IBM 1998 Annual Report Download

Download and view the complete annual report

Please find the complete 1998 IBM annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

startup

Table of contents

  • Page 1
    startup

  • Page 2
    because you can.

  • Page 3
    ... a garage, or you work inside one of the most venerable enterprises on earth, the rise of a globally connected world offers a truly rare opportunity: the chance to start something totally new. This is what we believe at IBM . And it is the core idea we are taking to customers (and pursuing ourselves...

  • Page 4
    Louis V. Gerstner, Jr. Chairman a nd Chie f Ex e cutive O ffic er

  • Page 5
    ...Board of Directors approved the second IBM stock split in two years. There were good reasons for this growth in investor confidence in IBM. For the fourth straight year, we reported record revenue - $81.7 billion. Our earnings rose to $6.3 billion. We set a new record in earnings per share. Customer...

  • Page 6
    ... seats. In the pages of this Annual Report, you will read what we tell these customers about e-business and what it takes to succeed in the evolving networked world. We'll also tell you why we think IBM is uniquely qualified, structured, situated and ready not only to benefit from all this change...

  • Page 7
    ...income taxes Income taxes Net income Earnings per share of common stock - basic Earnings per share of common stock - assuming dilution Cash dividends paid on common stock Per share of common stock Investment in plant, rental machines and other property Average number of common shares outstanding (in...

  • Page 8
    ... important processes like supply chain management, customer service and support, and distribution. But the important point is that e-business is not simply a matter of adding another distribution channel or introducing some new efficiencies. It is driving customers to do business in a fundamentally...

  • Page 9
    ... a book or trade stock. Where is the transaction executed? Where is the data managed and stored? Where does the processing take place? A teeny part is handled by your PC. Most of the work is done behind the scenes, in the network, by bigger computer systems. Businesses deploying network applications...

  • Page 10
    ... software lines. Middleware products like Tivoli systems management, Lotus Notes and Domino, and DB2 Universal Database have been standout performers. The advent of non- PC devices is also benefiting our OEM (original equipment manufacturer) business, where we sell IBM components like chips and disk...

  • Page 11
    ... world's premier e-business - in everything from procurement, where Net-based purchasing should save IBM nearly a quarter of a billion dollars in 1999; to e-commerce, where our online sales in December reached $ 38 million a day; to using distance learning to improve IBMers' skills. As important as...

  • Page 12
    ...faculties, to the way physicians treat patients and enterprises of all kinds serve customers of all kinds. It's a powerful idea. And like all new ideas, you can ponder it and po ssibly miss so mething big. Or yo u can start experimenting, learn, and push it for all it's worth. You can be part of the...

  • Page 13
    Gary Briggs e -busine ss marke ting strate gist NT

  • Page 14
    ... global reach, find new customers, improve service, conceive and deliver new offerings. It fundamentally alters the economics of transactions. The cost of basic banking transactions drops from $ 1 to one cent on the Net. Companies that once spent $ 35 to process an expense form do it for less...

  • Page 15
    ... the value of the Net as it transforms the internal operations of organizations and redefines the important work of noncommercial institutions. (and for the information technology industry). Our industry is growing about 10 percent a year, and spending on e-business hardware, software and services...

  • Page 16
    ... Air Canada is seeing major reductions in distribution costs - its second largest expense. SAAB CARS USA Extranet connects 225 dealers and 20 service centers. Dealers and technicians go online to order parts, trace deliveries, check warranties and maintain service histories. Saab estimates this Web...

  • Page 17
    ...small business once sold industrial work boots off a truck in a few eastern U.S. states. Its Web site now lists 250 varieties of boots and fields orders from M alaysia, Pakistan, Thailand and offshore oil rigs. M .D. ANDERSON CANCER CENTER This secure Net-based disease management tool at this Texas...

  • Page 18
    Behind the scenes at the making of an IBM e-business TV commercial - among the most distinctive and recognizable advertising campaigns on television today, according to market research.

  • Page 19
    ...of view on what the Net is all about. And our ads do introduce a lot of customers to the idea of e-business. But that's just where the conversation starts. When customers decide to use the Net to transform time-honored ways of working, they have to ask and answer some very big questions. Where do we...

  • Page 20
    Suzanne O' Connell industry so lutio ns e x pe rt 2. LEA

  • Page 21
    ...ourselves fortunate to count Be one thousands of them among our customers. They're captains of industry - or plan to be soon. And they're worth watching. They'... search for entirely new models - new ways to build competitive advantage, sell, enter markets, learn, and win. They share one more trait....

  • Page 22
    ... in cost savings in 1998 with a Net-based application that tightened the partnership with its suppliers by inviting them to offer cost-saving ideas. The suppliers weighed in with more than 13,000 suggestions. In three out of four cases, Chrysler took action - and shared some of the savings with the...

  • Page 23
    ... co-chief executive officer, Charles Schwab Corporation Three years ago, Charles Schwab had no Web business at all. Today, more than 2 million investors trade $ 6.2 billion a week over the Net, making Schwab the world's leading online brokerage and one of the largest secure sites on the Internet...

  • Page 24
    " The old model of TEACHING built around the 'sage on the stage' has to be rethought - has been rethought - and I don't think there's any going back." Dr. Rafael Rangel, chancellor, M onterrey Institute of Technology 22

  • Page 25
    ...exico and seven field offices across Latin America, the M onterrey Institute of Technology knows the value of distance learning. M exico's largest private university uses a Collaborative Education System (based on Lotus LearningSpace software) to support 2,500 courses at 81 remote sites - and to put...

  • Page 26
    ...the site - and its secure ordering system - in hours. Since August, sales are up nearly 1,000 percent. " The RESPONSE is almost frightening. I thought it would die off after Christmas, but it just keeps coming. I shipped to Slovakia, and I don't even know where that is." Christopher Lynas, director...

  • Page 27
    ... of Hawaii, the Kuwahara family has grown and sold world-class tropical flowers since 1965. But when massive international growers started to squeeze its sales, Hawaiian Greenhouse turned first to mail order, and then to the Internet. Today, 10 percent of all new orders originate on the Net and...

  • Page 28
    ... plans, from supercomputers to ThinkPads, as well as our work in creating the core underlying technologies that power them. these new devices will account for 40 percent of all devices connected to the Net by 2002 . This will bring computing and the Net to millions of new users quickly. IBM...

  • Page 29
    Mark Anzani S/39 0 hardware de ve lo pe r

  • Page 30
    personal computing is being redefined... (From left to right) Aptiva: award-winning PC family delivers superior technology - new ways to conduct networked transactions. WorkPad: it adds IBM technology to the base 3Com product, enhancing PC-syncing and network functions. Smart Card: applications ...

  • Page 31
    ... will still be PCs - millions people very quickly. IBM will build some of these devices, but our presence will be most evident under the covers - in the leading-edge chips and disk drives (like those at the bottom of this page) that will power all these new personal computing devices. and millions...

  • Page 32
    ... wins at the U.S. National Weather Service and the San Diego Supercomputing Center. because enterprise computing is being rediscovered you stake a lot So critical e-business applications have to run on enterprise servers and equally burly software called " middleware." In combination, they make...

  • Page 33
    ... and easy to run (requiring little or no support staff). That's one reason 20 percent of new orders in the fourth quarter of 1998 were from new customers. We shipped AS/ 400s in record numbers last year, and delivered a 94 percent performance improvement. NETFINITY In 1998 - its first full year in...

  • Page 34
    ... a little embedded computing and networking capability. The second trend is at the other end of the wire, what we call Deep Computing. It's the union of ultrafast processors with advanced algorithms and software to create very powerful systems that can attack problems and challenges previously...

  • Page 35
    R Bernie Meyerson IBM Fe llo w and pio ne e r o f silico n ge rmanium

  • Page 36
    ... the most powerful computers. But now that's changing. A new capability began with Deep Blue, a chess-playing supercomputer that could consider 200 million possible moves per second, coupled with analytical software so sophisticated some said it began to mimic the workings of the human mind. Today...

  • Page 37
    Now, IBM researchers and art historian Jack Wasserman are using Deep Computing techniques to create a near- perfect replica - a digital one - based on analysis of nearly 2 billion bits of data. They hope their work will lead to new theories about M ichelangelo's concepts of proportion and dimension,...

  • Page 38
    ... ...people have a way to solve problems that aren't merely hard, or time-consuming, or expensive. They can apply massive amounts of computing power to address some of the previously intractable quandaries of humankind. PERHAPS EVEN M ORE PROFOUND than what Deep Computing lets us do, is what it...

  • Page 39
    ... look at it: the supercomputer known as "Blue Pacific" is 50 times faster than Deep Blue, the supercomputer that defeated chess grandmaster Garry Kasparov. trillion...David Nowak, Accelerated Strategic Computing Initiative Program Leader, Lawrence Livermore National Laboratory. Next up: development of...

  • Page 40
    a nd be c ome s i n vi si b l e networked transformation. What's next is an explosion - from a world of a million e-businesses, and a billion connected users to a trillion connected things - cars, clothes, household appliances, machine tools, each emitting a little information and all of them ...

  • Page 41
    ...e w ireless links from the car to the Net, combined with IBM voice technology to give drivers e-mail (voiceactivated), driving dire c t ions and updates on road conditions. Onboard sensors would alert drivers - and the nearest service center - if a problem were bre w ing. And imagine the benefits to...

  • Page 42
    .... 5. Fast The question they ask is:... the surprising answer they get ...problems, to create new capabilities for customers, quickly and cost-effectively. This requires skills, insight and knowledge - in other words, great people. This is the intensely human business of information technology services...

  • Page 43
    ARD Anthony Rizzi glo bal se rvice s pro fe ssio nal

  • Page 44
    ... customers will dedicate fully half their e- business investments to services that help them make their moves to the Net. Over the past year, IBM has introduced more than 30 new e- business services - from Web site hosting, to e- commerce, to offerings for employee training and knowledge management...

  • Page 45
    ... our services business find they've also tapped a direct pipeline to solutions development teams in 26 industries, as well as the re sources of IBM Research. Often, this can provide a competitive edge for our customers - and for IBM . M onsanto's decision to sign a longt e rm, strategic outsourcing...

  • Page 46
    Five years at IBM . Of course, IBM is no startup, and we had our initial public offering more than 8 0 years ago. But in many ways our story over the last five years testifies to the transformational nature of our times. creating shareholder value $169 $184.38 $.86 $.775 $.65 $100 $104.63 ...

  • Page 47
    ... pay programs. Variable Pay IBM employees share in the company's success than $600 million in goods and services over the Internet. By streamlining procurement processes and taking them to the Web, IBM will save $240 million this year. In 1998 , more than 14 million customer questions and problems...

  • Page 48
    ... as 6 months. '94 '95 '96 '97 '98 RESEARCH LABORATORIES Three new laboratories were opened in the past five years. NEARLY San Jose 1 - 3 LESS • • • Austin Yorktown (1995) Beijing • Zurich • Haifa • • Delhi • Tokyo (1997) (1995) Since 1993 , IBM 's internal information...

  • Page 49
    ...$51 $43 $38 '94 '95 '96 '97 '98 TIVOLI DISTRIBUTED SYSTEM S M ANAGEM ENT PERCENTAGE REVENUE GROW TH (19 9 6 -19 9 8 ) NUM BER OF OEM CUSTOM ER DESIGNS IN ASICs Since 19 9 4 , the number of customer designs in A SIC s ( Application-Specific Integrated Circuits) has grown at an annual rate of...

  • Page 50
    Jayashree Subrahmonia re se arche r and co mmunity vo lunte e r because we CAN Chieko Asakawa me mbe r o f the te am be hind Ho me Page Re ade r te chno lo gy fo r the blind 48

  • Page 51
    ... Way of America launched the KidSmart Early Learning Program, a project to install computer learning centers in more than 1,000 nonprofit preschool sites across the United States. At the heart of IBM's philanthropic activities are IBM people, who last year volunteered 4 million hours of service to...

  • Page 52
    ... 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 businesses worldwide. 50

  • Page 53
    ... O Stockholders' Equity Activity P Contingencies Q Taxes R Selling and Advertising S Research, Development and Engineering T Earnings Per Share of Common Stock U Rental Expense and Lease Commitments V Stock-Based Compensation Plans W Retirement Plans X Nonpension Postretirement Benefits Y Segment...

  • Page 54
    ...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. Chairman of the Board and Chief Executive Officer Douglas L. Maine Senior Vice...

  • Page 55
    REPORT OF INDEPENDENT ACCOUNTANTS International Business M achines Corporation and Subsidiary Companies To the Stockholders and Board of Directors of International Business M achines Corporation: In our opinion, the accompanying consolidated financial statements, appearing on pages 64 through 89, ...

  • Page 56
    ... on addressing customers' needs to build integrated e-business solutions through the use of the company's hardware, services, software and technology. In addition, the company plans to continue to invest judiciously, reduce infrastructure and optimize the deployment of the company's employees and...

  • Page 57
    ... 1996. The declines were primarily the result of the company's continued shift to global services in 1998 and 1997. The Global Services segment has a lower gross profit margin than the company's Server segment (S/390, AS/400 and RS/6000), which has been declining as a percentage of total revenue...

  • Page 58
    ... and planning; e-commerce services for Web selling, e-payments, e-procurement, security and privacy; e-business enablement services involving applications, information use and messaging; learning services such as distributed learning; and hosted business applications such as network-delivered...

  • Page 59
    ... 1997 from 1996. The company continued its focus on reducing infrastructure costs with particular emphasis on expenses not related to revenue, e.g., non-customer travel and contracted services, while reallocating its resources to allow for investment in growth segments of the business. These actions...

  • Page 60
    ... intellectual property rights to several subsidiaries and the related valuation allowance impacts. See note Q, "Taxes," on pages 77 and 78 for additional information. The company spent approximately $1.6 billion on share repurchases in the fourth quarter. The average number of shares outstanding...

  • Page 61
    ..., as prescribed by generally accepted accounting principles and reflected in the Consolidated Statement of Cash Flows on page 68, are summarized in the following table: (Dollars in millions) 1998 1997 1996 The company's investments for plant, rental machines and other property were $6.5 billion...

  • Page 62
    ... debt not related to the Global Financing segment. Stockholders' equity declined $0.4 billion to $19.4 billion at December 31, 1998. The company's ongoing stock repurchasing program (see note O, "Stockholders' Equity Activity," on pages 76 and 77) basically offset the $6.3 billion of net income for...

  • Page 63
    ... agreed to enter into outsourcing contracts with each other. The company will outsource a significant portion of its global networking needs to AT&T. AT&T will outsource certain applications processing and data center management operations to the company. About 5,000 IBM employees will join AT&T as...

  • Page 64
    ... assume management of AT&T data processing centers, which operate corporate information systems such as accounts payable and receivable and employee payroll and benefits. In January 1998, the company acquired Software Artistry, Inc., a leading provider of both consolidated service desk and customer...

  • Page 65
    ... of the company's customers varies, and the company continues actively to encourage its customers to prepare their own systems, making available a broad array of product, service and educational offerings to assist them (see the IBM Year 2000 Home Page at http://www.ibm.com/IBM /year2000/). Efforts...

  • Page 66
    ... Income before income taxes L Q Provision for income taxes Net income Preferred stock dividends Net income applicable to common shareholders Earnings per share of common stock - basic Earnings per share of common stock - assuming dilution Average number of common shares outstanding: 16,662 5,046...

  • Page 67
    ... leases receivable Other accounts receivable Inventories Prepaid expenses and other current assets Total current assets Plant, rental machines and other property Less: Accumulated depreciation Plant, rental machines and other property- net Software, less accumulated amortization (1998 -$12,516; 1997...

  • Page 68
    ... and retired (13,450 shares) (1) Common stock issued under employee plans (19,651,603 shares) Purchases (3,850,643 shares) and sales (5,105,754 shares) of treasury stock under employee plans- net Employee benefits trust (10,000,000 shares) Tax effect - stock transactions Stockholders' equity...

  • Page 69
    ... and retired (51,250 shares) (5) Common stock issued under employee plans (14,850,519 shares) Purchases (4,163,057 shares) and sales (4,124,866 shares) of treasury stock under employee plans- net Fair value adjustment of employee benefits trust Tax effect - stock transactions Stockholders' equity...

  • Page 70
    ... for plant, rental machines and other property Proceeds from disposition of plant, rental machines and other property Acquisition of Tivoli Systems, Inc. Investment in software Purchases of marketable securities and other investments Proceeds from marketable securities and other investments Net cash...

  • Page 71
    ... 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. SOFTWARE Revenue from one-time charge licensed software is recognized when the program is shipped, provided the company has...

  • Page 72
    ... and losses, net of applicable taxes, recorded in Accumulated gains and losses not affecting retained earnings within stockholders' equity. Realized gains and losses are calculated based on the specific identification method. Inventories Current service costs of retirement plans and postretirement...

  • Page 73
    ..., 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...

  • Page 74
    ...Subsidiary Companies C Subsequent Events Stock Split G Plant, Rental M achines and Other Property (Dollars in millions) 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...

  • Page 75
    ... program: 5.8% average Other: 6.5% average Other currencies (average interest rate at December 31, 1998, in parentheses): Japanese yen (3.1% ) Canadian dollars (5.7% ) German marks (4.9% ) Swiss francs (2.5% ) U.K. pounds (7.9% ) Other (11.9% ) Less: Net unamortized discount Less: Current maturities...

  • Page 76
    ... 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. IBM has guaranteed certain...

  • Page 77
    ... 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...

  • Page 78
    ... 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...

  • Page 79
    ... 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...

  • Page 80
    ... 1997 1996 At December 31: 1998 1997 Employee benefits Bad debt, inventory and warranty reserves Alternative minimum tax credits Capitalized research and development Restructuring charges Deferred income General business credits Equity alliances Foreign tax loss carryforwards State and local tax...

  • Page 81
    ... 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: Long-Term Performance Plan Incentive awards are provided to officers and other key employees under the terms of the IBM 1997 Long...

  • Page 82
    ... 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...

  • Page 83
    ... measured the daily price changes of the stock over the most recent 5 and 6 year periods. W Retirement Plans 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...

  • Page 84
    ...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...

  • Page 85
    ... 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...

  • Page 86
    ... 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...

  • Page 87
    ... 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...

  • Page 88
    ... Corporation and Subsidiary Companies M ANAGEM ENT SYSTEM SEGM ENT VIEW Hardware Segments (Dollars in millions) Technology Personal Systems Server Global Services Software Global Financing Enterprise Investments Total Segments 1998: External revenue Internal revenue Total revenue Pre-tax...

  • Page 89
    ... 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...

  • Page 90
    ... transactions (7,519) Unallocated amounts: Cash and marketable securities 4,295 Notes and accounts receivable 7,715 Deferred tax assets 5,376 Plant, other property and equipment 7,706 Pension assets 4,836 Other 3,585 Total IBM Consolidated $«86,100 $«54,242 (6,287) 6,062 7,441 4,746 7,564 3,828...

  • Page 91
    ... primarily of advanced function printers and networking devices. Consolidated (Dollars in millions) 1998 1997 1996 For the year ended December 31: 1998 1997 1996 Net income before income taxes Provision for income taxes Net income Return on equity Geographic Information $«««1,165 432...

  • Page 92
    ... the year: 1998 1997 1996 1995 1994 Revenue Net income Per share of common stock - basic Per share of common stock - assuming dilution Cash dividends paid on common stock Per share of common stock Investment in plant, rental machines and other property Return on stockholders' equity At end of...

  • Page 93
    ... New Orchard Road Armonk, New York 10504 (914) 499-1900 The IBM Annual Report is printed on recycled paper and is recyclable. *AIX, Aptiva, AS/400, DB2, Deep Blue, e-business, Home Director, Home Page Reader, IBM, IBM Global Network, IBM logo, IntelliStation, MQ Series, Netfinity, OS/2, OS/390, OS...

  • Page 94
    ...the Supervisory Board Royal Dutch Petroleum Company Charles M. Vest President Massachusetts Institute of Technology SENIOR M ANAGEM ENT CORPORATE HEADQUARTERS Louis V. Gerstner, Jr. Chairman of the Board and Chief Executive Officer J. Thomas Bouchard Senior Vice President Human Resources Nicholas...

  • Page 95
    ... shareholders of record can use the Net to vote their proxy. The easy-touse online voting application is available as part of the interactive IBM Annual Report at www.ibm.com/annualreport/1998, as well as our Investor Resources site, www.ibm.com/investor. You'll also find there our popular Guide to...

  • Page 96
    19 9 8 Annual Report