred, or
when related revenue is recognized, whichever occurs first.
Retirement Plans and Nonpension Postretirement Benefits
Current service costs of retirement plans and post-retirement healthcare and
life insurance benefits are accrued in the period. Prior service costs resulting
from amendments to the plans are amortized over the average remaining service
period of employees expected to receive benefits.
Goodwill
Goodwill is charged to earnings on a straight-line basis over the periods
estimated to be benefited, generally not exceeding five years.
Common Stock
Common stock refers to the $.50 par value capital stock as designated in the
company's Certificate of Incorporation.
B Accounting Changes
The company implemented new accounting standards in 1997, 1996 and 1995. None of
these standards had a material effect on the financial position or results of
operations of the company.
In December 1997, the company implemented SFAS 128, "Earnings Per Share" (EPS).
This standard prescribes the methods for calculating basic and diluted EPS and
requires dual presentation of these amounts on the face of the earnings
statement. All EPS amounts are calculated in accordance with SFAS 128; no
restatement of EPS, for either basic or diluted, was required for amounts
reported previously in the company's filings with the U.S. Securities and
Exchange Commission.
Effective January 1, 1997, the company implemented SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The company
was generally in compliance with this standard prior to adoption.
In 1996, the company adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." This SOP provides guidance on the recognition, measurement,
display and disclosure of environmental remediation liabilities. See note L,
"Other Liabilities and Environmental," on page 61 for further information. The
company was generally in compliance with this standard prior to adoption.
In 1996, the company implemented the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." See note T, "Stock-Based Compensation
Plans," on pages 68 through 70 for further information.
55
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Effective January 1, 1995, the company implemented SFAS 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures." These standards
prescribe impairment measurements and reporting related to certain loans.
The company implemented SFAS 116, "Accounting for Contributions Received and
Contributions Made," effective January 1, 1995. This standard requires that the
fair value of contributions, including unconditional promises to give, be
recognized as expense in the period made.
In 1995, the company implemented SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard
prescribes the method for asset impairment evaluation for long-lived assets and
certain identifiable intangibles that are either to be held and used or intended
for disposal. The company was generally in conformance with this standard prior
to adoption.
In 1995, the company adopted the American Institute of Certified Public
Accountants SOP 93-7, "Reporting on Advertising Costs." This SOP provides
guidance on financial reporting of advertising costs in annual financial
statements. See note O, "Selling and Advertising," on page 64 for additional
disclosure on advertising expenses. The company was generally in conformance
with this SOP prior to adoption.
In 1998, the company will implement two accounting standards issued by the
Financial Accounting Standards Board in June of 1997. SFAS 130, "Reporting
Comprehensive Income," and SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," will have no effect on the company's
financial position or results of operations as they require only changes in or
additions to current disclosures.
During 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition on software
transactions and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The company is taking steps to meet the
requirements of the SOP and expects that it will not have a material impact on
the financial position or results of operations of the company.
C Common Stock Split
On April 29, 1997, the stockholders of the company approved amendments to the
Certificate of Incorporation to increase the number of authorized shares of
common stock from 750 million to 1,875 million, which was required to effect a
two-for-one stock split approved by the company's Board of Directors on January
28, 1997. In addition, the amendments served to reduce the par value of the
common stock from $1.25 to $.50 per share. Stockholders of record at the close
of business on May 9, 1997, received one additional share for each share held.
All share and per share data prior to the second quarter of 1997 presented in
the Consolidated Financial Statements and footnotes of this annual report
reflect the two-for-one stock split.
D Inventories
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Finished goods $1,090 $1,413
Work in process 4,026 4,377
Raw materials 23 80
------ ------
Total $5,139 $5,870
====== ======
</TABLE>
56
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
E Plant, Rental Machines and Other Property
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Land and land improvements $ 1,117 $ 1,208
Buildings 11,208 12,073
Plant, laboratory and
office equipment 25,015 24,824
------- -------
37,340 38,105
Less: Accumulated
depreciation 21,680 22,935
------- -------
15,660 15,170
Rental machines 4,793 3,788
Less: Accumulated
depreciation 2,106 1,551
------- -------
2,687 2,237
------- -------
Total $18,347 $17,407
======= =======
</TABLE>
F Investments and Sundry Assets
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Net investment in
sales-type leases* $13,733 $13,345
Less: Current portion - net 5,720 5,721
------- -------
8,013 7,624
Deferred taxes 3,163 3,246
Prepaid pension cost 3,828 3,324
Customer loan
receivables - not yet due 2,741 2,622
Installment payment
receivables 977 830
Alliance investments:
Cost method 236 320
Equity method 484 564
Goodwill, less accumulated
amortization (1997, $1,717;
1996, $1,300) 950 1,067
Marketable securities -
non-current 295 381
Other investments and
sundry assets 1,228 1,617
------- -------
Total $21,915 $21,595
======= =======
</TABLE>
* These leases relate principally to IBM equipment and are generally for terms
ranging from three to five years. Net investment in sales-type leases
includes unguaranteed residual values of approximately $563 million and $471
million at December 31, 1997 and 1996, respectively, and is reflected net of
unearned income at these dates of approximately $1,600 million and $2,000
million, respectively. Scheduled maturities of minimum lease payments
outstanding at December 31, 1997, expressed as a percentage of the total,
are approximately as follows: 1998, 45 percent; 1999, 32 percent; 2000, 16
percent; 2001, 5 percent; and 2002 and beyond, 2 percent.
57
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
G Debt
Short-term debt
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Commercial paper $ 4,583 $ 6,069
Short-term loans 5,699 3,966
Long-term debt: Current maturities 2,948 2,922
------- ------
Total $13,230 $12,957
======= =======
</TABLE>
The weighted-average interest rates for commercial paper at December 31, 1997
and 1996, were approximately 5.8 percent and 5.6 percent, respectively. The
weighted-average interest rates for short-term loans at December 31, 1997 and
1996, were approximately 5.5 percent and 5.7 percent, respectively.
Long-term debt
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: Maturities 1997 1996
<S> <C> <C> <C>
U.S. Dollars:
Debentures:
6.22% 2027 $ 500 $ --
7.0% 2025 600 600
7.0% 2045 150 150
7.125% 2096 850 850
7.5% 2013 550 550
8.375% 2019 750 750
Notes: 6.8% average 1998-2007 2,674 3,199
Medium-term note program: 6.0% average 1998-2009 4,472 1,851
Other: 6.3% average 1998-2012 1,319 330
------- -------
11,865 8,280
Other currencies (average interest rate
at December 31, 1997, in parentheses):
Japanese yen (3.1%) 1998-2014 3,944 4,028
Canadian dollars (5.7%) 1998-2003 407 5
French francs (8.0%) 1998-2002 13 282
German deutschmarks (4.9%) 1998-2000 111 25
Other (8.7%) 1998-2017 335 207
------- -------
16,675 12,827
Less: Net unamortized discount 31 33
------- -------
16,644 12,794
Less: Current maturities 2,948 2,922
------- -------
Total $13,696 $ 9,872
======= =======
</TABLE>
Annual maturities in millions of dollars on long-term debt outstanding at
December 31, 1997, are as follows: 1998, $2,948; 1999, $2,766; 2000, $4,213;
2001, $1,021; 2002, $1,338; 2003 and beyond, $4,389.
58
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
H Interest on Debt
Interest paid and accrued on borrowings of the company and its subsidiaries
amounted to $1,596 million in 1997, $1,565 million in 1996 and $1,600 million in
1995. Of these amounts, $32 million in 1997, $31 million in 1996 and $23 million
in 1995 were capitalized. The remainder was charged to the cost of rentals and
financing, or interest expense. The increase in interest expense is primarily
due to higher levels of debt, partially offset by lower average interest rates
in 1997 versus 1996. The decrease in interest expense in 1996 versus 1995 was
primarily a result of lower average interest rates. The average interest rate
for total debt was 6.4 percent, 7.0 percent and 7.2 percent in 1997, 1996 and
1995, respectively. These rates reflect the results of currency and interest
rate swaps applied to the debt described in note G, "Debt," on page 58.
I Lines of Credit
The company maintains a $10.0 billion committed global credit facility. Unused
committed lines of credit from this global facility and other existing committed
and uncommitted lines of credit at December 31, 1997, were $13.1 billion,
compared to $13.9 billion at December 31, 1996. Interest rates on borrowings
vary from country to country depending on local market conditions.
J Financial Instruments
The following presents information on certain significant on-and off-balance
sheet financial instruments, including derivatives.
Financial Instruments On-Balance Sheet (excluding derivatives)
Financial assets with carrying values approximating fair value include cash and
cash equivalents, marketable securities, notes and other accounts receivable and
other investments. Financial liabilities with carrying values approximating fair
value include accounts payable and other accrued expenses and liabilities, and
short-term and long-term debt.
The following table summarizes the company's marketable securities and other
investments, all of which were considered available for sale.
Marketable securities and other investments
<TABLE>
<CAPTION>
(Dollars in millions) Carrying Value
<S> <C> <C>
At December 31: 1997 1996
Current marketable securities:
U.S. government securities $ 93 $108
Time deposits and other bank obligations 181 283
Non-U.S. government securities and other fixed-term obligations 173 59
---- ----
Total $447 $450
==== ====
Marketable securities - non-current:*
U.S. government securities $ 54 $ 99
Time deposits and other bank obligations 183 127
Non-U.S. government securities and other fixed-term obligations 58 155
---- ----
Total $295 $381
==== ====
Other investments:*
Alliance investments on cost method $236 $320
==== ====
</TABLE>
* Included within Investments and sundry assets on the Consolidated
Statement of Financial Position (See note F on page 57).
59
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Financial Instruments Off-Balance Sheet (excluding derivatives)
IBM has guaranteed certain loans and financial commitments of affiliates. The
fair market values of these financial guarantees were $861 million and $787
million at December 31, 1997 and 1996, respectively. Additionally, the company
is contingently liable for commitments of various ventures to which it is a
party and certain other contracts. These commitments, which in the aggregate
were approximately $600 million and $400 million at December 31, 1997 and 1996,
respectively, are not expected to have a material adverse effect on the
company's financial position or results of operations.
The company's dealers had unused lines of credit available from IBM for working
capital financing of approximately $2.1 billion at December 31, 1997 and 1996.
Derivative Financial Instruments
The company has used derivative instruments as an element of its risk management
strategy for many years. Although derivatives entail a risk of nonperformance 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. The company has not sustained a material loss from these
instruments nor does it anticipate any material adverse effect on its results of
operations or financial position in the future.
The following table summarizes the notional value, carrying value and fair value
of the company's derivative financial instruments on-and off-balance sheet. The
notional value at December 31 provides an indication of the extent of the
company's involvement in such instruments at that time, but does not represent
exposure to market risk.
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
Notional Carrying Fair Notional Carrying Fair
(Dollars in millions) Value Value Value* Value Value Value*
<S> <C> <C> <C> <C> <C> <C>
Interest rate and currency contracts $24,774 $ 29 $ 84 $18,700 $ (70) $ (117)
Option contracts 14,211 41 193 10,100 92 81
------- ------- ------- ------- ------- -------
Total $38,985 $ 70 $ 277 $28,800 $ 22 $ (36)
======= ======= ======= ======= ======= =======
</TABLE>
Bracketed amounts are liabilities.
* The estimated fair value of derivatives both on-and off-balance sheet at
December 31, 1997 and 1996, consists of assets of $561 million and $258
million and liabilities of $304 million and $294 million, respectively.
The majority of the company's derivative transactions relates to the matching of
liabilities to assets associated with its global financing business. The company
issues debt, using the most efficient capital markets and products, which may
result in a currency or interest rate mismatch with the underlying lease.
Interest rate swaps or currency swaps are then used to match the interest rates
and currencies of its debt to the related global financing receivables. These
swap contracts are principally one to five years in duration. Interest and
currency rate differentials accruing under interest rate and currency swap
contracts related to the global financing business are recognized over the life
of the contracts in interest expense.
The company uses internal regional centers to manage the cash of its
subsidiaries. These regional centers principally use currency swaps to convert
cash flows in a cost-effective manner, predominantly for the company's European
subsidiaries. The terms of the swaps are generally less than one year. The
effects of these contracts are recognized over the life of the contract in
interest income.
When the terms of the underlying instrument are modified, or if it ceases to
exist, all changes in fair value of the swap contract are recognized in income
each period until it matures.
Additionally, the company uses derivatives to limit its exposure to loss
resulting from fluctuations in foreign currency exchange rates on anticipated
cash transactions between foreign subsidiaries and the parent company. The
company receives significant dividends, intracompany royalties and net payments
for goods and services from its non-U.S. subsidiaries. In anticipation of these
foreign currency flows, and given the volatility of the currency markets, the
company selectively employs foreign currency options to manage the currency
risk. The terms of these instruments are generally less than one year.
60
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
For purchased options that hedge anticipated transactions, gains and losses are
deferred and recognized in other income in the same period that the underlying
transaction occurs, expires or is otherwise terminated. At December 31, 1997 and
1996, there were no material deferred gains or losses. The premiums associated
with entering into option contracts are generally amortized over the life of the
options and are not material to the company's results. Unamortized premiums are
included in prepaid assets. All written options are marked to market monthly and
are not material to the company's results.
The company also enters into derivative transactions to moderate the impact that
an appreciation of the dollar relative to other currencies would have on the
translation of foreign earnings. These transactions do not qualify as hedges for
accounting purposes, and their foreign exchange gains and losses are recorded in
earnings as they occur.
K Sale and Securitization of Receivables
At year-end 1997, the company had a net balance of $.9 billion in assets under
management from the securitization of loans, leases and trade receivables,
compared to $1.1 billion at year-end 1996. The company received total cash
proceeds of approximately $3.0 billion and $4.0 billion in 1997 and 1996,
respectively, from the sale and securitization of these receivables and assets.
No material gain or loss resulted from these transactions. Recourse amounts
associated with the aforementioned sales and securitization activities are
expected to be minimal, and adequate reserves are in place to cover potential
losses.
L Other Liabilities and Environmental
Other liabilities consists principally of accruals for nonpension postretirement
benefits for U.S. employees ($6.8 billion) and indemnity and retirement plan
reserves for non-U.S. employees ($1.3 billion). More detailed discussion of
these liabilities appears in note X, "Nonpension Postretirement Benefits," on
pages 73 and 74, and note W, "Retirement Plans," on pages 71 through 73. In
addition, noncurrent liabilities associated with prior infrastructure reduction
actions amounted to $1.8 billion at December 31, 1997.
The company continues to participate in environmental assessments and cleanups
at a number of locations, including operating facilities, previously owned
facilities and Superfund sites. The company accrues for all known environmental
liabilities for remediation costs when a cleanup program becomes probable and
costs can be reasonably estimated. Estimated environmental costs associated with
post-closure activities, such as the removal and restoration of chemical storage
facilities and monitoring, are accrued when the decision is made to close a
facility. The amounts accrued, which do not reflect any insurance recoveries,
were $243 million and $244 million at December 31, 1997 and 1996, respectively.
The amounts accrued do not cover sites that are in the preliminary stages of
investigation where neither the company's percentage of responsibility nor the
extent of cleanup required has been identified. Also excluded is the cost of
internal environmental protection programs that are primarily preventive in
nature. Estimated environmental costs are not expected to materially impact the
financial position or results of the company's operations in future periods.
However, environmental cleanup periods are protracted in length, and
environmental costs in future periods are subject to changes in environmental
remediation regulations.
M Contingencies
On February 25, 1993, a consolidated and amended class action complaint was
filed against the company in the United States District Court for the Southern
District of New York alleging violations of Section 12 of the Securities Act of
1933 and Section 10 of the Securities Exchange Act of 1934. The complaint
alleges, among other matters, that the company disseminated false and misleading
statements concerning its financial condition and dividends during certain
periods of 1992, as a result of which plaintiffs were injured in connection with
their purchases of IBM stock during the period of September 30, 1992, through
December 14, 1992. The plaintiffs seek monetary damages. On February 3, 1997,
Judge Jed S. Rakoff issued an order granting the company's motion for summary
judgment in this case in its entirety. Plaintiffs have filed an appeal which is
pending. The company does not believe that the ultimate outcome of this matter
will have a material effect on its results of operations or its financial
position.
61
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
N Taxes
<TABLE>
<CAPTION>
(Dollars in millions)
For the year ended December 31: 1997 1996 1995
<S> <C> <C> <C>
Earnings before income taxes:
U.S. operations $ 3,193 $ 3,025 $ 2,149
Non-U.S. operations 5,834 5,562 5,664
------- ------- -------
$ 9,027 $ 8,587 $ 7,813
======= ======= =======
The provision for income taxes by geographic operations
is as follows:
U.S. operations $ 974 $ 1,137 $ 1,538
Non-U.S. operations 1,960 2,021 2,097
------- ------- -------
Total provision for income taxes $ 2,934 $ 3,158 $ 3,635
======= ======= =======
The components of the provision for income taxes by
taxing jurisdiction are as follows:
U.S. federal:
Current $ 163 $ 727 $ 85
Deferred 349 83 1,075
------- ------- -------
512 810 1,160
U.S. state and local:
Current 83 158 65
Deferred (87) (353) --
------- ------- -------
(4) (195) 65
Non-U.S.:
Current 2,330 2,262 2,093
Deferred 96 281 317
------- ------- -------
2,426 2,543 2,410
------- ------- -------
Total provision for income taxes 2,934 3,158 3,635
Provision for social security, real estate,
personal property and other taxes 2,774 2,584 2,566
------- ------- -------
Total provision for taxes $ 5,708 $ 5,742 $ 6,201
======= ======= =======
</TABLE>
The effect of tax law changes on deferred tax assets and liabilities did not
have a significant impact on the company's effective tax rate.
62
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
The significant components of activities that gave rise to deferred tax assets
and liabilities included on the balance sheet were as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets
(Dollars in millions)
At December 31: 1997 1996
<S> <C> <C>
Employee benefits $ 3,707 $ 3,554
Capitalized research and development 1,196 1,478
Restructuring charges 1,163 1,323
Alternative minimum tax credits 1,092 1,016
Asset impairments 1,027 1,304
Deferred income 893 993
General business credits 492 452
Equity alliances 378 340
Intracompany sales and services 235 194
State and local tax loss carryforwards 203 166
Foreign tax loss carryforwards 202 368
Depreciation 132 123
Other 2,507 2,411
------- -------
Gross deferred tax assets 13,227 13,722
Less: Valuation allowance 2,163 2,239
------- -------
Net deferred tax assets $11,064 $11,483
======= =======
Deferred Tax Liabilities
(Dollars in millions)
At December 31: 1997 1996
Sales-type leases $ 3,147 $ 3,126
Retirement benefits 2,147 1,967
Depreciation 1,556 1,702
Software costs deferred 420 648
Other 1,413 1,465
------- -------
Gross deferred tax liabilities $ 8,683 $ 8,908
======= =======
</TABLE>
The estimated reversal periods for the largest deductible temporary differences
are: employee benefits -1 to 30 years; capitalized research and development -1
to 6 years; restructuring -1 to 5 years.
The valuation allowance applies to U.S. federal tax credits, state and local net
deferred tax assets, and net operating loss carryforwards that may expire before
the company can utilize them.
63
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
A reconciliation of the company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
<TABLE>
<CAPTION>
For the year ended December 31: 1997 1996 1995
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Foreign tax differential (3) 2 2
State and local 1 1 1
U.S. valuation allowance -- (6) (2)
Other -- 3 2
------ ------ ------
Effective rate before purchased in-process
research and development 33 35 38
Purchased in-process research and development -- 2 9
------ ------ ------
Effective rate 33% 37% 47%
====== ====== ======
</TABLE>
For tax return purposes, the company has available tax credit carryforwards of
approximately $2,035 million, of which $1,092 million have an indefinite
carryforward period, $431 million expire in 1999 and the remainder thereafter.
The company also has state and local and foreign tax loss carryforwards, the tax
effect of which is $405 million. Most of these carryforwards are available for
15 years or have an indefinite carryforward period.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings amounted to $12,511 million at December 31, 1997, $12,111
million at December 31, 1996, and $12,565 million at December 31, 1995. These
earnings, which reflect full provision for non-U.S. income taxes, are
indefinitely reinvested in non-U.S. operations or will be remitted substantially
free of additional tax.
O Selling and Advertising
Selling and advertising expense is charged against income as incurred.
Advertising expense, which includes media, agency and promotional expenses,
amounted to $1,708 million, $1,569 million and $1,315 million in 1997, 1996 and
1995, respectively.
P Research, Development and Engineering
Research, development and engineering expense amounted to $4,877 million in
1997, $4,654 million in 1996 and $4,170 million in 1995. Expenditures for
product-related engineering included in these amounts were $570 million, $720
million and $783 million in 1997, 1996 and 1995, respectively.
Expenditures of $4,307 million in 1997, $3,934 million in 1996 and $3,387
million in 1995 were made for research and development activities covering basic
scientific research and the application of scientific advances to the
development of new and improved products and their uses. Of these amounts,
software-related activities were $2,016 million, $1,726 million and $1,157
million in 1997, 1996 and 1995, respectively.
Purchased in-process research and development expense was $435 million and
$1,840 million for 1996 and 1995, respectively.
64
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Q Global Financing
The primary focus of IBM's worldwide global financing offerings is to support
customers in their acquisition of the company's products and services. This
support is provided both by IBM and through its financing subsidiaries, the
results of which are presented in this note in a consistent manner.
The following schedules reflect the financial position, net earnings and cash
flows for global financing in comparison to the company's consolidated results
with global financing results reflected on an equity basis. This involves
presenting within a single line item the investment and related return from
global financing as reflected in the company's consolidated financial
statements. For the statement of financial position, global financing's assets
net of related liabilities and after elimination of applicable intracompany
transactions, are shown separately as a single line item, Investment in global
financing. Eliminations primarily pertain to internal markups to fair value of
equipment held on operating leases. With respect to the statement of earnings,
net earnings for global financing before applicable taxes, and after elimination
of related intracompany transactions are included in the description, Other
income. The provision for income taxes for global financing is based on the
statutory income tax rate of each country, calculated on a separate return
basis. For the statement of cash flows, certain cash flow activities are
reclassified to be consistent with the classification of such activities
reflected in the company's Consolidated Statement of Cash Flows. Such
reclassifications primarily pertain to cash flow activity related to financing
receivables.
Because global financing is different in nature from the company's
manufacturing, development and services businesses, management believes that the
aforementioned type of comparative disclosure enhances the understanding and
analysis of the consolidated financial statements.
Statement of Financial Position
<TABLE>
<CAPTION>
IBM with
Global Financing
(Dollars in millions) Global Financing on an Equity Basis
<S> <C> <C> <C> <C>
At December 31: 1997 1996 1997 1996
Assets:
Cash and cash equivalents $ 998 $ 1,433 $ 6,108 $ 6,254
Notes and accounts receivable -- -- 9,551 10,063
Net investment in capital leases 13,831 13,430 -- --
Working capital financing receivables 4,928 4,030 -- --
Loans receivable 6,951 6,428 -- --
Inventories 111 98 5,044 5,788
Plant, rental machines and other property,
net of accumulated depreciation 5,168 3,988 15,790 15,229
Other assets 3,457 2,386 13,364 15,010
Investment in global financing -- -- 5,142 5,613
------- ------- ------- -------
Total assets $35,444 $31,793 $54,999 $57,957
======= ======= ======= =======
Liabilities and stockholders' equity:
Taxes, accrued expenses and other liabilities $ 7,969 $ 7,915 $32,081 $34,127
Debt 23,824 20,627 3,102 2,202
------- ------- ------- -------
Total liabilities 31,793 28,542 35,183 36,329
Stockholders' equity/invested capital 3,651 3,251 19,816 21,628
------- ------- ------- -------
Total liabilities and stockholders' equity $35,444 $31,793 $54,999 $57,957
======= ======= ======= =======
</TABLE>
65
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Statement of Earnings
<TABLE>
<CAPTION>
IBM with Global Financing
(Dollars in millions) Global Financing on an Equity Basis
For the year ended December 31: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Finance and other income:
Finance income $ 1,833 $ 2,048 $ 2,110 $ -- $ -- $ --
Rental income - net 603 509 415 527 590 469
Sales and services 788 809 1,001 74,421 71,798 67,588
Other income 339 320 367 1,119 1,381 1,473
------- ------- ------- ------- ------- -------
Total finance and other income 3,563 3,686 3,893 76,067 73,769 69,530
Interest and other costs and expenses 2,432 2,426 2,782 67,040 65,182 61,717
------- ------- ------- ------- ------- -------
Net earnings before income taxes 1,131 1,260 1,111 9,027 8,587 7,813
Provision for income taxes 429 531 428 2,934 3,158 3,635
------- ------- ------- ------- ------- -------
Net earnings $ 702 $ 729 $ 683 $ 6,093 $ 5,429 $ 4,178
======= ======= ======= ======= ======= =======
</TABLE>
Global financing earnings yielded a return on average invested capital of 20.3
percent in 1997, compared to 22.7 percent in 1996. Included within these results
are intracompany services and fees received for tax benefits provided to the
company resulting from tax deferrals generated by financing transactions. Such
fees are eliminated from the Consolidated Statement of Earnings.
Statement of Cash Flows
<TABLE>
<CAPTION>
IBM with Global Financing
(Dollars in millions) Global Financing on an Equity Basis
For the year ended December 31: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net cash provided from operating
activities $ 3,919 $ 5,314 $ 3,712 $ 10,910 $ 8,217 $ 9,250
Net cash used in investing activities (8,435) (5,544) (3,968) (3,684) (3,435) (3,338)
Net cash provided from (used in)
financing activities 4,102 872 (198) (7,192) (4,824) (6,186)
Effect of exchange rate changes on
cash and cash equivalents (21) (17) (42) (180) (155) 107
-------- -------- -------- -------- -------- --------
Net change in cash and cash equivalents (435) 625 (496) (146) (197) (167)
Cash and cash equivalents at January 1 1,433 808 1,304 6,254 6,451 6,618
-------- -------- -------- -------- -------- --------
Cash and cash equivalents
at December 31 $ 998 $ 1,433 $ 808 $ 6,108 $ 6,254 $ 6,451
======== ======== ======== ======== ======== ========
</TABLE>
66
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
R Net Earnings Per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
For the year ended December 31: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Number of shares on which basic
earnings per share is calculated:
Average outstanding during year 983,286,361 1,056,704,188 1,138,768,058 1,169,917,398 1,146,478,480
Add - Incremental shares under
stock compensation plans 27,648,581 23,004,716 18,446,278 8,616,538 --
- Incremental shares related
to 5.75% convertible
bonds (average) -- -- 10,582,196 15,430,782 --
--------------- --------------- --------------- --------------- ---------------
Number of shares on which diluted
earnings per share is calculated 1,010,934,942 1,079,708,904 1,167,796,532 1,193,964,718 1,146,478,480
=============== =============== =============== =============== ===============
Net earnings (loss)
applicable to common
shareholders (millions) $ 6,073 $ 5,409 $ 4,116 $ 2,937 $ (8,148)
Net earnings effect
of interest on 5.75%
convertible bonds (millions) -- -- 1 19 --
--------------- --------------- --------------- --------------- ---------------
Net earnings (loss) on which
diluted earnings per share
is calculated (millions) $ 6,073 $ 5,409 $ 4,117 $ 2,956 $ (8,148)
=============== =============== =============== =============== ===============
Basic earnings (loss) per share $ 6.18 $ 5.12 $ 3.61 $ 2.51 $ (7.11)
Diluted earnings (loss) per share $ 6.01 $ 5.01 $ 3.53 $ 2.48 $ (7.11)
</TABLE>
Stock options to purchase 165,833 shares in 1997, 784,141 shares in 1996,
10,304,286 shares in 1995 and 14,531,336 shares in 1994 were outstanding, but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares, and therefore, the effect would be antidilutive. In 1993, the
incremental shares under stock plans (58,971,448 shares) and the effect of the
convertible bonds (15,430,800 shares) were not considered for the diluted
earnings per share calculation due to their antidilutive effect. As such, the
amounts reported for basic and diluted earnings per share are the same.
67
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
S Rental Expense and Lease Commitments
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $1,280 million in 1997, $1,210
million in 1996 and $1,145 million in 1995. The table below depicts gross
minimum rental commitments under noncancelable leases, amounts related to vacant
space that the company had previously reserved and sublease income commitments.
These amounts generally reflect activities related to office space.
<TABLE>
<CAPTION>
Beyond
(Dollars in millions) 1998 1999 2000 2001 2002 2002
<S> <C> <C> <C> <C> <C> <C>
Gross rental commitments $1,431 $1,235 $1,101 $ 936 $ 752 $1,787
Vacant space 262 206 194 149 111 255
Sublease income commitments 127 115 107 79 57 106
</TABLE>
T Stock-Based Compensation Plans
The company applies Accounting Principles Board (APB) Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans. A
description of the terms of the company's stock-based compensation plans
follows:
Long-Term Performance Plan
Incentive awards are provided to officers and other key employees under the
terms of the IBM 1997 Long-Term Performance Plan, which was approved by
stockholders in April 1997, and its predecessor plan, the 1994 Long-Term
Performance Plan ("the Plans"). The Plans are administered by the Executive
Compensation and Management Resources Committee of the Board of Directors. The
committee determines the type and terms of the awards to be granted, including
vesting provisions.
Awards may include stock options, stock appreciation rights (SARs), restricted
stock, cash or stock awards, or any combination thereof. The number of shares
that may be issued under the IBM 1997 Long-Term Performance Plan for awards is
50.3 million, which was 5 percent of the outstanding common stock on February
10, 1997. There were 46.4 million unused shares available for granting under the
IBM 1997 Long-Term Performance Plan and approximately 9.0 million shares
available for granting under the 1994 Long-Term Performance Plan at December 31,
1997.
Awards under the Plans resulted in compensation expense of $214.1 million,
$203.9 million and $106.3 million that were included in net earnings before
income taxes in 1997, 1996 and 1995, respectively. Such awards include those
that settle in cash, such as SARs, and restricted stock grants.
68
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Stock Option Grants
Stock options granted under the Plans allow the purchase of IBM's common stock
at 100 percent of the market price on the date of grant and generally expire 10
years from the date of grant. The following table summarizes option activity of
the Plans during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise No. of Shares Exercise No. of Shares Exercise No. of Shares
Price under Option Price under Option Price under Option
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 44 61,435,322 $ 39 68,565,806 $ 34 68,126,634
Options granted 71 21,471,228 63 15,359,058 39 12,937,404
Options exercised 42 (19,630,005) 36 (19,302,622) 26 (7,391,578)
Options terminated 56 (1,548,184) 61 (3,186,920) 52 (5,106,654)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31 $ 54 61,728,361 $ 44 61,435,322 $ 39 68,565,806
=========== =========== =========== =========== =========== ===========
Exercisable at December 31 $ 38 26,619,548 $ 41 30,603,845 $ 46 38,352,820
=========== =========== =========== =========== =========== ===========
</TABLE>
The shares under option at December 31, 1997, were in the following exercise
price ranges:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
Wtd. Avg. Wtd. Avg. Wtd. Avg.
No. of Exercise Contractual No. of Exercise
Exercise Price Range Options Price Life (in years) Options Price
<S> <C> <C> <C> <C> <C>
$21 - 50 25,762,003 $ 32 6 20,646,476 $ 31
$51 - 69 16,880,188 62 7 5,959,624 61
$70 and over 19,086,170 76 9 13,448 74
---------- ----------
61,728,361 26,619,548
========== ==========
</TABLE>
IBM Employees Stock Purchase Plan
The IBM Employees Stock Purchase Plan (ESPP) enables substantially all regular
employees to purchase full or fractional shares of IBM common stock through
payroll deductions of up to 10 percent of eligible compensation. The price an
employee pays is 85 percent of the average market price on the last day of an
applicable pay period.
During 1997, 1996 and 1995, employees purchased 4,676,980; 6,461,856 and
8,958,680 shares, all of which were treasury shares, for which $354 million,
$324 million and $344 million were paid to IBM, respectively.
There were approximately 35.5 million, 40.2 million and 46.6 million reserved
unissued shares available for purchase under the ESPP, as previously approved by
stockholders, at December 31, 1997, 1996 and 1995, respectively.
69
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Pro Forma Disclosure
In applying APB Opinion 25, no expense was recognized for stock options granted
under the Plan and for employee stock purchases under the ESPP. SFAS 123
requires that a fair market value of all awards of stock-based compensation be
determined using standard techniques and that pro forma net earnings and
earnings per share be disclosed as if the resulting stock-based compensation
amounts were recorded in the Consolidated Statement of Earnings as follows:
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
1997 1996 1995
As reported Pro forma As reported Pro forma As reported Pro forma
<S> <C> <C> <C> <C> <C> <C>
Net earnings applicable to
common shareholders $ 6,073 $ 5,866 $ 5,409 $ 5,267 $ 4,116 $ 4,020
Net earnings per share
of common stock $ 6.18 $ 5.97 $ 5.12 $ 4.98 $ 3.61 $ 3.53
Net earnings per share of
common stock - assuming dilution $ 6.01 $ 5.82 $ 5.01 $ 4.89 $ 3.53 $ 3.45
</TABLE>
The above pro forma amounts, for purposes of SFAS 123, reflect the portion of
the estimated fair value of awards earned in 1997, 1996 and 1995. The aggregate
fair value of awards granted is earned ratably over the vesting or service
period and is greater than that included in the pro forma amounts.
The company used the Black-Scholes model to value the stock options granted in
1997, 1996 and 1995. The weighted average assumptions used to estimate the value
of the options included in the pro forma amounts, and the weighted average
estimated fair value of an option granted are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Term (years)* 5/6 5/6 5/6
Volatility** 23.0% 22.0% 21.0%
Risk-free interest rate
(zero coupon
U.S. Treasury note) 6.2% 6.0% 7.0%
Dividend yield 1.0% 1.2% 2.0%
Weighted average
fair value $ 25 $ 20 $ 12
</TABLE>
* Option term is based on tax incentive options (5 years) and non-tax
incentive options (6 years).
** To determine volatility, the company measured the daily price changes of the
stock over the most recent 5 and 6 year periods.
U Stock Repurchases
The Board of Directors has authorized the company to repurchase IBM common
stock. The company repurchased 81,505,200 common shares at a cost of $7,128
million and 98,930,400 common shares at a cost of $5,810 million in 1997 and
1996, respectively. The repurchases resulted in a reduction of $34,338,668 and
$61,831,500 in the stated capital (par value) associated with common stock in
1997 and 1996, respectively. In 1997, 10 million repurchased shares were used to
establish the Employee Benefits Trust, while 2,727,864 and 979,000 in 1997 and
1996, respectively, were used to fund new acquisitions. The rest of the
repurchased shares were retired and restored to the status of authorized but
unissued shares. At December 31, 1997, approximately $2.7 billion of Board
authorized repurchases remained. The company plans to purchase shares on the
open market from time to time, depending on market conditions.
During 1995, the IBM Board of Directors authorized the company to purchase all
its outstanding Series A 7 1/2 percent preferred stock. The company repurchased
13,450 shares at a cost of $1.4 million during 1997, which resulted in a $134.50
($.01 par value per share) reduction in the stated capital associated with
preferred stock. The repurchased shares were retired and restored to the status
of authorized but unissued shares. No shares were repurchased in 1996. The
company plans to purchase remaining shares on the open market and in private
transactions from time to time, depending on market conditions.
70
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
V Employee Benefits Trust
Effective November 1, 1997, the company created an employee benefits trust to
which the company contributed 10 million shares of treasury stock. The company
is authorized to instruct the trustee to sell shares from time to time and to
use proceeds from such sales, and any dividends paid on such contributed stock,
toward the partial satisfaction of the company's future obligations under
certain of its compensation and benefits plans, including its retiree medical
plans. The shares held in trust are not considered outstanding for earnings per
share purposes until they are committed to be released, and the shares will be
voted by the trustee in accordance with its fiduciary duties. As of December 31,
1997, no shares have been committed to be released.
W Retirement Plans
The company and its subsidiaries have defined benefit and defined contribution
retirement plans covering substantially all regular employees, and a
supplemental retirement plan that covers certain executives. The aggregate
(benefit) cost of these plans for 1997, 1996 and 1995 was $(50) million, $120
million and $377 million, respectively.
The cost of the defined benefit plans for 1997, 1996 and 1995 was as follows:
Net Periodic Pension Cost
<TABLE>
<CAPTION>
U.S. Plan Non-U.S. Plans
1997 1996 1995 1997 1996 1995
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 397 $ 412 $ 315 $ 360 $ 378 $ 386
Interest cost on the projected
benefit obligation 2,215 2,125 2,098 1,173 1,292 1,325
Return on plan assets:
Actual (6,193) (4,849) (5,500) (3,461) (2,543) (1,848)
Deferred 3,286 2,148 2,958 2,021 1,075 403
Net amortizations (125) (121) (123) 16 28 12
Settlement (gains)/curtailment
losses -- -- -- (68) (102) 128
------- ------- ------- ------- ---------- ----------
Net periodic pension cost
(benefit) $ (420) $ (285) $ (252) $ 41 $ 128 $ 406
======= ======= ======= ======= ========== ==========
Total net periodic pension
cost for all non-U.S. plans $ 50 $ 148 $ 417
======= ========== ==========
Expected long-term rate of
return on plan assets 9.5% 9.25% 9.25% 6.0-9.5% 6.5-10.0% 6.25-10.0%
Cost of defined
contribution plans $ 236 $ 209 $ 176 $ 64 $ 29 $ 21
======= ======= ======= ======= ========== ==========
</TABLE>
Net periodic pension cost is determined using the Projected Unit Credit
actuarial method. Settlement gains in 1997 and 1996 reflect principally the
transfer of assets to defined contribution plans upon election by the employees
in certain countries. Curtailment losses in 1995 resulted from the significant
reductions in the expected years of future service caused by termination
programs and represent the immediate recognition of associated prior service
cost and a portion of previously unrecognized actuarial losses.
71
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
The table below provides information on the status of the U.S. and material
non-U.S. defined benefit retirement plans:
Funded Status
<TABLE>
<CAPTION>
U.S. Plan Non-U.S. Plans
1997 1996 1997 1996
(Dollars in millions)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(29,155) $(26,355) $(16,388) $(17,380)
======== ======== ======== ========
Accumulated benefit obligation $(30,466) $(27,698) $(17,187) $(18,273)
======== ======== ======== ========
Projected benefit obligation $(33,161) $(29,729) $(18,709) $(19,739)
Plan assets at fair value 38,475 34,281 21,601 20,808
-------- -------- -------- --------
Projected benefit obligation less than
plan assets 5,314 4,552 2,892 1,069
Unrecognized net gain (1,901) (1,421) (2,822) (1,539)
Unrecognized prior service cost 190 193 194 248
Unrecognized net asset established at
January 1, 1986 (911) (1,052) (87) (110)
-------- -------- -------- --------
Prepaid pension cost (pension liability)
recognized in the Consolidated
Statement of Financial Position $ 2,692 $ 2,272 $ 177 $ (332)
======== ======== ======== ========
Assumptions:
Discount rate 7.0% 7.75% 4.5-7.5% 4.5-8.5%
Long-term rate of compensation increase 5.0% 5.0% 2.6-6.1% 2.3-6.5%
</TABLE>
The U.S. plan's projected benefit obligation increased in 1997 by $3,432
million, primarily as a result of a change in the discount rate assumption, as
required under SFAS 87, "Employers' Accounting for Pensions," which increased
the projected benefit obligation by approximately $2,723 million. The non-U.S.
plans' projected benefit obligation decreased $1,030 million, primarily due to
the effects of exchange rates. The fair value of the plan assets for the U.S.
and non-U.S. plans increased $4,194 million and $793 million, respectively, year
to year as a result of the strong performance of the plan assets.
The effect on the company's results of operations and financial position from
changes in the estimates and assumptions used in computing pension expense and
prepaid pension cost or pension liability is mitigated by the delayed
recognition provisions of SFAS 87, with the exception of the effects of
settlement gains, curtailment losses and early terminations, which are
recognized immediately.
It is the company's practice to fund amounts for pensions sufficient to meet the
minimum requirements set forth in applicable employee benefit laws and with
regard to local tax laws. Additional amounts are contributed from time to time
when deemed appropriate by the company. Liabilities for amounts in excess of
these funding levels are accrued and reported in the company's Consolidated
Statement of Financial Position. The assets of the various plans include
corporate equities, government securities, corporate debt securities and
income-producing real estate.
U.S. Plan: U.S. regular, full-time and part-time employees are covered by a
noncontributory plan that is funded by company contributions to an irrevocable
trust fund, which is held for the sole benefit of employees. In 1994, the
company announced major changes to the plan, which took effect in 1995. Under a
new formula, which is being phased in over five years, retirement benefits will
be determined based on points accumulated for each year worked and final average
compensation period. To preserve benefits of employees close to retirement,
service and earnings credit will continue to accrue under the prior formula
through the year 2000, and upon retirement, these employees will receive the
benefit from either the new or prior formulas, whichever is higher. Benefits
become vested upon the completion of five years of service. The number of
individuals receiving benefits at December 31, 1997 and 1996, was 108,415 and
101,293, respectively.
72
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Non-U.S. Plans: Most subsidiaries and branches outside the U.S. have retirement
plans covering substantially all regular employees, under which funds are
deposited under various fiduciary-type arrangements, annuities are purchased
under group contracts or reserves are provided. Retirement benefits are based on
years of service and the employee's compensation, generally during a fixed
number of years immediately prior to retirement. The ranges of assumptions used
for the non-U.S. plans reflect the different economic environments within
various countries.
In 1994, the company introduced a non-qualified U.S. Supplemental Executive
Retirement Plan (SERP) effective January 1, 1995, which is being phased in over
three years. The SERP, which is unfunded, provides eligible executives defined
pension benefits outside the IBM Retirement Plan, based on average earnings,
years of service and age at retirement. At December 31, 1997 and 1996, the
projected benefit obligation was $128 million and $93 million, respectively. The
net unrecognized costs of the SERP were $72 million and $57 million, and the
amounts included in the Consolidated Statement of Financial Position were
pension liabilities of $56 million and $36 million at December 31, 1997 and
1996, respectively. The cost of the SERP, which is included in the Consolidated
Statement of Earnings, was $20 million, $19 million and $15 million for 1997,
1996 and 1995, respectively.
X Nonpension Postretirement Benefits
The company and its U.S. subsidiaries have defined benefit postretirement plans
that provide medical, dental and life insurance for retirees and eligible
dependents. Plan cost maximums for those who retired prior to January 1, 1992,
will take effect beginning with the year 2001. Plan cost maximums for all other
employees take effect upon retirement.
Net periodic postretirement benefit cost for the U.S. plan for the years ended
December 31 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in millions)
<S> <C> <C> <C>
Service cost $ 32 $ 43 $ 40
Interest cost on the accumulated postretirement
benefit obligation 455 478 520
Actual return on plan assets (15) (68) (198)
Net amortizations and deferrals (119) (87) (7)
----- ----- -----
Net periodic postretirement benefit cost $ 353 $ 366 $ 355
===== ===== =====
</TABLE>
Expected long-term rate of return on plan assets 5.0% 9.25% 9.25%
During 1997, the expected long-term rate of return on plan assets was reduced to
5 percent as a result of the shift in the asset portfolio. Certain of the
company's non-U.S. subsidiaries have similar plans for retirees. However, most
retirees outside the United States are covered by government-sponsored and
- -administered programs, and the obligations and cost of these programs are not
significant to the company.
73
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
The table below provides information on the status of the U.S. plans:
<TABLE>
<CAPTION>
Funded Status
(Dollars in millions)
1997 1996
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(5,327) $(5,454)
Fully eligible active plan participants (518) (512)
Other active plan participants (539) (487)
------- -------
Total (6,384) (6,453)
Plan assets at fair value 120 559
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets (6,264) (5,894)
Unrecognized net loss 578 378
Unrecognized prior service cost (1,073) (902)
------- -------
Accrued postretirement benefit cost recognized in the
Consolidated Statement of Financial Position $(6,759) $(6,418)
======= =======
Assumed discount rate 7.0% 7.75%
</TABLE>
The accumulated postretirement benefit obligation was determined by application
of the terms of medical, dental and life insurance plans, including the effects
of established maximums on covered costs, together with relevant actuarial
assumptions. These actuarial assumptions included a projected healthcare cost
trend rate of 6 percent. In 1997, the accumulated postretirement benefit
obligation increased by $387 million from the change, as required by SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," in the
assumed discount rate. This increase was partially offset by certain plan
amendments, which reduced the accumulated postretirement benefit obligation by
$300 million.
The effect of a 1 percent annual increase in the assumed healthcare cost trend
rate would increase the accumulated postretirement benefit obligation at
December 31, 1997, by approximately $51 million; the 1997 annual costs would not
be materially affected.
The plan assets include various domestic short-term fixed income securities.
Once plan assets have been depleted, the company intends to fund costs as they
are incurred. The accounting for the plan is based on the written plan.
74
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Y Segment Information
IBM is in the business of providing customer solutions through the use of
advanced information technologies. The company operates primarily in the single
industry segment that creates value by offering a variety of solutions that
include, either singularly or in some combination, services, software, systems,
products, financing and technologies. The schedule below shows revenue by
classes of similar products or services. Financial information by geographic
area is summarized in note Z, "Geographic Areas," on pages 76 and 77.
For purposes of classifying similar information technology products,
general-purpose computer systems that operate on a large class of applications
are classified as servers when the systems are simultaneously used by multiple
users at one time, or as clients when the systems are used by one user at a
time. Clients include personal computer and RS/6000 products, general-purpose
display-based terminals and monitors, and consumer and financial systems.
Servers include the System/390, AS/400, RS/6000 and personal computer server
products. Storage consists of externally attached direct access storage devices
and tape storage devices. Other peripherals consists of advanced function
printers and telecommunication devices. OEM hardware consists primarily of
revenue from the sale of HDD storage files and semiconductors.
These hardware classes of products represent groupings that perform similar
functions, as opposed to the complete spectrum of products associated with IBM's
product divisions. Accordingly, they do not represent the full range of any
division's offerings, which could include related peripherals, software and
maintenance.
Services represents a full range of solutions in Network Services, which
includes managed network operations and services; Professional Services,
consisting of systems management or outsourcing, systems integration design and
development, education and consulting; and Product Support Services, which
consists of availability services for operation support and business recovery
systems. Software includes applications and systems software for both host and
distributed systems. Maintenance consists of separately billed charges for
maintenance. Financing and other is composed primarily of financing revenue and
products and supplies not otherwise classified.
Some products logically fit in more than one class and are assigned to a
specific class based on a variety of factors. Over time, products tend to
overlap, merge into or split from existing classes as a result of changing
technologies, market perceptions and/or customer use. For example, market demand
may create requirements for technological enhancements to permit a peripheral
product to be functionally integrated with a display, a telecommunication device
and a processor to form a workstation. Such interchangeability and technological
progress tend to make year-to-year comparisons less valid than they would be in
an industry less subject to rapid change.
<TABLE>
<CAPTION>
Revenue by Classes of Similar Products or Services
Consolidated U.S. Only
(Dollars in millions)
1997 1996* 1995* 1997 1996* 1995*
<S> <C> <C> <C> <C> <C> <C>
Information technology:
Clients** $13,915 $13,925 $12,677 $ 5,804 $ 5,519 $ 4,881
Servers** 11,868 12,421 12,597 4,535 4,365 4,464
Peripherals:
Storage** 2,725 2,779 3,306 1,131 1,036 1,121
Other peripherals** 2,126 2,304 2,085 781 860 764
OEMhardware 5,590 4,550 4,490 3,848 3,092 2,824
Services 19,302 15,873 12,714 7,980 6,129 4,606
Software 12,844 13,052 12,657 4,569 4,377 4,117
Maintenance 6,402 6,981 7,409 2,461 2,525 2,618
Financing and other 3,736 4,062 4,005 1,554 1,492 1,394
------ ------ ------ ------- ------- ------
Total $78,508 $75,947 $71,940 $32,663 $29,395 $26,789
======= ======= ======= ======= ======= =======
</TABLE>
* Reclassified to conform to 1997 presentation.
** Hardware only, includes applicable rental revenue, excludes functions not
embedded, software and maintenance.
75
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Z Geographic Areas
The United States and Canada are managed as a single enterprise. However, in
compliance with SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," the United States is reported as a separate geographic area.
Canadian operations are included in the "Americas" area.
Non-U.S. subsidiaries operating in local currency environments account for
approximately 81 percent of the company's non-U.S. revenue. The remaining 19
percent is from subsidiaries and branches operating in U.S. dollars or in highly
inflationary environments.
In the Europe/Middle East/Africa area, European operations accounted for
approximately 95 percent of revenue in 1997, 1996 and 1995.
Interarea transfers consist principally of completed machines, subassemblies and
parts, and software. Machines and subassemblies and parts are generally
transferred at an intracompany selling price. Software transfers represent
license fees paid by non-U.S. subsidiaries. The intracompany selling price that
relates to fixed asset transfers is capitalized and depreciated by the importing
area.
76
<PAGE>
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions)
1997 1996 1995
United States
<S> <C> <C> <C>
Revenue - Customers $ 32,663 $ 29,395 $ 26,789
Interarea transfers 9,426 10,197 10,553
-------- -------- --------
Total $ 42,089 $ 39,592 $ 37,342
Net earnings 2,354 1,782 599
Assets at December 31 41,633 39,724 38,584
Europe/Middle East/Africa
Revenue - Customers $ 23,919 $ 25,280 $ 25,238
Interarea transfers 2,513 2,455 2,530
-------- -------- --------
Total $ 26,432 $ 27,735 $ 27,768
Net earnings 1,343 1,474 2,271
Assets at December 31 21,006 21,732 24,066
Asia Pacific
Revenue - Customers $ 15,246 $ 14,752 $ 13,892
Interarea transfers 3,475 2,781 2,698
-------- -------- --------
Total $ 18,721 $ 17,533 $ 16,590
Net earnings 1,788 1,466 1,098
Assets at December 31 11,984 12,152 12,789
Americas
Revenue - Customers $ 6,680 $ 6,520 $ 6,021
Interarea transfers 4,407 5,123 5,333
-------- -------- --------
Total $ 11,087 $ 11,643 $ 11,354
Net earnings 586 578 324
Assets at December 31 7,628 8,123 7,530
Eliminations
Revenue $(19,821) $(20,556) $(21,114)
Net earnings 22 129 (114)
Assets (752) (599) (2,677)
Consolidated
Revenue $ 78,508 $ 75,947 $ 71,940
Net earnings 6,093 5,429 4,178
Assets at December 31 81,499 81,132 80,292
======== ======== ========
</TABLE>
77
<PAGE>
International Business Machines Corporation
and Subsidiary Companies
- --------------------------------------------------------------------------------
Five-Year Comparison of Selected Financial Data
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
For the year: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenue $78,508 $75,947 $71,940 $64,052 $62,716
Net earnings (loss) before
changes in accounting principles 6,093 5,429 4,178 3,021 (7,987)
Per share of common stock 6.18 5.12 3.61 2.51 (7.01)
Effect of accounting changes* -- -- -- -- (114)
Per share of common stock -- -- -- -- (.10)
Net earnings (loss) 6,093 5,429 4,178 3,021 (8,101)
Per share of common stock 6.18 5.12 3.61 2.51 (7.11)
Per share of common stock - assuming dilution 6.01 5.01 3.53 2.48 (7.11)
Cash dividends paid on common stock 763 686 572 585 905
Per share of common stock .775 .65 .50 .50 .79
Investment in plant, rental machines
and other property 6,793 5,883 4,744 3,078 3,232
Return on stockholders' equity 29.7% 24.8% 18.5% 14.3% --
At end of year:
Total assets $81,499 $81,132 $80,292 $81,091 $81,113
Net investment in plant, rental machines
and other property 18,347 17,407 16,579 16,664 17,521
Working capital 6,911 6,695 9,043 12,112 6,052
Total debt 26,926 22,829 21,629 22,118 27,342
Stockholders' equity 19,816 21,628 22,423 23,413 19,738
</TABLE>
* 1993, postemployment benefits.
Selected Quarterly Data
(Dollars in millions except per share amounts and stock prices)
<TABLE>
<CAPTION>
Per Share
Common
Stock
Earnings Stock Prices**
Gross Net Assuming
Revenue Profit Earnings Earnings Dilution Dividends High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
First quarter $17,308 $ 6,592 $1,195 $ 1.18 $ 1.16 $ .175 $ 85.06 $ 65.00
Second quarter 18,872 7,401 1,446 1.46 1.43 .200 93.75 63.56
Third quarter 18,605 7,098 1,359 1.38 1.35 .200 109.44 90.13
Fourth quarter 23,723 9,518 2,093 2.16 2.11 .200 113.50 88.63
------- ------- ------ --------- --------- ---------
Total $78,508 $30,609 $6,093 $ 6.18 $ 6.01* $ .775
======= ======= ====== ========= ========= =========
1996
First quarter $16,559 $ 6,769 $ 774 $ .71 $ .69 $ .125 $ 64.44 $ 41.56
Second quarter 18,183 7,191 1,347 1.26 1.24 .175 60.44 48.06
Third quarter 18,062 7,258 1,285 1.23 1.20 .175 63.94 44.56
Fourth quarter 23,143 9,321 2,023 1.97 1.93 .175 83.00 61.56
------- ------- ------ --------- --------- ---------
Total $75,947 $30,539 $5,429 $ 5.12* $ 5.01* $ .650
======= ======= ====== ========= ========= =========
</TABLE>
* The sum of the quarters' earnings per share does not equal the
year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting
requirements.
** The stock prices reflect the high and low prices for IBM's common stock on
the New York Stock Exchange composite tape for the last two years.
78
<PAGE>
stockholder
information
- --------------------------------------------------------------------------------
IBM Stockholder Services
Stockholders with questions about their accounts should contact:
First Chicago Trust Company of New York
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey
07303-2530
(888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0405.
Stockholders can also reach First Chicago Trust Company via the Internet at:
[email protected]
Hearing-impaired stockholders with access to a telecommunications device (TDD)
can communicate directly with First Chicago Trust Company of New York by calling
(201) 222-4489.
IBM Investor Services
The Investor Services Program brochure outlines a number of services provided
for IBM stockholders and potential IBM investors, including the reinvestment of
dividends, direct purchase and the deposit of IBM stock certificates for
safekeeping. Call (888) 421-8860 for a copy of the brochure. Investors residing
outside the United States, Canada and Puerto Rico should call (212) 220-4169.
Stockholder Communications
Stockholders in the United States and Canada can get quarterly financial
results, listen to a summary of Mr. Gerstner's Annual Meeting remarks and hear
voting results from the meeting by calling (800) IBM-7800. Callers can also
request printed copies of the information via mail or fax. Stockholders residing
outside the United States, Canada and Puerto Rico should call (402) 573-9861.
Investors with other requests may write to:
IBM Stockholder Relations
IBM Corporation
New Orchard Road
Armonk, New York 10504
Annual Meeting
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 28, 1998,
at 10 a.m. (CST) at the Arie Crown Theatre, Lakeside Center, Chicago, Illinois.
IBM Stock
IBM common stock is listed on the New York Stock Exchange, on other exchanges in
the United States and around the world.
IBM on the Internet
Topics featured in this Annual Report can be found via the IBM home page on the
Internet at http://www.ibm.com. Financial results, news on IBM products,
services and other activities can also be found via that address.
Literature for IBM Stockholders
The following literature on IBM is available without charge from First Chicago
Trust Company of New York
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey
07303-2530
(201) 324-0405.
The Form 10-K Annual Report and Form 10-Q Quarterly Reports to the SEC provide
additional information on IBM's business. The 10-K is issued in April; 10-Q
reports are released in May, August and November.
An audiocassette recording of the 1997 Annual Report is available for
sight-impaired stockholders.
IBM Credit Corporation's Annual Report is available in April.
"IBM and the Environment" reports on IBM's environmental, safety and energy
programs.
"Valuing Diversity: An Ongoing Commitment" reviews IBM's philosophy on workforce
diversity, equal opportunity, affirmative action and work/life balance.
Programs, both within IBM and in the community, that promote opportunities for
women, minorities, people with disabilities, and Vietnam-era and disabled
veterans are also discussed.
General Information
For answers to general questions about IBM from within the continental United
States, call (800) 426-3333; from outside the continental United States, call
(520) 574-4600.
Corporate Offices
International Business Machines Corporation
New Orchard Road
Armonk, New York 10504
(914) 499-1900
[LOGO] The IBM Annual Report is printed on recycled paper and is recyclable.
Advantis, Aptiva, AS/400, AS/400e, Magic 3D Coloring Book, DB2, DB2 Universal
Database, Deep Blue, e-business logo, IBM, IBM Global Network, IBM logo,
IntelliStation, Netfinity, Network Station, PowerPC, RS/6000, ScrollPoint, SP,
System/390, S/390 Parallel Enterprise Server, ThinkPad and ViaVoice are
trademarks or registered trademarks of International Business Machines
Corporation in the United States and/or other countries. Domino, eSuite, Lotus,
Lotus Notes and Notes are trademarks or registered trademarks of Lotus
Development Corporation. Tivoli is a trademark of Tivoli Systems, Inc. in the
U.S. and/or other countries. In Denmark, Tivoli is a trademark licensed from Kj
benhavns Sommer-Tivoli A/S. NetObjects Fusion is a trademark of NetObjects, Inc.
Edmark is a registered trademark of Edmark Corporation. Intel is a registered
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trademarks of Sun Microsystems, Inc. Microsoft, Windows and Windows NT are
registered trademarks of Microsoft Corporation. Crayola is a registered
trademark of Binney & Smith, Inc.
Printed in U.S. G507-0501-03
79
<PAGE>
EXHIBIT II
PARENTS AND SUBSIDIARIES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------- -------------------
<S> <C> <C>
Registrant:
International Business Machines Corporation............................... New York
Subsidiaries:
IBM Credit Corporation.................................................... Delaware 100
Lotus Development Corporation............................................. Delaware 100
Tivoli Systems Inc........................................................ Delaware 100
Unison Software, Inc...................................................... Delaware 100
IBM World Trade Corporation............................................... Delaware 100
IBM Asia Pacific Service Corporation.................................... Japan 100
IBM China/Hong Kong Corporation......................................... Delaware 100
IBM Factoring Corporation............................................... Delaware 100
IBM World Trade Asia Corporation........................................ Delaware 100
WTC Insurance Corporation, Ltd.......................................... Bermuda 100
IBM Argentina, S.A...................................................... Argentina 100(E)
IBM Australia Ltd....................................................... Australia 100
IBM Bahamas Ltd......................................................... Bahamas 100
IBM de Bolivia, S.A..................................................... Bolivia 100
IBM Brasil-Industria, Maquinas e Servicos Ltda.......................... Brazil 100(E)
General Business Machines Corp.......................................... British V.I. 10
IBM Canada Credit Services Company...................................... Canada 100
IBM Canada Limited--IBM Canada Limitee.................................. Canada 100
IBM China Company Limited............................................... China 100
IBM de Chile, S.A.C..................................................... Chile 100(E)
IBM de Colombia, S.A.................................................... Colombia 90(C)
IBM Middle East FZE..................................................... United Arab 100
Emirates
IBM Middle East Dubai Airport Free Zone FZE............................. United Arab 100
Emirates
IBM del Ecuador, C.A.................................................... Ecuador 100
IBM Global Services India Pvt. Ltd...................................... India 80
Tata IBM Ltd............................................................ India 50
IBM Japan, Ltd.......................................................... Japan 100
IBM Korea, Inc.......................................................... Korea (South) 100
Mesiniaga Sdn. Bhd...................................................... Malaysia 10
Sunway Computer Services Sdn. Bhd....................................... Malaysia 20
Arrendadora de Technologia e Informatica, S.A. de C.V., Organizacion Mexico 99(C)
Auxiliar del Credito..................................................
Financiera de Tecnologia e Informatica S.A. de C.A., Sociedad Financiera Mexico 100(E)
del Objecto Limitado Filial...........................................
Grupo IBM Mexico, S.A. de C.V........................................... Mexico 100(A)
IBM de Mexico, S.A...................................................... Mexico 100(A)
IBM New Zealand Ltd..................................................... New Zealand 100
IBM del Peru, S.A....................................................... Peru 100
IBM World Trade Asia-Pacific Corp....................................... Philippines 98(A)
IBM Philippines, Incorporated........................................... Philippines 100(A)
</TABLE>
<PAGE>
PARENTS AND SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------- -------------------
<S> <C> <C>
IBM Romania Srl......................................................... Romania 100
IBM Singapore Pte. Ltd.................................................. Singapore 100
IBM Taiwan Corporation.................................................. Taiwan 100
Thai Systems Corporation Ltd............................................ Thailand 100
IBM Thailand Company Ltd................................................ Thailand 100(A)
IBM del Uruguay, S.A.................................................... Uruguay 100
IBM de Venezuela, S.A................................................... Venezuela 100
IBM Vietnam Company..................................................... Vietnam 100
IBM Central Europe & Russia Inc......................................... Delaware 100
IBM Oesterreich Internationale Bueromaschinen Gesellschaft m.b.H........ Austria 100
IBA (International Belarussian Alliance)................................ Belarus Republic 45
International Business Machines of Belgium S.A.......................... Belgium 100(E)
IBM Botswana (PTY) Limited.............................................. Botswana 100(A)
IBM Bulgaria Ltd........................................................ Bulgaria 100
IBM Croatia Ltd./ IBM Hrvatska d.o.o.................................... Croatia 100
IBM Ceska Republika spol. s.r.o......................................... Czech Republic 100
IBM Eesti Osauhing (IBM Estonia Ou)..................................... Estonia 100
Compagnie IBM France, S.A............................................... France 100(A)
IBM Eurocoordination.................................................... France --(B)
IBM Europe Middle East Africa........................................... France 100(A)
IBM Beteiligungs GmbH................................................... Germany 100
IBM Deutschland GmbH.................................................... Germany 82(C)
International Business Machines Corporation Magyarorszagi Kft........... Hungary 100
IBM Storage Products Industrial Duty Free Zone LLC...................... Hungary 100
IBM International Treasury Services Company............................. Ireland ---(D)
IBM Ireland Ltd......................................................... Ireland 100
IBM Italia S.p.A........................................................ Italy 96(C)
IBM Hellas Information Handling Systems S.A......................... Greece 100(E)
IBM Israel Ltd...................................................... Israel 100
Companhia IBM Portuguesa, S.A....................................... Portugal 100
IBM (International Business Machines) Turk Ltd. Sirketi............. Turkey 98(C)
IBM South Africa Group Ltd.......................................... South Africa 54
IBM East Africa Limited................................................. Kenya 67(C)
Sabiedriba ar irobezotu IBM Latvija..................................... Latvia 100
QuanTech S.A.L.......................................................... Lebanon 15
International Sales and Services B.V.................................... Netherlands 100
IBM Global Holdings B.V................................................. Netherlands 100
IBM International Centre for Asset Management N.V....................... Netherlands 100
IBM International Holdings B.V.......................................... Netherlands 100
IBM Nederland N.V....................................................... Netherlands 100
IBM Polska Sp. z.o.o.................................................... Poland 100
International Business Machines A/S..................................... Norway 60(C)
IBM East Europe/Asia Ltd................................................ Russia 100
IBM Slovensko spol.s.r.o................................................ Slovak Republic 100
IBM Slovenija d.o.o..................................................... Slovenia 100
</TABLE>
<PAGE>
PARENTS AND SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------- -------------------
<S> <C> <C>
International Business Machines, S.A.................................... Spain 100(E)
IBM Nordic Aktiebolag................................................... Sweden 100
IBM Danmark A/S..................................................... Denmark 100
Oy International Business Machines AB............................... Finland 100
IBM Svenska Aktiebolag.............................................. Sweden 100
IBM International Centre for Asset Management AG........................ Switzerland 100
IBM (Schweiz)--IBM (Suisse)--IBM (Svizzera)--IBM (Switzerland).......... Switzerland 100
IBM North Africa........................................................ Tunisia 99(C)
IBM United Kingdom Holdings Ltd......................................... United Kingdom 100
International Business Machines Limited................................. United Kingdom 100
IBM Zimbabwe (Private) Ltd.............................................. Zimbabwe 100
</TABLE>
- ------------------------
(A) Minor percentage held by other IBM shareholders, subject to repurchase
option.
(B) IBM Eurocoordination, S.A. is owned approximately 14% each by subsidiaries
located in France, Germany, Italy and the United Kingdom and approximately
4% each by subsidiaries located in Austria, Belgium, Denmark, Finland,
Ireland, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland and by
four other minority shareholders.
(C) Remaining percentage owned by another wholly-owned IBM company.
(D) IBM France and IBM Finland each own 16.6% and IBM Denmark and IBM
Switzerland each own 33.3% of IBM International Treasury Services Company.
(E) Minor percentage owned by another wholly-owned IBM company.
<PAGE>
EXHIBIT III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 2-77235,
2-77236, 33-5225, 33-29022, 33-33458 and 33-34406) and Form S-3 (Nos. 33-50537,
33-65119, 33-65119(1), 333-21073 and 333-40669) of International Business
Machines Corporation of our report dated January 19, 1998 appearing on page 39
of the 1997 Annual Report to Stockholders which is incorporated in this Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 10 of this
Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, N.Y. 10036
March 27, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Cathleen P. Black
----------------------------------
Cathleen P. Black
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Harold Brown
----------------------------------
Harold Brown
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Juergen Dormann
----------------------------------
Juergen Dormann
IBM Director
<PAGE>
POWER OF ATTORNEY OF LOUIS V. GERSTNER. JR.
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Chairman and
Chief Executive Officer of International Business Machines Corporation, a New
York corporation, which will file with the Securities and Exchange Commission,
Washington, D.C., under the provisions of the Securities Law, an Annual Report
for 1997 on Form 10-K, hereby constitutes and appoints Lawrence R. Ricciardi,
John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful
attorneys-in-fact and agents, and each of them with full power to act without
the others, for him or her and in his or her name, place and stead, in any and
all capacities, to sign said 10-K Annual Report and any and all amendments
thereto, and any and all other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform any and
all acts and things requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Louis V. Gerstner, Jr.
--------------------------------------
Louis V. Gerstner, Jr.
Chairman of the Board
and Chief Executive Officer
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Nannerl O. Keohane
----------------------------------
Nannerl O. Keohane
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Charles F. Knight
----------------------------------
Charles F. Knight
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Minoru Makihara
----------------------------------
Minoru Makihara
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Lucio A. Noto
----------------------------------
Lucio A. Noto
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John F. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ John B. Slaughter
----------------------------------
John B. Slaughter
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Alex Trotman
----------------------------------
Alex Trotman
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of February, 1998.
/s/ Lodewijk C. van Wachem
----------------------------------
Lodewijk C. van Wachem
IBM Director
<PAGE>
POWER OF ATTORNEY OF IBM DIRECTOR
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which will
file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Law, an Annual Report for 1997 on Form 10-K, hereby
constitutes and appoints Lawrence R. Ricciardi, John R. Joyce, Jeffrey D.
Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and
each of them with full power to act without the others, for him or her and in
his or her name, place and stead, in any and all capacities, to sign said 10-K
Annual Report and any and all amendments thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24 day of February, 1998.
/s/ Charles M. Vest
----------------------------------
Charles M. Vest
IBM Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM
CORPORATION'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,106
<SECURITIES> 447
<RECEIVABLES> 16,850
<ALLOWANCES> 0
<INVENTORY> 5,139
<CURRENT-ASSETS> 40,418
<PP&E> 42,133
<DEPRECIATION> 23,786
<TOTAL-ASSETS> 81,490
<CURRENT-LIABILITIES> 33,507
<BONDS> 0
8,601
0
<COMMON> 252
<OTHER-SE> 10,963
<TOTAL-LIABILITY-AND-EQUITY> 81,499
<SALES> 36,229
<TOTAL-REVENUES> 78,508
<CGS> 23,538
<TOTAL-COSTS> 47,899
<OTHER-EXPENSES> 21,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 728
<INCOME-PRETAX> 9,027
<INCOME-TAX> 2,934
<INCOME-CONTINUING> 6,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,093
<EPS-PRIMARY> 6.18
<EPS-DILUTED> 6.01
</TABLE>
<PAGE>
EXHIBIT IV
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ADDITIONAL EXHIBITS
A supplemental Consolidated Statement of Earnings schedule has been provided
for informational purposes only, to exclude the effects of a $435 million
non-recurring, non-tax deductible charge for purchased in-process research and
development in connection with the Tivoli System Inc. and Object Technology
International Inc. acquisitions in March, 1996. This supplemental statement is
shown in Exhibit IV(a).
This charge is discussed on pages 47 and 48 of IBM's 1997 Annual Report to
Stockholders.
<PAGE>
EXHIBIT IV(A)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS*
1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(DOLLARS IN MILLIONS
EXCEPT PER SHARE
AMOUNTS)
Revenue:
Hardware sales............................................................................ $ 36,229 $ 36,316
Services.................................................................................. 19,302 15,873
Software.................................................................................. 12,844 13,052
Maintenance............................................................................... 6,402 6,981
Rentals and financing..................................................................... 3,731 3,725
--------- ---------
Total revenue............................................................................... 78,508 75,947
Cost:
Hardware sales............................................................................ 23,538 23,396
Services.................................................................................. 15,281 12,647
Software.................................................................................. 3,784 4,082
Maintenance............................................................................... 3,394 3,659
Rentals and financing..................................................................... 1,902 1,624
--------- ---------
Total cost.................................................................................. 47,899 45,408
Gross profit................................................................................ 30,609 30,539
Operating expenses:
Selling, general and administrative....................................................... 16,634 16,854
Research, development and engineering..................................................... 4,877 4,654
--------- ---------
Total operating expenses.................................................................... 21,511 21,508
Operating income............................................................................ 9,098 9,031
Other income, principally interest.......................................................... 657 707
Interest expense............................................................................ 728 716
--------- ---------
Earnings before income taxes................................................................ 9,027 9,022
Provision for income taxes.................................................................. 2,934 3,158
--------- ---------
Net earnings................................................................................ 6,093 5,864
Preferred stock dividends and transaction costs............................................. 20 20
--------- ---------
Net earnings applicable to common shareholders.............................................. $ 6,073 $ 5,844
--------- ---------
--------- ---------
Net earnings per share common stock......................................................... $ 6.18 $ 5.53
--------- ---------
--------- ---------
Net earnings per share common stock--assuming dilution...................................... $ 6.01 $ 5.41
--------- ---------
--------- ---------
Average number of common shares outstanding (millions)...................................... 983.3 1,056.7
</TABLE>
- ------------------------
* See text in Exhibit IV
