From: http://www.xfrml.org/Demos/Viewer/Master.xml Date: 1999-09-01 1234567890-AB 1999-01-01 0115412541675DFG151F151G45DFG Verasign http://www.verisign.com/ 1998 Financial Statement for International Business Machines John Doe, CPA Financial,IBM,International Business Machines, Current Financial Statement Financial statement for IBM as of December 31, 1998, and for the Year then ended. Comparison figures for 1997 and 1996. Pricewaterhouse NA 1999-01-01 Financial statement XML 1.0 1234567890-AB NA English NA NA Public Domain 1999-01-01 Charles Hoffman Document created 1999-05-15 Charles Hoffman Modified to add tags International Business Machines Corporation 1 New Orchard Road Armonk NY 10540 1 New Orchard Road Armonk NY 10540 914-499-1900 http://www.ibm.com IBM is in the business of providing customer solutions through the use of advanced information technology. The company operates primarily in a single industry utilizing several segments that create value by offering a variety of solutions that include, either singularly or in some combination, technologies, systems, products, services, software and financing. High-tech Software Developer 3570 - Computer Hardware December 31 130871985 PricewaterhouseCoopers NYSE IBM Chicago IBM Pacific IBM INTERNATIONAL BUSINESS MACHINES CORP 0000051143 NY 34 0001047469-99-011848 10-K 4 19981231 19990329 Douglas L. Maine Louis V. Gerstner Jr. 1000000 December 31, 1998 December 31, The notes on pages 69 through 89 of the 1998 IBM Annual Report are an integral part of this statement. Five-Year Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies (Dollars in millions except per share amounts) 1998 1997* 1996* 1995* 1994* * Reclassified to conform to 1998 presentation. revenues 81667 78508 75947 71940 94052 netIncome 6328 6093 5429 4178 3021 netIncomePerShare 6.75 6.18 5.12 3.61 2.51 netIncomePerShareFullyDilluted 6.57 6.01 5.01 3.53 2.48 cashDividends 814 763 686 572 585 cashDividends .86 .775 .65 .50 .50 investments 6520 6793 5883 4744 3078 equity 32.6% 29.7% 24.8% 18.5% 14.3% totalAssets 86100 81499 81132 80292 81091 netInvestments 19631 18347 17407 16579 16664 capital 5533 6911 6695 9043 12112 debt 29413 26926 22829 21629 22118 stockholderEquity 19433 19816 21628 22423 23413 Price Waterhouse /s/ PricewaterhouseCoopers LLP 1301 Avenue of the Americas New York NY 10019 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of International Business Machines Corporation: January 21, 1999 Unqualified US GAAP In our opinion, the accompanying consolidated financial statements, appearing on pages 64 through 89, present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. CONSOLIDATED STATEMENT OF FINANCIAL POSITION International Business Machines Corporation and Subsidiary Companies * Reclassified to conform to 1998 presentation. (Dollars in millions) At December 31: Note 1998 1997* cashEquivalents 5375 7106 marketableSecurities M 393 447 receivablesTrade 18958 16850 receivablesOther 6510 5720 receivablesOther 1313 1256 inventories F 5200 5139 prepaidExpenses 4611 3900 CurrentAssets 42360 40418 fixedAssets G 44870 42133 fixedAssets 25239 23786 fixedAssets 19631 18347 software 599 819 investments H 23510 21915 otherAssets 24109 22734 assets 86100 81499 taxesPayable Q 3125 2381 notesPayable K & M 13905 13230 tradeAccountsPayable 6252 5215 compensationAndBenefits 3530 3043 deferredIncome 4115 3445 accruedExpenses 5900 6193 currentLiabilities 36827 33507 longTermDebt K & M 15508 13696 otherLiabilities N 12818 12993 deferredTaxes Q 1514 1487 totalLiabilities Q 66667 61683 contingencies P preferredStock O 247 252 commonStock 10121 8601 retainedEarnings 10141 11010 treasuryStock -133 -86 employeeBenefitsTrust -1854 -860 accumulatedGains 911 899 totalEquity 19433 19816 totalLiabilitiesAndEquity O 86100 81499 CONSOLIDATED STATEMENT OF EARNINGS International Business Machines Corporation and Subsidiary Companies (Dollars in millions except per share amounts) At the end of December 31: Note 1998 1997* 1996* * Reclassified to conform to 1998 presentation. revenues 35419 36630 36634 revenues 28916 25166 22310 revenues 11863 11164 11426 revenues 2877 2806 3054 revenues 2592 2742 2523 revenues 81667 78508 75947 costs 24214 23473 22888 costs 21125 18464 16270 costs 2260 2785 2946 costs 1494 1448 1481 costs 1702 1729 1823 costs 50795 47899 45408 grossProfit 30872 30609 30539 sellingGeneralAdministrative R 16662 16634 16854 researchAndDevelopment S 5046 4877 5089 operatingExpenses 21708 21511 21943 operatingIncome 9164 9098 8596 interestIncome 589 657 707 interestExpense L -713 -728 -716 incomeBeforeTaxes 9040 9027 8587 provisionForIncomeTaxes Q 2712 2934 3158 netIncome 6328 6093 5429 preferredStockDividends 20 20 20 netIncome 6308 6073 5409 epsCommonBasic T 6.75 6.18 5.12 epsCommonFullyDilluted T 6.57 6.01 5.01 sharesBasic T 934502785 983286361 1056704188 sharesFullyDiluted T 960065235 1010934942 1079708904 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY International Business Machines Corporation and Subsidiary Companies (Dollars in millions) Preferred Stock Common Stock Retained Earnings Treasury Stock Employee Benefits Trust Accumulated Gains and Losses Not Affecting Retained Earnings Total beginningBalance 253 7488 11630 -41 0 3093 22423 netIncome 5429 5429 foreignCurrencyTranslation -635 -635 unrealizedSecurityGains 111 111 other -524 netIncome 4905 dividendsCommon -686 -686 dividendsPreferred -20 -20 stockRepurchase -710 -5046 -5756 stockIssued 811 -13 798 stockPurchase -105 -94 -199 taxEffect 163 163 beginningBalance 253 7752 11189 -135 2569 21628 netIncome 6093 6093 foriegnCurrencyTranslation -1610 -1610 unrealizedSecurityGains -60 -60 otherGains -1670 otherGains 4423 dividends -763 -763 dividendsPreferred -20 -20 stockRepurchase -565 -5455 -6020 stockRepurchase -1 -1 stockIssued 985 -2 983 stockPurchase -32 49 17 other -860 -860 taxEffect 429 429 beginningBalance 252 8601 11010 -86 -860 899 19816 netIncome 6328 6328 foriegnCurrencyTranslation 69 69 unrealizedSecurityGains -57 -57 other 12 other 6340 dividendsCommon -814 -814 dividendsPreferred -20 -20 stockRepurchase -556 -6291 -6847 stockRepurchase -5 -5 stockIssued 709 -1 708 stockPurchase -71 -47 -118 fairValueAdjustment 1002 -994 8 taxEffect 365 365 beginningBalance 247 10121 10141 -133 -1,854 911 19433 * Reclassified to conform to 1998 presentation.The notes on pages 69 through 89 of the 1998 IBM Annual Report are an integral part of this statement.
 Indirect CONSOLIDATED STATEMENT OF CASH FLOWS International Business Machines Corporation and Subsidiary Companies (Dollars in millions) For the year ended December 31: 1998 1997 1996* * Reclassified to conform to 1998 presentation. netIncome 6328 6093 5429 depreciation 4475 4018 3676 amortization 517 983 1336 effectOfRestructuringCharges -355 -445 -1491 deferredIncomeTaxes -606 358 11 dispositionFixedAssets -261 -273 -300 receivables -2736 -3727 -650 inventories 73 432 196 otherAssets 880 -1087 -545 accountsPayable 362 699 319 otherLiabilities 596 1814 2294 cashOperatingActivities 9273 8865 10275 purchaseFixedAssets -6520 -6793 -5883 dispositionFixedAssets 905 1130 1314 investmentCompany 0 0 -716 investmentSoftware -250 -314 -295 purchasesMarketableSecurities -4211 -1617 -1613 proceedsMarketableSecurities 3945 1439 1470 investingActivities -6131 -6155 -5723 proceedsLongTermDebt 7567 9142 7670 proceedsShortTermDebt 499 -668 -919 paymentsLongTermDebt -5942 -4530 -4992 netPreferredStock -5 -1 0 netCommonStock -6278 -6250 -5005 dividendsCommonStock -834 -783 -706 netFinancingActivities -4993 -3090 -3952 exchangeRateChange 120 -201 -172 netChangeCash -1731 -581 428 beginningCash 7106 7687 7259 endingCash 5375 7106 7687 incomeTaxes 1929 2472 2229 interest 1605 1475 1563 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS International Business Machines Corporation and Subsidiary Companies significantAccountingPolicies A
The consolidated financial statements include the accounts of International Business Machines Corporation and its controlled subsidiary companies, which are majority owned. Investments in business entities in which IBM does not have control, but has the ability to exercise significant influence over operating and financial policies (generally 20-50 percent ownership), are accounted for by the equity method. Other investments are accounted for by the cost method.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions the company may undertake in the future, actual results ultimately may differ from the estimates.
Revenue from hardware sales or sales-type leases is recognized when the product is shipped. Revenue from rentals and operating leases is recognized monthly as the fees accrue.
Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price long-term service contracts is recognized over the contract term based on the percentage of services provided during the period compared to the total estimated services provided over the entire contract. Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent. Revenue from maintenance is recognized over the contractual period or as the services are performed. Revenue in excess of billings on service contracts are recorded as unbilled receivables and included in trade accounts receivable. Billings in excess of revenue recognized on service contracts are recorded as deferred income until the above revenue recognition criteria are met.
Revenue from one-time charge licensed software is recognized when the program is shipped, provided the company has vendor-specific objective evidence of the fair value of each element of the software offering. A deferral is recorded for post-contract customer support and any other future deliverables included within the contract arrangement. This deferral is earned over the support period or as contract elements are delivered. Revenue from monthly software licenses is recognized as license fees accrue.
Revenue from financing is recognized at level rates of return over the term of the lease or receivable.
Revenue for all categories is reduced for estimated customer returns, allowances and anticipated price actions.
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. In accordance with Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws.
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are recorded in Accumulated gains and losses not affecting retained earnings within stockholders' equity. Inventories and plant, rental machines and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars, or whose economic environment is highly inflationary, are translated at approximate exchange rates prevailing when acquired. All other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are translated at historical exchange rates. All other income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses that result from translation are included in net income.
In the normal course of business, the company uses a variety of derivative financial instruments for the purpose of currency exchange rate and interest rate risk management. In order to qualify for hedge accounting, the company requires that the derivative instruments used for risk management purposes effectively reduce the risk exposure that they are designed to hedge. For instruments associated with the hedge of anticipated transactions, hedge effectiveness criteria also require that the occurrence of the underlying transactions be probable. Instruments meeting these hedging criteria are formally designated as hedges at the inception of the contract. Those risk management instruments not meeting these criteria and considered ineffective as hedges are accounted for at fair value with changes in fair value recognized immediately in net income. Refer to note M, "Financial Instruments," on pages 74 and 75 for descriptions of the major classes of derivative financial instruments used by the company, including the specific methods used to account for them. In assessing the fair value of its financial instruments, both derivative and non-derivative, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. Quoted market prices or dealer quotes for the same or similar instruments are used for the majority of marketable securities, long-term investments and long-term debt. Other techniques, such as option pricing models, estimated discounted value of future cash flows, replacement cost and termination cost, are used to determine fair value for the remaining financial instruments. These values represent a general approximation of possible value and may never actually be realized.
All highly liquid investments with a maturity of three months or less at date of purchase are carried at fair value and considered to be cash equivalents.
Marketable securities included within current assets represent highly liquid securities with a maturity less than one year. The company's marketable securities are considered available for sale and are reported at fair value with changes in unrealized gains and losses, net of applicable taxes, recorded in Accumulated gains and losses not affecting retained earnings within stockholders' equity. Realized gains and losses are calculated based on the specific identification method.
Raw materials, work in process and finished goods are stated at the lower of average cost or net realizable value.
Plant, rental machines (computer equipment used internally or as part of managed operations contracts) and other property are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of depreciable properties are generally as follows: buildings, 50 years; building equipment, 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 15 years; and computer equipment, 1.5 to 5 years.
Costs related to the conceptual formulation and design of licensed programs are expensed as research and development. Costs incurred subsequent to establishment of technological feasibility to produce the finished product are capitalized. The annual amortization of the capitalized amounts is the greater of the amount computed based on the estimated revenue distribution over the products' revenue-producing lives, or the straight-line method, and is applied over periods ranging up to four years. Periodic reviews are performed to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged against income as incurred, or when related revenue is recognized, whichever occurs first.
Current service costs of retirement plans and postretirement healthcare and life insurance benefits are accrued in the period. Prior service costs resulting from amendments to the plans are amortized over the average remaining service period of employees expected to receive benefits. Assuming thresholds established in SFAS 87, "Employers' Accounting for Pensions," are met, unrecognized net gains and losses are amortized to service cost over the average remaining service life of employees expected to receive benefits. See note W, "Retirement Plans," on page 81 through 83 and note X, "Nonpension Postretirement Benefits," on pages 83 and 84 for further discussion.
Goodwill is charged to net income on a straight-line basis over the periods estimated to be benefited, generally not exceeding five years. Reviews to evaluate recoverability of this goodwill are conducted periodically.
Common stock refers to the $.50 par value capital stock as designated in the company's Certificate of Incorporation.
Earnings per share of common stock is computed by dividing net income after deduction of preferred stock dividends by the weighted-average number of common shares outstanding for the period. Earnings per common share of stock--assuming dilution reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock which would then share in the net income of the company. See note T, "Earnings Per Share of Common Stock," on page 79 for further discussion.
accountingChange B
The company implemented new accounting standards in 1998, 1997 and 1996. None of these standards had a material effect on the financial position or results of operations of the company. Beginning with the first quarter of 1998, the company adopted SFAS 130, "Reporting Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components. The disclosures required by SFAS 130 are presented in the Accumulated gains and losses not affecting retained earnings section in the Consolidated Statement of Stockholders' Equity on pages 66 and 67 and in note O, "Stockholders' Equity Activity," on pages 76 and 77. Effective December 31, 1998, the company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting operating segments and disclosures about products and services, geographic areas and major customers. See note Y, "Segment Information," on pages 84 through 89 for further information. Effective December 31, 1998, the company adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which established expanded disclosures for defined benefit pension and postretirement benefit plans. See note W, "Retirement Plans," on pages 81 through 83 and note X, "Nonpension Postretirement Benefits" on pages 83 and 84 for the required disclosures. On January 1, 1998, the company adopted the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition." This SOP provides guidance on revenue recognition for software transactions. It requires deferral of some or all of the revenue related to a specific contract depending on the existence of vendorspecific objective evidence and the ability to allocate the total fee to all elements within the contract. The portion of the fee allocated to an element is recognized as revenue when all of the revenue recognition criteria have been met for that element. In December 1997, the company implemented SFAS 128, "Earnings Per Share" (EPS). This standard prescribes the methods for calculating basic and diluted EPS and requires dual presentation of these amounts on the face of the earnings statement. No restatement of EPS, for either basic or diluted, was required for amounts reported previously in the company's filings with the U.S. Securities and Exchange Commission. Effective January 1, 1997, the company implemented SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The company was generally in compliance with this standard prior to adoption. In 1996, the company adopted SOP 96-1, "Environmental Remediation Liabilities." This SOP provides guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. See note N, "Other Liabilities and Environmental," on page 76 for further information. The company was generally in compliance with this standard prior to adoption. In 1996, the company implemented the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." See note V, "Stock-Based Compensation Plans," on pages 79 through 81 for further information.
In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. It requires an entity to recognize all derivatives as either assets or liabilities in the Statement of Financial Position and measure those instruments at fair value. Additionally, the fair value adjustments will impact either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge and, if so, the nature of the hedging activity. The company will adopt this new standard as of January 1, 2000. Management does not expect the adoption to have a material impact on the company's results of operations, however, the impact on the company's financial position is dependent upon the fair values of the company's derivatives and related financial instruments at the date of adoption. During 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The statement requires the capitalization of internal use computer software costs if certain criteria are met. The capitalized software costs will be amortized on a straight-line basis over the useful life of the software. The company will adopt the statement as of January 1, 1999. The adoption of the statement is not expected to have a material impact on the company's financial statements.
subsequentEvents C
On January 26, 1999, the IBM Board of Directors declared a two-for-one common stock split, subject to the approval of stockholders of an increase in the number of common shares authorized from 1,875 million to 4,687.5 million. The record date for the split will be on May 10, 1999, with distribution of the split shares expected to follow on May 26, 1999. Earnings per share calculations included in this report have not been restated to reflect this proposed stock split.
On February 1, 1999, the company issued $600 million of 5 3/8% notes due February 1, 2009. The net proceeds from the issuance of this debt will be used for general corporate purposes.
discontinuedOperations D In December 1998, IBM and AT&T announced that AT&T will acquire IBM's Global Network business for $5 billion in cash. In addition, the two companies have agreed to enter into outsourcing contracts with each other. This subject is discussed further on pages 61 and 62 under the section entitled "Divestitures/Acquisitions" in the Management Discussion. stockSplit E On April 29, 1997, the stockholders of the company approved amendments to the Certificate of Incorporation to increase the number of authorized shares of common stock from 750 million to 1,875 million, which was required to effect a two-for-one stock split approved by the company's Board of Directors on January 28, 1997. In addition, the amendments served to reduce the par value of the common stock from $1.25 to $.50 per share. Stockholders of record at the close of business on May 9, 1997, received one additional share for each share held. All share and per share data prior to the second quarter of 1997 presented in the Consolidated Financial Statements and footnotes of this Annual Report reflect the two-for-one stock split. inventories F (Dollars in millions) At December 31: 1998 1997 1088 1090 4112 4049 5200 5139
fixedAssets G (Dollars in millions) At December 31: 1998 1997 1091 1117 11088 11208 27025 25015 39204 37340 22463 21680 16741 15660 5666 4793 2776 2106 2890 2687 19631 18347
investments H (Dollars in millions) At December 31: 1998 1997 14384 13733 6510 5720 7874 8013 2921 3163 4836 3828 3499 2741 1087 977 420 484 138 236 945 950 281 295 1509 1228 23510 21915 * These leases relate principally to IBM equipment and are generally for terms ranging from three to five years. Net investment in sales-type leases includes unguaranteed residual values of approximately $685 million and $563 million at December 31, 1998 and 1997, respectively, and is reflected net of unearned income at those dates of approximately $1,600 million for both years. Scheduled maturities of minimum lease payments outstanding at December 31, 1998, expressed as a percentage of the total, are approximately as follows: 1999, 48 percent; 2000, 31 percent; 2001, 15 percent; 2002, 5 percent; and 2003 and beyond, 1 percent.
 shortTermDebt I The company maintains a $10.0 billion committed global credit facility. Unused committed lines of credit from this global facility amounted to $8.8 billion and $9.2 billion at December 31, 1998 and 1997, respectively. The company's other committed and uncommitted lines of credit amounted to $5.2 billion at December 31, 1998 and 1997. The unused portion of those lines amounted to $4.3 billion and $3.9 billion at December 31, 1998 and 1997, respectively. Total unused lines of credit at December 31, 1998 and 1997, amounted to $13.1 billion. Interest rates on borrowings vary from country to country depending on local market conditions. saleOfReceivables J At year-end 1998 and 1997, the company had a net balance of $0.9 billion in assets under management from the securitization of loans, leases and trade receivables. The company received total cash proceeds of approximately $2.4 billion and $3.0 billion in 1998 and 1997, respectively, from the sale and securitization of these receivables and assets. No material gain or loss resulted from these transactions. Recourse amounts associated with the aforementioned sale and securitization activities are expected to be minimal, and adequate reserves are in place to cover potential losses. debt K
Short-term debt(Dollars in millions) At December 31: 1998 1997 4885 4583 6370 5699 2650 2948 13905 13230
The weighted-average interest rates for commercial paper at December 31, 1998 and 1997, were approximately 5.7 percent and 5.8 percent, respectively. The weighted-average interest rates for short-term loans at December 31, 1998 and 1997, were approximately 5.3 percent and 5.5 percent, respectively.
Long-term debt(Dollars in millions) At December 31: Maturities 1998 1997* 500 500 700 0 600 600 150 150 850 850 550 550 750 750 2695 2674 4885 4472 1514 1319 13194 11865 3866 3944 672 407 120 111 91 85 25 28 221 235 18189 16675 31 31 18158 16644 2650 2948 15508 13696 * Reclassified to conform to 1998 presentation.
Annual maturities in millions of dollars on long-term debt outstanding at December 31, 1998, are as follows: 1999, $2,650; 2000, $5,120; 2001, $1,491; 2002, $1,676; 2003, $1,116; 2004 and beyond, $6,136.
longTermDebt L Interest paid and accrued on borrowings of the company and its subsidiaries amounted to $1,585 million in 1998, $1,596 million in 1997 and $1,565 million in 1996. Of these amounts, $28 million in 1998, $32 million in 1997 and $31 million in 1996 were capitalized. The remainder was charged to the cost of rentals and financing in the amounts of $844 million in 1998, $836 million in 1997 and $818 million in 1996, or interest expense in the amounts of $713 million in 1998, $728 million in 1997 and $716 million in 1996. The decrease in total interest expense in 1998 versus 1997 was due primarily to lower average interest rates, partially offset by higher levels of debt. The increase in total interest expense in 1997 versus 1996 was primarily due to higher levels of debt, partially offset by lower interest rates. The average interest rate for total debt was 5.7 percent, 6.4 percent and 7.0 percent in 1998, 1997 and 1996, respectively. These rates include the results of currency and interest rate swaps applied to the debt described in note K, "Debt," on page 73. financialInstruments M The company maintains portfolios of financial instruments both on- and off-balance sheet.
Financial assets with carrying values approximating fair value include cash and cash equivalents, marketable securities, notes and other accounts receivable and other investments. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued expenses and liabilities, and short-term and long-term debt. The following table summarizes the company's marketable securities and other investments, all of which were considered available for sale. MARKETABLE SECURITIES AND OTHER INVESTMENTS(Dollars in millions) Carrying Value At December 31: 1998 1997 15 93 335 181 43 173 393 447 0 54 271 183 10 58 281 295 138 236 * Included within Investments and sundry assets on the Consolidated Statement of Financial Position (See note H on page 72).
IBM has guaranteed certain loans and financial commitments of affiliates. The approximate amount of these financial guarantees were $1,158 million and $861 million at December 31, 1998 and 1997, respectively. Additionally, the company is responsible for fulfilling financial commitments associated with certain contracts to which it is a party. These commitments, which in the aggregate were approximately $1,600 million and $600 million at December 31, 1998 and 1997, respectively, are not expected to have a material adverse effect on the company's financial position or results of operations. The company's dealers had unused lines of credit available from IBM for working capital financing of approximately $3.6 billion and $2.1 billion at December 31, 1998 and 1997, respectively.
The company has used derivative instruments as an element of its risk management strategy for many years. Although derivatives entail a risk of nonperformance by counterparties, the company manages this risk by establishing explicit dollar and term limitations that correspond to the credit rating of each carefully selected counterparty. The company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its results of operations or financial position in the future. The following table summarizes the notional value, carrying value and fair value of the company's derivative financial instruments on- and off-balance sheet. The notional value at December 31 provides an indication of the extent of the company's involvement in such instruments at that time, but does not represent exposure to market risk. At December 31, 1998 At December 31, 1997 (Dollars in millions) Notional Value Carrying Value Fair Value Notional Value Carrying Value Fair Value 31,484 -485 -427 24774 29 84 9021 67 45 14211 41 193 40505 -418 -382 38985 70 277* Bracketed amounts are liabilities.* The estimated fair value of derivatives both on- and off-balance sheet at December 31, 1998 and 1997, consists of assets of $486 million and $581 million and liabilities of $868 million and $304 million, respectively.
A significant portion of the company's derivative transactions relates to the matching of liabilities to assets associated with both its global financing business and its non-global financing business. The company issues debt, using the most efficient capital markets and products, which may result in a currency or interest rate mismatch with the underlying assets. Interest rate swaps or currency swaps are then used to match the interest rates and currencies of its debt to the related assets. These swap contracts principally mature within five years. Interest and currency rate differentials accruing under these interest rate and currency swap contracts are recognized over the life of the contracts in interest expense. The company uses internal regional centers to manage the cash of its subsidiaries. These regional centers principally use currency swaps to convert cash flows in a cost-effective manner, predominantly for the company's European subsidiaries. The terms of the swaps are generally less than one year. The effects of these contracts are recognized over the life of the contract in interest expense. The company also utilizes currency swaps and other foreign currency contracts in order to hedge the foreign currency exposures of certain of the company's net investments in foreign subsidiaries. The currency effects of these hedges are reflected in the Accumulated gains and losses not affecting retained earnings section of Stockholders' equity, offsetting a portion of the translation of net assets. When the terms of an underlying instrument are modified, or if it ceases to exist, all changes in fair value of the swap contract are recognized in income each period until it matures. Additionally, the company uses derivatives to limit its exposure to loss resulting from fluctuations in foreign currency exchange rates on anticipated cash transactions among foreign subsidiaries and the parent company. The company receives significant intracompany royalties and net payments for goods and services from its non-U.S. subsidiaries. In anticipation of these foreign currency flows, and given the volatility of the currency markets, the company selectively employs foreign currency options to manage the currency risk. The terms of these instruments are generally less than one year. For purchased options that hedge qualifying anticipated transactions, gains and losses are deferred and recognized in net income in the same period that the underlying transaction occurs, expires or is otherwise terminated. At December 31, 1998 and 1997, there were no material deferred gains or losses. The premiums associated with entering into these option contracts are generally amortized over the life of the options and are not material to the company's results. Unamortized premiums are included in prepaid assets. For purchased options that hedge anticipated transactions which do not qualify for hedge accounting, gains and losses are recorded in net income as they occur on a mark-to-market basis. All written options are marked to market monthly and are not material to the company's results. The company also enters into transactions to moderate the impact that an appreciation of the dollar relative to other currencies would have on the translation of foreign earnings. These transactions do not qualify as hedges for accounting purposes, and their foreign exchange gains and losses are recorded in net income as they occur.
environmentalCosts N Other liabilities consists principally of accruals for nonpension postretirement benefits for U.S. employees ($6.6 billion) and nonpension postretirement benefits, indemnity and retirement plan reserves for non-U.S. employees ($1.4 billion). More detailed discussion of these liabilities appears in note X, "Nonpension Postretirement Benefits," on pages 83 and 84, and note W, "Retirement Plans," on pages 81 through 83. Also included are non-current liabilities associated with infrastructure reduction and restructuring actions taken in 1993 and prior. As a result, amounts representing postemployment preretirement accruals in the amount of $793 million and $681 million (net of sublease receipts) for accruals for leased space that the company has vacated are included. The company employs extensive internal environmental protection programs that are primarily preventative in nature. The cost of these ongoing programs is recorded as incurred. The company continues to participate in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned facilities and Superfund sites. The company accrues for all known environmental liabilities for remediation costs when a cleanup program becomes probable and costs can be reasonably estimated. In addition, estimated environmental costs associated with post-closure activities, such as the removal and restoration of chemical storage facilities and monitoring, are accrued when the decision is made to close a facility. The total amounts accrued, which do not reflect any insurance recoveries, were $238 million and $243 million at December 31, 1998 and 1997, respectively. The amounts accrued do not cover sites that are in the preliminary stages of investigation where neither the company's percentage of responsibility nor the extent of cleanup required has been identified. Estimated environmental costs are not expected to materially impact the financial position or results of the company's operations in future periods. However, environmental cleanup periods are protracted in length, and environmental costs in future periods are subject to changes in environmental remediation regulations. equity O
The Board of Directors from time to time has authorized the company to repurchase IBM common stock. The company repurchased 57,384,100 common shares at a cost of $6.9 billion and 81,505,200 common shares at a cost of $7.1 billion in 1998 and 1997, respectively. The repurchases resulted in a reduction of $28,498,409 and $34,388,668 in the stated capital (par value) associated with common stock in 1998 and 1997, respectively. In 1997, 10 million repurchased shares were used to establish the Employee Benefits Trust (see below). In 1998 and 1997, 387,282 and 2,727,864 shares, respectively, were issued as a result of acquisitions. The rest of the repurchased shares were retired and restored to the status of authorized but unissued shares. At December 31, 1998, approximately $2.8 billion of Board authorization for repurchases remained. The company plans to purchase shares on the open market from time to time, depending on market conditions. In 1995, the IBM Board of Directors authorized the company to purchase all of its outstanding Series A 7 1/2 percent preferred stock. During 1998 and 1997, the company repurchased 51,250 shares at a cost of $5.5 million and 13,450 shares at a cost of $1.4 million, respectively. This resulted in a $512.50 and $134.50 ($.01 par value per share) reduction in the stated capital associated with preferred stock as of December 31, 1998 and 1997, respectively. The repurchased shares were retired and restored to the status of authorized but unissued shares. The company plans to purchase remaining shares on the open market and in private transactions from time to time, depending on market conditions.
Effective November 1, 1997, the company created an employee benefits trust to which the company contributed 10 million shares of treasury stock. The company is authorized to instruct the trustee to sell shares from time to time and to use proceeds from such sales, and any dividends paid on such contributed stock, toward the partial satisfaction of the company's future obligations under certain of its compensation and benefits plans, including its retiree medical plans. The shares held in trust are not considered outstanding for earnings per share purposes until they are committed to be released. The shares will be voted by the trustee in accordance with its fiduciary duties. As of December 31, 1998 and 1997, no shares have been committed to be released. At December 31, 1998, the company adjusted its valuation of the employee benefits trust to fair value. This adjustment solely impacted line items within stockholders' equity and did not affect total stockholders' equity or net income. Accumulated Gains and Losses Not Affecting Retained Earnings (Dollars in millions) Foreign Currency Items (Net of Tax) Net Unrealized Gains (Losses) on Marketable Securities (Net of Tax) Total Gains and Losses Not Affecting Retained Earnings (Net of Tax) 3036 57 3093 -635 111 -524 2401 168 2569 -1610 -60 -1670 791 108 899 69 -57 12 860 51 911
NET CHANGE IN UNREALIZED GAINS (LOSSES) ON MARKETABLE SECURITIES (NET OF TAX)(Dollars in millions) For the year ended December 31: 1998 99 156 -57
contingencies P The company is subject to a variety of claims and suits that arise from time to time out of the ordinary course of its business, including actions with respect to contracts, intellectual property, product liability and environmental matters. The company does not believe that any such current action will have a material impact on the company's business, financial condition or results of operations. On February 25, 1993, a class action complaint was filed against the company in the United States District Court for the Southern District of New York alleging, among other matters, that the company disseminated false and misleading statements concerning its financial condition and dividends during certain periods of 1992. On February 3, 1997, Judge Rakoff issued an order granting the company's motion for summary judgment in this case in its entirety. Plaintiffs filed an appeal and on November 17, 1998, the Second Circuit Court of Appeals upheld Judge Rakoff's decision for the company. taxes Q (Dollars in millions) For the year ended December 31: 1998 1997 1996 2960 3193 3025 6080 5834 5562 9040 9027 8587 991 974 1137 1721 1960 2021 2712 2934 3158 1117 163 727 -475 349 83 642 512 810 139 83 158 -260 -87 -353 -121 -4 -195 2062 2330 2262 129 96 281 2191 2426 2543 2712 2934 3158 2859 2774 2584 5571 5708 5742
The effect of tax law changes on deferred tax assets and liabilities did not have a significant impact on the company's effective tax rate. The significant components of activities that gave rise to deferred tax assets and liabilities included on the balance sheet were as follows:
DEFERRED TAX ASSETS(Dollars in millions) At December 31: 1998 1997 3909 3707 1249 1027 1169 1092 913 1196 863 1163 686 893 555 492 387 378 304 202 212 203 201 132 182 235 2614 2507 13244 13227 488 2163 12756 11064
DEFERRED TAX LIABILITIES(Dollars in millions) At December 31: 1998 1997 3433 3147 2775 2147 1505 1556 287 420 1841 1413 9841 8683
As part of implementing its global strategies involving the relocation of certain of its manufacturing operations, the company transferred certain intellectual property rights to several non-U.S. subsidiaries in December 1998. Since these strategies, including this transfer, result in the anticipated utilization of U.S. federal tax credit carryforwards, the company reduced the valuation allowance from that previously required. The valuation allowance at December 31, 1998, principally applies to certain state and local and foreign tax loss carryforwards that, in the opinion of management, are more likely than not to expire before the company can utilize them. A reconciliation of the company's effective tax rate to the statutory U.S. federal tax rate is as follows: For the year ended December 31: 1998 1997 1996 35% 35% 35% -6 -3 2 1 1 1 -1 0 -6 1 0 5 30% 30% 30%
For tax return purposes, the company has available tax credit carryforwards of approximately $2,067 million, of which $1,169 million have an indefinite carryforward period, $184 million expire in 1999 and the remainder thereafter. The company also has state and local and foreign tax loss carryforwards, the tax effect of which is $516 million. Most of these carryforwards are available for 10 years or have an indefinite carryforward period. Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings amounted to $13,165 million at December 31, 1998, $12,511 million at December 31, 1997, and $12,111 million at December 31, 1996. These earnings, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.
expenses R Selling and advertising expense is charged against income as incurred. Advertising expense, which includes media, agency and promotional expenses, amounted to $1,681 million, $1,708 million and $1,569 million in 1998, 1997 and 1996, respectively. expenses S Research, development and engineering expense amounted to $5,046 million in 1998, $4,877 million in 1997 and $5,089 million in 1996. Expenditures for product-related engineering included in these amounts were $580 million, $570 million and $720 million in 1998, 1997 and 1996, respectively. Expenditures of $4,466 million in 1998, $4,307 million in 1997 and $4,369 million in 1996 were made for research and development activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses. Of these amounts, software-related activities were $2,086 million, $2,016 million and $2,161 million in 1998, 1997 and 1996, respectively. Included in the 1996 expenditures is $435 million of purchased in-process research and development expense relating to the Tivoli and Object Technology International, Inc. acquisitions. earningsPerShare T The following table sets forth the computation of basic and diluted earnings per share. For the year ended December 31: 1998 1997 1996 934502785 983286361 1056704188 25562450 27648581 23004716 960065235 1010934942 1079708904 6328 6093 5429 20 20 20 6308 6073 5409 6.75 6.18 5.12 6.57 6.01 5.01
Stock options to purchase 2,062,365 shares in 1998, 165,833 shares in 1997 and 784,141 shares in 1996 were outstanding, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares, and therefore, the effect would be antidilutive. In addition, 2,565,519 restricted stock units in 1998 relating to the company's Long-Term Performance Plan were not included in the computation of diluted earnings as their effect would be antidilutive. expenses U Rental expense, including amounts charged to inventories and fixed assets and excluding amounts previously reserved, was $1,431 million in 1998, $1,280 million in 1997 and $1,210 million in 1996. The table below depicts gross minimum rental commitments under noncancelable leases, amounts related to vacant space that the company has reserved and sublease income commitments. These amounts generally reflect activities related to office space and manufacturing equipment. (Dollars in millions) 1999 2000 2001 2002 2003 Beyond 2003 1398 1242 1085 877 623 1417 205 188 150 98 59 222 165 140 122 64 35 66
employeeCompensatoryPlans V The company applies Accounting Principles Board (APB) Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. A description of the terms of the company's stock-based compensation plans follows:
Incentive awards are provided to officers and other key employees under the terms of the IBM 1997 Long-Term Performance Plan, which was approved by stockholders in April 1997, and its predecessor plan, the 1994 Long-Term Performance Plan ("the Plans"). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors. The committee determines the type and terms of the awards to be granted, including vesting provisions. Awards may include stock options, stock appreciation rights, restricted stock, cash or stock awards, or any combination thereof. The number of shares that may be issued under the IBM 1997 Long-Term Performance Plan for awards is 50.3 million, which was 5 percent of the outstanding common stock on February 10, 1997. There were 34.3 million and 46.4 million unused shares available for granting under the IBM 1997 Long-Term Performance Plan as of December 31, 1998 and 1997, respectively, and approximately 2.0 and 9.0 million shares available for granting under the 1994 Long-Term Performance Plan at December 31, 1998 and 1997, respectively. These awards, which are expressed in terms of shares, are adjusted to fair value at the end of each period and the change in value is included in net income. Awards under the Plans resulted in compensation expense of $322.4 million, $214.1 million and $203.9 million in 1998, 1997 and 1996, respectively.
Stock options granted under the Plans allow the purchase of the company's common stock at 100 percent of the market price on the date of grant and generally expire 10 years from the date of grant. The following tables summarize option activity of the Plans during 1998, 1997 and 1996: 1998 1997 1996 Wtd. Avg. Exercise Price No. of Shares under Option Wtd. Avg. Exercise Price No. of Shares under Option Wtd. Avg. Exercise Price No. of Shares under Option 54 61728361 44 61435322 39 68565806 107 20587675 71 21471228 63 15359058 44 -14816738 42 -19630005 36 -19302622 71 -1,777,373 56 -1548184 61 -3186920 72 65721925 54 61728361 44 61435322 44 23095818 38 26619548 41 30603845
The shares under option at December 31, 1998, were in the following exercise price ranges: Options Outstanding Options Currently Exercisable Exercise Price Range No. of Options Exercise Price Wtd. Avg. Contractual Life (in years) Wtd. Avg. No. of Options Wtd. Avg. Exercise Price 16708124 32 5 15137952 32 26369118 68 7 7463820 66 20024496 103 9 491047 103 2620187 138 10 2999 112 65721925 72 23095818 44
The IBM Employees Stock Purchase Plan (ESPP) enables substantially all regular employees to purchase full or fractional shares of IBM common stock through payroll deductions of up to 10 percent of eligible compensation. The price an employee pays is 85 percent of the average market price on the last day of an applicable pay period. During 1998, 1997 and 1996, employees purchased 3,993,372, 4,676,980 and 6,461,856 shares, all of which were treasury shares, for which $415 million, $354 million and $324 million were paid to the company, respectively. There were approximately 31.5 million, 35.5 million and 40.2 million reserved unissued shares available for purchase under the ESPP, as previously approved by stockholders, at December 31, 1998, 1997 and 1996, respectively.
In applying APB Opinion No. 25, no expense was recognized for stock options granted under the Plan or for employee stock purchases under the ESPP. SFAS 123 requires that a fair market value of all awards of stock-based compensation be determined using standard techniques and that pro forma net income and earnings per share be disclosed as if the resulting stock-based compensation amounts were recorded in the Consolidated Statement of Earnings. The table below depicts the effects of SFAS 123. 1998 1997 1996 (Dollars in millions except per share amounts) As reported Pro forma As reported Pro forma As reported Pro forma 6308 5985 6073 5866 5409 5267 6.75 6.40 6.18 5.97 5.12 4.98 6.57 6.24 6.01 5.82 5.01 4.89
The pro forma amounts, for purposes of SFAS 123, reflect the portion of the estimated fair value of awards earned in 1998, 1997 and 1996. The aggregate fair value of awards granted is earned ratably over the vesting or service period and is greater than that included in the pro forma amounts. The company used the Black-Scholes model to value the stock options granted in 1998, 1997 and 1996. The weighted-average assumptions used to estimate the value of the options included in the pro forma amounts, and the weighted-average estimated fair value of an option granted are as follows: 1998 1997 1996 5/6 5/6 5/6 26.4% 23.0% 22.0% 5.1% 6.2% 6.0% 0.8% 1.0% 1.2% 36 25 20 * Option term is based on tax incentive options (5 years) and non-tax incentive options (6 years).** To determine volatility, the company measured the daily price changes of the stock over the most recent 5 and 6 year periods.
 pensionPlans W The company and its subsidiaries have defined benefit and defined contribution retirement plans covering substantially all regular employees, and a supplemental retirement plan that covers certain executives. The changes in the benefit obligations and plan assets of the U.S. and material non-U.S. defined benefit plans for 1998 and 1997 were as follows: U.S. Plan Non-U.S. Plans (Dollars in millions) 1998 1997* 1998 1997* 33161 29729 18846 19883 532 397 399 366 2261 2215 1213 1182 0 0 29 33 22 -2 0 129 0 14 2 0 2729 2805 1331 431 -2144 -1997 -683 -623 0 0 -254 -281 0 0 1155 -2186 0 0 10 -88 36561 33161 22048 18846 38475 34281 21841 21039 5240 6193 2400 3454 0 0 452 192 22 -2 0 129 0 0 29 33 -2144 -1997 -683 -623 0 0 1283 -2263 0 0 -28 -120 41593 38475 25294 21841 5032 5314 3246 2995 -1289 -1901 -2342 -2897 174 190 181 194 -771 -911 -78 -83 0 0 -87 -3 3146 2692 920 206 * Reclassified to conform to 1998 presentation.
U.S. regular, full-time and part-time employees are covered by a noncontributory plan that is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of employees. Under a new formula, which is being phased in over five years, retirement benefits will be determined based on points accumulated for each year worked and final average compensation period. To preserve benefits of employees close to retirement, service and earnings credit will continue to accrue under the prior formula through the year 2000, and upon retirement, these employees will receive the benefit from either the new or prior formulas, whichever is higher. Benefits become vested upon the completion of five years of service. The number of individuals receiving benefits at December 31, 1998 and 1997, was 116,685 and 108,415, respectively.
Most subsidiaries and branches outside the U.S. have retirement plans covering substantially all regular employees, under which funds are deposited under various fiduciary-type arrangements, annuities are purchased under group contracts or reserves are provided. Retirement benefits are based on years of service and the employee's compensation, generally during a fixed number of years immediately prior to retirement. The ranges of assumptions used for the non-U.S. plans reflect the different economic environments within various countries.
The company also has a non-qualified U.S. Supplemental Executive Retirement Plan (SERP). The SERP, which is unfunded, provides eligible executives defined pension benefits outside the IBM Retirement Plan, based on average earnings, years of service and age at retirement. At December 31, 1998 and 1997, the projected benefit obligation was $178 million and $128 million, respectively, and the amounts included in the Consolidated Statement of Financial Position were pension liabilities of $81 million and $56 million, respectively.
Weighted-average assumptions as of December 31: U.S. Plan Non-U.S. Plan 1998 1997 1996 1998 1997 1996 6.5% 7.0% 7.75% 4.5 - 7.5% 4.5 - 7.5% 4.5 - 8.5% 9.5% 9.5% 9.25% 6.5 - 10.0% 6.0 - 9.5% 6.5 - 10.0% 5.0% 5.0% 5.0% 2.7 - 6.1% 2.6 - 6.1% 2.3 - 6.5%
The cost of the defined benefit plans for 1998, 1997 and 1996 was as follows: U.S. Plan Non-U.S. Plan (Dollars in millions) 1998 1997* 1996* 1998 1997* 1996* 532 397 412 399 366 384 2261 2215 2125 1213 1182 1302 -3123 -2907 -2701 -1739 -1457 -1485 -124 -125 -121 21 15 27 0 0 0 10 -63 -102 -454 -420 -285 -96 43 126 -42 50 148 * Reclassified to conform to 1998 presentation
258 236 209 90 64 29 34 33 27 25 20 19
Net periodic pension cost is determined using the Projected Unit Credit actuarial method. The effects on the company's results of operations and financial position from changes in the estimates and assumptions used in computing pension and prepaid pension assets or pension liability is mitigated by the delayed recognition provisions of SFAS 87, with the exception of the effects of settlement gains, curtailment losses and early terminations, which are recognized immediately. The 0.5% decrease in the discount rate in 1998 resulted in an actuarial loss of $2,144 million for the U.S. plan. The 0.75% decrease in the discount rate in 1997 resulted in an actuarial loss of $2,723 million for the U.S. plan. It is the company's practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and with regard to local tax laws. Additional amounts are contributed from time to time when deemed appropriate by the company. Liabilities for amounts in excess of these funding levels are accrued and reported in the company's Consolidated Statement of Financial Position. The assets of the various plans include corporate equities, government securities, corporate debt securities and real estate. At December 31, 1998, the material non-U.S. defined benefit plans in which the plan assets exceeded the benefit obligation had obligations of $18,217 million and assets of $21,736 million. The material non-U.S. defined benefit plans in which the benefit obligation exceeded the fair value of plan assets had obligations of $3,831 million and assets of $3,558 million. At December 31, 1997, the material non-U.S. defined benefit plans in which the plan assets exceeded the benefit obligation had obligations of $18,322 million and assets of $21,391 million. The material non-U.S. defined benefit plans in which the benefit obligation exceeded the fair value of plan assets had obligations of $524 million and assets of $450 million.
postretirementBenefits X The company and its U.S. subsidiaries have defined benefit postretirement plans that provide medical, dental and life insurance for retirees and eligible dependents. Plan cost maximums for those who retired prior to January 1, 1992, will take effect beginning with the year 2001. Plan cost maximums for all other employees take effect upon retirement. The changes in the benefit obligation and plan assets of the U.S. plans for 1998 and 1997 are as follows: (Dollars in millions) 1998 1997 6,384 6,453 42 32 427 455 -26 -290 -146 -234 272 435 -486 -455 -10 -12 6457 6384 120 559 10 16 479 0 -486 -455 123 120 -6334 -6264 700 578 -965 -1073 -6599 -6759 * Reclassified to conform to 1998 presentation.
The benefit obligation was determined by application of the terms of medical, dental and life insurance plans, including the effects of established maximums on covered costs, together with relevant actuarial assumptions. These actuarial assumptions included a projected healthcare cost trend rate of 6 percent. The net periodic postretirement benefit cost for the U.S. plan for the years ended December 31 included the following components: (Dollars in millions) 1998 1997 1996 42 32 43 427 455 478 -5 -15 -68 -133 -119 -87 331 353 366
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: 6.5% 7.0% 7.75% 5.0% 5.0% 9.25%
The assets of the plan are comprised of short-term fixed income investments. Certain of the company's non-U.S. subsidiaries have similar plans for retirees. However, most of the retirees outside the United States are covered by government-sponsored and administered programs. The obligations and cost of these programs are not significant to the company. A one percentage-point change in the assumed healthcare cost trend rate would have the following effects as of December 31, 1998: (Dollars in millions) One Percentage Point Increase One Percentage Point Decrease 4 -6 87 -122
segmentInformation Y IBM is in the business of providing customer solutions through the use of advanced information technology. The company operates primarily in a single industry utilizing several segments that create value by offering a variety of solutions that include, either singularly or in some combination, technologies, systems, products, services, software and financing. Organizationally, the company's major operations consist of three hardware product segments--Technology, Personal Systems and Server; a Global Services segment; a Software segment; a Global Financing segment and a series of Enterprise Investments. The product segments are determined based on several factors including customer base, homogeneity of products, technology, delivery channels and other factors. The Technology segment produces peripheral equipment for use in general purpose computer systems including storage and networking devices, advanced function printers and display devices. In addition, the segment provides components such as semiconductors and hard disk drives for use in the company's products and for sale to original equipment manufacturers (OEM). Major business units include Storage Systems, Microelectronics, Printer Systems and Networking Hardware. The Personal Systems segment produces general purpose computer systems, including some system and consumer software, that operate applications for use by one user at a time (personal computer clients), or as servers, and display devices. Major brands include the Aptiva home PC's, IntelliStation workstations, Netfinity servers, PC 300 commercial desktop and ThinkPad mobile systems. Consumer software brands include Crayola, Edmark and World Book Multimedia Encyclopedia. These products are sold primarily through reseller and retail channels. The Server segment produces powerful multi-purpose computer systems that operate many open-network based applications and are used primarily by multiple users at the same time. They perform high-volume transaction processing and serve data to personal systems and other end-user devices. The servers are the engines behind the bulk of electronic business transactions, including e-commerce. Major brands include S/390, AS/400 and RS/6000. The segment's products are sold directly by the company and through business partner relationships. The Global Services segment is the world's largest and most versatile information technology services provider, supporting computer hardware and software products, and providing professional services to help customers of all sizes realize the full value of information technology (IT). The segment provides its customers with services that include business and IT consulting, business transformational services like an ERP solution, e-business services and full scope services like strategic outsourcing or Total Systems Management services. The Global Services segment is uniquely suited to integrate the full range of the company's capabilities, including hardware, software and research. The Software segment delivers operating systems for the company's servers and middleware for IBM and non-IBM platforms. Middleware includes application development, data management, networking, systems management, transaction processing, and messaging and collaboration. In addition to its own development, product and marketing effort, the segment supports more than 29,000 independent software vendors to ensure that the company's software and hardware offerings are included in those partners' solutions. The Global Financing segment provides and facilitates a broad array of financing services for the company, its customers and its business partners. The primary focus is to leverage its financial structuring, portfolio management and partnering skills to expand the company's customer and partner base. Enterprise Investments segment provides a spectrum of initiatives in information technology solutions, supporting the hardware, software and services segments of the company. The segment develops unique products designed to meet specific marketplace requirements and to complement the company's overall portfolio of products. Segment revenue and pre-tax income include transactions between the segments which are intended to reflect an arm's-length transfer at the best price available for comparable external customers. Specifically, semiconductors and disk drives are sourced internally from the Technology segment for use in the manufacture of the Server segment and Personal Systems segment products. Technology, hardware and software used by the Global Services segment in outsourcing engagements are sourced internally from the Technology, Server, Personal Systems and Software segments. For the internal use of information technology services, the Global Services segment recovers cost as well as a reasonable fee reflecting the arm's-length value of providing the services. The Global Services segment enters into arm's-length leases at prices equivalent to market rates with the Global Financing segment to facilitate the acquisition of equipment used in outsourcing engagements. All internal transaction prices are reviewed and reset annually if appropriate. The company extensively utilizes shared-staff concepts in order to realize economies of scale and efficient use of resources. As such, a significant amount of expense is shared by all of the company's segments. This expense represents sales coverage, marketing and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., Human Resources costs are allocated on headcount while account coverage expenses are allocated on a revenue mix that reflects the company's sales commission plan. When a clear and measurable driver cannot be identified, shared expenses are allocated based on a financial basis consistent with the company's management system, e.g., image advertising is allocated based on the gross profit of the segments. The unallocated corporate expenses primarily relate to expense arising from certain acquisitions, indirect infrastructure reductions and currency exchange gains and losses recorded in net income which are not allocated to the segments. The following tables reflect the results of the segments consistent with the company's management system. These results are not necessarily a depiction that is in conformity with generally accepted accounting principles, e.g., employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments on headcount. A different result could be arrived at for any segment if actuarial assumptions unique to each segment were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments. MANAGEMENT SYSTEM SEGMENT VIEW Hardware Segments (Dollars in millions) Technology Personal Systems Server Global Services Software Global Financing Enterprise Investments Total Segments 11890 12776 10624 28916 11863 2979 2468 81516 4578 29 445 2747 749 792 56 9396 16468 12805 11069 31663 12612 3771 2524 90912 955 -992 2842 3757 2588 1165 -616 9699 (4.4)% (10.8)% (6.0)% 13.5% 6.6% 5.8% 0.6% 2.0% (47.1)% (516.1)% (1.9)% 30.0% 27.2% 3.0% 32.3% 0.1% 5.8% (7.7)% 25.7% 11.9% 20.5% 30.9% (24.4)% 10.7% 11083 14337 11286 25166 11164 2935 2438 78409 6147 20 491 2737 671 628 70 10764 17,230 14,357 11,777 27,903 11,835 3,563 2,508 89,173 1806 -161 2896 2890 2034 1131 -910 9686 0.3% 3.3% (6.9)% 12.6% (1.5)% (3.3)% 5.0% 3.0% 17.7% (312.8)% (12.1)% 14.3% (17.5)% (10.2)% (17.4)% (5.7)% 10.5% (1.1)% 24.6% 10.4% 17.2% 31.7% (36.3)% 10.9% 10,244 13,876 12,230 22,310 11,426 3,224 2,294 75,604 6942 23 423 2460 593 462 95 10998 17186 13899 12653 24770 12019 3686 2389 86602 1535 -39 3293 2529 2466 1260 -775 10269 8.9% (0.3)% 26.0% 10.2% 20.5% 34.2% (32.4)% 11.9%
Reconciliations to IBM as Reported (Dollars in millions) 1998 1997 1996 90,912 89,173 86,602 151 99 343 -9396 -10764 -10998 81667 78508 75947 9699 9686 10269 -162 -377 -251 -497 -282 -996 0 0 -435 9040 9027 8587
No single customer represents 10% or more of the company's total revenue.
INVESTMENT IN EQUITY ALLIANCES AND EQUITY ALLIANCES GAINS/LOSSES The investments in equity alliances and the resulting gains and losses from these investments attributable to the segments are minimal and do not have a material impact on the financial results of the segments.
The assets of the hardware segments primarily include inventory and plant, property and equipment. The software segment assets mainly include inventory, plant, property and equipment, and investment in deferred software development. The Global Services segment assets primarily include maintenance inventory and plant, property and equipment associated with its strategic outsourcing business. Details regarding the Global Financing segment assets can be found on page 89. To accomplish the efficient use of space and equipment, it becomes necessary, in most instances, for several segments to share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and not allocated to each user segment. This is consistent with the company's management system and is reflected as such in the schedule on page 88. In such cases, there will not be a precise compatibility between segment pre-tax income and segment assets. Similarly, the depreciation amounts reported by segment are deployed on a landlord ownership basis and may not be consistent with the actual amounts included in the segments' pre-tax income. Such amounts included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures reported by segment are also in line with the landlord ownership basis of asset assignment. The Global Financing segment amounts on page 88 for interest income and interest expense reflect the interest income and expense associated with the financing business as well as the investment in cash and marketable securities. The remaining amounts of interest income and interest expense are not allocated discretely to the other segments, but are included as part of an indirect expense allocation.
MANAGEMENT SYSTEM SEGMENT VIEW Hardware Segments (Dollars in millions) Technology Personal Systems Server Global Services Software Global Financing Enterprise Investments Total Segments 11251 1464 2106 2236 2577 40109 363 60106 1207 121 178 322 681 2768 15 5292 2044 156 288 358 424 3438 19 6727 0 0 0 0 0 2725 0 2725 0 0 0 0 1252 0 1252 10060 1629 2191 1914 2642 35444 362 54242 1092 112 167 315 1132 2170 10 4998 2028 195 235 361 515 3615 16 6965 0 0 0 0 0 2639 0 2639 0 0 0 0 0 1175 0 1175 9435 2666 2322 2067 2813 31793 295 51391 1030 141 201 283 1496 1761 11 4923 1805 162 171 359 453 3086 11 6047 0 0 0 0 0 2752 0 2752 0 0 0 0 0 1166 0 1166
Reconciliations to IBM as Reported (Dollars in millions) 1998 1997 1996 60106 54242 51391 -7519 -6287 -5192 4295 6062 6601 7715 7441 7962 5376 4746 4683 7706 7564 7505 4836 3828 3323 3585 3903 4859 86100 81499 81132
In addition to the previous information for the company's business segments, the following information is provided to enhance the understanding of the Global Financing segment. This data summarizes the Global Financing segment's financial statements for 1998, 1997 and 1996, respectively. STATEMENT OF FINANCIAL POSITION(Dollars in millions) At December 31: 1998 1997 1996 1032 998 1433 14456 13831 13430 5798 4928 4030 8682 6951 6428 119 111 98 5663 5168 3988 4359 3457 2386 40109 35444 31793 8077 7969 7915 27754 23824 20627 35831 31793 28542 4278 3651 3251 40109 35444 31793
NET INCOME(Dollars in millions) For the year ended December 31: 1998 1997 1996 $1,165 $1,131 1,260 432 429 531 733 702 729 19.1% 20.3% 22.7%
CASH FLOWS(Dollars in millions) For the year ended December 31: 1998 1997 1996 4441 3919 5314 -7296 -8435 -5544 2856 4102 872 33 -21 -17 34 -435 625 998 1433 808 1032 998 1433
managementSystemSegments For the Personal Systems, Server, Software and Global Financing segments, the segment data on page 86 represents the revenue contributions from the products contained in the segments which are basically similar in nature. In the Technology and Global Services segments the table below provides external revenue for similar classes of products within those segments. OEM hardware consists primarily of revenue from the sale of HDD storage files and semiconductors. Storage consists of externally attached direct access storage devices and tape storage devices. Other technology consists primarily of advanced function printers and networking devices. managementSystemSegments Consolidated (Dollars in millions) 1998 1997 1996 6756 5560 4123 2439 2644 2716 2695 2879 3405 23730 19534 16218 5186 5632 6092
geographicSegmentsGeographic Information Revenue* Long-lived Assets** (Dollars in millions) 1998 1997 1996 1998 1997 1996 35303 32663 29395 18450 17802 16910 8567 9765 10181 4310 3635 3765 37797 36080 36371 12343 11621 11648 81667 78508 75947 35103 33058 32323 * Revenues are attributed to countries based on location of customer.** Includes all non-current assets except non-current financial instruments and deferred tax assets.
 Louis V. Gerstner Jr.
missionStatement AT IBM, we strive to lead in the creation, development, and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into value for our customers through our professional solutions and services bussinesses worldwide.