<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998
1-2360
(COMMISSION FILE NUMBER)
------------------------
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-0871985
(State of incorporation) (IRS employer identification
number)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
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 1, 1999 ON WHICH REGISTERED
- ------------------------------------------------------------------------- ------------- -----------------------------
<S> <C> <C>
Capital stock, par value $.50 per share 920,650,847 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
5.375% Notes due 2009 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.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 1999, was $155.0 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended
December 31, 1998, into Parts I, II and IV of Form 10-K.
Portions of IBM's definitive Proxy Statement dated March 23, 1999, into
Part III of Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS:
IBM was incorporated in the State of New York on June 15, 1911, as the
Computer-Tabulating-Recording Co.(C-T-R), a consolidation of the Computing Scale
Co. of America, the Tabulating Machine Co., and The International Time Recording
Co. of New York. In 1924, C-T-R adopted the name International Business Machines
Corporation.
IBM is in the business of providing customer solutions through the use of
advanced information technology. The company operates primarily in a single
industry utilizing several segments that create value by offering a variety of
solutions that include, either singularly or in some combination, technologies,
systems, products, services, software and financing.
Organizationally, the company's major operations consist of three hardware
segments: Technology, Personal Systems and Server; a Global Services segment; a
Software segment; a Global Financing segment and a series of Enterprise
Investments.
IBM offers its products through its global sales and distribution
organization. The sales and distribution organization has both a geographic
focus (in the Americas, Europe/Middle East/Africa, and Asia Pacific) and a
specialized and global industry focus. In addition, this organization includes a
global sales and distribution organization devoted exclusively to small and
medium businesses. IBM also offers its products through a variety of third party
distributors and resellers.
While IBM's various proprietary intellectual property rights are important
to its success, 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. 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 protects its intellectual
property 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. There can also be no assurances that IBM will be able to
obtain from third parties the licenses it needs in the future.
IBM's businesses employ a wide variety of components, supplies and raw
materials from a substantial number of suppliers around the world. To date, the
company has found that the components, supplies and raw materials necessary for
the manufacture, production and delivery of its products and services have been
available in the quantities required. Certain of the company's businesses may
rely on a single or limited number of suppliers, although the company makes
every effort to assure the alternative sources are available if the need arises.
The failure of the company's suppliers to deliver components, supplies and raw
material in sufficient quantities and in a timely manner could adversely affect
the company's business.
IBM'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 the
seasonality of technology purchases have historically resulted in first quarter
revenues lower than revenues for the immediately preceding fourth quarter.
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.
The company operates in businesses that are subject to intense competitive
pressures. The company's businesses face a significant number of competitors,
ranging from Fortune 50 companies to an increasing number of relatively small,
rapidly growing and highly specialized organizations. The company believes
2
<PAGE>
that its combination of technology, performance, quality, reliability, price and
the breadth of products and service offerings are important competitive factors.
Intense competitive pressures could affect prices or demand for IBM's
products and services, resulting in reduced profit margins and/or loss of market
opportunity. Unlike many of its competitors, IBM 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,
IBM may not fund or invest in certain of its businesses to the same degree that
its competitors do and these companies may have greater financial, technical and
marketing resources available to them than the businesses of IBM against which
they compete.
IBM 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 IBM operates could affect its business in
that country and its results of operations. IBM's results of operations could
also be affected by economic changes in those countries and by macroeconomic
changes, including recessions and inflation. For example, weakness in the Asian
and Latin American economies has had an adverse impact on IBM's business in
1998.
The following information is included in IBM's 1998 Annual Report to
Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of
similar products or services--Pages 84 through 89.
Financial information by geographic areas--Page 89.
Amount spent during each of the last three years on research
and development activities--Page 78.
Financial information regarding environmental activities--Page 76.
The number of persons employed by the registrant--Page 62.
The management discussion overview--Page 54.
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 in addition to other factors discussed
elsewhere in this Annual Report, in the company's filings with the Securities
and Exchange Commission or in materials incorporated herein or 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, shortened life
cycles and an increasing emphasis on being first to market with new products and
services.
3
<PAGE>
There can be no assurance that the company will successfully introduce new
products and services, that these products and services will be 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.
Volatility of Stock Prices: 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. 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.
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.
ITEM 2. PROPERTIES:
At December 31, 1998, IBM's manufacturing and development facilities in the
United States had aggregate floor space of 41.7 million square feet, of which
34.0 million were owned and 7.7 million were leased. Of these amounts, 3.1
million square feet were vacant and 1.9 million square feet were being leased to
non-IBM businesses. Similar facilities in 17 other countries totaled 18.0
million square feet, of which 13.7 million were owned and 4.3 million were
leased. Of these amounts, .9 million square feet were vacant and .6 million
square feet were being leased to non-IBM businesses.
Although improved production techniques, productivity gains, and
infrastructure reduction 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 59 of IBM's 1998 Annual Report to Stockholders which is
incorporated herein by reference.
4
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 29, 1999):
<TABLE>
<CAPTION>
OFFICER
AGE SINCE
--- -----------
<S> <C> <C>
Chairman of the Board of Directors and Chief Executive Officer
Louis V. Gerstner, Jr.(1)........................................................................ 57 1993
Senior Vice Presidents
J. Thomas Bouchard, Human Resources.............................................................. 58 1994
Nicholas M. Donofrio, Group Executive............................................................ 53 1995
William A. Etherington, Group Executive.......................................................... 57 1998
J. Bruce Harreld, Strategy....................................................................... 48 1995
Paul M. Horn, Research........................................................................... 52 1996
Abby F. Kohnstamm, Marketing..................................................................... 45 1998
Douglas L. Maine, Chief Financial Officer........................................................ 50 1998
Samuel J. Palmisano, Group Executive............................................................. 47 1997
Lawrence R. Ricciardi, General Counsel........................................................... 58 1995
Robert M. Stephenson, Group Executive............................................................ 60 1995
David M. Thomas, Group Executive................................................................. 49 1998
John M. Thompson, Group Executive................................................................ 56 1989
James T. Vanderslice, Group Executive............................................................ 58 1998
Vice Presidents
Mark Loughridge, Controller...................................................................... 45 1998
Daniel E. O'Donnell, Secretary................................................................... 51 1998
Jeffrey D. Serkes, Treasurer..................................................................... 40 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, J. Bruce Harreld, Douglas L. Maine, 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. 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. Maine was chief financial officer and executive vice president of MCI
Communications, a long-distance telecommunications company, from 1992 until
joining IBM in 1998. Prior to that he also served in several executive
positions, including controller, senior vice president-finance and president of
a 14 state operating division.
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.
5
<PAGE>
ITEM 3. LEGAL PROCEEDINGS:
Refer to note P "Contingencies" on page 77 of IBM's 1998 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 90 and 91 of IBM's 1998 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 618,962 common stockholders of
record at March 1, 1999.
ITEM 6. SELECTED FINANCIAL DATA:
Refer to page 90 of IBM's 1998 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 54 through 63 of IBM's 1998 Annual Report to Stockholders
which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Refer to the section titled "Market Risk" on pages 60 and 61 of IBM's 1998
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Refer to pages 52 and 53, and 64 through 89 of IBM's 1998 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
23, 1999, which are incorporated herein by reference. Also refer to Item 2
entitled "Executive Officers of the Registrant" in Part I of this Form.
ITEM 11. EXECUTIVE COMPENSATION:
Refer to pages 12 through 20 of IBM's definitive Proxy Statement dated March
23, 1999, which are incorporated herein by reference.
6
<PAGE>
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 "Ownership of Securities--Common Stock and
Total Stock-Based Holdings" appearing on pages 10 and 11 of IBM's
definitive Proxy Statement dated March 23, 1999, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Refer to the section entitled "Other Relationships" appearing on page 9 of
IBM's definitive Proxy Statement dated March 23, 1999, 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 1998 Annual Report to Stockholders
which are incorporated herein by reference:
Report of Independent Accountants (page 53).
Consolidated Statement of Earnings for the years ended December 31,
1998, 1997 and 1996 (page 64).
Consolidated Statement of Financial Position at December 31, 1998 and
1997 (page 65).
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 (pages 66 and 67).
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996 (page 68).
Notes to Consolidated Financial Statements (pages 69 through 89).
2. Financial statement schedules required to be filed by Item 8 of this
Form:
<TABLE>
<CAPTION>
SCHEDULE
PAGE NUMBER
- ----------- -------------
<C> <C> <S>
11 Report of Independent Accountants on Financial Statement Schedule
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.
7
<PAGE>
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) Quarterly Consolidated Statement of
Earnings--Restated 1998.
V-- IBM's 1998 Annual Report to Stockholders, certain sections of
which have been incorporated herein by reference.
VI-- Powers of Attorney.
VII-- Financial Data Schedule.
Not included in this Form 10-K:
-- The Certificate of Incorporation of IBM is Exhibit (3)(i) to Form
8-K dated April 29, 1997, and is hereby incorporated by reference.
-- The By-laws of IBM as amended through October 27, 1998, is
Exhibit 3 to Form 10-Q for the quarter ended September 30, 1998,
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 IBM 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 9 and 10 of IBM's definitive
Proxy Statement dated March 23, 1999, 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.
-- Second Amendment to Employment Agreement for L.V. Gerstner, Jr.
dated as of November 17, 1997, is Exhibit VI to Form 10-K for the
year ended December 31, 1997, 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.
8
<PAGE>
-- 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.
-- 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 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 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 instruments 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 instrument defining the rights of the holders of the 5.375%
Notes due 2009 is Exhibit 2 to Form 8-K, filed on January 29,
1999, 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 23, 1999, certain
sections of which have been incorporated herein by reference.
(b) Reports on Form 8-K:
A Form 8-K dated October 20, 1998, was filed with respect to the
company's financial results for the periods ended September 30,
1998, and included unaudited consolidated financial statements
for the period ended September 30, 1998.
A Form 8-K dated December 16, 1998, was filed for the press
release announcing the execution of definitive agreements between
IBM and AT&T, pursuant to which, among other things, AT&T will
acquire the assets of the IBM Global Network from IBM, is hereby
incorporated by reference.
9
<PAGE>
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.
<TABLE>
<S> <C> <C>
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)
</TABLE>
Date: March 29, 1999
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/ DOUGLAS L. MAINE Senior Vice President, March 29, 1999
- ------------------------------ Chief
(Douglas L. Maine) Financial Officer
/s/ MARK LOUGHRIDGE Vice President and March 29, 1999
- ------------------------------ Controller
(Mark Loughridge)
<TABLE>
<S> <C> <C>
CATHLEEN BLACK Director
KENNETH I. CHENAULT Director
JUERGEN DORMANN Director
NANNERL O. KEOHANE Director
CHARLES F. KNIGHT
Director
MINORU MAKIHARA Director By: /s/ DANIEL E. O'DONNELL
LUCIO A. NOTO Director -------------------------------------
JOHN B. SLAUGHTER Director (Daniel E. O'Donnell)
ALEX TROTMAN Director ATTORNEY-IN-FACT
LODEWIJK C. van WACHEM Director
CHARLES M. VEST Director March 29, 1999
</TABLE>
10
<PAGE>
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 21, 1999, appearing on page 53 of the 1998 Annual Report to
Stockholders of International Business Machines Corporation, (which report and
consolidated financial statements are incorporated by reference in Annual Report
on Form 10-K) also included an audit of the Financial Statement Schedule 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, N.Y. 10019
January 21, 1999
11
<PAGE>
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>
1998
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 775 $ 19 $ 794
----- ----- -----
----- ----- -----
--Non-current............................................................. $ 164 $ 31 $ 195
----- ----- -----
----- ----- -----
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
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
(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 at year-end 1998 approximate less than three 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 at
year-end 1997 approximate less than three and one-quarter 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 at
year-end 1996 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
<PAGE>
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 (3)(i) to Form 8-K dated April
29, 1997, and is hereby incorporated by reference.
The By-laws of IBM as amended through October 27, 1998, is Exhibit 3 to Form 10-Q
for the quarter ended September 30, 1998, and is hereby incorporated by
reference.
(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, 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 6.5% 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 6.5% Debentures due 2028
is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by
reference.
The instrument defining the rights of the holders of the 5.375% Notes due 2009 is
Exhibit 2 to Form 8-K, filed on January 29, 1999, 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 9 and 10 of IBM's definitive Proxy Statement dated March
23, 1999, 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
November 17, 1997, is Exhibit VI to Form 10-K for the year ended December 31,
1997, and is hereby incorporated by reference.
(11) Statement re computation of per share earnings.
The statement re computation of per share earnings is note T "Earnings Per Share of
Common Stock" on page 79 of IBM's 1998 Annual Report to Stockholders, which is
incorporated herein by reference.
(12) Statement re computation of ratios. I
(13) Annual report to security holders. V
(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. VI
(27) Financial Data Schedule. VII
(28) Information from reports furnished to state insurance regulatory authorities. Not applicable
(99) Additional exhibits. IV
</TABLE>
<PAGE>
EXHIBIT I
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and change in accounting
principles(1).............................................. $ 8,997 $ 9,054 $ 8,599 $ 7,910 $ 5,253
Add:
Fixed charges, excluding capitalized interest.............. 2,036 2,000 1,942 1,972 2,450
--------- --------- --------- --------- ---------
Earnings as adjusted....................................... $ 11,033 $ 11,054 $ 10,541 $ 9,882 $ 7,703
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed charges:
Interest expense........................................... $ 1,559 $ 1,573 $ 1,545 $ 1,591 $ 2,025
Capitalized interest....................................... 28 32 31 23 20
Portion of rental expense representative of interest....... 477 427 397 381 425
--------- --------- --------- --------- ---------
Total fixed charges.......................................... $ 2,064 $ 2,032 $ 1,973 $ 1,995 $ 2,470
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Preferred stock dividends(2)................................. 29 29 32 37 144
--------- --------- --------- --------- ---------
Combined fixed charges and preferred stock dividends......... $ 2,093 $ 2,061 $ 2,005 $ 2,032 $ 2,614
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges........................... 5.3 5.4 5.3 5.0 3.1
Ratio of earnings to combined fixed charges and preferred
stock dividends............................................ 5.3 5.4 5.3 4.9 2.9
</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
1998, 1997 and 1996, respectively. Excluded from the ratio computation for
the 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 1998, 1997, and
1996, respectively, or $29 million for 1998 and 1997 and $32 million for
1996 representing the pre-tax income which would be required to cover such
dividend requirements based on the company's effective tax rate for year end
1998, 1997 and 1996, respectively. For the 1995 and 1994 year ends,
preferred stock dividends are also on a pre-tax basis.
<PAGE>
EXHIBIT II
PARENTS AND SUBSIDIARIES
PARENTS AND SUBSIDIARIES
AS OF DECEMBER 31, 1998
<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................................... Massachusetts 100
Tivoli Systems Inc. ............................................ Delaware 100
IBM World Trade Corporation..................................... Delaware 100
IBM Asia Pacific Service Corporation.......................... Japan 100
IBM China/Hong Kong Corporation............................... Delaware 100
IBM World Trade Asia Corporation.............................. Delaware 100
WTC Insurance Corporation, Ltd. .............................. Bermuda 100
IBM Argentina, S.A. .......................................... Argentina 100(C)
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(C)
IBM Foreign Sales Corporation................................. Barbados 100
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(C)
IBM de Colombia, S.A. ........................................ Colombia 90(C)
IBM Middle East FZE........................................... United Arab Emirates 100
IBM Middle East Dubai Airport Free Zone FZE................... United Arab Emirates 100
IBM del Ecuador, C.A.......................................... Ecuador 100
IBM Global Services India Pvt. Ltd............................ India 80(E)
Tata IBM Ltd. ................................................ India 50
IBM Japan, Ltd. .............................................. Japan 100
IBM Korea, Inc. .............................................. Korea (South) 100
Mesiniaga Berhad.............................................. Malaysia 10
Sunway Computer Services Sdn. Bhd............................. Malaysia 20
Arrendadora de Tecnologia e Informatica, S.A. de C.V.,
Organizacion Auxiliar del Credito........................... Mexico 86(C)
Financiera de Tecnologia e Informatica S.A. de C.A., Sociedad
Financiera del Objecto Limitado Filial...................... Mexico 100(C)
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
<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 Taiwan Corporation........................................ Taiwan 100(A)
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 Belarussia Alliance)....................... Belarus Republic 45
International Business Machines of Belgium S.A. .............. Belgium 100(C)
IBM Botswana (PTY) Limited.................................... Botswana 100
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(C)
IBM Beteiligungs GmbH......................................... Germany 100
IBM Deutschland GmbH.......................................... Germany 82(C)
International Business Machines Corporation Magyarorszagi
Kft......................................................... 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(C)
IBM Israel Ltd. ............................................ Israel 100(C)
Companhia IBM Portuguesa, S.A. ............................. Portugal 100
IBM (International Business Machines) Turk Ltd. Sirketi..... Turkey 98(C)
IBM South Africa Group Ltd. ................................ South Africa 95(C)
IBM East Africa Limited....................................... Kenya 67(C)
Sabiedriba ar irobezotu IBM Latvija........................... Latvia 100
QuanTech S.A.L. .............................................. Lebanon 15
IBM Lietuva................................................... Lithuania 100
IBM Global Holdings B.V....................................... Netherlands 100
IBM International Centre for Asset Management N.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
International Business Machines, S.A. ........................ Spain 100(C)
IBM Nordic Aktiebolag....................................... Sweden 100
IBM Danmark A/S............................................. Denmark 100
</TABLE>
<PAGE>
PARENTS AND SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------------- -------------------
<S> <C> <C>
Oy International Business Machines AB....................... Finland 100
IBM Svenska Aktiebolag...................................... Sweden 100
IBM International Centre for Asset Management A.G. ........... 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, 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 held by another IBM shareholder.
<PAGE>
EXHIBIT III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777,
33-60225, 33-60227, 33-60237, 33-60815, 333-01411, 333-09055, 333-23315,
333-31305, 333-41813, 333-44981 and 333-48435) and the Prospectuses constituting
part of the Registration Statements on Form S-3 (Nos. 33-50537, 33-65119,
33-65119(1), 333-03763, 333-21073, 333-27669, 333-40669 and 333-70521) of
International Business Machines Corporation of our report dated January 21,
1999, appearing on page 53 of the 1998 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 11 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, N.Y. 10019
March 26, 1999
<PAGE>
EXHIBIT IV
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ADDITIONAL EXHIBITS
Effective December 31, 1998, the company adopted Statement of Financial
Accounting Standards 131, "Disclosures About Segments of an Enterprise and
Related Information." As a result of adopting this standard the company has
changed its revenue and cost lines in the Consolidated Statement of Earnings
generally aligning with the new segment information. The 1998 quarterly
Consolidated Statements of Earnings are restated in Exhibit IVa. Additional
information about the company's segments can be found in note Y, "Segment
Information," on pages 84 through 89 of the 1998 Annual Report to Stockholders.
<PAGE>
EXHIBIT IV(A)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY CONSOLIDATED STATEMENT OF EARNINGS-RESTATED*
1998
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER+ QUARTER+ QUARTER+ QUARTER+ FULL YEAR
----------- ----------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenue:
Hardware segments........................................ $ 7,318 $ 7,714 $ 8,920 $ 11,467 $ 35,419
Global Services segment.................................. 6,341 6,969 7,046 8,560 28,916
Software segment......................................... 2,644 2,866 2,808 3,545 11,863
Global Financing segment................................. 719 712 679 767 2,877
Enterprise Investments segment/Other..................... 596 562 642 792 2,592
----------- ----------- ----------- ----------- ---------
Total revenue............................................ 17,618 18,823 20,095 25,131 81,667
Cost:
Hardware segments........................................ $ 5,219 $ 5,347 $ 6,101 $ 7,547 24,214
Global Services segment.................................. 4,630 5,065 5,222 6,208 21,125
Software segment......................................... 540 548 544 628 2,260
Global Financing segment................................. 380 377 351 386 1,494
Enterprise Investments segment/Other..................... 399 340 410 553 1,702
----------- ----------- ----------- ----------- ---------
Total cost............................................... 11,168 11,677 12,628 15,322 50,795
Gross profit............................................. 6,450 7,146 7,467 9,809 30,872
Operating expenses:
Selling, general and administrative...................... 3,719 3,812 4,057 5,074 16,662
Research, development and engineering.................... 1,179 1,220 1,240 1,407 5,046
----------- ----------- ----------- ----------- ---------
Total operating expenses................................. 4,898 5,032 5,297 6,481 21,708
Operating income......................................... 1,552 2,114 2,170 3,328 9,164
Other income, principally interest....................... 150 130 122 187 589
Interest expense......................................... 179 161 160 213 713
----------- ----------- ----------- ----------- ---------
Income before income taxes............................... 1,523 2,083 2,132 3,302 9,040
Provision for income taxes............................... 487 631 638 956 2,712
----------- ----------- ----------- ----------- ---------
Net income............................................... 1,036 1,452 1,494 2,346 6,328
Preferred stock dividends................................ 5 5 5 5 20
----------- ----------- ----------- ----------- ---------
Net income applicable
to common shareholders................................... $ 1,031 $ 1,447 $ 1,489 $ 2,341 $ 6,308
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
* See text in Exhibit IV
+ Unaudited
<PAGE>
FINANCIAL REPORT
International Business Machines Corporation and Subsidiary Companies
Report of Management 52
Report of Independent Accountants 53
Management Discussion 54
Consolidated Financial Statements
Earnings 64
Financial Position 65
Stockholders' Equity 66
Cash Flows 68
Notes To Consolidated Financial Statements
A Significant Accounting Policies 69
B Accounting Changes 71
C Subsequent Events 72
D Divestitures 72
E Common Stock Split 72
F Inventories 72
G Plant, Rental Machines and Other Property 72
H Investments and Sundry Assets 72
I Lines of Credit 73
J Sale and Securitization of Receivables 73
K Debt 73
L Interest on Debt 74
M Financial Instruments 74
N Other Liabilities and Environmental 76
O Stockholders' Equity Activity 76
P Contingencies 77
Q Taxes 77
R Selling and Advertising 78
S Research, Development and Engineering 78
T Earnings Per Share of Common Stock 79
U Rental Expense and Lease Commitments 79
V Stock-Based Compensation Plans 79
W Retirement Plans 81
X Nonpension Postretirement Benefits 83
Y Segment Information 84
Five-Year Comparison of Selected Financial Data 90
Selected Quarterly Data 90
Stockholder Information 91
Board of Directors and Senior Management 92
51
<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.
PricewaterhouseCoopers 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/ Douglas L. Maine
Louis V. Gerstner, Jr. Douglas L. Maine
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
52
<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 64 through 89, present fairly, in all material respects, the financial
position of International Business Machines Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019
January 21, 1999
53
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Overview
IBM's financial results for 1998 demonstrated the value and strength of the
company's portfolio of businesses. The company achieved good results despite a
number of challenges throughout the year: weakness in Asia, ongoing softness in
memory chip prices, continued pricing pressures across many of its product
lines, product transitions in the Server segment and weakness in Latin America
during the second half of the year. Despite all of these factors, the company
achieved overall strong performance, especially from its Global Services
segment, Software segment and hard disk drive (HDD) products of the Technology
segment. The AS/400 product line, when viewed on a combined software and
hardware basis, had good year-over-year performance. On a geographic basis, good
results within North America and Europe were somewhat offset by weakness in Asia
and Latin America.
The company's financial results showed improved revenue growth and a more
balanced performance between gross profit and expense in the second half of the
year versus the first half of 1998. This improved performance led to a diluted
earnings per share growth of about 17 percent in the second half of the year,
versus a decline of about 1 percent in the first half of the year when compared
to the same periods of 1997.
The company reported revenue of $81.7 billion--a record for the fourth
consecutive year; while net income of $6.3 billion yielded a record $6.57
earnings per share of common stock--assuming dilution. The company funded
investments of approximately $20 billion in capital expenditures, research and
development, strategic acquisitions and repurchases of common stock.
Challenges
While good progress was made in 1998, there are a number of uncertainties facing
the company in 1999: the continued weak economies in Asia and Latin America,
continued price pressure in the information technology industry, particularly
within the fiercely competitive Personal Systems segment and the
microelectronics unit of the Technology segment, and how the "Year 2000 issue"
will affect customer purchases. The company's focus in 1999 will be to increase
revenue with particular emphasis on addressing customers' needs to build
integrated e-business solutions through the use of the company's hardware,
services, software and technology. In addition, the company plans to continue to
invest judiciously, reduce infrastructure and optimize the deployment of the
company's employees and resources to maintain or improve its pre-tax profits.
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 1998 Form 10-K to be filed on or about March 26, 1999.
Results of Operations
- --------------------------------------------------------------------------------
(Dollars in millions except per share amounts)
1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $81,667 $78,508 $75,947
Cost 50,795 47,899 45,408
- --------------------------------------------------------------------------------
Gross profit 30,872 30,609 30,539
Gross profit margin 37.8% 39.0% 40.2%
Total expense 21,832 21,582 21,952
- --------------------------------------------------------------------------------
Income before
income taxes $ 9,040 $ 9,027 $ 8,587
================================================================================
Net income $ 6,328 $ 6,093 $ 5,429
================================================================================
Earnings per share of
common stock--basic $ 6.75 $ 6.18 $ 5.12
================================================================================
Earnings per share of
common stock--
assuming dilution $ 6.57 $ 6.01 $ 5.01
================================================================================
Revenue in 1998 grew 4.0 percent as reported and 6.2 percent when currency
impacts are removed. This increase was primarily driven by growth in the Global
Services segment, HDD storage products of the Technology segment, and middleware
software offerings including those from Tivoli Systems, Inc. (Tivoli) of the
Software segment.
The following table provides the company's percentage of revenue by segment and
illustrates the continuing shift toward a greater percentage of the company's
revenue being derived from the Global Services and Software segments.
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Hardware segments 43.4% 46.7% 48.2%
Global Services segment 35.4 32.1 29.4
Software segment 14.5 14.2 15.0
Global Financing segment 3.5 3.6 4.0
Enterprise Investments
segment/Other 3.2 3.4 3.4
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
================================================================================
54
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
The overall gross profit margin at 37.8 percent decreased 1.2 points from 1997,
following a 1.2 point decrease in 1997 versus 1996. The declines were primarily
the result of the company's continued shift to global services in 1998 and 1997.
The Global Services segment has a lower gross profit margin than the company's
Server segment (S/390, AS/400 and RS/6000), which has been declining as a
percentage of total revenue over the past three years.
The 1998 revenue from the United States was $35.3 billion, an increase of 8.1
percent from 1997. Revenue from Europe/ Middle East/Africa was $26.0 billion, up
8.6 percent (up about 9 percent in constant currency). Asia Pacific revenue fell
9.4 percent (down about 1 percent in constant currency) to $13.8 billion, while
revenue from Latin America was $3.3 billion, a decline of 9.2 percent (down
about 7 percent in constant currency) versus 1997. Revenue from Canada was $3.3
billion, an increase of 6.8 percent (up about 14 percent in constant currency)
compared to 1997.
Information about the company's operating segments can be found in note Y,
"Segment Information," on pages 84 through 89. This note provides additional
information, including a description of the products and services of each
segment, as well as financial data pertaining to each segment.
The following discussion is based on the Consolidated Financial Statements found
on pages 64 through 68, which reflect, in all material respects, the company's
segment results on an external basis.
- --------------------------------------------------------------------------------
Hardware Segments
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $35,419 $36,630 $36,634
Cost 24,214 23,473 22,888
- --------------------------------------------------------------------------------
Gross profit $11,205 $13,157 $13,746
================================================================================
Gross profit margin 31.6% 35.9% 37.5%
- --------------------------------------------------------------------------------
Revenue from Hardware segments decreased 3.3 percent (down about 2 percent in
constant currency) from 1997, after being essentially flat in 1997 versus 1996.
Gross profit dollars from Hardware segments declined 14.8 percent from 1997,
following a decrease of 4.3 percent in 1997 from 1996.
Technology segment revenue increased 7.3 percent in 1998 versus 1997, following
an increase of 8.2 percent in 1997 compared to 1996. The increases were driven
by continued strong growth in HDD storage products, which are primarily sold to
Original Equipment Manufacturers (OEMs) for use in their product offerings,
storage tape products, and growth in custom logic products. These increases were
partially offset by lower dynamic random access memory (DRAM) revenue due to the
continued industry-wide pricing pressures and lower revenue from high-end
storage products. The company continues to evaluate various alternatives to
mitigate the impact of memory price pressures on the results of the company.
These alternatives include, among other actions, realigning alliance structures,
rebalancing sources of supply and redirecting product focus.
Server segment revenue decreased 5.9 percent in 1998 from 1997, following a
decrease of 7.7 percent in 1997 versus 1996. The declines were driven by lower
revenue from S/390, AS/400 and RS/6000. While S/390 revenue declined, total
delivery of computing power increased over 60 percent as measured in MIPS
(millions of instructions per second) versus last year. AS/400 and RS/6000 were
impacted by the effect of product transitions late in 1998, as well as
anticipation by customers of early 1999 product announcements.
Personal Systems segment revenue declined 10.9 percent in 1998 from 1997,
following an increase of 3.3 percent in 1997 versus 1996. The decline in 1998
versus 1997 was driven by lower revenue from both commercial and consumer
personal computers. Although Personal Systems segment revenue declined for the
full year, the second half of 1998 showed improved performance when compared to
the first half of the year. The increase in revenue in 1997 over 1996 was driven
by higher commercial personal computer revenue and increased general-purpose
display revenue.
The decrease in the 1998 Hardware segments' gross profit dollars was driven
primarily by lower margins associated with Personal Systems segment products.
This was a result of severe price reductions, partially offset by cost
improvements. In addition, gross profit dollars for the Technology segment were
lower due to the year-to-year price reductions in DRAMs. The decrease in gross
profit margin over the periods continues to be driven by the shift in the
company's revenue to lower gross profit products, such as personal computers,
OEM semiconductors and HDDs, as well as price pressures. The overall Hardware
segments' gross profit dollars and margin continue to be adversely impacted by
pricing pressures across most products.
- --------------------------------------------------------------------------------
Global Services Segment
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $28,916 $25,166 $22,310
Cost 21,125 18,464 16,270
- --------------------------------------------------------------------------------
Gross profit $ 7,791 $ 6,702 $ 6,040
================================================================================
Gross profit margin 26.9% 26.6% 27.1%
- --------------------------------------------------------------------------------
55
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
The Global Services segment revenue increased 14.9 percent in 1998 (up about 18
percent in constant currency) from 1997 and 12.8 percent in 1997 over 1996. The
increases were driven by all major categories of services. Strategic outsourcing
was a major contributor to the growth. Strategic outsourcing is the management
of all or part of our customer's business processes, technology operations,
network operations and data. The company's IT consulting and systems integration
offerings also had strong growth. Systems integration services assist companies
to bridge the gap between current capabilities and future business requirements
by modifying their existing applications and integrating new ones.
Another category of service offerings which demonstrated significant growth in
1998 was product support services. These services identify systems-related
requirements and determine more efficient solutions. The major offering
categories in this area are hardware and software support, business recovery
services, systems management and networking services, and site and connectivity
services.
E-business spans many of the Global Services segment offerings already mentioned
and played a key role in its 1998 growth. The company's e-business services
offerings include: e-business strategy and planning; e-commerce services for Web
selling, e-payments, e-procurement, security and privacy; e-business enablement
services involving applications, information use and messaging; learning
services such as distributed learning; and hosted business applications such as
network-delivered applications, Web hosting and Web infrastructure outsourcing.
In 1998, the company signed services contracts worth $33 billion, increasing the
backlog to $51 billion. The company continued to meet the growing demand for its
services by hiring about 18,000 employees in 1998 and over 15,000 employees in
each of 1997 and 1996.
Revenue and profitability increases in these services categories were partially
offset by lower revenue associated with maintenance offerings. The maintenance
portion of the Global Services segment continues to be affected by price
reductions on maintenance offerings. The focus on stabilizing maintenance
revenues led to identification of many new opportunities in this business. While
maintenance gross profit dollars are declining as a result of lower revenue, the
decrease was partially offset by cost efficiencies achieved in 1998. These
productivity improvements have sustained the gross profit margin despite
competitive pressures and overall declining revenue. The effect of lower
maintenance revenues was to reduce the overall Global Services profit margins,
but this impact was more than offset by increases in services profitability and
the sustained margins of the maintenance business.
- --------------------------------------------------------------------------------
Software Segment
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $11,863 $11,164 $11,426
Cost 2,260 2,785 2,946
- --------------------------------------------------------------------------------
Gross profit $ 9,603 $ 8,379 $ 8,480
================================================================================
Gross profit margin 80.9% 75.1% 74.2%
- --------------------------------------------------------------------------------
Software segment revenue increased 6.3 percent in 1998 (up about 9 percent in
constant currency) from 1997, following a decline of 2.3 percent from 1996. The
revenue increase in 1998 was driven by growth in the company's middleware
products consisting of data management, transaction processing, Tivoli systems
management, and messaging and collaboration. In addition, operating systems
software grew slightly year over year primarily as a result of strong AS/400
revenue. The decrease in 1997 versus 1996 of 2.3 percent was a result of lower
operating system revenue associated with S/390 products. This decrease was
partially offset by increased revenue for middleware products, especially
systems management software from Tivoli.
Software segment gross profit dollars increased 14.6 percent in 1998 from 1997,
following a decrease of 1.2 percent in 1997 from 1996. The improvement in gross
profit dollars was the result of less amortization cost of previously deferred
development spending. This is the result of more software spending being
expensed in the period incurred, and less being capitalized in relation to
historical levels. In 1997, this improvement was more than offset by the decline
in revenue versus 1996.
- --------------------------------------------------------------------------------
Global Financing Segment
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $2,877 $2,806 $3,054
Cost 1,494 1,448 1,481
- --------------------------------------------------------------------------------
Gross profit $1,383 $1,358 $1,573
================================================================================
Gross profit margin 48.1% 48.4% 51.5%
- --------------------------------------------------------------------------------
Global Financing segment revenue increased 2.5 percent in 1998 (up about 5
percent in constant currency) from 1997, following a decrease of 8.1 percent in
1997 versus 1996. The revenue increase in 1998 over 1997 was due to improved
used equipment sales and growth in software and services financing, offset by a
decline in working capital financing and decreased interest income. The revenue
decline in 1997 versus 1996 was attributable to lower used equipment sales and
decreases in both working capital financing and interest income.
Gross profit dollars increased 1.8 percent in 1998 versus 1997, following a
decrease of 13.7 percent in 1997 from 1996. The increase in 1998 versus 1997 was
primarily due to increased revenue and a higher gross profit margin in the U.S.
markets. The decrease in 1997 versus 1996 reflects a trend towards financing a
greater volume of low-end products and faster
56
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
growth in the more competitive U.S. markets. See note Y, "Segment Information,"
on pages 84 through 89 for more detailed information on the Global Financing
segment.
- --------------------------------------------------------------------------------
Enterprise Investments Segment/Other
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $2,592 $2,742 $2,523
Cost 1,702 1,729 1,823
- --------------------------------------------------------------------------------
Gross profit $ 890 $1,013 $ 700
================================================================================
Gross profit margin 34.3% 36.9% 27.7%
- --------------------------------------------------------------------------------
Information, including a description of the company's Enterprise Investment
segment, can be found in note Y, "Segment Information," on pages 84 through 89.
The revenue from the Enterprise Investments segment/Other decreased 5.5 percent
(down about 3 percent in constant currency) from 1997, following an increase of
8.7 percent in 1997 from 1996. The decrease was primarily a result of lower
software revenue, partially offset by higher revenue from point-of-sale
terminals. The increase in 1997 versus 1996 was driven by higher software and
point-of-sale terminal revenue. The gross profit dollars from the Enterprise
Investments segment/Other decreased 12.1 percent in 1998 versus 1997, following
an increase of 44.7 percent in 1997 versus 1996. The decline in 1998 gross
profit dollars was primarily driven by the lower software revenue versus 1997,
while the increase in 1997 versus 1996 was due to lower software costs.
- --------------------------------------------------------------------------------
Operating Expenses
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Selling, general and
administrative $16,662 $16,634 $16,854
Percentage of revenue 20.4% 21.2% 22.2%
Research, development
and engineering $ 5,046 $ 4,877 $ 5,089
Percentage of revenue 6.2% 6.2% 6.7%
- --------------------------------------------------------------------------------
Selling, general and administrative (SG&A) expense was essentially flat in 1998
versus 1997 and declined 1.3 percent in 1997 from 1996. The company continued
its focus on reducing infrastructure costs with particular emphasis on expenses
not related to revenue, e.g., non-customer travel and contracted services, while
reallocating its resources to allow for investment in growth segments of the
business. These actions yielded a 0.8 percentage point improvement in the
expense-to-revenue ratio in 1998 and a 1.0 percentage point improvement in 1997.
The company continues to focus on productivity, expense controls and
prioritization of spending in order to improve its expense-to-revenue level.
Research, development and engineering expense increased 3.5 percent in 1998 from
1997, following a decrease of 4.2 percent in 1997 from 1996. The increase
reflects the company's continued investments in high-growth opportunities like
e-business, Java, Tivoli systems management and HDD products, as well as the
impact of additional expenses associated with new acquisitions. The decline in
1997 versus 1996 was a result of $435 million of purchased in-process research
and development being recorded in 1996 for the Tivoli and Object Technology
International, Inc. acquisitions.
The company's ongoing research and development efforts have resulted in the
company being granted 2,658 patents in 1998, placing it number one in patents
granted in the U.S. for the sixth consecutive year. The application of these
technological advances has enabled the company to transform this research and
development into new products. Examples of these efforts are numerous patents
directly related to two major chip breakthroughs announced last year, silicon
germanium and silicon-on-insulator. Both technologies will be crucial in the
industry's development of a new class of "pervasive computing" devices, handheld
and embedded products such as smart phones and internet appliances that business
professionals and consumers will rely on for easy access to e-business data and
services. In addition, the use of copper in place of aluminum in the making of
integrated circuits was introduced into new products in 1998.
On a constant currency basis, SG&A expense increased approximately 2.1 percent
in 1998 versus 1997, and Research, development and engineering expense increased
approximately 3.9 percent.
See note Y, "Segment Information," on pages 84 through 89 for additional
information regarding each segment's pre-tax income, as well as the
methodologies employed by the company to allocate shared expenses to the
segments.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 30 percent
for 1998, as compared to the 1997 effective tax rate of 33 percent and a 1996
effective tax rate of 37 percent. Adjusting for purchased in-process research
and development which had no corresponding tax effect, the 1996 effective tax
rate would have been 35 percent. The reduction in the 1998 and 1997 tax rate
reflects the company's continued expansion into markets with lower effective tax
rates.
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.
57
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Fourth Quarter
For the quarter ended December 31, 1998, the company had revenue of $25.1
billion, an increase of 5.9 percent (up about 5 percent in constant currency)
over the same period of 1997. Net income in the fourth quarter was $2.3 billion
($2.47 per common share--assuming dilution), compared with net income of $2.1
billion ($2.11 per common share--assuming dilution) in the fourth quarter of
1997.
Fourth quarter revenue from the United States was $10.3 billion, an increase of
8.0 percent from the same period of 1997. Revenue from Europe/Middle East/Africa
was $8.7 billion, up 12.5 percent. Revenue from Canada was $996 million, up 8.3
percent. Asia Pacific revenue fell 3.4 percent to $4.2 billion, while revenue
from Latin America fell 21.7 percent to $929 million.
Excluding the effects of currency translation, Europe/Middle East/Africa grew 9
percent, Canada increased 12 percent, Asia Pacific declined 6 percent and Latin
America declined 19 percent versus the fourth quarter of 1997.
The Hardware segments revenue was essentially flat with the year-ago period
at $11.4 billion. Declines were driven by the Server segment, due to lower
S/390, AS/400 and RS/6000 revenue in 1998 versus 1997. Shipments of S/390
computing power increased by approximately 60 percent, as measured in MIPS,
though S/390 revenue declined. These decreases were offset by higher revenue
from the Technology and Personal Systems segments. The Technology segment
increases were driven by higher HDD revenue. The Personal Systems segment
increases were due to higher commercial personal computer revenue, partially
offset by lower consumer personal computer revenue.
Global Services segment revenue grew 14.1 percent versus the fourth quarter of
1997. Global Services revenue grew by more than $1 billion compared to last
year's fourth quarter, and the company's services unit signed more than $9
billion in new services contracts in the quarter. Maintenance offerings revenue
continued to decline when compared to the fourth quarter of 1997.
Software segment revenue increased 9.1 percent versus the fourth quarter of
1997. The increase was driven primarily by strength in database, transaction
processing and Tivoli systems management products.
Global Financing segment revenue increased 2.5 percent versus the fourth quarter
of 1997, and the Enterprise Investments segment/Other revenue increased 5.6
percent compared with 1997's fourth quarter.
The company's overall gross profit margin in the fourth quarter was 39.0
percent, compared to 40.1 percent in the year-earlier period.
Total fourth-quarter 1998 expenses were essentially flat year over year. The
expense-to-revenue ratio in the fourth quarter of 1998 was 25.9 percent compared
to 27.4 percent in the year-earlier period.
The company's tax rate was 28.9 percent in the fourth quarter, compared to 30.5
percent in the fourth quarter of 1997. The 1998 fourth quarter tax rate reflects
the net effect of the company's transfer of certain intellectual property rights
to several subsidiaries and the related valuation allowance impacts. See note Q,
"Taxes," on pages 77 and 78 for additional information.
The company spent approximately $1.6 billion on share repurchases in the fourth
quarter. The average number of shares outstanding in the fourth quarter of 1998
was 919.8 million, compared to 964.8 million in the year-earlier period. The
average number of shares outstanding for purposes of calculating diluted
earnings was 947.2 million in the fourth quarter of 1998 versus 990.7 million in
the fourth quarter of 1997.
Financial Condition
The company continued to make significant investments during 1998 to fund future
growth and increase shareholder value, expending $5.6 billion for research,
development and engineering, $4.8 billion for plant and other property,
including machines used in managed operations services offerings, $1.7 billion
for machines on operating leases with customers, $0.7 billion for strategic
acquisitions and $6.9 billion for the repurchase of the company's common shares.
The company had $5.8 billion in cash, cash equivalents and marketable securities
on hand at December 31, 1998.
The company has access to global funding sources. During 1998, 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
K, "Debt," on page 73.
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, 1998, $8.8
billion was unused and available.
The company had an outstanding balance at December 31, 1998 and 1997, of $0.9
billion in assets under management from the securitization of loans, leases and
trade receivables. For additional information see note J, "Sale and
Securitization of Receivables," on page 73.
The major rating agencies have continued their review of the company's financial
condition. In February 1998, Standard and
58
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Poor's upgraded its credit ratings for the company and its rated subsidiaries'
senior long-term debt to A+ from A, and on IBM's preferred stock to A from A-.
They also affirmed the commercial paper rating at A-1.
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.
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 68, are summarized in the following
table:
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net cash provided from (used in):
Operating activities $ 9,273 $ 8,865 $ 10,275
Investing activities (6,131) (6,155) (5,723)
Financing activities (4,993) (3,090) (3,952)
Effect of exchange rate
changes on cash and
cash equivalents 120 (201) (172)
- --------------------------------------------------------------------------------
Net change in cash and
cash equivalents $ (1,731) $ (581) $ 428
================================================================================
- --------------------------------------------------------------------------------
WORKING CAPITAL
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Current assets $42,360 $40,418
Current liabilities 36,827 33,507
- --------------------------------------------------------------------------------
Working capital $ 5,533 $ 6,911
================================================================================
Current ratio 1.15:1 1.21:1
================================================================================
Current assets increased $1.9 billion, driven primarily by increases in accounts
receivable relative to strong year-end global financing volumes and in prepaid
expenses due to increases in net deferred tax assets. The company ended 1998
with inventories of $5.2 billion, near last year's levels which were the lowest
since 1983, due to continued focus on inventory management process improvements,
notably in the Personal Systems segment. These improvements have enabled the
company's inventory turn rate to increase from 4.9 in 1997 to 5.3 in 1998.
Current liabilities increased $3.3 billion from year-end 1997 with increases of
$0.7 billion in taxes payable, $0.7 billion in short-term debt and $1.9 billion
in other current liabilities (increases in accounts payable ($1.0 billion),
compensation and benefits ($0.5 billion), and deferred income ($0.7 billion),
and a $0.3 billion decrease in other accrued expenses and liabilities). The
increase in taxes payable primarily reflects improvements in the company's
operating results in certain geographies. Short-term debt essentially increased
to support the growth of global financing assets. The increase in other current
liabilities was primarily attributable to the effect of currency rate
translation ($1.0 billion) on non-U.S. balances, and by considerable year-end
business activity relative to deferred income, mainly advanced billings for
software.
Investments
The company's investments for plant, rental machines and other property were
$6.5 billion for 1998, a decrease of $0.3 billion from 1997. The company
continues to invest significantly in its rapidly growing services business,
principally in the management of customers' information technology, and in
manufacturing capacity for HDDs and microelectronics.
In addition to software development expenses included in Research, development
and engineering, the company capitalized $0.3 billion of software costs during
both 1998 and 1997. Amortization of capitalized software costs amounted to $0.5
billion for 1998, a decrease of $0.5 billion from 1997. This decrease in the
level of costs amortized is a result of more software spending being expensed in
the period incurred, and less being capitalized in relation to historical
levels.
Investments and sundry assets were $23.5 billion at the end of 1998, an increase
of $1.6 billion from 1997, primarily the result of increases in prepaid pension
assets and non-current customer loan receivables. See note H, "Investments and
Sundry Assets," on page 72 for additional information.
- --------------------------------------------------------------------------------
DEBT AND EQUITY
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
Non-global financing debt $ 1,659 $ 3,102
Global financing debt 27,754 23,824
- --------------------------------------------------------------------------------
Total debt $29,413 $26,926
================================================================================
Stockholders' equity $19,433 $19,816
================================================================================
Debt/capitalization 60.2% 57.6%
EBITDA/interest expense 8x 8x
Non-global financing:
Debt/capitalization 9.9% 16.1%
EBITDA/interest expense 15x 14x
Global financing debt/equity 6.5:1 6.5:1
- --------------------------------------------------------------------------------
59
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Total debt increased $2.5 billion from year-end 1997, driven by an increase of
$3.9 billion in debt to support the growth in global financing assets, offset by
a $1.4 billion decrease in debt not related to the Global Financing segment.
Stockholders' equity declined $0.4 billion to $19.4 billion at December 31,
1998. The company's ongoing stock repurchasing program (see note O,
"Stockholders' Equity Activity," on pages 76 and 77) basically offset the $6.3
billion of net income for the year.
Non-global financing earnings before interest and taxes plus depreciation and
amortization (EBITDA) to non-global financing interest expense, adjusted for
future gross minimum rental commitments, was 15x and 14x in 1998 and 1997,
respectively. While the company does not calculate EBITDA on a segment basis, it
is a useful indicator of the company's ability to service its debt.
Currency Rate Fluctuations
The company's results are affected by changes in the relative values of non-U.S.
currencies to the U.S. dollar. At December 31, 1998, currency changes resulted
in assets and liabilities denominated in local currencies being translated into
more dollars. The currency rate changes also resulted in an unfavorable impact
on revenue of approximately 2 percent, 5 percent and 3 percent, respectively, in
1998, 1997 and 1996.
In high-inflation environments, 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 M, "Financial Instruments," on pages 74 and 75.
Market Risk
In the normal course of business, the financial position of the company is
routinely subjected to a variety of risks. In addition to the market risk
associated with interest rate and currency 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 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 M, "Financial Instruments," on pages 74 and
75.
For purposes of specific risk analysis, the company uses sensitivity analysis to
determine the impact that market risk exposures may have on the fair values of
the company's debt and other financial instruments.
The financial instruments included in the sensitivity analysis consist of all of
the company's cash and cash equivalents, 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 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, 1998 and 1997. The differences in this
comparison are the hypothetical gains or losses associated with each type of
risk.
Information provided by the model used does not necessarily represent the actual
changes in fair value that the company would incur under normal market
conditions because, of necessity, all variables other than the specific market
risk factor are held constant. In addition, the model is constrained by the fact
that certain items are specifically excluded from the analysis while the
financial instruments relating to the financing or hedging of those items are
included by definition. Excluded items include leased assets, forecasted foreign
currency cash flows, and the company's net investment in foreign operations. As
a consequence, reported changes in the values of some financial instruments
impacting the results of the sensitivity analysis are not matched with the
offsetting changes in the values of the items that those instruments are
designed to finance or hedge.
60
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
The results of the sensitivity analysis at December 31, 1998 and December 31,
1997, are as follows:
Interest Rate Risk: As of December 31, 1998, 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 of $396
million, as compared to $369 million as of December 31, 1997. Conversely, as of
December 31, 1998, 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 of $354 million, as compared to $341
million as of December 31, 1997. Changes in the relative sensitivity of the fair
value of the company's financial instrument portfolio for these theoretical
changes in the level of interest rates are primarily driven by changes in the
company's debt maturity and interest rate profile and amount. In 1998 versus
1997, the reported change in interest rate sensitivity is primarily due to an
overall increase in the amount of debt outstanding.
Foreign Currency Exchange Rate Risk: As of December 31, 1998, 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 of $1,317 million or an
increase in the fair value of the company's financial instruments of $1,535
million, as compared to a decrease of $809 million or increase of $981 million
as of December 31, 1997. The change in the relative sensitivity of the fair
market value of the company's financial instrument portfolio to the level of
foreign currency exchange rates is primarily driven by an increase in the use of
foreign currency swaps and other financial instruments designed to hedge the
company's net foreign investments in accordance with the company's established
risk management practices. As the impact of offsetting changes in the fair
market value of the company's net foreign investments is not included in the
sensitivity model, these results are not indicative of an increase in the
company's actual exposure to foreign currency exchange rate risk.
Financing Risks
Global financing is an integral part of the company's total worldwide offerings.
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. Remarketing efforts have consistently 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 the remaining net book value of machines on operating leases at
the end of the lease terms as of December 31, 1996, 1997 and 1998. The following
table excludes approximately $52 million of estimated residual value associated
with non-information technology equipment.
- --------------------------------------------------------------------------------
Total Run Out of 1998 Balance
- ------------------------------------------------ -----------------------------
2002 and
(Dollars in millions) 1996 1997 1998 1999 2000 2001 beyond
- --------------------------------------------------------------------------------
Sales-type leases $471 $ 563 $ 685 $167 $261 $226 $31
Operating leases 480 701 731 291 285 139 16
- --------------------------------------------------------------------------------
Total residual value $951 $1,264 $1,416 $458 $546 $365 $47
================================================================================
Divestitures/Acquisitions
In December 1998, the company and AT&T announced that AT&T will acquire IBM's
Global Network business for $5 billion in cash. In addition, the two companies
have agreed to enter into outsourcing contracts with each other. The company
will outsource a significant portion of its global networking needs to AT&T.
AT&T will outsource certain applications processing and data center management
operations to the company. About 5,000 IBM employees will join AT&T as part of
the acquisition and more than 2,000 AT&T employees will be offered positions
with the company.
The company believes that this transaction, in its entirety, will not have a
significant impact on the company's 1999 ongoing operational results. The
company and AT&T expect the acquisition to conclude in the various geographies
throughout 1999, following clearance by U.S. regulatory authorities and certain
regulatory authorities outside the U.S.
The company awarded AT&T Solutions a contract valued at $5 billion over five
years for a significant portion of the company's own global networking needs,
making it the single
61
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
largest networking outsourcing contract ever awarded. In addition, AT&T and the
Global Services unit have reached an agreement for services valued at about $4
billion over the next 10 years. As part of the agreement, the company will
manage AT&T's applications processing (including billing, service-order
processing, scheduling of installation and maintenance) for customers of AT&T's
business long-distance services. In addition, the company will assume management
of AT&T data processing centers, which operate corporate information systems
such as accounts payable and receivable and employee payroll and benefits.
In January 1998, the company acquired Software Artistry, Inc., a leading
provider of both consolidated service desk and customer relationship management
solutions for distributed enterprise environments. In March 1998, the company
acquired CommQuest Technologies, Inc., a company that designs and markets
advanced semiconductors for wireless communications applications, such as
cellular phones and satellite communications.
On April 16, 1997, the company 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 the company. In December
1997, the company acquired Eastman Kodak's share of Technology Service Solutions
(TSS), which was formed in 1994 by the company and Eastman Kodak. TSS is now a
wholly owned subsidiary of the company, offering comprehensive services
solutions to its customers. In December 1997, the company acquired Unison
Software, Inc., a leading developer of workload management software.
On March 1, 1996, the company acquired all outstanding shares of Tivoli for
approximately $800 million ($716 million 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 the acquisition to serve as a basis for
allocation of the purchase price to the various classes of assets. The company
recorded $280 million of goodwill, $103 million of other assets and expensed
$417 million of purchased in-process research and development as a result of the
appraisal.
In 1996, the acquisition of Object Technology International, Inc. for
approximately $50 million 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, included in Research,
development and engineering expense in the Consolidated Statement of Earnings,
to $435 million.
Employees
- --------------------------------------------------------------------------------
Percentage
Changes
-----------------
1998 1997 1996 1998-97 1997-96
- --------------------------------------------------------------------------------
IBM/wholly
owned
subsidiaries 291,067 269,465 240,615 8.0 12.0
Less than
wholly owned
subsidiaries 21,704 20,751 28,033 4.6 (26.0)
Complementary 36,900 43,000 37,000 (14.2) 16.2
- --------------------------------------------------------------------------------
As of December 31, 1998, employees of the company and its wholly owned
subsidiaries increased 21,602 over 1997, of which approximately 18,000 were in
the Global Services segment. Increases were also significant in the Tivoli
organization, as well as in the storage business, due to the addition of new
manufacturing capacity in the company's emerging markets.
The increase in employees in the less than wholly owned subsidiaries over last
year reflects continued growth in the company's Global Services segment, notably
Australia and India. Entities in emerging geographic markets such as China
increased as well. Partially offsetting the increase was a number of less than
wholly owned subsidiaries that were divested during the year or converted to a
wholly owned status.
The company's complementary workforce 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.
62
<PAGE>
MANAGEMENT DISCUSSION
International Business Machines Corporation and Subsidiary Companies
Year 2000
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 process dates beyond 1999, which may cause errors in
information or systems failures. Assessments of the potential effects of the
Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators, and it is not possible to predict what
the actual impact may be. Given this uncertainty, the company recognizes the
need to remain vigilant and is continuing its analysis, assessment, conversion
and contingency planning for the various Year 2000 issues, across its business.
With respect to its internal systems, the potential Year 2000 impacts extend
beyond the company's information technology systems to its manufacturing and
development systems and physical facilities. The company has been addressing
these issues using the same five-part methodology it recommends to its
customers: (1) assessment and strategy; (2) detailed analysis and planning; (3)
implementation; (4) maintaining readiness of converted systems; and (5) project
office management. The company has completed most conversion and testing
efforts, with extended system integration testing and contingency planning
projects scheduled throughout 1999. The company estimates that at the conclusion
of its various Year 2000 efforts, including conversion, testing and contingency
planning, it will have spent a total of approximately $575 million over a
multi-year period. Although the company believes its efforts will be successful,
any failure or delay could result in the disruption of business and in the
company incurring substantial expense. To minimize any such potential impact,
the company has initiated a global contingency planning effort designed to
support critical business operations.
As part of its ordinary course product development efforts, the company's
current product and service offerings have been designed by it to be Year 2000
ready. The Year 2000 readiness of the company's customers varies, and the
company continues actively to encourage its customers to prepare their own
systems, making available a broad array of product, service and educational
offerings to assist them (see the IBM Year 2000 Home Page at
http://www.ibm.com/IBM/year2000/). Efforts by customers to address Year 2000
issues may absorb a substantial part of their information technology budgets in
the near term, and customers may either delay or accelerate the deployment and
implementation of new applications and systems. While this behavior may increase
demand for certain of the company's products and services, including its Year
2000 offerings, it could also soften demand for other offerings or change
customer buying practices from past trends. These events could affect the
company's revenues or change its revenue patterns.
The company is also continuing its assessment of the Year 2000 readiness of its
key suppliers in an effort to establish that the company has adequate resources
for required supplies and components. With respect to third-party products the
company may remarket or provide with the company's offerings (such as
third-party software pre-loaded on the company's personal computers), the
company relies on its business partners and other third parties to be
responsible for the Year 2000 readiness of their offerings. A failure of the
company's suppliers, business partners and other third parties to address
adequately their Year 2000 readiness could affect the company's business. As
part of its contingency planning efforts, the company is identifying alternate
sources or strategies where necessary if significant exposures are identified.
Further, some commentators believe that a significant amount of litigation will
arise from Year 2000 issues. The company continues to believe that it has good
defenses to any such claims brought against it.
Finally, the Year 2000 presents a number of other risks and uncertainties that
could affect the company, including utilities and telecommunications failures,
competition for personnel skilled in the resolution of Year 2000 issues, and the
nature of government responses to Year 2000 issues, among others. While the
company continues to believe that the Year 2000 matters discussed above will not
have a material impact on its business, financial condition or results of
operations, it remains uncertain whether or to what extent the company may be
affected.
The Year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
63
<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 1998 1997* 1996*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Hardware segments $35,419 $36,630 $36,634
Global Services segment 28,916 25,166 22,310
Software segment 11,863 11,164 11,426
Global Financing segment 2,877 2,806 3,054
Enterprise Investments segment/Other 2,592 2,742 2,523
- -------------------------------------------------------------------------------------------------
Total revenue 81,667 78,508 75,947
- -------------------------------------------------------------------------------------------------
Cost:
Hardware segments 24,214 23,473 22,888
Global Services segment 21,125 18,464 16,270
Software segment 2,260 2,785 2,946
Global Financing segment 1,494 1,448 1,481
Enterprise Investments segment/Other 1,702 1,729 1,823
- -------------------------------------------------------------------------------------------------
Total cost 50,795 47,899 45,408
- -------------------------------------------------------------------------------------------------
Gross profit 30,872 30,609 30,539
- -------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative R 16,662 16,634 16,854
Research, development and engineering S 5,046 4,877 5,089
- -------------------------------------------------------------------------------------------------
Total operating expenses 21,708 21,511 21,943
- -------------------------------------------------------------------------------------------------
Operating income 9,164 9,098 8,596
Other income, principally interest 589 657 707
Interest expense L 713 728 716
- -------------------------------------------------------------------------------------------------
Income before income taxes 9,040 9,027 8,587
Provision for income taxes Q 2,712 2,934 3,158
- -------------------------------------------------------------------------------------------------
Net income 6,328 6,093 5,429
Preferred stock dividends 20 20 20
- -------------------------------------------------------------------------------------------------
Net income applicable to common shareholders $ 6,308 $ 6,073 $ 5,409
=================================================================================================
Earnings per share of common stock--basic T $ 6.75 $ 6.18 $ 5.12
Earnings per share of common stock--assuming dilution T $ 6.57 $ 6.01 $ 5.01
=================================================================================================
Average number of common shares outstanding:
Basic: 1998-934,502,785; 1997-983,286,361; 1996-1,056,704,188
Assuming dilution: 1998-960,065,235; 1997-1,010,934,942; 1996-1,079,708,904
* Reclassified to conform to 1998 presentation.
The notes on pages 69 through 89 of the 1998 IBM Annual Report are an
integral of this statement.
- -------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(Dollars in millions)
At December 31: Notes 1998 1997*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,375 $ 7,106
Marketable securities M 393 447
Notes and accounts receivable--trade, net of allowances 18,958 16,850
Sales-type leases receivable 6,510 5,720
Other accounts receivable 1,313 1,256
Inventories F 5,200 5,139
Prepaid expenses and other current assets 4,611 3,900
- ---------------------------------------------------------------------------------------------------
Total current assets 42,360 40,418
- ---------------------------------------------------------------------------------------------------
Plant, rental machines and other property G 44,870 42,133
Less: Accumulated depreciation 25,239 23,786
- ---------------------------------------------------------------------------------------------------
Plant, rental machines and other property--net 19,631 18,347
- ---------------------------------------------------------------------------------------------------
Software, less accumulated amortization (1998-$12,516; 1997-$12,610) 599 819
Investments and sundry assets H 23,510 21,915
- ---------------------------------------------------------------------------------------------------
Total assets $ 86,100 $ 81,499
===================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Taxes Q $ 3,125 $ 2,381
Short-term debt K & M 13,905 13,230
Accounts payable 6,252 5,215
Compensation and benefits 3,530 3,043
Deferred income 4,115 3,445
Other accrued expenses and liabilities 5,900 6,193
- ---------------------------------------------------------------------------------------------------
Total current liabilities 36,827 33,507
- ---------------------------------------------------------------------------------------------------
Long-term debt K & M 15,508 13,696
Other liabilities N 12,818 12,993
Deferred income taxes Q 1,514 1,487
- ---------------------------------------------------------------------------------------------------
Total liabilities 66,667 61,683
- ---------------------------------------------------------------------------------------------------
Contingencies P
Stockholders' equity: O
Preferred stock, par value $.01 per share 247 252
Shares authorized: 150,000,000
Shares issued (1998-2,546,011; 1997-2,597,261)
Common stock, par value $.50 per share 10,121 8,601
Shares authorized: 1,875,000,000
Shares issued (1998-926,869,052; 1997-969,015,351)
Retained earnings 10,141 11,010
Treasury stock, at cost (shares: 1998-962,146; 1997-923,955) (133) (86)
Employee benefits trust (shares: 1998-10,000,000; 1997-10,000,000) (1,854) (860)
Accumulated gains and losses not affecting retained earnings 911 899
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 19,433 19,816
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 86,100 $ 81,499
===================================================================================================
* Reclassified to conform to 1998 presentation
The notes on pages 69 through 89 of the 1998 IBM Annual Report are an integral
part of this statement.
===================================================================================================
</TABLE>
65
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Gains and
Losses Not
Employee Affecting
Preferred Common Retained Treasury Benefits Retained
(Dollars in millions) Stock Stock Earnings Stock Trust Earnings Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996*
Stockholders' equity, January 1, 1996 $ 253 $ 7,488 $ 11,630 $ (41) $ -- $ 3,093 $ 22,423
Net income plus gains and losses not
affecting retained earnings:
Net income 5,429 $ 5,429
--------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $19) (635) (635)
Net unrealized gains on marketable
securities (net of tax expense of $71) 111 111
--------
Total gains and losses not affecting
retained earnings (524)
--------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 4,905
========
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
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1996 253 7,752 11,189 (135) -- 2,569 21,628
- -------------------------------------------------------------------------------------------------------------------------------
1997*
Net income plus gains and losses not
affecting retained earnings:
Net income 6,093 $ 6,093
--------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $24) (1,610) (1,610)
Net unrealized losses on marketable
securities (net of tax benefit of $37) (60) (60)
--------
Total gains and losses not affecting
retained earnings (1,670)
--------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 4,423
========
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
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1997 $ 252 $ 8,601 $ 11,010 $ (86) $(860) $ 899 $ 19,816
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Gains and
Losses Not
Employee Affecting
Preferred Common Retained Treasury Benefits Retained
(Dollars in millions) Stock Stock Earnings Stock Trust Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Stockholders' equity, December 31, 1997 $252 $ 8,601 $11,010 $ (86) $ (860) $ 899 $ 19,816
Net income plus gains and losses not
affecting retained earnings:
Net income 6,328 $ 6,328
--------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation adjustments
(net of tax benefit of $45) 69 69
Net unrealized losses on marketable
securities (net of tax benefit of $36) (57) (57)
--------
Total gains and losses not affecting
retained earnings 12
--------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 6,340
========
Cash dividends declared--common stock (814) (814)
Cash dividends declared--preferred stock (20) (20)
Common stock purchased and retired
(56,996,818 shares) (556) (6,291) (6,847)
Preferred stock purchased and retired
(51,250 shares) (5) (5)
Common stock issued under employee
plans (14,850,519 shares) 709 (1) 708
Purchases (4,163,057 shares) and sales
(4,124,866 shares) of treasury stock
under employee plans--net (71) (47) (118)
Fair value adjustment of employee
benefits trust 1,002 (994) 8
Tax effect--stock transactions 365 365
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1998 $247 $10,121 $10,141 $(133) $(1,854) $ 911 $ 19,433
==================================================================================================================================
* Reclassified to conform to 1998 presentation.
The notes on pages 69 through 89 of the 1998 IBM Annual Report are an integral
part of this statement.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(Dollars in millions)
For the year ended December 31: 1998 1997 1996*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 6,328 $ 6,093 $ 5,429
Adjustments to reconcile net income to cash provided
from operating activities:
Depreciation 4,475 4,018 3,676
Amortization of software 517 983 1,336
Effect of restructuring charges (355) (445) (1,491)
Deferred income taxes (606) 358 11
Gain on disposition of fixed and other assets (261) (273) (300)
Other changes that (used) provided cash:
Receivables (2,736) (3,727) (650)
Inventories 73 432 196
Other assets 880 (1,087) (545)
Accounts payable 362 699 319
Other liabilities 596 1,814 2,294
- ------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 9,273 8,865 10,275
- ------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Payments for plant, rental machines and other property (6,520) (6,793) (5,883)
Proceeds from disposition of plant, rental machines
and other property 905 1,130 1,314
Acquisition of Tivoli Systems, Inc. -- -- (716)
Investment in software (250) (314) (295)
Purchases of marketable securities and other investments (4,211) (1,617) (1,613)
Proceeds from marketable securities and other investments 3,945 1,439 1,470
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,131) (6,155) (5,723)
- ------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from new debt 7,567 9,142 7,670
Short-term borrowings less than 90 days--net 499 (668) (919)
Payments to settle debt (5,942) (4,530) (4,992)
Preferred stock transactions--net (5) (1) --
Common stock transactions--net (6,278) (6,250) (5,005)
Cash dividends paid (834) (783) (706)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,993) (3,090) (3,952)
- ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 120 (201) (172)
- ------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,731) (581) 428
Cash and cash equivalents at January 1 7,106 7,687 7,259
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 5,375 $ 7,106 $ 7,687
======================================================================================================
Supplemental data:
Cash paid during the year for:
Income taxes $ 1,929 $ 2,472 $ 2,229
Interest $ 1,605 $ 1,475 $ 1,563
======================================================================================================
* Reclassified to conform to 1998 presentation.
The notes on pages 69 through 89 of the 1998 IBM Annual Report are an integral
part of this statement.
- ------------------------------------------------------------------------------------------------------
</TABLE>
<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
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
HARDWARE
Revenue from hardware sales or sales-type leases is recognized when the product
is shipped. Revenue from rentals and operating leases is recognized monthly as
the fees accrue.
SERVICES
Revenue from time and material service contracts is recognized as the services
are provided. Revenue from fixed price long-term service contracts is recognized
over the contract term based on the percentage of services provided during the
period compared to the total estimated services provided over the entire
contract. Losses on fixed price contracts are recognized during the period in
which the loss first becomes apparent. Revenue from maintenance is recognized
over the contractual period or as the services are performed. Revenue in excess
of billings on service contracts are recorded as unbilled receivables and
included in trade accounts receivable. Billings in excess of revenue recognized
on service contracts are recorded as deferred income until the above revenue
recognition criteria are met.
SOFTWARE
Revenue from one-time charge licensed software is recognized when the program is
shipped, provided the company has vendor-specific objective evidence of the fair
value of each element of the software offering. A deferral is recorded for
post-contract customer support and any other future deliverables included within
the contract arrangement. This deferral is earned over the support period or as
contract elements are delivered. Revenue from monthly software licenses is
recognized as license fees accrue.
FINANCING
Revenue from financing is recognized at level rates of return over the term of
the lease or receivable.
Revenue for all categories is reduced for estimated customer returns, allowances
and anticipated price actions.
Income Taxes
Income tax expense is based on reported income 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 recorded in Accumulated gains and losses
not affecting retained earnings within 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 net income.
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. In order to qualify for hedge accounting, the company
requires that the derivative instruments used for risk management purposes
effectively reduce the risk exposure that they are designed to hedge. For
instruments associated with the hedge of anticipated transactions, hedge
effectiveness criteria also require that the occurrence of the underlying
transactions be probable. Instruments meeting these hedging criteria are
formally designated as hedges at the inception of the contract. Those risk
management instruments not meeting these criteria and considered ineffective as
hedges are accounted for at fair
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
value with changes in fair value recognized immediately in net income. Refer to
note M, "Financial Instruments," on pages 74 and 75 for descriptions of the
major classes of derivative financial instruments used by the company, including
the specific 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.
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.
Marketable Securities
Marketable securities included within current assets represent highly liquid
securities with a maturity less than one year. The company's marketable
securities are considered available for sale and are reported at fair value with
changes in unrealized gains and losses, net of applicable taxes, recorded in
Accumulated gains and losses not affecting retained earnings within
stockholders' equity. Realized gains and losses are calculated based on the
specific identification method.
Inventories
Raw materials, work in process and finished goods are stated at the lower of
average cost or net realizable value.
Depreciation
Plant, rental machines (computer equipment used internally or as part of managed
operations contracts) and other property are carried at cost and depreciated
over their estimated useful lives using the straight-line method.
The estimated useful lives of depreciable properties are generally as follows:
buildings, 50 years; building equipment, 20 years; land improvements, 20 years;
plant, laboratory and office equipment, 2 to 15 years; and computer equipment,
1.5 to 5 years.
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 postretirement 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. Assuming thresholds established in
SFAS 87, "Employers' Accounting for Pensions," are met, unrecognized net gains
and losses are amortized to service cost over the average remaining service life
of employees expected to receive benefits. See note W, "Retirement Plans," on
page 81 through 83 and note X, "Nonpension Postretirement Benefits," on pages 83
and 84 for further discussion.
Goodwill
Goodwill is charged to net income on a straight-line basis over the periods
estimated to be benefited, generally not exceeding five years. Reviews to
evaluate recoverability of this goodwill are conducted periodically.
Common Stock
Common stock refers to the $.50 par value capital stock as designated in the
company's Certificate of Incorporation.
Earnings Per Share of Common Stock
Earnings per share of common stock is computed by dividing net income after
deduction of preferred stock dividends by the weighted-average number of common
shares outstanding for the period. Earnings per common share of stock--assuming
dilution reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
which would then share in the net income of the company. See note T, "Earnings
Per Share of Common Stock," on page 79 for further discussion.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
B Accounting Changes
Standards Implemented
The company implemented new accounting standards in 1998, 1997 and 1996. None of
these standards had a material effect on the financial position or results of
operations of the company.
Beginning with the first quarter of 1998, the company adopted SFAS 130,
"Reporting Comprehensive Income," which established standards for reporting and
displaying comprehensive income and its components. The disclosures required by
SFAS 130 are presented in the Accumulated gains and losses not affecting
retained earnings section in the Consolidated Statement of Stockholders' Equity
on pages 66 and 67 and in note O, "Stockholders' Equity Activity," on pages 76
and 77.
Effective December 31, 1998, the company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes standards
for reporting operating segments and disclosures about products and services,
geographic areas and major customers. See note Y, "Segment Information," on
pages 84 through 89 for further information.
Effective December 31, 1998, the company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which established
expanded disclosures for defined benefit pension and postretirement benefit
plans. See note W, "Retirement Plans," on pages 81 through 83 and note X,
"Nonpension Postretirement Benefits" on pages 83 and 84 for the required
disclosures.
On January 1, 1998, the company adopted the American Institute of Certified
Public Accountants Statement of Position (SOP) 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition for software
transactions. It requires deferral of some or all of the revenue related to a
specific contract depending on the existence of vendorspecific objective
evidence and the ability to allocate the total fee to all elements within the
contract. The portion of the fee allocated to an element is recognized as
revenue when all of the revenue recognition criteria have been met for that
element.
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. 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 SOP 96-1, "Environmental Remediation Liabilities."
This SOP provides guidance on the recognition, measurement, display and
disclosure of environmental remediation liabilities. See note N, "Other
Liabilities and Environmental," on page 76 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 V, "Stock-Based Compensation
Plans," on pages 79 through 81 for further information.
New Standards to be Implemented
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments. It
requires an entity to recognize all derivatives as either assets or liabilities
in the Statement of Financial Position and measure those instruments at fair
value. Additionally, the fair value adjustments will impact either stockholders'
equity or net income depending on whether the derivative instrument qualifies as
a hedge and, if so, the nature of the hedging activity. The company will adopt
this new standard as of January 1, 2000. Management does not expect the adoption
to have a material impact on the company's results of operations, however, the
impact on the company's financial position is dependent upon the fair values of
the company's derivatives and related financial instruments at the date of
adoption.
During 1998, the American Institute of Certified Public Accountants issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement requires the capitalization of internal use
computer software costs if certain criteria are met. The capitalized software
costs will be amortized on a straight-line basis over the useful life of the
software. The company will adopt the statement as of January 1, 1999. The
adoption of the statement is not expected to have a material impact on the
company's financial statements.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
C Subsequent Events
Stock Split
On January 26, 1999, the IBM Board of Directors declared a two-for-one common
stock split, subject to the approval of stockholders of an increase in the
number of common shares authorized from 1,875 million to 4,687.5 million. The
record date for the split will be on May 10, 1999, with distribution of the
split shares expected to follow on May 26, 1999. Earnings per share calculations
included in this report have not been restated to reflect this proposed stock
split.
Debt Offering
On February 1, 1999, the company issued $600 million of 5 3/8% notes due
February 1, 2009. The net proceeds from the issuance of this debt will be used
for general corporate purposes.
D Divestitures
In December 1998, IBM and AT&T announced that AT&T will acquire IBM's Global
Network business for $5 billion in cash. In addition, the two companies have
agreed to enter into outsourcing contracts with each other. This subject is
discussed further on pages 61 and 62 under the section entitled
"Divestitures/Acquisitions" in the Management Discussion.
E 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.
F Inventories
- --------------------------------------------------------------------------------
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Finished goods $1,088 $1,090
Work in process and
raw materials 4,112 4,049
- --------------------------------------------------------------------------------
Total $5,200 $5,139
================================================================================
G Plant, Rental Machines and Other Property
- --------------------------------------------------------------------------------
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Land and land improvements $ 1,091 $ 1,117
Buildings 11,088 11,208
Plant, laboratory and
office equipment 27,025 25,015
- --------------------------------------------------------------------------------
39,204 37,340
Less: Accumulated depreciation 22,463 21,680
- --------------------------------------------------------------------------------
16,741 15,660
Rental machines 5,666 4,793
Less: Accumulated depreciation 2,776 2,106
- --------------------------------------------------------------------------------
2,890 2,687
- --------------------------------------------------------------------------------
Total $19,631 $18,347
================================================================================
H Investments and Sundry Assets
- --------------------------------------------------------------------------------
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Net investment in sales-type leases* $14,384 $13,733
Less: Current portion--net 6,510 5,720
- --------------------------------------------------------------------------------
7,874 8,013
Deferred taxes 2,921 3,163
Prepaid pension assets 4,836 3,828
Customer loan receivables--
not yet due 3,499 2,741
Installment payment receivables 1,087 977
Alliance investments:
Equity method 420 484
Other 138 236
Goodwill, less accumulated
amortization (1998, $2,111;
1997, $1,717) 945 950
Marketable securities--non-current 281 295
Other investments and
sundry assets 1,509 1,228
- --------------------------------------------------------------------------------
Total $23,510 $21,915
================================================================================
* 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 $685 million and $563 million at
December 31, 1998 and 1997, respectively, and is reflected net of unearned
income at those dates of approximately $1,600 million for both years.
Scheduled maturities of minimum lease payments outstanding at December 31,
1998, expressed as a percentage of the total, are approximately as follows:
1999, 48 percent; 2000, 31 percent; 2001, 15 percent; 2002, 5 percent; and
2003 and beyond, 1 percent.
- --------------------------------------------------------------------------------
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
I Lines of Credit
The company maintains a $10.0 billion committed global credit facility. Unused
committed lines of credit from this global facility amounted to $8.8 billion and
$9.2 billion at December 31, 1998 and 1997, respectively. The company's other
committed and uncommitted lines of credit amounted to $5.2 billion at December
31, 1998 and 1997. The unused portion of those lines amounted to $4.3 billion
and $3.9 billion at December 31, 1998 and 1997, respectively. Total unused lines
of credit at December 31, 1998 and 1997, amounted to $13.1 billion. Interest
rates on borrowings vary from country to country depending on local market
conditions.
J Sale and Securitization of Receivables
At year-end 1998 and 1997, the company had a net balance of $0.9 billion in
assets under management from the securitization of loans, leases and trade
receivables. The company received total cash proceeds of approximately $2.4
billion and $3.0 billion in 1998 and 1997, 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 sale and securitization activities are expected to be minimal,
and adequate reserves are in place to cover potential losses.
K Debt
- --------------------------------------------------------------------------------
Short-term debt
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Commercial paper $ 4,885 $ 4,583
Short-term loans 6,370 5,699
Long-term debt: Current maturities 2,650 2,948
- --------------------------------------------------------------------------------
Total $13,905 $13,230
================================================================================
The weighted-average interest rates for commercial paper at December 31, 1998
and 1997, were approximately 5.7 percent and 5.8 percent, respectively. The
weighted-average interest rates for short-term loans at December 31, 1998 and
1997, were approximately 5.3 percent and 5.5 percent, respectively.
- --------------------------------------------------------------------------------
Long-term debt
(Dollars in millions)
At December 31: Maturities 1998 1997*
- --------------------------------------------------------------------------------
U.S. Dollars:
Debentures:
6.22%a 2027 $ 500 $ 500
6.5%a 2028 700 --
7.0%a 2025 600 600
7.0%a 2045 150 150
7.125%a 2096 850 850
7.5%a 2013 550 550
8.375%a 2019 750 750
Notes: 6.7% average 2000-2013 2,695 2,674
Medium-term note
program: 5.8% average 1999-2013 4,885 4,472
Other: 6.5% average 1999-2012 1,514 1,319
- --------------------------------------------------------------------------------
13,194 11,865
Other currencies
(average interest rate
at December 31, 1998,
in parentheses):
Japanese yen (3.1%) 1999-2014 3,866 3,944
Canadian dollars (5.7%) 1999-2003 672 407
German marks (4.9%) 1999-2002 120 111
Swiss francs (2.5%) 2001 91 85
U.K. pounds (7.9%) 1999-2004 25 28
Other (11.9%) 1999-2026 221 235
- --------------------------------------------------------------------------------
18,189 16,675
Less: Net unamortized
discount 31 31
- --------------------------------------------------------------------------------
18,158 16,644
Less: Current maturities 2,650 2,948
- --------------------------------------------------------------------------------
Total $15,508 $13,696
================================================================================
Annual maturities in millions of dollars on long-term debt outstanding at
December 31, 1998, are as follows: 1999, $2,650; 2000, $5,120; 2001, $1,491;
2002, $1,676; 2003, $1,116; 2004 and beyond, $6,136.
* Reclassified to conform to 1998 presentation.
- --------------------------------------------------------------------------------
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
L Interest on Debt
Interest paid and accrued on borrowings of the company and its subsidiaries
amounted to $1,585 million in 1998, $1,596 million in 1997 and $1,565 million in
1996. Of these amounts, $28 million in 1998, $32 million in 1997 and $31 million
in 1996 were capitalized. The remainder was charged to the cost of rentals and
financing in the amounts of $844 million in 1998, $836 million in 1997 and $818
million in 1996, or interest expense in the amounts of $713 million in 1998,
$728 million in 1997 and $716 million in 1996. The decrease in total interest
expense in 1998 versus 1997 was due primarily to lower average interest rates,
partially offset by higher levels of debt. The increase in total interest
expense in 1997 versus 1996 was primarily due to higher levels of debt,
partially offset by lower interest rates. The average interest rate for total
debt was 5.7 percent, 6.4 percent and 7.0 percent in 1998, 1997 and 1996,
respectively. These rates include the results of currency and interest rate
swaps applied to the debt described in note K, "Debt," on page 73.
M Financial Instruments
The company maintains portfolios of financial instruments both on- and
off-balance sheet.
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
(Dollars in millions) Carrying Value
----------------
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Current marketable securities:
U.S. government securities $ 15 $ 93
Time deposits and other bank obligations 335 181
Non-U.S. government securities and
other fixed-term obligations 43 173
- --------------------------------------------------------------------------------
Total $393 $447
================================================================================
Marketable securities--non-current:*
U.S. government securities $ -- $ 54
Time deposits and other bank obligations 271 183
Non-U.S. government securities and
other fixed-term obligations 10 58
- --------------------------------------------------------------------------------
Total $281 $295
================================================================================
Other investments:*
Alliance investments--Other $138 $236
================================================================================
* Included within Investments and sundry assets on the Consolidated Statement of
Financial Position (See note H on page 72).
- --------------------------------------------------------------------------------
Financial Instruments Off-Balance Sheet (excluding derivatives)
IBM has guaranteed certain loans and financial commitments of affiliates. The
approximate amount of these financial guarantees were $1,158 million and $861
million at December 31, 1998 and 1997, respectively. Additionally, the company
is responsible for fulfilling financial commitments associated with certain
contracts to which it is a party. These commitments, which in the aggregate were
approximately $1,600 million and $600 million at December 31, 1998 and 1997,
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 $3.6 billion and $2.1 billion at December 31,
1998 and 1997, respectively.
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.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
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, 1998 At December 31, 1997
--------------------------------- ------------------------------
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 $31,484 $(485) $(427) $24,774 $29 $ 84
Option contracts 9,021 67 45 14,211 41 193
- ----------------------------------------------------------------------------------------------------------------
Total $40,505 $(418) $(382)* $38,985 $70 $277*
================================================================================================================
Bracketed amounts are liabilities.
* The estimated fair value of derivatives both on- and off-balance sheet at
December 31, 1998 and 1997, consists of assets of $486 million and $581
million and liabilities of $868 million and $304 million, respectively.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
A significant portion of the company's derivative transactions relates to the
matching of liabilities to assets associated with both its global financing
business and its non-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 assets. Interest rate swaps or
currency swaps are then used to match the interest rates and currencies of its
debt to the related assets. These swap contracts principally mature within five
years. Interest and currency rate differentials accruing under these interest
rate and currency swap contracts 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 expense.
The company also utilizes currency swaps and other foreign currency contracts in
order to hedge the foreign currency exposures of certain of the company's net
investments in foreign subsidiaries. The currency effects of these hedges are
reflected in the Accumulated gains and losses not affecting retained earnings
section of Stockholders' equity, offsetting a portion of the translation of net
assets.
When the terms of an 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 among foreign subsidiaries and the parent company. The company
receives significant 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.
For purchased options that hedge qualifying anticipated transactions, gains and
losses are deferred and recognized in net income in the same period that the
underlying transaction occurs, expires or is otherwise terminated. At December
31, 1998 and 1997, there were no material deferred gains or losses. The premiums
associated with entering into these 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. For purchased options that
hedge anticipated transactions which do not qualify for hedge accounting, gains
and losses are recorded in net income as they occur on a mark-to-market basis.
All written options are marked to market monthly and are not material to the
company's results.
The company also enters into 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
net income as they occur.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
N Other Liabilities and Environmental
Other liabilities consists principally of accruals for nonpension postretirement
benefits for U.S. employees ($6.6 billion) and nonpension postretirement
benefits, indemnity and retirement plan reserves for non-U.S. employees ($1.4
billion). More detailed discussion of these liabilities appears in note X,
"Nonpension Postretirement Benefits," on pages 83 and 84, and note W,
"Retirement Plans," on pages 81 through 83.
Also included are non-current liabilities associated with infrastructure
reduction and restructuring actions taken in 1993 and prior. As a result,
amounts representing postemployment preretirement accruals in the amount of $793
million and $681 million (net of sublease receipts) for accruals for leased
space that the company has vacated are included.
The company employs extensive internal environmental protection programs that
are primarily preventative in nature. The cost of these ongoing programs is
recorded as incurred.
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. In addition, 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 total amounts accrued, which do not reflect any
insurance recoveries, were $238 million and $243 million at December 31, 1998
and 1997, 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. 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.
O Stockholders' Equity Activity
Stock Repurchases
The Board of Directors from time to time has authorized the company to
repurchase IBM common stock. The company repurchased 57,384,100 common shares at
a cost of $6.9 billion and 81,505,200 common shares at a cost of $7.1 billion in
1998 and 1997, respectively. The repurchases resulted in a reduction of
$28,498,409 and $34,388,668 in the stated capital (par value) associated with
common stock in 1998 and 1997, respectively. In 1997, 10 million repurchased
shares were used to establish the Employee Benefits Trust (see below). In 1998
and 1997, 387,282 and 2,727,864 shares, respectively, were issued as a result of
acquisitions. The rest of the repurchased shares were retired and restored to
the status of authorized but unissued shares. At December 31, 1998,
approximately $2.8 billion of Board authorization for repurchases remained. The
company plans to purchase shares on the open market from time to time, depending
on market conditions.
In 1995, the IBM Board of Directors authorized the company to purchase all of
its outstanding Series A 7 1/2 percent preferred stock. During 1998 and 1997,
the company repurchased 51,250 shares at a cost of $5.5 million and 13,450
shares at a cost of $1.4 million, respectively. This resulted in a $512.50 and
$134.50 ($.01 par value per share) reduction in the stated capital associated
with preferred stock as of December 31, 1998 and 1997, respectively. The
repurchased shares were retired and restored to the status of authorized but
unissued shares. The company plans to purchase remaining shares on the open
market and in private transactions from time to time, depending on market
conditions.
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. The shares will be voted
by the trustee in accordance with its fiduciary duties. As of December 31, 1998
and 1997, no shares have been committed to be released.
At December 31, 1998, the company adjusted its valuation of the employee
benefits trust to fair value. This adjustment solely impacted line items within
stockholders' equity and did not affect total stockholders' equity or net
income.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Accumulated Gains and Losses Not Affecting Retained Earnings
Foreign Net Unrealized Total Gains and
Currency Gains (Losses) on Losses Not Affecting
Items Marketable Securities Retained Earnings
(Dollars in millions) (Net of Tax) (Net of Tax) (Net of Tax)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance, January 1, 1996 $ 3,036 $ 57 $ 3,093
Change for period (635) 111 (524)
- ------------------------------------------------------------------------------------------------------
Ending balance, December 31, 1996 2,401 168 2,569
Change for period (1,610) (60) (1,670)
- ------------------------------------------------------------------------------------------------------
Ending balance, December 31, 1997 791 108 899
Change for period 69 (57) 12
- ------------------------------------------------------------------------------------------------------
Ending balance, December 31, 1998 $ 860 $ 51 $ 911
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED GAINS (LOSSES) ON
MARKETABLE SECURITIES (NET OF TAX)
(Dollars in millions)
For the year ended December 31: 1998
- --------------------------------------------------------------------------------
Unrealized gains
arising during the period, net of tax $ 99
Less gains included in net income
for the period, net of tax 156
- --------------------------------------------------------------------------------
Net decrease in unrealized gains
on marketable securities, net of tax $(57)
================================================================================
P Contingencies
The company is subject to a variety of claims and suits that arise from time to
time out of the ordinary course of its business, including actions with respect
to contracts, intellectual property, product liability and environmental
matters. The company does not believe that any such current action will have a
material impact on the company's business, financial condition or results of
operations.
On February 25, 1993, a class action complaint was filed against the company in
the United States District Court for the Southern District of New York alleging,
among other matters, that the company disseminated false and misleading
statements concerning its financial condition and dividends during certain
periods of 1992. On February 3, 1997, Judge Rakoff issued an order granting the
company's motion for summary judgment in this case in its entirety. Plaintiffs
filed an appeal and on November 17, 1998, the Second Circuit Court of Appeals
upheld Judge Rakoff's decision for the company.
Q Taxes
- --------------------------------------------------------------------------------
(Dollars in millions)
For the year ended December 31: 1998 1997 1996
- --------------------------------------------------------------------------------
Income before income taxes:
U.S. operations $ 2,960 $ 3,193 $ 3,025
Non-U.S. operations 6,080 5,834 5,562
- --------------------------------------------------------------------------------
$ 9,040 $ 9,027 $ 8,587
================================================================================
The provision for income taxes
by geographic operations
is as follows:
U.S. operations $ 991 $ 974 $ 1,137
Non-U.S. operations 1,721 1,960 2,021
- --------------------------------------------------------------------------------
Total provision for income taxes $ 2,712 $ 2,934 $ 3,158
================================================================================
The components of the provision
for income taxes by taxing
jurisdiction are as follows:
U.S. federal:
Current $ 1,117 $ 163 $ 727
Deferred (475) 349 83
- --------------------------------------------------------------------------------
642 512 810
U.S. state and local:
Current 139 83 158
Deferred (260) (87) (353)
- --------------------------------------------------------------------------------
(121) (4) (195)
Non-U.S.:
Current 2,062 2,330 2,262
Deferred 129 96 281
- --------------------------------------------------------------------------------
2,191 2,426 2,543
- --------------------------------------------------------------------------------
Total provision for income taxes 2,712 2,934 3,158
Provision for social security,
real estate, personal property
and other taxes 2,859 2,774 2,584
- --------------------------------------------------------------------------------
Total provision for taxes $ 5,571 $ 5,708 $ 5,742
================================================================================
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
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.
The significant components of activities that gave rise to deferred tax assets
and liabilities included on the balance sheet were as follows:
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Employee benefits $ 3,909 $ 3,707
Bad debt, inventory and
warranty reserves 1,249 1,027
Alternative minimum tax credits 1,169 1,092
Capitalized research and development 913 1,196
Restructuring charges 863 1,163
Deferred income 686 893
General business credits 555 492
Equity alliances 387 378
Foreign tax loss carryforwards 304 202
State and local tax loss carryforwards 212 203
Depreciation 201 132
Intracompany sales and services 182 235
Other 2,614 2,507
- --------------------------------------------------------------------------------
Gross deferred tax assets 13,244 13,227
Less: Valuation allowance 488 2,163
- --------------------------------------------------------------------------------
Net deferred tax assets $12,756 $11,064
================================================================================
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
(Dollars in millions)
At December 31: 1998 1997
- --------------------------------------------------------------------------------
Sales-type leases $3,433 $3,147
Retirement benefits 2,775 2,147
Depreciation 1,505 1,556
Software costs deferred 287 420
Other 1,841 1,413
- --------------------------------------------------------------------------------
Gross deferred tax liabilities $9,841 $8,683
================================================================================
As part of implementing its global strategies involving the relocation of
certain of its manufacturing operations, the company transferred certain
intellectual property rights to several non-U.S. subsidiaries in December 1998.
Since these strategies, including this transfer, result in the anticipated
utilization of U.S. federal tax credit carryforwards, the company reduced the
valuation allowance from that previously required. The valuation allowance at
December 31, 1998, principally applies to certain state and local and foreign
tax loss carryforwards that, in the opinion of management, are more likely than
not to expire before the company can utilize them.
A reconciliation of the company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
- --------------------------------------------------------------------------------
For the year ended December 31: 1998 1997 1996
- --------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
Foreign tax differential (6) (3) 2
State and local 1 1 1
U.S. valuation allowance
related items (1) -- (6)
Other 1 -- 5
- --------------------------------------------------------------------------------
Effective rate 30% 33% 37%
================================================================================
For tax return purposes, the company has available tax credit carryforwards of
approximately $2,067 million, of which $1,169 million have an indefinite
carryforward period, $184 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 $516 million. Most of these carryforwards are available for
10 years or have an indefinite carryforward period.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings amounted to $13,165 million at December 31, 1998, $12,511
million at December 31, 1997, and $12,111 million at December 31, 1996. 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.
R Selling and Advertising
Selling and advertising expense is charged against income as incurred.
Advertising expense, which includes media, agency and promotional expenses,
amounted to $1,681 million, $1,708 million and $1,569 million in 1998, 1997 and
1996, respectively.
S Research, Development and Engineering
Research, development and engineering expense amounted to $5,046 million in
1998, $4,877 million in 1997 and $5,089 million in 1996. Expenditures for
product-related engineering included in these amounts were $580 million, $570
million and $720 million in 1998, 1997 and 1996, respectively.
Expenditures of $4,466 million in 1998, $4,307 million in 1997 and $4,369
million in 1996 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 $2,086 million, $2,016 million and $2,161
million in 1998, 1997 and 1996, respectively. Included in the 1996 expenditures
is $435 million of purchased in-process research and development expense
relating to the Tivoli and Object Technology International, Inc. acquisitions.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
T 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: 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares on which basic earnings
per share is calculated:
Average outstanding during year 934,502,785 983,286,361 1,056,704,188
Add--Incremental shares under stock
compensation plans 25,562,450 27,648,581 23,004,716
- --------------------------------------------------------------------------------------------------------
Number of shares on which diluted earnings
per share is calculated 960,065,235 1,010,934,942 1,079,708,904
========================================================================================================
Net income (millions) $ 6,328 $ 6,093 $ 5,429
Less--Preferred stock dividends (millions) 20 20 20
- --------------------------------------------------------------------------------------------------------
Net income on which basic and diluted earnings
per share are calculated (millions) $ 6,308 $ 6,073 $ 5,409
========================================================================================================
Basic earnings per share $ 6.75 $ 6.18 $ 5.12
Diluted earnings per share $ 6.57 $ 6.01 $ 5.01
- --------------------------------------------------------------------------------------------------------
</TABLE>
Stock options to purchase 2,062,365 shares in 1998, 165,833 shares in 1997 and
784,141 shares in 1996 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 addition, 2,565,519 restricted stock units
in 1998 relating to the company's Long-Term Performance Plan were not included
in the computation of diluted earnings as their effect would be antidilutive.
U Rental Expense and Lease Commitments
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $1,431 million in 1998, $1,280
million in 1997 and $1,210 million in 1996. The table below depicts gross
minimum rental commitments under noncancelable leases, amounts related to vacant
space that the company has reserved and sublease income commitments. These
amounts generally reflect activities related to office space and manufacturing
equipment.
- --------------------------------------------------------------------------------
Beyond
(Dollars in millions) 1999 2000 2001 2002 2003 2003
- --------------------------------------------------------------------------------
Gross rental commitments $1,398 $1,242 $1,085 $877 $623 $1,417
Vacant space 205 188 150 98 59 222
Sublease income commitments 165 140 122 64 35 66
- --------------------------------------------------------------------------------
V Stock-Based Compensation Plans
The company applies Accounting Principles Board (APB) Opinion No. 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, 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 34.3 million and 46.4 million unused shares available for
granting under the IBM 1997 Long-Term Performance Plan as of December 31, 1998
and 1997, respectively, and approximately 2.0 and 9.0 million shares available
for granting under the 1994 Long-Term Performance Plan at December 31, 1998 and
1997, respectively.
These awards, which are expressed in terms of shares, are adjusted to fair value
at the end of each period and the change in value is included in net income.
Awards under the Plans resulted in compensation expense of $322.4 million,
$214.1 million and $203.9 million in 1998, 1997 and 1996, respectively.
79
<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 the company'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 tables summarize option
activity of the Plans during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
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 $ 54 61,728,361 $44 61,435,322 $39 68,565,806
Options granted 107 20,587,675 71 21,471,228 63 15,359,058
Options exercised 44 (14,816,738) 42 (19,630,005) 36 (19,302,622)
Options terminated 71 (1,777,373) 56 (1,548,184) 61 (3,186,920)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 72 65,721,925 $54 61,728,361 $44 61,435,322
===================================================================================================================
Exercisable at December 31 $ 44 23,095,818 $38 26,619,548 $41 30,603,845
===================================================================================================================
</TABLE>
The shares under option at December 31, 1998, 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 - 50A 16,708,124 $ 32 5 15,137,952 $ 32
$51 - 80A 26,369,118 68 7 7,463,820 66
$81 - 110A 20,024,496 103 9 491,047 103
$111 and over 2,620,187 138 10 2,999 112
- ----------------------------------------------------------------------------------------------------------------
65,721,925 $ 72 23,095,818 $ 44
================================================================================================================
</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 1998, 1997 and 1996, employees purchased 3,993,372, 4,676,980 and
6,461,856 shares, all of which were treasury shares, for which $415 million,
$354 million and $324 million were paid to the company, respectively.
There were approximately 31.5 million, 35.5 million and 40.2 million reserved
unissued shares available for purchase under the ESPP, as previously approved by
stockholders, at December 31, 1998, 1997 and 1996, respectively.
Pro Forma Disclosure
In applying APB Opinion No. 25, no expense was recognized for stock options
granted under the Plan or 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 income and earnings
per share be disclosed as if the resulting stock-based compensation amounts were
recorded in the Consolidated Statement of Earnings. The table below depicts the
effects of SFAS 123.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------------- --------------------------
(Dollars in millions except per share amounts) As reported Pro forma As reported Pro forma As reported Pro forma
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable to
common shareholders $6,308 $5,985 $6,073 $5,866 $5,409 $5,267
Earnings per share of
common stock--basic $ 6.75 $ 6.40 $ 6.18 $ 5.97 $ 5.12 $ 4.98
Earnings per share of
common stock--assuming dilution $ 6.57 $ 6.24 $ 6.01 $ 5.82 $ 5.01 $ 4.89
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The pro forma amounts, for purposes of SFAS 123, reflect the portion of the
estimated fair value of awards earned in 1998, 1997 and 1996. 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
1998, 1997 and 1996. 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:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Term (years)* 5/6 5/6 5/6
Volatility** 26.4% 23.0% 22.0%
Risk-free interest rate (zero
coupon U.S. treasury note) 5.1% 6.2% 6.0%
Dividend yield 0.8% 1.0% 1.2%
Weighted-average fair
value of options $ 36 $ 25 $ 20
* 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.
- --------------------------------------------------------------------------------
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 changes in the benefit obligations and plan assets of the U.S. and material
non-U.S. defined benefit plans for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
U.S. Plan Non-U.S. Plans
-------------------------- --------------------------
(Dollars in millions) 1998 1997* 1998 1997*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 33,161 $ 29,729 $ 18,846 $ 19,883
Service cost 532 397 399 366
Interest cost 2,261 2,215 1,213 1,182
Plan participants' contributions -- -- 29 33
Acquisitions/divestitures, net 22 (2) -- 129
Amendments -- 14 2 --
Actuarial losses 2,729 2,805 1,331 431
Benefits paid from trust (2,144) (1,997) (683) (623)
Direct benefit payments -- -- (254) (281)
Foreign exchange impact -- -- 1,155 (2,186)
Plan curtailments/settlements/termination benefits -- -- 10 (88)
- ----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 36,561 33,161 22,048 18,846
- ----------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 38,475 34,281 21,841 21,039
Actual return on plan assets 5,240 6,193 2,400 3,454
Employer contribution -- -- 452 192
Acquisitions/divestitures, net 22 (2) -- 129
Plan participants' contributions -- -- 29 33
Benefits paid from trust (2,144) (1,997) (683) (623)
Foreign exchange impact -- -- 1,283 (2,263)
Settlements -- -- (28) (120)
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 41,593 38,475 25,294 21,841
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets in excess
of benefit obligation 5,032 5,314 3,246 2,995
Unrecognized net actuarial gains (1,289) (1,901) (2,342) (2,897)
Unrecognized prior service costs 174 190 181 194
Unrecognized net transition asset (771) (911) (78) (83)
Adjustment to recognize minimum liability -- -- (87) (3)
- ----------------------------------------------------------------------------------------------------------------------
Prepaid pension asset recognized
in the Consolidated Statement of Financial Position $ 3,146 $ 2,692 $ 920 $ 206
======================================================================================================================
* Reclassified to conform to 1998 presentation.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
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. 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, 1998 and 1997, was 116,685 and
108,415, respectively.
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.
U.S. Supplemental Executive Retirement Plan: The company also has a
non-qualified U.S. Supplemental Executive Retirement Plan (SERP). 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, 1998 and 1997, the projected benefit obligation was
$178 million and $128 million, respectively, and the amounts included in the
Consolidated Statement of Financial Position were pension liabilities of $81
million and $56 million, respectively.
Weighted-average assumptions as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Plan Non-U.S. Plan
------------------------------------ ----------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.5% 7.0% 7.75% 4.5 - 7.5% 4.5 - 7.5% 4.5 - 8.5%
Expected return on plan assets 9.5% 9.5% 9.25% 6.5 - 10.0% 6.0 - 9.5% 6.5 - 10.0%
Rate of compensation increase 5.0% 5.0% 5.0% 2.7 - 6.1% 2.6 - 6.1% 2.3 - 6.5%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The cost of the defined benefit plans for 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
U.S. Plan Non-U.S. Plan
----------------------------- -----------------------------
(Dollars in millions) 1998 1997* 1996* 1998 1997* 1996*
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 532 $ 397 $ 412 $ 399 $ 366 $ 384
Interest cost 2,261 2,215 2,125 1,213 1,182 1,302
Expected return on plan assets (3,123) (2,907) (2,701) (1,739) (1,457) (1,485)
Net amortization (124) (125) (121) 21 15 27
Settlement losses/(gains) -- -- -- 10 (63) (102)
- ---------------------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit)--U.S. Plan
and material non-U.S. Plans $ (454) $ (420) $ (285) $ (96) $ 43 $ 126
=====================================================================================================================
Total net periodic pension cost (benefit) for all
non-U.S. plans $ (42) $ 50 $ 148
=====================================================================================================================
* Reclassified to conform to 1998 presentation
Cost of defined contribution plans $ 258 $ 236 $ 209 $ 90 $ 64 $ 29
=====================================================================================================================
Cost of complementary defined benefits $ 34 $ 33 $ 27
====================================================================================
Cost of U.S. supplemental executive
retirement plan $ 25 $ 20 $ 19
====================================================================================
</TABLE>
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
Net periodic pension cost is determined using the Projected Unit Credit
actuarial method.
The effects on the company's results of operations and financial position from
changes in the estimates and assumptions used in computing pension and prepaid
pension assets 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. The
0.5% decrease in the discount rate in 1998 resulted in an actuarial loss of
$2,144 million for the U.S. plan. The 0.75% decrease in the discount rate in
1997 resulted in an actuarial loss of $2,723 million for the U.S. plan.
It is the company's practice to fund amounts for pensions sufficient to meet the
minimum requirements set forth in applicable employee benefits 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 real
estate.
At December 31, 1998, the material non-U.S. defined benefit plans in which the
plan assets exceeded the benefit obligation had obligations of $18,217 million
and assets of $21,736 million. The material non-U.S. defined benefit plans in
which the benefit obligation exceeded the fair value of plan assets had
obligations of $3,831 million and assets of $3,558 million.
At December 31, 1997, the material non-U.S. defined benefit plans in which the
plan assets exceeded the benefit obligation had obligations of $18,322 million
and assets of $21,391 million. The material non-U.S. defined benefit plans in
which the benefit obligation exceeded the fair value of plan assets had
obligations of $524 million and assets of $450 million.
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.
The changes in the benefit obligation and plan assets of the U.S. plans for 1998
and 1997 are as follows:
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997*
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning
of year $ 6,384 $ 6,453
Service cost 42 32
Interest cost 427 455
Amendments (26) (290)
Actuarial gains (146) (234)
Actuarial losses 272 435
Benefits paid from trust (486) (455)
Direct benefit payments (10) (12)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 6,457 6,384
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 120 559
Actual return on plan assets 10 16
Employer contributions 479 --
Benefits paid, net
of employee contributions (486) (455)
- --------------------------------------------------------------------------------
Fair value of plan assets at
end of year 123 120
- --------------------------------------------------------------------------------
Benefit obligation in excess
of plan assets (6,334) (6,264)
Unrecognized net actuarial losses 700 578
Unrecognized prior service cost (965) (1,073)
- --------------------------------------------------------------------------------
Accrued postretirement
benefit liability recognized in the
Consolidated Statement
of Financial Position $(6,599) $(6,759)
================================================================================
* Reclassified to conform to 1998 presentation.
- --------------------------------------------------------------------------------
The 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.
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The net periodic postretirement benefit cost for the U.S. plan for the years
ended December 31 included the following components:
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 42 $ 32 $ 43
Interest cost 427 455 478
Expected return on
plan assets (5) (15) (68)
Net amortization and deferral (133) (119) (87)
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 331 $ 353 $ 366
================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.5% 7.0% 7.75%
Expected return on
plan assets 5.0% 5.0% 9.25%
- --------------------------------------------------------------------------------
The assets of the plan are comprised of short-term fixed income investments.
Certain of the company's non-U.S. subsidiaries have similar plans for retirees.
However, most of the retirees outside the United States are covered by
government-sponsored and administered programs. The obligations and cost of
these programs are not significant to the company.
A one percentage-point change in the assumed healthcare cost trend rate would
have the following effects as of December 31, 1998:
- --------------------------------------------------------------------------------
One Percentage One Percentage
(Dollars in millions) Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total service and
interest cost $ 4 $ (6)
Effect on postretirement benefit
obligation $87 $(122)
- --------------------------------------------------------------------------------
Y Segment Information
IBM is in the business of providing customer solutions through the use of
advanced information technology. The company operates primarily in a single
industry utilizing several segments that create value by offering a variety of
solutions that include, either singularly or in some combination, technologies,
systems, products, services, software and financing.
Organizationally, the company's major operations consist of three hardware
product segments--Technology, Personal Systems and Server; a Global Services
segment; a Software segment; a Global Financing segment and a series of
Enterprise Investments. The product segments are determined based on several
factors including customer base, homogeneity of products, technology, delivery
channels and other factors.
The Technology segment produces peripheral equipment for use in general purpose
computer systems including storage and networking devices, advanced function
printers and display devices. In addition, the segment provides components such
as semiconductors and hard disk drives for use in the company's products and for
sale to original equipment manufacturers (OEM). Major business units include
Storage Systems, Microelectronics, Printer Systems and Networking Hardware.
The Personal Systems segment produces general purpose computer systems,
including some system and consumer software, that operate applications for use
by one user at a time (personal computer clients), or as servers, and display
devices. Major brands include the Aptiva home PC's, IntelliStation workstations,
Netfinity servers, PC 300 commercial desktop and ThinkPad mobile systems.
Consumer software brands include Crayola, Edmark and World Book Multimedia
Encyclopedia. These products are sold primarily through reseller and retail
channels.
The Server segment produces powerful multi-purpose computer systems that operate
many open-network based applications and are used primarily by multiple users at
the same time. They perform high-volume transaction processing and serve data to
personal systems and other end-user devices. The servers are the engines behind
the bulk of electronic business transactions, including e-commerce. Major brands
include S/390, AS/400 and RS/6000. The segment's products are sold directly by
the company and through business partner relationships.
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
The Global Services segment is the world's largest and most versatile
information technology services provider, supporting computer hardware and
software products, and providing professional services to help customers of all
sizes realize the full value of information technology (IT). The segment
provides its customers with services that include business and IT consulting,
business transformational services like an ERP solution, e-business services and
full scope services like strategic outsourcing or Total Systems Management
services. The Global Services segment is uniquely suited to integrate the full
range of the company's capabilities, including hardware, software and research.
The Software segment delivers operating systems for the company's servers and
middleware for IBM and non-IBM platforms. Middleware includes application
development, data management, networking, systems management, transaction
processing, and messaging and collaboration. In addition to its own development,
product and marketing effort, the segment supports more than 29,000 independent
software vendors to ensure that the company's software and hardware offerings
are included in those partners' solutions.
The Global Financing segment provides and facilitates a broad array of financing
services for the company, its customers and its business partners. The primary
focus is to leverage its financial structuring, portfolio management and
partnering skills to expand the company's customer and partner base.
Enterprise Investments segment provides a spectrum of initiatives in information
technology solutions, supporting the hardware, software and services segments of
the company. The segment develops unique products designed to meet specific
marketplace requirements and to complement the company's overall portfolio of
products.
Segment revenue and pre-tax income include transactions between the segments
which are intended to reflect an arm's-length transfer at the best price
available for comparable external customers. Specifically, semiconductors and
disk drives are sourced internally from the Technology segment for use in the
manufacture of the Server segment and Personal Systems segment products.
Technology, hardware and software used by the Global Services segment in
outsourcing engagements are sourced internally from the Technology, Server,
Personal Systems and Software segments. For the internal use of information
technology services, the Global Services segment recovers cost as well as a
reasonable fee reflecting the arm's-length value of providing the services. The
Global Services segment enters into arm's-length leases at prices equivalent to
market rates with the Global Financing segment to facilitate the acquisition of
equipment used in outsourcing engagements. All internal transaction prices are
reviewed and reset annually if appropriate.
The company extensively utilizes shared-staff concepts in order to realize
economies of scale and efficient use of resources. As such, a significant amount
of expense is shared by all of the company's segments. This expense represents
sales coverage, marketing and support functions such as Accounting, Treasury,
Procurement, Legal, Human Resources and Billing and Collections. Where
practical, shared expenses are allocated based on measurable drivers of expense,
e.g., Human Resources costs are allocated on headcount while account coverage
expenses are allocated on a revenue mix that reflects the company's sales
commission plan. When a clear and measurable driver cannot be identified, shared
expenses are allocated based on a financial basis consistent with the company's
management system, e.g., image advertising is allocated based on the gross
profit of the segments. The unallocated corporate expenses primarily relate to
expense arising from certain acquisitions, indirect infrastructure reductions
and currency exchange gains and losses recorded in net income which are not
allocated to the segments.
The following tables reflect the results of the segments consistent with the
company's management system. These results are not necessarily a depiction that
is in conformity with generally accepted accounting principles, e.g., employee
retirement plan costs are developed using actuarial assumptions on a
country-by-country basis and allocated to the segments on headcount. A different
result could be arrived at for any segment if actuarial assumptions unique to
each segment were used. Performance measurement is based on income before income
taxes (pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
=================================================================================================================================
MANAGEMENT SYSTEM SEGMENT VIEW
Hardware Segments
------------------------------------
Personal Global Global Enterprise Total
(Dollars in millions) Technology Systems Server Services Software Financing Investments Segments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
External revenue $11,890 $12,776 $10,624 $28,916 $11,863 $2,979 $2,468 $81,516
Internal revenue 4,578 29 445 2,747 749 792 56 9,396
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue $16,468 $12,805 $11,069 $31,663 $12,612 $3,771 $2,524 $90,912
=================================================================================================================================
Pre-tax income $ 955 $ (992) $ 2,842 $ 3,757 $ 2,588 $1,165 $ (616) $ 9,699
=================================================================================================================================
Revenue year-to-
year change (4.4)% (10.8)% (6.0)% 13.5% 6.6% 5.8% 0.6% 2.0%
Pre-tax income year-
to-year change (47.1)% (516.1)% (1.9)% 30.0% 27.2% 3.0% 32.3% 0.1%
Pre-tax income margin 5.8% (7.7)% 25.7% 11.9% 20.5% 30.9% (24.4)% 10.7%
1997:
External revenue $11,083 $14,337 $11,286 $25,166 $11,164 $2,935 $2,438 $78,409
Internal revenue 6,147 20 491 2,737 671 628 70 10,764
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue $17,230 $14,357 $11,777 $27,903 $11,835 $3,563 $2,508 $89,173
=================================================================================================================================
Pre-tax income $ 1,806 $ (161) $ 2,896 $ 2,890 $ 2,034 $1,131 $ (910) $ 9,686
=================================================================================================================================
Revenue year-to-
year change 0.3% 3.3% (6.9)% 12.6% (1.5)% (3.3)% 5.0% 3.0%
Pre-tax income year-
to-year change 17.7% (312.8)% (12.1)% 14.3% (17.5)% (10.2)% (17.4)% (5.7)%
Pre-tax income margin 10.5% (1.1)% 24.6% 10.4% 17.2% 31.7% (36.3)% 10.9%
1996:
External revenue $10,244 $13,876 $12,230 $22,310 $11,426 $3,224 $2,294 $75,604
Internal revenue 6,942 23 423 2,460 593 462 95 10,998
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue $17,186 $13,899 $12,653 $24,770 $12,019 $3,686 $2,389 $86,602
=================================================================================================================================
Pre-tax income $ 1,535 $ (39) $ 3,293 $ 2,529 $ 2,466 $1,260 $ (775) $10,269
=================================================================================================================================
Pre-tax income margin 8.9% (0.3)% 26.0% 10.2% 20.5% 34.2% (32.4)% 11.9%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Reconciliations to IBM as Reported
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE:
Total reportable segments $90,912 $89,173 $86,602
Other revenues 151 99 343
Elimination of internal
revenue (9,396) (10,764) (10,998)
- --------------------------------------------------------------------------------
Total IBM Consolidated $81,667 $78,508 $75,947
================================================================================
PRE-TAX INCOME:
Total reportable segments $9,699 $9,686 $10,269
Elimination of internal
transactions (162) (377) (251)
Unallocated corporate
expenses (497) (282) (996)
Purchased research and
development -- -- (435)
- --------------------------------------------------------------------------------
Total IBM Consolidated $9,040 $9,027 $8,587
================================================================================
Major Customers
No single customer represents 10% or more of the company's total revenue.
Immaterial Items
INVESTMENT IN EQUITY ALLIANCES AND
EQUITY ALLIANCES GAINS/LOSSES
The investments in equity alliances and the resulting gains and losses from
these investments attributable to the segments are minimal and do not have a
material impact on the financial results of the segments.
Segment Assets and Other Items
The assets of the hardware segments primarily include inventory and plant,
property and equipment. The software segment assets mainly include inventory,
plant, property and equipment, and investment in deferred software development.
The Global Services segment assets primarily include maintenance inventory and
plant, property and equipment associated with its strategic outsourcing
business. Details regarding the Global Financing segment assets can be found on
page 89.
To accomplish the efficient use of space and equipment, it becomes necessary, in
most instances, for several segments to share plant, property and equipment
assets. Where assets are shared, landlord ownership of the assets is assigned to
one segment and not allocated to each user segment. This is consistent with the
company's management system and is reflected as such in the schedule on page 88.
In such cases, there will not be a precise compatibility between segment pre-tax
income and segment assets.
Similarly, the depreciation amounts reported by segment are deployed on a
landlord ownership basis and may not be consistent with the actual amounts
included in the segments' pre-tax income. Such amounts included in pre-tax
income reflect occupancy charges from the landlord segment and are not
specifically identified by the management reporting system.
Capital expenditures reported by segment are also in line with the landlord
ownership basis of asset assignment.
The Global Financing segment amounts on page 88 for interest income and interest
expense reflect the interest income and expense associated with the financing
business as well as the investment in cash and marketable securities. The
remaining amounts of interest income and interest expense are not allocated
discretely to the other segments, but are included as part of an indirect
expense allocation.
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT SYSTEM SEGMENT VIEW
Hardware Segments
----------------------------------
Personal Global Global Enterprise Total
(Dollars in millions) Technology Systems Server Services Software Financing Investments Segments
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Assets $11,251 $1,464 $2,106 $2,236 $2,577 $40,109 $363 $60,106
Depreciation/amortization 1,207 121 178 322 681 2,768 15 5,292
Capital expenditures/
investment-software 2,044 156 288 358 424 3,438 19 6,727
Interest income -- -- -- -- -- 2,725 -- 2,725
Interest expense -- -- -- -- -- 1,252 -- 1,252
1997:
Assets $10,060 $1,629 $2,191 $1,914 $2,642 $35,444 $362 $54,242
Depreciation/amortization 1,092 112 167 315 1,132 2,170 10 4,998
Capital expenditures/
investment-software 2,028 195 235 361 515 3,615 16 6,965
Interest income -- -- -- -- -- 2,639 -- 2,639
Interest expense -- -- -- -- -- 1,175 -- 1,175
1996:
Assets $ 9,435 $2,666 $2,322 $2,067 $2,813 $31,793 $295 $51,391
Depreciation/amortization 1,030 141 201 283 1,496 1,761 11 4,923
Capital expenditures/
investment-software 1,805 162 171 359 453 3,086 11 6,047
Interest income -- -- -- -- -- 2,752 -- 2,752
Interest expense -- -- -- -- -- 1,166 -- 1,166
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Reconciliations to IBM as Reported
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
ASSETS:
Total reportable segments $60,106 $54,242 $51,391
Elimination of internal
transactions (7,519) (6,287) (5,192)
Unallocated amounts:
Cash and marketable securities 4,295 6,062 6,601
Notes and accounts receivable 7,715 7,441 7,962
Deferred tax assets 5,376 4,746 4,683
Plant, other property
and equipment 7,706 7,564 7,505
Pension assets 4,836 3,828 3,323
Other 3,585 3,903 4,859
- --------------------------------------------------------------------------------
Total IBM Consolidated $86,100 $81,499 $81,132
================================================================================
88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
In addition to the previous information for the company's business segments, the
following information is provided to enhance the understanding of the Global
Financing segment. This data summarizes the Global Financing segment's financial
statements for 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
STATEMENT OF FINANCIAL POSITION
(Dollars in millions)
At December 31: 1998 1997 1996
- --------------------------------------------------------------------------------
Assets:
Cash and cash
equivalents $ 1,032 $ 998 $ 1,433
Net investment in
capital leases 14,456 13,831 13,430
Working capital
financing receivables 5,798 4,928 4,030
Loans receivable 8,682 6,951 6,428
Inventories 119 111 98
Equipment on operating
leases and other property,
net of accumulated
depreciation 5,663 5,168 3,988
Other assets 4,359 3,457 2,386
- --------------------------------------------------------------------------------
Total assets $40,109 $35,444 $31,793
================================================================================
Liabilities and stockholders' equity:
Taxes, accrued expenses
and other liabilities $ 8,077 $ 7,969 $ 7,915
Debt 27,754 23,824 20,627
- --------------------------------------------------------------------------------
Total liabilities 35,831 31,793 28,542
Stockholders' equity/
invested capital 4,278 3,651 3,251
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $40,109 $35,444 $31,793
================================================================================
- --------------------------------------------------------------------------------
NET INCOME
(Dollars in millions)
For the year ended December 31: 1998 1997 1996
- --------------------------------------------------------------------------------
Net income before
income taxes $1,165 $1,131 $1,260
Provision for income taxes 432 429 531
- --------------------------------------------------------------------------------
Net income $ 733 $ 702 $ 729
================================================================================
Return on equity 19.1% 20.3% 22.7%
================================================================================
- --------------------------------------------------------------------------------
CASH FLOWS
(Dollars in millions)
For the year ended December 31: 1998 1997 1996
- --------------------------------------------------------------------------------
Net cash provided from
operating activities $ 4,441 $ 3,919 $ 5,314
Net cash used in
investing activities (7,296) (8,435) (5,544)
Net cash provided from
financing activities 2,856 4,102 872
Effect of exchange rate
changes on cash and
cash equivalents 33 (21) (17)
- --------------------------------------------------------------------------------
Net change in cash
and cash equivalents 34 (435) 625
Cash and cash equivalents
at January 1 998 1,433 808
- --------------------------------------------------------------------------------
Cash and cash equivalents
at December 31 $ 1,032 $ 998 $ 1,433
================================================================================
Revenue by Classes of Similar Products or Services
For the Personal Systems, Server, Software and Global Financing segments, the
segment data on page 86 represents the revenue contributions from the products
contained in the segments which are basically similar in nature. In the
Technology and Global Services segments the table below provides external
revenue for similar classes of products within those segments. OEM hardware
consists primarily of revenue from the sale of HDD storage files and
semiconductors. Storage consists of externally attached direct access storage
devices and tape storage devices. Other technology consists primarily of
advanced function printers and networking devices.
- --------------------------------------------------------------------------------
Consolidated
---------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Technology:
OEM $ 6,756 $ 5,560 $ 4,123
Storage 2,439 2,644 2,716
Other technology 2,695 2,879 3,405
Global Services:
Services 23,730 19,534 16,218
Maintenance 5,186 5,632 6,092
Geographic Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Geographic Information
Revenue* Long-lived Assets**
- --------------------------------------------------------------- ---------------------------------
(Dollars in millions) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $35,303 $32,663 $29,395 $18,450 $17,802 $16,910
Japan 8,567 9,765 10,181 4,310 3,635 3,765
Other non-U.S. countries 37,797 36,080 36,371 12,343 11,621 11,648
- ------------------------------------------------------------------------------------------------------
Total $81,667 $78,508 $75,947 $35,103 $33,058 $32,323
======================================================================================================
* Revenues are attributed to countries based on location of customer.
** Includes all non-current assets except non-current financial instruments
and deferred tax assets.
- ------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
International Business Machines Corporation and Subsidiary Companies
Five-Year Comparison of Selected Financial Data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share amounts)
For the year: 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $81,667 $78,508 $75,947 $71,940 $64,052
Net income 6,328 6,093 5,429 4,178 3,021
Per share of common stock--basic 6.75 6.18 5.12 3.61 2.51
Per share of common stock--assuming dilution 6.57 6.01 5.01 3.53 2.48
Cash dividends paid on common stock 814 763 686 572 585
Per share of common stock .86 .775 .65 .50 .50
Investment in plant, rental machines
and other property 6,520 6,793 5,883 4,744 3,078
Return on stockholders' equity 32.6% 29.7% 24.8% 18.5% 14.3%
At end of year:
Total assets $86,100 $81,499 $81,132 $80,292 $81,091
Net investment in plant, rental machines
and other property 19,631 18,347 17,407 16,579 16,664
Working capital 5,533 6,911 6,695 9,043 12,112
Total debt 29,413 26,926 22,829 21,629 22,118
Stockholders' equity 19,433 19,816 21,628 22,423 23,413
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Selected Quarterly Data
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share amounts and stock prices)
Per Share Common Stock
-----------------------------------------
Earnings- Stock Prices**
Gross Net Earnings- Assuming ----------------------
Revenue Profit Income Basic Dilution Dividends High Low
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
First quarter $17,618 $ 6,450 $1,036 $1.08 $1.06 $ .20 $108.38 $ 95.63
Second quarter 18,823 7,146 1,452 1.54 1.50 .22 129.31 103.31
Third quarter 20,095 7,467 1,494 1.60 1.56 .22 138.13 110.75
Fourth quarter 25,131 9,809 2,346 2.55 2.47 .22 189.94 116.81
- ---------------------------------------------------------------------------------------------------------------------------------
Total $81,667 $30,872 $6,328 $6.75* $6.57* $ .86
===================================================================================================
1997
First quarter $17,308 $ 6,592 $1,195 $1.19 $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
===================================================================================================
* 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.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
STOCKHOLDER INFORMATION
IBM Stockholder Services
Stockholders with questions about their accounts should contact:
First Chicago Trust Company, a division of EquiServe
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 by calling (201)
222-4489.
IBM on the Internet
Topics featured in this Annual Report can be found via the IBM home page on the
Internet (http://www.ibm.com). Financial results, news on IBM products, services
and other activities can also be found via that address. Stockholders of record
can receive online account information and answers to frequently asked questions
regarding stockholder accounts via the Internet (http://www.ibm.com/investor).
Stockholders of record can also consent to receive future IBM Annual Reports and
Proxy Statements online through the Internet at this site.
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 (201) 324-0405.
Annual Meeting
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 27, 1999,
at 10 a.m. (EST) at the James L. Knight Center at the Miami Convention Center in
Miami, Florida.
IBM Stock
IBM common stock is listed on the New York Stock Exchange, on other exchanges in
the United States and around the world.
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
Literature for IBM Stockholders
The following literature on IBM is available without charge from First Chicago
Trust Company, a division of EquiServe
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 audio cassette recording of the 1998 Annual Report is available for
sight-impaired stockholders.
IBM Credit Corporation's Annual Report is available in April.
"Progress Report: Environment and Well-Being" reports on IBM's environmental,
safety and energy programs.
"Valuing Diversity: An Ongoing Commitment" communicates to the company's entire
community of employees, customers, stockholders, vendors, suppliers, business
partners and employment applicants the importance IBM places on the diversity of
the company's workplace and marketplace.
General Information
For answers to general questions about IBM from within the continental United
States, call (800) IBM-4YOU. From outside the United States, call (770)
863-1234.
Corporate Offices
International Business Machines Corporation
New Orchard Road
Armonk, New York 10504
(914) 499-1900
The IBM Annual Report is printed on recycled paper and is recyclable.
*AIX, Aptiva, AS/400, DB2, Deep Blue, e-business, Home Director, Home Page
Reader, IBM, IBM Global Network, IBM logo, IntelliStation, MQ Series, Netfinity,
OS/2, OS/390, OS/400, RS/6000, System/390, S/390, SecureWay, SP, ThinkPad,
ViaVoice, VisualAge and WorkPad are trademarks of International Business
Machines Corporation. Domino, Learning Space Software, Lotus and Lotus Notes are
trademarks of Lotus Development Corporation. Tivoli is a trademark of Tivoli
Systems, Inc. Crayola is a registered trademark of Binney & Smith, Inc. CrossPad
is a trademark of A.T. Cross Company and its subsidiaries. Edmark is a trademark
of Edmark Corporation. Microsoft and Windows NT are trademarks of Microsoft
Corporation in the United States, other countries, or both. Oracle is a
registered trademark of Oracle Corporation. Java and Solaris are trademarks of
Sun Microsystems, Inc. in the United States, other countries, or both. UNIX is a
registered trademark in the United States, other countries, or both and is
licensed exclusively through X/Open Company Limited. World Book is a trademark
of World Book Encyclopedia.
Printed in U.S.
G507-0501-04
91
<PAGE>
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
BOARD OF DIRECTORS
Cathleen Black
President
Hearst Magazines
Kenneth I. Chenault
President and
Chief Operating Officer
American Express Company
Juergen Dormann
Chairman of the
Management Board
Hoechst AG
Louis V. Gerstner, Jr.
Chairman of the Board and
Chief Executive Officer
IBM
Nannerl O. Keohane
President
Duke University
Charles F. Knight
Chairman and
Chief Executive Officer
Emerson Electric Co.
Minoru Makihara
Chairman
Mitsubishi Corporation
Lucio A. Noto
Chairman and
Chief Executive Officer
Mobil Corporation
John B. Slaughter
President
Occidental College
Alex Trotman
Retired Chairman and
Chief Executive Officer
Ford Motor Company
Lodewijk C. van Wachem
Chairman of the
Supervisory Board
Royal Dutch Petroleum Company
Charles M. Vest
President
Massachusetts Institute
of Technology
SENIOR MANAGEMENT
CORPORATE HEADQUARTERS
Louis V. Gerstner, Jr.
Chairman of the Board and
Chief Executive Officer
J. Thomas Bouchard
Senior Vice President
Human Resources
Nicholas M. Donofrio
Senior Vice President
Technology & Manufacturing
Paul M. Horn
Senior Vice President
Research
J. Bruce Harreld
Senior Vice President
Strategy
Stephen M. Ward, Jr.
Vice President
Business Transformation
and Chief Information Officer
David B. Kalis
Vice President
Communications
Abby F. Kohnstamm
Senior Vice President
Marketing
Douglas L. Maine
Senior Vice President and
Chief Financial Officer
Joseph C. Lane
General Manager
IBM Global Financing and
President, IBM Credit Corp.
Mark Loughridge
Vice President and Controller
Jeffrey D. Serkes
Vice President and Treasurer
Lawrence R. Ricciardi
Senior Vice President and
General Counsel
Christopher G. Caine
Vice President
Governmental Programs
Daniel E. O'Donnell
Vice President, Assistant
General Counsel and Secretary
Marshall C. Phelps, Jr.
Vice President
Intellectual Property &
Licensing
SALES & DISTRIBUTION GROUP
William A. Etherington
Senior Vice President and
Group Executive
John R. Joyce
General Manager
IBM Asia Pacific
Henry W. K. Chow
General Manager
IBM Greater China
Kakutaro Kitashiro
General Manager
IBM Japan
J. Michael Lawrie
General Manager
IBM Europe/
Middle East/Africa
Elio Catania
General Manager
IBM Italy, Greece,
Israel, Turkey
Peter T. Rowley
General Manager
Global Small &
Medium Business
Linda S. Sanford
General Manager
Global Industries
Jerry Cole
General Manager
Finance Sector
Christian Nivoix
General Manager
Distribution Sector
John W. Thompson
General Manager
IBM Americas
IBM GLOBAL SERVICES
Samuel J. Palmisano
Senior Vice President and
Group Executive
Douglas T. Elix
General Manager
IBM Global Services, Americas
Mark W. Elliott
General Manager
Marketing, Engagement &
Business Development
Hans-Ulrich Maerki
General Manager
IBM Global Services, EMEA
SERVER GROUP
Robert M. Stephenson
Senior Vice President and
Group Executive
David R. Carlucci
General Manager
System/390 Division
Susan M. Whitney
Vice President
Server Marketing
PERSONAL SYSTEMS GROUP
David M. Thomas
Senior Vice President and
Group Executive
Bob E. Dies
General Manager
Network and
Personal Computers
Jonathan J. Judge
General Manager
Sales & Service
William E. McCracken
General Manager
Marketing & Strategy
SOFTWARE GROUP
John M. Thompson
Senior Vice President and
Group Executive
Mark F. Bregman
General Manager
Pervasive Computing
Jan H. Lindelow
President and
Chief Executive Officer
Tivoli Systems, Inc.
Steven A. Mills
General Manager
Software Solutions Division
Jeffrey Papows
President
Lotus Development Corp.
Irving Wladawsky-Berger
General Manager
Internet Division
William M. Zeitler
General Manager
Worldwide Software
Sales & Marketing
Michael D. Zisman
Vice President
Strategy
Alfred W. Zollar
General Manager
Network Computing
Software Division
TECHNOLOGY GROUP
James T. Vanderslice
Senior Vice President and
Group Executive
John E. Kelly, III
General Manager
IBM Microelectronics Division
Ronald L. Kilpatrick
General Manager
Storage Systems Division
<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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Cathleen P. Black
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Kenneth I. Chenault
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ J. Dormann
----------------------------
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 1998 on Form 10-K, hereby constitutes and appoints Douglas L. Maine,
Lawrence R. Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell,
and Andrew Bonzani 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 23rd day of February 1999.
/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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Nannerl O. Keohane
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Charles F. Knight
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Minoru Makihara
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Lucio A. Noto
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ John B. Slaughter
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Alex Trotman
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Lodewijk C. van Wachem
----------------------------
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 1998 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., Douglas L. Maine, Lawrence R.
Ricciardi, Mark Loughridge, Jeffrey D. Serkes, Daniel E. O'Donnell, and Andrew
Bonzani 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 23rd day of February 1999.
/s/ Charles M. Vest
----------------------------
Director
<PAGE>
POWER OF ATTORNEY OF MARK LOUGHRIDGE
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Vice President
and Controller 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 1998 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr.,
Douglas L. Maine, Lawrence R. Ricciardi, Jeffrey D. Serkes, Daniel E. O'Donnell,
and Andrew Bonzani 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 23rd day of February 1999.
/s/ Mark Loughridge
-----------------------------
Mark Loughridge
Vice President and Controller
<PAGE>
POWER OF ATTORNEY OF DOUGLAS L. MAINE
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Senior Vice
President and Chief Financial 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 1998 on Form 10-K, hereby constitutes and appoints
Louis V. Gerstner, Jr., Lawrence R. Ricciardi, Mark Loughridge, Jeffrey D.
Serkes, Daniel E. O'Donnell, and Andrew Bonzani 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 23rd day of February 1999.
/s/ Douglas L. Maine
-----------------------------
Douglas L. Maine
Senior Vice President and
Chief Financial Officer
<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, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,375
<SECURITIES> 393
<RECEIVABLES> 18,958
<ALLOWANCES> 0
<INVENTORY> 5,200
<CURRENT-ASSETS> 42,360
<PP&E> 44,870
<DEPRECIATION> 25,239
<TOTAL-ASSETS> 86,100
<CURRENT-LIABILITIES> 36,827
<BONDS> 0
10,121
0
<COMMON> 247
<OTHER-SE> 9,065
<TOTAL-LIABILITY-AND-EQUITY> 86,100
<SALES> 35,419
<TOTAL-REVENUES> 81,667
<CGS> 24,214
<TOTAL-COSTS> 50,795
<OTHER-EXPENSES> 21,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 713
<INCOME-PRETAX> 9,040
<INCOME-TAX> 2,712
<INCOME-CONTINUING> 6,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,328
<EPS-PRIMARY> 6.75
<EPS-DILUTED> 6.57
</TABLE>
