<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, 1999
1-2360
(Commission File Number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-0871985
(State of incorporation) (IRS employer identification
number)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
</TABLE>
914-499-1900
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
VOTING SHARES OUTSTANDING NAME OF EACH EXCHANGE
TITLE OF EACH CLASS AT MARCH 1, 2000 ON WHICH REGISTERED
- ------------------- ------------------------- -----------------------
<S> <C> <C>
Capital stock, par value $.20 per share 1,793,760,770 New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary shares each representing one-fourth of a New York Stock Exchange
share of 7 1/2% 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. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 2000 was $179.8 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended
December 31, 1999 into Parts I, II and IV of Form 10-K.
Portions of IBM's definitive Proxy Statement dated March 13, 2000 into
Part III of Form 10-K.
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<PAGE>
PART I
ITEM 1. BUSINESS:
International Business Machines Corporation (IBM) was incorporated in the
State of New York on June 15, 1911, as the Computing-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 uses advanced information technology to provide customer solutions. The
company operates primarily in a single industry using 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 comprise three hardware
product segments -- Technology, Personal Systems and Server; a Global Services
segment; a Software segment; a Global Financing segment and an Enterprise
Investments segment. The segments are determined based on several factors,
including customer base, homogeneity of products, technology and delivery
channels.
IBM offers its products through its global sales and distribution
organizations. 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 effort devoted exclusively to small and medium
businesses. IBM also offers its products through a variety of third party
distributors and resellers, as well as through its on-line channels.
While the company's various proprietary intellectual property rights are
important to its success, IBM believes its business as a whole is not materially
dependent on any particular patent or license, or any particular group of
patents or licenses. IBM owns or is licensed under a number of patents, which
vary in duration, relating to its products. Licenses under patents owned by IBM
have been and are being granted to others under reasonable terms and conditions.
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. Also, there can 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 that are
necessary for the manufacture, production and delivery of its products have been
available in the quantities that are required. Certain of the company's
businesses rely on a single or limited number of suppliers, although the company
makes every effort to assure that alternative sources are available if the need
arises. The failure of the company's suppliers to deliver components, supplies
and raw materials 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. These
factors historically have resulted in lower revenue in the first quarter than in
the immediately preceding fourth quarter.
The value of unfilled orders is not a meaningful indicator of future
revenues from the company's product offerings due to the significant proportion
of revenue from services, the volume of products delivered from shelf
inventories, and the shortening of product delivery schedules. With respect to
the company's Global Services segment, in 1999 the company signed contracts
totaling over $38 billion, which contributed to a services backlog at
December 31, 1999 in excess of $60 billion, compared with $51 billion at the end
of 1998.
1
<PAGE>
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 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 the
company's products and services, resulting in reduced profit margins and/or loss
of market opportunity. Unlike many of its competitors, the company has a
portfolio of businesses and must allocate resources across these businesses
while competing with companies that specialize in one or more of these product
lines. As a result, the company may not fund or invest in certain of its
businesses to the same degree that its competitors do and these competitors may
have greater financial, technical and marketing resources available to them than
the businesses against which they compete.
The company operates in more than 150 countries worldwide and derives more
than half of its revenues from sales outside the United States. Changes in the
laws or policies of the countries in which the company operates could affect the
company's business in that country and the company's results of operations. The
company's results of operations also could be affected by economic and political
changes in those countries and by macroeconomic changes, including recessions
and inflation. For example, weakness in the Asian and Latin American economies
had an adverse effect on the company's business in 1998.
The following information is included in IBM's 1999 Annual Report to
Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of similar products or
services--Pages 89 through 93.
Financial information by geographic areas--Page 93.
Amount spent during each of the last three years on research and development
activities--Page 82.
Financial information regarding environmental activities--Page 77.
The number of persons employed by the registrant--Page 63.
The management discussion overview--Page 52.
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 therein by reference.
New Products and the Pace of Technological Change: The company's results of
operations depend on 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
2
<PAGE>
various businesses and the success of these products and services depends on
their acceptance by customers and business partners. Further, the company's
businesses are characterized by rapid technological changes and corresponding
shifts in customer demand, resulting in unpredictable product transitions and
shortened life cycles and increasing emphasis on being first to market with new
products and services.
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, 1999, IBM's manufacturing and development facilities in the
United States had aggregate floor space of 41.6 million square feet, of which
33.3 million was owned and 8.3 million was leased. Of these amounts,
2.8 million square feet was vacant and 2.1 million square feet was being leased
to non-IBM businesses. Similar facilities in 15 other countries totaled
16.1 million square feet, of which 11.1 million was owned and 5.0 million was
leased. Of these amounts, .3 million square feet was vacant and .4 million
square feet was 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 60 of IBM's 1999 Annual Report to Stockholders which is
incorporated herein by reference.
3
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 13, 2000):
<TABLE>
<CAPTION>
OFFICER
AGE SINCE
-------- --------
<S> <C> <C>
Chairman of the Board of Directors and Chief Executive
Officer
Louis V. Gerstner, Jr.(1)................................... 58 1993
Senior Vice Presidents
J. Thomas Bouchard, Human Resources......................... 59 1994
Nicholas M. Donofrio, Group Executive....................... 54 1995
Douglas T. Elix, Group Executive............................ 51 1999
William A. Etherington, Group Executive..................... 58 1998
J. Bruce Harreld, Strategy.................................. 49 1995
Paul M. Horn, Research...................................... 53 1996
John R. Joyce, Chief Financial Officer...................... 46 1999
Abby F. Kohnstamm, Marketing................................ 46 1998
Samuel J. Palmisano, Group Executive........................ 48 1997
Lawrence R. Ricciardi, General Counsel...................... 59 1995
David M. Thomas, Group Executive............................ 50 1998
John M. Thompson, Group Executive........................... 57 1989
Vice Presidents
Mark Loughridge, Controller................................. 46 1998
Daniel E. O'Donnell, Secretary.............................. 52 1998
Robert F. Woods, Treasurer.................................. 44 2000
</TABLE>
- ------------------------
(1) Member of the Board of Directors.
All executive 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 executive officer named above,
with the exception of J. Bruce Harreld, Lawrence R. Ricciardi and Robert F.
Woods has been an executive of IBM or its subsidiaries during the past five
years.
Mr. Harreld was president of Boston Chicken, Inc., a company which operates
and franchises foodservice stores, from 1993 until joining IBM in 1995. Prior to
that he was senior vice president, marketing and information services, at Kraft
General Foods, Inc. where he also served as the company's chief information
officer from 1989 to 1992.
Mr. Ricciardi was president of RJR Nabisco, Inc., an international consumer
products company, from 1993 until joining IBM in 1995. From 1989 to 1993, he
also served as executive vice president and general counsel at RJR
Nabisco, Inc. Prior to 1989, he was executive vice president and general counsel
of American Express Travel Related Services Company, Inc.
Mr. Woods was with E.I. du Pont de Nemours and Company, a global science
company focused on chemical and material and biological sciences, as Vice
President and Managing Director--DuPont Asia Pacific Ltd. from 1994 until
joining IBM in 1995. From 1992 to 1994, he was Director--Industrial Films--U.S.
and prior to that from 1989 to 1992 he was Vice President-Finance, DuPont
Mexico. From 1979 to 1989 he held a number of financial positions with DuPont.
ITEM 3. LEGAL PROCEEDINGS:
Refer to note O "Contingencies" on page 79 of IBM's 1999 Annual Report to
Stockholders which is incorporated herein by reference.
4
<PAGE>
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 94 and 95 of IBM's 1999 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 646,147 common stockholders of
record at March 1, 2000.
ITEM 6. SELECTED FINANCIAL DATA:
Refer to page 94 of IBM's 1999 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 52 through 63 of IBM's 1999 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 61 and 62 of IBM's 1999
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Refer to pages 50 and 51 and 64 through 93 of IBM's 1999 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.
5
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Refer to pages 5 through 7 of IBM's definitive Proxy Statement dated
March 13, 2000, 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 13, 2000, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners:
Not applicable.
(b) Security Ownership of Management:
Refer to the section entitled "Ownership of Securities--Common Stock and
Total Stock-Based Holdings" appearing on pages 10 and 11 of IBM's
definitive Proxy Statement dated March 13, 2000, 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 13, 2000, 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 1999 Annual Report to Stockholders
which are incorporated herein by reference:
Report of Independent Accountants (page 51).
Consolidated Statement of Earnings for the years ended December 31,
1999, 1998 and 1997 (page 64).
Consolidated Statement of Financial Position at December 31, 1999 and
1998 (page 65).
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 (page 68).
Consolidated Statement of Stockholders' Equity at December 31, 1999,
1998 and 1997 (pages 66 and 67).
Notes to Consolidated Financial Statements (pages 69 through 93).
6
<PAGE>
2. Financial statement schedules required to be filed by Item 8 of this
Form:
<TABLE>
<CAPTION>
SCHEDULE
PAGE NUMBER
- ---- --------
<S> <C> <C>
10..... Report of Independent Accountants on Financial
Statement Schedules.
S-1.... II Valuation and Qualifying Accounts and Reserves.
</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
consolidated financial statements or the notes thereto.
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 -- IBM's 1999 Annual Report to Stockholders, certain sections of which
have been incorporated herein by reference.
V -- Powers of Attorney.
VI -- Financial Data Schedule.
VII -- IBM Supplemental Executive Retention Plan.
Not included in this Form 10-K:
-- The Certificate of Incorporation of IBM is Exhibit (3)(i) to
Form 8-K filed April 28, 1999, 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 1999 Long-Term Performance Plan, a compensatory plan, is
contained in Registration Statement No. 333-30424 on Form S-8, filed
on February 15, 2000, 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 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 13, 2000, 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.
7
<PAGE>
-- 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 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 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, 1995, 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.
-- 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 Exhibit 2
and 3 to Form 8-K, filed on October 30, 1995, and are hereby
incorporated by reference.
-- The instrument defining the rights of holders of the 7.125%
Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6,
1996, and is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the 6.45% Notes
due 2007 and the 6.22% Debentures due 2027 are Exhibits 2 and 3 to
Form 8-K, filed on August 1, 1997, and is hereby incorporated by
reference.
-- The 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 instruments 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 Extended Tax Deferred Savings Plan is Exhibit X to Form 10-K
for the year ended December 31, 1994, and is hereby incorporated by
reference.
-- IBM's definitive Proxy Statement dated March 13, 2000, certain
sections of which have been incorporated herein by reference.
(b) Reports on Form 8-K:
The company filed Form 8-K on October 21, 1999, with respect to the
company's financial results for the periods ended September 30, 1999 and
included unaudited Consolidated Statement of Earnings, Consolidated
Statement of Financial Position and Segment Data for the periods ended
September 30, 1999.
8
<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 13, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN R. JOYCE
------------------------------------------- Senior Vice President, March 13, 2000
(John R. Joyce) Chief Financial Officer
/s/ MARK LOUGHRIDGE
------------------------------------------- Vice President and March 13, 2000
(Mark Loughridge) Controller
</TABLE>
<TABLE>
<S> <C> <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 (Daniel E. O'Donnell)
JOHN B. SLAUGHTER Director ATTORNEY-IN-FACT
ALEX TROTMAN Director
LODEWIJK C. VAN WACHEM Director March 13, 2000
</TABLE>
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of
International Business Machines Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 19, 2000, appearing on page 51 of the 1999 Annual Report to
Stockholders of International Business Machines Corporation, (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial
Statement Schedule present 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
New York, New York
January 19, 2000
10
<PAGE>
SCHEDULE II
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31:
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS END
DESCRIPTION OF PERIOD AND EXPENSES WRITEOFFS OTHER (A) OF PERIOD
- ----------- ---------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
1999
--Current............................... $794 $285 $202 $(23) $854
==== ==== ==== ==== ====
--Non-current........................... $195 $ 34 $ 28 $(43) $158
==== ==== ==== ==== ====
1998
--Current............................... $775 $165 $188 $ 42 $794
==== ==== ==== ==== ====
--Non-current........................... $164 $ 42 $ 18 $ 7 $195
==== ==== ==== ==== ====
1997
--Current............................... $787 $277 $267 $(22) $775
==== ==== ==== ==== ====
--Non-current........................... $164 $ 30 $ 21 $ (9) $164
==== ==== ==== ==== ====
ALLOWANCE FOR INVENTORY LOSSES
1999...................................... $723 $644 $514 $ 16 $869
==== ==== ==== ==== ====
1998...................................... $791 $761 $847 $ 18 $723
==== ==== ==== ==== ====
1997...................................... $942 $697 $778 $(70) $791
==== ==== ==== ==== ====
</TABLE>
- ------------------------
(A) PRIMARILY COMPRISES CURRENCY TRANSLATION ADJUSTMENTS.
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>
Plan of acquisition, reorganization, arrangement,
(2) 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 filed April 28, 1999, 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
6.45% Notes due 2007 and the 6.22% Debentures due 2027 are
Exhibit 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.
(9) Voting trust agreement. Not applicable
</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>
(10) Material contracts.
The IBM 1999 Long-Term Performance Plan, a compensatory
plan, is contained in Registration Statement No. 333-30424
on Form S-8, filed on February 15, 2000, 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 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 arrangements as described
under "Directors' Compensation" on pages 9 and 10 of IBM's
definitive Proxy Statement dated March 13, 2000, and is
hereby incorporated by reference.
The IBM Supplemental Executive Retention Plan. VII
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, 1995, 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 83 of IBM's
1999 Annual Report to Stockholders, which is incorporated
herein by reference.
(12) Statement re computation of ratios. I
</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>
(13) Annual report to security holders. IV
(18) Letter re change in accounting principles. Not applicable
(19) Previously unfiled documents. Not applicable
(21) Subsidiaries of the registrant. II
Published report regarding matters submitted to vote of
(22) security holders. Not applicable
(23) Consents of experts and counsel. III
(24) Powers of attorney. V
(27) Financial Data Schedule. VI
Information from reports furnished to state insurance
(28) regulatory authorities. Not applicable
(99) Additional exhibits. Not applicable
</TABLE>
<PAGE>
EXHIBIT VII
SUMMARY OF THE
IBM SUPPLEMENTAL EXECUTIVE RETENTION PLAN
The IBM Supplemental Executive Retirement Plan is amended and renamed
the IBM Supplemental Executive Retention Plan ("SERP"), effective July 1,
1999.
I. ELIGIBILITY
All retired executives currently receiving benefits from the prior SERP
on June 30, 1999, and all executives who (a) are within five years of
retirement eligibility, and have completed IBM employment of at least one
year, on June 30, 1999, and (b) have met the prior SERP average pay threshold
based on earnings for service to December 31, 1998, will continue to be
covered by the provisions of the prior SERP in existence on June 30, 1999.
The calculation of any additional benefits payable under the prior SERP will
always be based on the IBM Retirement Plan as the offsetting pension plan
even if the executive chooses to be covered by the IBM Personal Pension Plan
and the formula breakpoint (but not the pay threshold) will be indexed by at
least 5% per year beginning in 2000).
Executives who (a) are more than 5 years from retirement eligibility, and
have completed IBM employment of at least one year on June 30, 1999 and (b)
have met the prior SERP average pay threshold based on earnings for service
to December 31, 1998, will be covered by transition provisions as described
in Section III below.
All executives who meet the following criteria on the day they leave
active employment of IBM US, will be covered by the provisions of the current
SERP as described in Section II below:
- actively employed by IBM US as an executive;
- at least age 60 with 5 years of service (or age 55 with 15 years of
service and leave with the approval of senior management);
- Meet the average pay threshold of $250,000 for 1999 (increased
annually by at least 5% per annum).
Executives who are eligible under the provisions of both the prior SERP
and current SERP, shall receive benefits based on the provisions of the SERP
which provides the greater benefits.
II. CURRENT SERP PROVISIONS AS OF JULY 1, 1999
Full benefits (based on the formula described below) are available only
to eligible executives who leave employment with IBM US at or after age 60
with at least five years of service. Eligible executives who leave
employment with IBM at or after age 55 with at least 15 years of service may
receive a reduced benefit at the discretion of IBM senior management
(reduction is 6% per year on the total benefit based on the formula described
below), prorated for years and months of age prior to age 60).
The total benefit formula is based on "average pensionable pay." This
is "eligible compensation" (as defined in the IBM Retirement Plan, except
that annual incentive for Sales Executives will be counted at target starting
with 1999 earnings) earned over a five-year period (greater of final
five-years of IBM or five highest consecutive calendar years). The formula
is:
the sum of (a) 1% of average pensionable pay up to the Current SERP
pay threshold for that year and (b) 2.5% of average pensionable pay
above the Current SERP pay threshold for that year,
multiplied by years of service (up to a maximum of 35 years of service).
In no case can the total benefit under the SERP formula be greater than
65% of average pensionable pay times a fraction, the numerator of which is
actual years of service (up to a maximum of 35) and the denominator of which
is 35.
<PAGE>
The total benefit derived from this formula is then offset by the
single-life annuity available to or chosen by the individual from the IBM
Personal Pension Plan, except that, for executives who were within 5 years of
retirement under the IBM Retirement Plan and have completed IBM employment of
at lest one year on June 30, 1999, the formula is offset by the single life
annuity under the IBM Retirement Plan, even if the executives chooses to be
covered by the IBM Personal Pension Account. The annuity options available
are the same as the annuity options available under the IBM Personal Pension
Plan (and different forms of annuity distribution may be elected under each
of the plans).
If an eligible executives dies while in service after reaching age 55
with at least 15 years of service or age 60 with at least 5 years of service
(and met the average pay threshold in effect at time of death), the surviving
spouse or domestic partner will be eligible for a benefit payable as a single
life annuity. The total benefit will be calculated based on the annuity that
would have been payable had the executive separated on the date of death,
elected a 50% joint and survivor annuity and died the same day. This benefit
will be offset by the Personal Pension Plan annuity paid to the surviving
spouse or domestic partner (or otherwise payable had a different form of
Personal Pension Plan payout not applied). If an eligible executive becomes
disabled after reaching age 55 with at least 15 years of service or age 60
with at least 5 years of service (and met the average pay threshold in effect
at that time), the SERP applies based on service to the date the IBM
disability benefit starts. Pre-age 60 reduction factors apply to both death
and disability benefits.
SERP benefits continue to be subject to forfeiture if the executive
engages in activities which IBM in its discretion considers to IBM, including
for an IBM competitor.
If an executive is rehired after a period of severance, service prior
to that period of severance will be forfeited for purposes of the current
SERP formula.
III. TRANSITION
Executives who (a) are more than 5 years form retirement eligibility,
and have completed IBM employment o fat least one year, on June 30, 1999 and
(b) have met the prior SERP average pay threshold based on earnings for
service to December 31, 1998, will be covered by the following transition
provisions:
These individuals will be covered by the current SERP provisions as of
July 1, 1999. In addition, the prior SERP formula in effect on June 30,
1999, will continue to accrue until December 31, 2003 (the formula breakpoint
(but not the pay threshold) will be indexed by at least 5% per year beginning
in 2000). At that time, the total benefit accrued under that formula will be
calculated and will be frozen. When the executives leave IBM US, he or she
will be eligible for a SERP benefit equal to the greater of:
- The current SERP benefit determined based on the provisions in
Section II (provided the individual is eligible based on those
provisions); or
- The frozen benefit calculated as described above provided at
departure the individual meets the age and service eligibility
criteria of the prior SERP (and reduced if the executive leaves
before age 60);
Offset by the IBM Personal Pension Plan benefit as described in Section II.
<PAGE>
EXHIBIT I
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before income taxes (1).................. $11,665 $ 8,997 $ 9,054 $ 8,599 $7,910
Add:
Fixed charges, excluding capitalized
interest.................................... 1,921 2,036 2,000 1,942 1,972
------- ------- ------- ------- ------
Income as adjusted before income taxes........ $13,586 $11,033 $11,054 $10,541 $9,882
Fixed charges:
Interest expense.............................. $ 1,455 $ 1,559 $ 1,573 $ 1,545 $1,591
Capitalized interest.......................... 23 28 32 31 23
Portion of rental expense representative
of interest................................. 466 477 427 397 381
------- ------- ------- ------- ------
Total fixed charges............................. $ 1,944 $ 2,064 $ 2,032 $ 1,973 $1,995
Preferred stock dividend (2).................... 30 29 29 32 37
------- ------- ------- ------- ------
Combined fixed charges and preferred
stock dividends............................... $ 1,974 $ 2,093 $ 2,061 $ 2,005 $2,032
Ratio of net income to fixed charges............ 7.0 5.3 5.4 5.3 5.0
Ratio of net income to combined fixed charges
and preferred stock dividend.................. 6.9 5.3 5.4 5.3 4.9
</TABLE>
- ------------------------
(1) Income before income taxes excludes (a) amortization of capitalized interest
and (b) the company's share in the income and losses of
less-than-fifty-percent-owned affiliates.
(2) Included in the ratio calculation are preferred stock dividends of
$20 million for 1999, 1998, 1997, 1996 and 1995, respectively, or
$30 million in 1999, $29 million in 1998 and 1997, $32 million in 1996 and
$37 million in 1995 representing the pre-tax income that would be required
to cover such dividend requirements based on the company's effective tax
rate for 1999, 1998, 1997, 1996 and 1995, respectively. Excluded from the
ratio computation for 1995 are transaction costs of $42 million relating to
the repurchase of Series A 7 1/2 percent preferred stock depositary shares.
<PAGE>
Exhibit 13
49
financial report
International Business Machines Corporation
and Subsidiary Companies
Report of Management 50
Report of Independent Accountants 51
Management Discussion 52
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 Common Stock Split 72
D Acquisitions/Divestitures 72
E Inventories 73
F Plant, Rental Machines and Other Property 73
G Investments and Sundry Assets 73
H Lines of Credit 74
I Sale and Securitization of Receivables 74
J Debt 74
K Interest on Debt 75
L Financial Instruments 75
M Other Liabilities and Environmental Remediation 77
N Stockholders' Equity Activity 78
O Contingencies 79
P Taxes 79
Q Selling and Advertising 80
R 1999 Actions 81
S Research, Development and Engineering 82
T Earnings Per Share of Common Stock 83
U Rental Expense and Lease Commitments 83
V Stock-Based Compensation Plans 84
W Retirement Plans 86
X Nonpension Postretirement Benefits 88
Y Segment Information 89
Five-Year Comparison of Selected Financial Data 94
Selected Quarterly Data 94
Stockholder Information 95
Board of Directors and Senior Management 96
<PAGE>
50
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/ John R. Joyce
Louis V. Gerstner, Jr. John R. Joyce
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
51
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 93, present fairly, in all material respects, the financial
position of International Business Machines Corporation and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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
New York, New York
January 19, 2000
<PAGE>
52
management discussion
International Business Machines Corporation
and Subsidiary Companies
Overview of 1999
IBM's financial performance reflects two very different halves of 1999. The
company's performance in the first half was strong. The second half was hit hard
by Y2K-related issues, as many of its large customers locked down their systems
and technology purchases heading into the Y2K transition. Despite the difficult
second half, the overall year was a good one for the company. Revenue, net
income and earnings per share were at record levels. The company also had good
results on a full-year basis in the strategic growth areas of services, software
and original equipment manufacturer (OEM) technology.
The company reported revenue of $87.5 billion and net income of $7.7 billion
which yielded $4.12 per diluted common share. The results include an after-tax
benefit of $750 million, or $.40 per diluted common share, for a gain from the
sale of the company's Global Network to AT&T, charges for actions intended to
improve the long-term competitiveness of the company, a change in personal
computer depreciable lives and charges for acquired in-process research and
development related to acquisitions.
The company ended 1999 with cash and cash equivalents and marketable securities
of $5.8 billion, after funding investments of approximately $20 billion in
capital expenditures, research and development, strategic acquisitions and
repurchases of common stock. The company's debt ratios were well below 1998
levels. The non-global financing debt-to-capital ratio was 9 percent, and the
Global Financing business leverage was 5.5 to 1.
Challenges
The company believes that it has passed the most critical stage of Y2K. However,
because it expects the lockdowns to be lifted at different times by different
customers during the early part of 2000, the company will feel the lingering
effects of Y2K.
Consistent with the fundamental strategy that it put in place several years ago,
the company is well positioned to help its customers build integrated e-business
solutions. Services, software and OEM technology that are required for this
demanding e-business environment will drive the growth in IBM's revenue and
earnings.
In addition, the company is aggressively pursuing expanding markets. By
increasing sales and distribution through ibm.com, the company will continue to
build itself into a leading e-business company.
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 be materially
different, 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 1999 Form 10-K to be filed on or about March 13, 2000.
Results of Operations
(Dollars in millions
except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $87,548 $81,667 $78,508
Cost 55,619 50,795 47,899
- -------------------------------------------------------------------------------
Gross profit 31,929 30,872 30,609
Gross profit margin 36.4% 37.8% 39.0%
Total expense 20,172 21,832 21,582
- -------------------------------------------------------------------------------
Income before
income taxes $11,757 $ 9,040 $ 9,027
- -------------------------------------------------------------------------------
Net income $ 7,712 $ 6,328 $ 6,093
- -------------------------------------------------------------------------------
Earnings per share of
common stock--
assuming dilution $ 4.12 $ 3.29 $ 3.00
- -------------------------------------------------------------------------------
Earnings per share of
common stock--basic $ 4.25 $ 3.38 $ 3.09
- -------------------------------------------------------------------------------
Revenue in 1999 grew 7.2 percent. Growth in Global Services, personal computers,
microelectronics and middleware software products drove the increase, partially
offset by lower server revenue.
<PAGE>
53
management discussion
International Business Machines Corporation
and Subsidiary Companies
The following table identifies the company's percentage of revenue by category:
1999 1998 1997
- -------------------------------------------------------------------------------
Hardware 42.3% 43.4% 46.7%
Global Services 36.7 35.4 32.1
Software 14.5 14.5 14.2
Global Financing 3.6 3.5 3.6
Enterprise Investments/Other 2.9 3.2 3.4
- -------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
===============================================================================
The overall gross profit margin of 36.4 percent decreased 1.4 points from 1998,
following a 1.2 point decrease in 1998 versus 1997. The company's continued
shift in revenue to Global Services primarily drove the decline. Global Services
has a lower gross profit margin than the company's server products (S/390,
AS/400, RS/6000 and NUMA-Q), which are a declining percentage of total revenue.
Revenue for 1999 from the company's end-user businesses totaled $38.8 billion
from the Americas, an increase of 5.2 percent (7 percent increase in constant
currency) from 1998. Revenue from Europe/Middle East/Africa was $25.7 billion,
up 1.8 percent (6 percent increase in constant currency). Asia Pacific revenue
increased 19.4 percent (8 percent increase in constant currency) to $15.2
billion. OEM revenue was $7.8 billion, a 15.3 percent increase (14 percent
increase in constant currency) compared with 1998.
Information about the company's operating segments can be found in note Y,
"Segment Information," on pages 89 through 93. 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 on
pages 64 through 68, which reflect, in all material respects, the company's
segment results on an external basis.
Hardware
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $37,041 $35,419 $36,630
Cost 27,071 24,214 23,473
- -------------------------------------------------------------------------------
Gross profit $ 9,970 $11,205 $13,157
- -------------------------------------------------------------------------------
Gross profit margin 26.9% 31.6% 35.9%
Hardware revenue increased 4.6 percent from 1998, following a decline of 3.3
percent in 1998 versus 1997. Hardware gross profit dollars declined 11.0 percent
from 1998, following a decrease of 14.8 percent in 1998 from 1997.
Technology revenue increased 5.9 percent when compared with 1998, following an
increase of 7.3 percent in 1998 versus 1997. Strong growth in OEM technology,
primarily custom logic and high-performance static random access memory (SRAM)
revenue drove the increase in 1999 revenue. A slower growth rate in hard disk
drive (HDD) storage revenue in 1999 versus 1998 reflected pricing pressures and
a revenue mix away from high-end products. Lower revenues from storage tape and
direct access storage device (DASD) products, as well as lower networking
hardware revenue, partially offset those increases. The networking hardware
decreases resulted, in part, from the sale of routing and switching intellectual
property (IP) to Cisco Systems, Inc.
The company took actions in 1999 in the microelectronics and storage areas that
are aimed directly at strengthening the Technology Group over the long term.
Those actions are intended to shift the focus of the Technology Group to higher
margin businesses and more efficient operations. (See note R, "1999 Actions," on
pages 81 and 82 for additional information.)
Strong growth in HDD storage products, storage tape products and growth in
custom logic products drove the revenue increase in 1998 versus 1997. Lower
revenue from dynamic random access memory (DRAMs) and DASD sales partially
offset this revenue growth.
Personal Systems revenue grew 19.7 percent in 1999 from 1998, following a 10.9
percent decline in 1998 versus 1997. Despite continued pricing pressures,
personal computer revenue improved in 1999. Supply shortages of flat-panel
displays in the second half of 1999 constrained sales of ThinkPads, although
overall ThinkPad revenue was good. Netfinity servers demonstrated strong revenue
growth, compared with 1998 levels. The company continues to focus on expanding
its direct channel customers; improving its indirect channel efficiency;
increasing its attention on fast-growing, small- and medium-size businesses; and
realizing more opportunity in businesses that are tied to the personal computer,
including services, software and financing.
<PAGE>
54
management discussion
International Business Machines Corporation
and Subsidiary Companies
Server revenue declined 17.9 percent in 1999 from 1998, following a decrease of
5.9 percent in 1998 versus 1997. S/390 revenue declined in 1999 as customers
completed the task of making Y2K ready the mainframe computers that they use in
data centers to run mission critical, highly integrated enterprise-wide
applications with large transaction volumes. Once the systems were Y2K tested
and ready, customers were not inclined to enhance them because of concerns about
affecting their Y2K readiness. AS/400 revenue declined due to a slowdown in
sales related to Enterprise Resource Planning (ERP) solutions because of Y2K
concerns. RS/6000 revenue declined for SP-2 and entry models, partially offset
by the enterprise servers which had strong revenue growth in 1999.
Lower revenue from S/390, AS/400 and RS/6000 drove the 5.9 percent decrease in
revenue in 1998 versus 1997. While S/390 revenue declined, total delivery of
computing power increased more than 60 percent as measured in MIPS (millions of
instructions per second) versus 1997. Product transitions late in 1998 affected
the revenue for AS/400 and RS/6000 in 1998 versus 1997.
In January 2000, the Server Group reorganized to become the Enterprise Systems
Group and adopted a market-centric alignment to help customers connect and
integrate S/390, AS/400, RS/6000, NUMA-Q and Netfinity servers to support a
wider variety of applications. The reorganized group will focus on cross-server
customer requirements for Web servers, enterprise servers, mid-market servers,
and for storage subsystems across all computing environments.
During the year, the company signed major technology contracts with Dell
Computer Corporation (for the purchase of personal computer parts from the
company over seven years), Acer Incorporated (technology purchase contract over
seven years), EMC Corporation (five-year strategic technology and business
alliance), Cisco Systems, Inc. (technology purchase over five years) and
Nintendo Company, Ltd. (multi-year contract to purchase technology). The total
of these contracts could be in excess of $15 billion.
Hardware gross profit dollars decreased 11.0 percent in 1999 from 1998,
following a 14.8 percent decrease in 1998 versus 1997. In 1999, the shift in the
company's revenue away from servers, pricing pressures associated with HDDs and
memory chip prices drove the declines in gross profit dollars from 1998. A lower
model mix in the mobile HDDs (in which some customers are meeting their capacity
needs with new mid-range products, rather than with the more profitable high-end
mobile products) also had a negative effect on gross profit dollars. The decline
in gross profit dollars in 1998 was primarily driven by lower margins associated
with significant price reductions in Personal Systems products.
Hardware gross profit margin decreases in 1999 versus 1998 and 1998 versus 1997
continued to be driven by the shift in the company's revenue away from servers
to lower gross profit products, such as personal computers, OEM chip technology
and HDDs, as well as price pressures.
Global Services
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $32,172 $28,916 $25,166
Cost 23,304 21,125 18,464
- -------------------------------------------------------------------------------
Gross profit $ 8,868 $ 7,791 $ 6,702
- -------------------------------------------------------------------------------
Gross profit margin 27.6% 26.9% 26.6%
Global Services revenue increased 11.3 percent in 1999 from 1998 and 14.9
percent in 1998 over 1997. Revenue growth in 1999 without the effect of the sale
of the company's Global Network to AT&T would have been 13 percent. (See note D,
"Acquisitions/Divestitures," on pages 72 and 73 for additional information about
this sale.)
While maintenance revenues declined 1 percent, reflecting continued price
pressures as customers transitioned to new technologies, services revenue
excluding maintenance and the effect of the sale of the Global Network grew 17
percent. Strategic Outsourcing Services was a major contributor to this
performance. Strategic Outsourcing Services creates business value through
long-term strategic partnerships with customers by taking on responsibility for
their processes and systems. Business Innovation Services (formerly Systems
Integration and Consulting) and Integrated Technology Services (formerly Product
Support Services) performance was strong through the first nine months of 1999
but slowed in the fourth quarter due to the effect of Y2K-related customer
lockdowns and a slowdown in Y2K services.
<PAGE>
55
management discussion
International Business Machines Corporation
and Subsidiary Companies
Toward the end of the third quarter of 1999, the company started to see a
decline in demand for Y2K services and expects the effect of Y2K to linger into
2000 as the need for those services disappears. The company sees growing demand
for new services offerings especially in Business Innovation Services, which
provides business/industry consulting and end-to-end e-business implementation
of offerings like Supply Chain Management, Customer Relationship Management,
Enterprise Resource Planning and Business Intelligence. Integrated Technology
Services offers customers a single IT partner to manage multi-vendor IT systems
complexity in today's e-business environment, including traditional offerings
like Product Support Services, Business Recovery Services, Site and Connectivity
Services and Systems Management and Networking Services.
e-business spans many of the Global Services offerings and contributed
significantly to 1999 performance. 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;
distributed learning; and hosted business applications such as network-delivered
applications, Web hosting and Web infrastructure outsourcing. The company's
total discrete e-business services revenue grew 60 percent to over $3 billion in
1999. Revenue from Web hosting and e-business infrastructure services doubled
over 1998 and revenue from supply chain and e-procurement services tripled.
In 1999, the company signed contracts totaling over $38 billion, including 46
deals in excess of $100 million with four of those deals in excess of $1
billion. These deals contributed to a services backlog at December 31, 1999, in
excess of $60 billion compared with $51 billion at December 31, 1998. In
addition to these contracts, the company signed two extensive strategic
alliances with Dell Computer Corporation and Cisco Systems, Inc. The company
continued to meet the demand for its services by hiring more than 17,000
employees in 1999 and 18,000 employees in 1998.
Gross profit dollars and gross profit margins improved in 1999 over 1998.
Significant productivity improvements more than offset competitive pressures and
the negative effect of the changing mix of services and maintenance within the
Global Services portfolio.
Software
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $12,662 $11,863 $11,164
Cost 2,240 2,260 2,785
- -------------------------------------------------------------------------------
Gross profit $10,422 $ 9,603 $ 8,379
- -------------------------------------------------------------------------------
Gross profit margin 82.3% 80.9% 75.1%
Software revenue increased 6.7 percent in 1999 from 1998, following an increase
of 6.3 percent from 1997. The company's middleware products (which comprise, for
both IBM and non-IBM platforms, data management, transaction processing, Tivoli
systems management and Lotus Notes messaging and collaboration) had revenue
growth of 12 percent in 1999 and 9 percent in 1998. The company continues to
focus on helping customers use its software to transform their businesses into
e-businesses, particularly in collaboration with the company's Global Services
and channel partners.
The company's middleware products continued their momentum due to the company's
ability to integrate; the growing participation on non-IBM platforms and the
expanding market coverage as more partnerships were formed with Independent
Software Vendors, Web integrators and service providers; and a dedicated sales
force of 6,600 people.
Operating systems software revenue declined 4 percent in 1999 and increased 3
percent in 1998 when compared with previous periods. The decline in 1999 was
driven by lower revenue in AS/400. The 1998 increase was driven by higher AS/400
operating systems revenue versus 1997.
Software gross profit dollars increased 8.5 percent in 1999 from 1998, following
an increase of 14.6 percent in 1998 from 1997. Increased revenue and lower
levels of amortization costs associated with previously deferred software
development spending drove the improvement, partially offset by higher vendor
royalty payments due primarily to increased volumes.
<PAGE>
56
management discussion
International Business Machines Corporation
and Subsidiary Companies
Global Financing
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $3,137 $2,877 $2,806
Cost 1,446 1,494 1,448
- -------------------------------------------------------------------------------
Gross profit $1,691 $1,383 $1,358
- -------------------------------------------------------------------------------
Gross profit margin 53.9% 48.1% 48.4%
Global Financing revenue increased 9.0 percent in 1999 from 1998, following an
increase of 2.5 percent in 1998 versus 1997. Growth in working capital
financing, along with continued growth in financing of software and services,
drove the revenue increase in 1999. Financing originations increased to
approximately $43 billion, with year-to-year growth in working capital
financing, along with software and services financing. The revenue increase in
1998 over 1997 was due to improved sales of used equipment and growth in
software and services financing, offset by a decline in working capital
financing.
Gross profit dollars increased 22.3 percent in 1999 versus 1998, following an
increase of 1.8 percent in 1998 over 1997. The increase in 1999 reflects Global
Financing's ongoing strategy to increase its use of the company's Global
Treasury Centers rather than external banks as a funding source and lower costs
of borrowing. The increase in gross profit dollars in 1998 versus 1997 was
primarily due to increased revenue and a higher gross profit margin in the U.S.
markets.
Enterprise Investments/Other
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenue $2,536 $2,592 $2,742
Cost 1,558 1,702 1,729
- -------------------------------------------------------------------------------
Gross profit $ 978 $ 890 $1,013
- -------------------------------------------------------------------------------
Gross profit margin 38.6% 34.3% 36.9%
Enterprise Investments/Other revenue decreased 2.2 percent from 1998, following
a decrease of 5.5 percent in 1998 from 1997. The decrease was driven by lower
revenue from discontinued product lines, such as automated teller machines
(ATMs), partially offset by growth in point-of-sale terminals and computer-aided
three-dimensional interactive application (CATIA) software. The decrease in 1998
versus 1997 was primarily a result of lower software revenue, partially offset
by higher revenue from point-of-sale terminals.
The gross profit dollars from Enterprise Investments/Other increased 9.9 percent
in 1999 versus 1998, following a decrease of 12.1 percent in 1998 versus 1997.
The increase in 1999 gross profit dollars and gross profit margin was primarily
driven by an improving gross profit margin for point-of-sale terminals and
software. The decline in 1998 gross profit dollars and gross profit margin was
primarily driven by the lower software revenue versus 1997.
Operating Expenses
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Selling, general and
administrative $ 14,729 $ 16,662 $ 16,634
Percentage of revenue 16.8% 20.4% 21.2%
Research, development
and engineering $ 5,273 $ 5,046 $ 4,877
Percentage of revenue 6.0% 6.2% 6.2%
Selling, general and administrative (SG&A) expense declined 11.6 percent in 1999
versus 1998 and was essentially flat in 1998 with 1997. The decrease in 1999
reflects the net pre-tax benefit associated with the sale of the Global Network
and the actions taken by the company in 1999 to improve its competitiveness and
to strengthen further the company's overall business portfolio. (See note D,
"Acquisitions/Divestitures," on pages 72 and 73, and note R, "1999 Actions," on
pages 81 and 82 for further information.)
The company continues to manage aggressively its infrastructure expense and its
overall portfolio to allow for investment in growth areas of the business. Key
ongoing investments include software marketing, major marketing campaigns, and
new offerings for small and medium business opportunities, as well as the
e-business campaign. These types of expenditures are consistent with the
company's ongoing objective of growing revenue while improving the
expense-to-revenue ratio over time.
Research, development and engineering expense increased 4.5 percent in 1999 from
1998, following an increase of 3.5 percent in 1998 from 1997. The increase in
1999 reflects additional expenses associated with the acquisition of Sequent
Computer Systems, Inc., Mylex Corporation and DASCOM, Inc. Those acquisitions
are intended to improve the company's long-term
<PAGE>
57
management discussion
International Business Machines Corporation
and Subsidiary Companies
competitiveness in the server, storage and Web-security markets, respectively.
(See note D, "Acquisitions/Divestitures," on pages 72 and 73 for further detail
about the in-process research and development charge.) In addition, the
increases in both 1999 and 1998 reflect the company's continued investments in
high-growth opportunities like e-business, Tivoli systems management and Lotus
products, as well as the effect of ongoing research, development and engineering
expense associated with new acquisitions.
As a result of its ongoing research and development efforts, the company
received 2,756 patents in 1999, placing it number one in patents granted in the
U.S. for the seventh consecutive year. The application of these technological
advances transforms the company's research and development into new products.
Examples of these efforts range from new e-business solutions to innovative
manufacturing techniques. A patent for performing computer-based online commerce
using an intelligent agent will play a major role in future e-business. This
patent enables customers to use intelligent software agents to negotiate for
services from multiple providers. The intelligent agents take into account both
the availability of the requested service, such as airline seats, and the
providers' business policies, such as those on cancellations. The agents commit
to services with the most flexible policies first, giving the user the greatest
possible protection. With respect to manufacturing technologies, the
silicon-on-insulator (SOI) chip technology can reduce power consumption and
improve chip performance. A new patent in 1999 defines processing improvements
that increase the efficiency and reduce the cost of manufacturing SOI chips.
This technology 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.
See note Y, "Segment Information," on pages 89 through 93 for additional
information about the pre-tax income of each segment, 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 34.4 percent
for 1999, compared with the 1998 effective tax rate of 30.0 percent and a 1997
effective tax rate of 32.5 percent. The 4.4 point increase from the 1998 rate is
the result of the company's sale of its Global Network business to AT&T and
various other actions implemented during 1999. (See note D,
"Acquisitions/Divestitures," on pages 72 and 73 and note R, "1999 Actions," on
pages 81 and 82 for further detail regarding the tax impacts of these items.)
The reduction in the 1998 tax rate versus 1997 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) No. 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.
Fourth Quarter
For the quarter ended December 31, 1999, the company had revenue of $24.2
billion, a decrease of 3.8 percent from the same period in 1998. Net income in
the fourth quarter was $2.1 billion ($1.12 per diluted common share), compared
with net income of $2.3 billion ($1.24 per diluted common share) in the fourth
quarter of 1998.
Revenue for the fourth quarter of 1999 from the company's end-user businesses
totaled $10.4 billion from the Americas, a decrease of 3.7 percent (2 percent
decrease in constant currency) compared with the same period last year. Revenue
from Europe/Middle East/Africa was $7.2 billion, down 15.0 percent (6 percent
decrease in constant currency). Asia Pacific revenue grew 12.3 percent (2
percent increase in constant currency) to $4.4 billion. OEM revenue across all
geographies was $2.2 billion, a 12.5 percent increase (12 percent in constant
currency) compared with the fourth quarter of 1998.
<PAGE>
58
management discussion
International Business Machines Corporation
and Subsidiary Companies
Hardware revenue declined 10.7 percent (10 percent in constant currency) to
$10.2 billion from the 1998 fourth quarter. Y2K-related declines in customer
demand were a significant factor behind fourth-quarter revenue decreases in
S/390, AS/400, RS/6000 and personal computers. However, within the company's
server family, Netfinity PC revenues increased significantly, as did revenues
from RS/6000 mid-range servers, including the advanced RS/6000 Model S80.
Microelectronics revenues increased substantially, principally due to growth in
custom logic shipments. Shipments of the company's new "Shark" disk storage
product were strong in the quarter, although overall storage revenues declined
largely as a result of ongoing price pressures in HDDs. The overall hardware
gross profit margin declined to 26.6 percent from 34.2 percent.
Global Services revenue grew 2.0 percent (4 percent in constant currency) versus
the fourth quarter of 1998. Strategic Outsourcing showed good growth versus the
fourth quarter of 1998. Networking Services declined year to year due to the
sale of the Global Network to AT&T during 1999, while revenue from the other
categories of services was flat or declined as a result of the Y2K-related
slowdown. The company's services unit signed more than $10 billion in services
contracts in the quarter. Revenue from maintenance offerings was essentially
flat when compared with the fourth quarter of 1998.
Software revenue totaled $3.6 billion, up 1.7 percent (6 percent in constant
currency) over the prior year's final quarter. Middleware--which is critical for
e-business--grew 8 percent (13 percent at constant currency), with record fourth
quarter shipments of Lotus Notes and Domino groupware products and strong
performance in database, transaction processing, and Tivoli system management
software. The software gross profit margin improved 1.1 points year over year to
83.4 percent.
Global Financing revenue increased 19.3 percent (22 percent in constant
currency) versus the same period of 1998, and Enterprise Investments/Other
declined 13.3 percent (10 percent in constant currency) compared with 1998's
fourth quarter. The revenue decline in Enterprise Investments/Other resulted
from the company's strategy to withdraw from certain businesses, such as ATMs.
The company's overall gross profit margin in the fourth quarter was 36.7
percent, compared with 39.0 percent in the year-earlier period. The decrease was
primarily due to a drop in the hardware margin of 7.6 points from the fourth
quarter 1998 across S/390 and AS/400 servers, storage and personal computer
products. This decrease was partially offset by improved margins for services
and software in the fourth quarter of 1999 versus the same period in 1998.
Total fourth-quarter 1999 expense declined 9.3 percent when compared with the
fourth quarter of 1998. The decline reflects lower revenue-related expenses due
to the slowdown that is included in the fourth quarter results. The quarter also
reflected expenses associated with infrastructure reductions in areas such as
Sales and Distribution, Personal Systems and Server Group, which offset a gain
associated with the sale to Cisco Systems, Inc. of certain IBM intellectual
property. The expense-to-revenue ratio in the fourth quarter of 1999 was 24.4
percent, compared with 25.9 percent in the year-earlier period.
The company's tax rate was 30.0 percent in the fourth quarter, compared with
28.9 percent in the fourth quarter of 1998.
The company spent approximately $2.1 billion on common share repurchases in the
fourth quarter. The average number of shares outstanding in the fourth quarter
of 1999 was 1,793.0 million, compared with 1,839.5 million in the year-earlier
period. The average number of shares outstanding for purposes of calculating
diluted earnings per share was 1,847.8 million in the fourth quarter of 1999
versus 1,894.3 million in the fourth quarter of 1998.
Financial Condition
During 1999, the company continued to make significant investments to fund
future growth and increase shareholder value, spending $5,806 million for
research, development and engineering; $4,346 million for plant and other
property, including machines used in strategic outsourcing contracts; $1,613
million for machines on operating leases with customers; $1,542 million for
strategic acquisitions; and $7,280 million for the repurchase of the company's
common shares. The company had $5,831 million in cash and cash equivalents and
marketable securities at December 31, 1999.
The company has access to global funding sources. During 1999, the company
issued debt in a variety of geographies to a diverse set of investors, including
significant funding in the United States, Japan and Europe. The funding has a
wide range of maturities from short-term commercial paper to long-term debt.
More information about company debt is provided in note J, "Debt," on page 74.
<PAGE>
59
management discussion
International Business Machines Corporation
and Subsidiary Companies
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, 1999, $8,562
million was unused and available.
The company managed assets of $273 million and $864 million at December 31, 1999
and 1998, respectively, from the securitization of loans, leases and trade
receivables. For additional information, see note I, "Sale and Securitization of
Receivables," on page 74.
The major rating agencies have continued their review of the company's financial
condition. None of the agencies announced a change in rating in 1999. Standard
and Poor's rates the company and its rated subsidiaries' senior long-term debt
as A+, the commercial paper as A-1 and IBM's preferred stock as A.
Moody's Investors Service rates the senior long-term debt of the company and its
rated subsidiaries as A1, the commercial paper as Prime-1, and the company's
preferred stock as "a1."
Fitch Investors Service rates the company and its rated subsidiaries' senior
long-term debt as AA-, commercial paper as F-1+, and preferred stock as A+.
Duff & Phelps rates the company and its rated subsidiaries' senior long-term
debt as A+, commercial paper as Duff 1, and the company's preferred stock as A.
Cash Flows
The company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows on page 68, are summarized
in the following table:
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Net cash provided from
(used in):
Operating activities $ 10,111 $ 9,273 $ 8,865
Investing activities (1,669) (6,131) (6,155)
Financing activities (8,625) (4,993) (3,090)
Effect of exchange rate
changes on cash and
cash equivalents (149) 120 (201)
- -------------------------------------------------------------------------------
Net change in cash and
cash equivalents $ (332) $ (1,731) $ (581)
===============================================================================
Working Capital
(Dollars in millions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Current assets $43,155 $42,360
Current liabilities 39,578 36,827
- --------------------------------------------------------------------------------
Working capital $ 3,577 $ 5,533
- --------------------------------------------------------------------------------
Current ratio 1.09:1 1.15:1
================================================================================
Current assets increased $795 million, driven primarily by increases of $837
million in accounts receivable, $227 million in prepaid expenses and other
current assets and $63 million in cash and cash equivalents and marketable
securities, offset by a decrease of $332 million in inventories. The increase in
accounts receivable is due to strong global financing activity in the software
and services businesses across all geographies. The increase in prepaid expenses
and other current assets is due to increases in deferred tax assets from
year-end 1998. The increase in cash and cash equivalents and marketable
securities resulted primarily from cash generated from operations and the net
proceeds from the sale of the company's Global Network, offset by stock
repurchases, capital expenditures and strategic acquisitions.
The company ended 1999 with inventories of $4,868 million, the lowest level
since 1983, due to continued focus on inventory management process improvements,
notably in Personal Systems. These improvements increased the company's
inventory turnover to 5.9 in 1999 from 5.3 in 1998.
Current liabilities increased $2,751 million from year-end 1998 with increases
of $1,667 million in taxes payable, $325 million in short-term debt and $759
million in other current liabilities. The increase in other current liabilities
resulted from increases in accounts payable ($148 million), compensation and
benefits ($310 million), and deferred income ($414 million), and a $113 million
decrease in other accrued expenses and liabilities. The increase in taxes
payable primarily reflects improvements in the company's results associated with
the sale of the company's Global Network to AT&T. Short-term debt increased to
support the growth of global financing assets. The increase in other current
liabilities was primarily related to deferred income, mainly advanced billings
for software.
<PAGE>
60
management discussion
International Business Machines Corporation
and Subsidiary Companies
Investments
The company's investments for plant, rental machines and other property were
$5,959 million for 1999, a decrease of $561 million from 1998. The company
continues to invest significantly in its rapidly growing services business,
primarily 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 $464 million of software costs during
1999, an increase of $214 million from the 1998 period. The increase resulted
primarily from the adoption by the company as of January 1, 1999, of the
American Institute of Certified Public Accountants Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires the capitalization of internal use computer
software if certain criteria are met. The company amortizes the capitalized
costs over two years. Amortization of capitalized software costs (both internal
use and licensed programs) was $426 million in 1999, a decline of $91 million
from 1998.
Investments and sundry assets were $26,087 million at the end of 1999, an
increase of $2,577 million from 1998, primarily the result of increases in
prepaid pension assets, customer loan receivables-not yet due, and alliance
investments, which include investments in high-growth-potential technology
companies. See note G, "Investments and Sundry Assets," on page 73 for
additional information.
Debt and Equity
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------------
Non-global financing debt $ 1,555 $ 1,659
Global financing debt 26,799 27,754
- -------------------------------------------------------------------------------
Total debt $28,354 $29,413
- -------------------------------------------------------------------------------
Stockholders' equity $20,511 $19,433
- -------------------------------------------------------------------------------
Debt/capitalization 58.0% 60.2%
EBITDA/Interest expense 9x 8x
Non-global financing:
Debt/capitalization 9.0% 9.9%
EBITDA/Interest expense 19x 15x
Global financing debt/equity 5.5:1 6.5:1
Because a financing business has a different capital structure than a technology
business, the company's debt and key financial ratios are calculated on both a
global financing and non-global financing basis.
Total debt decreased $1,059 million from year-end 1998 as debt supporting the
growth of global financing assets decreased $955 million and non-global
financing debt decreased $104 million.
Stockholders' equity increased $1,078 million to $20,511 million at December 31,
1999, primarily due to the increase in retained earnings and accumulated gains
and losses not affecting retained earnings, partially offset by the company's
ongoing stock repurchase program. (See note N, "Stockholders' Equity Activity,"
on pages 78 and 79.)
The ratio of 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 19x and 15x in 1999
and 1998, respectively. EBITDA is a useful indicator of the company's ability to
service its debt.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect
the company's results. At December 31, 1999, currency changes resulted in assets
and liabilities denominated in local currencies being translated into fewer
dollars than at year-end 1998. The currency rate changes had minimal effect on
1999 revenue growth, but had an unfavorable effect on 1998 and 1997 revenue
growth of approximately 2 percent and 5 percent, respectively.
In high-inflation environments, translation adjustments are reflected in period
income, as required by SFAS No. 52, "Foreign Currency Translation." Generally,
the company limits currency risk in these countries by linking prices and
contracts to U.S. dollars, financing operations locally and entering into
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 of currency and hedging appears in
note L, "Financial Instruments," on pages 75 through 77.
<PAGE>
61
management discussion
International Business Machines Corporation
and Subsidiary Companies
Market Risk
In the normal course of business, the financial position of the company
routinely is subject 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 all of these risks and has established policies
and business practices to protect against the adverse effects of these and other
potential exposures. As a result, the company does not anticipate any material
losses from these risks.
The company'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 L, "Financial Instruments," on pages 75
through 77.
For purposes of specific risk analysis, the company uses sensitivity analysis to
determine the effects that market risk exposures may have on the fair values of
the company's debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis comprise
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. The company's portfolio of derivative
financial instruments includes interest rate swaps, interest rate options,
foreign currency swaps, forward contracts and foreign currency option contracts.
To perform sensitivity analysis, the company assesses the risk of loss in fair
values from the effect 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 affected by the changes in rates that are
attributable to the market risk that is being measured.
The company selected the discount rates that it used for the present value
computations based on market interest and foreign currency exchange rates in
effect at December 31, 1999 and 1998. The differences in this comparison are the
hypothetical gains or losses associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily represent
the actual changes in fair value that the company would incur under normal
market conditions because, due to practical limitations, all variables other
than the specific market risk factor are held constant. In addition, the results
of the model are constrained by the fact that certain items are specifically
excluded from the analysis, while the financial instruments that relate 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, the reported changes in
the values of some financial instruments that affect 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.
The results of the sensitivity analysis at December 31, 1999, and December 31,
1998, are as follows:
Interest Rate Risk: As of December 31, 1999, 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 $164
million as compared with a decrease of $322 million 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 $145 million as compared with an increase of $282
million as of December 31, 1998. 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 primarily are driven by changes in the
company's debt maturity and interest rate profile and amount. In 1999 versus
1998, the reported decline in interest rate sensitivity primarily is due to the
effect of increased activity in receive fixed/pay floating interest rate swaps.
<PAGE>
62
management discussion
International Business Machines Corporation
and Subsidiary Companies
Foreign Currency Exchange Rate Risk: As of December 31, 1999, a 10 percent
decrease or increase 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 $1,319
million or an increase in the fair value of the company's financial instruments
of $1,340 million, respectively, compared with a decrease of $597 million or an
increase of $855 million, respectively, as of December 31, 1998. 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 primarily
is driven by an increase in the overall level of net foreign investment hedging
activity as well as by an increase in the use of foreign currency forwards in
lieu of foreign currency options to hedge the company's various foreign currency
exposures in accordance with the company's established risk management
practices. As the effect of offsetting changes in the fair market value of the
company's net foreign investments are not included in the sensitivity model, the
results of the analysis do not indicate 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 consistently have 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, 1997, 1998 and 1999. The following
table excludes approximately $34 million of estimated residual value associated
with non-information technology equipment.
<TABLE>
<CAPTION>
Total Run Out of 1999 Balance
-------------------------------- ---------------------------------------------
2003 and
(Dollars in millions) 1997 1998 1999 2000 2001 2002 beyond
- ------------------------------------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales-type leases $ 563 $ 685 $ 737 $ 209 $ 301 $ 198 $ 29
Operating leases 701 731 609 319 197 87 6
- ------------------------------------------------------------ ---------------------------------------------
Total residual value $1,264 $1,416 $1,346 $ 528 $ 498 $ 285 $ 35
================================================================================================================
</TABLE>
<PAGE>
63
management discussion
International Business Machines Corporation
and Subsidiary Companies
Employees and Related Workforce
Percentage
Changes
--------------------
1999 1998 1997 1999-98 1998-97
- -------------------------------------------------------------------------------
IBM/wholly
owned
subsidiaries 307,401 291,067 269,465 5.6 8.0
Less than
wholly owned
subsidiaries 17,176 21,704 20,751 (20.9) 4.6
Complementary 29,800 36,900 43,000 (19.2) (14.2)
IBM employees, including wholly owned subsidiaries, increased by more than
16,000 in 1999. The growth areas of the company, Global Services and the
Software Group, continue to drive the increase; Global Services hired
approximately 17,000 in 1999. Acquisitions also contributed to the increase. The
company also continues to reduce its infrastructure and to withdraw from certain
businesses, thereby offsetting some of the growth. For example, during 1999, IBM
sold its Global Network to AT&T, resulting in the loss of about 5,300 employees.
The decrease in employees in the less than wholly owned subsidiaries over the
last year reflects a number of entities that were converted to a wholly owned
status, such as Global Services in India and MiCRUS in the U.S., or divested
during the year. Partially offsetting the decrease was continued growth in
Global Services, notably in Australia, and in a number of subsidiaries in China.
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.
Year 2000
The issues raised by the transition to the Year 2000 presented a pervasive and
unprecedented global challenge to IBM, its customers, partners, suppliers and
employees, as well as to governments, communities and individuals. The company
believes that the overall uneventful arrival of the Year 2000 is testimony to
the hard work and investment of organizations and individuals around the world.
With respect to the company's own operations, it prepared more than one million
critical items for the transition, including PCs and servers, application
software, and manufacturing tools and instruments. In addition, 2,500 suppliers,
750 business partners and 200 subsidiaries were assessed for risk mitigation
planning purposes. The company estimates that it will have spent approximately
$500 million over a multi-year period in these efforts, including conversion,
testing and contingency planning.
Over the past five years, the company undertook numerous initiatives to help
customers prepare for the Year 2000 including contacting customers around the
world to help promote awareness of Year 2000 issues; developing a range of
service offerings and tools to help customers assess, develop and execute plans
to make their systems Year 2000 ready; and making the company's own current
hardware and software offerings Year 2000 ready. To illustrate the extent of the
company's efforts, more than one million customers used the company's technical
support Year 2000 Web site; and the company's Global Services organization
processed more than one billion lines of customer code. Further, the company
found that a large number of its enterprise customers locked down their
information technology systems and postponed technology purchases heading into
the Year 2000 transition, which adversely affected the company's business
performance during the second half of 1999. See the Results of Operations and
Financial Condition sections within the Management Discussion for further
information.
In the near term, the company recognizes the need to maintain its vigilance in
the event Y2K issues do arise. 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 potential claims
brought against it.
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).
<PAGE>
64
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 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Hardware $37,041 $35,419 $36,630
Global Services 32,172 28,916 25,166
Software 12,662 11,863 11,164
Global Financing 3,137 2,877 2,806
Enterprise Investments/Other 2,536 2,592 2,742
- -----------------------------------------------------------------------------------------
Total revenue 87,548 81,667 78,508
- -----------------------------------------------------------------------------------------
Cost:
Hardware 27,071 24,214 23,473
Global Services 23,304 21,125 18,464
Software 2,240 2,260 2,785
Global Financing 1,446 1,494 1,448
Enterprise Investments/Other 1,558 1,702 1,729
- -----------------------------------------------------------------------------------------
Total cost 55,619 50,795 47,899
- -----------------------------------------------------------------------------------------
Gross profit 31,929 30,872 30,609
- -----------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative Q 14,729 16,662 16,634
Research, development and engineering S 5,273 5,046 4,877
- -----------------------------------------------------------------------------------------
Total operating expenses 20,002 21,708 21,511
- -----------------------------------------------------------------------------------------
Operating income 11,927 9,164 9,098
Other income, principally interest 557 589 657
Interest expense K 727 713 728
- -----------------------------------------------------------------------------------------
Income before income taxes 11,757 9,040 9,027
Provision for income taxes P 4,045 2,712 2,934
- -----------------------------------------------------------------------------------------
Net income 7,712 6,328 6,093
Preferred stock dividends 20 20 20
- -----------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 7,692 $ 6,308 $ 6,073
- -----------------------------------------------------------------------------------------
Earnings per share of common stock:
Assuming dilution T $ 4.12 $ 3.29* $ 3.00*
Basic T $ 4.25 $ 3.38* $ 3.09*
=========================================================================================
</TABLE>
Average number of common shares outstanding:
Assuming dilution: 1999-1,871,073,912; 1998-1,920,130,470*; 1997-2,021,869,884*
Basic: 1999-1,808,538,346; 1998-1,869,005,570*; 1997-1,966,572,722*
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
<PAGE>
65
consolidated statement of financial position
International Business Machines Corporation
and Subsidiary Companies
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
At December 31: Notes 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,043 $ 5,375
Marketable securities L 788 393
Notes and accounts receivable--trade, net of allowances 20,039 18,958
Sales-type leases receivable 6,220 6,510
Other accounts receivable 1,359 1,313
Inventories E 4,868 5,200
Prepaid expenses and other current assets 4,838 4,611
- -----------------------------------------------------------------------------------------------------
Total current assets 43,155 42,360
- -----------------------------------------------------------------------------------------------------
Plant, rental machines and other property F 39,616 44,870
Less: Accumulated depreciation 22,026 25,239
- -----------------------------------------------------------------------------------------------------
Plant, rental machines and other property--net 17,590 19,631
- -----------------------------------------------------------------------------------------------------
Software 663 599
Investments and sundry assets G 26,087 23,510
- -----------------------------------------------------------------------------------------------------
Total assets $ 87,495 $ 86,100
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Taxes P $ 4,792 $ 3,125
Short-term debt J & L 14,230 13,905
Accounts payable 6,400 6,252
Compensation and benefits 3,840 3,530
Deferred income 4,529 4,115
Other accrued expenses and liabilities 5,787 5,900
- -----------------------------------------------------------------------------------------------------
Total current liabilities 39,578 36,827
- -----------------------------------------------------------------------------------------------------
Long-term debt J & L 14,124 15,508
Other liabilities M 11,928 12,818
Deferred income taxes P 1,354 1,514
- -----------------------------------------------------------------------------------------------------
Total liabilities 66,984 66,667
- -----------------------------------------------------------------------------------------------------
Contingencies O
Stockholders' equity: N
Preferred stock, par value $.01 per share 247 247
Shares authorized: 150,000,000
Shares issued and outstanding (1999 and 1998-2,546,011)
Common stock, par value $.20* per share C 11,762 10,121
Shares authorized: 4,687,500,000*
Shares issued (1999-1,876,665,245; 1998-1,853,738,104*)
Retained earnings 16,878 10,141
Treasury stock, at cost (shares: 1999-72,449,015; 1998-1,924,293*) (7,375) (133)
Employee benefits trust (shares: 1999-20,000,000; 1998-20,000,000*) (2,162) (1,854)
Accumulated gains and losses not affecting retained earnings 1,161 911
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 20,511 19,433
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 87,495 $ 86,100
=====================================================================================================
</TABLE>
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
<PAGE>
66
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>
1997*
Stockholders' equity, January 1, 1997 $ 253 $ 7,752 $ 11,189 $ (135) $ -- $ 2,569 $ 21,628
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
(137,554,672** shares) (565) (5,455) (6,020)
Preferred stock purchased and
retired (13,450 shares) (1) (1)
Common stock issued under employee
plans (39,303,206** shares) 985 (2) 983
Purchases (8,254,336** shares) and sales
(10,764,558** shares) of treasury stock
under employee plans--net (32) 49 17
Employee benefits trust (20,000,000** shares) (860) (860)
Tax effect--stock transactions 429 429
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1997 $ 252 $ 8,601 $ 11,010 $ (86) $ (860) $ 899 $ 19,816
================================================================================================================================
1998*
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
(113,993,636** shares) (556) (6,291) (6,847)
Preferred stock purchased and retired
(51,250 shares) (5) (5)
Common stock issued under employee
plans (29,701,038** shares) 709 (1) 708
Purchases (9,100,678** shares) and sales
(9,024,296** 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
================================================================================================================================
</TABLE>
<PAGE>
67
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>
1999
Stockholders' equity, December 31, 1998 $ 247 $ 10,121 $ 10,141 $ (133) $ (1,854) $ 911 $ 19,433
Net income plus gains and losses not
affecting retained earnings:
Net income 7,712 $ 7,712
---------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $180) (546) (546)
Net unrealized gains on marketable
securities (net of tax expense of $456) 796 796
---------
Total gains and losses not affecting
retained earnings 250
---------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 7,962
---------
Cash dividends declared--common stock (859) (859)
Cash dividends declared--preferred stock (20) (20)
Treasury shares purchased, not retired
(70,711,971 shares) (7,192) (7,192)
Common stock issued under employee
plans (22,927,141 shares) 741 (1) 740
Purchases (6,418,975 shares) and sales
(6,606,223 shares) of treasury stock
under employee plans--net (95) (50) (145)
Fair value adjustment of employee
benefits trust 318 (308) 10
Increase due to shares issued by subsidiary 37 37
Tax effect--stock transactions 545 545
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1999 $ 247 $ 11,762 $ 16,878 $ (7,375) $ (2,162) $ 1,161 $ 20,511
================================================================================================================================
</TABLE>
* Reclassified to conform with 1999 presentation.
** Adjusted to reflect a two-for-one stock split effective May 10, 1999.
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
<PAGE>
68
consolidated statement of stockholders' equity
International Business Machines Corporation
and Subsidiary Companies
<TABLE>
<CAPTION>
(Dollars in millions)
At December 31: 1999 1998* 1997*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 7,712 $ 6,328 $ 6,093
Adjustments to reconcile net income to cash provided
from operating activities:
Depreciation 6,159 4,475 4,018
Amortization of software 426 517 983
Deferred income taxes (713) (606) 358
Gain on disposition of fixed and other assets (4,791) (261) (273)
Other changes that (used) provided cash:
Receivables (1,677) (2,736) (3,727)
Inventories 301 73 432
Other assets (130) 219 (378)
Accounts payable (3) 362 699
Other liabilities 2,827 902 660
- ------------------------------------------------------------------------------------------------
Net cash provided from operating activities 10,111 9,273 8,865
- ------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Payments for plant, rental machines and other property (5,959) (6,520) (6,793)
Proceeds from disposition of plant, rental machines
and other property 1,207 905 1,130
Investment in software (464) (250) (314)
Purchases of marketable securities and other investments (3,949) (4,211) (1,617)
Proceeds from marketable securities and other investments 2,616 3,945 1,439
Proceeds from sale of the Global Network 4,880 -- --
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,669) (6,131) (6,155)
- ------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from new debt 6,133 7,567 9,142
Short-term borrowings less than 90 days--net 276 499 (668)
Payments to settle debt (7,510) (5,942) (4,530)
Preferred stock transactions--net -- (5) (1)
Common stock transactions--net (6,645) (6,278) (6,250)
Cash dividends paid (879) (834) (783)
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,625) (4,993) (3,090)
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (149) 120 (201)
- ------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (332) (1,731) (581)
Cash and cash equivalents at January 1 5,375 7,106 7,687
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 5,043 $ 5,375 $ 7,106
- ------------------------------------------------------------------------------------------------
Supplemental data:
Cash paid during the year for:
Income taxes $ 1,904 $ 1,929 $ 2,472
Interest $ 1,574 $ 1,605 $ 1,475
================================================================================================
</TABLE>
* Reclassified to conform with 1999 presentation.
The accompanying notes on pages 69 through 93 are an integral part of the
financial statements.
<PAGE>
69
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 in
general 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 that are reported in the consolidated financial statements
and accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that the company may undertake in
the future, actual results may be different from the estimates.
Revenue
The company recognizes revenue when it is realized or realizable and earned. The
company reduces revenue for estimated customer returns, allowances and
anticipated price actions. The following are the specific revenue recognition
policies for each major category of 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 that are provided
during the period compared with the total estimated services to be 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 is recorded as unbilled receivables
and is included in trade accounts receivable. Billings in excess of revenue that
is 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 at the inception of
the license term, provided the company has vendor-specific objective evidence of
the fair value of each element of the software offering and the software has
been delivered. Revenue is deferred if vendor-specific objective evidence does
not exist for each contract element, or if there are uncertainties about the
timing of delivery of specific contract elements. The revenue that is deferred
for any contract element is recognized when all of the revenue recognition
criteria have been met for that element. 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.
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between assets and
liabilities that are recognized for financial reporting purposes and the amounts
that are recognized for income tax purposes. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
these deferred taxes are measured by applying currently enacted tax laws.
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 the company acquired the assets or
liabilities. All other assets and liabilities are translated at year-end
exchange rates. Cost of sales and depreciation are translated at historical
exchange rates. All other income and expense items are translated at the average
rates of exchange prevailing during the year. Gains and losses that result from
translation are included in net income.
<PAGE>
70
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Financial Instruments
In the normal course of business, the company uses a variety of derivative
financial instruments to manage currency exchange rate and interest rate risk.
To qualify for hedge accounting, the company requires that the derivative
instruments that are used for risk management purposes effectively reduce the
risk exposure that they are designed to hedge. For instruments that are
associated with the hedge of an anticipated transaction, hedge effectiveness
criteria also require that it be probable that the underlying transaction will
occur. Instruments that meet these hedging criteria are formally designated as
hedges at the inception of the contract. When the terms of an underlying hedged
item or transaction are modified, or when the underlying hedged item ceases to
exist, all changes in the fair value of the risk management instrument are
recognized in income each period until the instrument matures. Those risk
management instruments that do not meet the hedging criteria are accounted for
at fair value, and changes in fair value are recognized immediately in net
income. Refer to note L, "Financial Instruments," on pages 75 through 77 for
descriptions of the major classes of derivative financial instruments used by
the company, including the specific methods that the company uses to account for
them.
In determining the fair value of its derivative and non-derivative financial
instruments, the company uses a variety of methods and assumptions that are
based on market conditions and risks existing at each balance sheet date. For
the majority of financial instruments including most derivatives, long-term
investments and long-term debt, standard market conventions and techniques such
as estimated discounted value of future cash flows, option pricing models,
replacement cost and termination cost are used to determine fair value. Quoted
market prices or dealer quotes for the same or similar instruments are used for
the remaining financial instruments.
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 in current assets represent securities with a
maturity of less than one year. The company's policy is to invest in primarily
high-grade marketable securities. 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 that is used internally, subject to
an operating lease or as part of strategic outsourcing 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 generally are 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 that are related to the conceptual formulation and design of licensed
programs are expensed as research and development. Also, for licensed programs,
the company capitalizes costs to produce the finished product that are incurred
after technological feasibility is established. 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 three years. The
company performs periodic reviews to ensure that unamortized program costs
remain recoverable from future revenue. The company charges costs to support or
service licensed programs against income as they are incurred.
The company capitalizes certain costs that are incurred to purchase or to create
and implement internal use computer software, which include software coding,
installation, testing and data conversion. Capitalized costs are amortized on a
straight-line basis over two years.
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 that result
from amendments to the plans are amortized over the average remaining service
period of the employees expected to receive benefits. Unrecognized net gains and
losses that exceed ten percent of the greater of the projected benefit
obligation or the market-related value of plan assets are amortized to service
cost over the average remaining service life of employees expected to receive
benefits. See note W, "Retirement Plans," on pages 86 through 88 and note X,
"Nonpension Postretirement Benefits," on pages 88 and 89 for further discussion.
<PAGE>
71
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Goodwill
Goodwill is charged to net income on a straight-line basis over the periods
estimated to benefit, generally not to exceed five years. The company performs
reviews to evaluate the recoverability of goodwill and takes into account events
or circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists.
Common Stock
Common stock refers to the $.20 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--basic is computed by dividing Net income
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period. Earnings per share of common stock--assuming
dilution reflects the maximum potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock and would then share in the net income of the company. See note T,
"Earnings Per Share of Common Stock," on page 83 for further discussion.
B Accounting Changes
Standards Implemented
The company implemented new accounting standards in 1999, 1998 and 1997. None of
these standards had a material effect on the financial position or results of
operations of the company.
Effective January 1, 1999, the company adopted American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The SOP
requires a company to capitalize certain costs that are incurred to purchase or
to create and implement internal use computer software. See note A, "Significant
Accounting Policies" on pages 69 through 71 for a description of the company's
policies for internal use software.
Effective December 31, 1998, the company adopted SFAS No. 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 89 through 93 for the company's segment information.
Effective December 31, 1998, the company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which establishes
standardized disclosures for defined benefit pension and postretirement benefit
plans. See note W, "Retirement Plans," on pages 86 through 88 and note X,
"Nonpension Postretirement Benefits," on pages 88 and 89 for the disclosures.
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
in a full set of general-purpose financial statements the gains and losses not
affecting retained earnings. The disclosures required by SFAS No. 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 N, "Stockholders' Equity Activity," on pages 78 and 79.
Effective January 1, 1998, the company adopted the AICPA SOP 97-2, "Software
Revenue Recognition." This SOP provides guidance on revenue recognition for
software transactions. See note A, "Significant Accounting Policies" on pages 69
through 71 for a description of the company's policy for software revenue
recognition.
Effective December 31, 1997, the company implemented SFAS No. 128, "Earnings Per
Share" (EPS). This statement prescribes the methods for calculating basic and
diluted EPS and requires dual presentation of these amounts on the face of the
Consolidated Statement of Earnings.
Effective January 1, 1997, the company implemented SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.
New Standards to be Implemented
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133." This statement defers the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to fiscal years beginning after June 15, 2000, although early
adoption is encouraged. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments. It requires a company to recognize all
derivatives as
<PAGE>
72
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. Additionally, the fair value
adjustments will affect either stockholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. The company will adopt this
standard as of January 1, 2001. Management does not expect the adoption to have
a material effect on the company's results of operations; however, the effect on
the company's financial position depends on the fair values of the company's
derivatives and related financial instruments at the date of adoption.
C Common Stock Split
On January 26, 1999, the company's Board of Directors approved a two-for-one
stock split effective May 10, 1999. On April 27, 1999, the stockholders of the
company approved amendments to the Certificate of Incorporation to increase the
number of authorized shares of common stock from 1,875 million to 4,687.5
million, which was required to effect that stock split. In addition, the
amendment reduced the par value of the common shares from $.50 to $.20 per
share. Common stockholders of record at the close of business on May 10, 1999,
received one additional share for each share held. All share and per share data
presented in the Consolidated Financial Statements and notes of this Annual
Report reflect the two-for-one stock split.
D Acquisitions/Divestitures
Acquisitions
In 1999, the company completed 17 acquisitions at a cost of approximately $1.5
billion. Three of the major acquisitions for the year are detailed in the
following discussion.
On September 24, 1999, the company acquired all of the outstanding capital stock
of Sequent Computer Systems, Inc. (Sequent) for approximately $828 million.
Sequent was an acknowledged leader in systems based on NUMA (non-uniform memory
access) architecture.
On September 29, 1999, the company acquired all of the outstanding stock of
Mylex Corporation (Mylex) for approximately $259 million. Mylex was a leading
developer of technology for moving, storing, protecting and managing data in
desktop and networked environments.
On September 27, 1999, the company acquired DASCOM, Inc. (DASCOM), an industry
leader in Web-based and enterprise-security technology, for approximately $115
million.
The company accounted for each acquisition as a purchase transaction. The
effects of these acquisitions on the company's Consolidated Financial Statements
were not material. Hence, the company has not provided pro forma financial
statements as if the companies had combined at the beginning of the current
period or the immediately preceding period.
The company engaged a nationally recognized independent appraisal firm to
express an opinion on the fair value of the net assets that the company acquired
to serve as a basis for the following allocation of the purchase price.
(Dollars in millions) Sequent Mylex DASCOM
- -------------------------------------------------------------------------------
Purchase price $ 828 $ 259 $ 115
Tangible net assets (liabilities) 382 67 (17)
Identifiable intangible assets 187 35 13
Current technology 87 26 19
Goodwill 183 145 92
In-process research
and development 85 7 19
Deferred tax liabilities
related to identifiable
intangible assets (96) (21) (11)
The tangible net assets comprise primarily cash, accounts receivable, land,
buildings and leasehold improvements. The identifiable intangible assets
comprise primarily patents, trademarks, customer lists, assembled workforce,
employee agreements and leasehold interests. The identifiable intangible assets
and goodwill will be amortized on a straight-line basis over a five-year period.
In connection with the acquisitions of Sequent, Mylex and DASCOM, the company
recorded a pre-tax charge for research, development and engineering of $111
million ($111 million after tax, or $.06 per diluted common share) for acquired
in-process research and development (IPR&D). At the date of each acquisition,
the IPR&D projects had not yet reached technological feasibility and had no
alternative future uses. The value of the IPR&D reflects the relative value and
contribution of the acquired research and development to the company's existing
research or product lines.
<PAGE>
73
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
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. In connection with these
acquisitions, the company recorded a pre-tax charge for IPR&D of $111 million
($111 million after tax, or $.06 per diluted common share).
On April 16, 1997, the company purchased a majority interest in NetObjects, a
leading provider of Web site development tools for designers and intranet
developers. In 1999, as a result of NetObject's initial public offering, the
company's interest declined to less than 50 percent. In September 1997, the
company acquired the 30 percent equity interest held by Sears in Advantis, the
U.S. network services arm of the company's Global Network. Advantis was then
owned 100 percent by the company. Advantis became part of the company's Global
Network, which the company sold to AT&T in 1999. In December 1997, the company
acquired Eastman Kodak's share of Technology Service Solutions, which was formed
in 1994 by the company and Eastman Kodak. In December 1997, the company acquired
Unison Software, Inc., a leading developer of workload management software. In
connection with these acquisitions the company recorded a pre-tax charge for
IPR&D of $111 million ($111 million after tax, or $.05 per diluted common
share).
Divestitures
In December 1998, the company announced that it would sell its Global Network
business to AT&T. During 1999, the company completed the sale to AT&T for $4,991
million. More than 5,300 IBM employees joined AT&T as a result of these sales of
operations in 71 countries.
The company recognized a pre-tax gain of $4,057 million ($2,495 million after
tax, or $1.33 per diluted common share). The net gain reflects dispositions of
Plant, rental machines and other property of $410 million, other assets of $182
million and contractual obligations of $342 million.
E Inventories
(Dollars in millions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Finished goods $ 1,162 $ 1,088
Work in process and raw materials 3,706 4,112
- --------------------------------------------------------------------------------
Total $ 4,868 $ 5,200
================================================================================
F Plant, Rental Machines and Other Property
(Dollars in millions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Land and land improvements $ 1,026 $ 1,091
Buildings 10,395 11,088
Plant, laboratory and office equipment 22,503 27,025
- --------------------------------------------------------------------------------
33,924 39,204
Less: Accumulated depreciation 19,268 22,463
- --------------------------------------------------------------------------------
14,656 16,741
Rental machines 5,692 5,666
Less: Accumulated depreciation 2,758 2,776
- --------------------------------------------------------------------------------
2,934 2,890
- --------------------------------------------------------------------------------
Total $17,590 $19,631
================================================================================
G Investments and Sundry Assets
(Dollars in millions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Net investment in sales-type leases* $14,201 $14,384
Less: Current portion--net 6,220 6,510
- --------------------------------------------------------------------------------
7,981 7,874
Deferred taxes 2,654 2,921
Prepaid pension assets 5,636 4,836
Customer loan receivables--
not yet due 4,219 3,499
Installment payment receivables 848 1,087
Alliance investments:
Equity method 595 420
Other--available for sale 1,439 138
Goodwill, less accumulated amortization
(1999, $2,646; 1998, $2,111) 1,045 945
Marketable securities--non-current 113 281
Other investments and sundry assets 1,557 1,509
- --------------------------------------------------------------------------------
Total $26,087 $23,510
================================================================================
* 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 $737 million
and $685 million at December 31, 1999 and 1998, 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, 1999, expressed as a percentage of the total,
are approximately as follows: 2000, 49 percent; 2001, 32 percent; 2002, 14
percent; 2003, 4 percent; and 2004 and beyond, 1 percent.
<PAGE>
74
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
H Lines of Credit
The company maintains a $10.0 billion global credit facility. The company's
other committed and uncommitted lines of credit were $5.5 billion and $5.2
billion at December 31, 1999 and 1998, respectively. Interest rates and other
terms of borrowing under these lines of credit vary from country to country
depending on local market conditions at the time of the borrowing.
(Dollars in billions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Unused Lines
From the global credit facility $ 8.6 $ 8.8
From other committed and
uncommitted lines 4.5 4.3
- --------------------------------------------------------------------------------
Total unused lines of credit $ 13.1 $ 13.1
================================================================================
I Sale and Securitization of Receivables
The company manages assets of $273 million and $864 million from the
securitization of loans, leases and trade receivables, at year-end 1999 and
1998, respectively. The company received cash proceeds of $1,311 million and
$2,425 million in 1999 and 1998, respectively, from the sale and securitization
of these receivables and assets. No significant gain or loss resulted from these
transactions. The company expects recourse amounts associated with the
aforementioned sale and securitization activities to be minimal, and has
adequate reserves to cover potential losses.
J Debt
Short-term debt
(Dollars in millions)
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Commercial paper $ 5,074 $ 4,885
Short-term loans 3,351 6,370
Long-term debt: Current maturities 5,805 2,650
- --------------------------------------------------------------------------------
Total $14,230 $13,905
================================================================================
The weighted-average interest rates for commercial paper at December 31, 1999
and 1998, were 5.9 percent and 5.7 percent, respectively. The weighted-average
interest rates for short-term loans at December 31, 1999 and 1998, were 4.0
percent and 5.3 percent, respectively.
Long-term debt
(Dollars in millions)
At December 31: Maturities 1999 1998
- --------------------------------------------------------------------------------
U.S. Dollars:
Debentures:
6.22% 2027 $ 500 $ 500
6.5% 2028 700 700
7.0% 2025 600 600
7.0% 2045 150 150
7.125% 2096 850 850
7.5% 2013 550 550
8.375% 2019 750 750
Notes: 6.3% average 2000-2014 4,191 2,695
Medium-term note
program: 5.8% average 2000-2014 6,230 4,885
Other: 6.5% average 2000-2012 1,227 1,514
- --------------------------------------------------------------------------------
15,748 13,194
Other currencies
(average interest rate
at December 31, 1999,
in parentheses):
Japanese yen (3.0%) 2000-2014 3,141 3,866
Canadian dollars (5.7%) 2000-2005 707 672
German marks (4.9%) 2002 103 120
Swiss francs (2.5%) 2001 78 91
U.K. pounds (7.0%) 2000-2003 33 25
Other (13.6%) 2000-2014 159 221
- --------------------------------------------------------------------------------
19,969 18,189
Less: Net unamortized
discount 40 31
- --------------------------------------------------------------------------------
19,929 18,158
Less: Current maturities 5,805 2,650
- --------------------------------------------------------------------------------
Total $14,124 $15,508
================================================================================
Annual maturities in millions of dollars on long-term debt outstanding at
December 31, 1999, are as follows: 2000, $5,805; 2001, $2,915; 2002, $2,659;
2003, $1,234; 2004, $489; 2005 and beyond, $6,867.
<PAGE>
75
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
K Interest on Debt
Interest paid and accrued on borrowings of the company and its subsidiaries was
$1,475 million in 1999, $1,585 million in 1998 and $1,596 million in 1997. Of
these amounts, the company capitalized $23 million in 1999, $28 million in 1998
and $32 million in 1997. Of the remainder, the company charged to the cost of
financing $725 million in 1999, $844 million in 1998 and $836 million in 1997,
and to interest expense $727 million in 1999, $713 million in 1998 and $728
million in 1997. The decrease in total interest in 1999 versus 1998 was due
primarily to lower average interest rates, partially offset by an increase in
average debt outstanding during 1999. The decrease in 1998 versus 1997 was due
primarily to lower average interest rates, partially offset by higher
outstanding average debt. The average effective interest rate for total debt was
5.1 percent, 5.7 percent and 6.4 percent in 1999, 1998 and 1997, respectively.
These rates include the results of currency and interest rate swaps applied to
the debt described in note J, "Debt," on page 74.
L Financial Instruments
The company maintains on- and off-balance sheet portfolios of financial
instruments.
Financial Instruments On-Balance Sheet (excluding derivatives)
Financial assets with carrying values that approximate fair value include cash
and cash equivalents, marketable securities, notes and other accounts receivable
and other investments. Financial liabilities with carrying values that
approximate 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, all of which
are considered available for sale.
MARKETABLE SECURITIES*
(Dollars in millions) Fair Value
---------------------
At December 31: 1999 1998
- --------------------------------------------------------------------------------
Current marketable securities:
U.S. government securities $ 15 $ 15
Time deposits and other bank obligations 746 335
Non-U.S. government securities and
other fixed-term obligations 27 43
- --------------------------------------------------------------------------------
Total $ 788 $ 393
================================================================================
Marketable securities--non-current:**
Time deposits and other bank obligations $ 105 $ 271
Non-U.S. government securities and
other fixed-term obligations 8 10
- --------------------------------------------------------------------------------
Total $ 113 $ 281
================================================================================
Alliance investments** $1,439 $ 138
================================================================================
* Gross unrealized gains (before taxes) on marketable securities were $1,310
million and $87 million at December 31, 1999 and 1998, respectively. Gross
unrealized losses (before taxes) on marketable securities were $7 million
and $8 million at December 31, 1999 and 1998, respectively.
** Included within Investments and sundry assets on the Consolidated
Statement of Financial Position. (See note G on page 73.)
Financial Instruments Off-Balance Sheet (excluding derivatives)
IBM has guaranteed certain loans and financial commitments of its affiliates.
The approximate amount of these financial guarantees was $1.2 billion at
December 31, 1999 and 1998.
The company's dealers had unused lines of credit available from IBM for working
capital financing of approximately $4.5 billion and $3.6 billion at December 31,
1999 and 1998, respectively.
<PAGE>
76
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
The company enters into contracts that effectively provide the company with
committed future borrowings in select foreign currencies. The aggregate notional
value of these contracts was $6.4 billion and $3.0 billion as of December 31,
1999 and 1998, respectively. The terms of these contracts generally are less
than eighteen months. Foreign exchange gains and losses associated with these
contracts are recorded in net income as they are realized. These amounts have
not been and are not expected to be material to the company's financial results.
Derivative Financial Instruments
The company uses derivative financial instruments as an element of its risk
management strategy. The company manages the risk of nonperformance by
counterparties by establishing explicit dollar and term limitations that
correspond to the credit rating of each carefully selected counterparty. The
company has not sustained a material loss from these instruments nor does it
anticipate any material adverse effect on its results of operations or financial
position in the future.
The following table summarizes the notional value, carrying value and fair value
of the company's derivative financial instruments on- and off-balance sheet. The
notional value at December 31 provides an indication of the extent of the
company's involvement in these instruments at that time, but does not represent
exposure to credit, interest rate or foreign exchange rate market risks.
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
--------------------------------- ---------------------------------
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 $29,830 $ (257) $ (491) $31,484 $ (485) $ (427)
Option contracts 1,705 59 54 9,021 67 45
- ----------------------------------------------------------------------------------------------------------------
Total $31,535 $ (198) $ (437)* $40,505 $ (418) $ (382)*
================================================================================================================
</TABLE>
Amounts in parentheses are liabilities.
* The estimated fair value of derivatives both on- and off-balance sheet at
December 31, 1999 and 1998, comprises assets of $616 million and $486
million and liabilities of $1,053 million and $868 million, respectively.
A significant portion of the company's derivative transactions relates to
matching the interest and foreign currency rate profiles of funding liabilities
with the interest and foreign currency rate profiles of global financing and
other market risk sensitive assets. 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. The company uses interest
rate swaps or currency swaps to match the interest rate and currency profiles of
its debt to the related assets. The terms of these swap contracts generally are
less than five years. Net interest settlements and currency rate differentials
that accrue under interest rate and currency swap contracts, respectively, are
recognized in interest expense over the life of the contracts.
The company uses its Global Treasury Centers to manage the cash of its
subsidiaries. These treasury 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 generally are less than one year. The
interest rate differential in these contracts is recognized in interest expense
over the life of the contracts.
The company also uses currency swaps and other foreign currency contracts 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 thereby offsetting a portion of the translation of the net
foreign assets.
<PAGE>
77
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
The company also uses derivatives to limit its exposure to loss resulting
primarily from fluctuations in foreign currency exchange rates on anticipated
cash transactions among foreign subsidiaries and with 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 in view of the volatility of the currency markets, the
company selectively employs foreign currency derivatives to manage its currency
risk. The terms of these instruments generally are less than eighteen months.
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 otherwise is terminated. At December
31, 1999 and 1998, there were no material deferred gains or losses. The premiums
associated with entering into these option contracts generally are amortized
over the life of the options and are not material to the company's results.
Unamortized premiums are recorded in prepaid assets. Gains and losses on
purchased options that hedge anticipated transactions that do not qualify for
hedge accounting, and on written options, are recorded in earnings as they occur
and are not material to the company's results.
M Other Liabilities and Environmental Remediation
Other liabilities principally comprises accruals for nonpension postretirement
benefits for U.S. employees ($6,392 million) and nonpension postretirement
benefits, indemnity and retirement plan reserves for non-U.S. employees ($1,028
million). More detailed discussion of these liabilities appears in note X,
"Nonpension Postretirement Benefits," on pages 88 and 89, and note W,
"Retirement Plans," on pages 86 through 88.
Also included in other liabilities are non-current liabilities associated with
infrastructure reduction and restructuring actions taken through 1993. Other
liabilities includes $659 million for postemployment preretirement accruals and
$503 million (net of sublease receipts) for accruals for leased space that the
company vacated.
The company employs extensive internal environmental protection programs that
primarily are preventive 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 when it becomes probable that the company will incur clean-up costs
and those costs can reasonably be estimated. In addition, estimated
environmental costs that are associated with post-closure activities (for
example, 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 actual or anticipated insurance
recoveries, were $240 million and $238 million at December 31, 1999 and 1998,
respectively.
The amounts accrued do not cover sites that are in the preliminary stages of
investigation; that is, for which neither the company's percentage of
responsibility nor the extent of cleanup required has been identified. Estimated
environmental costs are not expected to materially affect the financial position
or results of the company's operations in future periods. However, estimates of
future costs are subject to change due to protracted cleanup periods and
changing environmental remediation regulations.
<PAGE>
78
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
N Stockholders' Equity Activity
Stock Repurchases
From time to time, the Board of Directors authorizes the company to repurchase
IBM common stock. The company repurchased 71,618,800 common shares at a cost of
$7.3 billion and 114,768,200 common shares at a cost of $6.9 billion in 1999 and
1998, respectively. In 1999, the company did not retire the shares it
repurchased. The 1998 repurchases resulted in a reduction of $28,498,409 in the
stated capital (par value) associated with common stock. In 1998, the company
retired the repurchased shares and restored them to the status of authorized but
unissued shares. In 1999 and 1998, the company issued 906,829 and 774,564
shares, respectively, as a result of exercises of employee stock options. At
December 31, 1999, approximately $2.5 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 Board of Directors authorized the company to purchase all of its
outstanding Series A 7-1/2 percent preferred stock. The company did not
repurchase any shares in 1999. During 1998, the company repurchased 51,250
shares at a cost of $5.5 million. This resulted in a $512.50 ($.01 par value per
share) reduction in the stated capital associated with preferred stock as of
December 31, 1998. The company retired the repurchased shares and restored them
to the status of authorized but unissued shares. The company plans to purchase
the remaining outstanding shares on the open market and in private transactions
from time to time, depending on market conditions. There were 2,546,011 shares
outstanding at December 31, 1999 and 1998.
Employee Benefits Trust
Effective November 1, 1997, the company created an employee benefits trust to
which it contributed 20 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 those sales, and any dividends paid on the contributed stock,
toward the partial satisfaction of the company's future obligations under
certain of its compensation and benefits plans. The shares held in trust are not
considered outstanding for purposes of calculating earnings per share until they
are committed to be released. The trustee will vote the shares in accordance
with its fiduciary duties. As of December 31, 1999 and 1998, the company had not
committed any shares to be released.
At December 31, 1998, the company adjusted its valuation of the employee
benefits trust to fair value. This adjustment affected only line items within
stockholders' equity; it did not affect total stockholders' equity or net
income.
Accumulated Gains and Losses Not Affecting Retained Earnings
<TABLE>
<CAPTION>
Foreign Net Unrealized Total Gains and
Currency Gains (Losses) on Losses Not Affecting
(Dollars in millions) Items* Marketable Securities* Retained Earnings*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance, January 1, 1997 $ 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
Change for period (546) 796 250
- -----------------------------------------------------------------------------------------------------------
Ending balance, December 31, 1999 $ 314 $ 847 $ 1,161
===========================================================================================================
</TABLE>
* Net of tax.
<PAGE>
79
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
NET CHANGE IN UNREALIZED GAINS (LOSSES) ON
MARKETABLE SECURITIES (NET OF TAX)
(Dollars in millions)
For the year ended December 31: 1999 1998**
- -----------------------------------------------------------------------------
Net unrealized gains arising
during the period $943 $ 44
Less net gains included
in net income for the period 147 101
- -----------------------------------------------------------------------------
Net increase in net unrealized
gains on marketable securities $796 $ (57)
=============================================================================
* Restated to present amounts net of tax.
O Contingencies
The company is subject to a variety of claims and suits that arise from time to
time in 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 current action will have a material effect
on the company's business, financial condition or results of operations.
P Taxes
(Dollars in millions)
For the year ended December 31: 1999 1998 1997
- -------------------------------------------------------------------------------
Income before income taxes:
U.S. operations $ 5,892 $2,960 $3,193
Non-U.S. operations 5,865 6,080 5,834
- -------------------------------------------------------------------------------
$11,757 $9,040 $9,027
===============================================================================
The provision for income taxes
by geographic operations
is as follows:
U.S. operations $ 2,005 $ 991 $ 974
Non-U.S. operations 2,040 1,721 1,960
- -------------------------------------------------------------------------------
Total provision for income taxes $ 4,045 $2,712 $2,934
===============================================================================
The components of the provision for income taxes by taxing jurisdiction are as
follows:
(Dollars in millions)
For the year ended December 31: 1999 1998 1997
- -------------------------------------------------------------------------------
U.S. federal:
Current $ 1,759 $ 1,117 $ 163
Deferred (427) (475) 349
- -------------------------------------------------------------------------------
1,332 642 512
U.S. state and local:
Current 272 139 83
Deferred 7 (260) (87)
- -------------------------------------------------------------------------------
279 (121) (4)
Non-U.S.:
Current 2,727 2,062 2,330
Deferred (293) 129 96
- -------------------------------------------------------------------------------
2,434 2,191 2,426
- -------------------------------------------------------------------------------
Total provision for income taxes 4,045 2,712 2,934
Provision for social security,
real estate, personal property
and other taxes 2,831 2,859 2,774
- -------------------------------------------------------------------------------
Total provision for taxes $ 6,876 $ 5,571 $ 5,708
===============================================================================
The effect of tax law changes on deferred tax assets and liabilities did not
have a significant effect on the company's effective tax rate.
<PAGE>
80
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
The significant components of activities that gave rise to deferred tax assets
and liabilities that are recorded on the balance sheet were as follows:
DEFERRED TAX ASSETS
(Dollars in millions)
At December 31: 1999 1998
- -------------------------------------------------------------------------------
Employee benefits $ 3,737 $ 3,909
Alternative minimum tax credits 1,244 1,169
Bad debt, inventory and
warranty reserves 1,093 1,249
Infrastructure reduction charges 918 863
Capitalized research and development 880 913
Deferred income 870 686
General business credits 605 555
Foreign tax loss carryforwards 406 304
Equity alliances 377 387
Depreciation 326 201
State and local tax loss carryforwards 227 212
Intracompany sales and services 153 182
Other 2,763 2,614
- -------------------------------------------------------------------------------
Gross deferred tax assets 13,599 13,244
Less: Valuation allowance 647 488
- -------------------------------------------------------------------------------
Net deferred tax assets $12,952 $12,756
- -------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
(Dollars in millions)
At December 31: 1999 1998
- -------------------------------------------------------------------------------
Retirement benefits $ 3,092 $ 2,775
Sales-type leases 2,914 3,433
Depreciation 1,237 1,505
Software costs deferred 250 287
Other 2,058 1,841
- -------------------------------------------------------------------------------
Gross deferred tax liabilities $ 9,551 $ 9,841
===============================================================================
The valuation allowance at December 31, 1999, 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 use 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: 1999 1998 1997
- -------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
Foreign tax differential (2) (6) (3)
State and local 1 1 1
Valuation allowance
related items -- (1) --
Other -- 1 --
- -------------------------------------------------------------------------------
Effective rate 34% 30% 33%
===============================================================================
For tax return purposes, the company has available tax credit carryforwards of
approximately $1,919 million, of which $1,244 million have an indefinite
carryforward period, $199 million expire in 2004 and the remainder thereafter.
The company also has state and local and foreign tax loss carryforwards, the tax
effect of which is $633 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 were $14,900 million at December 31, 1999, $13,165 million at
December 31, 1998, and $12,511 million at December 31, 1997. 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.
Q Selling and Advertising
Selling and advertising expense is charged against income as incurred.
Advertising expense, which includes media, agency and promotional expenses, was
$1,758 million, $1,681 million and $1,708 million in 1999, 1998 and 1997,
respectively.
<PAGE>
81
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
R 1999 Actions
Technology Group Actions
During 1999, the company implemented actions that were designed to better align
the operations and cost structure of IBM's Technology Group with that group's
strategic direction in view of the competitive environment, overcapacity in the
industry and resulting pricing pressures. The actions affect the
Microelectronics Division (MD), the Storage Systems Division (SSD) and the
Networking Hardware Division (NHD) of the company's Technology Group. The
company expects these actions to be substantially completed by the first half of
2000.
In total, the Technology Group actions resulted in a charge of $1,690 million
($1,366 million after tax, or $.73 per diluted common share) as described below
and in the table on page 82.
The actions within MD addressed a prolonged, industry-wide downturn in memory
chip prices that affected the results of the company's semiconductor business.
They are intended to enable the company to (1) reconfigure the assets and
capabilities of the division to allow more focus on the faster-growth,
higher-margin custom logic portion of the MD business and (2) enhance its
ability to more cost effectively manage a partnership agreement that was formed
to produce complementary metal oxide semiconductor (CMOS) based logic
components.
The company will reduce its internal dynamic random access memory (DRAM)
capacity by converting its manufacturing facility in Essonnes, France, from DRAM
to custom logic over an 18-month period. The company is effecting that
conversion through a joint venture with Infineon Technologies, a subsidiary of
Siemens AG. Also related to DRAM, the company executed contracts with various
banks and other financing institutions to sell and lease back test equipment.
The company also participates in a 50/50 joint venture (Dominion Semiconductor
Company) with Toshiba Corporation to produce DRAM memory components. The company
entered into an agreement whereby Toshiba will assume the company's interest in
Dominion effective December 31, 2000. The company will participate in the
capacity output of Dominion at a significantly reduced rate in the interim
period.
The company held a majority interest in a joint venture (MiCRUS) with Cirrus
Logic Inc. (the partner) to produce CMOS-based logic components for IBM and its
partner based on contractual capacity agreements. The partner indicated that it
would not require the output capacity that is provided for in the partnership
agreement. The company determined that the most cost-effective manner in which
to address the partner's desire to exit the partnership agreement was to acquire
the minority interest held by that partner.
The company also announced aggressive steps intended to improve its competitive
position in the markets that SSD serves by merging server hard disk drive (HDD)
product lines and realigning operations. The company is integrating all server
HDDs into a single low-cost design platform that uses common development and
manufacturing processes. The company continues to transfer manufacturing
assembly and test operations to Hungary and Mexico and expects to complete these
actions by mid 2000.
The actions within NHD relate to a global alliance with Cisco Systems, Inc. As a
result of the announcement of the alliance, demand for the router and switch
products from both existing and new customers deteriorated.
<PAGE>
82
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
The following table identifies the significant components of the pre-tax charge
related to the 1999 actions as well as the after-tax charges and the effect on
earnings per share assuming dilution; the investments and other asset
write-downs in 1999; and the liability as of December 31, 1999:
<TABLE>
<CAPTION>
Effect on
Earnings Investments
Total per Share- and Other Liability Liability
(Dollars in millions except Pre-Tax After-Tax Assuming Asset Created as of
per share amounts) Charges* Charges Dilution Write-Downs in 1999 Dec. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Technology Group
MD Actions:
DRAM
Equipment(1) $ 662 $ 603 $.32 $ 662 $ -- $ --
Employee Terminations(2) 167 167 .09 -- 167 149
Dominion Investment(3) 171 104 .05 171 -- --
MiCRUS Investment(4) 152 92 .05 -- 152 152
SSD Actions:
Equipment(5) 337 277 .15 337 -- --
Employee Terminations(6) 23 14 .01 -- 23 7
NHD Action:
Inventory Write-downs and
Contract Cancellations(7) 178 109 .06 178 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1999 Actions $1,690 $1,366 $.73 $1,348 $342 $308
=================================================================================================================================
</TABLE>
* With the exception of NHD inventory write-downs, all charges were recorded
in Selling, general and administrative expense. NHD inventory write-downs
were recorded in Hardware cost.
(1) Represents (a) the difference between net book value and fair value of
assets that were contributed to a joint venture, (b) the book value of
assets that were idled as a result of the MD actions and that were
scrapped and (c) the difference between the net book value and the
appraised fair value of test equipment subject to sale-leaseback
agreements.
(2) Workforce reductions that affect approximately 790 employees (455 direct
manufacturing and 335 indirect manufacturing) in France. The workforce
reductions are expected to be substantially completed by the end of the
first quarter of 2000.
(3) Write-off of investment in joint venture at the signing of the agreement
with Toshiba Corporation.
(4) Acquisition of minority interest in MiCRUS and charges for equipment
leasehold cancellation liabilities and lease rental payments for idle
equipment.
(5) Represents (a) the book value of assets that were idled as a result of the
SSD actions and scrapped, (b) write-downs to fair value of equipment under
contract for sale and delivery by December 31, 1999, and March 31, 2000,
and (c) the difference between the net book value and the appraised fair
value of equipment subject to sale-leaseback agreements.
(6) Workforce reductions that affect approximately 900 employees (780 direct
manufacturing and 120 indirect manufacturing) in the United States. There
are 210 terminations remaining in the first half of 2000.
(7) Write-down to net realizable value of inventory of router and switch
products ($144 million) and contract cancellation fees ($34 million)
related to deterioration in demand for router and switch products.
Change in Estimate
As a result of a change in estimate of the useful life of personal computers
(PCs) from five years to three years, the company recognized a charge in the
second quarter of 1999 of $404 million ($241 million after tax, $.13 per diluted
common share). In the second quarter, the company wrote off the net book value
of PCs that were 3 years or older and, therefore, had no remaining useful life.
The remaining book value of the assets will be depreciated over the remaining
new useful life. The net effect on future operations is expected to be minimal
as the increased depreciation due to the shorter life will be offset by the
lower depreciable base attributable to the write-off of PCs older than three
years.
S Research, Development and Engineering
Research, development and engineering expense was $5,273 million in 1999, $5,046
million in 1998 and $4,877 million in 1997. Expenses for product-related
engineering included in these amounts were $698 million, $580 million and $570
million in 1999, 1998 and 1997, respectively.
The company had expenses of $4,575 million in 1999, $4,466 million in 1998 and
$4,307 million in 1997 for 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 expenses were $2,036 million, $2,086
million and $2,016 million in 1999, 1998 and 1997, respectively. Included in the
expense each year are charges for acquired in-process research and development.
See note D, "Acquisitions/Divestitures" on pages 72 and 73 for further
information about that expense.
<PAGE>
83
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 of common stock.
<TABLE>
<CAPTION>
For the year ended December 31: 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during year 1,808,538,346 1,869,005,570 1,966,572,722
Add--Incremental shares under stock compensation plans 59,344,849 51,124,900 55,297,162
Add--Incremental shares associated with contingently issuable shares 3,190,717 -- --
- --------------------------------------------------------------------------------------------------------------------------
Number of shares on which diluted earnings per share is calculated 1,871,073,912 1,920,130,470 2,021,869,884
==========================================================================================================================
Net income applicable to common stockholders (millions) $ 7,692 $ 6,308 $ 6,073
Add--net income applicable to contingently issuable shares (millions) 11 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income on which diluted earnings per share is calculated (millions) $ 7,703 $ 6,308 $ 6,073
==========================================================================================================================
Earnings per share of common stock:
Assuming dilution $ 4.12 $ 3.29 $ 3.00
Basic $ 4.25 $ 3.38 $ 3.09
</TABLE>
Stock options to purchase 27,355,056 common shares in 1999, 4,124,730 shares in
1998 and 331,666 shares in 1997 were outstanding, but were not included in the
computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive. In addition, 5,131,038
restricted stock units in 1998 relating to the company's Long Term Performance
Plan were not included in the computation of diluted earnings per share as their
effect would have been antidilutive. Net income applicable to common
stockholders excludes preferred stock dividends of $20 million for 1999, 1998
and 1997.
U Rental Expense and Lease Commitments
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $1,397 million in 1999, $1,431
million in 1998 and $1,280 million in 1997. The table below depicts (a) gross
minimum rental commitments under noncancelable leases, including amounts related
to vacant space associated with infrastructure reduction and restructuring
actions taken through 1993 (previously reserved), and (b) offsetting sublease
income commitments. These amounts generally reflect activities related to office
space and manufacturing equipment.
<TABLE>
<CAPTION>
Beyond
(Dollars in millions) 2000 2001 2002 2003 2004 2004
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross rental commitments $1,314 $1,143 $ 982 $ 769 $ 469 $1,213
Vacant space 219 168 122 75 41 130
Sublease income commitments 124 91 71 48 34 62
</TABLE>
<PAGE>
84
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
V Stock-Based Compensation Plans
The company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," 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 1999 Long-Term Performance Plan, which was approved by
stockholders in April 1999, the IBM 1997 Long-Term Performance Plan, which was
approved by stockholders in April 1997, and its predecessor plan, the IBM 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 1999 Long-Term Performance Plan is 118.7 million, which
was 6.5 percent of the company's outstanding common stock on February 10, 1999.
No shares were issued under this Plan during 1999. There were 33.7 million and
68.8 million unused shares available to be granted under the IBM 1997 Long-Term
Performance Plan as of December 31, 1999 and 1998, respectively. As of December
31, 1999, there were no unused shares under the IBM 1994 Long-Term Performance
Plan. There were 4.1 million shares available to be granted under that Plan as
of December 31, 1998.
With the exception of stock options, 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 $267.3 million, $322.4 million and $214.1 million in
1999, 1998 and 1997, respectively.
STOCK OPTION GRANTS
Stock options are granted to employees at an exercise price equal to the fair
market value of the company's stock at the date of grant. Generally, options
vest 25 percent per year, are fully vested four years from the grant date and
have a term of 10 years. The following tables summarize option activity under
the Plans during 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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 $ 36 131,443,850 $27 123,456,722 $22 122,870,644
Options granted 115 42,786,845 53 41,175,350 36 42,942,456
Options exercised 28 (23,160,228) 22 (29,633,476) 21 (39,260,010)
Options canceled/expired 61 (4,933,944) 36 (3,554,746) 28 (3,096,368)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 60 146,136,523 $36 131,443,850 $27 123,456,722
==========================================================================================================================
Exercisable at December 31 $ 29 51,599,735 $22 46,191,636 $19 53,239,096
==========================================================================================================================
</TABLE>
The shares under option at December 31, 1999, were in the following exercise
price ranges:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
----------------------------------------------- -----------------------------
Wtd. Avg.
Wtd. Avg. Remaining 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>
$10 - 40 64,827,422 $ 28 6 42,694,829 $ 24
$41 - 70 37,007,973 52 8 8,234,965 52
$71 - 100 17,135,848 87 9 664,991 76
$101 and over 27,165,280 127 10 4,950 126
- -----------------------------------------------------------------------------------------------------------
146,136,523 $ 60 51,599,735 $ 29
===========================================================================================================
</TABLE>
<PAGE>
85
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
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 the
applicable pay period. The stockholders approved the current plan in 1995.
Approximately 57.3 million, 63.0 million and 71.0 million reserved unissued
shares were available for purchase under the ESPP at December 31, 1999, 1998 and
1997, respectively.
During 1999, 1998 and 1997, employees purchased 5.7 million, 8.0 million and 9.4
million shares, respectively, all of which were treasury shares, and paid to IBM
$514 million, $415 million and $354 million, respectively, for these shares.
Pro Forma Disclosure
In accordance with APB Opinion No. 25, the company does not recognize expense
for stock options granted under the Plans or for employee stock purchases under
the ESPP. SFAS No. 123, "Accounting for Stock-Based Compensation," requires a
company to determine the fair market value of all awards of stock-based
compensation using an option-pricing model and to disclose pro forma net income
and earnings per share as if the resulting stock-based compensation amounts were
recorded in the Consolidated Statement of Earnings. The table below presents
these pro forma disclosures.
<TABLE>
<CAPTION>
1999 1998 1997
(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 $ 7,692 $ 7,044 $ 6,308 $ 5,985 $ 6,073 $ 5,866
Earnings per share of
common stock--assuming dilution $ 4.12 $ 3.78 $ 3.29 $ 3.12 $ 3.00 $ 2.91
Earnings per share of
common stock--basic $ 4.25 $ 3.89 $ 3.38 $ 3.20 $ 3.09 $ 2.98
</TABLE>
The pro forma amounts that are disclosed in accordance with SFAS 123 reflect the
portion of the estimated fair value of awards that was earned in 1999, 1998 and
1997.
The company used the Black-Scholes model to value the stock options that it
granted in 1999, 1998 and 1997. The assumptions that the company used to
estimate the fair value of the options and the weighted-average estimated fair
value of an option on the date of grant are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Term (years)* 5/6 5/6 5/6
Volatility** 27.3% 26.4% 23.0%
Risk-free interest rate (zero
coupon U.S. treasury note) 6.6% 5.1% 6.2%
Dividend yield 0.4% 0.8% 1.0%
Weighted-average fair
value per option $ 46 $ 18 $ 13
* Option term is 5 years for tax incentive options and 6 years for non-tax
incentive options.
** To determine volatility, the company measured the daily price changes of
the stock over the last 5- and 6-year periods for tax incentive options
and non-tax incentive options, respectively.
<PAGE>
86
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
W Retirement Plans
The company and its subsidiaries have defined benefit and defined contribution
retirement plans that cover 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 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
U.S. Plan Non-U.S. Plans
---------------------- ----------------------
(Dollars in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 36,561 $ 33,161 $ 22,048 $ 18,846
Service cost 566 532 475 399
Interest cost 2,404 2,261 1,282 1,213
Plan participants' contributions -- -- 29 29
Acquisitions/divestitures, net 68 22 (47) --
Amendments 75 -- -- 2
Actuarial (gains) losses (2,766) 2,729 522 1,331
Benefits paid from trust (2,474) (2,144) (737) (683)
Direct benefit payments -- -- (257) (254)
Foreign exchange impact -- -- (1,552) 1,155
Plan curtailments/settlements/termination benefits -- -- 7 10
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 34,434 36,561 21,770 22,048
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 41,593 38,475 25,294 21,841
Actual return on plan assets 6,397 5,240 5,184 2,400
Employer contribution -- -- 143 452
Acquisitions/divestitures, net 68 22 (36) --
Plan participants' contributions -- -- 29 29
Benefits paid from trust (2,474) (2,144) (737) (683)
Foreign exchange impact -- -- (1,995) 1,283
Settlements -- -- (39) (28)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 45,584 41,593 27,843 25,294
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets in excess of
benefit obligation 11,150 5,032 6,073 3,246
Unrecognized net actuarial gains (7,003) (1,289) (4,597) (2,342)
Unrecognized prior service costs 269 174 140 181
Unrecognized net transition asset (632) (771) (72) (78)
Adjustment to recognize minimum liability -- -- (84) (87)
- ---------------------------------------------------------------------------------------------------------
Net prepaid pension asset recognized in the
Consolidated Statement of Financial Position $ 3,784 $ 3,146 $ 1,460 $ 920
=========================================================================================================
</TABLE>
<PAGE>
87
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 participants.
Effective July 1, 1999, IBM converted to a new formula, the Personal Pension
Account (PPA), for determining pension benefits for most of its employees. Under
the PPA, retirement benefits are credited to each employee's cash balance
account monthly based on a percentage of the employee's pensionable
compensation. Employees who were retirement eligible or within five years of
retirement eligibility with at least one year of service, or who were at least
forty years of age with at least ten years of service as of June 30, 1999, could
elect to participate in the PPA or to have their service and earnings credit
accrue under the preexisting benefit formula. Benefits become vested on the
completion of five years of service under either formula.
The number of individuals who were receiving benefits at December 31, 1999 and
1998, was 124,175 and 116,685, respectively.
Non-U.S. Plans
Most subsidiaries and branches outside the U.S. have retirement plans that cover
substantially all regular employees, under which the company deposits funds
under various fiduciary-type arrangements, purchases annuities under group
contracts or provides reserves. Retirement benefits are based on years of
service and the employee's compensation, generally during a fixed number of
years immediately before retirement. The ranges of assumptions that are used for
the non-U.S. plans reflect the different economic environments within various
countries.
U.S. Supplemental Executive Retention Plan
The company also has a non-qualified U.S. Supplemental Executive Retention Plan
(SERP). The SERP, which is unfunded, provides defined pension benefits outside
the IBM Retirement Plan to eligible executives based on average earnings, years
of service and age at retirement. Effective July 1, 1999, the company adopted
the Supplemental Executive Retention Plan (which replaces the previous
Supplemental Executive Retirement Plan). Some participants of the pre-existing
SERP still will be eligible for benefits under that plan, but will not be
eligible for the new plan. At December 31, 1999 and 1998, the projected benefit
obligation was $149 million and $178 million, respectively, and the amounts
included in the Consolidated Statement of Financial Position were pension
liabilities of $109 million and $81 million, respectively.
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
<TABLE>
<CAPTION>
U.S. Plan Non-U.S. Plans
------------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.75% 6.5% 7.0% 4.5-7.3% 4.5-7.5% 4.5-7.5%
Expected return on plan assets 9.5% 9.5% 9.5% 6.0-10.5% 6.5-10.0% 6.0-9.5%
Rate of compensation increase 6.0% 5.0% 5.0% 2.6-6.1% 2.7-6.1% 2.6-6.1%
COST OF THE DEFINED BENEFIT PLANS:
<CAPTION>
U.S. Plan Non-U.S. Plans
------------------------------- -----------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 566 $ 532 $ 397 $ 475 $ 399 $ 366
Interest cost 2,404 2,261 2,215 1,282 1,213 1,182
Expected return on plan assets (3,463) (3,123) (2,907) (1,937) (1,739) (1,457)
Net amortization of unrecognized net actuarial
gains, net transition asset and prior service costs (145) (124) (125) 42 21 15
Settlement (gains)/losses -- -- -- (23) 10 (63)
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic pension (benefit) cost--U.S. Plan
and material non-U.S. Plans $ (638) $ (454) $ (420) $ (161) $ (96) $ 43
- -------------------------------------------------------------------------------------------------------------------------------
Total net periodic pension (benefit) cost for all
non-U.S. Plans $ (124) $ (42) $ 50
- -------------------------------------------------------------------------------------------------------------------------------
Cost of defined contribution plans $ 275 $ 258 $ 236 $ 131 $ 90 $ 64
- -------------------------------------------------------------------------------------------------------------------------------
Cost of complementary defined benefits $ 38 $ 34 $ 33
- ---------------------------------------------------------------------------------------------
Cost of U.S. Supplemental Executive
Retention Plan $ 30 $ 25 $ 20
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
88
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 most changes in the estimates and assumptions used to compute pension
and prepaid pension assets or pension liability is mitigated by the delayed
recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions."
The effects of settlement gains, curtailment losses and early terminations
are recognized immediately. The 1.25 percent increase in the discount rate in
1999 resulted in an actuarial gain of $5,003 million for the U.S. plan. The
0.5 percent decrease in the discount rate in 1998 resulted in an actuarial
loss of $2,144 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 local
tax laws. From time to time, the company contributes additional amounts as it
deems appropriate. 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, 1999, the material non-U.S. defined benefit plans in which the
plan assets exceeded the benefit obligation had obligations of $21,168 million
and assets of $27,400 million. The material non-U.S. defined benefit plans in
which the benefit obligation exceeded the fair value of plan assets had
obligations of $602 million and assets of $443 million.
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.
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. Effective July 1, 1999, IBM established a "Future Health Account
(FHA) Plan" for employees who are more than five years away from retirement
eligibility. Employees who are eligible to retire within five years retained the
benefits under the company's preexisting retiree health benefits plan. Under
either the FHA or the preexisting plan, there is a maximum cost to the company
for retiree health care. For employees who retired before January 1, 1992, that
maximum will become effective in the year 2001. For all other employees, the
maximum is effective on retirement.
The changes in the benefit obligation and plan assets of the U.S. plans for 1999
and 1998 are as follows:
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,457 $ 6,384
Service cost 48 42
Interest cost 424 427
Amendments (127) (26)
Actuarial gains (445) (146)
Actuarial losses 371 272
Benefits paid from trust (325) (486)
Direct benefit payments (225) (10)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 6,178 6,457
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 123 120
Actual (loss)/gain on plan assets (18) 10
Employer contributions 325 479
Benefits paid, net of employee
contributions (325) (486)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 105 123
- --------------------------------------------------------------------------------
Benefit obligation in excess
of plan assets (6,073) (6,334)
Unrecognized net actuarial losses 631 700
Unrecognized prior service costs (948) (965)
- --------------------------------------------------------------------------------
Accrued postretirement benefit
liability recognized in the
Consolidated Statement
of Financial Position $(6,390) $(6,599)
- --------------------------------------------------------------------------------
<PAGE>
89
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
The benefit obligation was determined by applying 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 include a projected healthcare cost trend rate of 6 percent.
The net periodic postretirement benefit cost for the U.S. plan for the years
ended December 31 included the following components:
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 48 $ 42 $ 32
Interest cost 424 427 455
Expected return on plan assets (6) (5) (15)
Net amortization of
unrecognized net actuarial
losses and prior service costs (124) (133) (119)
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 342 $ 331 $ 353
================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.75% 6.5% 7.0%
Expected return
on plan assets 5.0% 5.0% 5.0%
The plan assets primarily comprise 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, 1999:
One-Percentage- One-Percentage-
(Dollars in millions) Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total service and
interest cost $ 7 $ (9)
Effect on postretirement benefit
obligation $95 $(120)
Y Segment Information
IBM uses advanced information technology to provide customer solutions. The
company operates primarily in a single industry using 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 comprise three hardware product
segments--Technology, Personal Systems and Server; a Global Services segment; a
Software segment; a Global Financing segment and an Enterprise Investment
segment. The segments are determined based on several factors, including
customer base, homogeneity of products, technology and delivery channels.
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 HDDs 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 PCs, IntelliStation workstations,
Netfinity servers, PC 300 commercial desktop and ThinkPad mobile systems. These
products are sold directly by the company and through reseller and retail
channels.
The Server segment produces powerful multi-purpose computer systems that operate
many open-network-based applications and are used simultaneously by multiple
users. 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. Brands
include S/390, AS/400, RS/6000 and NUMA-Q. The segment's products are sold
directly by the company and through business partner relationships.
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. The segment provides
value through three primary lines of business: Strategic Outsourcing Services;
Business Innovation Services; and Integrated Technology Services. Strategic
Outsourcing Services create business value through long-term strategic
partnerships with customers by taking on responsibility for their processes and
systems. Business Innovation Services (formerly Systems Integration and
Consulting) provide business/industry consulting and end-to-end e-business
implementation of offerings like Supply Chain Management, Customer Relationship
Management, Enterprise Resource Planning and Business Intelligence.
<PAGE>
90
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Integrated Technology Services offer customers a single IT partner to manage
multi-vendor IT systems' complexity in today's e-business environment including
traditional offerings like Product Support, Business Recovery Services, Site and
Connectivity Services, and Systems Management and Networking Services. Learning
Services supports the three primary lines of business and help customers design,
develop and deploy curricula to educate their employees. The Global Services
segment is uniquely suited to integrate the full range of the company's and key
industry participants' capabilities, including hardware, software, services and
research.
The Software segment delivers operating systems for the company's servers and
e-business enabling software (middleware) for IBM and non-IBM platforms. The
company has reorganized its e-business offerings to align with key customer
opportunity areas--transformation and integration, leveraging information,
organizational effectiveness and managing technology. In addition to its own
development, product and marketing effort, the segment supports more than 35,000
Independent Software Vendors to ensure that the company's software and hardware
offerings are included in those partners' solutions.
The Global Financing segment is the world's largest provider of financing
services for information technology (IT). The segment provides lease and loan
financing that enables the company's customers to acquire complete IT and
e-business solutions--hardware, software and services--provided by the company
and its business partners. Special focus is placed on the financing needs of
small and medium businesses, and the emerging financing needs of NetGen
companies. Global Financing, as a reliable source of capital for the
distribution channel, also provides the company's business partners with
customized commercial financing for inventory, accounts receivable, term loans
and acquisitions, helping them manage their cash flow, invest in infrastructure
and grow their business.
The Enterprise Investments segment provides industry specific 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
that 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 that are 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 uses shared-staff concepts to realize economies of scale
and efficient use of resources. Thus, 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 on a financial basis that is 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 arising from certain acquisitions,
indirect infrastructure reductions, certain intellectual property income and
currency exchange gains and losses are recorded in net income but 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 using actuarial assumptions that are
unique to the segment. 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.
<PAGE>
91
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
MANAGEMENT SYSTEM SEGMENT VIEW
<TABLE>
<CAPTION>
Hardware
------------------------------------
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>
1999:
External revenue $ 12,597 $ 15,290 $ 8,718 $ 32,172 $ 12,662 $ 3,219 $ 2,499 $ 87,157
Internal revenue 3,800 45 326 2,636 767 835 19 8,428
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 16,397 $ 15,335 $ 9,044 $ 34,808 $ 13,429 $ 4,054 $ 2,518 $ 95,585
==================================================================================================================================
Pre-tax income $ 764 $ (557) $ 1,590 $ 4,528 $ 2,830 $ 1,286 $ (324) $ 10,117
==================================================================================================================================
Revenue year-to-year change (0.4)% 19.8% (18.3)% 9.9% 6.5% 7.5% (0.2)% 5.1%
Pre-tax income year-
to-year change (20.0)% 43.9% (44.1)% 20.5% 9.4% 10.4% 47.4% 4.3%
Pre-tax income margin 4.7% (3.6)% 17.6% 13.0% 21.1% 31.7% (12.9)% 10.6%
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%
</TABLE>
Reconciliations to IBM as Reported
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
REVENUE:
Total reportable segments $ 95,585 $ 90,912 $ 89,173
Other revenues 391 151 99
Elimination of internal
revenue (8,428) (9,396) (10,764)
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 87,548 $ 81,667 $ 78,508
- --------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
PRE-TAX INCOME:
Total reportable segments $ 10,117 $ 9,699 $ 9,686
Elimination of internal
transactions (145) (162) (377)
Sale of Global Network 4,057 -- --
1999 actions (2,205) -- --
Unallocated corporate
expenses (67) (497) (282)
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 11,757 $ 9,040 $ 9,027
- --------------------------------------------------------------------------------
<PAGE>
92
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
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 that are attributable to the segments do not have a
significant effect on the financial results of the segments.
Segment Assets and Other Items
The assets of the hardware segments primarily are inventory and plant, property
and equipment. The software segment assets mainly are plant, property and
equipment, and investment in deferred software development. The Global Services
segment assets primarily are maintenance inventory and plant, property and
equipment associated with its strategic outsourcing business.
To accomplish the efficient use of the company's space and equipment, it usually
is necessary 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 is not allocated to each user segment. This is consistent with the
company's management system and is reflected accordingly in the schedule below.
In those cases, there will not be a precise correlation between segment pre-tax
income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on the
assigned landlord ownership and may not be consistent with the amounts that are
included in the segments' pre-tax income. The amounts that are included in
pre-tax income reflect occupancy charges from the landlord segment and are not
specifically identified by the management reporting system.
Capital expenditures that are reported by each segment also are in line with the
landlord ownership basis of asset assignment.
The Global Financing segment amounts below for interest income and interest
expense reflect the interest income and interest 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 discretely
identified to the other segments, but are included as part of an indirect
expense allocation.
MANAGEMENT SYSTEM SEGMENT VIEW
<TABLE>
<CAPTION>
Hardware
------------------------------------
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>
1999:
Assets $10,409 $ 1,372 $ 2,846 $ 2,060 $ 2,527 $39,686 $ 408 $59,308
Depreciation/amortization 2,142 127 191 367 576 2,976 15 6,394
Capital expenditures/
investment in software 1,834 172 312 249 656 3,217 12 6,452
Interest income -- -- -- -- -- 2,961 -- 2,961
Interest expense -- -- -- -- -- 1,232 -- 1,232
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 in 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 in software 2,028 195 235 361 515 3,615 16 6,965
Interest income -- -- -- -- -- 2,639 -- 2,639
Interest expense -- -- -- -- -- 1,175 -- 1,175
</TABLE>
<PAGE>
93
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Reconciliations to IBM as Reported
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
ASSETS:
Total reportable segments $ 59,308 $ 60,106 $ 54,242
Elimination of internal
transactions (5,776) (7,519) (6,287)
Unallocated amounts:
Cash and marketable
securities 4,563 4,295 6,062
Notes and accounts
receivable 7,004 7,715 7,441
Deferred tax assets 5,428 5,376 4,746
Plant, other property
and equipment 6,146 7,706 7,564
Pension assets 5,636 4,836 3,828
Other 5,186 3,585 3,903
- --------------------------------------------------------------------------------
Total IBM Consolidated $ 87,495 $ 86,100 $ 81,499
================================================================================
Revenue by Classes of Similar Products or Services
For the Personal Systems, Server, Software and Global Financing segments, the
segment data on page 91 represents the revenue contributions from the products
that are contained in the segments and that are basically similar in nature. The
table below provides external revenue for similar classes of products within the
Technology and Global Services segments. OEM hardware comprises primarily
revenue from the sale of HDD storage files and semiconductors. Storage comprises
externally attached direct access storage devices and tape storage devices.
Other technology comprises advanced function printers and networking devices.
Consolidated
-----------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Technology:
OEM $ 7,800 $ 6,756 $ 5,560
Storage 2,389 2,439 2,644
Other technology 2,408 2,695 2,879
Global Services:
Services 27,035 23,730 19,534
Maintenance 5,137 5,186 5,632
Major Customers
No single customer represents 10 percent or more of the company's total revenue.
Geographic Information
Revenue* Long-lived Assets**
--------------------------- ---------------------------
(Dollars in millions) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
United States $37,171 $35,303 $32,663 $19,309 $18,450 $17,802
Japan 10,411 8,567 9,765 4,710 4,310 3,635
Other countries 39,966 37,797 36,080 10,259 12,343 11,621
- --------------------------------------------------------------------------------
Total $87,548 $81,667 $78,508 $34,278 $35,103 $33,058
================================================================================
* Revenues are attributed to countries based on location of customer.
** Includes all non-current assets except non-current financial instruments
and deferred tax assets.
<PAGE>
94
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: 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $87,548 $81,667 $78,508 $75,947 $71,940
Net income 7,712 6,328 6,093 5,429 4,178
Per share of common stock:
Assuming dilution 4.12 3.29* 3.00* 2.50* 1.76*
Basic 4.25 3.38* 3.09* 2.56* 1.81*
Cash dividends paid on common stock 859 814 763 686 572
Per share of common stock .47 .43* .3875* .325* .25*
Investment in plant, rental machines
and other property 5,959 6,520 6,793 5,883 4,744
Return on stockholders' equity 39.0% 32.6% 29.7% 24.8% 18.5%
At end of year:
- -------------------------------------------------------------------------------------------------------------
Total assets $87,495 $86,100 $81,499 $81,132 $80,292
Net investment in plant, rental machines
and other property 17,590 19,631 18,347 17,407 16,579
Working capital 3,577 5,533 6,911 6,695 9,043
Total debt 28,354 29,413 26,926 22,829 21,629
Stockholders' equity 20,511 19,433 19,816 21,628 22,423
</TABLE>
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
Selected Quarterly Data
(Dollars in millions except per share amounts and stock prices)
<TABLE>
<CAPTION>
Per Share of Common Stock
-------------------------------------
Earnings
----------------------- Stock Prices**
Gross Net Assuming -----------------------
Revenue Profit Income Dilution Basic Dividends High Low
- ---------------------------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
First quarter $20,317 $ 7,258 $1,470 $ .78 $ 0.80 $ .11* $ 99.63* $ 80.88*
Second quarter 21,905 8,224 2,391 1.28 1.32 .12 132.00 81.50*
Third quarter 21,144 7,564 1,762 .93 .97 .12 139.19 117.56
Fourth quarter 24,182 8,883 2,089 1.12 1.16 .12 123.25 89.00
- ---------------------------------------------------------------------------------------------- -----------------------
Total $87,548 $31,929 $7,712 $ 4.12+ $ 4.25 $ .47
==============================================================================================
1998
First quarter $17,618 $ 6,450 $1,036 $ .53* $ .54* $ .10* $ 54.19* $ 47.81*
Second quarter 18,823 7,146 1,452 .75* .77* .11* 64.66* 51.66*
Third quarter 20,095 7,467 1,494 .78* .80* .11* 69.06* 55.38*
Fourth quarter 25,131 9,809 2,346 1.24* 1.27* .11* 94.97* 58.41*
- ---------------------------------------------------------------------------------------------- -----------------------
Total $81,667 $30,872 $6,328 $ 3.29*+ $ 3.38* $ .43*
==============================================================================================
</TABLE>
* Adjusted to reflect a two-for-one stock split effective May 10, 1999.
+ Earnings Per Share (EPS) in each quarter is computed using the
weighted-average number of shares outstanding during that quarter while
EPS for the full year is computed using the weighted-average number of
shares outstanding during the year. Thus, the sum of the four quarters'
EPS does not equal the full-year EPS.
** 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.
<PAGE>
95
stockholder information
International Business Machines Corporation
and Subsidiary Companies
IBM Stockholder Services
Stockholders with questions about their accounts should contact:
EquiServe, First Chicago Trust Division
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 EquiServe, First Chicago Trust Division, via the
Internet at: [email protected]
Hearing-impaired stockholders with access to a telecommunications device (TDD)
can communicate directly with EquiServe, First Chicago Trust Division, by
calling (800) 490-1493. Stockholders residing outside the United States, Canada
and Puerto Rico should call (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).
Stockholder of record can also consent to receive future IBM Annual Reports and
Proxy Statements online through the Internet at this site.
IBM Investor Services Program
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 25, 2000,
at 10 a.m. (EST) in the Grand Ballroom at the Renaissance Cleveland Hotel in
Cleveland, Ohio.
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 EquiServe,
First Chicago Trust Division
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.
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 March; 10-Q
reports are released in May, August and November.
An audio cassette recording of the 1999 Annual Report will be available for
sight-impaired stockholders in June.
IBM Credit Corporation's Annual Report is available in April.
"IBM Environment and Well-Being: Progress Report" 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
[RECYCLE LOGO] The IBM Annual Report is printed on recycled paper and is
recyclable.
*alphaWorks, Aptiva, AS/400, DB2, IBM, IntelliStation, Microdrive, MiCRUS, MQ
Series, Netfinity, Network Station, NUMA-Q, RS/6000, S/390, Shark, ThinkPad,
ViaVoice, WebConnection, Web Sphere and WorkPad are trademarks of International
Business Machines Corporation or its wholly owned subsidiaries. CATIA is a
trademark of Dassault Systemes SA. Intel is a trademark of Intel Corporation.
Linux is a trademark of Linus Torvalds. Domino, Lotus and Lotus Notes are
trademarks of Lotus Development Corporation. Tivoli is a trademark of Tivoli
Systems, Inc. Java is a trademark of Sun Microsystems, Inc. Technicolor is a
trademark of Technicolor, Inc. UNIX is a trademark in the United States and
other countries licensed exclusively through The Open Group Limited. Other
company product and service names may be trademarks or service marks of others.
Printed in U.S.
G507-0501-05
<PAGE>
96
board of directors and senior management
International Business Machines Corporation
and Subsidiary Companies
Board of Directors
Cathleen Black
President
Hearst Magazines
Kenneth I. Chenault
President and
Chief Operating Officer
American Express Company
Juergen Dormann
Chairman of the
Board of Management Aventis S.A.
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
Vice Chairman
Exxon Mobil Corporation
John B. Slaughter
President Emeritus
Occidental College, and
Melbo Professor of
Leadership in Education
University of Southern California
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
J. Bruce Harreld
Senior Vice President
Strategy
Stephen M. Ward, Jr.
Vice President
Business Transformation and
Chief Information Officer
John R. Joyce
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
David B. Kalis
Vice President
Communications
Jon C. Iwata
Vice President
Corporate Communications
Abby F. Kohnstamm
Senior Vice President
Marketing
Lawrence R. Ricciardi
Senior Vice President and
General Counsel
Christopher G. Caine
Vice President
Governmental Programs
Michael A. Candido, Jr.
Vice President and
Assistant General Counsel
Daniel E. O'Donnell
Vice President, Assistant
General Counsel and Secretary
TECHNOLOGY AND MANUFACTURING GROUP
Nicholas M. Donofrio
Senior Vice President and Group Executive
Paul M. Horn
Senior Vice President
Research
John E. Kelly, III
General Manager
IBM Microelectronics Division
Glenn H. Larnerd
General Manager
Storage Technology Division
William E. McCracken
General Manager
IBM Printing Systems
IBM GLOBAL SERVICES
Douglas T. Elix
Senior Vice President and Group Executive
Michael E. Daniels
General Manager
IBM Global Services, Asia Pacific
Mark W. Elliott
General Manager
IBM Global Services, Americas
Daniel R. Colby
General Manager
Industrial and Communications Sectors
Hans-Ulrich Maerki
General Manager
IBM Global Services, EMEA
Virginia M. Rometty
General Manager
Strategy and Marketing
SALES AND DISTRIBUTION GROUP
William A. Etherington
Senior Vice President and Group Executive
David R. Carlucci
General Manager
IBM Americas
Jerry Cole
General Manager
Financial Services Sector
Kakutaro Kitashiro
General Manager
IBM Asia Pacific
Henry W. K. Chow
General Manager
IBM Greater China
J. Michael Lawrie
General Manager
IBM Europe/Middle East/Africa
Erwin Staudt
General Manager
IBM Germany
Douglas L. Maine
General Manager
ibm.com
Peter T. Rowley
General Manager
Global Midmarket Business
ENTERPRISE SYSTEMS GROUP
Samuel J. Palmisano
Senior Vice President and Group Executive
Rodney C. Adkins
General Manager
Web Servers
Robert W. Moffat, Jr.
Vice President
Finance, Planning
and Operations
Linda S. Sanford
General Manager
Storage Subsystems Division
Susan M. Whitney
Vice President
Server Marketing
Irving Wladawsky-Berger
Vice President
Technology and Strategy
William M. Zeitler
General Manager
Enterprise Servers
PERSONAL SYSTEMS GROUP
David M. Thomas
Senior Vice President and Group Executive
Jonathan J. Judge
General Manager
Sales and Service
Ralph F. Martino
General Manager
Marketing and Strategy
SOFTWARE GROUP
John M. Thompson
Senior Vice President and Group Executive
Jan H. Lindelow
President and
Chief Executive Officer
Tivoli Systems, Inc.
Steven A. Mills
General Manager
Software Group Solutions and Strategy
Mark F. Bregman
General Manager
Pervasive Computing
Michael D. Zisman
Vice President
Knowledge Management
Alfred W. Zollar
President and
Chief Executive Officer
Lotus Development Corp.
<PAGE>
EXHIBIT II
PARENTS AND SUBSIDIARIES
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OR COUNTRY OF PERCENTAGE OF
OF INCORPORATION OR VOTING SECURITIES OWNED
ORGANIZATION BY ITS IMMEDIATE PARENT
-------------------- -----------------------
<S> <C> <C>
Registrant:
International Business Machines Corporation...... New York
Subsidiaries:
IBM Credit Corporation........................... Delaware 100
Tivoli Systems Inc. ............................. Delaware 100
IBM World Trade Corporation...................... Delaware 100
IBM Asia Pacific Service Corporation........... Japan 100
IBM Central and Eastern Europe/Middle East/
Africa, Inc. ................................ Delaware 100
IBM China/Hong Kong Corporation................ Delaware 100
IBM Plans Management Corporation............... New York 88(A)
IBM World Trade Asia Corporation............... Delaware 100
WTC Insurance Corporation, Ltd. ............... Bermuda 100
IBM Argentina, S.A. ........................... Argentina 100(A)
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(A)
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(A)
IBM de Colombia, S.A. ......................... Colombia 90(A)
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 90(B)
IBM India Ltd. ................................ India 99
IBM Japan, Ltd. ............................... Japan 100
IBM Korea, Inc. ............................... Korea (South) 100
Mesiniaga Berhad............................... Malaysia 6
Sunway Computer Services Sdn. Bhd. ............ Malaysia 20
Arrendadora de Tecnologia e Informatica, S.A.
de C.V., Organizacion Auxiliar del
Credito...................................... Mexico 86(A)
Financiera de Tecnologia e Informatica S.A. de
C.A., Sociedad Financiera del Objecto
Limitado Filial.............................. Mexico 100(A)
Grupo IBM Mexico, S.A. de C.V. ................ Mexico 100(C)
IBM de Mexico, S.A. ........................... Mexico 100(C)
</TABLE>
<PAGE>
PARENTS AND SUBSIDIARIES--(CONTINUED)
<TABLE>
<CAPTION>
STATE OR COUNTRY OF PERCENTAGE OF
OF INCORPORATION OR VOTING SECURITIES OWNED
ORGANIZATION BY ITS IMMEDIATE PARENT
-------------------- -----------------------
<S> <C> <C>
IBM New Zealand Ltd. .......................... New Zealand 100
IBM del Peru, S.A. ............................ Peru 100
IBM World Trade Asia-Pacific Corp.............. Philippines 98(C)
IBM Philippines, Incorporated.................. Philippines 100(C)
IBM Romania Srl................................ Romania 100
IBM Taiwan Company Limited..................... Taiwan 100(C)
Thai Systems Corporation Ltd. ................. Thailand 100
IBM Thailand Company Ltd. ..................... Thailand 100(C)
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(A)
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(C)
IBM Eurocoordination........................... France --(D)
IBM Europe Middle East Africa.................. France 100(A)
IBM Beteiligungs GmbH.......................... Germany 100
IBM Deutschland GmbH........................... Germany 82(A)
International Business Machines Corporation
Magyarorszagi Kft. .......................... Hungary 100
IBM International Treasury Services Company.... Ireland --(E)
IBM Ireland Ltd. .............................. Ireland 100
IBM Italia S.p.A. ............................. Italy 96(A)
IBM Hellas Information Handling Systems
S.A. ...................................... Greece 100(A)
IBM Israel Ltd. ............................. Israel 100(A)
Companhia IBM Portuguesa, S.A. .............. Portugal 100
IBM (International Business Machines) Turk
Ltd. Sirketi............................... Turkey 98(A)
IBM South Africa Group Ltd. ................. South Africa 100
IBM East Africa Limited........................ Kenya 67(A)
Sabiedriba ar irobezotu IBM Latvija............ Latvia 100
QuanTech s.a.l. ............................... Lebanon 15
IBM Lietuva.................................... Lithuania 100
EDESA S. A. ................................... Luxembourg 1
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(A)
IBM East Europe/Asia........................... Russia 100
</TABLE>
<PAGE>
PARENTS AND SUBSIDIARIES--(CONTINUED)
<TABLE>
<CAPTION>
STATE OR COUNTRY OF PERCENTAGE OF
OF INCORPORATION OR VOTING SECURITIES OWNED
ORGANIZATION BY ITS IMMEDIATE PARENT
-------------------- -----------------------
<S> <C> <C>
International Technology
IBM Slovensko spol.s.r.o. ..................... Slovak Republic 100
IBM Slovenija d.o.o. .......................... Slovenia 100
International Business Machines, S.A. ......... Spain 100(A)
IBM Nordic Aktiebolag........................ Sweden 100
IBM Danmark A/S.............................. Denmark 100
Oy International Business Machines AB........ Finland 100
IBM Svenska Aktiebolag....................... Sweden 100
IBM International Centre for Asset Management
A.G. ........................................ Switzerland 100
IBM (Schweiz)--IBM (Suisse)--IBM (Svizzera)--
IBM (Switzerland)............................ Switzerland 100
IBM North Africa............................... Tunisia 99(A)
IBM United Kingdom Holdings Ltd. .............. United Kingdom 100
International Business Machines Limited........ United Kingdom 100
IBM Zimbabwe (Private) Ltd. ................... Zimbabwe 100
</TABLE>
- ------------------------
(A) Remaining percentage owned by another wholly-owned IBM company.
(B) Minor percentage held by another IBM shareholder.
(C) Minor percentage held by other IBM shareholders, subject to repurchase
option.
(D) 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.
(E) 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.
<PAGE>
EXHIBIT III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777,
33-60225, 33-60227, 33-60237, 33-60815, 33-01411, 333-09055, 333-23315,
333-31305, 333-41813, 333-44981, 333-48435, 333-81157, 333-87757, 333-87856,
333-87925 and 333-30424) 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 19, 2000 appearing on
page 51 of the 1999 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 dated January 19, 2000 on the Financial Statement Schedules, which
appear on page 10 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 13, 2000
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Cathleen P. Black
-------------------------------------
Director
CATHLEEN P. BLACK
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Kenneth I. Chenault
-------------------------------------
Director
KENNETH I. CHENAULT
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Juergen Dormann
-------------------------------------
Director
JUERGEN DORMANN
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Nannerl O. Keohane
-------------------------------------
Director
NANNERL O. KEOHANE
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Charles F. Knight
-------------------------------------
Director
CHARLES F. KNIGHT
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Minoru Makihara
-------------------------------------
Director
MINORU MAKIHARA
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Lucio A. Noto
-------------------------------------
Director
LUCIO A. NOTO
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ John B. Slaughter
-------------------------------------
Director
JOHN B. SLAUGHTER
<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 1999 on Form
10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce,
Lawrence R. Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Alex Trotman
-------------------------------------
Director
ALEX TROTMAN
<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 1999 on Form 10-K, hereby
constitutes and appoints Louis V. Gerstner, Jr., John R. Joyce, Lawrence R.
Ricciardi, Walter S. Berman, Mark Loughridge, 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 29th day of February 2000.
/s/ Lodewijk C. van Wachem
-------------------------------------
Director
LODEWIJK C. van WACHEM
<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 31,1999
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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,043
<SECURITIES> 788
<RECEIVABLES> 20,039
<ALLOWANCES> 0
<INVENTORY> 4,868
<CURRENT-ASSETS> 43,155
<PP&E> 39,616
<DEPRECIATION> 22,026
<TOTAL-ASSETS> 87,495
<CURRENT-LIABILITIES> 39,578
<BONDS> 0
0
247
<COMMON> 11,762
<OTHER-SE> 8,502
<TOTAL-LIABILITY-AND-EQUITY> 87,495
<SALES> 37,041
<TOTAL-REVENUES> 87,548
<CGS> 27,071
<TOTAL-COSTS> 55,619
<OTHER-EXPENSES> 20,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 727
<INCOME-PRETAX> 11,757
<INCOME-TAX> 4,045
<INCOME-CONTINUING> 7,712
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,712
<EPS-BASIC> 4.25
<EPS-DILUTED> 4.12
</TABLE>
