-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fbkzgs3BgSlzHqKT+G7Nt86A84nTSQfy7PRMyCpk+IcM4P+Bi/s43/PjKOtdmyx8 otKDJEghf4J/O4U6OJiNdA== 0000912057-97-010483.txt : 19970328 0000912057-97-010483.hdr.sgml : 19970328 ACCESSION NUMBER: 0000912057-97-010483 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL BUSINESS MACHINES CORP CENTRAL INDEX KEY: 0000051143 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 130871985 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02360 FILM NUMBER: 97565345 BUSINESS ADDRESS: STREET 1: ONE OLD ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9147651900 MAIL ADDRESS: STREET 1: ONE OLD ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996 1-2360 (Commission File Number) INTERNATIONAL BUSINESS MACHINES CORPORATION (Exact name of registrant as specified in its charter)
NEW YORK 13-0871985 (State of incorporation) (IRS employer identification number) ARMONK, NEW YORK 10504 (Address of principal executive offices) (Zip Code)
914-765-1900 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act:
VOTING SHARES OUTSTANDING NAME OF EACH EXCHANGE TITLE OF EACH CLASS AT MARCH 11, 1997 ON WHICH REGISTERED - -------------------------------------------------------------- ----------------- ------------------------------ Capital stock, par value $1.25 per share 498,985,928 New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Depositary shares each representing one-fourth of a share of New York Stock Exchange 7 1/2% preferred stock, par value $.01 per share 6 3/8% Notes due 1997 New York Stock Exchange 6 3/8% Notes due 2000 New York Stock Exchange 7 1/4% Notes due 2002 New York Stock Exchange 7 1/2% Debentures due 2013 New York Stock Exchange 8 3/8% Debentures due 2019 New York Stock Exchange 7% Debentures due 2025 New York Stock Exchange 7% Debentures due 2045 New York Stock Exchange 7 1/8% 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 11, 1997 was $72.9 billion. Documents incorporated by reference: Portions of IBM's Annual Report to Stockholders for the year ended December 31, 1996 into Parts I and II of Form 10-K. Portions of IBM's definitive Proxy Statement dated March 18, 1997 into Part III of Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS: IBM develops, manufactures and sells advanced information processing products, including computers and microelectronic technology, software, networking systems and information technology-related services. The company offers value through its worldwide sales and service units in North America, Europe/Middle East/Africa, Asia Pacific and Latin America by providing comprehensive and competitive product choices. The value of unfilled orders is not a meaningful indicator of future revenues due to the significant proportion of revenue from services, the volume of products delivered from shelf inventories, and the shortening of product delivery schedules. Therefore, the company believes that backlog information is not material to an understanding of its business. IBM owns or is licensed under a number of patents relating to its products. Licenses under patents owned by IBM have been and are being granted to others under reasonable terms and conditions. IBM believes its business as a whole is not materially dependent upon any particular patent or license, or any particular group of patents or licenses. The following information is included in IBM's 1996 Annual Report to Stockholders and is incorporated herein by reference: Segment information and revenue by classes of similar products or services--Pages 82 and 83. Financial information by geographic areas--Pages 84 and 85. Amount spent during each of the last three years on research and development activities-- Page 68. Financial information regarding environmental activities--Page 69. The number of persons employed by the registrant--Page 55. The management discussion overview--Page 44. ITEM 2. PROPERTIES: At December 31, 1996, IBM's manufacturing and development facilities in the United States had aggregate floor space of 49.7 million square feet, of which 41.3 million was owned and 8.4 million was leased. Of these amounts, 9.1 million square feet was vacant and 2.5 million square feet was being leased to non-IBM businesses. Similar facilities in 15 other countries totaled 15.1 million square feet, of which 12.2 million was owned and 2.9 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 restructuring actions have resulted in reduced manufacturing floor space, continuous upgrading of facilities is essential to maintain technological leadership, improve productivity and meet customer demand. For additional information on expenditures for plant, rental machines and other property, refer to "Investments" on page 52 of IBM's 1996 Annual Report to Stockholders which is incorporated herein by reference. 1 EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 26, 1997):
OFFICER AGE SINCE --- ----------- Chairman of the Board of Directors and Chief Executive Officer Louis V. Gerstner, Jr.(1).................................................... 55 1993 Senior Vice Presidents J. Thomas Bouchard, Human Resources.......................................... 56 1994 Nicholas M. Donofrio, Group Executive........................................ 51 1995 J. Bruce Harreld, Strategy................................................... 46 1995 Paul M. Horn, Research....................................................... 50 1996 Ned C. Lautenbach, Group Executive........................................... 53 1987 Lawrence R. Ricciardi, General Counsel....................................... 56 1995 Robert M. Stephenson, Group Executive........................................ 58 1995 G. Richard Thoman, Chief Financial Officer................................... 52 1993 John M. Thompson, Group Executive............................................ 54 1989 Vice Presidents John E. Hickey, Secretary.................................................... 53 1994 John R. Joyce, Controller.................................................... 43 1996 Jeffrey D. Serkes, Treasurer................................................. 38 1994
- ------------------------ (1) Member of the Board of Directors. All officers are elected by the Board of Directors and serve until the next election of officers in conjunction with the annual meeting of the stockholders as provided in the By-laws. Each officer named above, with the exception of J. Thomas Bouchard, Louis V. Gerstner, Jr., J. Bruce Harreld, Lawrence R. Ricciardi, Jeffrey D. Serkes, and G. Richard Thoman, has been an executive of IBM or its subsidiaries during the past five years. Mr. Bouchard was senior vice president, human resources, of U.S. West, Inc., a telecommunications company, from 1989 until joining IBM in 1994. Prior to 1989, he spent 15 years with United Technologies Corporation in a variety of executive positions, including senior vice president of human resources. Mr. Gerstner was the chairman of the board and chief executive officer of RJR Nabisco Holdings Corporation, an international consumer products company, from 1989 until joining IBM in 1993. From 1985 to 1989, he was president of American Express Company, and from 1983 to 1989, he was chairman and chief executive officer of American Express Travel Related Services Co., Inc. Mr. Harreld was president of Boston Chicken, Inc., a company which operates and franchises foodservice stores, from 1993 until joining IBM in 1995. Prior to that he was senior vice president, marketing and information services, at Kraft General Foods, Inc. where he also served as the company's chief information officer from 1989 to 1992. Mr. Ricciardi was president of RJR Nabisco, Inc., an international consumer products company, from 1993 until joining IBM in 1995. From 1989 to 1993, he also served as executive vice president and general counsel at RJR Nabisco, Inc. Prior to 1989, he was executive vice president and general counsel of American Express Travel Related Services Company, Inc. Mr. Serkes was vice president and deputy treasurer at RJR Nabisco, Inc., an international consumer 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. 2 Mr. Thoman was the president of Nabisco International, Inc., a food company, from 1992 until joining IBM in 1993. From 1985 to 1989, he was president of American Express Travel Related Services International, and co-chief executive officer of American Express Travel Related Services Co., Inc., and chief executive officer of American Express International from 1989 to 1992. ITEM 3. LEGAL PROCEEDINGS: Refer to note L "Contingencies" on page 69 of IBM's 1996 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 page 86 and 87 of IBM's 1996 Annual Report to Stockholders which are incorporated herein by reference. IBM common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. There were 615,605 common stockholders of record at March 11, 1997. ITEM 6. SELECTED FINANCIAL DATA: Refer to page 86 of IBM's 1996 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 44 through 55 of IBM's 1996 Annual Report to Stockholders which are incorporated herein by reference. On January 28, 1997, the IBM Board of Directors declared a two-for-one common stock split, subject to the approval of stockholders of an increase in the number of common shares authorized from 750 million to 1,875 million. The record date for the split is currently expected to be on or after May 9, 1997, with distribution of the split shares to follow on or after May 27, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Refer to pages 42 and 43 and 56 through 85 of IBM's 1996 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 and the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" appearing on page 11 of IBM's definitive Proxy Statement dated March 18, 1997 which are incorporated herein by reference. Also refer to Item 2 entitled "Executive Officers of the Registrant" in Part I of this Form. 3 ITEM 11. EXECUTIVE COMPENSATION: Refer to pages 13 through 23 of IBM's definitive Proxy Statement dated March 18, 1997, which are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: (a) Security Ownership of Certain Beneficial Owners: Refer to the section entitled "Security Ownership of Certain Beneficial Owners" appearing on page 11 of IBM's definitive Proxy Statement dated March 18, 1997, which is incorporated herein by reference. (b) Security Ownership of Management: Refer to the section entitled "Common Stock and Total Stock-Based Holdings of Management" appearing on pages 12 and 13 of IBM's definitive Proxy Statement dated March 18, 1997, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Refer to the section entitled "Other Relationships" appearing on page 10 of IBM's definitive Proxy Statement dated March 18, 1997, 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 1996 Annual Report to Stockholders which are incorporated herein by reference: Report of Independent Accountants (page 43). Consolidated Statement of Earnings for the years ended December 31, 1996, 1995 and 1994 (page 56). Consolidated Statement of Financial Position at December 31, 1996 and 1995 (page 57). Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (page 58). Consolidated Statement of Stockholders' Equity at December 31, 1996, 1995 and 1994 (page 59). Notes to Consolidated Financial Statements (pages 60 through 85) 2. Financial statement schedules required to be filed by Item 8 of this Form:
SCHEDULE PAGE NUMBER - ----------- ------------- 8 Report of Independent Accountants on Financial Statement Schedule. II Valuation and Qualifying Accounts S-1
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. 4 3. Exhibits: Included in this Form 10-K: I--Computation of Fully Diluted Earnings Per Share. II-- Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends. III--Parents and Subsidiaries. IV--Consent of Independent Accountants. V-- Additional Exhibits (a) Supplemental Consolidated Statement of Earnings--1996 and 1995. VI--The By-laws of IBM as amended through April 30, 1996. VII-- IBM's 1996 Annual Report to Stockholders, certain sections of which have been incorporated herein by reference. VIII--Powers of Attorney. IX--Financial Data Schedule. Not included in this Form 10-K: -- The Certificate of Incorporation of IBM is Exhibit VI to Form 10-K for the year ended December 31, 1993, and is hereby incorporated by reference. -- The IBM 1994 Long-Term Performance Plan, a management compensatory plan, is contained in Registration Statement No. 33-53777 on Form S-8, filed on May 24, 1994, and is hereby incorporated by reference. -- Board of Directors compensatory plans, as described under "Directors' Compensation" on pages 10 and 11 of IBM's definitive Proxy Statement dated March 18, 1997, 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, 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. -- The instruments defining the rights of the holders of the 6 3/8% Notes due 1997 and the 7 1/4% 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 3/8% Notes due 2000 and the 7 1/2% 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. 5 -- The instruments defining the rights of holders of the 8 3/8% 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% Debentures due 2025 and the 7% 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 1/8% Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, 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 as amended and restated effective January 1, 1996, is Exhibit 10 to Form 10-Q for the quarter ended March 31, 1996, and is hereby incorporated by reference. -- The IBM Tax Deferred Savings Plan as amended and restated as of June 15, 1996, is Exhibit 4 to Registration Statment No. 333-09055 on form S-8, filed on July 29, 1996, and is hereby incorporated by reference. -- IBM's definitive Proxy Statement dated March 18, 1997, certain sections of which have been incorporated herein by reference. (b) Reports on Form 8-K: A Form 8-K dated October 21, 1996, was filed with respect to the company's financial results for the periods ended September 30, 1996 and included unaudited consolidated financial statements for the period ended September 30, 1996. A Form 8-K dated December 5, 1996 and a Form 8-K/A dated December 6, 1996, were filed to incorporate by reference into Registration Statement No. 33-65119 on Form S-3, effective February 7, 1996, the Underwriting Agreement dated December 3, 1996, among International Business Machines Corporation, Salomon Brothers Inc., Chase Securities Inc., CS First Boston Corporation, Merrill Lynch, Pierce, Fenner and & Smith Incorporated and Morgan Stanley & Co. Incorporated. In addition, the Form of the $850 million 7 1/8% Debenture due 2096 was incorporated by reference into Registration Statement No. 33-65119 on Form S-3, effective February 7, 1996 and were part of this Form 8-K and Form 8-K/A. No financial statements were filed with the Form 8-K or Form 8-K/A. 6 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 26, 1997 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/ (G. RICHARD THOMAN) Senior Vice President - ------------------------------ and Chief Financial March 26, 1997 (G. Richard Thoman) Officer /s/ (JOHN R. JOYCE) Vice President and - ------------------------------ Controller March 26, 1997 (John R. Joyce) CATHLEEN BLACK Director HAROLD BROWN Director JUERGEN DORMANN Director NANNERL O. KEOHANE Director CHARLES F. KNIGHT Director LUCIO A. NOTO Director By: /s/JOHN E. HICKEY JOHN B. SLAUGHTER Director (John E. Hickey) ALEX TROTMAN Director Attorney-in-fact CHARLES M. VEST Director March 26, 1997
7 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 20, 1997, appearing on page 43 of the 1996 Annual Report to Stockholders of International Business Machines Corporation, (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, N.Y. 10036 January 20, 1997 8 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 - ------------------------------------------------------------------------------ ------------- ------------- ------------- 1996 Account deducted from assets: Allowance for doubtful accounts --Current................................................................. $ 790 $ (3) $ 787 ----- --- ----- ----- --- ----- --Non-current............................................................. $ 174 $ (10) $ 164 ----- --- ----- ----- --- ----- 1995 Account deducted from assets: Allowance for doubtful accounts --Current................................................................. $ 719 $ 71 $ 790 ----- --- ----- ----- --- ----- --Non-current............................................................. $ 166 $ 8 $ 174 ----- --- ----- ----- --- ----- 1994 Account deducted from assets: Allowance for doubtful accounts --Current................................................................. $ 683 $ 36 $ 719 ----- --- ----- ----- --- ----- --Non-current............................................................. $ 187 $ (21) $ 166 ----- --- ----- ----- --- -----
- ------------------------ (A) Includes additions charged to costs and expenses less accounts written off and translation adjustments. Note-- The receivables upon which the above allowances are based are highly diversified by geography, industry and individual customer. The allowances for receivable losses for the year ended 1996 approximate less than three and one-half percent of the company's current receivables and less than one and one- half percent of the company's non-current receivables. The allowances for receiveable losses for the year ended 1995 approximate less than three and one-half percent of the company's current receivables and one and one-half percent of non-current receivables. The allowances for receivable losses for the year ended 1994 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. 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 VI to Form 10-K for the year ended December 31, 1993, and is hereby incorporated by reference. The By-laws of IBM as amended through April 30, 1996. VI (4) Instruments defining the rights of security holders. The instruments defining the rights of the holders of the 6 3/8% Notes due 1997 and the 7 1/4% 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 3/8% Notes due 2000 and the 7 1/2% 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 3/8% 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% Debentures due 2025 and the 7% 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 1/8% Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated by reference. (9) Voting trust agreement. Not applicable (10) Material contracts. 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. Board of Directors compensatory arrangements as described under "Directors' Compensation" on page 10 of IBM's definitive Proxy Statement dated March 18, 1997, 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 as amended and restated effective January 1, 1996, is Exhibit 10 to Form 10-Q for the quarter ended March 31, 1996, 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, 1995, 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.
REFERENCE NUMBER PER ITEM 601 OF EXHIBIT REGULATION NUMBER IN S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K - --------------- ---------------------------------------------------------------------------------- ---------------- 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. The IBM Tax Deferred Savings Plan as amended and restated as of June 15, 1996, is Exhibit 4 to Registration Statement No. 333-09055 on Form S-8, filed on July 29, 1996, and is hereby incorporated by reference. (11) Statement re computation of per share earnings. I (12) Statement re computation of ratios. II (13) Annual report to security holders. VII (18) Letter re change in accounting principles. Not applicable (19) Previously unfiled documents. Not applicable (21) Subsidiaries of the registrant. III (22) Published report regarding matters submitted to vote of security holders. Not applicable (23) Consents of experts and counsel. IV (24) Powers of attorney. VIII (27) Financial Data Schedule. IX (28) Information from reports furnished to state insurance regulatory authorities. Not applicable (99) Additional exhibits. V
EX-3 2 BY LAWS BY-LAWS of INTERNATIONAL BUSINESS MACHINES CORPORATION Adopted April 29, 1958 As Amended Through April 30, 1996 [April 30, 1996] TABLE OF CONTENTS ARTICLE I PAGE Definitions.......................... 1 ARTICLE II MEETINGS OF STOCKHOLDERS SEC. 1. Place of Meetings........ 1 SEC. 2. Annual Meetings.......... 1 SEC. 3. Special Meetings......... 2 SEC. 4. Notice of Meetings....... 2 SEC. 5. Quorum................... 2 SEC. 6. Organization............. 3 SEC. 7. Items of Business........ 3 SEC. 8. Voting................... 3 SEC. 9. List of Stockholders..... 4 SEC. 10. Inspectors of Election... 4 ARTICLE III BOARD OF DIRECTORS SEC. 1. General Powers........... 5 SEC. 2. Number; Qualifications; Election; Term of Office................. 5 SEC. 3. Place of Meetings........ 5 SEC. 4. First Meeting............ 5 SEC. 5. Regular Meetings......... 5 SEC. 6. Special Meetings......... 5 SEC. 7. Notice of Meetings....... 5 SEC. 8. Quorum and Manner of Acting................. 6 SEC. 9. Organization............. 6 SEC. 10. Resignations............. 6 SEC. 11. Vacancies................ 6 SEC. 12. Retirement of Directors.............. 6 [April 30, 1996] - i - ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SEC. 1. Executive Committee...... 7 SEC. 2. Powers of the Executive Committee.............. 7 SEC. 3. Meetings of the Executive Committee.............. 7 SEC. 4. Quorum and Manner of Acting of the Executive Committee.............. 8 SEC. 5. Other Committees......... 8 SEC. 6. Changes in Committees; Resignations; Removals; Vacancies.............. 9 ARTICLE V OFFICERS SEC. 1. Number and Qualifications.. 9 SEC. 2. Resignations............. 9 SEC. 3. Removal.................. 10 SEC. 4. Vacancies................ 10 SEC. 5. Chairman of the Board.... 10 SEC. 6. Vice Chairman of the Board.................. 10 SEC. 7. President................ 10 SEC. 8. Designated Officers...... 11 SEC. 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents............. 11 SEC. 10. Treasurer................ 11 SEC. 11. Secretary................ 12 SEC. 12. Controller............... 13 SEC. 13. Compensation............. 13 ARTICLE VI CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SEC. 1. Execution of Contracts... 13 SEC. 2. Loans.................... 13 SEC. 3. Checks, Drafts, etc...... 14 SEC. 4. Deposits................. 14 SEC. 5. General and Special Bank Accounts............... 14 SEC. 6. Indemnification.......... 14 [April 30, 1996] - ii - ARTICLE VII SHARES SEC. 1. Stock Certificates....... 15 SEC. 2. Books of Account and Record of Stockholders........... 15 SEC. 3. Transfers of Stock....... 15 SEC. 4. Regulations.............. 16 SEC. 5. Fixing of Record Date.... 16 SEC. 6. Lost, Destroyed or Mutilated Certificates..... 16 SEC. 7. Inspection of Records.... 17 SEC. 8. Auditors................. 17 ARTICLE VIII OFFICES SEC. 1. Principal Office......... 17 SEC. 2. Other Offices............ 17 ARTICLE IX Waiver of Notice..................... 17 ARTICLE X Fiscal Year.......................... 18 ARTICLE XI Seal................................. 18 ARTICLE XII Amendments........................... 18 [April 30, 1996] - iii - BY-LAWS OF INTERNATIONAL BUSINESS MACHINES CORPORATION ------- ARTICLE I DEFINITIONS In these By-laws, and for all purposes hereof, unless there be something in the subject or context inconsistent therewith: (a) 'Corporation' shall mean International Business Machines Corporation. (b) 'Certificate of Incorporation' shall mean the restated Certificate of Incorporation as filed on May 27, 1992, together with any and all amendments and subsequent restatements thereto. (c) Board' shall mean the Board of Directors of the Corporation. (d) 'stockholders' shall mean the stockholders of the Corporation. (e) 'Chairman of the Board', 'Vice Chairman of the Board', 'Chairman of the Executive Committee', 'Chief Executive Officer,' 'Chief Financial Officer', 'Chief Accounting Officer', 'President', 'Executive Vice President', 'Senior Vice President', 'Vice President', 'Treasurer', 'Secretary', or 'Controller', as the case may be, shall mean the person at any given time occupying the particular office with the Corporation. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place either within or outside the State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting. SECTION 2. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the last Tuesday of April of each year, if not a legal holiday, or, if such day shall be a legal holiday, then on the next succeeding day not a legal holiday. If any annual meeting shall not be held on the day designated herein, or if the directors to be elected at such annual [April 30, 1996] - 1 - meeting shall not have been elected thereat or at any adjournment thereof, the Board shall forthwith call a special meeting of the stockholders for the election of directors to be held as soon thereafter as convenient and give notice thereof as provided in these By-laws in respect of the notice of an annual meeting of the stockholders. At such special meeting the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held. SECTION 3. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law, may be called at any time by the Chairman of the Board or by the Board. SECTION 4. Notice of Meetings. Notice of each meeting of the stockholders, annual or special, shall be in writing and given in the name of the Chairman of the Board, a Vice Chairman of the Board or the President or a Vice President or the Secretary. Such notice shall state the purpose or purposes for which the meeting is called and the date and hour when and the place where it is to be held. A copy thereof shall either be served personally upon, or sent by mail, postage prepaid, to all stockholders of record entitled to vote at such meeting, and all stockholders of record who, by reason of any action proposed to be taken at such meeting, would be entitled to have their stock appraised if such action were taken, not less than ten or more than fifty days before the day on which the meeting is called to be held. If mailed, such copy shall be directed to each stockholder at the address listed on the record of stockholders of the Corporation, or if the stockholder shall have filed with the Secretary a written request that notices be mailed to some other address, it shall be mailed to the address designated in such request. Nevertheless, notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall waive notice thereof as hereinafter provided in Article IX of these By-laws. Except when expressly required by law, notice of any adjourned meeting of the stockholders need not be given nor shall publication of notice of any annual or special meeting thereof be required. SECTION 5. Quorum. Except as otherwise provided by law, at all meetings of the stockholders, the presence of holders of record of a majority of the outstanding shares of stock of the Corporation having voting power, in person or represented by proxy and entitled to vote thereat, shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or represented by proxy and entitled to vote thereat, or, in the absence of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting, may adjourn such meeting from time to time without further notice, other than by announcement at the meeting at which such adjournment shall be taken, until a quorum shall be present thereat. At any adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called. [April 30, 1996] - 2 - Section 6. Organization. At each meeting of the stockholders, the Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice Chairman of the Board, or if the Chairman of the Board, the President, and all Vice Chairmen of the Board shall be absent therefrom, an Executive Vice President, or if the Chairman of the Board, the President, all Vice Chairmen of the Board and all Executive Vice Presidents shall be absent therefrom, a Senior Vice President shall act as chairman. The Secretary, or, if the Secretary shall be absent from such meeting or unable to act, the person whom the Chairman of such meeting shall appoint secretary of such meeting shall act as secretary of such meeting and keep the minutes thereof. Section 7. Items of Business. The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows: -- Call to order. -- Proof of notice of meeting or of waiver thereof. -- Appointment of inspectors of election, if necessary. -- A quorum being present. -- Reports. -- Election of directors. -- Other business specified in the notice of the meeting. -- Voting. -- Adjournment. Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine. The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including but not limited to the maintenance of order and decorum. SECTION 8. Voting. Except as otherwise provided by law, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in the stockholder's name on the record of stockholders of the Corporation: (a) on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-laws as the record date for the determination of the stockholders who shall be entitled to vote at such meeting, or [April 30, 1996] - 3 - (b) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting shall have been given, or (c) if such record date shall not have been so fixed and if no notice of such meeting shall have been given, then at the time of the call to order of such meeting. Any vote on stock of the Corporation at any meeting of the stockholders may be given by the stockholder of record entitled thereto in person or by proxy appointed by an instrument in writing, subscribed by such stockholder or by the stockholder's attorney thereunto duly authorized and delivered to the secretary of such meeting at or prior to the time designated in the order of business for turning in proxies. At all meetings of the stockholders at which a quorum shall be present, all matters (except where otherwise provided by law, the Certificate of Incorporation or these By-laws) shall be decided by the vote of a majority in voting interest of the stockholders present in person or represented by proxy and entitled to vote thereat. Unless required by law, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by the stockholder's proxy as such, if there be such proxy. SECTION 9. List of Stockholders. A list, certified by the Secretary, of the stockholders of the Corporation entitled to vote shall be produced at any meeting of the stockholders upon the request of any stockholder of the Corporation pursuant to the provisions of applicable law, the Certificate of Incorporation or these By-laws. Section 10. Inspectors of Election. Prior to the holding of each annual or special meeting of the stockholders, two inspectors of election to serve thereat shall be appointed by the Board, or, if the Board shall not have made such appointment, by the Chairman of the Board. If there shall be a failure to appoint inspectors, or if, at any such meeting, any inspector so appointed shall be absent or shall fail to act or the office shall become vacant, the chairman of the meeting may, and at the request of a stockholder present in person and entitled to vote at such meeting shall, appoint such inspector or inspectors of election, as the case may be, to act thereat. The inspectors of election so appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting, with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors of election shall take charge of the polls, and, after the voting on any question, shall make a certificate of the results of the vote taken. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. [April 30, 1996] - 4 - ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these By-laws, directed or required to be exercised or done by the stockholders. SECTION 2. Number; Qualifications; Election; Term of Office. The number of directors of the Corporation shall be eleven, but the number thereof may be increased to not more than twenty-five, or decreased to not less than nine, by amendment of these By-laws. The directors shall be elected at the annual meeting of the stockholders. At each meeting of the stockholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes at such election shall be elected. Each director shall hold office until the annual meeting of the stockholders which shall be held next after the election of such director and until a successor shall have been duly elected and qualified, or until death, or until the director shall have resigned as hereinafter provided in Section 10 of this Article III. SECTION 3. Place of Meetings. Meetings of the Board shall be held at such place either within or outside State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting. SECTION 4. First Meeting. The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, on the same day the annual meeting of stockholders is held. Notice of such meeting need not be given. Such meeting may be held at any other time or place which shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III. SECTION 5. Regular Meetings. Regular meetings of the Board shall be held at times and dates fixed by the Board or at such other times and dates as the Chairman of the Board shall determine and as shall be specified in the notice of such meetings. Notice of regular meetings of the Board need not be given except as otherwise required by law or these By-laws. SECTION 6. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board. SECTION 7. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time, place and, if required by law or these By-laws, the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the [April 30, 1996] - 5 - time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall waive notice thereof as provided in Article IX of these By-laws. Any meeting of the Board shall be a legal meeting without notice thereof having been given, if all the directors of the Corporation then holding office shall be present thereat. SECTION 8. Quorum and Manner of Acting. A majority of the Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting. Participation in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence in person at a meeting. Except as otherwise expressly required by law or the Certificate of Incorporation and except also as specified in Section 1, Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article XII of these By-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. Section 9. Organization. At each meeting of the Board, the Chairman of the Board, or in the case of the Chairman's absence therefrom, the President, or in the case of the President's absence therefrom, a Vice Chairman, or in the case of the absence of all such persons, another director chosen by a majority of directors present, shall act as chairman of the meeting and preside thereat. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof. SECTION 10. Resignations. Any director of the Corporation may resign at any time by giving written notice of resignation to the Board or the Chairman of the Board or the Secretary. Any such resignation shall take effect at the time specified therein, or if the time when it shall become effective shall not be specified therein, then it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 11. Vacancies. Any vacancy in the Board, whether arising from death, resignation, an increase in the number of directors or any other cause, may be filled by the Board. SECTION 12. Retirement of Directors. The Board may prescribe a retirement policy for directors on or after reaching a certain age, provided, however, that such [April 30, 1996] - 6 - retirement shall not cut short the annual term for which any director shall have been elected by the stockholders. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 1. Executive Committee. The Board, by resolution adopted by a majority of the Board, may designate not less than four of the directors then in office to constitute an Executive Committee, each member of which unless otherwise determined by resolution adopted by a majority of the whole Board, shall continue to be a member of such Committee until the annual meeting of the stockholders which shall be held next after designation as a member of such Committee or until the earlier termination as a director. The Chief Executive Officer shall always be designated as a member of the Executive Committee. The Board may by resolution appoint one member as the Chairman of the Executive Committee who shall preside at all meetings of such Committee. In the absence of said Chairman, the Chief Executive Officer shall preside at all such meetings. In the absence of both the Chairman of the Executive Committee and the Chief Executive Officer, the Chairman of the Board shall preside at all such meetings. In the absence of the Chairman of the Executive Committee and the Chief Executive Officer and the Chairman of the Board, the President shall preside at all such meetings. In the absence of all such persons, a majority of the members of the Executive Committee present shall choose a chairman to preside at such meetings. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof. SECTION 2. Powers of the Executive Committee. To the extent permitted by law, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, to the extent permitted by law, the Executive Committee shall have, and may exercise, all the powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but excluding the power to appoint a member of the Executive Committee) in such manner as the Executive Committee shall deem to be in the best interests of the Corporation and not inconsistent with any prior specific action of the Board. An act of the Executive Committee taken within the scope of its authority shall be an act of the Board. The Executive Committee shall render in the form of minutes a report of its several acts at each regular meeting of the Board and at any other time when so directed by the Board. SECTION 3. Meetings of the Executive Committee. Regular meetings of the Executive Committee shall be held at such times, on such dates and at such places as shall be fixed by resolution adopted by a majority of the Executive Committee, [April 30, 1996] - 7 - of which regular meetings notice need not be given, or as shall be fixed by the Chairman of the Executive Committee or in the absence of the Chairman of the Executive Committee the Chief Executive Officer and specified in the notice of such meeting. Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or by the Chief Executive Officer. Notice of each such special meeting of the Executive Committee (and of each regular meeting for which notice shall be required), stating the time and place thereof shall be mailed, postage prepaid, to each member of the Executive Committee, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held; but notice need not be given to a member of the Executive Committee who shall waive notice thereof as provided in Article IX of these By-laws, and any meeting of the Executive Committee shall be a legal meeting without any notice thereof having been given, if all the members of such Committee shall be present thereat. SECTION 4. Quorum and Manner of Acting of the Executive Committee. Four members of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of the members of the Executive Committee present at a meeting at which a quorum shall be present shall be the act of the Executive Committee. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of the Executive Committee. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such. SECTION 5. Other Committees. The Board may, by resolution adopted by a majority of the Board, designate members of the Board to constitute other committees, which shall have, and may exercise, such powers as the Board may by resolution delegate to them, and shall in each case consist of such number of directors as the Board may determine; provided, however, that each such committee shall have at least three directors as members thereof. Such a committee may either be constituted for a specified term or may be constituted as a standing committee which does not require annual or periodic reconstitution. A majority of all the members of any such committee may determine its action and its quorum requirements and may fix the time and place of its meetings, unless the Board shall otherwise provide. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of such other committees. In addition to the foregoing, the Board may, by resolution adopted by a majority of the Board, create a committee of indeterminate membership and duration and not subject to the limitations as to the membership, quorum and manner of meeting and acting prescribed in these By-laws, which committee, in the event of a major disaster or catastrophe or national emergency which renders the Board [April 30, 1996] - 8 - incapable of action by reason of the death, physical incapacity or inability to meet of some or all of its members, shall have, and may exercise all the powers of the Board in the management of the business and affairs of the Corporation (including, without limitation, the power to authorize the seal of the Corporation to be affixed to all papers which may require it and the power to fill vacancies in the Board). An act of such committee taken within the scope of its authority shall be an act of the Board. SECTION 6. Changes in Committees; Resignations; Removals; Vacancies. The Board shall have power, by resolution adopted by a majority of the Board, at any time to change or remove the members of, to fill vacancies in, and to discharge any committee created pursuant to these By-laws, either with or without cause. Any member of any such committee may resign at any time by giving written notice to the Board or the Chairman of the Board or the Secretary. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any vacancy in any committee, whether arising from death, resignation, an increase in the number of committee members or any other cause, shall be filled by the Board in the manner prescribed in these By-laws for the original appointment of the members of such committee. ARTICLE V OFFICERS SECTION 1. Number and Qualifications. The officers of the Corporation shall include the Chairman of the Board, and may include one or more Vice Chairmen of the Board, the President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice Presidents or as Senior Vice Presidents or by other designations), the Treasurer, the Secretary and the Controller. Officers shall be elected from time to time by the Board, each to hold office until a successor shall have been duly elected and shall have qualified, or until death, or until resignation as hereinafter provided in Section 2 of this Article V, or until removed as hereinafter provided in Section 3 of this Article V. Section 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall become effective upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. [April 30, 1996] - 9 - Section 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by a resolution adopted by a majority of the Board at any meeting of the Board. Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of office which shall be vacant, in the manner prescribed in these By-laws for the regular election or appointment to such office. Section 5. Chairman of the Board. The Chairman of the Board shall, if present, preside at each meeting of the stockholders and of the Board and shall perform such other duties as may from time to time be assigned by the Board. The Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it. The Chairman of the Board, when there is no President or in the absence or incapacity of the President, shall perform all the duties and functions and exercise all the powers of the President. SECTION 6. Vice Chairman of the Board. Each Vice Chairman of the Board shall assist the Chairman of the Board and have such other duties as may be assigned by the Board or the Chairman of the Board. The Vice Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it. Section 7. President. The President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board. The President may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered, and affix the seal of the Corporation to any instrument which shall require it; and, in general, perform all duties incident to the office of President. The President shall in the absence or incapacity of the Chairman of the Board, perform all the duties and functions [April 30, 1996] - 10 - and exercise all the powers of the Chairman of the Board. Section 8. Designated Officers. (a) Chief Executive Officer. Either the Chairman of the Board, or the President, as the Board of Directors may designate, shall be the Chief Executive Officer of the Corporation. The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in Section 5 or 7 of this Article V, general and active supervision over the business and affairs of the Corporation and over its several officers, agents, and employees, subject, however, to the control of the Board. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, be an ex officio member of all committees of the Board (except the Audit Committee, the Directors and Corporate Governance Committee, and committees specifically empowered to fix or approve the Chief Executive Officer's compensation or to grant or administer bonus, option or other similar plans in which the Chief Executive Officer is eligible to participate), and, in general, shall perform all duties incident to the position of Chief Executive Officer and such other duties as may from time to time be assigned by the Board. (b) Other Designated Officers. The Board of Directors may designate officers to serve as Chief Financial Officer, Chief Accounting Officer and other such designated positions and to fulfill the responsibilities of such designated positions in addition to their duties as officers as set forth in this Article V. SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Each Executive and Senior Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President. Each Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or a Senior Vice President. Any Vice President may sign certificates representing shares of stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws. SECTION 10. Treasurer. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, and may invest the same in any securities, may open, maintain and close accounts for effecting any and all purchase, sale, investment and lending transactions in securities of any and all kinds for and on behalf of the Corporation or any employee pension or benefit plan fund or other fund established by the Corporation, as may be permitted by law; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; [April 30, 1996] - 11 - (c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board or the Executive Committee; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor; (f) render to the Board, whenever the Board may require, an account of all transactions as Treasurer; and (g) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President. SECTION 11. Secretary. The Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the Executive Committee and other committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President. [April 30, 1996] - 12 - Section 12. Controller. The Controller shall: (a) have control of all the books of account of the Corporation; (b) keep a true and accurate record of all property owned by it, of its debts and of its revenues and expenses; (c) keep all accounting records of the Corporation (other than the accounts of receipts and disbursements and those relating to the deposits of money and other valuables of the Corporation, which shall be kept by the Treasurer); (d) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation; and (e) in general, perform all the duties incident to the office of Controller and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President. SECTION 13. Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee the power to fix or approve the compensation of any officers. An officer of the Corporation shall not be prevented from receiving compensation by reason of being also a director of the Corporation; but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to such officer. ARTICLE VI CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. Execution of Contracts. Except as otherwise required by law or these By-laws, any contract or other instrument may be executed and delivered in the name and on behalf of the Corporation by any officer (including any assistant officer) of the Corporation. The Board or the Executive Committee may authorize any agent or employee to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board or such Committee, as the case may be, may by resolution determine. SECTION 2. Loans. Unless the Board shall otherwise determine, the Chairman of the Board or a Vice Chairman of the Board or the President or any Vice President, acting together with the Treasurer or the Secretary, may effect loans and advances at any time for the Corporation from any bank, trust company or other [April 30, 1996] - 13 - institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board. SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board or the Executive Committee or authorized by the Treasurer acting together with either the General Manager of an operating unit or a nonfinancial Vice President of the Corporation, which authorization may be general or confined to specific instances. SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board or the Executive Committee may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer, employee or agent of the Corporation. SECTION 5. General and Special Bank Accounts. The Board or the Executive Committee may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board or the Executive Committee may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. The Board or the Executive Committee may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient. SECTION 6. Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as in effect at any time, indemnify any person made, or threatened to be made, a party to an action or proceeding whether civil or criminal (including an action or proceeding by or in the right of the Corporation or any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, for which any director or officer of the Corporation served in any capacity at the request of the Corporation), by reason of the fact that such person or such person's testator or intestate was a director or officer of the Corporation, or served such other corporation, partnership, joint [April 30, 1996] - 14 - venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein. Such indemnification shall be a contract right and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, consistent with the provisions of applicable law in effect at any time. Indemnification shall be deemed to be 'permitted' within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time. ARTICLE VII SHARES SECTION 1. Stock Certificates. The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares. Each owner of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board, certifying the number of shares of stock of the Corporation owned. To the extent that shares are represented by certificates, such certificates of stock shall be signed in the name of the Corporation by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is signed by a registrar, other than the Corporation or its employee, the signatures of the Chairman of the Board, a Vice Chairman of the Board, the President, the Secretary, and transfer agent or a transfer clerk acting on behalf of the Corporation upon such certificates may be facsimiles, engraved or printed. In case any officer, transfer agent or transfer clerk acting on behalf of the Corporation ceases to be such officer, transfer agent, or transfer clerk before such certificates shall be issued, they may nevertheless be issued by the Corporation with the same effect as if they were still such officer, transfer agent or transfer clerk at the date of their issue. SECTION 2. Books of Account and Record of Stockholders. There shall be kept at the office of the Corporation correct books of account of all its business and transactions, minutes of the proceedings of stockholders, Board, and Executive Committee, and a book to be known as the record of stockholders, containing the names and addresses of all persons who are stockholders, the number of shares of stock held, and the date when the stockholder became the owner of record thereof. SECTION 3. Transfers of Stock. Transfers of shares of stock of the Corporation shall be made on the record of stockholders of the Corporation only upon authorization by the registered holder thereof, or by an attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed, provided such shares are represented by a certificate, or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose names shares of stock shall stand on the [April 30, 1996] - 15 - record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer. SECTION 4. Regulations. The Board may make such additional rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificated or uncertificated shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates of stock to bear the signature or signatures of any of them. SECTION 5. Fixing of Record Date. The Board shall fix a time not exceeding fifty nor less than ten days prior to the date then fixed for the holding of any meeting of the stockholders or prior to the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose without a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were holders of record of voting stock at such time, and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The Board may fix a time not exceeding fifty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of capital stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. SECTION 6. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Corporation may, in its discretion, require such owner or the owner's legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. Anything to the contrary notwithstanding, the Corporation, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal [April 30, 1996] - 16 - proceedings under the laws of the State of New York. SECTION 7. Inspection of Records. The record of stockholders and minutes of the proceedings of stockholders shall be available for inspection, within the limits and subject to the conditions and restrictions prescribed by applicable law. SECTION 8. Auditors. The Board shall employ an independent public or certified public accountant or firm of such accountants who shall act as auditors in making examinations of the consolidated financial statements of the Corporation and its subsidiaries in accordance with generally accepted auditing standards. The auditors shall certify that the annual financial statements are prepared in accordance with generally accepted accounting principles, and shall report on such financial statements to the stockholders and directors of the Corporation. The Board's selection of auditors shall be presented for ratification by the stockholders at the annual meeting. Directors and officers, when acting in good faith, may rely upon financial statements of the Corporation represented to them to be correct by the officer of the Corporation having charge of its books of account, or stated in a written report by the auditors fairly to reflect the financial condition of the Corporation. ARTICLE VIII OFFICES SECTION 1. Principal Office. The principal office of the Corporation shall be at such place in the Town of North Castle, County of Westchester and State of New York as the Board shall from time to time determine. SECTION 2. Other Offices. The Corporation may also have an office or offices other than said principal office at such place or places as the Board shall from time to time determine or the business of the Corporation may require. ARTICLE IX WAIVER OF NOTICE Whenever under the provisions of any law of the State of New York, the Certificate of Incorporation or these By-laws or any resolution of the Board or any committee thereof, the Corporation or the Board or any committee thereof is authorized to take any action after notice to the stockholders, directors or members of any such committee, or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of any period of time, if, at any time before or after such action shall be completed, such notice or lapse of time shall be waived in writing by the person or persons entitled to said notice or entitled to [April 30, 1996] - 17 - participate in the action to be taken, or, in the case of a stockholder, by an attorney thereunto authorized. Attendance at a meeting requiring notice by any person or, in the case of a stockholder, by the stockholder's attorney, agent or proxy, shall constitute a waiver of such notice on the part of the person so attending, or by such stockholder, as the case may be. ARTICLE X FISCAL YEAR The fiscal year of the Corporation shall end on the thirty-first day of December in each year. ARTICLE XI SEAL The Seal of the Corporation shall consist of two concentric circles with the IBM logotype appearing in bold face type within the inner circle and the words 'International Business Machines Corporation' appearing within the outer circle. ARTICLE XII AMENDMENTS These By-laws may be amended or repealed or new By-laws may be adopted by the stockholders at any annual or special meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting. These By-laws, subject to the laws of the State of New York, may also be amended or repealed or new By-laws may be adopted by the affirmative vote of a majority of the Board given at any meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting; provided, however, that if any By-law regulating an impending election of directors is adopted or amended or repealed by the Board, there shall be set forth in the notice of the next meeting of the stockholders for the election of directors the By-law so adopted or amended or repealed, together with a concise statement of the changes made. [April 30, 1996] - 18 - INTERNATIONAL BUSINESS MACHINES CORPORATION I, the undersigned, Secretary of International Business Machines Corporation, do hereby certify that the foregoing is a true and complete copy of the By-laws of said Corporation, including all amendments thereto, and the same is in force at the date hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation, this day of 19 . .................... Secretary [April 30, 1996] - 19 - EX-11 3 COMP PER SHARE EARNINGS EXHIBIT I COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE UNDER TREASURY STOCK METHOD SET FORTH IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15
YEAR ENDED DECEMBER 31: ------------------------------------------------------------------------- 1996 1995 1994 1993* 1992* ------------- ------------- ------------- ------------- ------------- Number of shares on which published earnings per share is based: Average outstanding during year.... 528,352,094 569,384,029 584,958,699 573,239,240 570,896,489 Add-- Incremental shares under stock compensation and stock purchase plans........................... 11,502,358 9,223,139 4,308,269 -- -- -- Incremental shares related to 5 3/4% CGI convertible bonds (average)....................... -- 5,291,098 7,715,391 -- -- ------------- ------------- ------------- ------------- ------------- Number of shares on which fully diluted earnings per share is based.............................. 539,854,452 583,898,266 596,982,359 573,239,240 570,896,489 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net earnings (loss) applicable to common shareholders (millions)..... $ 5,409 $ 4,116 $ 2,937 $ (8,148) $ (4,965) --Net earnings (loss) effect of interest on 5 3/4% CGI convertible bonds (millions)..... -- 1 19 -- -- ------------- ------------- ------------- ------------- ------------- Net earnings (loss) on which fully diluted earnings per share is based (millions)......................... $ 5,409 $ 4,117 $ 2,956 $ (8,148) $ (4,965) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Fully diluted earnings (loss) per share.............................. $ 10.02 $ 7.05 $ $4.95 $ (14.22) $ (8.70) Published earnings (loss) per share.............................. $ 10.24 $ 7.23 $ $5.02 $ (14.22) $ (8.70)
- ------------------------ * In 1993 and 1992, incremental shares under stock plans and the effect of the convertible debentures and bonds were not considered for the fully diluted earnings per share calculation due to their antidilutive effect. As such, the amounts reported for primary and fully diluted earnings per share are the same. EX-12 4 COMP OF RATIOS EXHIBIT II COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIVIDENDS (UNAUDITED) (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31: ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Earnings before income taxes and change in accounting principles(1)............................................... $ 8,599 $ 7,910 $ 5,253 $ (8,432) $ (8,861) Add: Fixed charges, excluding capitalized interest............... 1,942 1,972 2,450 2,853 3,348 --------- --------- --------- --------- --------- Earnings as adjusted.......................................... $ 10,541 $ 9,882 $ 7,703 $ (5,579) $ (5,513) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Fixed charges: Interest expense............................................ $ 1,545 $ 1,591 $ 2,025 $ 2,291 $ 2,645 Capitalized interest........................................ 31 23 20 46 101 Portion of rental expense representative of interest........ 397 381 425 562 703 --------- --------- --------- --------- --------- Total fixed charges........................................... $ 1,973 $ 1,995 $ 2,470 $ 2,899 $ 3,449 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Preferred stock dividends(2).................................. 32 37 144 47 0 --------- --------- --------- --------- --------- Combined fixed charges and preferred stock dividends.......... $ 2,005 $ 2,032 $ 2,614 $ 2,946 $ 3,449 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges............................ 5.3 5.0 3.1 (A) (A) Ratio of earnings to combined fixed charges and preferred stock dividends............................................. 5.3 4.9 2.9 (A) (A)
- ------------------------ (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 and transaction costs of $20 million and $62 million for 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. Included are preferred stock dividends of $20 million, for 1996 and 1995, respectively, or $32 million and $37 million representing the pre-tax earnings which would be required to cover such dividend requirements based on the company's effective income tax rate for year end 1996 and 1995, respectively. For the 1994 and 1993, preferred stock dividends are also on a pre-tax basis. (A) No ratios are shown for these periods as earnings were insufficient to cover fixed charges and combined fixed charges and preferred stock dividends. As a result of the net loss incurred for the year ended December 31, 1993 earnings were inadequate to cover fixed charges and combined fixed charges and preferred stock dividends by $8,478 million and $8,525 million, respectively. As a result of the net loss incurred for the year ended December 31, 1992, earnings were inadequate to cover fixed charges by $8,962 million. EX-13 5 EXHIBIT 13 Exhibit 13 FINANCIAL REPORT 42. Report of Management 43. Report of Independent Accountants 44. Management Discussion 56. Consolidated Financial Statements Earnings Financial Position Cash Flows Stockholders' Equity 60. Notes To Consolidated Financial Statements 60. A Signicant Accounting Policies 62. B Accounting Changes 63. C Inventories 63. D Plant, Rental Machines and Other Property 64. E Investments and Sundry Assets 64. F Debt 66. G Taxes 68. H Selling and Advertising 68. I Research, Development and Engineering 69. J Interest on Debt 69. K Other Liabilities and Environmental 69. L Contingencies 70. M Customer Financing 73. N Rental Expense and Lease Commitments 73. O Stock-Based Compensation Plans 75. P Stock Repurchases 76. Q Retirement Plans 78. R Nonpension Postretirement Benefits 79. S Lines of Credit 80. T Sale and Securitization of Receivables 80. U Financial Instruments 82. V Subsequent Event 82. W Segment Information 84. X Geographic Areas 86. Five-Year Comparison of Selected Financial Data 86. Selected Quarterly Data 41. 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 dened lines of responsibility and delegation of authority, and comprehensive systems and control procedures. We believe this structure provides reasonable assurance that transactions are executed in accordance with management authorization, and that they are appropriately recorded, in order to permit preparation of financial statements in conformity with generally accepted accounting principles and to adequately safeguard, verify and maintain accountability of assets. An important element of the control environment is an ongoing internal audit program. To assure the effective administration of internal control, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels, and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and followed. Price Waterhouse LLP, independent accountants, is retained to examine IBM's financial statements. Its accompanying report is based on an examination conducted in accordance with generally accepted auditing standards, including a review of the internal control structure and tests of accounting procedures and records. The Audit Committee of the Board of Directors is composed solely of outside directors, and is responsible for recommending to the Board the independent accounting firm to be retained for the coming year, subject to stockholder approval. The Audit Committee meets periodically and privately with the independent accountants, with our internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters. /s/ Louis V. Gerstner, Jr. /s/ G. Richard Thoman Louis V. Gerstner, Jr. G. Richard Thoman Chairman of the Board and Senior Vice President and and Chief Executive Officer Chief Financial Officer 42. 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 56 through 85, present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP 1177 Avenue of the Americas New York, NY 10036 January 20, 1997 43. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies OVERVIEW IBM's financial performance in 1996 reflects continued progress towards its strategic goals of revenue growth, an expanded portfolio of industry-specific customer solutions, especially through network computing, and an increasingly competitive cost and expense structure. The company reported record revenue of nearly $ 76 billion, 30 percent net earnings growth over 1995 and ended the year with over $ 8 billion in cash. The company also continued to align itself for strategic growth by investing almost $ 20 billion in critical high-growth and advanced technology businesses, research and development, acquisitions and repurchases of its common shares. The growth in revenue was principally due to the continued transition of revenue mix to the company's high-growth businesses. Revenue from services, personal computers and distributed software offerings grew strongly year over year. At the same time, while System/390* revenue declined due to pricing pressures, its total installed base grew nearly 25 percent, well above the 14 percent growth rate of just two years ago as customers continued to move to integrated network solutions. The company's results were also affected adversely by the continued weakness of the European economy and the continued strengthening of the U.S. dollar. Without the currency effect, year-to-year revenue growth would have been 9 percent compared with the reported growth of 6 percent. LOOKING FORWARD While excellent progress was made in 1996, the company must continue to implement strategic actions to further improve its competitiveness. These actions include an on-going focus on revenue growth and stable net income margins, while at the same time maintaining a strong balance sheet and cash flows for long-term growth. 44. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies RESULTS OF OPERATIONS (Dollars in millions except per share amounts) 1996 1995 1994 Revenue $ 75,947 $ 71,940 $ 64,052 Cost 45,408 41,573 38,768 -------- -------- -------- Gross profit 30,539 30,367 25,284 Gross profit margin 40.2% 42.2% 39.5% Total expense 21,952 22,554 20,129 -------- -------- -------- Net earnings before income taxes $ 8,587 $ 7,813 $ 5,155 -------- -------- -------- -------- -------- -------- Net earnings $ 5,429 $ 4,178 $ 3,021 -------- -------- -------- -------- -------- -------- Net earnings per share of common stock $ 10.24 $ 7.23 $ 5.02 -------- -------- -------- -------- -------- -------- Revenue grew 5.6 percent as reported and 8.6 percent when currency impacts are removed. This increase was primarily driven by the high-growth areas of the company's product portfolio: services, personal computers and distributed software offerings including those from Lotus Development Corporation (Lotus) and Tivoli Systems, Inc. (Tivoli). The following table provides the company's percent of revenue by category: 1996 1995 1994 Hardware sales 47.8% 49.5% 50.5% Services 20.9 17.7 15.2 Software 17.2 17.6 17.7 Maintenance 9.2 10.3 11.3 Rentals and financing 4.9 4.9 5.3 -------- -------- -------- Total 100.0% 100.0% 100.0% -------- -------- -------- -------- -------- -------- The overall gross profit margin at 40.2 percent decreased 2.0 points from 1995, following a 2.7 point increase in 1995 over 1994. The 1996 decline was primarily a result of the company's continued shift to the higher growth sources of revenue, most notably, services and personal computers. These businesses have lower gross profit margins than the company's more traditional high-end hardware offerings. The increase in 1995 was primarily driven by improved margins in hardware sales resulting from cost improvements across most major product lines. The following table is provided for informational purposes only, to exclude the effects of certain items on the company's net earnings.
(Dollars in millions except per share amounts) 1996 1995* 1994 Net earnings after tax as reported $ 5,429 $ 4,178 $ 3,021 Purchased in-process research and development (pages 54 and 55) 435 1,840 - Effects of Federal Systems Company (FSC) sale (page 55) - - (248) Software amortization change - - 192 ------- ------- ------- Adjusted net earnings $ 5,864 $ 6,018 $ 2,965 ------- ------- ------- ------- ------- ------- Adjusted net earnings per share of common stock $ 11.06 $ 10.46 $ 4.92 ------- ------- ------- ------- ------- -------
*Reclassified to conform to 1996 presentation. 45. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies HARDWARE SALES (Dollars in millions) 1996 1995 1994 Revenue $ 36,316 $ 35,600 $32,344 Cost 23,396 21,862 21,300 -------- -------- -------- Gross profit $ 12,920 $13,738 $11,044 -------- -------- -------- -------- -------- -------- Gross profit margin 35.6% 38.6% 34.1% Information on revenue by classes of similar products or services is included in note W, "Segment Information," on pages 82 and 83. The product trends addressed in this discussion and in that disclosure are indicative, in all material respects, of hardware sales activity. Revenue from hardware sales increased 2.0 percent from 1995, following an increase of 10.1 percent in 1995 from 1994. Gross profit dollars from hardware sales decreased 6.0 percent from 1995, following an increase of 24.4 percent in 1995 from 1994. Revenue from servers decreased 1.4 percent from 1995, following a 9.0 percent increase versus 1994. The 1996 decrease was primarily driven by lower revenue from System/390, although total delivery of mainframe computing power, including shipments placed with end-users through both operating leases and service offerings, increased 49 percent as measured in MIPS (millions of instructions per second) versus last year. The System/390 revenue decrease was partially offset by higher revenue from AS/400*, RISC System/6000* and personal computer servers. The 1995 increase reflected higher revenue across all server products when compared to 1994 levels. Personal system client revenue grew 13.8 percent from 1995, following a 15.1 percent increase in 1995 from 1994. The 1996 increase was driven by higher revenue from personal computers, especially consumer products, partially offset by lower revenue from RISC System/6000. The 1995 increase over 1994 resulted from higher revenue across all personal system client products. Storage products revenue, including products sold primarily through the Original Equipment Manufacturer (OEM) channel, decreased 4.1 percent in 1996 from 1995, following an increase of 4.8 percent in 1995 from 1994. The decline in 1996 is a result of lower revenue associated with high-end storage products due to continuing price competition. This decrease was partially offset by strong revenue growth in hard disk drive (HDD) storage and tape products when compared to 1995 levels. These product areas in 1996 accounted for more revenue than high-end storage products. The 1995 increase versus 1994 was primarily driven by strong growth in HDD storage products, partially offset by lower revenue from high-end storage and tape products. OEM hardware revenue declined 9.1 percent in 1996 versus 1995, following a 35.5 percent increase in 1995 over 1994. The 1996 decrease was driven by lower semiconductor revenue due to continuing industry-wide pricing pressures. 46. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies The decrease in the 1996 hardware sales gross profit margin was driven by the mix of revenue to lower gross profit products, such as personal computers, and by lower OEM semiconductor margins. The increase in the 1995 hardware gross profit margin was driven by improved gross profit margins on System/390, personal computers, RISC System/6000 servers and OEM products. The overall hardware sales margin continues to be adversely impacted by pricing pressures across all products. SERVICES (Dollars in millions) 1996 1995 1994 Revenue $ 15,873 $ 12,714 $ 9,715 Cost 12,647 10,042 7,769 -------- -------- ------- Gross profit $ 3,226 $ 2,672 $ 1,946 -------- -------- ------- -------- -------- ------- Gross profit margin 20.3% 21.0% 20.0% Services revenue increased 24.8 percent in 1996 from 1995 and 30.9 percent in 1995 over 1994. These increases are primarily in the areas of managed operations of systems and networks, systems integration design and development, availability services and consulting engagements. In 1996, the company signed services contracts worth more than $ 27 billion. To meet the growing demands in its services businesses, the company hired more than 15,000 new employees while maintaining a consistent level of gross profitability. SOFTWARE (Dollars in millions) 1996 1995 1994 Revenue $ 13,052 $ 12,657 $ 11,346 Cost 4,082 4,428 4,680 -------- -------- -------- Gross profit $ 8,970 $ 8,229 $ 6,666 -------- -------- -------- -------- -------- -------- Gross profit margin 68.7% 65.0% 58.8% Software revenue increased 3.1 percent in 1996 from 1995, following an increase of 11.6 percent in 1995 from 1994. The increase in 1996 was driven by distributed software offerings including Lotus Notes*, cc:Mail* and systems management software from Tivoli, partially offset by lower host-based computer software revenue associated with System/390 and AS/400. The increase in 1995 was primarily due to revenue from Lotus products in the second half of 1995, after the acquisition. Software gross profit dollars increased 9.0 percent in 1996 from 1995, following an increase of 23.4 percent in 1995 from 1994. The increase in 1995 from 1994 was affected by a change in the amortization period for software products in 1994. Excluding the effect of this change, the gross profit dollars would have increased 18.2 percent. The increase in gross profit dollars in both 1996 and 1995 was driven primarily by the company's continuing shift towards a more iterative software development process. As a result, a larger percentage of software development spending was expensed, and less was capitalized ($ .3 billion in 1996, compared to $ .8 billion in 1995), yielding lower costs of amortization. 47. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Maintenance (Dollars in millions) 1996 1995 1994 Revenue $ 6,981 $ 7,409 $ 7,222 Cost 3,659 3,651 3,635 ------- ------- ------- Gross profit $ 3,322 $ 3,758 $ 3,587 ------- ------- ------- ------- ------- ------- Gross profit margin 47.6% 50.7% 49.7% Maintenance revenue decreased 5.8 percent in 1996 from 1995, following an increase of 2.6 percent in 1995 from 1994. Gross profit dollars decreased 11.6 percent, following an increase of 4.8 percent in 1995 from 1994. Revenue and gross profit margins in 1996 were lower due to continued price reductions. Rentals and Financing (Dollars in millions) 1996 1995 1994 Revenue $ 3,725 $ 3,560 $ 3,425 Cost 1,624 1,590 1,384 ------- ------- ------- Gross profit $ 2,101 $ 1,970 $ 2,041 ------- ------- ------- ------- ------- ------- Gross profit margin 56.4% 55.4% 59.6% Rentals and financing revenue increased 4.6 percent in 1996 from 1995, following an increase of 3.9 percent in 1995 over 1994. In both 1996 and 1995, revenue increased as new originations of operating leases for high-end products outpaced the expiration of older leases. The mix of operating lease originations and hardware sales of these products remained constant year to year. Gross profit dollars increased 6.6 percent from 1995, following a decline of 3.4 percent in 1995 from 1994. The increase was primarily a result of higher margins on operating leases and lower interest rates. The decrease in 1995 was a reflection of both declining volumes and rental prices on high-end products. The financing results are discussed in more detail in note M, "Customer Financing," on pages 70 through 72. 48. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies OPERATING EXPENSES (Dollars in millions) 1996 1995* 1994 Selling, general and administrative $ 16,854 $ 16,766 $ 15,916 Percentage of revenue 22.2% 23.3% 24.8% Research, development and engineering $ 4,654 $ 4,170 $ 4,363 Percentage of revenue 6.1% 5.8% 6.8% Purchased in-process research and development $ 435 $ 1,840 $ - *Reclassified to conform to 1996 presentation. Selling, general and administrative (SG&A) expense remained essentially flat in 1996 compared to 1995. The company's shift towards investments in more variable based high-yield programs, such as advertising, business partner programs, expenditures associated with new acquisitions and investments and its continued focus on reducing fixed infrastructure costs yielded a 1.1 point improvement in the expense to revenue ratio in 1996. The 1996 and 1995 results included $ 669 million and $ 626 million, respectively, associated with infrastructure reductions. The 1995 results also included a one-time gain of $ 175 million due to the settlement of certain contractual obligations resulting from the 1994 FSC sale. The company continues to focus on productivity, reengineering, expense controls and prioritization of spending in order to maintain competitive expense to revenue levels. Research, development and engineering expense increased 11.6 percent in 1996 from 1995, following a decrease of 4.4 percent in 1995 from 1994. The increase in 1996 is primarily a result of the company's change in the software development process as discussed in the Software section on page 47. In addition, the on-going activities of Lotus and Tivoli are included in 1996 results, as compared to 1995 which included only Lotus activity from July to December 1995. Purchased in-process research and development in 1996 and 1995 was primarily associated with the Tivoli and Lotus acquisitions, respectively. Provision for Income Taxes The provision for income taxes resulted in an effective tax rate of 37 percent for 1996, as compared to the 1995 effective tax rate of 47 percent. Without the effect of expensing the purchased in-process research and development with no corresponding tax effect, the 1996 and 1995 effective tax rates would have been 35 percent and 38 percent, respectively. The reduction in the 1996 tax rate is due to the company's continued expansion into markets with lower effective tax rates, as well as the use of foreign tax credits to offset the tax effect of dividend repatriation from non-U.S. affiliates. The company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," which provides that a valuation allowance should be recognized to reduce the deferred tax asset to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considered estimates of future taxable income, which are based primarily on recent financial performance. 49. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Fourth Quarter For the quarter ended December 31, 1996, the company had revenue of $ 23.1 billion, a 5.6 percent increase over the same period of 1995. Net earnings in the fourth quarter were $ 2,023 million ($ 3.93 per common share), compared to net earnings of $ 1,711 million ($ 3.09 per common share) in the fourth quarter of 1995. Fourth-quarter revenue increased in the United States, Asia-Pacific and Latin America, and declined in Canada. Specifically, revenue from the United States increased 12.1 percent year over year to $ 8.8 billion. Revenue from the company's Europe, Middle East, and Africa unit was $ 8.1 billion, essentially flat from 1995 to 1996. Asia-Pacific revenue grew 6.2 percent to $ 4.3 billion, while revenue in Latin America was $ 1.1 billion, an increase of 3.9 percent. Revenue from Canada declined 2.4 percent to $ .8 billion. Currency had an approximately 3 percentage point negative impact on the company's revenue results in the fourth quarter. This compares with an approximately 2 percentage point positive revenue effect in the fourth quarter of 1995. At constant currency in the fourth quarter of 1996, European revenue would have grown 3 percent and Asia-Pacific revenue would have increased 14 percent. Hardware sales revenue was $ 11.7 billion, an increase of 1.7 percent compared to the fourth quarter of 1995. Personal computer revenue grew year over year in both commercial and consumer categories. AS/400, storage product and networking hardware revenue also increased. System/390 and OEM hardware revenue declined, while RISC System/6000 revenue was essentially flat. Services revenue was $ 5.0 billion, an increase of 22.3 percent compared to the fourth quarter of last year. This increase reflects the continued strength across the company's services categories, including managed operations of systems and networks, systems integration design and development and availability services. Software revenue grew 3.9 percent year over year to $ 3.7 billion. The increase was driven by strong growth of Lotus and Tivoli distributed software products, offset by lower host-based computer software revenue. Maintenance revenue decreased 5.8 percent from 1995's fourth quarter, due to continuing competitive pricing pressures. Rentals and financing grew 9.4 percent from 1995's fourth quarter due to increased operating leases of high-end products. The company's overall gross profit margin was 40.3 percent in the fourth quarter, compared to 41.7 percent in the same period of 1995. This decrease was a result of the continuing shift of revenue to lower margin offerings including services and personal systems. Total expenses declined 2.3 percent year over year, while the expense-to-revenue ratio decreased from 29.8 percent to 27.8 percent. This decline reflects the continuing efforts to shift toward investments in more variable based spending programs and reductions in infrastructure expenditures. 50. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Financial Condition The company for the third consecutive year generated over $ 10 billion in cash flow from operations which funded significant investments in plant, rental machines and other property, strategic acquisitions, such as Tivoli and Object Technology International, Inc., as well as common share repurchases. The company ended 1996 with $ 8.1 billion in cash, up $ .4 billion from year-end 1995. The company has access to global funding sources. During 1996, the company issued debt in a variety of geographies to a diverse set of investors. Significant funding was issued in the United States, Japan and Europe. Funding was obtained across the range of debt maturities from short-term commercial paper to long-term debt. In December 1996, the company issued $ 850 million of debt which matures in 100 years. More information about company debt is provided in note F, "Debt," on pages 64 and 65. 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 March 1996, and extended to March 2001. As of December 31, 1996, $ 9.4 billion was unused and available. At year-end 1996, the company had an outstanding balance of $ 1.1 billion of assets under management from the securitization of loans, leases and trade receivables, compared to the year-end 1995 level of $ 1.2 billion. The company retains access to additional funds through securitization, as discussed in note T, "Sale and Securitization of Receivables," on page 80. The rating agencies continued their review of the company's debt. In December 1996, Fitch Investors Service upgraded its credit ratings for the company and its rated subsidiaries' senior long-term debt to AA- from A+. Fitch also upgraded the company's preferred stock to A+ from A. They continue to rate commercial paper at F-1+. In January 1997, Standard and Poor's revised its outlook on the company and its rated subsidiaries to positive from stable and affirmed its ratings of senior debt at A, commercial paper at A-1, and preferred stock at 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." 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. 51. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Cash Flows The company's cash flows from operating, investing and financing activities as prescribed by generally accepted accounting principles and reflected in the Consolidated Statement of Cash Flows on page 58, are summarized in the following table: (Dollars in millions) 1996 1995 1994 Net cash provided from (used in): Operating activities $ 10,275 $ 10,708 $ 11,793 Investing activities (5,723) (5,052) (3,426) Financing activities (3,952) (6,384) (6,412) Effect of exchange rate changes on cash and cash equivalents (172) 65 106 -------- -------- -------- Net change in cash and cash equivalents $ 428 $ (663) $ 2,061 -------- -------- -------- -------- -------- -------- Working Capital At December 31: (Dollars in millions) 1996 1995 Current assets $ 40,695 $ 40,691 Current liabilities 34,000 31,648 -------- -------- Working capital $ 6,695 $ 9,043 -------- -------- -------- -------- Current ratio 1.20:1 1.29:1 -------- -------- -------- -------- The company continued to maintain a strong current ratio of 1.20 to 1. Current assets remained essentially flat due to aggressive inventory and accounts receivable management. The company's overall inventories declined $ .5 billion driven primarily by inventory management process improvements, particularly in personal computers. While trade accounts receivable was essentially unchanged from December 31, 1995, collections improved, resulting in a nearly $ 1 billion reduction, which offset record fourth-quarter revenue. Current liabilities were higher primarily due to increases in short-term debt associated with customer financing. Short-term borrowings were used to take advantage of generally more favorable interest rates. Investments The company's investments for plant, rental machines and other property were $ 5.9 billion for 1996, an increase of $ 1.1 billion from 1995. The increase reflects continued investment in the company's rapidly growing services business, particularly management of customers' information technology, as well as storage products and the advanced technology area of microelectronics. In addition to software development expenses included in research, development and engineering, the company capitalized $ .3 billion of software costs during 1996 versus $ .8 billion capitalized in 1995. Amortization of capitalized software costs amounted to $ 1.4 billion for 1996, a decrease of $ .3 billion from 1995. Investments and sundry assets were $ 21.6 billion at the end of 1996, an increase of $ 1.0 billion from 1995, primarily the result of increases in prepaid pension assets, the company's investment in business alliances and goodwill associated with strategic acquisitions, primarily Tivoli. See note E, "Investments and Sundry Assets," on page 64 for additional information. 52. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Debt and Equity (Dollars in millions) 1996 1995 "Core" debt $ 2,202 $ 1,907 Customer financing debt 20,627 19,722 -------- -------- Total debt $ 22,829 $ 21,629 -------- -------- -------- -------- Stockholders' equity $ 21,628 $ 22,423 -------- -------- -------- -------- Debt/capitalization 51.4% 49.1% "Core" debt/capitalization 10.7% 8.5% Customer financing debt/equity 6.3:1 6.3:1 Total debt increased $ 1.2 billion from year-end 1995, driven by an increase of $ .9 billion in debt to support the growth in customer financing assets and $ .3 billion in "core" debt. The company's "core" debt to capitalization ratio is at a conservative 10.7 percent and the customer financing debt to equity has been maintained at 6.3 to 1. Stockholders' equity declined 3.5 percent to $ 21.6 billion from December 31, 1995. The company's strong net earnings were reduced by the company's significant common share repurchases, dividend payments and the stronger dollar effect on the company's foreign net assets. See page 59, "Consolidated Statement of Stockholders' Equity," for additional information. Currency Rate Fluctuations Since approximately 84 percent of the company's non-U.S. revenue was derived from affiliates operating in local currency environments, the company's results are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. Worldwide currencies weakened versus the U.S. dollar in 1996, which resulted in assets and liabilities denominated in local currencies being translated into fewer dollars. The currency rate changes also resulted in an unfavorable impact on revenue of approximately 3 percent in 1996, compared to a favorable impact in 1995 and 1994 of 4 percent and 2 percent, respectively. In high-inflation environments, primarily parts of Latin America, translation adjustments are reflected in period income, as required by SFAS 52, "Foreign Currency Translation." Generally, the company minimizes currency risk in these countries by linking prices and contracts to U.S. dollars, by financing operations locally and through foreign currency hedge contracts. The company uses a variety of financial hedging instruments to minimize currency risks related to customer financing transactions and the repatriation of dividends and royalties. Further discussion on currency and hedging appears in note U, "Financial Instruments," on pages 80 through 82. 53. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies Financing Risks Customer financing is an integral part of the company's total worldwide offerings. Financial results of customer financing can be found in note M, "Customer Financing," on pages 70 through 72. Inherent in customer financing are certain risks: credit, interest rate, currency and residual value. The company manages credit risk through comprehensive credit evaluations and pricing practices. To manage the risks associated with an uncertain interest rate environment, the company pursues a funding strategy of substantially matching the terms of its debt with the terms of its assets. Currency risks are managed by denominating liabilities in the same currency as the assets. Residual value risk is managed by developing projections of future equipment values at lease inception, reevaluating these projections periodically, and effectively deploying remarketing capabilities to recover residual values and potentially earn a profit. In 1996 and 1995, the remarketing effort generated profits. The following table depicts an approximation of the unguaranteed residual value maturities for the company's sales-type leases, as well as a projection of net book value of operating leases at the end of the lease terms as of December 31, 1994, 1995 and 1996. The following table excludes approximately $ 50 million of estimated residual value associated with non-information technology equipment.
Total Run Out of 1996 Residual Value Balance ------------------------- -------------------------------------- (Dollars in millions) 1994 1995 1996 1997 1998 1999 2000 and beyond Sales-type leases $ 535 $ 470 $ 471 $ 130 $ 155 $ 160 $ 26 Operating leases 140 295 480 160 165 140 15 ----- ----- ----- ----- ----- ----- ---- Total residual value $ 675 $ 765 $ 951 $ 290 $ 320 $ 300 $ 41 ----- ----- ----- ----- ----- ----- ---- ----- ----- ----- ----- ----- ----- ----
Acquisitions and Divestitures On March 1, 1996, the company acquired all outstanding shares of Tivoli for approximately $ 800 million ($ 716 million in net cash). On July 5, 1995, the company acquired all outstanding shares of Lotus for approximately $ 3.2 billion ($ 2.9 billion in net cash). The company engaged a nationally recognized, independent appraisal firm to express an opinion on the fair market value of the assets of each of the acquisitions to serve as a basis for allocation of the purchase price to the various classes of assets. The company allocated the total purchase prices as follows:
1996 1995 (Dollars in millions) Tivoli Lotus Tangible and intangible net assets $ 140 $ 1,157 Purchased in-process research and development 417 1,840 Goodwill 280 540 Deferred tax liabilities related to identifiable intangible assets (37) (291) ----- ------- Total $ 800 $ 3,246 ----- ------- ----- -------
Purchased in-process research and development represented the value of software products still in the development stage and not considered to have reached technological feasibility. 54. MANAGEMENT DISCUSSION International Business Machines Corporation and Subsidiary Companies In addition, the acquisition of Object Technology International, Inc., resulted in a valuation of purchased in-process research and development amounting to $ 18 million, bringing the total amount of purchased in-process research and development in 1996 to $ 435 million. In accordance with applicable accounting rules, the $ 435 million was expensed upon acquisition in the first quarter of 1996 and the $ 1,840 million was expensed upon acquisition in the third quarter of 1995. The sale of FSC to Loral Corporation for $ 1.503 billion in cash had a closing date of March 1, 1994, and was effective January 1, 1994. This transaction resulted in an after-tax net gain of $ 248 million ($ .43 per common share) in the company's first-quarter 1994 results. In the fourth quarter of 1995, the company recorded a before-tax gain of $ 175 million due to the conclusion of contractual obligations between the company and Loral Corporation. Employees
Percentage Changes 1996 1995 1994 1996-95 1995-94 IBM/wholly owned subsidiaries 240,615 225,347 219,839 6.8 2.5 Less than wholly owned subsidiaries 28,033 26,868 23,200 4.3 15.8 Complementary 37,000 38,000 35,000 (2.6) 8.6
As of December 31, 1996, employees of IBM and its wholly owned subsidiaries increased 15,268 from 1995 mainly due to hiring in high-growth areas of the business - services, personal computers and Lotus, as well as expansion in emerging geographic markets and acquisition of business entities such as Tivoli. The moderate growth in less than wholly owned subsidiaries was due primarily to investments in the company's growing worldwide services business, as well as in emerging geographic markets such as China. The company's complementary work force comprises 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. 55. CONSOLIDATED STATEMENT OF EARNINGS International Business Machines Corporation and Subsidiary Companies (Dollars in millions except per share amounts)
For the year ended December 31: Notes 1996 1995* 1994 Revenue: Hardware sales $ 36,316 $ 35,600 $ 32,344 Services 15,873 12,714 9,715 Software 13,052 12,657 11,346 Maintenance 6,981 7,409 7,222 Rentals and financing M 3,725 3,560 3,425 - --------------------------------------------------------------------------------------- Total revenue 75,947 71,940 64,052 - --------------------------------------------------------------------------------------- Cost: Hardware sales 23,396 21,862 21,300 Services 12,647 10,042 7,769 Software 4,082 4,428 4,680 Maintenance 3,659 3,651 3,635 Rentals and financing 1,624 1,590 1,384 - --------------------------------------------------------------------------------------- Total cost 45,408 41,573 38,768 - --------------------------------------------------------------------------------------- Gross profit 30,539 30,367 25,284 - --------------------------------------------------------------------------------------- Operating expenses: Selling, general and administrative H 16,854 16,766 15,916 Research, development and engineering I 4,654 4,170 4,363 Purchased in-process research and development I 435 1,840 - - --------------------------------------------------------------------------------------- Total operating expenses 21,943 22,776 20,279 - --------------------------------------------------------------------------------------- Operating income 8,596 7,591 5,005 Other income, principally interest 707 947 1,377 Interest expense J 716 725 1,227 - --------------------------------------------------------------------------------------- Earnings before income taxes 8,587 7,813 5,155 Provision for income taxes G 3,158 3,635 2,134 - --------------------------------------------------------------------------------------- Net earnings 5,429 4,178 3,021 Preferred stock dividends and transaction costs 20 62 84 - --------------------------------------------------------------------------------------- Net earnings applicable to common shareholders $ 5,409 $ 4,116 $ 2,937 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Net earnings per share of common stock $ 10.24 $ 7.23 $ 5.02 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Average number of common shares outstanding: 1996 - 528,352,094; 1995 - 569,384,029; 1994 - 584,958,699
*Reclassified to conform to 1996 presentation. The notes on pages 60 through 85 are an integral part of this statement. 56. CONSOLIDATED STATEMENT OF FINANCIAL POSITION International Business Machines Corporation and Subsidiary Companies
(Dollars in millions) At December 31: Notes 1996 1995 Assets Current assets: Cash and cash equivalents $ 7,687 $ 7,259 Marketable securities U 450 442 Notes and accounts receivable - trade, net of allowances 16,515 16,450 Sales-type leases receivable 5,721 5,961 Other accounts receivable 931 991 Inventories C 5,870 6,323 Prepaid expenses and other current assets 3,521 3,265 - ------------------------------------------------------------------------------------------------ Total current assets 40,695 40,691 - ------------------------------------------------------------------------------------------------ Plant, rental machines and other property D 41,893 43,981 Less: Accumulated depreciation 24,486 27,402 - ------------------------------------------------------------------------------------------------ Plant, rental machines and other property - net 17,407 16,579 - ------------------------------------------------------------------------------------------------ Software, less accumulated amortization (1996, $ 12,199; 1995, $ 11,276) 1,435 2,419 Investments and sundry assets E 21,595 20,603 - ------------------------------------------------------------------------------------------------ Total assets $ 81,132 $ 80,292 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Current liabilities: Taxes $ 3,029 $ 2,634 Short-term debt F 12,957 11,569 Accounts payable 4,767 4,511 Compensation and benefits 2,950 2,914 Deferred income 3,640 3,469 Other accrued expenses and liabilities 6,657 6,551 - ------------------------------------------------------------------------------------------------ Total current liabilities 34,000 31,648 - ------------------------------------------------------------------------------------------------ Long-term debt F 9,872 10,060 Other liabilities K 14,005 14,354 Deferred income taxes G 1,627 1,807 - ------------------------------------------------------------------------------------------------ Total liabilities 59,504 57,869 - ------------------------------------------------------------------------------------------------ Contingencies L Stockholders' equity: Preferred stock, par value $.01 per share - shares authorized: 150,000,000 shares issued: 1996 - 2,610,711; 1995 - 2,610,711 P 253 253 Common stock, par value $1.25 per share - shares authorized: 750,000,000 shares issued: 1996 - 509,070,542; 1995 - 548,199,013 P&V 7,752 7,488 Retained earnings 11,189 11,630 Translation adjustments 2,401 3,036 Treasury stock, at cost (shares: 1996 - 1,089,533; 1995 - 424,583) (135) (41) Net unrealized gain on marketable securities 168 57 - ------------------------------------------------------------------------------------------------ Total stockholders' equity 21,628 22,423 - ------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 81,132 $ 80,292 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement. 57. CONSOLIDATED STATEMENT OF CASH FLOWS International Business Machines Corporation and Subsidiary Companies (Dollars in millions)
For the year ended December 31: 1996 1995 1994 Cash flow from operating activities: Net earnings $ 5,429 $ 4,178 $ 3,021 Adjustments to reconcile net earnings to cash provided from operating activities: Depreciation 3,676 3,955 4,197 Amortization of software 1,336 1,647 2,098 Effect of restructuring charges (1,491) (2,119) (2,772) Purchased in-process research and development 435 1,840 - Deferred income taxes 11 1,392 825 Gain on disposition of fixed and other assets (300) (339) (11) Other changes that (used) provided cash: Receivables (650) (530) 653 Inventories 196 107 1,518 Other assets (980) (1,100) 187 Accounts payable 319 659 305 Other liabilities 2,294 1,018 1,772 - ------------------------------------------------------------------------------------------- Net cash provided from operating activities 10,275 10,708 11,793 - ------------------------------------------------------------------------------------------- Cash flow from investing activities: Payments for plant, rental machines and other property (5,883) (4,744) (3,078) Proceeds from disposition of plant, rental machines and other property 1,314 1,561 900 Acquisition of Lotus Development Corporation - net - (2,880) - Acquisition of Tivoli Systems, Inc. - net (716) - - Investment in software (295) (823) (1,361) Purchases of marketable securities and other investments (1,613) (1,315) (3,866) Proceeds from marketable securities and other investments 1,470 3,149 2,476 Proceeds from the sale of Federal Systems Company - - 1,503 - ------------------------------------------------------------------------------------------- Net cash used in investing activities (5,723) (5,052) (3,426) - ------------------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds from new debt 7,670 6,636 5,335 Short-term borrowings less than 90 days - net (919) 2,557 (1,948) Payments to settle debt (4,992) (9,460) (9,445) Preferred stock transactions - net - (870) (10) Common stock transactions - net (5,005) (4,656) 318 Cash dividends paid (706) (591) (662) - ------------------------------------------------------------------------------------------- Net cash used in financing activities (3,952) (6,384) (6,412) - ------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (172) 65 106 - ------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 428 (663) 2,061 Cash and cash equivalents at January 1 7,259 7,922 5,861 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 7,687 $ 7,259 $ 7,922 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Supplemental data: Cash paid during the year for: Income taxes $ 2,229 $ 1,453 $ 649 Interest $ 1,563 $ 1,720 $ 2,132 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement. 58. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY International Business Machines Corporation and Subsidiary Companies
Net (Dollars in millions) Unrealized Gain on Preferred Common Retained Translation Treasury Marketable Stock Stock Earnings Adjustments Stock Securities Total 1994 Stockholders' equity, January 1, 1994 $ 1,091 $ 6,980 $ 10,009 $ 1,658 $ - $ - $ 19,738 Net earnings 3,021 3,021 Cash dividends declared - common stock (585) (585) Cash dividends declared - preferred stock (84) (84) Preferred stock purchased and retired (105,000 shares) (10) (10) Common stock issued under employee plans (6,120,255 shares) 318 318 Common stock issued to U.S. pension plan fund (671,030 shares) 39 39 Purchases (1,401,740 shares) and sales (934,919 shares) of treasury stock under employee plans - net (9) (34) (43) Tax reductions - employee plans 5 5 Other 1,014 1,014 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1994 1,081 7,342 12,352 2,672 (34) - 23,413 1995 Net earnings 4,178 4,178 Cash dividends declared - common stock (572) (572) Cash dividends declared - preferred stock (20) (20) Common stock purchased and retired (50,906,300 shares) (655) (4,209) (4,864) Preferred stock purchased and retired (8,534,289 shares) (828) (42) (870) Common stock issued under employee plans (4,271,948 shares) 279 279 Purchases (4,662,047 shares) and sales (4,706,964 shares) of treasury stock under employee plans - net (57) (7) (64) Conversion of debentures (6,653,121 shares) 471 471 Tax reductions - employee plans 51 51 Other 364 57 421 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1995 253 7,488 11,630 3,036 (41) 57 22,423 1996 Net earnings 5,429 5,429 Cash dividends declared - common stock (686) (686) Cash dividends declared - preferred stock (20) (20) Common stock purchased and retired (48,975,700 shares) (710) (5,046) (5,756) Common stock issued under employee plans (9,847,229 shares) 811 (13) 798 Purchases (4,457,166 shares) and sales (3,792,216 shares) of treasury stock under employee plans - net (105) (94) (199) Tax reductions - employee plans 163 163 Other (635) 111 (524) - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1996 $ 253 $ 7,752 $ 11,189 $ 2,401 $ (135) $ 168 $ 21,628 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
The notes on pages 60 through 85 are an integral part of this statement. 59. 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 majority owned subsidiary companies. Investments in business entities in which IBM does not have control, but has the ability to exercise significant influence over operating and financial policies (generally 20-50 percent ownership), are accounted for by the equity method. Other investments are accounted for by the cost method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions the company may undertake in the future, actual results ultimately may differ from the estimates. Revenue Revenue from hardware sales or sales-type leases is recognized when the product is shipped. Revenue from one-time-charge licensed software is recognized when the program is shipped with an appropriate deferral for post-contract customer support. This deferral is earned over the support period. Revenue from monthly software licenses is recognized as license fees accrue; from maintenance and services over the contractual period or as the services are performed; from rentals and operating leases, monthly as the fees accrue; and from financing at level rates of return over the term of the lease or receivable. Revenue is reduced for estimated customer returns and allowances. Income Taxes Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In accordance with SFAS 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws. Translation of Non-U.S. Currency Amounts Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate component of stockholders' equity. Inventories and plant, rental machines and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars, or whose economic environment is highly inflationary, are translated at approximate exchange rates prevailing when acquired. All other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are translated at historical exchange rates. All other income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses that result from translation are included in earnings. 60. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Financial Instruments In the normal course of business, the company enters into a variety of derivative financial instruments solely for the purpose of currency exchange rate and interest rate risk management. Refer to note U, "Financial Instruments," on pages 80 though 82 for descriptions of these financial instruments, including the methods used to account for them. In assessing the fair value of its financial instruments, both derivative and non-derivative, the company uses a variety of methods and assumptions, which are based on market conditions and risks existing at each balance sheet date. Quoted market prices or dealer quotes for the same or similar instrument were used for the majority of marketable securities, long-term investments and long-term debt. Other techniques, such as option pricing models, estimated discounted value of future cash flows, replacement cost and termination cost, have been used to determine fair value for the remaining financial instruments. These values represent a general approximation of possible value and may never actually be realized. Cash Equivalents All highly liquid investments with a maturity of three months or less at date of purchase are carried at fair value and considered to be cash equivalents. Inventories Raw materials, work in process and finished goods are stated at the lower of average cost or market. Depreciation Plant, rental machines and other property are carried at cost, and depreciated over their estimated useful lives using the straight-line method. Software Costs related to the conceptual formulation and design of licensed programs are expensed as research and development. Costs incurred subsequent to establishment of technological feasibility to produce the finished product are capitalized. The annual amortization of the capitalized amounts is the greater of the amount computed based on the estimated revenue distribution over the products' revenue-producing lives, or the straight-line method, and is applied over periods ranging up to four years. Periodic reviews are performed to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged against income as incurred, or when related revenue is recognized, whichever occurs first. Retirement Plans and Nonpension Postretirement Benefits Current service costs of retirement plans and postretirement healthcare and life insurance benefits are accrued in the period. Prior service costs resulting from amendments to the plans are amortized over the average remaining service period of employees expected to receive benefits. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Goodwill Goodwill is charged to earnings on a straight-line basis over the periods estimated to be benefited, currently not exceeding five years. Common Stock Common stock refers to the $ 1.25 par value capital stock as designated in the company's Certificate of Incorporation. Net earnings per common share amount is computed by dividing earnings after deduction of preferred stock dividends and transaction costs by the average number of common shares outstanding in the period. B Accounting Changes The company implemented new accounting standards in 1996, 1995 and 1994. None of these standards had a material effect on the financial position or results of operations of the company. In 1996, the company adopted the American Institute of Certified Public Accountants Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." This SOP provides authoritative guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. In 1996, the company implemented the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." See note O, "Stock-Based Compensation Plans," on pages 73 through 75 for further information. In June 1996, the Financial Accounting Standards Board issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. While the standard requires implementation in 1997, the company is already generally in compliance. Effective January 1, 1995, the company implemented SFAS 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These standards prescribe impairment measurements and reporting related to certain loans. The company implemented SFAS 116, "Accounting for Contributions Received and Contributions Made," effective January 1, 1995. This standard requires that the fair value of contributions, including unconditional promises to give, be recognized as expense in the period made. In 1995, the company implemented SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The company was generally in conformance with this standard prior to adoption. 62. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies In 1995, the company adopted the American Institute of Certified Public Accountants SOP 93-7, "Reporting on Advertising Costs." This SOP provides guidance on financial reporting of advertising costs in annual financial statements. The company was generally in conformance with this SOP prior to adoption. See note H, "Selling and Advertising," on page 68 for additional disclosure on advertising expenses. Effective January 1, 1994, the company implemented SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. See note U, "Financial Instruments," on pages 80 though 82 for further information. C Inventories At December 31: (Dollars in millions) 1996 1995 Finished goods $ 1,413 $ 1,241 Work in process 4,377 4,990 Raw materials 80 92 -------- -------- Total $ 5,870 $ 6,323 -------- -------- -------- -------- D Plant, Rental Machines and Other Property At December 31: (Dollars in millions) 1996 1995 Land and land improvements $ 1,208 $ 1,348 Buildings 12,073 12,653 Plant, laboratory and office equipment 24,824 26,658 -------- -------- 38,105 40,659 Less: Accumulated depreciation 22,935 25,604 -------- -------- 15,170 15,055 Rental machines 3,788 3,322 Less: Accumulated depreciation 1,551 1,798 -------- -------- 2,237 1,524 Total $ 17,407 $ 16,579 -------- -------- -------- -------- 63. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies E Investments and Sundry Assets At December 31: (Dollars in millions) 1996 1995 Net investment in sales-type leases* $ 13,345 $ 14,007 Less: Current portion - net 5,721 5,961 -------- -------- 7,624 8,046 Deferred taxes 3,246 3,376 Prepaid pension cost 3,324 2,535 Non-current customer loan receivables 2,622 2,390 Installment payment receivables 830 844 Investments in business alliances 884 509 Goodwill, less accumulated amortization (1996, $ 1,300; 1995, $ 913) 1,067 870 Other investments and sundry assets 1,998 2,033 -------- -------- Total $ 21,595 $ 20,603 -------- -------- -------- -------- *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 $471 million and $470 million at December 31, 1996 and 1995, respectively, and is reflected net of unearned income at these dates of approximately $2,000 million and $2,100 million, respectively. Scheduled maturities of minimum lease payments outstanding at December 31, 1996, expressed as a percentage of the total, are approximately as follows: 1997, 47 percent; 1998, 30 percent; 1999, 16 percent; 2000, 5 percent; and 2001 and beyond, 2 percent. F Debt Short-term debt At December 31: (Dollars in millions) 1996 1995 Commercial paper $ 6,069 $ 4,933 Short-term loans 3,966 3,755 Long-term debt: Current maturities 2,922 2,881 -------- -------- Total $ 12,957 $ 11,569 -------- -------- -------- -------- The weighted-average interest rates for commercial paper at December 31, 1996 and 1995, were approximately 5.6 percent and 5.7 percent, respectively. The weighted-average interest rates for short-term loans at December 31, 1996 and 1995, were approximately 5.7 percent and 6.6 percent, respectively. 64. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Long-term debt At December 31: (Dollars in millions) Maturities 1996 1995 U.S. Dollars: Debentures: 7% 2025 $ 600 $ 600 7% 2045 150 150 7-1/8% 2096 850 - 7-1/2% 2013 550 550 8-3/8% 2019 750 750 Notes: 5-1/2% to 7-1/2% 1997-2002 3,025 3,025 7-1/2% to 9-1/2% 1997-2000 174 186 Medium-term note program: 6.0% average 1997-2009 1,851 1,730 Other U.S. dollars: 5.9% to 8.9% 1997-2012 330 416 -------- ------- 8,280 7,407 Other currencies (average interest rate at December 31, 1996, in parentheses): Japanese yen (2.8%) 1997-2014 4,028 4,149 Swiss francs 1996 - 43 Canadian dollars (11.0%) 1997-1999 5 431 French francs (10.1%) 1997-2002 282 358 Australian dollars (6.7%) 1997-1998 44 320 Other (11.6%) 1996-2017 188 256 -------- ------- 12,827 12,964 Less: Net unamortized discount 33 23 -------- ------- 12,794 12,941 Less: Current maturities 2,922 2,881 -------- ------- Total $ 9,872 $10,060 -------- ------- -------- ------- Annual maturities in millions of dollars on long-term debt outstanding at December 31, 1996, are as follows: 1997, $2,922; 1998, $1,462; 1999, $1,469; 2000, $2,478; 2001, $386; 2002 and beyond, $4,110. 65. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies G Taxes (Dollars in millions) 1996 1995 1994 For the year ended December 31: Earnings before income taxes: U.S. operations $ 3,025 $ 2,149 $ 1,574 Non-U.S. operations 5,562 5,664 3,581 -------- -------- -------- $ 8,587 $ 7,813 $ 5,155 -------- -------- -------- -------- -------- -------- The provision for income taxes by geographic operations is as follows: U.S. operations $ 1,137 $ 1,538 $ 654 Non-U.S. operations 2,021 2,097 1,480 -------- -------- -------- Total provision for income taxes $ 3,158 $ 3,635 $ 2,134 -------- -------- -------- -------- -------- -------- The components of the provision for income taxes by taxing jurisdiction are as follows: U.S. federal: Current $ 727 $ 85 $ 49 Deferred 83 1,075 74 -------- -------- -------- 810 1,160 123 U.S. state and local: Current 158 65 68 Deferred (353) - - -------- -------- -------- (195) 65 68 Non-U.S.: Current 2,262 2,093 1,192 Deferred 281 317 751 -------- -------- -------- 2,543 2,410 1,943 -------- -------- -------- Total provision for income taxes 3,158 3,635 2,134 Social security, real estate, personal property and other taxes 2,584 2,566 2,465 -------- -------- -------- Total taxes $ 5,742 $ 6,201 $ 4,599 -------- -------- -------- -------- -------- -------- The effect of tax law changes on deferred tax assets and liabilities did not have a significant impact on the company's effective tax rate. 66. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies The significant components of activities that gave rise to deferred tax assets and liabilities included on the balance sheet were as follows: Deferred Tax Assets At December 31: (Dollars in millions) 1996 1995* Employee benefits $ 3,554 $ 3,374 Capitalized research and development 1,478 1,772 Restructuring charges 1,323 2,003 Asset impairments 1,304 1,424 Alternative minimum tax credits 1,016 859 Deferred income 993 306 General business credits 452 452 Foreign tax loss carryforwards 368 303 Equity alliances 340 407 Intracompany sales and services 194 325 State and local tax loss carryforwards 166 236 Depreciation 123 172 Foreign tax credits - 1,183 Other 2,411 2,463 -------- -------- Gross deferred tax assets 13,722 15,279 Less: Valuation allowance 2,239 3,868 -------- -------- Net deferred tax assets $ 11,483 $ 11,411 -------- -------- -------- -------- Deferred Tax Liabilities Sales-type leases $ 3,126 $ 2,898 Retirement benefits 1,967 1,919 Depreciation 1,702 1,787 Software costs deferred 648 967 Other 1,465 1,320 -------- -------- Gross deferred tax liabilities $ 8,908 $ 8,891 -------- -------- -------- -------- *Reclassified to conform to 1996 presentation. The estimated reversal periods for the largest deductible temporary differences are: Employee benefits - 1 to 30 years; Capitalized research and development - 1 to 7 years; Restructuring - 1 to 5 years. The valuation allowance applies to U.S. federal tax credits, state and local net deferred tax assets and net operating loss carryforwards, and net operating losses in certain foreign jurisdictions that may expire before the company can utilize them. The net change in the total valuation allowance for the year ended December 31, 1996, was principally due to the use of available foreign tax credits in conjunction with the repatriation of dividends from foreign subsidiaries and any resulting benefit in the current year was substantially reduced by the additional tax cost associated with the dividend repatriation. It is reasonably possible that the deferred tax asset valuation allowance could continue to decrease in the near term, depending on the company's ability to generate sufficient taxable income in multiple tax jurisdictions. 67. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies The consolidated effective income tax rate was 37 percent in 1996, 47 percent in 1995 and 41 percent in 1994. 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: 1996 1995 1994 Statutory rate 35% 35% 35% Foreign tax differential 2 2 5 State and local 1 1 1 U.S. valuation allowance (6) (2) - Other 3 2 - ---- ---- ---- Effective rate before purchased in-process research and development 35% 38% 41% Purchased in-process research and development 2 9 - ---- ---- ---- Effective rate 37% 47% 41% For tax return purposes, the company has available tax credit carryforwards of approximately $ 1,673 million, of which $ 1,016 million have an indefinite carryforward period, $ 184 million expire in 1999 and the remainder thereafter. The company also has state and local and foreign tax loss carryforwards, the tax effect of which is $ 534 million. Most of these carryforwards have an indefinite carryforward period. Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings amounted to $ 12,111 million at December 31, 1996, $ 12,565 million at December 31, 1995 and $ 11,280 million at December 31, 1994. 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. H Selling and Advertising Selling and advertising expenses are charged against income as incurred. Advertising and promotional expense included in SG&A expense amounted to $ 1,569 million, $ 1,315 million and $ 977 million in 1996, 1995 and 1994, respectively. I Research, Development and Engineering Research, development and engineering expenses amounted to $ 4,654 million in 1996, $ 4,170 million in 1995 and $ 4,363 million in 1994. Expenditures for product-related engineering included in these amounts were $ 720 million, $ 783 million and $ 981 million in 1996, 1995 and 1994, respectively. Expenditures of $ 3,934 million in 1996, $ 3,387 million in 1995 and $ 3,382 million in 1994 were made for research and development activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses. Of these amounts, software-related activities were $ 1,726 million, $ 1,157 million and $ 793 million in 1996, 1995 and 1994, respectively. Purchased in-process research and development was $ 435 million and $ 1,840 million, for 1996 and 1995, respectively. 68. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies J Interest on Debt Interest paid and accrued on borrowings of the company and its subsidiaries amounted to $ 1,565 million in 1996, $ 1,600 million in 1995 and $ 2,006 million in 1994. Of these amounts, $ 31 million in 1996, $ 23 million in 1995 and $ 20 million in 1994 were capitalized. The remainder was charged to cost of rentals and financing, and interest expense. The year-to-year decrease in interest expense was primarily a result of lower average interest rates which were 7.0 percent, 7.2 percent and 8.0 percent in 1996, 1995 and 1994, respectively. K Other Liabilities and Environmental Other liabilities consists principally of accruals for nonpension postretirement benefits for U.S. employees and indemnity and retirement plan reserves for non-U.S. employees. More detailed discussion of these liabilities appears in note R, "Nonpension Postretirement Benefits," on pages 78 and 79, and note Q, "Retirement Plans," on pages 76 through 78. In addition, accruals associated with prior year infrastructure reduction actions amounted to $ 2.8 billion at December 31, 1996. In addition, the company continues to participate in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned facilities and Superfund sites. The company accrues for all known environmental liabilities for remediation cost when a cleanup program becomes probable and costs can be reasonably estimated. Estimated environmental costs associated with post-closure activities, such as the removal and restoration of chemical storage facilities and monitoring, are accrued when the decision is made to close a facility. The amounts accrued, which do not reflect any insurance recoveries, were $ 244 million and $ 223 million at December 31, 1996 and 1995, respectively. The amounts accrued do not cover sites that are in the preliminary stages of investigation where neither the company's percentage of responsibility nor the extent of cleanup required has been identified. Also excluded is the cost of internal environmental protection programs that are primarily preventive in nature. Estimated environmental costs are not expected to materially impact the financial position or results of the company's operations in future periods. However, environmental cleanup periods are protracted in length, and environmental costs in future periods are subject to changes in environmental remediation regulations. L Contingencies On February 25, 1993, a consolidated and amended class action complaint was filed against the company in the United States District Court for the Southern District of New York alleging violations of Section 12 of the Securities Act of 1933 and Section 10 of the Securities Exchange Act of 1934. The complaint alleges, among other matters, that the company disseminated false and misleading statements concerning its financial condition and dividends during certain periods of 1992, as a result of which plaintiffs were injured in connection with their purchases of IBM stock during the period of September 30, 1992, through December 14, 1992. The plaintiffs seek money damages. On February 3, 1997, Judge Jed S. Rakoff issued an order granting the company's motion for summary judgment in this case in its entirety. The company does not believe that the ultimate outcome of this matter will have a material effect on its results of operations or its financial position. 69. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies M Customer Financing The primary focus of IBM's worldwide customer financing offerings is to support customers in their acquisitions of the company's products and services. This support is provided both by IBM and through its financing subsidiaries, the results of which are presented in this note in a consistent manner. The following schedules reflect the financial position, net earnings and cash flows for customer financing in comparison to the company's consolidated results with customer financing results reflected on an equity basis. This involves presenting within a single line item the investment and related return from customer financing as reflected in the company's consolidated financial statements. For the statement of financial position, customer financing's assets net of related liabilities, and after elimination of applic able intracompany transactions, are shown separately as a single line item, Investment in customer financing. Eliminations primarily pertain to internal mark-ups to fair value on equipment held on operating leases. With respect to the statement of earnings, net earnings for customer financing before applicable taxes and after elimination of related intracompany transactions, are included in the line description, Other income. The provision for income taxes for customer financing is based on the statutory income tax rate of each country, calculated on a separate return basis. For the statement of cash flows, certain cash flow activities are reclassified to be consistent with the classification of such activities reflected in the company's Consolidated Statement of Cash Flows. Such reclassifications primarily pertain to cash flow activity related to financing receivables. Because customer financing is different in nature from the company's manufacturing, development and services businesses, management believes that the aforementioned type of comparative disclosure enhances the understanding and analysis of the consolidated financial statements. 70. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Statement of Financial Position IBM with At December 31: Customer Financing Customer Financing on an Equity Basis (Dollars in millions) 1996 1995* 1996 1995* Assets: Cash and cash equivalents $ 1,433 $ 808 $ 6,254 $ 6,451 Notes and accounts receivable - - 10,063 10,981 Net investment in capital leases 13,430 14,096 - - Working capital financing receivables 4,030 3,886 - - Loans receivable 6,428 5,481 - - Inventories 98 87 5,788 6,252 Plant, rental machines and other property, net of accum. depreciation 3,988 2,924 15,229 15,101 Other assets 2,386 1,564 15,010 14,501 Investment in customer financing - - 5,613 4,768 -------- ------- -------- -------- Total assets $ 31,793 $28,846 $ 57,957 $ 58,054 -------- ------- -------- -------- -------- ------- -------- -------- Liabilities and stockholders' equity: Taxes, accrued expenses and other liabilities $ 7,915 $ 5,992 $ 34,127 $ 33,724 Debt 20,627 19,722 2,202 1,907 -------- ------- -------- -------- Total liabilities 28,542 25,714 36,329 35,631 Stockholders' equity/invested capital 3,251 3,132 21,628 22,423 -------- ------- -------- -------- Total liabilities and stockholders' equity $ 31,793 $28,846 $ 57,957 $ 58,054 -------- ------- -------- -------- -------- ------- -------- -------- *Reclassified to conform to 1996 presentation. Statement of Earnings
IBM with For the year ended December 31: Customer Financing Customer Financing on an Equity Basis (Dollars in millions) 1996 1995 1994 1996 1995 1994 Finance and other income: Finance income $ 2,048 $ 2,110 $ 2,026 $ - $ - $ - Rental income, net 509 415 338 590 469 589 Sales 809 1,001 1,160 71,798 67,588 59,991 Other income 320 367 933 1,381 1,473 1,423 ------- ------- ------- ------- ------- ------- Total finance and other income 3,686 3,893 4,457 73,769 69,530 62,003 Interest and other costs and expenses 2,426 2,782 3,245 65,182 61,717 56,848 ------- ------- ------- ------- ------- ------- Net earnings before income taxes 1,260 1,111 1,212 8,587 7,813 5,155 Provision for income taxes 531 428 505 3,158 3,635 2,134 ------- ------- ------- ------- ------- ------- Net earnings $ 729 $ 683 $ 707 $ 5,429 $ 4,178 $ 3,021 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
71. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Statement of Cash Flows
For the year ended December 31: IBM with Customer Financing Customer Financing on an Equity Basis (Dollars in millions) 1996 1995 1994 1996 1995 1994 Net cash provided from operating activities $ 5,314 $ 3,712 $ 2,669 $ 8,217 $ 9,250 $ 8,393 Net cash used in investing activities (5,544) (3,968) (249) (3,435) (3,338) (2,446) Net cash provided from (used in) financing activities 872 (198) (3,294) (4,824) (6,186) (3,118) Effect of exchange rate changes on cash and cash equivalents (17) (42) 82 (155) 107 24 ------- ------- ------- ------- ------- ------- Net change in cash and cash equivalents 625 (496) (792) (197) (167) 2,853 Cash and cash equivalents at January 1 808 1,304 2,096 6,451 6,618 3,765 ------- ------- ------- ------- ------- ------- Cash and cash equivalents at December 31 $ 1,433 $ 808 $ 1,304 $ 6,254 $ 6,451 $ 6,618 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Customer financing debt at December 31, 1996, consisted of borrowings with external financial institutions of $ 14,127 million and intracompany borrowings of $ 6,500 million. Intracompany borrowings are made pursuant to loan agreements between the parties at interest rates approximating market rates. Customer financing earnings yielded a return on average invested capital of 22.7 percent in 1996, compared to 22.6 percent in 1995. Included within these results are intracompany services and fees received for tax benefits provided to the company resulting from tax deferrals generated by financing transactions. Such fees are eliminated from the Consolidated Statement of Earnings. The 1994 earnings included income resulting from IBM Credit Corporation's litigation settlement with Comdisco, Inc., and from IBM Credit Corporation's sale of IBM Credit Investment Management Corporation. 72. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies N Rental Expense and Lease Commitments Rental expense, including amounts charged to inventories and fixed assets and excluding amounts previously reserved, was $ 1,210 million in 1996, $ 1,145 million in 1995 and $ 1,276 million in 1994. The table below depicts gross minimum rental commitments under non-cancelable leases, amounts related to vacant space which the company had previously reserved and sublease income commitments. These amounts generally reflect activities related to office space. Beyond (Dollars in millions) 1997 1998 1999 2000 2001 2001 Gross rental commitments $ 1,129 $ 1,005 $ 888 $ 761 $ 580 $ 1,722 Vacant space 322 283 231 215 167 438 Sublease income commitments 119 110 96 84 66 129 O Stock-Based Compensation Plans The company applies Accounting Principles Board (APB) Opinion 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 1994 Long-Term Performance Plan (the "Plan"), which was approved by stockholders in April 1994. The Plan is administered by the Executive Compensation and Management Resources Committee of the Board of Directors. The committee determines the type and terms of the award to be granted, including vesting provisions. Awards may include stock options, stock appreciation rights (SARs), restricted stock, cash, stock or any combination thereof. The number of shares that may be issued under the Plan for awards granted wholly or partly in stock during the five-year term of the Plan is 29.1 million, which approximated 5 percent of the outstanding common stock as determined on February 10, 1994. Prior to April 25, 1994, awards were issued under the IBM 1989 Long-Term Performance Plan. There were approximately 13.0 million, 21.0 million and 27.8 million unused shares available for granting under the 1994 Long-Term Performance Plan as of December 31, 1996, 1995 and 1994, respectively. Awards under the Plan resulted in compensation expense of $ 203.9 million, $ 106.3 million and $ 139.1 million, that was included in net earnings before income taxes, in 1996, 1995 and 1994, respectively. Such awards include those that settle in cash, such as SARs, and restricted stock grants. 73. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Stock Option Grants Stock options granted under the Plan allow the purchase of IBM's common stock at 100 percent of the market price on the date of grant and typically expire 10 years from the date of grant. The following table summarizes option activity of the Plan during 1996, 1995 and 1994:
1996 1995 1994 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 Balance at January 1 $ 78 34,282,903 $ 68 34,063,317 $ 83 29,260,724 Options granted 126 7,679,529 77 6,468,702 54 6,863,219 Options exercised 71 (9,651,311) 51 (3,695,789) 44 (235,044) Options terminated 121 (1,593,460) 103 (2,553,327) 91 (1,825,582) ----- ---------- ----- ---------- ----- ---------- Balance at December 31 $ 88 30,717,661 $ 78 34,282,903 $ 68 34,063,317 ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- Exercisable at December 31 $ 83 15,301,922 $ 91 19,176,410 $ 103 16,666,537 ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ----------
The shares under option at December 31, 1996, were at the following exercise prices:
Options Options Outstanding Currently Exercisable Wtd. Avg. Wtd. Avg. Wtd. Avg. No. of Exercise Contractual No. of Exercise Exercise Price Range Options Price Life (in years) Options Price $43 - 99 18,570,322 $ 64 7 10,678,111 $ 65 $100 - 139 11,398,198 122 7 3,890,671 117 $140 & over 749,141 160 2 733,140 160 ---------- ---------- 30,717,661 15,301,922 ---------- ---------- ---------- ----------
IBM Employees Stock Purchase Plan The IBM Employees Stock Purchase Plan (ESPP) enables substantially all regular employees to purchase full or fractional shares of IBM common stock through payroll deductions of up to 10 percent of eligible compensation. The price an employee pays is 85 percent of the average market price on the last day of an applicable pay period. During 1996, 1995 and 1994, employees purchased 3,230,928; 4,479,340 and 6,576,030 shares, all of which were treasury shares, for which $ 324 million, $ 344 million and $ 350 million was paid to IBM, respectively. There were approximately 20.1 million, 23.3 million and 15.1 million reserved unissued shares available for purchase, as previously approved by stockholders, at December 31, 1996, 1995 and 1994, respectively. 74. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Pro Forma Disclosure In applying APB Opinion 25, no expense was recognized for stock options granted under the Plan and for employee stock purchases under the ESPP. Beginning in 1995, SFAS 123, "Accounting for Stock-Based Compensation," required that a fair market value of all awards of stock-based compensation be determined using standard techniques and that pro forma net earnings and earnings per share be disclosed as if the resulting stock-based compensation amounts were recorded in the Consolidated Statement of Earnings as follows:
1996 1995 (Dollars in millions except per share amounts) As reported Pro forma As reported Pro forma Net earnings applicable to common shareholders $ 5,409 $ 5,267 $ 4,116 $ 4,020 Net earnings per share of common stock $ 10.24 $ 9.97 $ 7.23 $ 7.06
The above pro forma amounts, for purposes of SFAS 123, reflect the portion of the estimated fair value of awards earned in 1996 and 1995. The aggregate fair value of awards granted is earned ratably over the vesting or service period and is greater than that included in the pro forma amounts. The company used the Black-Scholes model to value the stock options granted in 1996 and 1995. The weighted average assumptions used to estimate the value of the options included in the pro forma amounts, and the weighted average estimated fair value of an option granted are as follows: 1996 1995 Term (years)* 5/6 5/6 Volatility** 22.0% 21.0% Risk-free interest rate (zero coupon U.S. Treasury note) 6.0% 7.0% Dividend yield 1.2% 2.0% Weighted average fair value $ 40 $ 23 *Option term is based on tax incentive options (5 years) and non-tax incentive options (6 years). **To determine volatility the company measured the daily price changes of the stock over the most recent 5 and 6 year periods. P Stock Repurchases In 1996 and 1995, the Board of Directors authorized the company to purchase up to $ 13.5 billion of IBM common stock. During 1996 and 1995, the company repurchased 49,465,200 common shares at a cost of $ 5,810 million and 50,906,300 common shares at a cost of $ 4,864 million, respectively. The repurchases resulted in a reduction of $ 61,831,500 and $ 63,632,875 in the stated capital (par value) associated with common stock in 1996 and 1995, respectively. The repurchased shares were retired and restored to the status of authorized but unissued shares. At December 31, 1996, approximately $ 2.8 billion of Board authorized repurchases remained. The company plans to purchase shares on the open market from time to time, depending on market conditions. During 1995, the IBM Board of Directors authorized the company to purchase all of its outstanding Series A 7 1/2 percent preferred stock depositary shares. The company repurchased 8,534,289 shares at a cost of $ 870 million during 1995, which resulted in a reduction of $ 85,343 in the stated capital (par value) associated with preferred stock. The repurchased shares were retired and restored to the status of authorized but unissued shares. No shares were repurchased in 1996. The company plans to purchase remaining shares on the open market and in private transactions from time to time, depending on market conditions. 75. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Q Retirement Plans The company and its subsidiaries have defined benefit and defined contribution retirement plans covering substantially all regular employees. The cost of the defined contribution plans was not material. The aggregate worldwide cost of the defined benefit plans for 1996, 1995 and 1994 was $ (137) million, $ 165 million and $ 678 million, respectively, as follows:
Net Periodic Pension Cost U.S. Plan Non-U.S. Plans 1996 1995 1994 1996 1995 1994 Expected long-term rate of return on plan assets 9.25% 9.25% 9.5% 6.5-10% 6.25-10% 5.5-9% (Dollars in millions) Service cost $ 412 $ 315 $ 542 $ 378 $ 386 $ 467 Interest cost on the projected benefit obligation 2,125 2,098 2,033 1,292 1,325 1,107 Return on plan assets: Actual (4,849) (5,500) 327 (2,543) (1,848) 329 Deferred 2,148 2,958 (2,826) 1,075 403 (1,540) Net amortizations (121) (123) (65) 28 12 19 Settlement (gains)/curtailment losses - - - (102) 128 269 ------- ------- ------- ------- --------- ------- Net periodic pension cost $ (285) $ (252) $ 11 $ 128 $ 406 $ 651 ------- ------- ------- ------- --------- ------- ------- ------- ------- ------- --------- ------- Total net periodic pension cost for all non-U.S. plans $ 148 $ 417 $ 667 ------- --------- ------- ------- --------- -------
Net periodic pension cost is determined using the Projected Unit Credit actuarial method. Settlement gains in 1996 reflect principally the transfer of assets to defined contribution plans upon election by the employees in certain countries. Curtailment losses in 1995 and 1994 resulted from the significant reductions in the expected years of future service caused by termination programs and represent the immediate recognition of associated prior service cost and a portion of previously unrecognized actuarial losses. In 1994, the company introduced a non-qualified U.S. Supplemental Executive Retirement Plan (SERP) effective January 1, 1995, which will be phased in over three years. The SERP, which is unfunded, provides eligible executives defined pension benefits outside the IBM Retirement Plan, based on average earnings, years of service and age at retirement. At December 31, 1996 and 199 5, the projected benefit obligation was $ 93 million and $ 82 million, respectively. The net unrecognized costs of the SERP were $ 57 million and $ 64 million, and the amounts included in the Consolidated Statement of Financial Position were pension liabilities of $ 36 million and $ 18 million as of December 31, 1996 and 1995, respectively. These amounts are in addition to the U.S. retirement plan financial information included herein. 76. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies The table below provides information on the status of the U.S. and material non-U.S. defined benefit retirement plans: Funded Status
U.S. Plan Non-U.S. Plans 1996 1995 1996 1995 Assumptions: Discount rate 7.75% 7.25% 4.5-8.5% 4.5-9.0% Long-term rate of compensation increase 5% 5% 2.3-6.5% 1.5-6.5% (Dollars in millions) Actuarial present value of benefit obligations: Vested benefit obligation $ (26,355) $ (26,413) $ (17,380) $ (17,788) Accumulated benefit obligation $ (27,698) $ (28,070) $ (18,273) $ (18,771) Projected benefit obligation $ (29,729) $ (30,235) $ (19,739) $ (20,294) Plan assets at fair value 34,281 31,209 20,808 19,693 --------- --------- --------- --------- Projected benefit obligation less than (in excess of) plan assets 4,552 974 1,069 (601) Unrecognized net (gain) loss (1,421) 1,976 (1,539) (436) Unrecognized prior service cost 193 230 248 267 Unrecognized net asset established at January 1, 1986 (1,052) (1,193) (110) (143) --------- --------- --------- --------- Prepaid pension cost (pension liability) recognized in the Consolidated Statement of Financial Position $ 2,272 $ 1,987 $ (332) $ (913) --------- --------- --------- --------- --------- --------- --------- ---------
The U.S. plan's projected benefit obligation decreased in 1996 primarily as a result of a change in the discount rate assumption, as required under SFAS 87, "Employers' Accounting for Pensions," which decreased the projected benefit obligation by approximately $ 1,700 million. The effect on the company's results of operations and financial position from changes in the estimates and assumptions used in computing pension expense and prepaid pension cost or pension liability is mitigated by the delayed recognition provisions of SFAS 87 with the exception of the effects of settlement gains, curtailment losses and early terminations, which are recognized immediately. It is the company's practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefit laws and with regard to local tax laws. Additional amounts are contributed from time to time when deemed appropriate by the company. Liabilities for amounts in excess of these funding levels are accrued and reported in the company's Consolidated Statement of Financial Position. The assets of the various plans include corporate equities, government securities, corporate debt securities and income-producing real estate. 77. 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 which is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of employees. In 1994, the company announced major changes to the plan that took effect in 1995. Under a new formula, which is being phased in over five years, retirement benefits will be determined based on points accumulated for each year worked and final average compensation period. To preserve benefits of employees close to retirement, service and earnings credit will continue to accrue under the prior formula through the year 2000, and upon retirement, these employees will receive the benefit from either the new or prior formulas, whichever is higher. Benefits become vested upon the completion of five years of service. The number of individuals receiving benefits at December 31, 1996 and 1995, was 101,293 and 92,133, respectively. Non-U.S. Plans: Most subsidiaries and branches outside the U.S. have retirement plans covering substantially all regular employees, under which funds are deposited under various fiduciary-type arrangements, annuities are purchased under group contracts or reserves are provided. Retirement benefits are based on years of service and the employee's compensation, generally during a fixed number of years immediately prior to retirement. The ranges of assumptions used for the non-U.S. plans reflect the different economic environ- ments within various countries. R Nonpension Postretirement Benefits The company and its U.S. subsidiaries have defined benefit postretirement plans that provide medical, dental and life insurance for retirees and eligible dependents. Plan cost maximums for those who retired prior to January 1, 1992, will take effect beginning with the year 2001. Plan cost maximums for all other employees take effect upon retirement. The table below provides information on the status of the U.S. plans: Funded Status 1996 1995 Assumed discount rate 7.75% 7.25% (Dollars in millions) Accumulated postretirement benefit obligation: Retirees $ (5,454) $ (5,661) Fully eligible active plan participants (512) (704) Other active plan participants (487) (653) -------- -------- Total (6,453) (7,018) Plan assets at fair value 559 886 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets (5,894) (6,132) Unrecognized net loss 378 718 Unrecognized prior service cost (902) (660) -------- -------- Accrued postretirement benefit cost recognized in the Consolidated Statement of Financial Position $ (6,418) $ (6,074) -------- -------- -------- -------- The accumulated postretirement benefit obligation was determined by application of the terms of medical, dental and life insurance plans, including the effects of established maximums on covered costs, together with relevant actuarial assumptions. These actuarial assumptions included a projected healthcare cost trend rate of 6 percent. In 1996, the accumulated postretirement benefit obligation decreased by $ 565 million primarily from the change, as required by SFAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," in the assumed discount rate. 78. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies The effect of a 1 percent annual increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation at December 31, 1996, by approximately $ 27 million; the 1996 annual costs would not be materially affected. It is the company's practice to fund amounts for postretirement benefits with an independent trustee, as deemed appropriate from time to time. The plan assets include various domestic fixed income securities. The accounting for the plan is based on the written plan. Net periodic postretirement benefit cost for U.S. retirees for the years ended December 31 included the following components: 1996 1995 1994 Expected long-term rate of return on plan assets 9.25% 9.25% 9.5% (Dollars in millions) Service cost $ 43 $ 40 $ 51 Interest cost on the accumulated postretirement benefit obligation 478 520 512 Actual return on plan assets (68) (198) 22 Net amortizations and deferrals (87) (7) (163) ------ ------ ------ Net periodic postretirement benefit cost $ 366 $ 355 $ 422 ------ ------ ------ ------ ------ ------ Certain of the company's non-U.S. subsidiaries have similar plans for retirees. However, most retirees outside the United States are covered by government-sponsored and administered programs, and the obligations and cost of these programs are not significant to the company. S Lines of Credit The company maintains a $ 10.0 billion committed global credit facility. Unused committed lines of credit from this global facility and other existing committed and uncommitted lines of credit at December 31, 1996, were $ 13.9 billion, compared to $ 14.6 billion at December 31, 1995. Interest rates on borrowings vary from country to country depending on local market conditions. 79. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies T Sale and Securitization of Receivables At year-end 1996, the company had a net balance of $ 1.1 billion in assets under management from the securitization of loans, leases and trade receivables, compared to $ 1.2 billion at year-end 1995. The company received total cash proceeds of approximately $ 4.0 billion and $ 3.4 billion in 1996 and 1995, respectively, from the sale and securitization of these receivables and assets. No material gain or loss resulted from these transactions. Recourse amounts associated with the aforementioned sales and securitization activities are expected to be minimal, and adequate reserves are in place to cover potential losses. U Financial Instruments The following presents information on certain significant on- and off-balance sheet financial instruments, including derivatives. Financial Instruments On-Balance Sheet (excluding derivatives) Financial assets with carrying values approximating fair value include cash and cash equivalents, marketable securities, notes and other accounts receivable and other investments. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued expenses and liabilities, as well as short-term and long-term debt. The following table summarizes the company's marketable securities and other investments, all of which were considered available for sale. Marketable securities and other investments At December 31: Carrying Value (Dollars in millions) 1996 1995 Current marketable securities: U.S. government securities $ 108 $ 222 Time deposits and other bank obligations 283 93 Non-U.S. government securities and other fixed-term obligations 59 127 ------ ------ Total $ 450 $ 442 ------ ------ ------ ------ Non-current marketable securities:* U.S. government securities $ 99 $ - Time deposits and other bank obligations 127 97 Non-U.S. government securities and other fixed-term obligations 155 72 ------ ------ Total $ 381 $ 169 ------ ------ ------ ------ Other investments:* Alliance investments on cost method $ 320 $ 128 ------ ------ ------ ------ *Included within Investments and sundry assets on the Consolidated Statement of Financial Position. 80. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Financial Instruments Off-Balance Sheet (excluding derivatives) IBM has guaranteed certain loans and financial commitments of affiliates. The fair market values of these financial guarantees were $ 787 million and $ 794 million at December 31, 1996 and 1995, respectively. Additionally, the company is contingently liable for commitments of various ventures to which it is a party, certain receivables sold with recourse and other contracts. These commitments, which in the aggregate were approximately $ 400 million and $ 200 million at December 31, 1996 and 1995, respectively, are not expected to have a material adverse effect on the company's financial position or results of operations. The company's dealers had unused lines of credit available from IBM for working capital financing of approximately $ 2.1 billion and $ 1.0 billion at December 31, 1996 and 1995, respectively. Derivative Financial Instruments The following table summarizes the notional value, carrying value and fair value of the company's derivative financial instruments on and off the balance sheet. The notional value at year end provides an indication of the extent of the company's involvement in such instruments, but does not represent exposure to market risk.
At December 31, 1996 At December 31, 1995 Notiona Carrying Fair Notional Carrying Fair (Dollars in millions) Value Value Value* Value Value Value* Interest rate and currency contracts $ 18,700 $ (70) $ (117) $ 13,600 $ (88) $ (161) Option contracts 10,100 92 81 4,800 18 41 --------- ----- ------ --------- ------ ------- Total $ 28,800 $ 22 $ (36) $ 18,400 $ (70) $ (120) --------- ----- ------ --------- ------ ------- --------- ----- ------ --------- ------ -------
Bracketed amounts are liabilities. *The estimated fair value of derivatives both on- and off-balance sheet at December 31, 1996 and 1995, consists of assets of $258 million and $153 million and liabilities of $294 million and $273 million, respectively. The majority of the company's derivative transactions relates to the matching of liabilities to assets associated with its worldwide customer financing business. The company issues debt, using the most efficient capital markets and products, which may result in a currency or interest rate mismatch. Interest rate swaps or currency swaps are then used to match the interest rates and currencies of its debt to the related customer financing receivables. These swap contracts are principally one to five years in duration. The company uses an internal regional center to manage the cash of its subsidiaries. This regional center principally uses currency swaps to convert cash flows in a cost-effective manner, predominantly for the company's European subsidiaries. The terms of the swaps are generally less than one year. Interest and currency rate differentials accruing under interest rate and currency swap contracts related to the customer financing business are recognized over the life of the contracts in interest expense, and the effects of contracts related to intracompany funding are recognized over the life of the contract in interest income. When the terms of the underwriting instrument are modified, or if it ceases to exist for whatever reason, all changes in fair value of the swap contracts are recognized in income each period until they mature. 81. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies Additionally, the company uses derivatives to limit its exposure to loss resulting from fluctuations in foreign currency exchange rates on anticipated cash transactions between foreign subsidiaries and the parent company. The company receives significant dividends, intracompany royalties and net payments for goods and services from its non-U.S. subsidiaries. In anticipation of these foreign currency flows, and given the volatility of the currency markets, the company selectively employs foreign currency options to manage the currency risk. The terms of these instruments are generally less than one year. For purchased options that hedge anticipated transactions, gains and losses are deferred and recognized in other income in the same period that the underlying transaction occurs, expires or is otherwise terminated. At December 31, 1996 and 1995, there were no material deferred gains or losses. The premiums associated with entering into option contracts are generally amortized over the life of the options and are not material to the company's results. Unamortized premiums are included in prepaid assets. All written options are marked to market monthly and are not material to the company's results. The company has used derivative instruments as an element of its risk management strategy for many years. Although derivatives entail a risk of non-performance by counterparties, the company manages this risk by establishing explicit dollar and term limitations that correspond to the credit rating of each carefully selected counterparty. The company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its results of operations or financial position in the future. V Subsequent Event On January 28, 1997, the IBM Board of Directors declared a two-for-one common stock split, subject to the approval of stockholders of an increase in the number of common shares authorized from 750 million to 1,875 million. The record date for the split is currently expected to be on or after May 9, 1997, with distribution of the split shares to follow on or after May 27, 1997. W Segment Information IBM is in the business of providing customer solutions through the use of advanced information technologies. The company operates primarily in the single industry segment that creates value by offering a variety of solutions that include, either singularly or in some combination, services, software, systems, products, financing and technologies. The schedule on page 83 shows revenue by classes of similar products or services. Financial information by geographic area is summarized in note X, "Geographic Areas," on pages 84 and 85. For purposes of classifying similar information technology products, general purpose computer systems that operate on a large class of applications are classified as processor servers when the systems are simultaneously used by multiple users at one time, or as clients when the systems are used by one user at a time. Servers include the System/390, AS/400, RISC System/6000 and personal computer server products. Personal systems clients include personal computers and RISC System/6000 client products. Other clients include display-based terminals and consumer and financial systems. Storage consists of externally attached direct access storage devices, tape storage devices and HDD storage files sold to external customers. Other peripherals consists of advanced function printers and telecommunication devices. OEM hardware consists primarily of revenue from the sale of semiconductors. 82. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies These hardware classes of products represent groupings that perform similar functions, as opposed to the complete spectrum of products associated with IBM's product divisions. Accordingly, they do not represent the full range of any division's offerings, which could include related peripherals, software and maintenance. Services represents a wide range of service offerings including consulting, education, systems integration design and development, managed operations of systems and networks and availability services. Software includes applications and systems software for both host and distributed systems. Maintenance consists of separately billed charges for maintenance. Financing and other is composed primarily of financing revenue and products and supplies not otherwise classified. Some products logically fit in more than one class and are assigned to a specific class based on a variety of factors. Over time, products tend to overlap, merge into or split from existing classes as a result of changing technologies, market perceptions and/or customer use. For example, market demand may create requirements for technological enhancements to permit a peripheral product to be functionally integrated with a display, a telecommunication device and a processor to form a workstation. Such interchan geability and technological progress tend to make year-to-year comparisons less valid than they would be in an industry less subject to rapid change. Revenue by Classes of Similar Products or Services
Consolidated U.S. Only (Dollars in millions) 1996 1995* 1994* 1996 1995* 1994* Information technology: Processors: Servers** $ 12,421 $ 12,597 $ 11,553 $ 4,365 $ 4,464 $ 3,958 Clients: Personal systems** 12,747 11,199 9,731 5,090 4,401 4,046 Other clients** 1,178 1,478 1,538 429 480 463 Peripherals: Storage** 4,632 4,828 4,608 2,390 1,970 1,767 Other peripherals** 2,304 2,085 2,006 860 764 810 OEMhardware 2,697 2,968 2,191 1,738 1,975 1,285 Services 15,873 12,714 9,715 6,129 4,606 3,709 Software 13,052 12,657 11,346 4,377 4,117 3,926 Maintenance 6,981 7,409 7,222 2,525 2,618 2,648 Financing and other 4,062 4,005 4,142 1,492 1,394 1,506 -------- -------- -------- ------- ------- ------- Total $ 75,947 $ 71,940 $ 64,052 $29,395 $26,789 $24,118 -------- -------- -------- ------- ------- ------- -------- -------- -------- ------- ------- -------
**Reclassified to conform to 1996 presentation. **Hardware only, includes applicable rental revenue, excludes functions not embedded, software and maintenance. 83. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies X Geographic Areas Sales and services in the United States and Canada are managed as a single enterprise. However, in compliance with SFAS 14, "Financial Reporting for Segments of a Business Enterprise," the United States is reported as a separate geographic area. Canadian operations are included in the "Americas" area. Non-U.S. subsidiaries operating in local currency environments account for approximately 84 percent of the company's non-U.S. revenue. The remaining 16 percent is from subsidiaries and branches operating in U.S. dollars or in highly inflationary environments. In the Europe/Middle East/Africa area, European operations accounted for approximately 95 percent of revenue in 1996, 1995 and 1994. Interarea transfers consist principally of completed machines, subassemblies and parts and software. Machines, subassemblies and parts are generally transferred at an intracompany selling price. Software transfers represent license fees paid by non-U.S. subsidiaries. The intracompany selling price that relates to fixed asset transfers is capitalized and depreciated by the importing area. 84. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies (Dollars in millions) 1996 1995 1994 United States Revenue - Customers $ 29,395 $ 26,789 $ 24,118 Interarea transfers 10,196 10,553 6,336 -------- -------- -------- Total $ 39,592 $ 37,342 $ 30,454 Net earnings 1,782 599 969 Assets at December 31 39,724 38,584 37,156 Europe/Middle East/Africa Revenue - Customers $ 25,280 $ 25,238 $ 23,034 Interarea transfers 2,455 2,530 1,787 -------- -------- -------- Total $ 27,735 $ 27,768 $ 24,821 Net earnings 1,474 2,271 1,086 Assets at December 31 21,732 24,066 25,816 Asia Pacific Revenue - Customers $ 14,752 $ 13,892 $ 11,365 Interarea transfers 2,781 2,698 1,876 -------- -------- -------- Total $ 17,533 $ 16,590 $ 13,241 Net earnings 1,466 1,098 567 Assets at December 31 12,152 12,789 12,619 Americas Revenue - Customers $ 6,520 $ 6,021 $ 5,535 Interarea transfers 5,123 5,333 4,257 -------- -------- -------- Total $ 11,643 $ 11,354 $ 9,792 Net earnings 578 324 498 Assets at December 31 8,123 7,530 7,783 Eliminations Revenue $(20,556) $(21,114) $(14,256) Net earnings 129 (114) (99) Assets (599) (2,677) (2,283) Consolidated Revenue $ 75,947 $ 71,940 $ 64,052 Net earnings 5,429 4,178 3,021 Assets at December 31 81,132 80,292 81,091 -------- -------- -------- -------- -------- -------- 85. International Business Machines Corporation and Subsidiary Companies Five-Year Comparison of Selected Financial Data
(Dollars in millions except per share amounts) 1996 1995 1994 1993 1992 For the year: Revenue $ 75,947 $ 71,940 $ 64,052 $ 62,716 $ 64,523 Net earnings (loss) before changes in accounting principles 5,429 4,178 3,021 (7,987) (6,865) Per share of common stock 10.24 7.23 5.02 (14.02) (12.03) Effect of accounting changes* - - - (114) 1,900 Per share of common stock - - - (.20) 3.33 Net earnings (loss) 5,429 4,178 3,021 (8,101) (4,965) Per share of common stock 10.24 7.23 5.02 (14.22) (8.70) Cash dividends paid on common stock 686 572 585 905 2,765 Per share of common stock 1.30 1.00 1.00 1.58 4.84 Investment in plant, rental machines and other property 5,883 4,744 3,078 3,232 4,698 Return on stockholders' equity 24.8% 18.5% 14.3% - - At end of year: Total assets $ 81,132 $ 80,292 $ 81,091 $ 81,113 $ 86,705 Net investment in plant, rental machines and other property 17,407 16,579 16,664 17,521 21,595 Working capital 6,695 9,043 12,112 6,052 2,955 Total debt 22,829 21,629 22,118 27,342 29,320 Stockholders' equity 21,628 22,423 23,413 19,738 27,624
*1993, postemployment benefits; 1992, income taxes. Selected Quarterly Data (Dollars in millions except per share and stock prices)
Net Per Share Common Stock Gross Earnings Earnings Stock Prices** Revenue Profit (Loss) (Loss) Dividends High Low 1996 First quarter $ 16,559 $ 6,769 $ 774 $ 1.41 $ .25 $ 128.88 $ 83.13 Second quarter 18,183 7,191 1,347 2.51 .35 120.88 96.13 Third quarter 18,062 7,258 1,285 2.45 .35 127.88 89.13 Fourth quarter 23,143 9,321 2,023 3.93 .35 166.00 123.13 -------- -------- ------- ------- ------ Total $ 75,947 $ 30,539 $ 5,429 $ 10.24* $ 1.30 -------- -------- ------- ------- ------ -------- -------- ------- ------- ------ 1995 First quarter $ 15,735 $ 6,664 $ 1,289 $ 2.12 $ .25 $ 85.13 $ 70.25 Second quarter 17,531 7,631 1,716 2.97 .25 99.38 82.25 Third quarter 16,754 6,921 (538) (.96) .25 114.63 91.63 Fourth quarter 21,920 9,151 1,711 3.09 .25 102.38 87.75 -------- -------- ------- ------- ------ Total $ 71,940 $ 30,367 $ 4,178 $ 7.23* $ 1.00 -------- -------- ------- ------- ------ -------- -------- ------- ------- ------
**The sum of the quarter's earnings per share does not equal the year-to-date earnings per share due to changes in average share calculations. This is in accordance with prescribed reporting requirements. **The stock prices reflect the high and low prices for IBM's common stock on the New York Stock Exchange composite tape for the last two years. 86. EX-21 6 SUBSIDS OF REGISTRANT EXHIBIT III PARENTS AND SUBSIDIARIES AS OF DECEMBER 31, 1996
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 Integrated Systems Solutions 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(E) IBM Australia Ltd. ..................................................... Australia 100 IBM Bahamas Ltd. ....................................................... Bahamas 100 IBM de Bolivia, S.A..................................................... Bolivia 100 IBM Brasil-Industria, Maquinas e Servicos Ltda.......................... Brazil 100(E) IBM Canada Limited-- IBM Canada Limitee.................................................... Canada 100 IBM China Company Limited............................................... China 100 IBM de Chile, S.A.C. ................................................... Chile 100(E) IBM de Colombia, S.A.................................................... Colombia 90(C) IBM Middle East FZE..................................................... United Arab Emirates 100 IBM del Ecuador, C.A.................................................... Ecuador 100 Tata Information Systems Ltd. (TISL).................................... India 50 IBM Japan, Ltd. ........................................................ Japan 100 IBM Korea, Inc. ........................................................ Korea (South) 100 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 Latin American Region S.A. ......................................... Peru 100 IBM World Trade Asia-Pacific Corporation................................ Philippines 98(A) IBM Philippines, Incorporated........................................... Philippines 100(A) IBM Romania Srl ........................................................ Romania 100 IBM Singapore Pte. Ltd. ................................................ Singapore 100 IBM Taiwan Corporation.................................................. Taiwan 100 Thai Systems Corporation Ltd............................................ Thailand 100 IBM Thailand Company Ltd................................................ Thailand 100(A) IBM del Uruguay, S.A. .................................................. Uruguay 100 IBM de Venezuela, S.A. ................................................. Venezuela 100 IBM Vietnam Company..................................................... Vietnam 100 IBM Central Europe & Russia Inc. ....................................... Delaware 100 IBM Oesterreich, Internationale Bueromaschinen Gesellschaft m.b.H....... Austria 100 IBA (International Belarussia Alliance)................................. Belarus Republic 45 International Business Machines of Belgium S.A.......................... Belgium 100 IBM Botswanna (PTY) Limited............................................. Botswana 100(A) IBM Bulgaria Ltd........................................................ Bulgaria 100 IBM Croatia Ltd./ IBM Hrvatska d.o.o. .................................. Croatia 100 IBM Ceska Republika spol. s.r.o......................................... Czech Republic 100 IBM Slovensko spol. s.r.o. ............................................. Slovak Republic 100
PARENTS AND SUBSIDIARIES AS OF DECEMBER 31, 1996
PERCENTAGE OF STATE OR COUNTRY VOTING SECURITIES OF INCORPORATION OWNED BY ITS OR ORGANIZATION IMMEDIATE PARENT ------------------- ------------------- Compagnie IBM France, S.A. ............................................. France 100(A) IBM Eurocoordination.................................................... France -- (B) IBM Europe Middle East Africa........................................... France 100(A) IBM Beteiligungs GmbH................................................... Germany 100 IBM Deutschland GmbH.................................................... Germany 82(C) International Business Machines Corporation Magyarorszagi Kft........... Hungary 100 IBM Storage Products Industrial Duty Free Zone LLC ..................... Hungary 100 IBM International Treasury Services Company............................. Ireland -- (D) IBM Ireland Ltd. ....................................................... Ireland 100 IBM SEMEA S.p.A. ....................................................... Italy 100 IBM Hellas Information Handling Systems S.A........................... Greece 100(E) IBM Israel Ltd........................................................ Israel 100(E) Companhia IBM Portuguesa, S.A......................................... Portugal 100 IBM (International Business Machines) Turk Ltd. Sirketi............... Turkey 98(C) IBM South Africa Group Ltd............................................ South Africa 52 QuanTech................................................................ Lebanon 15 International Sales and Services B.V. .................................. Netherlands 100 IBM International Centre for Asset Management N.V....................... Netherlands 100 IBM International Holdings B.V.......................................... Netherlands 100 IBM Nederland N.V....................................................... Netherlands 100 IBM International Finance 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(E) IBM Nordic Aktiebolag................................................... Sweden 100 IBM Danmark A/S....................................................... Denmark 100 Oy International Business Machines AB................................. Finland 100 IBM Svenska Aktiebolag................................................ Sweden 100 IBM International Centre for Asset Management A.G. ..................... Switzerland 100 IBM (Schweiz)--IBM (Suisse)--IBM (Svizzera)--IBM (Switzerland).......... Switzerland 100 IBM United Kingdom Holdings Ltd. ....................................... United Kingdom 100 International Business Machines Limited................................. United Kingdom 100 Bedford Investments (Private) Ltd....................................... Zimbabwe 100
- ------------------------ (A) Minor percentage held by other IBM shareholders, subject to repurchase option. (B) IBM Eurocoordination, S.A. is owned approximately 14% each by subsidiaries located in France, Germany, Italy and the United Kingdom and approximately 4% each by subsidiaries located in Austria, Belgium, Denmark, Finland, Ireland, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland and by four other minority shareholders. (C) Remaining percentage owned by another wholly-owned IBM company. (D) IBM France and IBM Finland each own 16.6% and IBM Denmark and IBM Switzerland each own 33.3% of IBM International Treasury Services Company. (E) Minor percentage owned by another wholly-owned IBM company. EX-23 7 CONSENT OF EXPERTS/COUNSEL EXHIBIT IV CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 2-77235, 2-77236, 33-5225, 33-29022, 33-33458 and 33-34406) and Form S-3 (Nos. 33-50537, 33-65119, 33-65119(1) and 333-03763) of International Business Machines Corporation of our report dated January 20, 1997 appearing on page 43 of the 1996 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 8 of this Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, N.Y. 10036 March 26, 1997 EX-24 8 POWERS OF ATTORNEY POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Cathleen P. Black ------------------------- Director CATHLEEN P. BLACK POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Harold Brown ------------------------- Director HAROLD BROWN POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Dormann ------------------------- Director JUERGEN DORMANN POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Louis V. Gerstner, Jr. ------------------------- Louis V. Gerstner, Jr. Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Nannerl O. Keohane ------------------------- Director NANNERL O. KEOHANE POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Charles F. Knight ------------------------- Director CHARLES F. KNIGHT POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Lucio A. Noto ------------------------- Director LUCIO A. NOTO POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ John B. Slaughter ------------------------- Director JOHN B. SLAUGHTER POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Alex Trotman ------------------------- Director ALEX TROTMAN POWER OF ATTORNEY OF 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 1996 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., G. Richard Thoman, Lawrence R. Ricciardi, John R. Joyce, Jeffrey D. Serkes, and John E. Hickey his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign said 10-K Annual Report and any and all amendments thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of February, 1997. ---- -------- /s/ Charles M. Vest ------------------------- Director CHARLES M. VEST EX-27 9 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 7,687 450 16,515 0 5,870 40,695 41,893 24,486 81,132 34,000 0 7,752 0 253 13,623 81,132 36,316 75,947 23,396 45,408 21,943 0 716 8,587 3,158 5,429 0 0 0 5,429 10.24 10.02
EX-99. 10 ADDITIONAL EXH EXHIBIT V INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ADDITIONAL EXHIBITS A supplemental Consolidated Statement of Earnings schedule has been provided for informational purposes only, to exclude the effects of a $435 million non-recurring, non-tax deductible charge for purchased in-process research and development in connection with the Tivoli Systems, Inc. and Object Technology International, Inc. acquisitions in March, 1996. The 1995 results also exclude the effects of the third quarter charge of $1,840 million for purchased in-process research and development in connection with the Lotus Development Corporation acquisition. This supplemental statement is shown in Exhibit V(a). These charges are discussed on pages 54 and 55 of IBM's 1996 Annual Report to Stockholders. EXHIBIT V(A) INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS* 1996 AND 1995 (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1996 1995 - -------------------------------------------------------------------------------------------- --------- --------- Revenue: Hardware sales............................................................................ $ 36,316 $ 35,600 Services ................................................................................. 15,873 12,714 Software.................................................................................. 13,052 12,657 Maintenance............................................................................... 6,981 7,409 Rentals and financing .................................................................... 3,725 3,560 --------- --------- Total revenue............................................................................... 75,947 71,940 Cost: Hardware sales............................................................................ 23,396 21,863 Services ................................................................................. 12,647 10,041 Software.................................................................................. 4,082 4,428 Maintenance............................................................................... 3,659 3,652 Rentals and financing .................................................................... 1,624 1,589 --------- --------- Total cost.................................................................................. 45,408 41,573 Gross profit................................................................................ 30,539 30,367 Operating expenses: Selling, general and administrative....................................................... 16,854 16,766 Research, development and engineering..................................................... 4,654 4,170 --------- --------- Total operating expenses.................................................................... 21,508 20,936 Operating income............................................................................ 9,031 9,431 Other income, principally interest.......................................................... 707 947 Interest expense............................................................................ 716 725 --------- --------- Earnings before income taxes................................................................ 9,022 9,653 Provision for income taxes ................................................................. 3,158 3,635 --------- --------- Net earnings ............................................................................... 5,864 6,018 Preferred stock dividends and transaction costs ............................................ 20 62 Net earnings applicable to common shareholders.............................................. $ 5,844 $ 5,956 --------- --------- --------- --------- Net earnings per share common stock......................................................... $ 11.06 $ 10.46 --------- --------- --------- --------- Average number of common shares outstanding (millions) ..................................... 528.4 569.4
- ------------------------ * See text in Exhibit V -----END PRIVACY-ENHANCED MESSAGE-----