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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
1-2360
(COMMISSION FILE NUMBER)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-0871985
(State of incorporation) (IRS employer identification
number)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
914-499-1900
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
VOTING SHARES
OUTSTANDING
AT NAME OF EACH EXCHANGE
TITLE OF EACH CLASS MARCH 1, 1999 ON WHICH REGISTERED
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Capital stock, par value $.50 per share 920,650,847 New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary shares each representing one-fourth of a share of 7 1/2% New York Stock Exchange
preferred stock, par value $.01 per share
6.375% Notes due 2000 New York Stock Exchange
7.25% Notes due 2002 New York Stock Exchange
6.45% Notes due 2007 New York Stock Exchange
5.375% Notes due 2009 New York Stock Exchange
7.50% Debentures due 2013 New York Stock Exchange
8.375% Debentures due 2019 New York Stock Exchange
7.00% Debentures due 2025 New York Stock Exchange
6.22% Debentures due 2027 New York Stock Exchange
6.50% Debentures due 2028 New York Stock Exchange
7.00% Debentures due 2045 New York Stock Exchange
7.125% Debentures due 2096 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 1999, was $155.0 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended
December 31, 1998, into Parts I, II and IV of Form 10-K.
Portions of IBM's definitive Proxy Statement dated March 23, 1999, into
Part III of Form 10-K.
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PART I
ITEM 1. BUSINESS:
IBM was incorporated in the State of New York on June 15, 1911, as the
Computer-Tabulating-Recording Co.(C-T-R), a consolidation of the Computing Scale
Co. of America, the Tabulating Machine Co., and The International Time Recording
Co. of New York. In 1924, C-T-R adopted the name International Business Machines
Corporation.
IBM is in the business of providing customer solutions through the use of
advanced information technology. The company operates primarily in a single
industry utilizing several segments that create value by offering a variety of
solutions that include, either singularly or in some combination, technologies,
systems, products, services, software and financing.
Organizationally, the company's major operations consist of three hardware
segments: Technology, Personal Systems and Server; a Global Services segment; a
Software segment; a Global Financing segment and a series of Enterprise
Investments.
IBM offers its products through its global sales and distribution
organization. The sales and distribution organization has both a geographic
focus (in the Americas, Europe/Middle East/Africa, and Asia Pacific) and a
specialized and global industry focus. In addition, this organization includes a
global sales and distribution organization devoted exclusively to small and
medium businesses. IBM also offers its products through a variety of third party
distributors and resellers.
While IBM's various proprietary intellectual property rights are important
to its success, IBM believes its business as a whole is not materially dependent
upon any particular patent or license, or any particular group of patents or
licenses. IBM owns or is licensed under a number of patents relating to its
products. Licenses under patents owned by IBM have been and are being granted to
others under reasonable terms and conditions. IBM protects its intellectual
property rights in a variety of ways. These protections may not prevent
competitors from independently developing products and services similar to or
duplicative of the company's nor can there be any assurance that these
protections will adequately deter misappropriation or improper use of the
company's technology. There can also be no assurances that IBM will be able to
obtain from third parties the licenses it needs in the future.
IBM's businesses employ a wide variety of components, supplies and raw
materials from a substantial number of suppliers around the world. To date, the
company has found that the components, supplies and raw materials necessary for
the manufacture, production and delivery of its products and services have been
available in the quantities required. Certain of the company's businesses may
rely on a single or limited number of suppliers, although the company makes
every effort to assure the alternative sources are available if the need arises.
The failure of the company's suppliers to deliver components, supplies and raw
material in sufficient quantities and in a timely manner could adversely affect
the company's business.
IBM's revenues are affected by such factors as the introduction of new
products, the length of the sales cycles and the seasonality of technology
purchases. As a result, the company's results are difficult to predict and the
seasonality of technology purchases have historically resulted in first quarter
revenues lower than revenues for the immediately preceding fourth quarter.
The value of unfilled orders is not a meaningful indicator of future
revenues due to the significant proportion of revenue from services, the volume
of products delivered from shelf inventories, and the shortening of product
delivery schedules. Therefore, the company believes that backlog information is
not material to an understanding of its business.
The company operates in businesses that are subject to intense competitive
pressures. The company's businesses face a significant number of competitors,
ranging from Fortune 50 companies to an increasing number of relatively small,
rapidly growing and highly specialized organizations. The company believes
2
that its combination of technology, performance, quality, reliability, price and
the breadth of products and service offerings are important competitive factors.
Intense competitive pressures could affect prices or demand for IBM's
products and services, resulting in reduced profit margins and/or loss of market
opportunity. Unlike many of its competitors, IBM has a portfolio of businesses
and must allocate resources across these businesses while competing with
companies that specialize in one or more of these product lines. As a result,
IBM may not fund or invest in certain of its businesses to the same degree that
its competitors do and these companies may have greater financial, technical and
marketing resources available to them than the businesses of IBM against which
they compete.
IBM operates in more than 150 countries worldwide and derives more than half
of its revenues from sales outside the United States. Changes in the laws or
policies of the countries in which IBM operates could affect its business in
that country and its results of operations. IBM's results of operations could
also be affected by economic changes in those countries and by macroeconomic
changes, including recessions and inflation. For example, weakness in the Asian
and Latin American economies has had an adverse impact on IBM's business in
1998.
The following information is included in IBM's 1998 Annual Report to
Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of
similar products or services--Pages 84 through 89.
Financial information by geographic areas--Page 89.
Amount spent during each of the last three years on research
and development activities--Page 78.
Financial information regarding environmental activities--Page 76.
The number of persons employed by the registrant--Page 62.
The management discussion overview--Page 54.
Forward-looking and Cautionary Statements: Certain statements contained in
this Annual Report may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act").
The company may also make forward-looking statements in other reports filed with
the Securities and Exchange Commission, in materials delivered to stockholders
and in press releases. In addition, the company's representatives may from time
to time make oral forward-looking statements. Forward-looking statements provide
current expectations of future events based on certain assumptions and include
any statement that does not directly relate to any historical or current fact.
Words such as "anticipates," "believes, "expects," "estimates," "intends,"
"plans," "projects," and similar expressions, may identify such forward-looking
statements. In accordance with the Reform Act, set forth below are cautionary
statements that accompany those forward-looking statements. Readers should
carefully review these cautionary statements as they identify certain important
factors that could cause actual results to differ materially from those in the
forward-looking statements and from historical trends. The following cautionary
statements are not exclusive and are in addition to other factors discussed
elsewhere in this Annual Report, in the company's filings with the Securities
and Exchange Commission or in materials incorporated herein or therein by
reference.
New Products and the Pace of Technological Change: The company's results of
operations depend upon the continued successful development and marketing of new
and innovative products and services. The development of new products and
services requires significant capital investments by the company's various
businesses and the success of these products and services depends on their
acceptance by customers and business partners. Further, the company's businesses
are characterized by rapid technological changes and corresponding shifts in
customer demand, resulting in unpredictable product transitions, shortened life
cycles and an increasing emphasis on being first to market with new products and
services.
3
There can be no assurance that the company will successfully introduce new
products and services, that these products and services will be accepted by
customers, or that the company's businesses will recoup or realize a return on
their capital investments. In addition, from time to time the company may
experience difficulties or delays in the development, production or marketing of
new products and services.
Volatility of Stock Prices: The company's stock price is affected by a
number of factors, including quarterly variations in results, the competitive
landscape, general economic and market conditions and estimates and projections
by the investment community. As a result, like other technology companies, the
company's stock price is subject to significant volatility.
Dependence on Key Personnel: Much of the future success of the company
depends on the continued service and availability of skilled personnel,
including technical, marketing and staff positions. Experienced personnel in the
information technology industry are in high demand and competition for their
talents is intense. There can be no assurance that the company will be able to
successfully retain and attract the key personnel it needs.
Currency and Customer Financing Risks: The company derives a significant
percentage of its non-U.S. revenues from its affiliates operating in local
currency environments and its results are affected by changes in the relative
values of non-U.S. currencies and the U.S. dollar. Further, inherent in the
company's customer financing business are risks related to the concentration of
credit risk and the creditworthiness of the customer, interest rate and currency
fluctuations on the associated debt and liabilities and the determination of
residual values. The company employs a number of strategies to manage these
risks, including the use of derivative financial instruments. Derivatives
involve the risk of non-performance by the counterparty. In addition, there can
be no assurance that the company's efforts to manage these risks will be
successful.
Distribution Channels: The company offers its products directly and through
a variety of third party distributors and resellers. Changes in the financial or
business condition of these distributors and resellers could subject the company
to losses and affect its ability to bring its products to market.
Acquisitions and Alliances: The company has made and expects to continue to
make acquisitions or enter into alliances from time to time. Acquisitions and
alliances present significant challenges and risks relating to the integration
of the business into the company, and there can be no assurances that the
company will manage acquisitions and alliances successfully.
ITEM 2. PROPERTIES:
At December 31, 1998, IBM's manufacturing and development facilities in the
United States had aggregate floor space of 41.7 million square feet, of which
34.0 million were owned and 7.7 million were leased. Of these amounts, 3.1
million square feet were vacant and 1.9 million square feet were being leased to
non-IBM businesses. Similar facilities in 17 other countries totaled 18.0
million square feet, of which 13.7 million were owned and 4.3 million were
leased. Of these amounts, .9 million square feet were vacant and .6 million
square feet were being leased to non-IBM businesses.
Although improved production techniques, productivity gains, and
infrastructure reduction actions have resulted in reduced manufacturing floor
space, continuous upgrading of facilities is essential to maintain technological
leadership, improve productivity and meet customer demand. For additional
information on expenditures for plant, rental machines and other property, refer
to "Investments" on page 59 of IBM's 1998 Annual Report to Stockholders which is
incorporated herein by reference.
4
EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 29, 1999):
OFFICER
AGE SINCE
--- -----------
Chairman of the Board of Directors and Chief Executive Officer
Louis V. Gerstner, Jr.(1)........................................................................ 57 1993
Senior Vice Presidents
J. Thomas Bouchard, Human Resources.............................................................. 58 1994
Nicholas M. Donofrio, Group Executive............................................................ 53 1995
William A. Etherington, Group Executive.......................................................... 57 1998
J. Bruce Harreld, Strategy....................................................................... 48 1995
Paul M. Horn, Research........................................................................... 52 1996
Abby F. Kohnstamm, Marketing..................................................................... 45 1998
Douglas L. Maine, Chief Financial Officer........................................................ 50 1998
Samuel J. Palmisano, Group Executive............................................................. 47 1997
Lawrence R. Ricciardi, General Counsel........................................................... 58 1995
Robert M. Stephenson, Group Executive............................................................ 60 1995
David M. Thomas, Group Executive................................................................. 49 1998
John M. Thompson, Group Executive................................................................ 56 1989
James T. Vanderslice, Group Executive............................................................ 58 1998
Vice Presidents
Mark Loughridge, Controller...................................................................... 45 1998
Daniel E. O'Donnell, Secretary................................................................... 51 1998
Jeffrey D. Serkes, Treasurer..................................................................... 40 1994
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(1) Member of the Board of Directors.
All officers are elected by the Board of Directors and serve until the next
election of officers in conjunction with the annual meeting of the stockholders
as provided in the By-laws. Each officer named above, with the exception of J.
Thomas Bouchard, J. Bruce Harreld, Douglas L. Maine, Lawrence R. Ricciardi and
Jeffery D. Serkes, has been an executive of IBM or its subsidiaries during the
past five years.
Mr. Bouchard was senior vice president, human resources, of U.S. West, Inc.,
a telecommunications company, from 1989 until joining IBM in 1994. Prior to
1989, he spent 15 years with United Technologies Corporation in a variety of
executive positions, including senior vice president of human resources.
Mr. Harreld was president of Boston Chicken, Inc., a company which operates
and franchises foodservice stores, from 1993 until joining IBM in 1995. Prior to
that he was senior vice president, marketing and information services, at Kraft
General Foods, Inc. where he also served as the company's chief information
officer from 1989 to 1992.
Mr. Maine was chief financial officer and executive vice president of MCI
Communications, a long-distance telecommunications company, from 1992 until
joining IBM in 1998. Prior to that he also served in several executive
positions, including controller, senior vice president-finance and president of
a 14 state operating division.
Mr. Ricciardi was president of RJR Nabisco, Inc., an international consumer
products company, from 1993 until joining IBM in 1995. From 1989 to 1993, he
also served as executive vice president and general counsel at RJR Nabisco, Inc.
Prior to 1989, he was executive vice president and general counsel of American
Express Travel Related Services Company, Inc.
Mr. Serkes was vice president and deputy treasurer at RJR Nabisco, Inc., an
international consumer products company, from 1993 until joining IBM in 1994.
From 1987 to 1993, he also served as vice president and assistant treasurer,
corporate finance; director, capital markets; and manager, foreign exchange at
RJR Nabisco, Inc.
5
ITEM 3. LEGAL PROCEEDINGS:
Refer to note P "Contingencies" on page 77 of IBM's 1998 Annual Report to
Stockholders which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:
Refer to pages 90 and 91 of IBM's 1998 Annual Report to Stockholders which
are incorporated herein by reference solely as they relate to this item.
IBM common stock is listed on the New York Stock Exchange, Chicago Stock
Exchange and Pacific Stock Exchange. There were 618,962 common stockholders of
record at March 1, 1999.
ITEM 6. SELECTED FINANCIAL DATA:
Refer to page 90 of IBM's 1998 Annual Report to Stockholders which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Refer to pages 54 through 63 of IBM's 1998 Annual Report to Stockholders
which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Refer to the section titled "Market Risk" on pages 60 and 61 of IBM's 1998
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Refer to pages 52 and 53, and 64 through 89 of IBM's 1998 Annual Report to
Stockholders which are incorporated herein by reference. Also refer to the
Financial Statement Schedule on page S-1 of this Form.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Refer to pages 5 through 7 of IBM's definitive Proxy Statement dated March
23, 1999, which are incorporated herein by reference. Also refer to Item 2
entitled "Executive Officers of the Registrant" in Part I of this Form.
ITEM 11. EXECUTIVE COMPENSATION:
Refer to pages 12 through 20 of IBM's definitive Proxy Statement dated March
23, 1999, which are incorporated herein by reference.
6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners:
Not applicable.
(b) Security Ownership of Management:
Refer to the section entitled "Ownership of Securities--Common Stock and
Total Stock-Based Holdings" appearing on pages 10 and 11 of IBM's
definitive Proxy Statement dated March 23, 1999, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Refer to the section entitled "Other Relationships" appearing on page 9 of
IBM's definitive Proxy Statement dated March 23, 1999, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this report:
1. Financial statements from IBM's 1998 Annual Report to Stockholders
which are incorporated herein by reference:
Report of Independent Accountants (page 53).
Consolidated Statement of Earnings for the years ended December 31,
1998, 1997 and 1996 (page 64).
Consolidated Statement of Financial Position at December 31, 1998 and
1997 (page 65).
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 (pages 66 and 67).
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996 (page 68).
Notes to Consolidated Financial Statements (pages 69 through 89).
2. Financial statement schedules required to be filed by Item 8 of this
Form:
SCHEDULE
PAGE NUMBER
- ----------- -------------
11 Report of Independent Accountants on Financial Statement Schedule
S-1 II Valuation and Qualifying Accounts
All other schedules are omitted as the required matter is not
present, the amounts are not significant or the information is shown
in the financial statements or the notes thereto.
7
3. Exhibits:
Included in this Form 10-K:
I-- Computation of Ratio of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
II-- Parents and Subsidiaries.
III-- Consent of Independent Accountants.
IV-- Additional Exhibits (a) Quarterly Consolidated Statement of
Earnings--Restated 1998.
V-- IBM's 1998 Annual Report to Stockholders, certain sections of
which have been incorporated herein by reference.
VI-- Powers of Attorney.
VII-- Financial Data Schedule.
Not included in this Form 10-K:
-- The Certificate of Incorporation of IBM is Exhibit (3)(i) to Form
8-K dated April 29, 1997, and is hereby incorporated by reference.
-- The By-laws of IBM as amended through October 27, 1998, is
Exhibit 3 to Form 10-Q for the quarter ended September 30, 1998,
and is hereby incorporated by reference.
-- The IBM 1997 Long-Term Performance plan, a compensatory plan, is
contained in Registration Statement No. 333-31305 on Form S-8,
filed on July 15, 1997, and is hereby incorporated by reference.
-- The IBM 1994 Long-Term Performance Plan, a management
compensatory plan, is contained in Registration Statement No.
33-53777 on Form S-8, filed on May 24, 1994, and is hereby
incorporated by reference.
-- Board of Directors compensatory plans, as described under
"Directors' Compensation" on pages 9 and 10 of IBM's definitive
Proxy Statement dated March 23, 1999, which is incorporated herein
by reference.
-- IBM Board of Directors Deferred Compensation and Equity Award
Plan is Exhibit X to Form 10-K for the year ended December 31,
1996, and is hereby incorporated by reference.
-- The Employment Agreement for L.V. Gerstner, Jr. is Exhibit 19 to
Form 10-Q dated March 31, 1993, and is hereby incorporated by
reference.
-- Amendment to Employment Agreement for L.V. Gerstner, Jr. dated as
of January 1, 1996, is Exhibit XI to Form 10-K for the year ended
December 31, 1996, and is hereby incorporated by reference.
-- Second Amendment to Employment Agreement for L.V. Gerstner, Jr.
dated as of November 17, 1997, is Exhibit VI to Form 10-K for the
year ended December 31, 1997, and is hereby incorporated by
reference.
-- The instruments defining the rights of the holders of the 7.25%
Notes due 2002 are Exhibits 4(a) through 4(l) to Registration
Statement No. 33-33590 on Form S-3, filed on February 22, 1990,
and are hereby incorporated by reference.
8
-- The instruments defining the rights of the holders of the 6.375%
Notes due 2000 and the 7.50% Debentures due 2013 are Exhibits 4(a)
through 4(l) to Registration Statement No. 33-49475(1) on Form
S-3, filed May 24, 1993, and are hereby incorporated by reference.
-- The instruments defining the rights of holders of the 8.375%
Debentures due 2019 are Exhibits 4(a)(b)(c) and (d) to
Registration Statement 33-31732 on Form S-3, filed on October 24,
1989, and are hereby incorporated by reference.
-- The instruments defining the rights of holders of the 7.00%
Debentures due 2025 and the 7.00% Debentures due 2045 are Exhibits
2 and 3 to Form 8-K, filed on October 30, 1995, and are hereby
incorporated by reference.
-- The instrument defining the rights of holders of the 7.125%
Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December
6, 1996, and is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the 6.45%
Notes due 2007 and the 6.22% Debentures due 2027 are Exhibits 2
and 3 to Form 8-K, filed on August 1, 1997, and is hereby
incorporated by reference.
-- The instruments defining the rights of the holders of the 6.50%
Debentures due 2028 is Exhibit 2 to Form 8-K, filed on January 8,
1998, and is hereby incorporated by reference.
-- The instrument defining the rights of the holders of the 5.375%
Notes due 2009 is Exhibit 2 to Form 8-K, filed on January 29,
1999, and is hereby incorporated by reference.
-- The IBM Supplemental Executive Retirement Plan is Exhibit IX to
Form 10-K for the year ended December 31, 1994, and is hereby
incorporated by reference.
-- The IBM Extended Tax Deferred Savings Plan is Exhibit X to Form
10-K for the year ended December 31, 1994, and is hereby
incorporated by reference.
-- IBM's definitive Proxy Statement dated March 23, 1999, certain
sections of which have been incorporated herein by reference.
(b) Reports on Form 8-K:
A Form 8-K dated October 20, 1998, was filed with respect to the
company's financial results for the periods ended September 30,
1998, and included unaudited consolidated financial statements
for the period ended September 30, 1998.
A Form 8-K dated December 16, 1998, was filed for the press
release announcing the execution of definitive agreements between
IBM and AT&T, pursuant to which, among other things, AT&T will
acquire the assets of the IBM Global Network from IBM, is hereby
incorporated by reference.
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant)
By: /s/ LOUIS V. GERSTNER, JR.
------------------------------------------
(Louis V. Gerstner, Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER)
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ DOUGLAS L. MAINE Senior Vice President, March 29, 1999
- ------------------------------ Chief
(Douglas L. Maine) Financial Officer
/s/ MARK LOUGHRIDGE Vice President and March 29, 1999
- ------------------------------ Controller
(Mark Loughridge)
CATHLEEN BLACK Director
KENNETH I. CHENAULT Director
JUERGEN DORMANN Director
NANNERL O. KEOHANE Director
CHARLES F. KNIGHT
Director
MINORU MAKIHARA Director By: /s/ DANIEL E. O'DONNELL
LUCIO A. NOTO Director -------------------------------------
JOHN B. SLAUGHTER Director (Daniel E. O'Donnell)
ALEX TROTMAN Director ATTORNEY-IN-FACT
LODEWIJK C. van WACHEM Director
CHARLES M. VEST Director March 29, 1999
10
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of
International Business Machines Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 21, 1999, appearing on page 53 of the 1998 Annual Report to
Stockholders of International Business Machines Corporation, (which report and
consolidated financial statements are incorporated by reference in Annual Report
on Form 10-K) also included an audit of the Financial Statement Schedule in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, N.Y. 10019
January 21, 1999
11
SCHEDULE II
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31:
(DOLLARS IN MILLIONS)
BALANCE AT BALANCE AT
BEGINNING NET END
DESCRIPTION OF PERIOD CHANGE(A) OF PERIOD
- ------------------------------------------------------------------------------ ------------- ----------- -------------
1998
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 775 $ 19 $ 794
----- ----- -----
----- ----- -----
--Non-current............................................................. $ 164 $ 31 $ 195
----- ----- -----
----- ----- -----
1997
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 787 $ (12) $ 775
----- ----- -----
----- ----- -----
--Non-current............................................................. $ 164 $ 0 $ 164
----- ----- -----
----- ----- -----
1996
Account deducted from assets:
Allowance for doubtful accounts
--Current................................................................. $ 790 $ (3) $ 787
----- ----- -----
----- ----- -----
--Non-current............................................................. $ 174 $ (10) $ 164
----- ----- -----
----- ----- -----
- ------------------------
(A) Includes additions charged to costs and expenses less accounts written off
and translation adjustments.
Note--
The receivables upon which the above allowances are based are highly
diversified by geography, industry and individual customer. The allowances for
receivable losses at year-end 1998 approximate less than three percent of the
company's current receivables and less than one and one-half percent the
company's non-current receivables. The allowances for receivable losses at
year-end 1997 approximate less than three and one-quarter percent of the
company's current receivables and less than one and one-half percent of the
company's non-current receivables. The allowances for receivable losses at
year-end 1996 approximate less than three and one-half percent of the company's
current receivables and one and one-half percent of the company's non-current
receivables.
S-1
EXHIBIT INDEX
REFERENCE
NUMBER
PER
ITEM 601 OF EXHIBIT
REGULATION NUMBER IN
S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K
- ------------- ----------------------------------------------------------------------------------- ----------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not applicable
(3) Certificate of Incorporation and By-laws.
The Certificate of Incorporation of IBM is Exhibit (3)(i) to Form 8-K dated April
29, 1997, and is hereby incorporated by reference.
The By-laws of IBM as amended through October 27, 1998, is Exhibit 3 to Form 10-Q
for the quarter ended September 30, 1998, and is hereby incorporated by
reference.
(4) Instruments defining the rights of security holders.
The instruments defining the rights of the holders of the 7.25% Notes due 2002 are
Exhibits 4(a) through 4(l) to Registration Statement No. 33-33590 on Form S-3,
filed February 22, 1990, and are hereby incorporated by reference.
The instruments defining the rights of the holders of the 6.375% Notes due 2000 and
the 7.50% Debentures due 2013 are Exhibits 4(a) through 4(l) to Registration
Statement No. 33-49475(1) on Form S-3, filed on May 24, 1993, and are hereby
incorporated by reference.
The instruments defining the rights of the holders of the 8.375% Debentures due
2019 are Exhibits 4(a)(b)(c) and (d) to Registration Statement No. 33-31732 on
Form S-3, filed on October 24, 1989, are hereby incorporated by reference.
The instruments defining the rights of the holders of the 7.00% Debentures due 2025
and the 7.00% Debentures due 2045 are Exhibits 2 and 3 to Form 8-K, filed on
October 30, 1995, and are hereby incorporated by reference.
The instrument defining the rights of the holders of the 7.125% Debentures due 2096
is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated
by reference.
The instruments defining the rights of the holders of the 6.5% Notes due 2007 and
the 6.22% Debentures due 2027 are Exhibits 2 and 3 to Form 8-K, filed on August
1, 1997, and is hereby incorporated by reference.
The instrument defining the rights of the holders of the 6.5% Debentures due 2028
is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by
reference.
The instrument defining the rights of the holders of the 5.375% Notes due 2009 is
Exhibit 2 to Form 8-K, filed on January 29, 1999, and is hereby incorporated by
reference.
(9) Voting trust agreement. Not applicable
(10) Material contracts.
The IBM 1997 Long-Term Performance plan, a compensatory plan, is contained in
Registration Statement No. 333-31305 on Form S-8, filed on July 15, 1997, and is
hereby incorporated by reference.
A copy of the IBM 1994 Long-Term Performance Plan is contained in Registration
Statement No. 33-53777 on Form S-8, filed on May 24, 1994, and is hereby
incorporated by reference.
REFERENCE
NUMBER
PER
ITEM 601 OF EXHIBIT
REGULATION NUMBER IN
S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K
- ------------- ----------------------------------------------------------------------------------- ----------------
Board of Directors compensatory arrangements as described under "Directors'
Compensation" on pages 9 and 10 of IBM's definitive Proxy Statement dated March
23, 1999, and is hereby incorporated by reference.
The IBM Supplemental Executive Retirement Plan is Exhibit IX to Form 10-K for the
year ended December 31, 1994, and is hereby incorporated by reference.
The IBM Extended Tax Deferred Savings Plan is Exhibit X to Form 10-K for the year
ended December 31, 1994, and is hereby incorporated by reference.
The IBM Board of Directors Deferred Compensation and Equity Award Plan is Exhibit X
to Form 10-K for the year ended December 31, 1996, and is hereby incorporated by
reference.
The IBM Non-Employee Directors Stock Option Plan is Appendix B to IBM's definitive
Proxy Statement dated March 14, 1995, and is hereby incorporated by reference.
The Employment Agreement for L.V. Gerstner, Jr. is Exhibit 19 to Form 10-Q dated
March 31, 1993, and is hereby incorporated by reference.
Amendment to Employment Agreement for L.V. Gerstner, Jr. dated as of January 1,
1996, is Exhibit XI to Form 10-K for the year ended December 31, 1996, and is
hereby incorporated by reference.
Second Amendment to Employment Agreement for L.V. Gerstner, Jr., dated as of
November 17, 1997, is Exhibit VI to Form 10-K for the year ended December 31,
1997, and is hereby incorporated by reference.
(11) Statement re computation of per share earnings.
The statement re computation of per share earnings is note T "Earnings Per Share of
Common Stock" on page 79 of IBM's 1998 Annual Report to Stockholders, which is
incorporated herein by reference.
(12) Statement re computation of ratios. I
(13) Annual report to security holders. V
(18) Letter re change in accounting principles. Not applicable
(19) Previously unfiled documents. Not applicable
(21) Subsidiaries of the registrant. II
(22) Published report regarding matters submitted to vote of security holders. Not applicable
(23) Consents of experts and counsel. III
(24) Powers of attorney. VI
(27) Financial Data Schedule. VII
(28) Information from reports furnished to state insurance regulatory authorities. Not applicable
(99) Additional exhibits. IV
EXHIBIT I
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)
YEAR ENDED DECEMBER 31:
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Earnings before income taxes and change in accounting
principles(1).............................................. $ 8,997 $ 9,054 $ 8,599 $ 7,910 $ 5,253
Add:
Fixed charges, excluding capitalized interest.............. 2,036 2,000 1,942 1,972 2,450
--------- --------- --------- --------- ---------
Earnings as adjusted....................................... $ 11,033 $ 11,054 $ 10,541 $ 9,882 $ 7,703
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed charges:
Interest expense........................................... $ 1,559 $ 1,573 $ 1,545 $ 1,591 $ 2,025
Capitalized interest....................................... 28 32 31 23 20
Portion of rental expense representative of interest....... 477 427 397 381 425
--------- --------- --------- --------- ---------
Total fixed charges.......................................... $ 2,064 $ 2,032 $ 1,973 $ 1,995 $ 2,470
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Preferred stock dividends(2)................................. 29 29 32 37 144
--------- --------- --------- --------- ---------
Combined fixed charges and preferred stock dividends......... $ 2,093 $ 2,061 $ 2,005 $ 2,032 $ 2,614
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges........................... 5.3 5.4 5.3 5.0 3.1
Ratio of earnings to combined fixed charges and preferred
stock dividends............................................ 5.3 5.4 5.3 4.9 2.9
- ------------------------
(1) Earnings before income taxes and changes in accounting principle excludes
both amortization expense of capitalized interest as well as the company's
share in the income and losses of less-than-fifty-percent-owned affiliates.
(2) The company reported preferred stock dividends of $20 million for year-end
1998, 1997 and 1996, respectively. Excluded from the ratio computation for
the year end 1995 are transaction costs of $42 million relating to the
repurchase of Series A 7 1/2 percent preferred stock depositary shares.
Included are preferred stock dividends of $20 million, for 1998, 1997, and
1996, respectively, or $29 million for 1998 and 1997 and $32 million for
1996 representing the pre-tax income which would be required to cover such
dividend requirements based on the company's effective tax rate for year end
1998, 1997 and 1996, respectively. For the 1995 and 1994 year ends,
preferred stock dividends are also on a pre-tax basis.
EXHIBIT II
PARENTS AND SUBSIDIARIES
PARENTS AND SUBSIDIARIES
AS OF DECEMBER 31, 1998
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------------- -------------------
Registrant:
International Business Machines Corporation..................... New York
Subsidiaries:
IBM Credit Corporation.......................................... Delaware 100
Lotus Development Corporation................................... Massachusetts 100
Tivoli Systems Inc. ............................................ Delaware 100
IBM World Trade Corporation..................................... Delaware 100
IBM Asia Pacific Service Corporation.......................... Japan 100
IBM China/Hong Kong Corporation............................... Delaware 100
IBM World Trade Asia Corporation.............................. Delaware 100
WTC Insurance Corporation, Ltd. .............................. Bermuda 100
IBM Argentina, S.A. .......................................... Argentina 100(C)
IBM Australia Ltd. ........................................... Australia 100
IBM Bahamas Ltd. ............................................. Bahamas 100
IBM de Bolivia, S.A. ......................................... Bolivia 100
IBM Brasil-Industria, Maquinas e Servicos Ltda................ Brazil 100(C)
IBM Foreign Sales Corporation................................. Barbados 100
General Business Machines Corp. .............................. British V.I. 10
IBM Canada Credit Services Company............................ Canada 100
IBM Canada Limited--IBM Canada Limitee........................ Canada 100
IBM China Company Limited..................................... China 100
IBM de Chile, S.A.C........................................... Chile 100(C)
IBM de Colombia, S.A. ........................................ Colombia 90(C)
IBM Middle East FZE........................................... United Arab Emirates 100
IBM Middle East Dubai Airport Free Zone FZE................... United Arab Emirates 100
IBM del Ecuador, C.A.......................................... Ecuador 100
IBM Global Services India Pvt. Ltd............................ India 80(E)
Tata IBM Ltd. ................................................ India 50
IBM Japan, Ltd. .............................................. Japan 100
IBM Korea, Inc. .............................................. Korea (South) 100
Mesiniaga Berhad.............................................. Malaysia 10
Sunway Computer Services Sdn. Bhd............................. Malaysia 20
Arrendadora de Tecnologia e Informatica, S.A. de C.V.,
Organizacion Auxiliar del Credito........................... Mexico 86(C)
Financiera de Tecnologia e Informatica S.A. de C.A., Sociedad
Financiera del Objecto Limitado Filial...................... Mexico 100(C)
Grupo IBM Mexico, S.A. de C.V................................. Mexico 100(A)
IBM de Mexico, S.A. .......................................... Mexico 100(A)
IBM New Zealand Ltd. ......................................... New Zealand 100
IBM del Peru, S.A. ........................................... Peru 100
IBM World Trade Asia-Pacific Corp. ........................... Philippines 98(A)
IBM Philippines, Incorporated................................. Philippines 100(A)
PARENTS AND SUBSIDIARIES
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------------- -------------------
IBM Romania Srl............................................... Romania 100
IBM Taiwan Corporation........................................ Taiwan 100(A)
Thai Systems Corporation Ltd. ................................ Thailand 100
IBM Thailand Company Ltd. .................................... Thailand 100(A)
IBM del Uruguay, S.A. ........................................ Uruguay 100
IBM de Venezuela, S.A. ....................................... Venezuela 100
IBM Vietnam Company........................................... Vietnam 100
IBM Central Europe & Russia Inc. ............................. Delaware 100
IBM Oesterreich Internationale Bueromaschinen Gesellschaft
m.b.H. ..................................................... Austria 100
IBA (International Belarussia Alliance)....................... Belarus Republic 45
International Business Machines of Belgium S.A. .............. Belgium 100(C)
IBM Botswana (PTY) Limited.................................... Botswana 100
IBM Bulgaria Ltd. ............................................ Bulgaria 100
IBM Croatia Ltd./ IBM Hrvatska d.o.o. ........................ Croatia 100
IBM Ceska Republika spol. s.r.o. ............................. Czech Republic 100
IBM Eesti Osauhing (IBM Estonia Ou)........................... Estonia 100
Compagnie IBM France, S.A. ................................... France 100(A)
IBM Eurocoordination.......................................... France --(B)
IBM Europe Middle East Africa................................. France 100(C)
IBM Beteiligungs GmbH......................................... Germany 100
IBM Deutschland GmbH.......................................... Germany 82(C)
International Business Machines Corporation Magyarorszagi
Kft......................................................... Hungary 100
IBM International Treasury Services Company................... Ireland --(D)
IBM Ireland Ltd. ............................................. Ireland 100
IBM Italia S.p.A.............................................. Italy 96(C)
IBM Hellas Information Handling Systems S.A. ............... Greece 100(C)
IBM Israel Ltd. ............................................ Israel 100(C)
Companhia IBM Portuguesa, S.A. ............................. Portugal 100
IBM (International Business Machines) Turk Ltd. Sirketi..... Turkey 98(C)
IBM South Africa Group Ltd. ................................ South Africa 95(C)
IBM East Africa Limited....................................... Kenya 67(C)
Sabiedriba ar irobezotu IBM Latvija........................... Latvia 100
QuanTech S.A.L. .............................................. Lebanon 15
IBM Lietuva................................................... Lithuania 100
IBM Global Holdings B.V....................................... Netherlands 100
IBM International Centre for Asset Management N.V. ........... Netherlands 100
IBM Nederland N.V. ........................................... Netherlands 100
IBM Polska Sp. z.o.o. ........................................ Poland 100
International Business Machines A/S........................... Norway 60(C)
IBM East Europe/Asia Ltd. .................................... Russia 100
IBM Slovensko spol.s.r.o. .................................... Slovak Republic 100
IBM Slovenija d.o.o. ......................................... Slovenia 100
International Business Machines, S.A. ........................ Spain 100(C)
IBM Nordic Aktiebolag....................................... Sweden 100
IBM Danmark A/S............................................. Denmark 100
PARENTS AND SUBSIDIARIES
PERCENTAGE OF
STATE OR COUNTRY VOTING SECURITIES
OF INCORPORATION OWNED BY ITS
OR ORGANIZATION IMMEDIATE PARENT
------------------------- -------------------
Oy International Business Machines AB....................... Finland 100
IBM Svenska Aktiebolag...................................... Sweden 100
IBM International Centre for Asset Management A.G. ........... Switzerland 100
IBM (Schweiz)--IBM (Suisse)-- IBM (Svizzera)-- IBM
(Switzerland)............................................... Switzerland 100
IBM North Africa.............................................. Tunisia 99(C)
IBM United Kingdom Holdings Ltd. ............................. United Kingdom 100
International Business Machines Limited....................... United Kingdom 100
IBM Zimbabwe (Private) Ltd. .................................. Zimbabwe 100
- ------------------------
(A) Minor percentage held by other IBM shareholders, subject to repurchase
option.
(B) IBM Eurocoordination, is owned approximately 14% each by subsidiaries
located in France, Germany, Italy and the United Kingdom and approximately
4% each by subsidiaries located in Austria, Belgium, Denmark, Finland,
Ireland, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland and by
four other minority shareholders.
(C) Remaining percentage owned by another wholly-owned IBM company.
(D) IBM France and IBM Finland each own 16.6% and IBM Denmark and IBM
Switzerland each own 33.3% of IBM International Treasury Services Company.
(E) Minor percentage held by another IBM shareholder.
EXHIBIT III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777,
33-60225, 33-60227, 33-60237, 33-60815, 333-01411, 333-09055, 333-23315,
333-31305, 333-41813, 333-44981 and 333-48435) and the Prospectuses constituting
part of the Registration Statements on Form S-3 (Nos. 33-50537, 33-65119,
33-65119(1), 333-03763, 333-21073, 333-27669, 333-40669 and 333-70521) of
International Business Machines Corporation of our report dated January 21,
1999, appearing on page 53 of the 1998 Annual Report to Stockholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 11 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, N.Y. 10019
March 26, 1999
EXHIBIT IV
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ADDITIONAL EXHIBITS
Effective December 31, 1998, the company adopted Statement of Financial
Accounting Standards 131, "Disclosures About Segments of an Enterprise and
Related Information." As a result of adopting this standard the company has
changed its revenue and cost lines in the Consolidated Statement of Earnings
generally aligning with the new segment information. The 1998 quarterly
Consolidated Statements of Earnings are restated in Exhibit IVa. Additional
information about the company's segments can be found in note Y, "Segment
Information," on pages 84 through 89 of the 1998 Annual Report to Stockholders.
EXHIBIT IV(A)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY CONSOLIDATED STATEMENT OF EARNINGS-RESTATED*
1998
FIRST SECOND THIRD FOURTH
QUARTER+ QUARTER+ QUARTER+ QUARTER+ FULL YEAR
----------- ----------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
Revenue:
Hardware segments........................................ $ 7,318 $ 7,714 $ 8,920 $ 11,467 $ 35,419
Global Services segment.................................. 6,341 6,969 7,046 8,560 28,916
Software segment......................................... 2,644 2,866 2,808 3,545 11,863
Global Financing segment................................. 719 712 679 767 2,877
Enterprise Investments segment/Other..................... 596 562 642 792 2,592
----------- ----------- ----------- ----------- ---------
Total revenue............................................ 17,618 18,823 20,095 25,131 81,667
Cost:
Hardware segments........................................ $ 5,219 $ 5,347 $ 6,101 $ 7,547 24,214
Global Services segment.................................. 4,630 5,065 5,222 6,208 21,125
Software segment......................................... 540 548 544 628 2,260
Global Financing segment................................. 380 377 351 386 1,494
Enterprise Investments segment/Other..................... 399 340 410 553 1,702
----------- ----------- ----------- ----------- ---------
Total cost............................................... 11,168 11,677 12,628 15,322 50,795
Gross profit............................................. 6,450 7,146 7,467 9,809 30,872
Operating expenses:
Selling, general and administrative...................... 3,719 3,812 4,057 5,074 16,662
Research, development and engineering.................... 1,179 1,220 1,240 1,407 5,046
----------- ----------- ----------- ----------- ---------
Total operating expenses................................. 4,898 5,032 5,297 6,481 21,708
Operating income......................................... 1,552 2,114 2,170 3,328 9,164
Other income, principally interest....................... 150 130 122 187 589
Interest expense......................................... 179 161 160 213 713
----------- ----------- ----------- ----------- ---------
Income before income taxes............................... 1,523 2,083 2,132 3,302 9,040
Provision for income taxes............................... 487 631 638 956 2,712
----------- ----------- ----------- ----------- ---------
Net income............................................... 1,036 1,452 1,494 2,346 6,328
Preferred stock dividends................................ 5 5 5 5 20
----------- ----------- ----------- ----------- ---------
Net income applicable
to common shareholders................................... $ 1,031 $ 1,447 $ 1,489 $ 2,341 $ 6,308
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
* See text in Exhibit IV
+ Unaudited