-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, NCyEnNkVGU7Bcqhzn8Rysfa2Ntr4Kth1yTm63UM8gZ1lW5h3V5WnvGMnKPcpOoTg 5DxHid2IFkgucj6ghY/sRQ== 0000950112-95-000774.txt : 199507120000950112-95-000774.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950112-95-000774 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: MSE 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: 95523674 BUSINESS ADDRESS: STREET 1: OLD ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9147651900 10-K 1 INTERNATIONAL BUSINESS MACHINES CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1994 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 7, 1995 ON WHICH REGISTERED - --------------------------------- -------------------------- ------------------------ Capital stock, par value 584,225,210 New York Stock Exchange $1.25 per share Midwest Stock Exchange Pacific Stock Exchange Depositary shares each New York Stock Exchange representing one-fourth of a share of 7 1/2% preferred stock, par value $ .01 per share 6 3/8% Notes due 1997 New York Stock Exchange 9% Notes due 1998 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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant at March 7, 1995 was $46.6 billion. Documents incorporated by reference: Portions of IBM's Annual Report to Stockholders for the year ended December 31, 1994 into Parts I and II of Form 10-K. Portions of IBM's definitive Proxy Statement dated March 14, 1995 into Part III of Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS: IBM has two fundamental missions. First, the company strives to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, and microelectronics. Second, the company translates these advanced technologies into value for our customers worldwide through its sales and professional services units in North America, Europe/Middle East/Africa, Asia Pacific, and Latin America. Management continues to believe its decision, in 1993 to remain an integrated provider of information technology rather then becoming an emerging federation of companies, was the correct one. This single interface to the customer allows IBM employees to better understand and address the full range of the customers' information needs and to provide them with comprehensive and timely solutions. 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. 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 1994 Annual Report to Stockholders and is incorporated herein by reference: 1. Segment information and revenue by classes of similar products or services--Pages 74 and 75. 2. Financial information by geographic areas--Pages 76 and 77. 3. Amount spent during each of the last three years on research and development activities--Page 59. 4. The number of persons employed by the registrant-- Page 47. 5. The management discussion overview--Page 36. ITEM 2. PROPERTIES: At December 31, 1994, IBM's manufacturing and development facilities in the United States had aggregate floor space of 55.2 million square feet, of which 43.4 million was owned and 11.8 million was leased. Of these amounts, 8.5 million square feet was vacant and 1.0 million square feet was being leased to non-IBM businesses. Similar facilities in 15 other countries totaled 21.0 million square feet, of which 18.0 million was owned and 3.0 million was leased. Of these amounts, 2.0 million square feet was vacant and .7 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 1 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 43 of IBM's 1994 Annual Report to Stockholders which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS: Refer to note M "Contingencies" on page 62 of IBM's 1994 Annual Report to Stockholders which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: Refer to pages 78 and 79 and the inside back cover of IBM's 1994 Annual Report to Stockholders which are incorporated herein by reference solely as they relate to this item. IBM common stock is listed on the New York Stock Exchange, Midwest Stock Exchange and Pacific Stock Exchange. There were 705,318 common stockholders of record at March 7, 1995. On February 28, 1995, the Board of Directors authorized the company to repurchase outstanding depositary shares representing the IBM Series A Preferred Stock. The company plans to buy the shares from time to time on the open market. As of February 28, 1995, approximately 10.5 million depositary shares were outstanding. ITEM 6. SELECTED FINANCIAL DATA: Refer to page 79 of IBM's 1994 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 36 through 47 of IBM's 1994 Annual Report to Stockholders which are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Refer to pages 34 and 35 and 48 through 78 of IBM's 1994 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. 2 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Refer to pages 4 through 6 of IBM's definitive Proxy Statement dated March 14, 1995 which are incorporated herein by reference solely as they relate to this item. EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 28, 1995): OFFICER AGE SINCE --- ------- Chairman of the Board of Directors and Chief Executive Officer Louis V. Gerstner, Jr.(1)................................... 53 1993 Senior Vice Presidents J. Thomas Bouchard, Human Resources......................... 54 1994 James A. Cannavino, Strategy and Development(2)............. 50 1988 Nicholas M. Donofrio, Group Executive....................... 49 1995 Donato A. Evangelista, General Counsel...................... 62 1983 Ned C. Lautenbach, Group Executive.......................... 51 1987 G. Richard Thoman, Group Executive.......................... 50 1993 John M. Thompson, Group Executive........................... 52 1989 Patrick A. Toole, Group Executive........................... 57 1984 Jerome B. York, Chief Financial Officer(1).................. 56 1993 Vice President and Treasurer Jeffrey D. Serkes........................................... 36 1994 - ------------ (1) Member of the Board of Directors. (2) Will be retiring effective March 31, 1995. 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., Jeffrey D. Serkes, G. Richard Thoman, and Jerome B. York, has been an 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, a food and tobacco 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. Serkes was vice president and deputy treasurer of RJR Nabisco, Inc., a food and tobacco 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 of RJR Nabisco, Inc. 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-CEO of American Express Travel Related Services Co., Inc. and CEO of American Express International from 1989 to 1992. Mr. York, from 1979 until joining IBM in 1993, served in a number of executive positions at Chrysler Corporation, an automotive manufacturer, including executive vice president-finance and chief financial officer from 1990 to 1993 and vice president and controller from 1989 to 1990. Prior 3 to joining Chrysler, he held a number of technical and management positions with General Motors Corporation, Ford Motor Corporation, The Hertz Corporation and Baker Industries, Inc. ITEM 11. EXECUTIVE COMPENSATION: Refer to pages 12 through 20 of IBM's definitive Proxy Statement dated March 14, 1995, 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 "Stock Ownership" appearing on pages 9 through 11 of IBM's definitive Proxy Statement dated March 14, 1995, which is incorporated herein by reference solely as it relates to this item. (b) SECURITY OWNERSHIP OF MANAGEMENT: Refer to the section entitled "Stock Ownership" appearing on pages 9 through 11 of IBM's definitive Proxy Statement dated March 14, 1995, which is incorporated herein by reference solely as it relates to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Refer to page 8 "Other Relationships" of IBM's definitive Proxy Statement dated March 14, 1995, 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 1994 ANNUAL REPORT TO STOCKHOLDERS WHICH ARE INCORPORATED HEREIN BY REFERENCE: Report of Independent Accountants (page 35). Consolidated Statement of Operations for the years ended December 31, 1994, 1993 and 1992 (page 48). Consolidated Statement of Financial Position at December 31, 1994 and 1993 (page 49). Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992 (page 50). Consolidated Statement of Stockholders' Equity at December 31, 1994, 1993 and 1992 (page 51). Notes to Consolidated Financial Statements (pages 52 through 78). 2. FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE FILED BY ITEM 8 OF THIS FORM: SCHEDULE PAGE NUMBER - ---- -------- 7 Report of Independent Accountants on Financial Statement Schedules. S-1 II-- Valuation and Qualifying Accounts All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the financial statements or the notes thereto. 4 3. EXHIBITS: INCLUDED IN THIS FORM 10-K: I-- Computation of Fully Diluted Earnings Per Share. II-- Parents and Subsidiaries. III-- Consent of Independent Accountants. IV-- Additional Exhibits (a) Supplemental Consolidated Statement of Operations--1994 and 1993. V-- The By-laws of IBM as amended through February 1, 1995. VI-- IBM's 1994 Annual Report to Stockholders, certain sections of which have been incorporated herein by reference. VII-- Powers of Attorney. VIII-- Financial Data Schedule. IX-- IBM Supplemental Executive Retirement Plan. X-- IBM Extended Tax Deferred Savings Plan. XI-- IBM Board of Directors Deferred Compensation and Equity Award Plan. 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. -- A copy of 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 page 9 of IBM's definitive Proxy Statement dated March 14, 1995, which is incorporated herein 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. -- 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 9% Notes due 1998 are Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985, and Exhibit 4(b) to Registration Statement No. 33-6889 on Form S-3, filed on July 1, 1986, 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. -- 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. -- IBM's definitive Proxy Statement dated March 14, 1995, certain sections of which have been incorporated herein by reference. (b) REPORTS ON FORM 8-K: -- No reports on Form 8-K were filed during the last quarter of 1994. 5 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 28, 1995 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/ JEROME B. YORK Senior Vice March 28, 1995 .............................. President, (JEROME B. YORK) Chief Financial Officer, acting Controller, and Director | | | HAROLD BROWN Director | JAMES E. BURKE Director | FRITZ GERBER Director | NANNERL O. KEOHANE Director | CHARLES F. KNIGHT Director | THOMAS S. MURPHY Director | LUCIO A. NOTO Director | By /s/JOHN E. HICKEY JOHN B. SLAUGHTER Director | ...................... ALEX TROTMAN Director | (JOHN E. HICKEY) LODEWIJK C. VAN WACHEM Director | ATTORNEY-IN-FACT CHARLES M. VEST Director | EDGAR S. WOOLARD, JR. Director | 6 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of INTERNATIONAL BUSINESS MACHINES CORPORATION Our audits of the consolidated financial statements referred to in our report dated January 20, 1995 (which refers to the changes in the methods of accounting for postemployment benefits in 1993, and income taxes in 1992), appearing on page 35 of the 1994 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 1177 Avenue of the Americas New York, N.Y. 10036 January 20, 1995 7 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 END DESCRIPTION OF PERIOD NET CHANGE(A) OF PERIOD - -------------------------------------------------------- ---------- ------------- ---------- 1994 Account deducted from assets: Allowance for doubtful accounts --Current........................................... $683 $ 36 $719 ----- ----- ----- ----- ----- ----- --Non-current....................................... $187 $ (21) $166 ----- ----- ----- ----- ----- ----- 1993 Account deducted from assets: Allowance for doubtful accounts --Current........................................... $578 $ 105 $683 ----- ----- ----- ----- ----- ----- --Non-current....................................... $209 $ (22) $187 ----- ----- ----- ----- ----- ----- 1992 Account deducted from assets: Allowance for doubtful accounts --Current........................................... $414 $ 164 $578 ----- ----- ----- ----- ----- ----- --Non-current....................................... $196 $ 13 $209 ----- ----- ----- ----- ----- -----
- --------- (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. With the growth of the company's working capital financing business in 1994, the concentration of such financings for certain large dealers and remarketers of information industry products has become more significant. 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. The allowances for the year ended 1993, approximate less than three and one-half percent of the company's current receivables and less than two percent of the company's non-current receivables. The allowances for the year ended 1992, approximate less than three percent of the company's current receivables and less than two percent of the company's non-current receivables. S-1 EXHIBIT INDEX
REFERENCE NUMBER EXHIBIT PER ITEM 601 OF NUMBER IN REGULATION S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K - ---------------- ----------------------------------------------------------- -------------- (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 February 1, 1995. V (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 9% Notes due 1998 are Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985, and Exhibit 4(b) to Registration Statement No. 33-6889 on Form S-3 filed on July 1, 1986, 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(l) on Form S-3, file 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. (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 "Director's Compensation" on page 9 of IBM's definitive Proxy Statement dated March 14, 1995, which is incorporated herein by reference. IBM Supplemental Executive Retirement Plan. IX IBM Extended Tax Deferred Savings Plan. X IBM Board of Directors Deferred Compensation and Equity XI Award Plan. 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. (11) Statement re computation of per share earnings. I (12) Statement re computation of ratios. Not applicable (13) Annual report to security holders. VI
REFERENCE NUMBER EXHIBIT PER ITEM 601 OF NUMBER IN REGULATION S-K DESCRIPTION OF EXHIBITS THIS FORM 10-K - ---------------- ----------------------------------------------------------- -------------- (18) Letter re change in accounting principles. Not applicable (19) Previously unfiled documents. Not applicable (21) Subsidiaries of the registrant. II (22) Published report regarding matters submitted to vote of Not applicable security holders. (23) Consents of experts and counsel. III (24) Powers of attorney. VII (27) Financial Data Schedule. VIII (28) Information from reports furnished to state insurance Not applicable regulatory authorities. (99) Additional exhibits. IV
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: ----------------------------------------------------------------------- 1994 1993* 1992* 1991* 1990 ----------- ----------- ----------- ----------- ----------- Number of shares on which published earnings per share is based: Average outstanding during year........ 584,958,699 573,239,240 570,896,489 572,003,382 572,647,906 Add--Incremental shares under stock option and stock purchase plans.. 4,308,269 -- -- -- 1,665,262 - --Incremental shares related to 7 7/8% con- vertible debentures (average)............ -- -- -- -- 8,162,976 - --Incremental shares related to 5 3/4% CGI convertible bonds (average)............ 7,715,391 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Number of shares on which fully diluted earnings per share is based..... 596,982,359 573,239,240 570,896,489 572,003,382 582,476,144 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) applicable to common shareholders (millions)........... $2,937 $(8,148) $(4,965) $(2,861) $5,967 Add--Net earnings (loss) effect of interest on 7 7/8% convertible deben- tures (millions)..... -- -- -- -- 65 - --Net earnings (loss) effect of interest on 5 3/4% CGI convertible bonds (millions)..... 19 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) on which fully diluted earnings per share is based (millions)..... $2,956 $(8,148) $(4,965) $(2,861) $6,032 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Fully diluted earnings (loss) per share......... $4.95 $(14.22) $(8.70) $(5.01) $10.36 Published earnings (loss) per share.............. $5.02 $(14.22) $(8.70) $(5.01) $10.42
- ------------ * In 1993, 1992, and 1991, 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. The 7 7/8% convertible debentures were called and redeemed on November 21, 1992. EXHIBIT II PARENTS AND SUBSIDIARIES AS OF DECEMBER 31, 1994
STATE OR PERCENTAGE OF COUNTRY VOTING OF SECURITIES INCORPORATION OWNED BY ITS OR ORGANIZATION IMMEDIATE PARENT --------------- ---------------- Registrant: International Business Machines Corporation......... New York Subsidiaries: IBM Credit Corporation.............................. Delaware 100 Integrated Systems Solutions Corp. ................. 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 90(F) IBM de Colombia, S.A. ............................ Colombia 90(E) IBM del Ecuador, C.A. ............................ Ecuador 100 IBM Southeast Asia Services Ltd. ................. Hong Kong 100 Tata Information Systems Ltd. (TISL).............. India 50 IBM Japan, Ltd. .................................. Japan 100 IBM Korea Systems Corporation..................... Korea 100 IBM Korea, Inc. .................................. Korea (South) 100 Grupo IBM Mexico, S.A. de C.V. ................... Mexico 100(B) IBM de Mexico, S.A. ............................ Mexico 100(B) 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 Corp. ............... Philippines 100(B) IBM Philippines, Incorporated..................... Philippines 100(B) IBM Singapore Pte. Ltd. .......................... Singapore 100 IBM Taiwan Corporation............................ Taiwan 100 Thai Systems Corporation Ltd. .................... Thailand 100 IBM Thailand Company Ltd. ........................ Thailand 100(B) IBM del Uruguay, S.A. ............................ Uruguay 100 IBM de Venezuela, S.A. ........................... Venezuela 100 IBM World Trade Europe/Middle East/ Africa Corporation.............................. Delaware 100 IBM Central Europe & Russia Inc. ............... Delaware 100
PARENTS AND SUBSIDIARIES AS OF DECEMBER 31, 1994--(CONTINUED)
STATE OR PERCENTAGE OF COUNTRY VOTING OF SECURITIES INCORPORATION OWNED BY ITS OR ORGANIZATION IMMEDIATE PARENT --------------- ---------------- IBM World Trade Europe/Middle East/ Africa Corporation (continued) IBM Oesterreich, Internationale Bueromaschinen Gesellschaft m.b.H. .......................... Austria 100 International Business Machines of Belgium S.A. ......................................... Belgium 100(D) IBM Bulgaria Ltd. .............................. Bulgaria 100 C.T.S. d.o.o. .................................. Croatia 100 IBM Ceska Republika spol. s.r.o. ............... Czech Republic 100 IBM Slovensko spol. s.r.o. ..................... Slovak Republic 100 Compagnie IBM France, S.A. ..................... France 100(B) IBM Eurocoordination, S.A. ..................... France --(C) IBM Europe, S.A. ............................... France 100(B) IBM Beteiligungs GmbH........................... Germany 100 IBM Deutschland GmbH............................ Germany 72(H) International Business Machines Corporation Magyarorszagi Kft............................. Hungary 100 IBM International Treasury Services Company..... Ireland --(K) IBM Ireland Ltd. ............................... Ireland 100(D) IBM SEMEA S.p.A. ............................... Italy 100 IBM Hellas Information Handling Systems S.A. ....................................... Greece 100(D) IBM Israel Ltd. .............................. Israel 100(D) Companhia IBM Portuguesa, S.A. ............... Portugal 100 IBM (International Business Machines) Turk Ltd. Sirketi................................ Turkey 98(A) IBM International Centre for Asset Management N.V. ......................................... Netherlands 100 International Maintenance Parts Logistics B.V. ......................................... Netherlands --(J) 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(G) IBM East Europe/Asia Ltd. ...................... Russia 100(D) IBM Slovenija d.o.o. ........................... Slovenia 100 ISG Ltd. ....................................... South Africa 28(I) International Business Machines, S.A. .......... Spain 100(B) 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
(Footnotes on following page) (Footnotes for preceding page) - ------------ (A) Remaining percentage owned by IBM World Trade Europe/Middle East/Africa Corporation. (B) Minor percentage held by minority IBM shareholders, subject to repurchase option. (C) 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. (D) Minor percentage owned by IBM World Trade Corporation. (E) Remaining percentage owned by IBM World Trade Asia Corporation. (F) Minor percentage owned by IBM Americas/Far East Systems Corporation. (G) IBM Nordic Aktiebolag (100% owned by IBM World Trade Europe/ Middle East/Africa Corporation) owns the remaining percentage. (H) IBM World Trade Corporation owns 10% and IBM Beteiligungs GmbH owns 18%. (I) IBM SEMEA S.p.A. holds an additional 24% of ISG Ltd. (J) Owned jointly by nine IBM Europe/Middle East/Africa Corporation subsidiaries in Europe. (K) 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.
EXHIBIT III CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 2-77235, 2-77236, 33-5225, 33-29022, 33-33458 and 33-34406) and Form S-3 (No. 33-50537 and 33-54375) of International Business Machines Corporation of our report dated January 20, 1995 appearing on page 35 of the 1994 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 7 of this Form 10-K. /s/ PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, N.Y. 10036 March 28, 1995 EX-3.(B) 2 Exhibit V BY-LAWS of INTERNATIONAL BUSINESS MACHINES CORPORATION Adopted April 29, 1958 As Amended Through February 1, 1995 [February 1, 1995] -1- 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 [February 1, 1995] -2- 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 [February 1, 1995] -3- 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 [February 1, 1995] -4- 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 meeting [February 1, 1995] -1- 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. [February 1, 1995] -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 [February 1, 1995] -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. [February 1, 1995] -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 fourteen, 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 [February 1, 1995] -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, [February 1, 1995] -6- provided, however, that such 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 [February 1, 1995] -7- Executive Committee, 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 [February 1, 1995] -8- emergency which renders the Board 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. [February 1, 1995] -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 [February 1, 1995] -10- duties and functions 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; [February 1, 1995] -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. [February 1, 1995] -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 [February 1, 1995] -13- bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board. 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 [February 1, 1995] -14- corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein. Such indemnification shall be a contract right and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, consistent with the provisions of applicable law in effect at any time. Indemnification shall be deemed to be 'permitted' within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time. ARTICLE VII SHARES SECTION 1. Stock Certificates. 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. The certificates representing shares 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 or accompanied by a duly executed stock transfer power and the payment of all [February 1, 1995] -15- taxes thereon. The person in whose name shares of stock shall stand on the record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer. 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 certificates for 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 [February 1, 1995] -16- issue any such new certificate, except pursuant to legal 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 [February 1, 1995] -17- entitled to 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. [February 1, 1995] -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 [February 1, 1995] -19- EXHIBIT IV INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES ADDITIONAL EXHIBITS A supplemental Consolidated Statement of Operations schedule has been provided for informational purposes only, to exclude the effects of the Federal Systems Company (FSC) sale and a change in software amortization periods adopted in the first quarter of 1994. The 1993 results exclude FSC results, restructuring charges, and the effect of implementing Statement of Financial Accounting Standards 112, "Employers' Accounting for Postemployment Benefits." This supplemental statement is shown in Exhibit IVa. The sale of FSC is discussed on page 47 of IBM's 1994 Annual Report to Stockholders, while the software change is discussed on pages 38 and 39. Restructuring charges are discussed on pages 60 and 61, while the accounting change is discussed on page 54. EXHIBIT IV(A) INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS* 1994 AND 1993 1994+ 1993+ ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenue: Hardware sales.......................................... $32,344 $30,337 Software................................................ 11,346 10,953 Services................................................ 9,715 7,686 Maintenance............................................. 7,222 7,295 Rentals and financing................................... 3,425 4,166 ------- ------- 64,052 60,437 Cost: Hardware sales.......................................... 21,300 20,447 Software................................................ 4,384 4,310 Services................................................ 7,769 6,418 Maintenance............................................. 3,635 3,545 Rentals and financing................................... 1,384 1,738 ------- ------- 38,472 36,458 Gross Profit.............................................. 25,580 23,979 Operating expenses: Selling, general and administrative..................... 16,298 18,272 Research, development and engineering................... 4,363 5,558 ------- ------- Operating income (loss)................................... 4,919 149 Other income, principally interest........................ 1,377 1,108 Interest expense.......................................... 1,227 1,273 ------- ------- Earnings (loss) before income taxes....................... 5,069 (16) Provision (benefit) for income taxes...................... 2,104 80 ------- ------- Net earnings (loss)....................................... 2,965 (96) Preferred stock dividends................................. 84 47 Net earnings (loss) applicable to common shareholders..... $ 2,881 $ (143) ------- ------- ------- ------- Net earnings (loss) per share common stock................ $ 4.92 $ (.25) ------- ------- ------- ------- Average number of common shares outstanding (M's)......... 585.0 573.2 - ------------ * See text in Exhibit IV + Unaudited EX-10.(A) 3 EXHIBIT IX IBM SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective January 1, 1995) INDEX _____ ARTICLE 1 - Purpose 1 ARTICLE 2 - Definitions 1 ARTICLE 3 - Coverage and Effect 3 ARTICLE 4 - Management and Administration 3 ARTICLE 5 - Claims Procedure 5 ARTICLE 6 - Service Credit 5 A. Foreign Service 5 B. Service Credit for Leaves of Absence 6 C. Other Service Credit 6 ARTICLE 7 - Retirement Date and Commencement of Benefits 6 A. Normal Retirement Date 6 B. Early Retirement Date 6 C. Commencement of SERP Benefits 7 ARTICLE 8 - SERP Benefits 7 A. Normal Retirement Benefit 7 B. Early SERP Benefit 8 C. Form and Method of Payment 9 D. Effective Date of Election 10 E. Revocation of Election 10 F. SERP Benefits for Disabled Participants 11 ARTICLE 9 - Preretirement Spousal Annuity 11 ARTICLE 10 - Suspension of Benefits for Reemployed Retired 11 Participants ARTICLE 11 - Forfeiture 12 A. Competitive or Prejudicial Conduct 12 B. Disclosure of Confidential Information 12 C. Disclosure and Assignment of Rights 13 D. Forfeiture and Rescission 13 ARTICLE 12 - Information for Benefits Calculations 13 A. Incomplete or Incorrect Information 13 B. Overpayments 14 ARTICLE 13 - Alienation of Benefits 14 ARTICLE 14 - Withholding Taxes 14 ARTICLE 15 - Distributions to Minors and Incompetents 14 ARTICLE 16 - No Right to Employment 15 ARTICLE 17 - Unfunded Plan 16 ARTICLE 18 - Miscellaneous 17 A. Construction 17 B. Severability 18 C. Title and Headings Not to Control 18 D. Complete Statement of Plan 18 E. Booklets and Brochures 18 ARTICLE 19 - Situs of Plan; Governing Law 18 ARTICLE 1 - Purpose ___________________ International Business Machines Corporation ("IBM"), a New York corporation, has established the IBM Supplemental Executive Retirement Plan (the "SERP" or the "Plan") with the intention of attracting and retaining executives whose skills and talents are important to IBM's operations by providing a monthly retirement income that supplements benefits under the IBM Retirement Plan. ARTICLE 2 - Definitions _______________________ a. Company - IBM and its Domestic Subsidiaries, excluding foreign offices of the Company except as otherwise provided in these Articles. b. Subsidiary - a corporation, or other form of business organization, the majority interest of which is owned, directly or indirectly, by the Company. c. Domestic Subsidiary - a Subsidiary organized and existing under the laws of the United States or any state, territory or possession thereof, provided, however, that the Plan shall not be deemed to cover the employees of any Domestic Subsidiary unless so authorized by the chief human resources officer of IBM. d. Board of Directors - the Board of Directors of IBM. e. Executive Compensation and Management Resources Committee (also, the "Committee") - the Executive Compensation and Management Resources Committee of the Board of Directors or such other persons or group as said Board may appoint to serve as the Committee. f. Foreign Service - Service with a Foreign Subsidiary (i.e., a Subsidiary other than a Domestic Subsidiary) or with a Foreign Branch (i.e., a branch of the Company or of a Domestic Subsidiary that operates principally outside the United States, its territories or possessions). g. IBM Retirement Plan - the retirement plan established by IBM pursuant to a resolution of its Board of Directors effective December l8, l945, as amended from time to time. -1- h. Regular Employee (also, "Employee") - an employee so defined by the IBM Retirement Plan. i. Executive - A Regular Employee so classified in the sole discretion of the Company's chief human resources officer. j. Participant - an Executive who meets the requirements of ARTICLE 3, or a former Executive who is accruing or receiving Benefits pursuant to the provisions of the Plan. k. Beneficiary - a person who is designated by a Participant or by the terms of the Plan to receive a Benefit under the Plan in respect of a deceased Participant. A Beneficiary shall not be considered a Participant by virtue of this definition. l. ERISA - the Employee Retirement Income Security Act of l974, as amended from time to time. m. Plan Administrator - a person or a committee appointed pursuant to ARTICLE 4 hereof which shall be responsible for reporting, record keeping and related administrative matters under the Plan. If a committee is appointed to serve as the Plan Administrator, any one of the members of the committee may act individually on behalf of the committee to fulfill the committee's duties. n. Continuous Service - Service as defined in the IBM Retirement Plan except as provided in ARTICLE 6 hereof; provided that a Participant shall not in any event be considered to have more than 35 years of Continuous Service hereunder. o. Compensation - Compensation as defined in the IBM Retirement Plan except that in no event shall 1989 or 1994 Long-Term Incentive Plan awards or payments or payments under any successor plan be included in Compensation. p. Plan Year - the calendar year. q. Normal Retirement Age - age 65. r. Normal Retirement Date - the date specified by ARTICLE 7A hereof. s. Early Retirement Date - the date on which a Participant retires from employment with the Company -2- in accordance with the provisions of ARTICLE 7B hereof. t. Spouse - a person who, according to the laws of the state of a Participant's domicile, is the Participant's spouse on the earlier of (i) the date of the Participant's death while employed by the Company or (ii) the Participant's Annuity Commencement Date. u. Actuarial Equivalent - shall mean a form of payment that is equal in value to another form of payment, as determined by the Plan Administrator in accordance with the actuarial assumptions specified by the IBM Retirement Plan. v. Annuity Commencement Date - shall mean the date as of which SERP Benefits are scheduled to commence. w. SERP Benefit (also, "Benefit") - a payment or series of payments made or due under the Plan. x. Pay - the average of the Participant's annual Compensation over (i) the last five years of employment or (ii) the highest consecutive five calendar years of employment, whichever is greater. y. Breakpoint - $185,000, subject to such adjustments as may be made from time to time by IBM's chief human resources officer in his or her sole discretion. z. Earnings Threshold - $150,000, subject to such adjustments as may be made from time to time by IBM's chief human resources officer in his or her sole discretion. ARTICLE 3 - Coverage and Effect _______________________________ This document states the terms of the Plan as established by Resolution of the Board of Directors on October 24, 1994 and first effective on January 1, 1995. Participation is limited to Executive Level Regular Employees in the United States whose Pay equals or exceeds the Earnings Threshold. ARTICLE 4 - Management and Administration _________________________________________ The Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or the Committee, but only if the -3- Committee's action is not materially inconsistent with a prior action of the Board. The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement. The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated: (a) the Board of Directors, (b) the Executive Compensation and Management Resources Committee, (c) IBM's chief human resources officer, and (d) the Plan Administrator and each person on any committee serving as the Plan Administrator. Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan. The Board of Directors shall be responsible only for designating those persons who will serve on the Committee and for approving any resolution to terminate the Plan. The Committee may, pursuant to a duly adopted resolution, delegate to IBM's chief financial officer, chief human resources officer, or Treasurer, the Plan Administrator and/or any other officer or employee of IBM, authority to carry out any decision, directive or resolution of the Committee. The Committee shall appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator. The Plan Administrator shall have the full power and authority, in its sole discretion: (a) to promulgate and enforce such rules and regulations as it shall deem necessary or appropriate for the administration of the Plan; (b) to adopt any amendments to the Plan that are required by law; (c) to interpret the Plan consistent with the terms and intent thereof; and (d) to resolve any possible ambiguities, inconsistencies and omissions in the Plan. All such actions shall be in accordance with the terms and intent of the Plan and the Plan Administrator shall on a regular basis report such actions to the Committee. Additionally, IBM's chief human resources officer shall appoint and designate such other IBM employees as may be needed to provide adequate staff services to the Committee and the Plan Administrator. The Committee and/or the Plan Administrator may engage the services of accountants, attorneys, actuaries, consultants and such other professional personnel as they deem necessary or advisable to assist them in fulfilling their responsibilities under the Plan. The Committee, the Plan Administrator, and their delegates and assistants shall be entitled to act on the -4- basis of all tables, valuations, certificates, opinions and reports furnished by such professional personnel. ARTICLE 5 - Claims Procedure ____________________________ IBM's Executive Compensation Department is responsible for advising Participants and Beneficiaries of their Benefits under the Plan. If a Participant or Beneficiary believes he or she is entitled to Benefits and has not received them, the Participant or Beneficiary must submit a written claim to the Director of Executive Compensation, IBM Corporation, Old Orchard Road, Armonk, New York l0504. The Plan Administrator shall furnish to the Participant or Beneficiary a written decision setting forth the Plan Administrator's decision. If the Plan Administrator denies a claim for Benefits in whole or in part, the claimant may appeal the denial of the claim in writing within 60 days of receiving the Plan Administrator's written decision. ARTICLE 6 - Service Credit __________________________ A. Foreign Service _______________ All Foreign Service by a Regular Employee who is otherwise eligible for Benefits under the Plan will be deemed for all Plan purposes, in all respects as Continuous Service with the Company, except that there shall be deducted from the combined amount payable under the Plan and the IBM Retirement Plan, any amount paid or payable to the Participant or Beneficiary arising out of Foreign Service to the extent that credit is given for such Foreign Service under this ARTICLE 6A and pursuant to any pension, retirement, severance indemnity, provident fund or other similar plan--whether in the form of installments or lump sum and whether private or sponsored by a foreign govern- ment--to the extent not provided by direct contributions made by the Participant, (l) provided that a Participant with such Foreign Service immediately preceded by Continuous Service with the Company must, before credit for such Foreign Service is given, resume employment as a Regular Employee of the Company; and (2) further provided that a Participant with such Foreign Service not immediately preceded by Continuous Service with the Company must, before credit for such Foreign Service is given, complete one year of -5- Continuous Service as a Regular Employee of the Company subsequent to such Foreign Service. B. Service Credit for Leaves of Absence ____________________________________ A Participant who commences a leave of absence granted under IBM's human resources practices then in effect, and who resumes the status of an Executive Level Regular Employee upon completion of the leave, shall be deemed, for all Plan purposes, as having been an actively employed Participant throughout the leave and to have received Compensation during the leave at the rate in effect immediately before the leave began. If the Participant does not so resume his or her status as an Executive Level Regular Employee for at least 30 days for any reason other than disability or death, the Participant shall be treated as having severed from service with the Company on the date immediately preceding the date the leave began (i.e., the last day worked), and neither the Participant nor the Participant's Beneficiary shall be eligible for a SERP Benefit. C. Other Service Credit ____________________ IBM's chief executive officer, or other senior officer designated by the Committee, in his or her sole discretion, may grant Continuous Service credit to an Executive in excess of actual Continuous Service subject to such limitations and conditions as the officer considers appropriate, if the officer deems this to be in the best interests of the Company. ARTICLE 7 - Retirement Date and Commencement of Benefits ________________________________________________________ A. Normal Retirement Date ______________________ A Participant's Normal Retirement Date is the last working day of the month in which his or her 65th birthday occurs; provided that the Participant has completed one year of Continuous Service, and further provided that, if a Participant was born on the first day of the month, the Normal Retirement Date shall be the last day of the month immediately preceding the 65th anniversary of birth. B. Early Retirement Date _____________________ A Participant described in any of the following paragraphs may retire from employment on an Early Retirement Date specified in the applicable paragraph below: -6- 1. A Participant with 30 years or more of Continuous Service may retire on an Early Retirement Date at the end of any month, 2. A Participant with 15 or more years of Continuous Service may retire on an Early Retirement Date at the end of any month at or after reaching age 55, 3. A Participant with five or more years of Continuous Service who is eligible to receive Social Security benefits at age 62 may retire on an Early Retirement Date at the end of any month at or after reaching age 62; provided that in order to retire on an Early Retirement Date a Participant must give the Company at least six months prior written notice, in a form approved by the Plan Administrator, of his or her intention to retire early and to have SERP Benefits commence, unless the Plan Administrator waives such notice requirement. C. Commencement of SERP Benefits _____________________________ In addition to all other conditions, in no event shall payment of SERP Benefits commence unless and until the Participant applies for such Benefits before his or her Annuity Commencement Date. In no event shall any SERP Benefit be paid under this Plan unless the Participant (1) meets the Plan's eligibility conditions on the date of his or her retirement, disability, or death, (2) retires (or dies while eligible to retire) under the terms of the IBM Retirement Plan, (3) holds an Executive Level position (as determined by IBM's chief human resources officer in his or her sole discretion) on the date of his or her retirement or death, and (4) complies with the requirements imposed by ARTICLE 11 hereof. ARTICLE 8 - SERP Benefits _________________________ A. Normal Retirement Benefit _________________________ The Participant's SERP Benefit, when expressed as a single life annuity commencing as of the first day of the month next following the Participant's Normal Retirement Date, shall be equal to one-twelfth of the Phase-In Percentage (defined below) multiplied by the excess of (i) the Pension Credit (defined below) over (ii) the total annual single life annuity benefit at Normal Retirement Age, including the single life annuity benefit attributable to -7- the Personal Retirement Provision whether such is paid in annuity form or not, payable monthly to the Participant under the IBM Retirement Plan or under any pension arrangement between the Company and a Participant which is payable monthly for life after termination of employment. The Phase-In Percentage shall be determined on the date the Participant retires, and shall not be increased thereafter. If the Participant retires on January 31, 1995, the Phase-In Percentage shall be 27%. If the Participant retires after January 31, 1995, the Phase-In Percentage shall be 27% plus 2% for each succeeding month (3% for the month of December) up to and including the month of the Participant's retirement, until the Phase-In Percentage reaches 100% for a Participant retiring on or after December 31, 1997. The Phase-In Percentage shall in no event exceed 100%. The Pension Credit shall be a single life annuity equal to the sum of: (1) 1.7% of Pay up to the Breakpoint, plus 2.55% of Pay in excess of the Break Point (if any), multiplied by the Participant's years of Continuous Service up to a maximum of 20 years, (2) 1.3% of Pay multiplied by the Participant's years of Continuous Service between 20 and 30 years (if any), plus (3) .75% of Pay multiplied by the Participant's Continuous Service between 30 and 35 years (if any). B. Early SERP Benefit __________________ If the Participant elects to retire on an Early Retirement Date with an Annuity Commencement Date on or after his or her 60th birthday, the Participant's SERP Benefit when paid in the form of a single life annuity, shall be equal to the SERP Benefit calculated in accordance with Section A of this ARTICLE 8 based on the Participant's years of Continuous Service and Pay on the Participant's Early Retirement Date. If the Participant elects to retire on an Early Retirement Date with an Annuity Commencement Date before his or her 60th birthday, the Participant's SERP Benefit, when paid in the form of a single life annuity, shall be be the amount determined in accordance with the following table: -8- Participant's SERP Benefit under Age at Annuity ARTICLE 8A hereof, Commencement Date reduced begins by the following ______ ________________ 59 3% 58 7% 57 11% 56 15% 55 20% below 55 20% plus 5% per year for each year before the Participant's 55th birthday For each month of age falling between the ages or years shown above, one-twelfth of the difference between the respective factors should be added. The reductions described in this Section 8B shall be applied to the Pension Credit calculation under ARTICLE 8A prior to the subtraction of any benefit payable under the IBM Retirement Plan. The Phase-In Percentage shall be applied to the net SERP Benefit. C. Form and Method of Payment __________________________ The normal form of payment of the SERP Benefit for a Participant who is unmarried on his or her Annuity Commencement Date is a single life annuity for the Participant's life. The normal form of payment of the SERP Benefit for a Participant who is married on his or her Annuity Commencement Date is a joint and survivor annuity providing an annuity to the Participant for life, in a monthly amount that is less than that payable under a single life annuity, and a survivor annuity for the life of the Participant's Spouse in a monthly amount equal to 50 percent of the monthly amount payable to the married Participant during his or her lifetime. This form of payment, which constitutes a 50% joint and survivor annuity, shall be the Actuarial Equivalent of the single life annuity otherwise payable to the Participant, based on the age of the Participant and the age of the Participant's Spouse as of the Annuity Commencement Date. A Participant also may elect to be paid under any alternative form of payment available under the IBM Retirement Plan except for the Early Retirement Level Income Option. Any such election must be made in the manner and form prescribed by IBM's Executive Compensation -9- Department which may, in certain instances, require the consent of the Participant's Spouse to the alternative form of payment. Each alternative form of payment shall be the Actuarial Equivalent of the single life annuity payable to the Participant in accordance with this ARTICLE 8. Payment of the SERP Benefit shall be made monthly as of the first day of the month beginning with the month following the month in which the Participant retires from employment with the Company. D. Effective Date of Election __________________________ Any election under this ARTICLE 8 shall be effective on the later of the Participant's Annuity Commencement Date or 30 days after IBM's Executive Compensation Department receives the election. The death of a survivor annuitant before the Participant's Annuity Commencement Date automatically revokes any such election. The death of a survivor annuitant on or after the Participant's Annuity Commencement Date does not revoke the Participant's election. E. Revocation of Election ______________________ A Participant may revoke an election he or she has made under this ARTICLE 8 at any time before the Participant's Annuity Commencement Date. In order to be effective, any such revocation must be received by IBM's Executive Compensation Department before the Annuity Commencement Date and must be made in the manner and form prescribed by IBM's Executive Compensation Department. A timely revocation of an election shall only become effective upon receipt by IBM's Executive Compensation Department. If a Participant revokes an election of an alternative form of payment, the Participant's form of payment shall automatically revert to the normal form of payment prescribed by this ARTICLE 8. After revoking an election, the Participant may elect an alternative form of payment in accordance with this ARTICLE 8; however, in order to become effective, the Participant's election of an alternative form of payment (other than the normal form of payment) must be received by IBM's Executive Compensation Department before the Participant's Annuity Commencement Date. A timely election shall become effective as of the later of the Participant's Annuity Commencement Date or 30 days after IBM's Executive Compensation Department receives the election. -10- F. SERP Benefits for Disabled Participants _______________________________________ A Participant who (i) becomes totally and permanently disabled (as determined in accordance with the terms of the IBM Long Term Disability Plan) after becoming eligible to retire hereunder and while at Executive Level, (ii) remains so disabled until Normal Retirement Age, and (iii) receives benefits under the IBM Long Term Disability Plan, shall be eligible to receive a SERP Benefit upon reaching Normal Retirement Age, notwithstanding his or her ineligibility for that Benefit under other provisions of the Plan. The Annuity Commencement Date for such disabled Participant shall be his or her Normal Retirement Date. The disabled Participant's SERP benefit shall be based on the Participant's Pay and Continuous Service on the date the Participant's IBM Sickness and Accident Income Plan benefits cease. ARTICLE 9 - Preretirement Spousal Annuity _________________________________________ A preretirement spousal annuity shall be payable to the Spouse of a Participant who dies before his or her Annuity Commencement Date, but who, on the date of death, is both married and eligible to retire immediately hereunder. The preretirement spousal annuity shall be the survivor annuity that the Participant's Spouse would have received under the Plan had the Participant retired on his or her date of death with a 50 percent joint and survivor annuity in effect in accordance with the provisions of ARTICLE 8 hereof. In no event shall the preretirement spousal annuity be payable to anyone other than the Participant's Spouse on the date of the Participant's death. ARTICLE 10 - Suspension of Benefits for Reemployed __________________________________________________ Retired Participants ____________________ If a retired Participant is reemployed by the Company, any SERP Benefits otherwise payable to the Participant shall be suspended during the period of reemployment. If the reemployed Participant subsequently completes one year of Continuous Service and retires from the Company, the Participant shall be eligible for SERP Benefits under the terms of the Plan in effect on the date the Participant's employment with the Company ceases, based on the Participant's Pay and Continuous Service as of that date, but reduced by the Actuarial Equivalent of any Benefits paid before the Participant's reemployment. If the reemployed Participant again retires -11- without having completed one year of Continuous Service during his or her period of reemployment, the SERP Benefits being paid to the Participant immediately before his or her reemployment shall resume, without adjustment, immediately following his or her retirement. ARTICLE 11 - Forfeiture _______________________ A. Competitive or Prejudicial Conduct __________________________________ A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the chief executive officer of the Company or other senior officer designated by the Committee, is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company. For a Participant whose employment has terminated, the judgment of the chief executive officer shall be based on the Participant's position and responsibilities while employed by the Company, the Participant's post-employment responsibilities and position with the other organization or business, the extent of past, current and potential completion or conflict between the Company and the other organization or business, the effect on the Company's customers, suppliers and competitors of the Participant assuming the post-employment position, the guidelines established in the then current edition of IBM's booklet, Business Conduct Guidelines, and such other considerations ___________________________ as are deemed relevant given the applicable facts and circumstances. A Participant who has retired shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a substantial investment to the Participant or a greater than 10 percent equity interest in the organization or business. B. Disclosure of Confidential Information ______________________________________ A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company, or use in other than the Company's business, any confidential information or material, as defined in the Company's Agreement Regarding Confidential Information and Intellectual Property, related to the business of the Company, acquired by the Participant either during or -12- after employment with the Company. C. Disclosure and Assignment of Rights ___________________________________ A Participant, pursuant to the Company's Agreement Regarding Confidential Information and Intellectual Property shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research, or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries. D. Forfeiture and Rescission _________________________ Upon retirement, and from time to time thereafter upon request by the Committee, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of the Plan. Failure to comply with the provisions of Section A, B, or C of this ARTICLE prior to retirement or receipt of any Benefit payment hereunder shall cause the forfeiture of all SERP Benefits even if the failure to comply is not discovered until Benefits have commenced. Failure to comply with the provisions of Section A, B, and C of this ARTICLE after SERP Benefits have commenced hereunder shall cause any such payments to be rescinded from the point in time when the conduct which led to the failure to comply occurred. The Plan Administrator shall notify the Participant in writing of any such rescission, and within ten days after receiving a notice of rescission from the Company, the Participant shall pay to the Company in cash the amount of any payment that has been rescinded in accordance with this ARTICLE. ARTICLE 12 - Information for Benefits Calculations __________________________________________________ A. Incomplete or Incorrect Information ___________________________________ Any delay in receiving from a Participant or Beneficiary information requested by the Company's Executive Compensation Department, including but not limited to information regarding a Participant's Spouse or other factors necessary for the calculation of Benefits under the Plan, shall result in the Benefits payable being based initially on the information then available to IBM's -13- Executive Compensation Department and the Plan Administrator, and their estimate of any unavailable information. If additional or different information thereafter becomes available to IBM's Executive Compensation Department or the Plan Administrator, Benefits shall be adjusted appropriately as determined by the Plan Administrator. B. Overpayments ____________ If any overpayment of Benefits is made under the Plan, the amount of the overpayment may be set off against further amounts payable to or on account of the person who received the overpayment until the overpayment has been recovered in full. The foregoing remedy is not intended to be exclusive. ARTICLE 13 - Alienation of Benefits ___________________________________ No Benefit payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy or like encumbrance. No Benefit under the Plan shall in any manner be liable for or subject to the debts or liabilities of any person entitled to Benefits under the Plan. ARTICLE 14 - Withholding Taxes ______________________________ The Company and the Plan Administrator shall withhold such taxes and make such reports to governmental authorities as they reasonably believe to be required by law. ARTICLE 15 - Distributions to Minors and Incompetents _____________________________________________________ If the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive Benefits under the Plan is incompetent to care for his or her affairs, and in the absence of the appointment of a legal guardian of the property of the incompetent, payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee or other legal representative) may be made to the spouse, parent, brother or sister or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent. In the absence of the appointment of a legal guardian of the property of a minor, any minor's share of Benefits under the -14- Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor. The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed before authorizing the payment of Benefits in such situations. Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this ARTICLE 15 shall be a complete discharge of any obligation arising under the Plan with respect to such Benefit payments. ARTICLE 16 - No Right to Employment ___________________________________ Nothing herein contained shall be deemed to give any employee the right to be retained in the service of the Company or to interfere with the right of the Company to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan. ARTICLE 17 - Unfunded Plan __________________________ The Plan shall be unfunded. The Company shall not be required to segregate any assets to provide Benefits, nor shall the Plan be construed as providing for such segregation, nor shall the Company or the Committee be deemed to be a trustee of any assets of the Plan. Any liability of the Company to any Participant or Beneficiary with respect to SERP Benefits shall be based solely upon any contractual obligations created by the Plan. No such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance or any property of the Company. Neither the Company nor the Committee shall be required to give any security or bond for the performance of any obligation created by the Plan. ARTICLE 18 - Miscellaneous __________________________ A. Construction ____________ Unless the contrary is plainly required by the context, wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the female gender, and vice versa, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form, and vice versa. -15- B. Severability ____________ If any provision of the Plan is held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. C. Titles and Headings Not to Control __________________________________ The titles to ARTICLES and the headings of Sections in the Plan are placed herein for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. D. Complete Statement of Plan __________________________ This document is a complete statement of the Plan. The Plan may be amended, modified or terminated only in writing and then only as provided herein. E. Booklets and Brochures ______________________ The Company shall from time to time issue to Participants one or more booklets or brochures summarizing the Plan. In the event of any conflict between the Plan document and the booklets and brochures, the Plan document shall control. ARTICLE 19 - Situs of Plan; Governing Law __________________________________________ The situs of the Plan shall be the State of New York. The Plan shall be governed by ERISA, and to the extent not preempted by ERISA, the law of the State of New York. -16- EX-10.(B) 4 EXHIBIT X IBM EXTENDED TAX DEFERRED SAVINGS PLAN Effective January 1, 1995 INTRODUCTION The IBM Extended Tax Deferred Savings Plan has been authorized by the Board of Directors of International Business Machines to be applicable effective on and after January 1, 1995. The purpose of this Plan is to attract and retain executives by providing a means for making compensation deferrals and matching company contributions for those employees eligible to participate in the International Business Machines Tax Deferred Savings Plan with respect to whom compensation deferrals and company contributions under the TDSP are or would be limited by application of the limitations imposed on qualified plans by Sections 401(a)(17), 401(a)(30), and 415 of the Internal Revenue Code. This Plan is intended to constitute an unfunded deferred compensation plan for a select group of management or highly compensated employees under Sections 201(2), 301(a)(2), 401(a)(1), and 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended. All benefits payable under the Plan shall be paid out of the general assets of the Company. IBM EXTENDED TAX DEFERRED SAVINGS PLAN TABLE OF CONTENTS ARTICLE 1. DEFINITIONS Page 1 ARTICLE 2. PARTICIPATION Page 4 2.01 Eligibility ........................................... Page 4 2.02 Participation ......................................... Page 4 ARTICLE 3. CONTRIBUTIONS Page 5 3.01 Amount of Deferral Contributions ...................... Page 5 3.02 Matching Contributions ................................ Page 5 3.03 Additional Company Contributions ...................... Page 5 3.04 Investment of Accounts ................................ Page 6 3.05 Vesting of Accounts ................................... Page 6 3.06 Individual Accounts ................................... Page 6 ARTICLE 4. INVESTMENT OF DEFERRALS AND DEFERRAL ACCOUNTS Page 7 4.01 Deemed TDSP Investments; Participant Control .......... Page 7 4.02 Change of Investment Selection on Future Deferrals .... Page 8 4.03 Change of Investment Selection on Existing Deferral Accounts .............................................. Page 8 ARTICLE 5. PAYMENT OF ACCOUNTS Page 9 5.01 Commencement of Deferral Payments ..................... Page 9 5.02 Method of Payment ..................................... Page 9 5.03 Designation of Beneficiary ............................ Page 9 ARTICLE 6. GENERAL PROVISIONS Page 11 6.01 Funding ............................................... Page 11 6.02 No Contract of Employment ............................. Page 11 6.03 Facility of Payment ................................... Page 12 6.04 Withholding Taxes ..................................... Page 12 6.05 Nonalienation ......................................... Page 12 6.06 Administration ........................................ Page 12 6.07 Construction .......................................... Page 13 ARTICLE 7. MANAGEMENT AND ADMINISTRATION Page 14 7.01 Amendment or Termination .............................. Page 14 7.02 Responsibilities ...................................... Page 14 ARTICLE 8. CLAIMS PROCEDURE Page 16 IBM EXTENDED TAX DEFERRED SAVINGS PLAN ARTICLE 1. DEFINITIONS The following words and phrases as used herein have the following meanings unless a different meaning is required by the context: 1.01 "Accounts" shall mean the Company Account and the Deferral Account. 1.02 "Beneficiary" shall mean a person other than a Participant who is designated by a Participant or by the terms of the Plan to receive a benefit under the Plan by reason of the death of the Participant. 1.03 "Board" shall mean the Board of Directors of IBM. 1.04 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 1.05 "Committee" shall mean the Executive Compensation and Management Resources Committee appointed by the Board. 1.06 "Company" shall mean International Business Machines Corporation ("IBM"), a New York corporation having its principal place of business at Armonk, New York, and its Domestic Subsidiaries, excluding Foreign Branches of the Company except as may be otherwise provided in these Articles. 1.07 "Company Account" shall mean, with respect to a Participant, all amounts credited to the Participant under Sections 3.02 and 3.03, and earnings, gains, or losses on those amounts pursuant to Section 3.04. 1.08 "Company Contributions" shall mean the amount credited to a Participant under Sections 3.02 and 3.03. 1.09 "Compensation" shall mean the Participant's salary and annual incentive payment for a calendar year which would be payable to a Participant for services rendered to the Company after the Participant is no longer able to actively participate in the TDSP (or would have been unable to actively participate in the TDSP if the Participant was not an active participant in the TDSP) during the calendar year by reason of Code Section 401(a)(17) or Code Section 401(a)(30). A Participant's Compensation will be determined without regard to a Participant's election to make compensation reduction contributions under the TDSP (or under a cafeteria plan pursuant to Code Section 125) or to make Deferrals under this Plan. 1.10 "DCP Participant" shall mean a Participant who, for a calendar year, was offered the opportunity by the Company to defer up to 100% of his or her annual incentive payment payable for that calendar year. 1.11 "Deferral Account" shall mean, with respect to a Participant, the Participant's account balance under the Deferred Compensation Plan that Page 2 has been transferred to this Plan, all amounts credited to a Participant under Section 3.01 and earnings, gains, or losses on those amounts pursuant to Section 3.04. 1.12 "Deferral Election Agreement" shall mean the agreement entered into by the Participant pursuant to Section 2.02 under which he or she elects to defer a portion of his or he` Compensation under this Plan. 1.13 "Deferrals" shall mean the amount credited to a Participant under Section 3.01 1.14 "Deferred Compensation Plan" shall mean the incentive compensation deferral program established by IBM in November 1993. 1.15 "Domestic Subsidiary" shall mean a Subsidiary, organized and existing under the laws of the United States or any state, territory, or possession thereof; provided however, that the Plan shall not be deemed to cover the employees of any Domestic Subsidiary unless authorized by the Company's chief human resources officer. 1.16 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.17 "Effective Date" shall mean January 1, 1995. 1.18 "Eligible Employee" shall mean, for a calendar year, a domestic executive employee of the Company who is eligible for the IBM Retirement Plan whose annual rate of salary and annual incentive payment is expected to exceed (or solely, for purposes of Section 3.03 did exceed in the immediately preceding calendar year) the compensation limit under Code Sec- tion 401(a)(17), as determined by the Committee in the relevant year. 1.19 "IBM" shall mean International Business Machines Corporation, any predecessor, or any successor by merger, purchase, or otherwise. 1.20 "Participant" shall mean each Eligible Employee who has made the election described in Section 2.02(a), is credited with an amount under Sec- tion 3.03, or whose account balance under the Deferred Compensation Plan has been transferred to the employee's Deferral Account under this Plan. 1.21 "Plan" shall mean this IBM Extended Tax Deferred Savings Plan, as now in effect or as hereafter amended. 1.22 "Plan Administrator" shall mean a person or a committee appointed pursuant to Article 7 which shall be responsible for reporting, recordkeeping, and related administrative requirements. If appointed as a committee, any one of the members of the committee may act individually on behalf of the committee to fulfill the committee's duties. As of the Effective Date, the Director of Executive Compensation has been appointed as the Plan Administrator. Page 3 1.23 "Plan Year" shall mean the calendar year with the first Plan Year commencing on January 1, 1995. 1.24 "Subsidiary" shall mean a corporation or other form of business organiza- tion the majority interest of which is owned, directly or indirectly, by the Company. 1.25 "TDSP" shall mean the International Business Machines Tax Deferred Savings Plan, established by the Company by resolution of its Retirement Plans Committee, effective July 1, 1983, as amended from time to time. Page 4 ARTICLE 2. PARTICIPATION 2.01 Eligibility Eligibility is limited To US executive level Eligible Employees of IBM and selected Domestic Subsidiaries whose rate of annual Compensation (defined as salary and annual incentive rat,e) is $1S0,000 or more for calendar year 1995 (adjusted periodically thereafter based on industry trends and government guidelines). For this purpose, "selected Domestic Subsidiaries" and the "executive level" are defined by the chief human resources officer in his or her sole discretion and is subject to change. The Committee shall notify employees of their eligibility for participation in the Plan as soon as practicable after the chief human resources officer has made its determination that such employees qualify as Eligible Employees for a calendar year. 2.02 Participation (a) No later than one month before the first day of the calendar year during which an Eligible Employee desires to have contributions credited on his or her behalf pursuant to Section 3.01, an Eligible Employee must execute a Deferral Election Agreement authorizing Deferrals under this Plan for such year in accordance with the provisions of Section 3.0l. (b) If an Eligible Employee becomes an employee of the Company during a calendar year, he or she may execute a Deferral Election Agreement within 30 days of his or her date of hire. The Deferral Election Agreement shall apply to Compensation earned by the Eligible Employee in the payroll periods beginning after such agreement is submitted to the Committee. (c) Each Deferral Election Agreement under the Plan shall be irrevocable for the calendar year to which it relates. (d) Irrespective of whether an employee has made the election described above, any employee who has been selected by the Committee to have Company Contributions credited on his or her behalf pursuant to Section 3.03 shall be a Participant. (e) As a condition to participation in the Plan, a Participant may also be required by the Committee to provide such other information as the Committee may deem necessary to properly administer the Plan. Page 5 ARTICLE 3. CONTRIBUTIONS 3.01 Amount of Deferral Contributions For each payroll period that an Eligible Employee has Compensation beginning on or after the effective date of an Eligible Employee's Deferral Election Agreement, his or her Deferral Account shall be credited with an amount of Deferrals. The amount of Deferrals shall be equal to the designated percentage of Compensation elected by the Participant in his or her Deferral Election Agreement. Under the Deferral Election Agreement, the Eligible Employee may elect to forego receipt of amounts equivalent to 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, or 12% of the Employee's Compensation for each pay period during which the election is in effect, and in the event an Eligible Employee is a DCP Participant for the calendar year, he or she may defer up to 100% of his or her annual incentive payment for the calendar year. Deferrals shall be made under this Section 3.01 shall commence for payroll periods for a calendar year at such time as the Participant may no longer actively participate in the TDSP for the calendar year (or would have been unable to actively participate in the TDSP if the Participant was an active participant in the TDSP for the calendar year) by reason of Code Section 401(a)(17) or Code Section 401(a)(30) and has Compensation. No Deferrals may be made hereunder prior to such time, except for the deferral of a DCP Participant's annual incentive payment. 3.02 Matching Contributions The amount of Company Matching Contributions credited to a Participant for each payroll period shall be equal to 50% of the Participant's Deferrals for the payroll period; provided however, that no Company Matching Contributions will be made for a Participant's Deferrals in excess of 6% of the Participant's Compensation for that payroll period. Company Matching Contributions will be made in units of IBM Stock with no right to transfer such units, except as otherwise provided in this Plan. 3.03 Additional Company Contributions IBM may cause the Committee to credit on behalf of any Participant or any Eligible Employee who is not yet a Participant for a particular calendar year an additional amount of Company Matching Contributions or other Company Contributions, which will be made only in units of IBM Stock with no right to transfer such units, except as otherwise provided in this Plan; provided however, that any employee who was not eligible for a given calendar year because his or her rate of Compensation was expected to be below the $150,000 threshold (as adjusted) will nonetheless be credited with Company Matching Contributions (but may not make Elective Deferrals) under the Plan without any further action by IBM or the Committee, based upon such employee's Elective Deferral rate under the TDSP at the end of Page 6 the calendar year, if the employee's actual Compensation for that calendar year exceeds $150,000 (as adjusted and only to the extent that the Company Matching Contributions would have been at least $300). 3.04 Investment of Accounts A Participant's Deferral Account shall be treated as if the Participant had invested it in certain TDSP investment Funds in accordance with Article 4. A Participant's Company Account shall be treated as if it had been invested in the IBM Stock Fund under the TDSP; provided however, that in the event a Participant retires from the Company and does not elect to have the entire amount of his or her Accounts then paid to him or her, any amounts credited to the Participant's Company Account after retirement will be treated as if they were transferred to the Participant's Deferral Account for purposes of this Section 3.04 and Article 4. 3.05 Vesting of Accounts A Participant always shall be fully vested in his or her Accounts. 3.06 Individual Accounts The Committee shall maintain, or cause to be maintained, records showing the individual balances of each Participant's Accounts. Periodically, each Participant shall be furnished with a statement setting forth the value of his or her Accounts. Page 7 ARTICLE 4. INVESTMENT OF DEFERRALS AND DEFERRAL ACCOUNTS 4.01 Deemed TDSP Investments; Participant Control A Participant shall designate the proportions in which his or her Deferrals shall be treated as if they had been allocated among certain Investment Funds under the TDSP. Those Investment Funds are: (a) The Fixed Income Fund This fund's objective is to preserve principal (the amount invested) and to provide a relatively stable rate of interest. Under TDSP, the fund invests in interest-bearing instruments, including contracts with highly rated insurance companies, banks, and other financial institutions. (b) The Large Company Index Fund This fund is for investors seeking long-term growth of capital by achieving a market rate of return from a diversified group of large- and medium-sized company common stocks in the United States. Under TDSP, the fund invests in a broad range of common stocks to produce investment results approximating the price and yield performance of Standard & Poor's 500 Index. (c) The Small Company Stock Fund Investors who would like to pursue long-term capital growth from a diversified group of small- and medium-sized company common stocks in the United States may want to consider this fund. Under TDSP, the fund seeks to produce results that substantially duplicate the price and yield performance of small- and medium-sized company stocks generally not represented in the Standard & Poor's 500 Index. (d) The International Stock Fund This fund is for aggressive investors seeking long-term capital appreciation and diversification through investments in stocks based outside of the United States. Under TDSP, the fund invests in equity market investments outside North America, based on the Morgan Stanley Capital International Europe, Australia, and Far East (EAFE) Index, with a modified country weighting that limits investments in securities of any one country to approximately 25% of the fund. (e) The IBM Stock Fund The IBM Stock Fund will appeal to aggressive investors looking for capital appreciation from a single stock investment. The objective of the fund is participation in IBM's future stock performance. IBM corporate officers who elect this investment are subject to such Page 8 restrictions which are necessary for compliance with securities laws. The Committee may, in its discretion (which discretion may be delegated to the Treasurer or other executive officer of IBM), from time to time make additional TDSP Investment Funds available as an investment measure under this Plan and may determine that any TDSP Investment Fund, including any of the Funds described above, may be terminated as an investment measure under this Plan. A Participant may elect to invest his or her Deferrals entirely in any one of the funds or may elect any combination in 5% multiples. 4.02 Change of Investment Selection on Future Deferrals A Participant may elect to change his or her investment selection for future Deferrals once per month. The Participant must make this election in the manner prescribed by the Committee. 4.03 Change of Investment Selection on Existing Deferral Accounts With regard to a Participant's existing Deferral Account balance, a Participant may elect to transfer balances among the Investment Funds once per month; provided however, that the portion of the Deferral Account of a Company officer that is allocated to the IBM Stock Fund may not be transferred to another Investment Fund while the officer remains in Company employment. Any permissible transfers, if among more than one Investment Fund, must be made in 5% multiples. The Participant must make this election in the manner prescribed by the Committee, and the Committee may impose such additional rules and limitations upon transfers between Investment Funds as the Committee may consider necessary or appropriate. Page 9 ARTICLE 5. PAYMENT OF ACCOUNTS 5.01 Commencement of Deferral Payments A Participant shall be entitled to receive payment of his or her Accounts upon the Participant's (1) termination of employment from the Company for any reason other than retirement from the Company or (2) retirement from the Company with a balance of less than $25,000 in his or her Accounts. Any other Participant who is a DCP Participant and who has a termination of employment from the Company while a DCP Participant or any other Participant who retires from the Company shall be entitled to receive payment of his or her Accounts during the January following the calendar year during which the Participant had a termination of employment from the Company. 5.02 Method of Payment Payment of Accounts shall be made in a single lump sum payment. Notwithstanding the foregoing, a Participant with a balance of at least $25,000 in his or her Accounts who either retires from the Company or is a DCP Participant for the calendar year in which he or she no longer works for the Company may elect to receive (1) a lump sum payment upon his or her termination of employment from the Company or (2) up to ten ratable annual installment payments of the balance in his or her Accounts commencing during the January following the calendar year during which the Participant had a termination of employment from the Company. For this election to be effective, at least one full calendar year must pass between the calendar year the Participant makes the election and the calendar year the Participant has a termination of employment from the Company. The Participant must make this election in the manner prescribed by the Committee. Upon application of a Participant, the Committee may authorize earlier payment to the Participant after termination of employment with the Company of an amount reasonably needed to satisfy the emergency need caused by an unforeseeable emergency that causes severe financial hardship to the Participant. If a Participant dies before payment of the entire balance of his or her Accounts, an amount equal to the unpaid portion thereof as of the date of his or her death shall be payable in one lump sum to his or her Beneficiary. 5.03 Designation of Beneficiary Each Participant's Beneficiary under this Plan shall automatically be the person or persons designated as the Participant's beneficiary under the TDSP even if such designation is found to be invalid under the provisions of ERISA or the Code. Such Beneficiary shall be entitled to receive the lump sum amount, if any, payable under the Plan upon the Participant's death pursuant to this Section 5.03 (except if that Participant was a DCP Participant and had made an election pursuant to Section 5.02); provided Page 10 however, that the beneficiary is alive at the time of the Participant's death. If no such Beneficiary designation is in effect at the time of the Participant's death, or if no designated Beneficiary survives the Participant, the Participant's Beneficiary shall be deemed to be the Participant's beneficiary under IBM's Group Life Insurance Plan. Page 11 ARTICLE 6. GENERAL PROVISIONS 6.01 Funding (a) All amounts payable in accordance with this Plan shall constitute a general unsecured obligation of the Company. Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company, to the extent not paid by a grantor trust established pursuant to paragraph (b) below. In the sole discretion of the Committee, a Participant's Accounts may be reduced to reflect allocable administrative expense. (b) IBM may, for administrative reasons, establish a grantor trust for the benefit of Participants participating in the Plan. The assets of said trust will be held separate and apart from other Company funds and shall be used exclusively for the purposes set forth in the Plan and the applicable trust agreement, subject to the following conditions: (i) The creation of said trust shall not cause the Plan to be other than "unfunded" for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended; (ii) The Company shall be treated as "grantor" of said trust for purposes of Section 677 of the Code; and (iii) Said trust agreement shall provide that its assets may be used to satisfy claims of the Company's general creditors in the event of its insolvency, and the rights of such general creditors are enforceable by them under federal and state law. (c) Neither the Company nor the Committee guarantees the investment alterna- tives available under the Plan in any manner against loss or depreciation. 6.02 No Contract of Employment Nothing herein contained shall be deemed to give any employee the right to be retained in the service of the Company or an Affiliate or to interfere with the right of the Company or an Affiliate to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan. Nothing appearing in or done pursuant to the Plan shall be held or construed to create a contract of employment with the Company, to obligate the Company to continue the services of any Employee, or to affect or modify any Employee's terms of employment in any way or to give any person any legal or equitable right or interest in the Plan or any part thereof or distribution therefrom or against the Company except as expressly provided herein. Page 12 6.03 Facility of Payment In the event the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive benefits under the Plan is incompetent to care for his or her affairs and in the absence of the appointment of a legal guardian of the property of the incompetent, benefit payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee, or other legal representa- tive) may be made to the spouse, parent, brother or sister, or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent. In the absence of the appointment of a legal guardian of the property of a minor, any minor's share of benefits payable under the Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor. The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed before authorizing the payment of benefits in such situation. Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this Article 6 shall be a complete discharge or any obligation arising under the Plan with respect to such benefit payments. 6.04 Withholding Taxes The Plan Administrator shall have the right to withhold all applicable taxes or other payments from benefits hereunder and to report information to government agencies when required to do so by law. 6.05 Nonalienation No benefits payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy, or like encumbrance. No benefit under the Plan shall in any manner be liable for or subject to the debts or labilities of any person entitled to benefits under the Plan. 6.06 Administration A11 decisions, determinations, or interpretations the Board, the Committee, the Plan Administrator, the Company or any member, officer or employee thereof are authorized to make under the Plan (including the delegation of any authority hereunder to another party) shall be made in that party's sole discretion and shall be final, binding, and conclusive on all interested persons. Page 13 6.07 Construction The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management or highly compensated employees, and all rights hereunder shall be governed by and construed in accordance with the laws of the State of New York to the extent not governed by the Employee Retirement income Security Act of 1974, as amended. Page 14 ARTICLE 7. MANAGEMENT AND ADMINISTRATION 7.01 Amendment or Termination This Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or the Committee, but only if the Committee's action is not materially inconsis- tent with a prior action of the Board. The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement. 7.02 Responsibilities (a) The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated: (i) the Board, (ii) the Committee, (iii) the chief human resources officer, and (iv) the Plan Administrator and each person on any committee serving as the Plan Administrator. Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan. (b) The Board shall be responsible only for designating those persons who will serve on the Committee and for approval of any resolution to amend or terminate the Plan. (c) The Committee may, pursuant to a duly adopted resolution, delegate to the chief financial officer or the chief human resources officer, the Treasurer, the Plan Administrator or any other officer or employee of IBM, authority to carry out any decision, directive, or resolution of the Committee. (d) The Committee shall appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator. In the sole discretion of the Plan Administrator, the Plan Administrator shall have the full power and authority to: (i) promulgate and enforce such rules and regulations as shall be deemed be necessary or appropriate for the administration of the Plan; (ii) adopt any amendments to the Plan that are required by law; (iii) interpret the Plan consistent with the terms and intent thereof; and (iv) resolve any possible ambiguities, inconsistencies, and omissions. Page 15 All such determinations and interpretations shall be in accordance with the terms and intent of the Plan, and the Plan Administrator shall report such actions to the Committee on a regular basis. Additionally, the chief human resources officer shall appoint and designate such other IBM employees as may be needed to provide adequate staff services to the Committee and the Plan Administrator. (e) The Committee and the Plan Administrator may engage the services of accountants, attorneys, actuaries, investment consultants, and such other professional personnel as are deemed necessary or advisable to assist them in fulfilling their responsibilities under the Plan. The Committee, the Plan Administrator, and their delegates and assistants will be entitled to act on the basis of all tables, valuations, certificates, opinions, and reports furnished by such professional personnel. Page 16 ARTICLE 8. CLAIMS PROCEDURE IBM's Executive Compensation Department is responsible for advising Participants and Beneficiaries of their benefits under the Plan. In the event a Participant or Beneficiary believes he or she is entitled to benefits and has not received them, the Participant or Beneficiary must submit a claim to the Director of Executive Compensation, IBM Corporation, Old Orchard Road, Armonk, New York 10504. A written decision setting forth its conclusions will be furnished by the Plan Administrator to the Participant or Beneficiary within 60 days after the request for review is received. Failure of the Plan Administrator to follow this procedure shall not, in and of itself, give rise to a cause of action for benefits hereunder. EX-10.C 5 EXHIBIT XI As amended, restated, and combined on July 27, 1993 IBM Board of Directors Deferred Compensation and Equity Award Plan ------------------------------------------- ARTICLE I. Purpose ------- International Business Machines Corporation ("IBM") has established, pursuant to resolutions adopted on July 27, 1993, the Deferred Compensation and Equity Award Plan (the "Plan") to amend, restate and combine the Deferred Compensation Plan ("DCP") and Restricted Equity Award Plan ("REAP") of the Board of Directors, to enable members of the Board of Directors (the "Board") who are not then IBM employees ("Outside Directors") to defer receipt of compensation for the services of Outside Directors to later years and to provide part of the compensation for the services of Outside Directors in a promise to deliver shares of IBM Capital Stock ("Shares"). ARTICLE II. Maintenance of Records ---------------------- IBM shall maintain three bookkeeping accounts for each Outside Director, a Cash Account, a Promised Fee Shares Account, and a Promised Award Shares Account, which shall be credited in accordance with the terms of this Plan and the elections of each Outside Director pursuant to this Plan. ARTICLE III. Promised Award Shares --------------------- (a) Initial Awards -------------- An Initial Award of a promise by IBM to deliver one hundred Shares, pursuant to ARTICLE VII hereof, to an Outside Director ("Promised Award Shares") shall be made to any newly-elected Outside Director upon his or her election to the Board. (b) Annual Awards ------------- Each year, on the first day of the month following the annual meeting of IBM stockholders held pursuant to IBM's By-laws, each Outside Director who was elected at such annual meeting (including newly-elected Outside Directors) shall receive an Annual Award of one hundred Promised Award Shares. (c) Voting Rights ------------- Promised Award Shares do not have voting rights. -1- (d) Promised Award Shares Account ----------------------------- Promised Award Shares shall be credited to the Promised Award Shares Account. ARTICLE IV. Deferral of Fees ---------------- (a) Eligibility and Election ------------------------ Any Outside Director may elect to defer receipt of all or any portion of the other compensation for services ("Fees") to be earned by such Outside Director by indicating such election to the Secretary of IBM on an Election Form supplied by the Secretary ("Deferral Election"). The Outside Director's election must specify (i) the portion of the Fees to be deferred, (ii) the "Deferral Period" (a minimum of one "Election Term"), (iii) the choice of deferral in cash or a promise by IBM to deliver Shares ("Promised Fee Shares"), pursuant to ARTICLE VII hereof, and (iv) the time(s) of payment or delivery. Each Deferral Election is irrevocable with respect to the Fees payable for the Deferral Period to which it applies. "Deferral Period" shall mean, with respect to a Deferral Election, the period of Fee payments that are being deferred pursuant to such Deferral Election. "Election Term" shall mean the period beginning on the date an Outside Director is elected to the Board and ending on the date of the next succeeding Annual Meeting of IBM Stockholders. (b) Credit for Amounts Deferred --------------------------- (i) The Cash Account will be credited with the amount of Fees accrued during a Deferral Period and deferred as cash (such credit to be made when such Fees become payable), plus interest at an annual rate equal to the average of the first 26-week Treasury Bill issued in January and July of each year, computed from the date such Fees would have been paid had they not been deferred. (ii) The Promised Fee Shares Account will be credited with the number of Shares, including fractions, which could have been purchased had the amount of the Fees accrued during a Deferral -2- Period and deferred as Promised Fee Shares been used to purchase Shares on the date such Fees would have been paid had they not been deferred, at a price equal to Fair Market Value on such date. (iii) "Fair Market Value" shall be the average of the high and low prices of Shares on the New York Stock Exchange on the date in question, provided that if no sales of Shares were made on said Exchange on that date, the average of the high and low prices reported for the preceding day on which sales of Shares were made on said Exchange. (iv) Promised Fee Shares do not have voting rights. (c) Advance Notice of Election -------------------------- Any Deferral Election with respect to Fees to be earned during an Election Term shall be delivered to the Secretary of IBM: (i) in the case of Fees deferred and to be recorded in the Cash Account, on or before the date 30 days prior to the first date of such Election Term or, with respect to a new Outside Director, before the first date of such Election Term; or (ii) in the case of Fees deferred and to be recorded in the Promised Fee Shares Account, on or before the date six months prior to the first date of such Election Term or, with respect to a new Outside Director, before the first date of such Election Term. (d) Duration of Election -------------------- A Deferral Election may be made annually for the succeeding Election Term or, at the Outside Director's direction, shall continue from Election Term to Election Term unless a written request to modify or terminate that election for subsequent Election Terms is submitted to the Secretary of IBM on or before the date six months prior to the first date of the first such subsequent Election Term, provided that such -------- six-month period may be reduced to 30 days if -3- neither the Deferral Election being modified or terminated nor the modified Deferral Election provides for a deferral of Fees as Promised Fee Shares during such first Election Term. (e) Financial Hardship ------------------ In the event that an Outside Director incurs a severe financial hardship, the Outside Director's deferral schedule with respect to his or her Cash Account or Promised Fee Shares Account shall be revised by the Board (or an authorized Committee of the Board) to the extent reasonably necessary to eliminate the severe financial hardship. Such severe financial hardship must be caused by an accident, illness, or event beyond the control of the Outside Director. (f) Conversion of DCP Elections --------------------------- Ongoing elections under the DCP to defer Fees as share units and/or cash shall be continued and converted to elections to defer Fees into a Promised Fee Shares Account and/or a Cash Account, respectively, under the Plan, except to the extent the Outside Director elects prior to July 27, 1993 to change such an election to defer Fees into share units into an election to defer Fees into the Cash Account. ARTICLE V. Dividends, Distributions and Adjustments ---------------------------------------- Whenever a cash dividend or any other distribution is paid with respect to Shares, the Promised Fee Shares Account and Promised Award Shares Account of each Outside Director shall be credited with an additional number of Promised Fee Shares or Promised Award Shares, as applicable, equal to the number of Shares, including fractional Shares, that could have been purchased had such dividend or other distribution been paid on each Promised Fee Share in the Promised Fee Shares Account and Promised Award Share in the Promised Award Shares Account (on the record date for such dividend or distribution) and the amount of such dividend or value of such other distribution been used to acquire additional Shares at the Fair Market Value on the date such dividend or -4- other distribution is paid. The value of any such other distribution on or related to Shares shall, at the option of the Board (or an authorized Committee of the Board), be either determined by the Board or independently established. The number of Promised Award Shares and Promised Fee Shares shall be fully adjusted upon the occurrence of any stock split, stock dividend, combination or reclassification, recapitalization, merger or similar event, and shall be appropriately adjusted for the value (determined in the manner provided above with respect to distributions) of any right, privilege or opportunity provided or offered by IBM to holders of Shares. ARTICLE VI. Conversion of REAP and DCP Shares Account ----------------------------------------- Balances -------- The amount in the account of an Outside Director as of July 27, 1993 under the DCP in units equivalent to a number of Shares (including fractions of Shares) and payable in cash only ("units") shall be converted under the Plan as of July 27, 1993 to an amount in the same number of Shares (including fractions of Shares) credited to the Outside Director's Promised Fee Shares Account, unless the Outside Director elects prior to July 27, 1993 to convert the units as of July 27, 1993 into credits in the Cash Account. The number of Shares in the escrow account of an Outside Director as of July 27, 1993 under the REAP shall be converted under the Plan as of July 27, 1993 to an equal number of Promised Award Shares credited to the Outside Director's Promised Award Shares Account. An Outside Director's cash account balance under the DCP as of July 27, 1993 will be converted to an equivalent balance under the Outside Director's Cash Account under the Plan as of July 27, 1993. ARTICLE VII. Delivery -------- Delivery of amounts from the Cash Account and Shares from the Promised Award Shares Account and Promised Fee Shares Account will be made to an Outside Director in accordance with his or her applicable Deferral Elections or, if no election applies, promptly after the date on which the Outside Director ceases to -5- be a member of the Board; provided, that when an Outside -------- Director terminates service on account of any act of (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of IBM or any direct or indirect majority-owned subsidiary of IBM, Promised Award Shares credited to such Outside Director's Promised Award Shares Account shall be forfeited. In the event of an Outside Director's death, such Outside Director's estate or beneficiary, as appropriate, shall be paid the amount credited to his or her Cash Account and an amount equal to the Fair Market Value on the date of death of the Promised Award Shares and Promised Fee Shares credited to his or her Promised Award Shares Account and Promised Fee Shares Account. Upon becoming entitled to receive Shares, an Outside Director may elect to receive in lieu thereof a cash payment. In the case of Shares to be delivered pursuant to a Deferral Election, the cash payment shall be equal to the Fair Market Value of the Shares on the delivery date specified in the Deferral Election. In the case of shares to be delivered promptly after the date on which a Director ceases to be a member of the Board, the cash payment shall be equal to the Fair Market Value of the Shares on the first day after such date. In any case when Shares are to be delivered, a cash payment will be so made in lieu of delivering a fractional Share. ARTICLE VIII. Source of Shares ---------------- 45,000 Shares as of July 27, 1993, plus an additional 20,000 Shares as of May 1, 1994, and as of each May 1 thereafter, shall be reserved and authorized for delivery under the Plan from time to time. These Shares may be provided from newly-issued or repurchased Shares. If any change is made in the number of Shares outstanding or in the rights of such outstanding Shares (such as by stock split, stock dividend, combination or reclassification, recapitalization, merger or similar event), the Board (or an authorized Committee of the Board) may make such adjustments in the number of or rights relating to Shares authorized to be delivered pursuant to the Plan as the Board (or such Committee) determines is equitable to preserve the respective rights of the participants in the Plan. Shares forfeited under the Plan or settled in cash in lieu of delivery shall not reduce the number of Shares authorized under the Plan and shall not be deemed to have been delivered under the Plan; provided, that the number of Shares -------- settled in cash in lieu of delivery shall not exceed the cumulative number of Shares authorized for delivery under the Plan (without deduction for Shares delivered). -6- ARTICLE IX. Alienability ------------ No amount due or payable under the Plan or any interest in the Plan, shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy or like encumbrance. No such amount shall in any manner be liable for or subject to the debts or liability of any Outside Director. Prior to delivery of Shares by IBM pursuant to Article VII, no director shall have any right to transfer or assign any Share, or any right to receive any Share, credited to him under this Plan. Any purported assignment shall be null and void. ARTICLE X. Outside Director's Rights Unsecured ----------------------------------- The right of an Outside Director to receive any cash payment or Shares hereunder shall rank as an unsecured claim against IBM. Assets that may be set aside for IBM's convenience with respect to the Plan shall not in any way be held in trust for, or be subject to any prior claim by, an Outside Director or beneficiary. ARTICLE XI. Effective Date -------------- The Plan shall become effective on July 27, 1993. ARTICLE XII. Amendment and Termination ------------------------- The Board or any authorized Committee of the Board may at any time terminate, and may at any time and from time to time and in any respect amend, the Plan for any reason; provided that -------- the Plan may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, or the rules thereunder. -7- EX-13 6 EXHIBIT VI FINANCIAL HIGHLIGHTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES (Dollars in millions except per share amounts) 1994 1993 For the Year: Revenue $ 64,052 $ 62,716 Earnings (loss) before income taxes $ 5,155 $ (8,797) Income taxes $ 2,134 $ (810) Net earnings (loss) before change in accounting principle $ 3,021 $ (7,987) Per share of common stock $ 5.02 $ (14.02) Effect of change in accounting principle* $ -- $ (114) Per share of common stock $ -- $ (.20) Net earnings (loss) $ 3,021 $ (8,101) Per share of common stock $ 5.02 $ (14.22) Cash dividends paid on common stock $ 585 $ 905 Per share of common stock $ 1.00 $ 1.58 Investment in plant, rental machines and other property $ 3,078 $ 3,232 Average number of common shares outstanding (in millions) 585 573 At End of Year: Total assets $ 81,091 $ 81,113 Net investment in plant, rental machines and other property $ 16,664 $ 17,521 Working capital $ 12,112 $ 6,052 Total debt $ 22,118 $ 27,342 Stockholders' equity $ 23,413 $ 19,738 Number of regular, full-time employees 219,839 256,207 Number of stockholders 713,060 741,047 *1993 cumulative effect of Statement of Financial Accounting Standards (SFAS) 112, "Employers' Accounting for Postemployment Benefits." FINANCIAL REPORT 34} REPORT OF MANAGEMENT 35} REPORT OF INDEPENDENT ACCOUNTANTS 36} MANAGEMENT DISCUSSION 48} CONSOLIDATED FINANCIAL STATEMENTS Operations Financial Position Cash Flows Stockholders' Equity 52} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A Significant Accounting Policies B Accounting Changes C Marketable Securities D Inventories E Plant, Rental Machines and Other Property F Investments and Sundry Assets G Debt H Taxes I Research, Development and Engineering J Restructuring Actions K Interest on Debt L Other Liabilities and Environmental M Contingencies N Customer Financing O Rental Expense and Lease Commitments P Long-Term Performance Plan Q Stock Purchase Plan R Retirement Plans S Nonpension Postretirement Benefits T Lines of Credit U Sales and Securitization of Receivables V Preferred Stock W Financial Instruments X Segment Information Y Geographic Areas Z Subsequent Events 79} FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA 79} SELECTED QUARTERLY DATA 80} IBM BOARD OF DIRECTORS AND MANAGEMENT 81} SHAREHOLDER INFORMATION 33 REPORT OF MANAGEMENT INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. We believe this structure provides reasonable assurance that transactions are executed in accordance with management authorization, and that they are appropriately recorded, in order to permit preparation of financial statements in conformity with generally accepted accounting principles and to adequately safeguard, verify, and maintain accountability of assets. An important element of the control environment is an ongoing internal audit program. To assure the effective administration of internal control, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels, and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and followed. Price Waterhouse LLP, independent accountants, is retained to examine IBM's financial statements. Their 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. Louis V. Gerstner, Jr. Jerome B. York Chairman of the Board Senior Vice President and Chief Executive Officer and Chief Financial Officer 34 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 48 through 78, present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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. As discussed in the note on accounting changes on pages 53 and 54, the company changed its methods of accounting for postemployment benefits in 1993 and income taxes in 1992. We concur with these changes. Price Waterhouse LLP 1177 Avenue of the Americas New York, NY 10036 January 20, 1995 35 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES overview IBM has made substantial progress during 1994 in stabilizing its operations, rebuilding its balance sheet, improving its cost structure, and increasing shareholder value. The actions taken during the past two years to "right-size" the company have improved IBM's competitiveness in the rapidly changing market for information technology products and services. As a result, the company returned to profitability for the first time since 1990. Overall, the company's hardware offerings remain under price and competitive pressure. Revenue growth was strong for RISC System/6000* products, merchant-market semiconductors, and Original Equipment Manufacturer (OEM) files, while Application System/400* (AS/400) products showed moderate growth. Although mainframe processor revenue declined, it was stronger than expected. In addition, introduction of CMOS technology is progressing well and the broader use of these products in parallel processing is expected to continue. Personal computer revenue grew, but at a slower rate than certain competitors and the industry as a whole. The company believes that the restructuring actions taken this year will, in the long run, lead to improved performance in this area. It is also anticipated that the pressures on price and margin will remain for all hardware offerings. The company's services offerings continue to grow rapidly, but remain at margins lower than the company's traditional hardware offerings. While much progress has been made, IBM must continue its pace of change as it focuses increasingly on revenue growth, improving the time to market with new products, re-engineering its business processes, and reducing its cost and expense structure. results of operations (Dollars in millions) 1994 1993 1992 Revenue $ 64,052 $ 62,716 $ 64,523 Cost 38,768 38,568 35,069 -------------- -------------- -------------- Gross profit 25,284 24,148 29,454 Total expense without restructuring charges 20,129 24,000 26,835 Restructuring charges - 8,945 11,645 -------------- -------------- --------------- Net earnings (loss) before income taxes $ 5,155 $ (8,797) $ (9,026) -------------- -------------- --------------- Net earnings (loss) $ 3,021 $ (8,101) $ (4,965) -------------- -------------- --------------- Gross profit margin 39.5% 38.5% 45.6%
Revenue as reported in the United States was $24.1 billion, a decrease of 6.2 percent compared to 1993. When adjusted for the Federal Systems Company (FSC) sale, which is discussed on page 47, U.S. revenue grew 3.0 percent in 1994, following a 4.3 percent increase in 1993 over 1992. Revenue from Europe was $23.0 billion, an increase of 5.8 percent over 1993, following a 12.8 percent decrease in 1993 from 1992. Asia-Pacific revenue grew 13.4 percent to $11.4 billion compared to 1993, following a 3.6 percent increase over 1992 levels. Revenue from Canada was $2.5 billion, an increase of 15.8 percent over 1993, following a 6.1 percent decrease 36 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES in 1993 versus 1992. Latin America revenue decreased .7 percent to $3.0 billion in 1994, following a 3.7 percent increase in 1993 over 1992. The overall gross profit margin has been relatively stable for the last two years at approximately 39 percent. The gross profit margins continue to be affected by hardware pricing pressures and the company's shift to services revenue, which has lower gross profit margins than its hardware offerings. The company reported net earnings of $3,021 million ($5.02 per common share), a net loss of $8,101 million ($14.22 per common share), and a net loss of $4,965 million ($8.70 per common share) for 1994, 1993, and 1992, respectively. When adjusted for the FSC sale ($248 million or $.43 per common share) and the effect of increased amortization resulting from the change in software amortization periods ($192 million or $.33 per common share), net earnings for 1994 were $2,965 million ($4.92 per common share). This compares to a full-year 1993 net loss of $96 million ($.25 per common share) excluding the FSC results ($105 million or $.18 per common share), the effects of a restructuring charge of $7,996 million ($14.02 per common share), and the cumulative effect of $114 million ($.20 decrease in earnings per common share) as a result of the company's adoption of Statement of Financial Accounting Standards (SFAS) 112, "Employers' Accounting for Postemployment Benefits." In 1992, the company had net earnings of $1,328 million ($2.32 per common share) after excluding the FSC results of $89 million ($.16 per common share), the effects of a restructuring charge of $8,282 million ($14.51 per common share), and the cumulative benefit to earnings of $1,900 million ($3.33 per common share) as a result of the company's adoption of SFAS 109, "Accounting for Income Taxes." hardware sales (Dollars in millions) 1994 1993 1992 Total revenue $ 32,344 $ 30,591 $ 33,755 Total cost 21,300 20,696 19,698 ------------- ------------- ------------- Gross profit $ 11,044 $ 9,895 $ 14,057 ------------- ------------- ------------- Gross profit margin 34.1% 32.3% 41.6% Worldwide revenue from hardware sales increased 5.7 percent from 1993, following a decrease of 9.4 percent in 1993 from 1992. Worldwide gross profit dollars from hardware sales increased 11.6 percent from 1993, following a decrease of 29.6 percent in 1993 from 1992. Revenue from processors decreased 2.8 percent from 1993, following a 27.6 percent decrease in 1993 from 1992. These decreases were primarily due to declines in System/390* processor revenue, resulting from continuing competitive pricing pressures associated with these products. AS/400 product revenue grew in 1994 over 1993, as the new advanced series processors showed strong growth. AS/400 product revenue declined in 1993 from 1992, primarily in Europe, due to lower volumes. 37 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Personal systems revenue grew 14.2 percent in 1994 over 1993, following a 27.6 percent increase in 1993 over 1992. The increases resulted from higher revenue from personal computers and strong growth for the RISC System/6000 products. The personal computer revenue continues to reflect severe price competition. Storage products revenue decreased 26.1 percent in 1994 from 1993, following a decrease of 21.2 percent in 1993 from 1992. These declines were a result of continuing price competition across most storage products. OEM hardware revenue grew 151.2 percent in 1994 over 1993, following a 132.1 percent increase in 1993 over 1992. These increases are primarily attributable to increased sales of merchant-market semiconductors and low-end storage files. Information on revenue by classes of similar products or services is included on pages 74 and 75. The product trends demonstrated in this discussion and in that disclosure are indicative, in all material respects, of hardware sales activity. The increase in hardware sales gross profit margin in 1994 was primarily driven by cost improvements in System/390 processors, offset by lower personal computer margins resulting from price pressures. Although the overall hardware margin increased, it continued to be impacted by pricing pressures on high-end products and personal computers. The decrease in 1993 gross profit margin from 1992 reflected pricing pressures on high-end products and personal computers. In addition, personal computer revenue, which carries a lower gross profit margin, was a proportionally larger part of hardware sales. software (Dollars in millions) 1994 1993 1992 Total revenue $ 11,346 $ 10,953 $ 11,103 Total cost 4,680 4,310 3,924 ------------- ------------- ------------- Gross profit $ 6,666 $ 6,643 $ 7,179 ------------- ------------- ------------- Gross profit margin 58.8% 60.7% 64.7% Software revenue increased 3.6 percent in 1994 from 1993, following a decline of 1.4 percent in 1993 from 1992. The increase in 1994 was primarily due to higher one-time-charge revenue associated with RISC System/6000 computer placements. The decline in 1993 was primarily a result of lower one-time-charge revenue reflecting decreased AS/400 computer placements. Software gross profit dollars increased .3 percent in 1994 from 1993, following a decrease of 7.5 percent in 1993 from 1992. The 1994 software gross profit dollars and margin were affected by a change in the company's software amortization periods effective January 1, 1994. This change was a result of a continuing review of the company's portfolio of software offerings, software amortization periods, and recoverability of the capitalized investment in software products. The change reduced amortization periods to a maximum of four years to recognize more rapid advances in software technology and thus a shorter period over which to recover capitalized costs. This change resulted in increased amortization costs after tax of $192 million ($.33 per common share). Excluding the effects of this change, gross profit dollars would have increased 4.8 percent and the gross 38 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES profit margin would have been 61.4 percent in 1994. The decrease in gross profit margin in 1993 from 1992 was partially a result of lower one-time-charge revenue as previously discussed and a higher level of program product write-offs that were recorded as a result of the continuing review of the company's portfolio of software offerings. Write-offs in 1994, 1993, and 1992, excluding the effects of changes in amortization lives, were $491 million, $327 million, and $62 million, respectively. services (Dollars in millions) 1994 1993 1992 Services $ 9,715 $ 7,648 $ 5,530 Federal Systems Company -- 2,063 1,822 ------------ ------------ ------------ Services revenue excluding maintenance 9,715 9,711 7,352 Cost 7,769 8,279 6,051 ------------ ------------ ------------ Gross profit $ 1,946 $ 1,432 $ 1,301 ------------ ------------ ------------ Gross profit margin 20.0% 14.7% 17.7% Maintenance revenue $ 7,222 $ 7,295 $ 7,635 Cost 3,635 3,545 3,430 ------------ ------------ ------------ Gross profit $ 3,587 $ 3,750 $ 4,205 ------------ ------------ ------------ Gross profit margin 49.7% 51.4% 55.1% Total services revenue $ 16,937 $ 17,006 $ 14,987 Cost 11,404 11,824 9,481 ------------ ------------ ------------ Gross profit $ 5,533 $ 5,182 $ 5,506 ------------ ------------ ------------ Gross profit margin 32.7% 30.5% 36.7%
Services revenue, excluding maintenance, on an as-reported basis, was flat when compared to 1993. The 1994 results do not include operational results from FSC, which were included in 1993 and 1992 results. When adjusted for the effects of the FSC sale, services revenue continued to show strong overall growth, increasing 27.0 percent in 1994 over 1993, following an increase of 38.3 percent in 1993 over 1992. The increases were primarily driven by strong growth in managed operations for both systems and networks, consulting, and systems integration activity. Services gross profit dollars, excluding maintenance, increased 35.9 percent, following an increase of 10.1 percent in 1993 over 1992. Adjusted for the FSC sale, 1994 gross profit dollars increased 54.0 percent over 1993, and 7.3 percent in 1993 versus 1992. The 1993 gross profit dollars were impacted by cost adjustments that were required on certain older contracts that were not expected to be profitable. The services gross profit margins adjusted for the FSC activity, excluding maintenance, were 20.0 percent, 16.5 percent, and 21.3 percent in 1994, 1993, and 1992, respectively. Maintenance revenue decreased 1.0 percent from 1993, following a decrease of 4.4 percent in 1993 from 1992. Gross profit dollars decreased 4.4 percent year-over-year, following a decrease of 10.8 percent in 1993 from 39 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES 1992. Maintenance revenue and gross profit margins continue to be adversely affected by the competitive environment and resulting pricing pressures on maintenance offerings. This trend is expected to continue. rentals and financing (Dollars in millions) 1994 1993 1992 Total revenue $ 3,425 $ 4,166 $ 4,678 Total cost 1,384 1,738 1,966 ------------ ------------ ------------ Gross profit $ 2,041 $ 2,428 $ 2,712 ------------ ------------ ------------ Gross profit margin 59.6% 58.3% 58.0% Rentals and financing revenue decreased 17.8 percent from 1993, following a decrease of 10.9 percent in 1993 from 1992. Rentals and financing gross profit dollars decreased 15.9 percent from 1993, following a decrease of 10.5 percent in 1993 from 1992. These decreases are a result of lower financing volumes and reduced prices of IBM products being financed. operating expenses (Dollars in millions) 1994 1993 1992 Selling, general and administrative $ 15,916 $ 18,282 $ 19,526 Percentage of revenue 24.8% 29.2% 30.3% Research, development and engineering $ 4,363 $ 5,558 $ 6,522 Percentage of revenue 6.8% 8.9% 10.1%
Selling, general and administrative (SG&A) expense decreased 12.9 percent from 1993, which followed a decrease of 6.4 percent in 1993 from 1992. The 1994 decrease includes the before-tax gain from the FSC sale. Without this gain, SG&A decreased 10.9 percent. These decreases reflect the results of the company's focus on productivity, restructuring programs, and expense controls. Work-force-related SG&A decreased 6.9 percent from 1993, which followed a decrease of 11.7 percent from 1992. The component of SG&A that is not work force related decreased in 1994, primarily as a result of the gain from the FSC sale, lower provisions for accounts receivable, and increased royalty/patent income over 1993 levels. Late in 1994, the Mexican economy suffered severe disruptions, which caused a rapid decline in the Mexican Peso. As a result, the company incurred a $27 million exchange loss, which is recorded in SG&A. Research, development and engineering expense decreased 21.5 percent in 1994, following a decrease of 14.8 percent in 1993 from 1992. The reductions reflect the company's focus on productivity and expense controls, which resulted in elimination of redundant efforts and reprioritization of development activities to areas such as microprocessors, RISC technology, networking, personal computers, and desktop software. 40 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES restructuring charges No restructuring charges were recorded in 1994. Restructuring charges were $8.9 billion in 1993 and $11.6 billion in 1992. These charges include expenses associated with work force reductions, facility consolidations, capacity reductions, and other related actions to streamline the company. These charges are discussed further on pages 60 and 61. other income Other income, principally interest, was $1.4 billion in 1994, an increase of 23.7 percent from 1993, which almost doubled when compared to 1992 levels. The 1994 increase reflects higher levels of available cash and higher interest rates versus 1993. The 1993 increase over 1992 reflects higher levels of available cash and higher interest rates in countries whose economic environment is highly inflationary, notably Brazil. Although other income increased, exchange losses from currency revaluations of cash largely offset the increase. Exchange losses are reflected in SG&A expense. In July 1994, the Brazilian government converted to a new currency, the Real. The new currency is tied to the U.S. dollar as part of the government's economic plan to reduce inflation and stabilize the economy. If the changes in Brazil are successful, it is anticipated that the economic plan will have the effect of lowering the company's interest income and interest expense, as well as the exchange gains and losses associated with the local currency cash deposits and borrowings. Other income and interest expense amounts decreased significantly during the second half of 1994 compared with previous periods of 1994 and 1993 as a result of this change. Conversely, the Mexican Peso and economy continue to experience disruption. While the company's operations in Mexico are not as significant as its Brazilian operations, high-priority attention is being given to strategies to minimize exchange impacts. provision for income taxes The provision for income taxes resulted in a charge of $2,134 million in 1994, a benefit of $810 million in 1993, and a benefit of $2,161 million in 1992. The 1994 provision was based on earnings before income taxes of $5,155 million, resulting in an effective tax rate of 41 percent for 1994. The effective tax rates of (9) percent in 1993 and (24) percent in 1992 were principally due to limited tax benefits on restructuring charges, along with a high effective tax rate on earnings in certain non-U.S. operations. Excluding the effects of restructuring charges, the effective tax rates were 94 percent in 1993 and 46 percent in 1992. The high effective tax rate in 1993 resulted from earnings in non-U.S. operations of $1.3 billion at an average tax rate of 50.2 percent, offset by a loss before taxes in the United States of $1.1 billion at a tax rate of 44.5 percent. The company accounts for income taxes under SFAS 109, "Accounting for Income Taxes," which provides for recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the likelihood of realization, management considered estimates of future taxable income. The total amount of U.S. federal taxable income needed to realize U.S. federal deferred tax assets, net of valuation allowances, is approximately 41 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES $14.0 billion as compared to approximately $15.0 billion in 1993. In estimating the amount of U.S. taxable income that may be available to the company to utilize as many deferred tax assets as possible, the last three years' U.S. taxable income was considered. This was approximately $200 million (estimated income) in 1994, $(1.2) billion loss for 1993, and $4.4 billion income for 1992. In addition, consideration was given to the impact of the announced restructuring actions on the company's future taxable income and tax planning strategies related to research and development costs. changes in accounting principles The company implemented SFAS 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1993. The cumulative effect of adopting this standard, which is discussed further on page 54, was a one-time charge of $114 million (net of approximately $61 million of income tax benefits). Most of this charge was included in U.S. operations. Effective January 1, 1992, the company implemented SFAS 109, "Accounting for Income Taxes." The cumulative effect of adopting this standard was a one-time benefit to net earnings of $1,900 million for recognition of previously unrecognized tax benefits. fourth quarter For the quarter ended December 31, 1994, the company had net earnings of $1,230 million ($2.06 per common share) compared to net earnings of $382 million ($.62 per common share) in the fourth quarter of 1993. Revenue for the fourth quarter of 1994 totaled $19.9 billion, an increase of 2.6 percent when compared to the same period of 1993. Fourth quarter 1994 revenue increased 6.6 percent over 1993 levels when adjusted for the sale of FSC. On a geographic basis, revenue from Europe was $7.6 billion in the fourth quarter, an increase of 7.8 percent over the same period of last year. Asia-Pacific revenue grew 10.9 percent to $3.4 billion compared to the fourth quarter of 1993. Revenue from Canada was $.8 billion, an increase of 19.4 percent over 1993's fourth quarter. U.S. fourth-quarter revenue was $7.0 billion, an increase of 4.6 percent over the same period of last year after adjusting for the FSC sale. Revenue from Latin America declined 6.5 percent to $1.1 billion compared to the fourth quarter of 1993. Revenue gains resulting from currency rate fluctuation were largely offset by increases in costs and expenses due to currency. Revenue on a constant currency basis grew approximately 3 percent in the quarter. Total hardware sales increased 2.5 percent to $10.6 billion in the fourth quarter compared to the same period of 1993, while total software revenue grew 6.9 percent to $3.3 billion. Services revenue increased 3.8 percent to $3.3 billion or 31.4 percent when adjusted for the sale of FSC compared to the fourth quarter of 1993. Maintenance revenue increased 1.9 percent to $1.8 billion in the quarter over the prior year, and rentals and financing revenue declined 12.5 percent to $862 million. Within specific hardware product areas, AS/400 and RISC System/6000 revenue continued to show strong growth. Mainframe and high-end storage products revenue declined primarily as a result of year-over-year price reductions. Personal computer revenue declined with particular weakness in the U.S. Revenue from sales of OEM products continued to show strong growth, particularly in the semiconductor area. 42 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The company's overall gross profit margin, which has held steady for the last two years, was 40.6 percent compared to 38.2 percent in the fourth quarter of 1993. Total expenses, including net interest expense, declined 10.9 percent in the fourth quarter of 1994 compared to the same period of 1993. financial condition The company's financial condition improved significantly during 1994, with increases in cash and stockholders' equity and decreases in outstanding debt and total liabilities. working capital (Dollars in millions) 1994 1993 Current assets $ 41,338 $ 39,202 Current liabilities 29,226 33,150 ------------ ------------ Working capital $ 12,112 $ 6,052 ------------ ------------ Current ratio 1.41:1 1.18:1 Current assets increased $2.1 billion due to increases in cash, cash equivalents, and marketable securities of $3.4 billion and accounts receivable of $2.1 billion, offset by decreases of $1.2 billion in inventories and $2.2 billion in prepaid expenses. The increase in cash, cash equivalents, and marketable securities is primarily attributable to cash generated from operations and $1.5 billion in proceeds from the sale of FSC, offset by net cash utilized to settle outstanding debt of $6.1 billion, and net cash outflow of $2.8 billion due to the company's restructuring programs. The increase in accounts receivable largely reflects strong year-end business volumes, and the company's efforts to reduce the securitization and factoring of receivables. The decline in inventories from year-end 1993 levels results from ongoing efforts to better manage the company's inventories, particularly personal computer inventories. Lower prepaid expenses resulted from the disposition of FSC net assets, which were being held for sale, as well as a decrease in current deferred tax assets. Current liabilities decreased $3.9 billion from December 31, 1993, with declines of $2.5 billion in short-term debt and $2.5 billion in other accrued expenses and liabilities, offset by a net increase of $1.1 billion in other current liabilities (increases in taxes, accounts payable, and compensation and benefits, and a slight decrease in deferred income). The reduction in short-term debt is driven by the company's efforts to reduce its overall debt obligations, while the decline in other accrued expenses and liabilities is due to lower restructuring accrual balances from implementation of the company's restructuring programs. investments The company's capital expenditures for plant, rental machines and other property were $3.1 billion for the year ended December 31, 1994, a decrease of $.1 billion from 1993. The net book value of plant, rental machines and other property declined $.9 billion from 1993, primarily due to depreciation exceeding current levels of capital additions. 43 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES In addition to software development expense included in research, development and engineering expense, the company capitalized $1.4 billion of software costs during 1994, versus the $1.5 billion capitalized in 1993. Amortization of capitalized software costs amounted to $2.1 billion for 1994, an increase of $.1 billion from 1993. This amortization included $.3 billion in accelerated amortization of capitalized software costs resulting from the software amortization change implemented in the first quarter of 1994. This change is discussed on pages 38 and 39. debt and equity (Dollars in millions) 1994 1993 Short-term debt $ 9,570 $ 12,097 Long-term debt 12,548 15,245 ------------ ------------ Total debt $ 22,118 $ 27,342 ------------ ------------ Stockholders' equity $ 23,413 $ 19,738 ------------ ------------ Long-term debt/equity 53.6% 77.2% Long-term debt declined $2.7 billion from December 31, 1993, due to the company's continuing focus on reduction of its outstanding debt obligations; long-term debt issued in support of the company's financing activities declined $1.9 billion, while "core" long-term debt declined $.8 billion in 1994. Other non-current liabilities increased $2.8 billion from year-end 1993, due primarily to the redesignation of restructuring reserves in addition to increases in postretirement benefit reserves. The company has accrued for environmental matters, including estimated costs of cleanup of Superfund sites, operating facilities, and restoration and monitoring costs related to the closure of facilities. The company also has environmental programs in place which include investment in state-of-the-art facilities for environmental protection as well as other programs to ensure compliance with government regulations and the company's commitment to responsible environmental practices. Environmental costs, including costs associated with complying with existing environmental regulations, are not expected to materially affect the company's financial position or results of operations in future periods. Further discussion appears in note L on pages 61 and 62. Stockholders' equity increased $3.7 billion from December 31, 1993, resulting from increases of $2.4 billion in retained earnings, $1.0 billion in translation adjustments, and $.3 billion in common stock transactions. currency rate fluctuations Approximately 90 percent of the company's non-U.S. business is conducted in local currency environments. With the majority of worldwide currencies strengthening versus the U.S. dollar in 1994, assets and liabilities denominated in local currencies translate into more U.S. dollars. Changes in net worth arising from these currency fluctuations are accumulated in the translation adjustments component of stockholders' equity. As of December 31, 1994, the cumulative translation adjustment was $2.7 billion, an increase of $1.0 billion over 1993. 44 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES In high-inflation environments, such as 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 and by financing operations locally. The company has been, to a great degree, buffered from currency risk in its business operations by manufacturing, developing and procuring a significant portion of its product line in non-U.S. countries, so that costs reflect local economic conditions. Also, financial hedging instruments are used to minimize currency risks related to the company's customer financing transactions and the repatriation of dividends and royalties. Currency rate variations did not have a material effect on the company's operating results in 1994, 1993, or 1992. Revenue gains in 1994, resulting from currency rate fluctuations, were largely offset by increases in costs and expenses due to currency movements. liquidity In December 1993, the company entered into a $10.0 billion committed global credit facility as part of the company's ongoing efforts to ensure appropriate levels of liquidity. As of December 31, 1994, $9.4 billion was unused and still available. Further discussion appears in note T on page 71. At year-end 1994, the company had a net balance of $1.8 billion in assets under management from the securitization of lease and trade receivables. This amount is $1.3 billion lower than the 1993 year-end balance of $3.1 billion. Further discussion appears in note U on page 71. During 1994, the company issued, in lieu of purchasing on the open market, 5.7 million shares of common stock, which has been sold to employees under the IBM Employees 1990 Stock Purchase Plan. Also, during 1994, the company contributed .7 million shares of common stock, as well as cash, to the IBM Retirement Plan Trust Fund. In October of 1994, Moody's Investors Service upgraded its short-term debt rating for IBM and its rated subsidiaries to "Prime-1" from "Prime-2." The following table summarizes the company's cash flow from operating, investing, and financing activities as prescribed by Generally Accepted Accounting Principles (GAAP), as reflected in the Consolidated Statement of Cash Flows on page 50: (Dollars in millions) 1994 1993 1992 Net cash provided from (used in): Operating activities $ 11,793 $ 8,327 $ 6,274 Investing activities (3,426) (4,202) (5,878) Financing activities (6,412) (1,914) 654 Effect of exchange rate changes on cash and cash equivalents 106 (796) (549) ----------- ------------ ------------ Net change in cash and cash equivalents $ 2,061 $ 1,415 $ 501
45 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The improvement in 1994 cash flow from operations, compared with the 1993 period, was mainly driven by the increase in earnings and lower inventories, offset by cash outlays associated with the company's restructuring activities. The period-to-period improvement in cash flow from investing activities primarily results from the proceeds derived from the sale of FSC in the first quarter of 1994. The increase in net cash outflow from financing activities in 1994 is due principally to the company's ongoing efforts to reduce its overall outstanding debt obligations. The company's "core" business involves the sales of information technology products and services as distinct from its customer financing and certain other activities. The company believes it is important to understand the different dynamics of these two businesses. Therefore, the company has derived a model for separately measuring cash flow of the "core" business. The model is not intended to replace the GAAP cash flow above, but is supplementary in nature. Under this model, "core" cash flow from operations was approximately $6.9 billion in 1994. Operations, as defined in this model, includes operating and investing activities, but excludes the impact of changes in customer financing assets and net cash proceeds from securitization of trade accounts receivable, which are viewed as financing in nature. financing risks Customer financing is an integral part of the company's total worldwide offerings. Financial results of customer financing can be found on pages 62 through 65. 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 earning a profit. In 1994 and 1993, 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, 1993 and 1994. The following schedule excludes approximately $50 million of estimated residual value associated with non-information technology equipment. Total Run Out of 1994 Residual Value Balance ----------- --------------------------------------- (Dollars in millions) 1993 1994 1995 1996 1997 1998 1999 Sales-type leases $ 760 $ 535 $ 210 $ 200 $ 95 $ 25 $ 5 Operating leases 250 140 75 40 20 5 -- ------ ------- ------ ------ ------ ----- ----- Total residual value $1,010 $ 675 $ 285 $ 240 $ 115 $ 30 $ 5 46 MANAGEMENT DISCUSSION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES federal systems company 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. The net gain reflects the impact of certain contractual, employee postemployment, and other obligations, which included amounts for the Advanced Automation System contract for the Federal Aviation Authority, that the company recorded as part of the sale. The sale also resulted in a decrease of $752 million in prepaid expenses and other current assets, which represents the net assets associated with FSC. Additionally, as a result of this sale, approximately 10,000 people have either transferred to Loral, retired, or are on a preretirement leave from the company. FSC marketed specialized products and services to the defense, space, and other agencies of the U.S. government and several non-U.S. governments. Federal Systems Marketing, which sells the company's standard products to government agencies, was not part of the transaction. In 1993, FSC had, on a stand-alone basis, net earnings of $58 million on revenues of $2.3 billion. employees Percentage Changes 1994 1993 1992 1994-93 1993-92 IBM/wholly owned subsidiaries 219,839 256,207 301,542 (14.2)% (15.0)% Less than wholly owned subsidiaries 23,200 10,989 6,468 111.1% 69.9% Complementary 35,000 35,000 29,000 0.0% 20.7%
As of December 31, 1994, regular employees were down 36,368 from 1993 and 81,703 from 1992. The company continues to form business entities to enhance efficiencies and achieve its strategic objectives. Some of these entities, while less than wholly owned, are consolidated into the company's financial statements. The increase in employees in the less than wholly owned subsidiaries category in 1994 results primarily from the formation of the following IBM business ventures: Technology Service Solutions (U.S.) - 4,920; Information Services Group Limited (South Africa) - 1,400; and Integrated Systems Solutions Corporation (Australia) - 1,059. The company's complementary work force comprises equivalent full-time workers hired under temporary, part-time, and limited-term-employment arrangements to meet specific short-term business needs in a flexible and cost-effective manner. looking forward Although the company returned to profitability in 1994, significant challenges remain. The company must continue to focus on productivity improvements, growth industries and emerging markets, costs and implementation of its long-term strategies. This is particularly true within the Personal Computer Company and desktop software. In 1995, the company will reduce its expenses as re-engineering and restructuring programs continue. The company plans to reduce total annual expenses $8.0 billion from 1992 levels by mid-1996. This is $1.0 billion more than its previously stated goal. At year-end 1994, annual expenses had decreased by $6.3 billion when compared with full-year 1992 levels. 47 CONSOLIDATED STATEMENT OF OPERATIONS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Dollars in millions except per share amounts) For the year ended December 31: Notes 1994 1993 1992 Revenue: Hardware sales $ 32,344 $ 30,591 $ 33,755 Software 11,346 10,953 11,103 Services 9,715 9,711 7,352 Maintenance 7,222 7,295 7,635 Rentals and financing N} 3,425 4,166 4,678 - ------------------------------------------------------------------------------- Total revenue 64,052 62,716 64,523 - ------------------------------------------------------------------------------- Cost: Hardware sales 21,300 20,696 19,698 Software 4,680 4,310 3,924 Services 7,769 8,279 6,051 Maintenance 3,635 3,545 3,430 Rentals and financing 1,384 1,738 1,966 - ------------------------------------------------------------------------------- Total cost 38,768 38,568 35,069 - ------------------------------------------------------------------------------- Gross profit 25,284 24,148 29,454 - ------------------------------------------------------------------------------- Operating expenses: Selling, general and administrative 15,916 18,282 19,526 Research, development and engineering I} 4,363 5,558 6,522 Restructuring charges J} -- 8,945 11,645 - ------------------------------------------------------------------------------- Total operating expenses 20,279 32,785 37,693 - ------------------------------------------------------------------------------- Operating income (loss) 5,005 (8,637) (8,239) Other income, principally interest 1,377 1,113 573 Interest expense K} 1,227 1,273 1,360 - -------------------------------------------------------------------------------- Earnings (loss) before income taxes 5,155 (8,797) (9,026) Provision (benefit) for income taxes H} 2,134 (810) (2,161) - -------------------------------------------------------------------------------- Net earnings (loss) before changes in accounting principles 3,021 (7,987) (6,865) Effect of changes in accounting principles B} -- (114) 1,900 - -------------------------------------------------------------------------------- Net earnings (loss) 3,021 (8,101) (4,965) Preferred stock dividends 84 47 -- - -------------------------------------------------------------------------------- Net earnings (loss) applicable to common shareholders $ 2,937 $ (8,148) $ (4,965) - -------------------------------------------------------------------------------- Per share of common stock amounts: Before changes in accounting principles $ 5.02 $ (14.02) $ (12.03) Effect of changes in accounting principles B} -- (.20) 3.33 - -------------------------------------------------------------------------------- Net earnings (loss) applicable to common shareholders $ 5.02 $ (14.22) $ (8.70) - -------------------------------------------------------------------------------- Average number of common shares outstanding: 1994-584,958,699; 1993-573,239,240; 1992-570,896,489 The notes on pages 52 through 78 are an integral part of this statement. 48 CONSOLIDATED STATEMENT OF FINANCIAL POSTION INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES (Dollars in millions) At December 31: Notes 1994 1993 Assets Current assets: Cash $ 1,240 $ 873 Cash equivalents 6,682 4,988 Marketable securities C} 2,632 1,272 Notes and accounts receivable--trade, net of allowances 14,018 11,676 Sales-type leases receivable 6,351 6,428 Other accounts receivable 1,164 1,308 Inventories D} 6,334 7,565 Prepaid expenses and other current assets 2,917 5,092 - ------------------------------------------------------------------------------- Total current assets 41,338 39,202 - ------------------------------------------------------------------------------- Plant, rental machines and other property E} 44,820 47,504 Less: Accumulated depreciation 28,156 29,983 - ------------------------------------------------------------------------------- Plant, rental machines and other property--net 16,664 17,521 - ------------------------------------------------------------------------------- Software, less accumulated amortization (1994, $10,793; 1993, $10,143) 2,963 3,703 Investments and sundry assets F} 20,126 20,687 - ------------------------------------------------------------------------------- Total assets $ 81,091 $ 81,113 - ------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Taxes H} $ 1,771 $ 1,589 Short-term debt G} 9,570 12,097 Accounts payable 3,778 3,400 Compensation and benefits 2,702 2,053 Deferred income 3,475 3,575 Other accrued expenses and liabilities 7,930 10,436 - ------------------------------------------------------------------------------- Total current liabilities 29,226 33,150 - ------------------------------------------------------------------------------- Long-term debt G} 12,548 15,245 Other liabilities L} 14,023 11,177 Deferred income taxes H} 1,881 1,803 - ------------------------------------------------------------------------------- Total liabilities 57,678 61,375 - ------------------------------------------------------------------------------- Contingencies M} Stockholders' equity: Preferred stock, par value $.01 per share-- shares authorized: 150,000,000 shares issued: 1994--11,145,000; 1993--11,250,000 V } 1,081 1,091 Common stock, par value $1.25 per share-- shares authorized: 750,000,000 shares issued: 1994--588,180,244; 1993--581,388,475 7,342 6,980 Retained earnings 12,352 10,009 Translation adjustments 2,672 1,658 Treasury stock, at cost (shares: 1994--469,500; 1993--2,679) (34) -- - ------------------------------------------------------------------------------- Total stockholders' equity 23,413 19,738 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 81,091 $ 81,113 - ------------------------------------------------------------------------------- The notes on pages 52 through 78 are an integral part of this statement. 49 CONSOLIDATED STATEMENT OF CASH FLOWS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
(Dollars in millions) For the year ended December 31: 1994 1993 1992 Cash flow from operating activities: Net earnings (loss) $ 3,021 $ (8,101) $ (4,965) Adjustments to reconcile net earnings (loss) to cash provided from operating activities: Effect of changes in accounting principles -- 114 (1,900) Effect of restructuring charges (2,772) 5,230 8,312 Depreciation 4,197 4,710 4,793 Deferred income taxes 825 (1,335) (3,356) Amortization of software 2,098 1,951 1,466 (Gain) loss on disposition of investment assets (11) 151 54 Other changes that provided (used) cash: Receivables 653 1,185 1,052 Inventories 1,518 583 704 Other assets 187 1,865 110 Accounts payable 305 359 (311) Other liabilities 1,772 1,615 315 - ----------------------------------------------------------------------------------- Net cash provided from operating activities 11,793 8,327 6,274 - ----------------------------------------------------------------------------------- Cash flow from investing activities: Payments for plant, rental machines and other property (3,078) (3,154) (4,751) Proceeds from disposition of plant, rental machines and other property 900 793 633 Investment in software (1,361) (1,507) (1,752) Purchases of marketable securities and other investments (3,866) (2,721) (3,284) Proceeds from marketable securities and other investments 2,476 2,387 3,276 Proceeds from the sale of Federal Systems Company 1,503 -- -- - ----------------------------------------------------------------------------------- Net cash used in investing activities (3,426) (4,202) (5,878) - ----------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds from new debt 5,335 11,794 10,045 Payments to settle debt (9,445) (8,741) (10,735) Short-term borrowings less than 90 days-net (1,948) (5,247) 4,199 Preferred stock transactions-net (10) 1,091 -- Common stock transactions-net 318 122 (90) Cash dividends paid (662) (933) (2,765) - ----------------------------------------------------------------------------------- Net cash (used in) provided from financing activities (6,412) (1,914) 654 - ----------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 106 (796) (549) - ----------------------------------------------------------------------------------- Net change in cash and cash equivalents 2,061 1,415 501 Cash and cash equivalents at January 1 5,861 4,446 3,945 - ----------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 7,922 $ 5,861 $ 4,446 - ----------------------------------------------------------------------------------- Supplemental data: Cash paid during the year for: Income taxes $ 287 $ 452 $ 1,297 Interest $ 2,132 $ 2,410 $ 3,132 - ----------------------------------------------------------------------------------
The notes on pages 52 through 78 are an integral part of this statement. 50
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES (Dollars in millions) Preferred Common Retained Translation Treasury Stock Stock Earnings Adjustments Stock Total 1992 Stockholders' equity, January 1, 1992 $ -- $ 6,531 $ 26,983 $ 3,196 $ (31) $ 36,679 Net loss (4,965) (4,965) Cash dividends declared-common stock (2,765) (2,765) Common stock issued under employee plans (442,581 shares) 26 26 Purchases (8,097,681 shares) and sales (8,073,124 shares) of treasury stock under employee plans-net (129) 6 (123) Tax reductions-employee plans 6 6 Translation adjustments (1,234) (1,234) - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1992 -- 6,563 19,124 1,962 (25) 27,624 1993 Net loss (8,101) (8,101) Cash dividends declared-common stock (905) (905) Cash dividends declared-preferred stock (47) (47) Preferred stock issued (11,250,000 shares) 1,091 1,091 Common stock issued under employee plans (3,765,854 shares) 159 159 Common stock issued to U.S. pension plan fund (5,828,970 shares) 258 258 Purchases (6,099,023 shares) and sales (6,452,566 shares) of treasury stock under employee plans-net (62) 25 (37) Translation adjustments (304) (304) - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1993 1,091 6,980 10,009 1,658 -- 19,738 1994 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 Translation adjustments 1,014 1,014 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity, December 31, 1994 $ 1,081 $ 7,342 $ 12,352 $ 2,672 $ (34) $ 23,413 - ------------------------------------------------------------------------------------------------------------------------------
The notes on pages 52 through 78 are an integral part of this statement. 51 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. 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. Selling Expenses Selling expenses are charged against income as incurred. 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 Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws. Translation of Non-U.S. Currency Amounts Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate component of stockholders' equity. Inventories and plant, rental machines and other property 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. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Cash Equivalents All highly liquid investments with a maturity of three months or less at date of purchase are 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 from two to four years. Periodic reviews are performed to ensure that unamortized program costs remain recoverable over future revenues. 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. 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. Earnings (loss) per common share amounts are computed by dividing earnings (loss) after deduction of preferred stock dividends by the average number of common shares outstanding in the period. B} accounting changes Effective January 1, 1994, the company implemented SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Adoption of this standard had no impact on the company's Consolidated Statement of Operations, and the Consolidated Statement of Financial Position was not materially affected. Prior years' consolidated financial statements have not been restated to reflect this change. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Effective January 1, 1993, the company implemented SFAS 112, "Employers' Accounting for Postemployment Benefits." While the company was generally in compliance with the standard prior to adoption, a charge was taken to recognize the cost of certain benefits, primarily related to healthcare for employees on disability. The cumulative effect of adopting this standard was a one-time charge of $114 million (net of approximately $61 million of income tax benefits). Prior years' consolidated financial statements were not restated to reflect this change. In 1992, the company implemented SFAS 109, "Accounting for Income Taxes.'' This standard superseded the previous accounting standard for income taxes, SFAS 96, which the company adopted in 1988. Under SFAS 109, the company recognizes deferred tax assets if it is more likely than not that a benefit will be realized. The cumulative effect of this accounting change, which was to recognize previously unrecognized tax benefits for years prior to January 1, 1992, increased net earnings for 1992 by $1,900 million, or $3.33 per common share. The Financial Accounting Standards Board issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," in May 1993 and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure," an amendment of SFAS 114, in October 1994. These standards prescribe impairment measurements and reporting related to certain loans. SFAS 114 and SFAS 118 are effective for fiscal years beginning after December 15, 1994. The implementation of these standards is not expected to have a material effect on the financial position or results of operations of the company. C} marketable securities At December 31: (Dollars in millions) 1994 1993 U.S. government securities $ 1,020 $ 702 Time deposits and other bank obligations 459 515 Non-U.S. government securities and other fixed-term obligations 1,153 55 ----------- ----------- Total, which approximates market value $ 2,632 $ 1,272 ----------- ----------- D} inventories At December 31: (Dollars in millions) 1994 1993 Finished goods $ 1,442 $ 1,906 Work in process 4,636 5,539 Raw materials 256 120 ----------- ----------- Total $ 6,334 $ 7,565 ----------- ----------- 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES E} plant, rental machines and other property At December 31: (Dollars in millions) 1994 1993 Land and land improvements $ 1,437 $ 1,422 Buildings 13,093 13,314 Plant, laboratory and office equipment 27,084 29,829 ----------- ----------- 41,614 44,565 Less: Accumulated depreciation 26,299 28,576 ----------- ----------- 15,315 15,989 Rental machines and parts 3,206 2,939 Less: Accumulated depreciation 1,857 1,407 ----------- ----------- 1,349 1,532 ----------- ----------- Total $ 16,664 $ 17,521 ----------- ----------- F} investments and sundry assets At December 31: (Dollars in millions) 1994 1993 Net investment in sales-type leases* $ 15,838 $ 17,518 Less: Current portion-net 6,351 6,428 ----------- ----------- 9,487 11,090 Deferred taxes 4,533 4,521 Prepaid pension cost 1,528 532 Non-current customer loan receivables 1,311 882 Installment payment receivables 817 703 Investments in business alliances 380 650 Goodwill, less accumulated amortization (1994, $648;1993, $462) 427 646 Other investments and sundry assets 1,643 1,663 ----------- ----------- Total $ 20,126 $ 20,687 ----------- ----------- *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 $535 million and $760 million at December 31, 1994 and 1993, and is reflected net of unearned income at these dates of approximately $2,600 million and $3,100 million, respectively. Scheduled maturities of minimum lease payments outstanding at December 31, 1994, expressed as a percentage of the total, are approximately as follows: 1995, 40 percent; 1996, 33 percent; 1997, 18 percent; 1998, 7 percent; 1999 and after, 2 percent. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES G} debt short-term debt At December 31: (Dollars in millions) 1994 1993 Commercial paper $ 2,544 $ 3,735 Short-term loans 2,977 4,356 Long-term debt: Current maturities 4,049 4,006 ----------- ----------- Total $ 9,570 $ 12,097 ----------- ----------- The weighted-average interest rates for commercial paper at December 31, 1994 and 1993, were 4.9 percent and 3.9 percent, respectively. The weighted average interest rates for short-term loans at December 31, 1994 and 1993, were 6.6 percent and 5.9 percent, respectively. long-term debt At December 31: (Dollars in millions) 1994 1993 Maturities U.S. Dollars: Debentures : 7-1/2% 2013 $ 550 $ 550 8-3/8% 2019 750 750 Notes : 5-5/8% to 7-5/8% 1995-2002 3,325 4,267 7-3/4% to 8-7/8% 1995-1997 -- 102 9% to 9-7/8% 1995-2000 641 692 Medium-term note program: 4.1% to 9.9% 1995-2008 2,803 1,734 Other U.S. dollars: 4.0% to 9.5% 1995-2012 558 1,765 ----------- ----------- 8,627 9,860 Other currencies (average interest rate at December 31, 1994, in parentheses): Japanese yen (4.5%) 1995-2014 4,769 5,057 Swiss francs (5.0%) 1995-1996 629 699 European currency units (9.1%) 1995 400 1,044 Canadian dollars (10.3%) 1995-1999 638 852 French francs (7.3%) 1995-2002 858 809 Australian dollars (9.6%) 1995-1997 326 253 Other (9.7%) 1995-2017 371 696 ----------- ----------- 16,618 19,270 Less: Net unamortized discount 21 19 ----------- ----------- 16,597 19,251 Less: Current maturities 4,049 4,006 ----------- ----------- Total $ 12,548 $ 15,245 ----------- ----------- Annual maturity and sinking fund requirements in millions of dollars on long-term debt outstanding at December 31, 1994, are as follows: 1995, $4,049; 1996, $3,105; 1997, $2,769; 1998, $2,240; 1999, $315; 2000 and beyond, $4,140. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES H} taxes (Dollars in millions) 1994 1993 1992 For the year ended December 31: Earnings (loss) before income taxes: U.S. operations $ 1,574 $ (6,073) $ (7,678) Non-U.S. operations 3,581 (2,724) (1,348) --------- ----------- ----------- $ 5,155 $ (8,797) $ (9,026) --------- ----------- ----------- The provision (benefit) for income taxes by geographic operations is as follows: U.S. operations $ 654 $ (505) $ (2,179) Non-U.S. operations 1,480 (305) 18 --------- ----------- ----------- Total provision (benefit) for income taxes $ 2,134 $ (810) $ (2,161) --------- ----------- ----------- The components of the provision (benefit) for income taxes by taxing jurisdiction are as follows: U.S. federal: Current $ 49 $ (4) $ (115) Deferred 74 (890) (2,390) Net deferred investment tax credits -- (51) (54) --------- ----------- ----------- 123 (945) (2,559) U.S. state and local: Current 68 26 (14) Deferred -- 23 3 --------- ----------- ----------- 68 49 (11) Non-U.S.: Current 1,192 554 1,378 Deferred 751 (468) (969) --------- ----------- ----------- 1,943 86 409 --------- ----------- ----------- Total provision (benefit) for income taxes 2,134 (810) (2,161) Social security, real estate, personal property, and other taxes 2,465 2,614 3,067 --------- ----------- ----------- Total taxes $ 4,599 $ 1,804 $ 906 --------- ----------- ----------- The non-U.S. deferred income tax provision was reduced $106 million due to the utilization of operating loss carryforwards in 1994. The impact of tax law changes on deferred tax assets and liabilities was not material to the company's financial results in 1994 and 1992 and was a benefit of $170 million in 1993. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The significant components of deferred tax assets and liabilities included on the balance sheet were as follows: (Dollars in millions) 1994 1993* At December 31: Deferred Tax Assets Retiree medical benefits $ 2,500 $ 1,961 Restructuring charges 2,446 5,253 Capitalized R&D 2,057 1,739 Foreign tax credits 1,380 885 Alternative minimum tax credits 738 729 Inventory 633 621 Foreign tax loss carryforwards 469 989 Doubtful accounts 453 480 General business credits 452 452 Equity alliances 445 309 State and local tax loss carryforwards 370 566 Employee benefits 363 480 Intracompany sales and services 357 440 Depreciation 249 234 U.S. federal tax loss carryforwards 230 1,093 Warranty 163 125 Retirement benefits 127 124 Software income deferred 78 186 Other 2,685 2,521 ------------- ------------ Gross deferred tax assets 16,195 19,187 Less: Valuation allowance 4,551 5,035 ------------- ------------ Total deferred tax assets $ 11,644 $ 14,152 ------------- ------------ Deferred Tax Liabilities Sales-type leases $ 2,862 $ 3,118 Depreciation 1,653 1,537 Software costs deferred 1,283 1,824 Retirement benefits 1,061 1,069 Other 823 1,379 ------------- ------------ Gross deferred tax liabilities $ 7,682 $ 8,927 ------------- ------------ * Reclassified to conform with 1994 presentation. The valuation allowance applies to U.S. federal tax credit and net operating loss carryforwards, 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, 1994, was a decrease of $484 million. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The estimated reversal periods for the largest deductible temporary differences are: Retiree Medical - 1 to 30 years; Restructuring - 1 to 5 years. The consolidated effective income tax rate was 41 percent in 1994, (9) percent in 1993, and (24) percent in 1992. 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: 1994 1993 1992 Statutory rate 35% (35)% (34)% U.S. valuation allowance related to restructuring -- 20 6 Foreign tax differential 5 7 5 State and local, net 1 -- -- Other -- (1) (1) ------ ------ ------ Effective rate 41% (9)% (24)% For tax return purposes, the company has available tax credit carryforwards of approximately $2,944 million, of which $369 million expire in 1996, $776 million expire in 1998, $576 million expire in 1999, and the remainder thereafter. The company also has federal, state and local, and foreign tax loss carryforwards, the tax effect of which is $1,069 million. Most of these carryforwards are available for fourteen years or have an indefinite carryforward period. Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings amounted to $11,280 million at December 31, 1994, $10,915 million at December 31, 1993, and $12,182 million at December 31, 1992. 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. Accordingly, no material provision has been made for taxes that might be payable upon remittance of such earnings nor is it practicable to determine the amount of this liability. I} research, development and engineering Research, development and engineering expenses amounted to $4,363 million in 1994, $5,558 million in 1993, and $6,522 million in 1992. Expenditures for product-related engineering included in these amounts were $981 million, $1,127 million, and $1,439 million in 1994, 1993, and 1992, respectively. Expenditures of $3,382 million in 1994, $4,431 million in 1993, and $5,083 million in 1992 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 $793 million, $1,097 million, and $1,161 million in 1994, 1993, and 1992, respectively. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES J} restructuring actions In 1993 and 1992, the company recorded restructuring charges of $8.9 billion before taxes ($8.0 billion after taxes or $14.02 per common share) and $11.6 billion before taxes ($8.3 billion after taxes or $14.51 per common share), respectively, as part of restructuring programs to streamline and reduce resources utilized in the business. These charges and their subsequent utilization are summarized in the following table: (Dollars in billions) Amounts Amounts Amounts Charged in Utilized at to be 1993 and Year-end Utilized 1992* 1994 in 1995 Work force related $ 11.5 $ 10.5 $ 1.0 Manufacturing capacity 4.9 4.0 .9 Excess space 3.4 3.0 .4 Other .7 .7 -- ---------- ---------- --------- Total restructuring charges $ 20.5 $ 18.2 $ 2.3** ---------- ---------- --------- *Includes redistribution among categories, as described in detail below. **$1.4 billion included in Other accrued expenses and liabilities and $.9 billion reduction to Plant, rental machines and other property in the Consolidated Statement of Financial Position at December 31, 1994. As of December 31, 1994, the company has determined that restructuring reserve balances are adequate to cover committed restructuring actions. Based on the actual restructuring actions in 1994, it was necessary to redistribute by category $1.2 billion of the $20.5 billion assumed in the original restructuring plans. The company reduced reserve balances designated for manufacturing capacity actions by $1.2 billion and increased amounts originally designated for work-force-related and excess space actions by $.1 billion and $1.1 billion, respectively. All remaining restructuring actions have been announced as of December 31, 1994, and it is estimated that approximately $1.3 billion of the remaining $2.3 billion of restructuring reserves will be utilized by March 31, 1995, with the remaining amounts being fully utilized prior to December 31, 1995. The company records restructuring charges against operations and provides a reserve based on the best information available at the time the decision is made to undertake the restructuring action. The reserves are considered utilized when specific restructuring criteria are met, indicating the planned restructuring action has occurred. Work-force-related reserves are considered utilized at payment for termination or acceptance of other contractual arrangements. Manufacturing capacity reserves are considered utilized based on execution of planned actions at each affected location. The reserve for excess space is utilized when the remaining lease obligations are settled or the space has been vacated and made available for sublease. It is the company's policy to continue to charge depreciation, rental, and other operating costs relating to manufacturing capacity and excess space to ongoing operations while they remain in business use. Salaries and benefits are charged to operations while the employee is actively employed. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The $11.4 billion of work-force-related reserves taken in 1992 and 1993 contemplated worldwide staff reductions of approximately 110,000 people. Through 1994, approximately 98,000 people have left the company under these programs. The $.1 billion increase in work-force-related reserves was primarily a result of higher than planned costs associated with staff reductions in Europe. The manufacturing capacity reserves were reduced by $1.2 billion due to the combination of increased demand for selected products, increased asset requirements in several significant new Microelectronics Division joint ventures, as well as a higher level of sales to third parties than originally planned. The excess space accrual increased by $1.1 billion as a result of additional lease space being vacated, primarily within the United States as a result of work force reductions and more efficient utilization of owned space allowing for consolidation of leased space. Remaining cash outlays associated with work-force-related activities are expected to total $3.7 billion of which $1.7 billion will be expended in 1995. Remaining amounts relate to the pension plan curtailment portion of the charge and other postretirement payments which will be made as required for funding appropriate pension and other postretirement benefits in future years. Remaining manufacturing capacity actions will not involve substantial cash outlays. Cash requirements related to excess space charges are expected to be expended as follows: $635 million in 1995, $418 million in 1996, $391 million in 1997, and $999 million in 1998 and beyond. K} interest on debt Interest on borrowings of the company and its subsidiaries amounted to $2,006 million in 1994, $2,298 million in 1993, and $2,698 million in 1992. Of these amounts, $20 million in 1994, $46 million in 1993, and $101 million in 1992 were capitalized. The remainder was charged to cost of rentals and financing, and interest expense. The lower levels of expense were a result of decreases in total debt outstanding of $5.2 billion in 1994 versus 1993 and $2.0 billion in 1993 versus 1992. The average interest rate for total debt was 8.0 percent, 7.7 percent, and 9.6 percent in 1994, 1993, and 1992, respectively. L} other liabilities and environmental Other liabilities consists principally of accruals for nonpension postretirement benefits, indemnity, and retirement plan reserves for non-U.S. employees, and restructuring charges. More detailed discussions of these liabilities appear in note S, "Nonpension Postretirement Benefits," on pages 69 through 71; note R, "Retirement Plans," on pages 67 through 69; and note J, "Restructuring Actions," on pages 60 and 61. 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 are undiscounted and do not reflect any insurance recoveries, were $179 million and $77 million at December 31, 1994 and 1993, respectively. The increase in the 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES accrual relates to expected costs of post-closure activities, reassessment of remediation activities at operating facilities, and participation at additional Superfund sites. The amounts accrued do not cover sites which are in the preliminary stages of investigation where neither the company's percentage of responsibility nor the extent of cleanup required have been identified. Also excluded is the cost of internal environmental protection programs which 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 earnings in future periods are subject to changes in environmental remediation regulations. M} contingencies On February 25, 1993, a consolidated and amended class action complaint was filed against the company in the United States District Court for the Southern District of New York alleging violations of Section 12 of the Securities Act of 1933 and Section 10 of the Securities Exchange Act of 1934. The complaint alleges, among other matters, that the company disseminated false and misleading statements concerning its financial condition and dividends during certain periods of 1992, as a result of which plaintiffs were injured in connection with their purchases of IBM stock during the period of September 30, 1992, through December 14, 1992. The plaintiffs seek unspecified money damages. The company believes it has good defenses to the allegations raised in the consolidated complaint and intends to defend itself vigorously. 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. N} customer financing The primary focus of IBM's worldwide customer financing offerings is to support customers in their acquisitions of IBM'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, results of operations, and cash flows for customer financing in comparison to the company's consolidated results with customer financing results reflected on the 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 applicable 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, and the normal elimination of intracompany payables and receivables. With respect to the statement of operations, net earnings for customer financing before applicable taxes and after elimination of related intracompany transactions, are included in the line description, other income. 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. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Because customer financing is different in nature from the company's manufacturing and services businesses, management believes that the aforementioned type of comparative disclosure enhances an understanding and analysis of the consolidated financial statements. statement of financial position
At December 31: IBM with Customer Customer Financing on an Financing Equity Basis (Dollars in millions) 1994 1993 1994 1993 Assets: Cash and cash equivalents $ 1,304 $ 2,096 $ 6,618 $ 3,765 Notes and accounts receivable -- -- 9,602 8,177 Net investment in sales-type leases 15,977 17,518 -- -- Working capital financing receivables 2,539 1,898 -- -- Loans receivable 3,910 3,615 -- -- Inventories 101 143 6,246 7,466 Plant, rental machines and other property, net of accum. depreciation 2,672 2,627 15,319 15,788 Other assets 2,167 2,551 16,516 16,679 Investment in customer financing -- -- 4,175 5,524 -------- -------- --------- -------- Total assets $ 28,670 $ 30,448 $ 58,476 $ 57,399 -------- -------- --------- -------- Liabilities and stockholders' equity: Taxes, accrued expenses, and other liabilities $ 6,487 $ 6,417 $ 32,109 $ 31,450 Debt 19,164 21,131 2,954 6,211 -------- -------- -------- ------- Total liabilities 25,651 27,548 35,063 37,661 Stockholders' equity/invested capital 3,019 2,900 23,413 19,738 -------- -------- -------- ------- Total liabilities and stockholders' equity $ 28,670 $ 30,448 $ 58,476 $ 57,399 -------- -------- --------- --------
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES statement of operations For the year ended December 31: Customer IBM with Customer Financing Financing on an Equity Basis (Dollars in millions) 1994 1993 1992 1994 1993 1992 Finance and other income: Finance income $ 2,026 $ 2,485 $ 2,699 $ -- $ -- $ -- Rental income, net of depreciation 338 285 337 589 692 962 Sales 1,160 1,391 1,384 59,991 57,483 58,646 Other income 933 850 505 1,423 1,184 955 --------- --------- --------- -------- --------- --------- Total finance and other income 4,457 5,011 4,925 62,003 59,359 60,563 Interest and other costs and expenses 3,245 3,994 3,947 56,848 68,156 69,589 --------- --------- --------- -------- --------- --------- Net earnings (loss) before income taxes 1,212 1,017 978 5,155 (8,797) (9,026) Provision (benefit) for income taxes 505 443 406 2,134 (810) (2,161) --------- --------- --------- -------- --------- --------- Net earnings (loss) before changes in accounting principles 707 574 572 3,021 (7,987) (6,865) Effects of changes in accounting principles -- -- -- -- (114) 1,900 --------- --------- --------- -------- --------- --------- Net earnings (loss) $ 707 $ 574 $ 572 $ 3,021 $ (8,101) $ (4,965) --------- --------- --------- -------- --------- --------- statement of cash flows For the year ended December 31: Customer IBM with Customer Financing Financing on an Equity Basis (Dollars in millions) 1994 1993 1992 1994 1993* 1992* Net cash provided from operating activities $ 2,669 $ 3,004 $ 3,414 $ 8,393 $ 4,499 $ 5,248 Net cash used in investing activities (249) (284) (4,176) (2,446) (3,094) (4,090) Net cash (used in) provided from financing activities (3,294) (1,680) 1,094 (3,118) (234) (440) Effect of exchange rate changes on cash and cash equivalents 82 (47) (21) 24 (749) (528) --------- ---------- --------- --------- --------- --------- Net change in cash and cash equivalents (792) 993 311 2,853 422 190 Cash and cash equivalents at January 1 2,096 1,103 792 3,765 3,343 3,153 --------- ---------- ---------- -------- -------- --------- Cash and cash equivalents at December 31 $ 1,304 $ 2,096 $ 1,103 $ 6,618 $3,765 $ 3,343 --------- ---------- ---------- -------- -------- ---------
* Reclassified to conform with 1994 presentation. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Customer financing debt at December 31, 1994, consisted of borrowings directly with external financial institutions of $16,052 million and intracompany borrowings of $3,112 million. Intracompany borrowings are made pursuant to loan agreements between the parties at market rates of interest. Customer financing earnings yielded a return on average invested capital of 24.5 percent in 1994, compared to 18.4 percent in 1993. 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 Operations. The 1994 earnings include 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. 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. O} rental expense and lease commitments Rental expense, including amounts charged to inventories and fixed assets, excluding amounts charged to restructuring, was $1,276 million in 1994, $1,686 million in 1993, and $2,108 million in 1992. The table below depicts gross minimum rental commitments, under non-cancellable leases; amounts related to vacant space, the majority of which the company had reserved for in restructuring charges; and sublease commitments. These amounts generally reflect activities related to office space.
Beyond (Dollars in millions) 1995 1996 1997 1998 1999 1999 Gross rental commitments $ 1,220 $ 1,072 $ 925 $ 827 $ 717 $ 2,594 Vacant space 383 351 310 277 215 619 Sublease commitments 70 76 72 67 53 99
P} long-term performance plan In April 1994, stockholders approved the IBM 1994 Long-Term Performance Plan, which provides incentive awards for officers and other key employees. The plan is administered by the Executive Compensation and Management Resources Committee of the Board of Directors. The Committee determines the type of award to be granted, which may include stock, a stock option, a Stock Appreciation Right (SAR), cash, 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 29,105,600, which is 5% of the outstanding common stock as determined on February 10, 1994. Prior to April 25, 1994, stock options were issued under the IBM 1989 Long-Term Performance Plan and the IBM 1986 and predecessor Stock Option Plans. Options allow the purchase of IBM's common stock at 100 percent of the market price on the date of grant and have a maximum duration of 10 years. Payment by the optionee upon exercise of an option may be made using IBM stock, as well as cash. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES SARs offer eligible optionees the alternative of electing not to exercise the related stock option, but to receive payment in cash and/or stock, equivalent to the difference between the option price and the average market price of IBM stock on the date of exercising the right. The following table summarizes option activity during 1994 and 1993: Number of shares under option 1994 1993 Balance at January 1 29,260,724 35,621,963 Options granted 6,863,219 13,744,772 Options exercised (235,044) -- Options terminated (1,825,582) (20,106,011) ---------- ----------- Balance at December 31 34,063,317 29,260,724 ---------- ----------- Exercisable at December 31 16,666,537 14,636,324 In April 1993, the committee of the Board of Directors then responsible for administering the plan, the Nominating and Executive Compensation Committee, approved management's plan to allow optionees, other than executive officers, to voluntarily forfeit all of their existing IBM stock options, granted from 1984 through 1992, in exchange for a fewer number of new stock option grants. Under this program, 18,054,615 options, at average prices ranging from $66.94 to $159.50, were terminated and 7,405,090 new options, at a price of $47.88, were granted subject to certain conditions for vesting and exercise. The options exercised in 1994 were at an average option price of $46.42 per share. There were no options exercised in 1993. The shares under option at December 31, 1994, and December 31, 1993, were at option prices ranging from $43.00 to $159.50 per share. There were 27,842,801 and 6,011,858 unused shares carried forward and made available for granting in the subsequent year as of December 31, 1994, and 1993, respectively. Q} stock purchase plan The IBM Employees 1990 Stock Purchase Plan enables employees who are not participants in IBM's stock option programs to purchase IBM common stock through payroll deductions of up to 10 percent of eligible compensation. The price an employee pays for a share of stock is 85 percent of the average market price on the date the employee has accumulated sufficient funds to buy a share. In July 1993, the Board of Directors approved management's plan to issue, instead of purchase on the open market, stock to be sold to employees under the plan. On October 25, 1994, the Board of Directors approved management's plan to revert to purchasing IBM common stock on the open market for sale to employees as part of this plan. During 1994, employees purchased 6,576,030 shares, including 906,629 treasury shares, for which $350 million was paid to IBM. There were 15,126,471 reserved unissued shares available for purchase under the plan at December 31, 1994. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES R} retirement plans The company and its subsidiaries have retirement plans covering substantially all regular employees. The total cost of all plans for 1994, 1993, and 1992 was $681 million, $1,525 million, and $838 million, respectively. Net periodic pension cost of the U.S. retirement plan and selected non-U.S. plans for the years ended December 31 included the following components:
U.S. Plan Non-U.S. Plans 1994 1993 1992 1994 1993 1992 Expected long-term rate of return on plan assets 9.5% 9.5% 9.5% 5.5-9% 5-10% 5-12% (Dollars in millions) Service cost: Benefits earned during the period $ 542 $ 571 $ 586 $ 467 $ 576 $ 603 Termination incentive expenses -- 263 355 -- -- -- Interest cost on the projected benefit obligation 2,033 1,909 1,671 1,107 1,064 1,060 Return on plan assets: Actual 327 (3,990) (1,216) 329 (3,036) (998) Deferred (2,826) 1,605 (1,047) (1,540) 1,891 (166) Net amortizations (65) (62) (88) 19 12 24 Curtailment losses -- 431 -- 269 215 -- ------- ------- ------- ------- ------- ------- Net periodic pension cost $ 11 $ 727 $ 261 $ 651 $ 722 $ 523 ------- ------- ------- ------- ------- ------- Total net periodic pension cost for all non-U.S. plans $ 667 $ 798 $ 577 ------- ------- -------
Net periodic pension cost is determined using the Projected Unit Credit actuarial method. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits. An assumption is made for modified career average plans such that the average earnings base period will be updated to the years prior to retirement. Termination incentive expenses represent the cost of special retirement benefits offered to employees for a short period of time in exchange for voluntary termination of service. Curtailment losses reflect 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. The curtailment losses and termination charges, referred to above, were accrued as restructuring charges in 1993 and 1992. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES 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, 1994, the projected benefit obligation was $64 million of which $61 million ($73 million of unrecognized prior service cost and $12 million of unrecognized actuarial gains) is subject to amortization. The remaining $3 million has been accrued in the Consolidated Statement of Financial Position. Net periodic pension cost for this plan was $3 million in 1994. These amounts are not reflected in the net periodic pension cost and funded status of the U.S. retirement plan. The table below provides information on the status of the U.S. retirement plan, and selected non-U.S. plans that represent approximately 97 percent of the total non-U.S. accumulated benefit obligations. The funded status at December 31 was as follows:
U.S. Plan Non-U.S. Plans 1994 1993 1994 1993 Assumptions: Discount rate 8.25% 7.25% 5.0-9.0% 5-9.25% Long-term rate of compensation increase 5.0% 5.0% 2.8-7.0% 2.8-6.6% (Dollars in millions) Actuarial present value of benefit obligations: Vested benefit obligation $ (22,553) $ (24,736) $ (15,454) $ (12,342) Accumulated benefit obligation $ (24,186) $ (26,325) $ (16,743) $ (13,544) Projected benefit obligation $ (25,783) $ (29,024) $ (18,751) $ (16,129) Plan assets at fair value 26,780 28,198 17,424 16,159 ---------- ---------- ---------- ---------- Projected benefit obligation less than (in excess of) plan assets 997 (826) (1,327) 30 Unrecognized net loss (gain) 1,224 1,550 (17) (1,184) Unrecognized prior service cost 248 1,282 276 304 Unrecognized net asset established at January 1, 1986 (1,334) (1,474) (152) (145) ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost recognized in the statement of financial position $ 1,135 $ 532 $ (1,220) $ (995) ---------- ---------- ---------- ----------
The U.S. plan's projected benefit obligation decreased in 1994 primarily as a result of a change in the discount rate and a plan amendment. The change in the discount rate decreased the projected benefit obligation $3,055 million. The plan amendment reduced the projected benefit obligation and unrecognized prior service cost $959 million. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES It is the company's practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefit and tax laws, and such additional amounts as the company may determine to be appropriate from time to time. In July 1993, the Board of Directors authorized the issuance of up to 15 million shares of IBM common stock to be contributed to the IBM Retirement Plan Trust Fund through 1994. Through December 31, 1994, the company has contributed 6,500,000 shares to the fund. The assets of the various plans include corporate equities, government securities, corporate debt securities, and income-producing real estate. U.S. Plan: U.S. regular, full-time, and part-time employees are covered by a noncontributory plan which is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of employees. On October 5, 1994, the company announced major changes to the plan that take place starting in 1995. Under a new formula, which will be phased in over five years, retirement benefits will be determined based on points accumulated for each year worked and final average compensation. To preserve benefits of employees close to retirement, service and earnings credit will continue to accrue under the current core formula through the year 2000 and upon retirement, current employees will receive the benefit from either the new or current formulas, whichever is higher. Benefits become vested upon the completion of five years of service. The number of individuals receiving benefits at December 31, 1994 and 1993, was 85,009 and 77,664, respectively. Non-U.S. Plans: Most subsidiaries and branches outside the United States have retirement plans covering substantially all regular employees, under which funds are deposited under various fiduciary-type arrangements, annuities are purchased under group contracts, or reserves are provided. Retirement benefits are based on years of service and the employee's compensation, generally during a fixed number of years immediately prior to retirement. The ranges of assumptions used for the non-U.S. plans reflect the different economic environments within the various countries. S} 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. In 1993, the company applied plan cost maximums to those who retired prior to January 1, 1992. These maximums will take effect beginning with the year 2001. Plan cost maximums were established in 1990 for those employees retiring after December 31, 1991. 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 include healthcare cost trend rates projected ratably from 12.0 percent in 1995 to 6 percent in the year 2007. The effect of a 1 percent annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by approximately $52 million; the annual costs would not be materially affected. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Net periodic postretirement benefit cost for the years ended December 31 included the following components: 1994 1993 1992 Expected long-term rate of return on plan assets 9.5% 9.5% 9.5% (Dollars in millions) Service cost: Benefits attributed to service during the period $ 51 $ 53 $78 Termination incentive expenses -- -- 71 Interest cost on the accumulated postretirement benefit obligation 512 566 485 Return on plan assets: Actual 22 (201) (67) Deferred (125) 84 (59) Net amortizations and other (38) 29 (61) Curtailment loss -- 732 -- ------- ---------- ----------- Net periodic postretirement benefit cost $ 422 $ 1,263 $ 447 ------- ---------- ----------- In the Consolidated Statement of Operations, the curtailment loss and termination expenses referred to above are included in restructuring charges. The table below provides information on the status of the plans. The funded status at December 31 was as follows: 1994 1993 Assumed discount rate 8.25% 7.25% (Dollars in millions) Accumulated postretirement benefit obligation: Retirees $ (5,411) $ (5,761) Fully eligible active plan participants 567) (673) Other active plan participants (530) (927) ----------- ------------- Total (6,508) (7,361) Plan assets at fair value 1,028 1,366 Accumulated postretirement benefit ----------- ------------- obligation in excess of plan assets (5,480) (5,995) Unrecognized net loss 505 1,431 Unrecognized prior service cost (744) (828) ----------- ------------- Accrued postretirement benefit cost recognized in the statement of financial position $ (5,719) $ (5,392) ----------- ------------- 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES In 1994, the accumulated postretirement benefit obligation decreased $649 million as a result of the change in the assumed discount rate. 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 corporate equities and government securities. The accounting for the plan is based on the written plan. 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. T} lines of credit As part of the company's ongoing efforts toward greater efficiency of its treasury activities and to ensure appropriate liquidity levels, in December 1993, the company entered into a $10.0 billion committed global credit facility. Unused committed lines of credit from this global facility and other previously existing committed and uncommitted lines of credit at December 31, 1994, were $15.1 billion, compared to $15.7 billion at December 31, 1993. Interest rates on borrowings vary from country to country depending on local market conditions. U} sales and securitization of receivables The company received total cash proceeds of approximately $12.6 billion and $6.8 billion in 1994 and 1993 from the sale and securitization of primarily trade receivables. At year-end 1994, the company had a net balance of $1.8 billion in assets under management from the securitization of lease and trade receivables. This amount is $1.3 billion lower than the 1993 year-end balance of $3.1 billion. 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. Prepaid expenses and other current assets on the December 31, 1993, Consolidated Statement of Financial Position included $751 million of net assets that had been reclassified pending the sale of FSC, as discussed on page 47. V} preferred stock On June 7, 1993, the company issued 11.25 million shares of Series A Preferred Stock, represented by 45 million depositary shares. The preferred stock is not convertible into, or exchangeable for, shares of any other class or classes of stock of the company. The preferred stock has priority for dividends over the company's common stock. Dividends on the preferred stock are cumulative and accrue from the date of original issue at a rate of $7.50 per share (equivalent to $1.875 per depositary share). The preferred stock is not redeemable prior to July 1, 2001. Thereafter, the company, at its option, may redeem the preferred stock, in whole or in part, at any time at a redemption price per share of $100 ($25 per depositary share), plus accrued and unpaid dividends. Upon any dissolution, liquidation or winding up of the affairs of the company, holders of the preferred stock will be entitled to receive $100 per share ($25 per depositary share) plus accrued and unpaid dividends before any distribution to holders of the company's common stock. See note Z, "Subsequent Events," on page 78 for additional information regarding this subject. 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES W} financial instruments The following table summarizes the carrying amount and estimated fair value of the company's significant financial instruments, derivative and non-derivative, both on and off the balance sheet:
At December 31, 1994 At December 31, 1993* (Dollars in millions) Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Cash and cash equivalents $ 7,922 $ 7,922 $ 5,861 $ 5,861 Marketable securities 2,632 2,632 1,272 1,272 Loans and other long-term receivables-net 3,857 3,813 3,609 3,609 Working capital financing receivables-net 2,539 2,539 1,898 1,898 Long-term investments 68 68 179 178 Non-trade accounts payable and accruals** (1,437) (1,437) (1,759) (1,759) Short-term debt (9,570) (9,570) (12,097) (12,097) Long-term debt (12,548) (12,000) (15,245) (15,840) Derivatives:+ Interest rate and currency swap agreements 2 201 (37) (147) Option contracts 8 8 36 43 Forward exchange contracts -- -- 2 (45) Financial guarantees -- (727) -- (749)
*Reclassified to conform with 1994 presentation. **Excludes amounts related to restructuring discussed in note J on pages 60 and 61. +The estimated fair value of derivatives both on and off balance sheet at December 31, 1994, consists of assets of $448 million and liabilities of $239 million. In assessing the fair value of these financial instruments, the company has used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, non-trade accounts payable and accruals, and short-term debt, it was assumed that the carrying amount approximated fair value for the majority of these instruments because of their short maturities. 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 merely represent a general approximation of possible value and may never actually be realized. In the normal course of business, the company enters into a variety of derivative instruments solely for the purpose of currency exchange rate and interest rate risk management. 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 or currency swaps are then used by the company to match the interest rates and currencies of its debt to the related customer financing receivables. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES To a much lesser extent, interest rate swaps are used to rebalance the fixed versus floating mix on the company's "core" debt. Interest rate swap contracts are principally one to five years in duration. The company also uses an internal regional center to manage the cash of its subsidiaries in a cost effective manner. This regional center principally uses currency swaps to deliver local currency denominated funding predominantly to the company's European subsidiaries. The terms of the currency swaps are generally less than five years. 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 and foreign exchange contracts to manage the currency risk. The terms of these instruments are generally less than a year. 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 which 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 condition in the future. The notional value of derivative instruments held at year end, which provides an indication of the extent of the company's involvement in such instruments but does not represent its exposure to market risk, was as follows: (Dollars in billions) 1994 1993* Option contracts $ 4.4 $ 1.6 Interest rate and currency swap agreements 19.2 17.2 Forward exchange contracts .6 .3 * Reclassified to conform with 1994 presentation. The costs associated with entering into derivative contracts are generally amortized over the life of the instruments and are not material to the company's results. Unamortized premiums are included in prepaid assets. Interest rate differentials accruing under interest rate swaps which receive hedge accounting treatment are recognized over the life of the contracts in interest expense. Derivative instruments which qualify as hedges of net investments in subsidiaries are included in prepaid assets, and gains and losses are included in stockholders' equity. For purchased options which hedge anticipated transactions, gains and losses are deferred and recognized in other income in the same period that the underlying transaction occurs or expires. At December 31, 1994, there were no material deferred gains or losses. All written options, except those that qualify as hedges of net investments, are marked to market monthly, as are some purchased options which do not qualify for hedge accounting. These options appear on the balance sheet in prepaid assets or other liabilities. The related gains and losses are recognized immediately in other income. Although these options do not qualify for hedge accounting, they are used by the company as part of its overall risk management program. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES The company originates financing for customers in a variety of industries and throughout the world. The company has a diversified portfolio of capital equipment financings for end users. With the growth of the company's working capital financing business in 1994, the concentration of such financings for certain large dealers and remarketers of information industry products has become more significant. All such loans are collateralized by the inventory and accounts receivable of the dealers and remarketers. The company does not believe that this risk will have a material adverse effect on its financial position or results of operations. IBM has guaranteed certain loans and commitments of various ventures to which it is a party. Additionally, the company is contingently liable for certain receivables sold with recourse. These commitments, which in the aggregate were approximately $.9 billion and $2 billion at December 31, 1994 and 1993 respectively, are not expected to have a material adverse effect on the company's financial position or results of operations. X} 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 75 shows revenue by classes of similar products or services. Financial information by geographic area is summarized on pages 76 and 77. For purposes of classifying similar information technology products, user programmable equipment having the capability of manipulating data arithmetically or logically and making calculations, in a manner directly addressable by the user through the operation of a stored program, has been classified as processors. Processors includes high-end and midrange products. Personal systems includes personal computers, power personal systems, and RISC System/6000 products. Other workstations includes display-based terminals and consumer and financial systems. Storage consists of externally attached direct access storage devices and tape storage devices. Other peripherals consists of advanced function printers and telecommunication devices. OEM hardware consists primarily of revenue from the sale of semiconductors and low-end storage files to external customers. 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. Software includes both applications and systems software. Maintenance consists of separately billed charges for maintenance. Services represents a wide range of service offerings including consulting, education, systems design and development, managed operations, and availability services. 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 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES technological enhancements to permit a peripheral product to be functionally integrated with a display, a telecommunication device, and a processor to form a workstation. Such interchangeability and technological progress tend to make year-to-year comparisons less valid than they would be in an industry less subject to rapid change. Revenue by Classes of Similar Products or Services
Consolidated U.S. Only (Dollars in millions) 1994 1993* 1992* 1994 1993* 1992* Information technology: Processors** $ 9,784 $ 10,071 $ 13,916 $ 3,235 $ 3,179 $ 4,818 Workstations: Personal systems** 11,500 10,067 7,887 4,769 4,578 3,033 Other workstations** 1,538 2,006 2,671 463 689 874 Peripherals: Storage** 3,551 4,808 6,105 1,375 1,898 2,400 Other peripherals** 2,006 2,149 2,970 810 901 1,202 OEM hardware 3,248 1,293 557 1,677 726 365 Software 11,346 10,953 11,103 3,926 3,898 3,883 Services 9,715 7,648 5,530 3,709 3,037 1,724 Maintenance 7,222 7,295 7,635 2,648 2,726 2,809 Financing and other 4,142 4,109 3,984 1,506 1,754 1,360 ---------- ---------- ---------- --------- ---------- ------- Subtotal 64,052 60,399 62,358 24,118 23,386 22,468 Federal Systems Company - 2,317 2,165 - 2,317 2,165 ---------- ---------- ---------- --------- ---------- ------- Total $ 64,052 $ 62,716 $ 64,523 $ 24,118 $ 25,703 $24,633 ---------- ---------- ---------- --------- ---------- -------
*Reclassified to conform with 1994 presentation. **Hardware only, includes applicable rental revenue, excludes functions not embedded, software, and maintenance. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Y} geographic areas Marketing and services in the United States and Canada are managed as a single enterprise. However, in compliance with Statement of Financial Accounting Standards 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 90 percent of the company's non-U.S. revenue. The remaining 10 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 1994, 1993, and 1992. 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. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES (Dollars in millions) 1994 1993* 1992* United States Revenue -- Customers $ 24,118 $ 25,703 $ 24,633 Interarea transfers 6,336 7,297 7,524 ----------- ------------ ------------ Total $ 30,454 $ 33,000 $ 32,157 Net earnings (loss) 969 (5,566) (5,545) Assets at December 31 37,156 38,333 42,109 Europe/Middle East/Africa Revenue -- Customers $ 23,034 $ 21,779 $ 24,971 Interarea transfers 1,787 1,071 1,154 ----------- ------------ ------------ Total $ 24,821 $ 22,850 $ 26,125 Net earnings (loss) 1,086 (1,695) (1,728) Assets at December 31 25,816 24,566 26,770 Asia Pacific Revenue -- Customers $ 11,365 $ 10,020 $ 9,672 Interarea transfers 1,876 1,452 1,875 ----------- ------------ ------------ Total $ 13,241 $ 11,472 $ 11,547 Net earnings (loss) 567 (443) 126 Assets at December 31 12,619 12,778 12,837 Americas Revenue -- Customers $ 5,535 $ 5,214 $ 5,247 Interarea transfers 4,257 3,458 3,452 ----------- ------------ ------------ Total $ 9,792 $ 8,672 $ 8,699 Net earnings (loss) 498 (251) 157 Assets at December 31 7,783 7,359 6,990 eliminations Revenue $ (14,256) $ (13,278) $ (14,005) Net (loss) earnings (99) (32) 125 Assets (2,283) (1,923) (2,001) consolidated Revenue $ 64,052 $ 62,716 $ 64,523 Net earnings (loss) 3,021 (7,987) (6,865) Assets at December 31 81,091 81,113 86,705 ----------- ------------ ------------ *Net (loss) earnings before effect of changes in accounting for postemployment benefits (1993) and income taxes (1992). 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES Z} subsequent events On January 11, 1995, the company commenced a tender offer to purchase for cash any and all of the Series A Preferred Stock represented by 44.6 million outstanding depositary shares for a price of $25.00 net per depositary share. Under the offer, depositary shares tendered and purchased by the company will not receive or otherwise be entitled to the regular quarterly cash dividend expected to be paid for the first quarter of 1995 and also will not receive any accrued dividends for that period. The offer is not conditioned upon any minimum number of depositary shares being tendered. The offer and withdrawal rights expired on February 8, 1995. The company has purchased 34.1 million depositary shares under this offer. On January 31, 1995, the Board of Directors authorized the company to repurchase up to $2.5 billion of IBM common shares on the open market. The company plans to purchase the shares from time to time, depending on market conditions. 78
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES five-year comparison of selected financial data (Dollars in millions except per share amounts) 1994 1993 1992 1991 1990 For the year: Revenue $ 64,052 $ 62,716 $ 64,523 $ 64,766 $ 68,931 Net earnings (loss) before changes in accounting principles 3,021 (7,987) (6,865) (598) 5,967 Per share of common stock 5.02 (14.02) (12.03) (1.05) 10.42 Effect of accounting changes* -- (114) 1,900 (2,263) -- Per share of common stock -- (.20) 3.33 (3.96) -- Net earnings (loss) 3,021 (8,101) (4,965) (2,861) 5,967 Per share of common stock 5.02 (14.22) (8.70) (5.01) 10.42 Cash dividends paid on common stock 585 905 2,765 2,771 2,774 Per share of common stock 1.00 1.58 4.84 4.84 4.84 Investment in plant, rental machines and other property 3,078 3,232 4,698 6,502 6,548 Return on stockholders' equity 13.6% -- -- -- 14.8% At end of year: Total assets $ 81,091 $ 81,113 $ 86,705 $ 92,473 $ 87,568 Net investment in plant, rental machines and other property 16,664 17,521 21,595 27,578 27,241 Working capital 12,112 6,052 2,955 7,018 13,313 Total debt 22,118 27,342 29,320 26,947 19,545 Stockholders' equity 23,413 19,738 27,624 36,679 42,553
*1993, postemployment benefits; 1992, income taxes; 1991, nonpension postretirement benefits. selected quarterly data
(Dollars in millions Net Per Share Common Stock ------------------------ except per share Gross Earnings Earnings Stock Prices+ -------------------- and stock prices) Revenue Profit (Loss) (Loss) Dividends High Low 1994 First quarter $ 13,373 $ 4,940 $ 392 $ .64 $ .25 $ 60.00 $ 51.38 Second quarter 15,351 6,104 689 1.14 .25 65.00 51.38 Third quarter 15,431 6,154 710 1.18 .25 71.38 54.50 Fourth quarter 19,897 8,086 1,230 2.06 .25 76.38 67.38 ---------- --------- --------- --------- ------- Total $ 64,052 $ 25,284 $ 3,021 $ 5.02 $ 1.00 ---------- --------- --------- --------- ------- 1993 First quarter $ 13,058 $ 5,162 $ (399)* $ (.70)* $ .54 $ 57.13 $ 45.88 Second quarter 15,519 5,974 (8,036) (14.10) .54 54.38 47.13 Third quarter 14,743 5,602 (48) (.12) .25 49.75 40.63 Fourth quarter 19,396 7,410 382 .62 .25 59.88 42.13 ---------- --------- --------- --------- ------- Total $ 62,716 $ 24,148 $ (8,101) $ (14.22)** $ 1.58 ---------- --------- --------- --------- -------
*Includes charge of $114 million, or $.20 per common share, cumulative effect of change in accounting for postemployment benefits. **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. 79 STOCKHOLDER INFORMATION Corporate Offices International Business Machines Corporation Corporate Headquarters One Old Orchard Road Armonk, New York 10504 (914) 765-1900 IBM Stock IBM common stock is listed on the New York Stock Exchange, on other exchanges in the United States and around the world. Annual Meeting The IBM Annual Meeting of Stockholders will be held on Tuesday, April 25, 1995 at 10 a.m. at the Ovens Auditorium, 2700 East Independence Blvd., Charlotte, North Carolina. IBM on the Internet Financial results, news on new IBM products and services and insights from company executives are available via IBM's home page on the Internet. The address is http://www.ibm.com General Information For answers to general questions about IBM from within the continental United States, call (800) 426-3333; from outside the continental United States, call (602) 629-3200. Hearing-Impaired Stockholders Hearing-Impaired stockholders with access to a telecommunications device (TTD) can communicated directly with First Chicago Trust Company of New York by calling (201) 222-4489. The IBM Annual Report is partially printed on [logo] recycled paper and is recyclable. Stockholder Communications Stockholders in the United States and Canada can get quarterly financial results, listen to a summary of Mr. Gerstner's Annual Meeting remarks and hear voting results from the meeting by calling (800) IBM-7800. Callers can also request printed copies of the information via mail or fax. Stockholders residing outside the United States or Canada should call (402) 573-9861. IBM Stockholder Services Stockholders with questions about their accounts should contact: First Chicago Trust Company of New York Mail Suite 4688 P.O. Box 2530 Jersey City, NJ 07303-2530 (201) 324-0405 or via Internet at: shares@info.ibm.com To transfer stocks, write to: First Chicago Trust Company of New York Stock Transfer Department Mail Suite 4680 14 Wall Street New York, New York 10005 (Registered mail is recommended when stock is mailed.) Investors with other requests may write to: IBM Stockholder Relations IBM Corporation One Old Orchard Road Armonk, New York 10504 Literature for IBM Stockholders The following literature on IBM is available without charge from First Chicago Trust Company of New York, Suite 4688, P.O. Box 2530, Jersey City, New Jersey 07303-2530; (201) 324-0405. The Form 10-K Annual Report and Form 10-Q Quarterly Reports to the SEC provide additional information on IBM's business. The 10-K is issued in April; 10-Q reports are released in May, August and November. IBM Credit Corporation's Annual Report is available in March. The IBM Dividend Reinvestment Plan booklet tells how stockholders may automatically reinvest dividends to purchase additional IBM stock. "IBM and the Environment" reports on IBM's safety, energy and environmental programs. "Valuing Diversity: An Ongoing Commitment" reviews IBM's philosophy on workforce diversity, equal opportunity, affirmative action, and work/life balance. Programs, both within IBM and in the community, that promote opportunities for women, minorities, people with disabilities and Vietnam-era and disabled veterans are also discussed. *AIX, AS/400, DB2, HelpCenter, ISSC, Media Streamer, Nways, OS/2, Person to Person, POWERparallel, PowerPC, RAMAC, RS/6000, S/390, SP2, Scalable POWERparallel System, System/36, System/390, ThinkPad, ValuePoint, VisualAge, VoiceType and Workplace Shell are trademarks or registered trademarks of International Business Machines Corporation. CATIA is a trademark of Dassault Systemes. Pentium is a trademark of Intel Corporation. PRODIGY is a service mark and registered trademark of Prodigy Services Company. Printed In the United States. 81 EX-24 7 Exhibit VII POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Harold Brown -------------------------- Harold Brown POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ James E. Burke ---------------------------- James E. Burke POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Fritz Gerber -------------------------- Fritz Gerber POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Louis V. Gerstner, Jr. ------------------------------------ Louis V. Gerstner, Jr. POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Nannerl O. Keohane -------------------------------- Nannerl O. Keohane POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Charles F. Knight ------------------------------- Charles F. Knight POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Thomas S. Murphy ------------------------------ Thomas S. Murphy POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Lucio A. Noto --------------------------- Lucio A. Noto POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ John B. Slaughter ------------------------------- John B. Slaughter POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Alex Trotman -------------------------- Alex Trotman POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Charles M. Vest ----------------------------- Charles M. Vest POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Lodewijk C. van Wachem ------------------------------------ Lodewijk C. van Wachem POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Edgar S. Woolard, Jr. ----------------------------------- Edgar S. Woolard, Jr. POWER OF ATTORNEY OF IBM DIRECTOR --------------------------------- KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of International Business Machines Corporation, a New York corporation, which will file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Law, an Annual Report for 1994 on Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., Jerome B. York, Jeffrey D. Serkes, John E. Hickey and Nicholas J. DeRoma his or her 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 28th day of February 1995. /s/ Jerome B. York ---------------------------- Jerome B. York EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CORPORATION'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1994 DEC-31-1994 7,922 2,632 14,018 0 6,334 41,338 44,820 28,156 81,091 29,226 0 7,308 0 1,081 15,024 81,091 32,344 64,052 21,300 38,768 20,279 0 1,227 5,155 2,134 3,021 0 0 0 3,021 5.02 4.95
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