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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 2008

1-2360
(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)

NEW YORK
(State of Incorporation)
  13-0871985
(IRS Employer Identification Number)

ARMONK, NEW YORK
(Address of principal executive offices)

 

10504
(Zip Code)

914-499-1900
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
  Voting shares outstanding
at February 10, 2009
  Name of each exchange
on which registered

Capital stock, par value $.20 per share

 

1,341,677,786

 

New York Stock Exchange
        Chicago Stock Exchange

4.00% Notes due 2011

 

 

 

New York Stock Exchange
4.95% Notes due 2011       New York Stock Exchange
6.625% Notes due 2014       New York Stock Exchange
7.50% Debentures due 2013       New York Stock Exchange
8.375% Debentures due 2019       New York Stock Exchange
7.00% Debentures due 2025       New York Stock Exchange
6.22% Debentures due 2027       New York Stock Exchange
6.50% Debentures due 2028       New York Stock Exchange
7.00% Debentures due 2045       New York Stock Exchange
7.125% Debentures due 2096       New York Stock Exchange

         Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes  ý     No  o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ý   Accelerated filer  o   Non-Accelerated filer  o
Smaller reporting company  o       (Do not check if a smaller reporting company)

         Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  o     No  ý

         The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $160.6 billion.

Documents incorporated by reference:

         Portions of IBM's Annual Report to Stockholders for the year ended December 31, 2008 into Parts I, II and IV of Form 10-K.

         Portions of IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009 are incorporated by reference into Part III of Form 10-K.



PART I

Item 1. Business:

        International Business Machines Corporation (IBM or the company) was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. (C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating Machine Co. and The International Time Recording Co. of New York. Since that time, IBM has focused on the intersection of business insight and technological invention, and its operations and aims have been international in nature. This was signaled over 80 years ago, in 1924, when C-T-R changed its name to International Business Machines Corporation. And it continues today: The company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a client's operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.

STRATEGY

        In IBM's view, today's networked economy has created a global business landscape and a mandate for business change. It also opens the opportunity to upgrade the efficiency and effectiveness of the global infrastructure through embedded information technology—what IBM calls a "smarter planet." Smart airports, smart highways, smart supply chains are all possible. IBM is working with clients and governments around the world to explore these opportunities and implement new ideas.

        Integrated global economies have opened markets of new opportunity and new sources of skills. The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world. IBM continues to adjust its footprint toward emerging geographies, tapping their higher growth, providing the technology infrastructure they need and taking advantage of the talent pools they provide to better service the company's clients.

        At the same time, the current economic crisis increases the pressure on both businesses and governments around the world to adapt. The needs for additional transparency, security and efficiencies are clear.

        Given these opportunities and economic challenges, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape. IBM's strategy addresses this new era and delivers value to its clients through three strategic priorities:

Focus on Open Technologies and High-Value Solutions

        A new computing model has emerged, replacing the PC-based, client/server approach. This new model is networked, modular, open and represents a fundamental shift in the technology requirements of the company's clients. IBM is well positioned to provide its enterprise clients the open technologies and high-value solutions they will need to compete.

    IBM is leveraging its leadership position in the convergence of software and services, in service oriented architecture (SOA), in virtualization, business intelligence and analytics, in open and modular information technology (IT)—continuing its shift from commoditizing segments to higher value segments with better profit opportunity.

    The company continues to be a leading force in open source solutions to enable its clients to achieve higher levels of interoperability, cost efficiency and quality.

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Deliver Integration and Innovation to Clients

        Changes in the market have caused IBM's clients to seek flexibility and innovation in everything from technical architecture to their business model. In response, IBM is focused on delivering integration and innovation to its clients—offering them technologies and services that support real value creation.

    IBM has a long heritage of transforming the business operations of large enterprises and has earned the trust to be their innovation partner and global integrator.

    The company has an extensive set of global assets and capabilities it is applying to improve services profitability, both for its clients and for itself.

Become the Premier Globally Integrated Enterprise

        As global networks and technology capabilities change business economics, legacy business designs can quickly become noncompetitive. IBM believes a globally-integrated enterprise, designed for this new landscape, can compete effectively and will benefit from the opportunities offered.

    To reshape its business for the global economy, IBM has replaced vertical hierarchies with horizontally integrated teams.

    Across the business, the company has made significant investments in emerging markets, taking core processes and functions that were once managed regionally and shifting them to a globally integrated model.

        Looking forward, IBM is confident it understands the economic shift of globalization, the evolution of the new computing model and the powerful role of innovation in this new landscape. Its unique capabilities are well adapted to help the company's clients innovate and compete effectively in this new environment.

BUSINESS MODEL

        The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and IT solutions; and, providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients.

        The company's global capabilities include services, software, hardware, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients.

        The business model is flexible, adapting to the continuously changing market and economic environment. The company has divested commoditizing businesses like personal computers and hard disk drives, and strengthened its position through strategic investments and acquisitions in higher value segments like business intelligence and analytics, virtualization and green solutions. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.

        The business model, supported by the company's long-term financial model, has enabled the company to deliver consistently strong earnings, cash flows and returns on invested capital in changing economic environments.

BUSINESS SEGMENTS AND CAPABILITIES

        The company's major operations are comprised of: a Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment.

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Global Services is a critical component of the company's strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and hardware, other suppliers' products are also used if a client solution requires it. Within Global Services there are two reportable segments: Global Technology Services and Global Business Services.

Global Technology Services (GTS) primarily provides IT infrastructure services and business process services, delivering business value through the company's global scale, standardization and automation.

GTS Capabilities

         Strategic Outsourcing Services. Comprehensive IT services integrated with business insight working with clients to reduce costs and improve productivity through the outsourcing of processes and operations.

         Integrated Technology Services. Services offerings that help clients access, manage and support their technology infrastructures, through a combination of skilled resources, software and IBM's knowledge of business processes. The portfolio includes Service Product Lines which complement hardware from Systems and Technology and software offerings from the Software business.

         Business Transformation Outsourcing. A range of offerings from standardized processing platforms and Business Process Outsourcing through transformational offerings that deliver improved business results to clients through the strategic change and/or operation of the client's business processes, applications and infrastructure.

         Maintenance. A number of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructure.

Global Business Services (GBS) primarily provides professional services and application outsourcing services, delivering business value and innovation to clients through solutions which leverage industry-and business-process expertise.

GBS Capabilities

         Consulting and Systems Integration. Delivery of value to clients through consulting services for client relationship management, financial management, human-capital management, business strategy and change, and supply-chain management.

         Application Management Services. Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through the company's global resource capabilities, industry knowledge and the standardization and automation of application development.

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. IBM middleware is designed to open standards which allows the efficient integration of disparate client applications that may have been built internally, or provided by packaged software vendors or system integrators. Operating systems are the software engines that run computers. Approximately two-thirds of external software segment revenue is annuity-based, coming from recurring license charges and ongoing subscription and support from one-time charge (OTC) arrangements. The remaining one-third of external revenue relates to OTC arrangements, in which the client pays one up-front payment for a perpetual license. Typically, arrangements for the sale of OTC software include one year of maintenance. The client can also purchase ongoing maintenance after the first year, which includes product upgrades and technical support.

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Software Capabilities

         WebSphere Software. Management of a wide variety of business processes using open standards to interconnect applications, data and operating systems. Provides the foundation for Web-enabled applications and is a key product set in deploying a SOA.

         Information Management Software. Advanced database, content management, information integration and business intelligence software that helps companies integrate, manage and gain value from their business information.

         Tivoli Software. Software for infrastructure management, including security and storage management that will help organizations better manage their IT infrastructure to more effectively deliver IT services.

         Lotus Software. Collaboration, messaging and social networking software that enables businesses to communicate, collaborate and increase productivity.

         Rational Software. Software tools that help clients manage their software development processes and capabilities. With the acquisition of Telelogic in 2008, Rational software supports software development for both IT solutions and embedded system solutions.

         Operating Systems. Software that manages the fundamental processes that make computers run.

Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. Approximately 55 percent of Systems and Technology's server and storage sales transactions are through the company's business partners; approximately 45 percent are direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology and products, packaging solutions and engineering technology services to clients and for IBM's own advanced technology needs.

Systems and Technology Capabilities

         Servers. IBM systems, which are typically connected to a network and provide the required infrastructure for business. These systems use both IBM and non-IBM operating systems, and all IBM servers can also run Linux, a key open source operating system. (System z, legacy System i, converged System p and System x).

         Storage. Information infrastructure products and solutions, which address critical client requirements for information retention and archiving, availability and virtualization, and security and compliance. The portfolio consists of a broad range of disk and tape storage systems and software.

         Microelectronics. Semiconductor design and manufacturing primarily for use in IBM systems and for sale to external clients (OEM).

         Retail Store Solutions. Point-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.

Global Financing is described on pages 53 through 57 in IBM's 2008 Annual Report to Stockholders.

Global Financing Capabilities

         Client Financing. Lease and loan financing to end user and internal clients for terms generally between two and seven years.

         Commercial Financing. Short-term inventory and accounts receivable financing to dealers and remarketers of IT products.

         Remarketing. The sale and lease of used equipment (primarily sourced from the conclusion of lease transactions) to new or existing clients.

IBM WORLDWIDE ORGANIZATIONS

        The following worldwide organizations play key roles in IBM's delivery of value to its clients:

    Sales and Distribution

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    Research, Development and Intellectual Property

    Integrated Supply Chain

    Integrated Technology Delivery

    Business Process Delivery

Sales and Distribution

        IBM has a significant global presence, operating in over 170 countries, with an increasingly broad-based geographic distribution of revenue. The company's Sales and Distribution organization manages a strong global footprint, with dedicated country based operating units focused on delivering client value. Within these units, client relationship professionals work with integrated teams of consultants, product specialists and delivery fulfillment teams to improve clients' business performance. These teams deliver value by understanding the clients' business and needs, and then bring together capabilities from across IBM and an extensive network of Business Partners to develop and implement solutions.

        By combining global expertise with local experience, IBM's geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry-skilled resources to serve clients' agendas. IBM extends capabilities to mid-market client segments by leveraging industry skills with marketing, ibm.com and local Business Partner resources.

        In 2008, the company implemented a new growth markets organization to increase its focus on the emerging markets of Brazil, Russia, India and China and the additional opportunities around the world that have market growth rates greater than the global average—countries within Southeast Asia, Eastern Europe, the Middle East and Latin America. The company's major markets include the United States, Canada, the U.K., France, Germany, Italy, Japan, Denmark, Sweden, Switzerland, Austria, Belgium, Finland, Greece, Ireland, the Netherlands, Portugal, Cyprus, Norway, Israel, Spain, the Bahamas and the Caribbean region.

        The majority of IBM's revenue, excluding the company's original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors:

    Financial Services: Banking, Financial Markets, Insurance

    Public: Education, Government, Healthcare, Life Sciences

    Industrial: Aerospace and Defense, Automotive, Chemical and Petroleum, Electronics

    Distribution: Consumer Products, Retail, Travel and Transportation

    Communications: Telecommunications, Media and Entertainment, Energy and Utilities

    Small and Medium Business: Mainly companies with less than 1,000 employees

Research, Development and Intellectual Property

        IBM's research and development (R&D) operations differentiate the company from its competitors. IBM annually spends approximately $6 billion for R&D, focusing its investments on high-growth, high-value opportunities. As a result of innovations in these and other areas, IBM was once again awarded more U.S. patents in 2008 than any other company, the first company to achieve over 4,000 patents in a year. The company will continue to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership and promote innovation.

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        In addition to producing world-class hardware and software products, IBM innovations are also a major differentiator in providing solutions for the company's clients through its services businesses. The company's investments in R&D also result in intellectual property (IP) income of approximately $1 billion annually. Some of IBM's technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in either/both IBM products and/or the products of the licensee. While the company's various proprietary intellectual property rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. Licenses under patents owned by IBM have been and are being granted to others under reasonable terms and conditions.

Integrated Supply Chain

        Consistent with the company's work with clients to transform their supply chains for greater efficiency and responsiveness to global market conditions, the company continues to derive business value from its own globally integrated supply chain, which provides a strategic advantage for the company to create value for clients. IBM leverages its supply chain expertise for clients through its supply-chain business transformation outsourcing service to optimize and help operate clients' end-to-end supply-chain processes, from procurement to logistics.

        IBM spends approximately $38 billion annually through its supply chain, procuring materials and services globally. The supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time, improved response to marketplace opportunities and external risks and converted fixed costs to variable costs. Simplifying and streamlining internal processes has improved operations, sales force productivity and processes, and these actions have improved client satisfaction.

Integrated Technology Delivery

        Integrated Technology Delivery (ITD) combines all of the worldwide service delivery capabilities for Strategic Outsourcing with strong local and regional management teams supported by a set of global competencies. ITD leverages the company's global scale and advanced technology to deliver standardized solutions that are automated, repeatable and globally integrated. Clients gain cost advantages, access to industry-leading skills and IBM's scale and overall flexibility. ITD manages the world's largest privately-owned IT infrastructure with employees in over 40 countries supporting over 450 data centers.

Business Process Delivery

        Business Process Delivery (BPD) provides highly efficient, world-class delivery capabilities in IBM's business process delivery operations, which include Business Transformation Outsourcing, Business Process Outsourcing and Business Process Services. BPD has employees and delivery centers in over 40 countries worldwide.

COMPETITION

        The company is a globally-integrated enterprise, doing business in over 170 countries. The company participates in the highly competitive information technology (IT) industry, where its competitors vary by industry segment, and range from large multinational enterprises to smaller, more narrowly focused entities. Overall, across its business segments, the company recognizes hundreds of competitors worldwide.

        The markets for each of the company's business segments is characterized by aggressive competition among all types of competitors. Across its business, the company's principal methods of

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competition are: technology innovation; performance; price; quality; brand; its broad range of capabilities, products and services; client relationships; the ability to deliver business value to clients; and, service and support. In order to maintain leadership in the IT industry, a corporation must continue to invest, innovate and integrate. Over the past several years, the company has been executing a strategy to transform its business, including shifting to higher value market segments and offerings and increasing its capabilities through internal investments and strategic acquisitions. Overall, the company is the leader or among the leaders in each of its business segments.

        A summary of the competitive environment for each business segment is included below:

Global Services:

        The company's services segments, GTS and GBS, operate in a highly competitive and continually evolving global market. GTS competes in strategic outsourcing, business transformation outsourcing, integrated technology services and IT support services. GBS competes in consulting, system integration and application management services. The principal competitive factors in these business segments include: technical skills and capabilities, innovative service and product offerings, the ability to add value and the time-to-value, price, client relationships, quality of sales and delivery, reliability, security and the availability of resources. The company's competitive advantages in the services business include its global reach and scale, best-of-breed process and industry skills, extensive technology expertise and infrastructure management, an ability to deliver integrated solutions that can address clients' needs in any environment and a strong set of relationships with clients and strategic business partners worldwide. GTS competes with a variety of competitors worldwide across its principal market segments: the global, broad based competitors are Hewlett-Packard Company (HP), Accenture and Computer Sciences Corporation. Indian service providers, including Satyam Computer Services Ltd. and Wipro Technologies (Wipro), are moving to offer managed infrastructure services, targeting similar customer segments to GTS. The principal competitors for GBS are Accenture, Infosys Consulting and Wipro.

Software:

        The enterprise management software market is highly competitive and the key competitive factors in this segment include: functionality, ease of use, scalability, compliance with open standards and total cost of ownership. The company's leadership in these areas provides it with competitive advantages. The company's software business includes middleware, operating systems and related software provided to all industry segments worldwide. The middleware portfolio is the broadest in the industry and it also covers both mainframe and distributed computing environments. The depth and breadth of the company's software offerings, coupled with its global sales and technical support infrastructure differentiate the company's software business from its competitors. In addition, the company's research and development capabilities and intellectual property patent portfolio contribute to this segment's leadership. The company's principal competitors in this segment include Oracle Corporation, Microsoft Corporation, EMC and CA, Inc. In addition, the company competes with smaller, niche competitors in specific geographic or product markets worldwide.

Systems and Technology:

        The enterprise server and storage market is highly competitive and is characterized by ongoing technology innovation, with competition focused on value, function and reliability, and new entrants leveraging technology to compete against traditional offerings. The company's principal competitors include HP, Dell, Inc. (Dell), Sun Microsystems and EMC Corporation. The company's leadership in virtualization, power management, security, multi-operating system capabilities and the ability of its systems platforms to leverage the entire system, from the company's custom semiconductors through the software stack to increase efficiency and lower cost, provide the company with competitive

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advantages in this segment. In addition, the company's research and development capabilities and intellectual property patent portfolio contribute significantly to this segment's leadership.

Global Financing:

        The company's Global Financing business provides client financing, commercial financing and participates in the remarketing of used equipment. In 2008, the global financial credit crisis impacted both the client and commercial financing markets. The supply of credit diminished and financial institutions faced increases in loan losses, higher borrowing costs and liquidity challenges. Global Financing's access to capital and its ability to manage increased exposures provide a competitive advantage for the company. The key competitive factors include price, client service, contract flexibility, ease of doing business and residual values. In client and commercial financing, Global Financing competes with three types of companies: other captive financing companies such as HP and Dell, non-captive companies such as General Electric Company and CIT Group, Inc. and banks or financial institutions. In the remarketing segment, the company competes with local and regional brokers plus original manufacturers the fragmented worldwide used IT equipment market.

Forward-looking and Cautionary Statements

        Certain statements contained in this Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). The company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, the company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. The company assumes no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, set forth under Item 1A. "Risk Factors" on pages 10 through 13 are cautionary statements that accompany those forward-looking statements. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in the company's filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

        The following information is included in IBM's 2008 Annual Report to Stockholders and is incorporated herein by reference:

        Segment information and revenue by classes of similar products or services—pages 116 to 119.

        Financial information by geographic areas—page 119.

        Amount spent during each of the last three years on R&D activities—page 101.

        Financial information regarding environmental activities—pages 94 and 95.

        The number of persons employed by the registrant—pages 52 and 53.

        The management discussion overview—pages 19 and 20.

        Available information—page 125.

Also refer to Item 1A. entitled "Risk Factors" in Part I of this Form.

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Executive Officers of the Registrant (at February 24, 2009):

 
  Age   Officer since  

Chairman of the Board, President and Chief Executive Officer:

             

Samuel J. Palmisano(1)

    57     1997  

Senior Vice Presidents:

             

Rodney C. Adkins, Development and Manufacturing, Systems and Technology Group

    50     2007  

Michael E. Daniels, Global Technology Services

    54     2005  

Jon C. Iwata, Marketing and Communications

    46     2002  

John E. Kelly, III, Research and Intellectual Property

    55     2000  

R. Franklin Kern, Global Business Services

    55     2008  

Mark Loughridge, Chief Financial Officer

    55     1998  

J. Randall MacDonald, Human Resources

    60     2000  

Steven A. Mills, Software Group

    57     2000  

Robert W. Moffat, Jr., Systems and Technology Group

    52     2002  

Virginia M. Rometty, Global Sales and Distribution

    51     2005  

Linda S. Sanford, Enterprise On Demand Transformation

    56     2000  

Timothy S. Shaughnessy, Services Delivery

    51     2004  

Robert C. Weber, Legal and Regulatory Affairs, and General Counsel

    58     2006  

Vice President:

             

James J. Kavanaugh, Controller

    42     2008  

(1)
Member of the Board of Directors.

        All executive officers are elected by the Board of Directors and serve until the next election of officers in conjunction with the annual meeting of the stockholders as provided in the By-laws. Each executive officer named above, with the exception of Robert C. Weber, has been an executive of IBM or its subsidiaries during the past five years.

        Mr. Weber was a partner at Jones Day, an international law firm, until joining IBM in 2006. He was with Jones Day for almost 30 years, and his career included counseling corporations, individuals and boards of directors, as well as extensive experience in corporate derivative litigation, federal and state enforcement actions and commercial litigation.

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Item 1A. Risk Factors:

         Downturn in Economic Environment and Corporate IT Spending Budgets could impact the Company's Business: If overall demand for systems, software and services decreases, whether due to general economic conditions or a shift in corporate buying patterns, the company's revenue and profit could be impacted.

         The Company may not meet its Growth and Productivity Objectives under its Internal Business Transformation and Global Integration Initiatives: On an ongoing basis, IBM seeks to drive greater productivity, flexibility and cost savings by transforming and globally integrating its own business processes and functions to remain competitive and to enable scaling of resources in both emerging and more established geographical markets. These efforts may not yield their intended gains in overall efficiency and enablement of rapid scaling, which may impact the company's ability to meet its growth and productivity objectives.

         Failure of Innovation Initiatives could impact the Long-Term Success of the Company: IBM has been moving away from commoditized categories of the IT industry and into areas in which it can differentiate itself through innovation and by leveraging its investments in R&D. If IBM is unable to continue its cutting-edge innovation in the highly competitive IT industry, the company could fail in its ongoing efforts to maintain and increase its market share and its profit margins. In addition, IBM has one of the strongest brand names in the world, and its brand and overall reputation could be negatively impacted by many factors, including if the company does not continue to be recognized for its industry-leading technology and solutions. If the company's brand image is tarnished by negative perceptions, our ability to attract and retain customers could be impacted.

         Risks from Investing in Growth Opportunities could impact the Company's Business: The company continues to invest significantly in growth opportunities, including higher-value segments of enterprise computing and dozens of emerging countries, including Brazil, Russia, India and China, to drive revenue growth and market share gains. Client adoption rates and viable economic models are uncertain in the high-value and rapidly-growing segments. In addition, as the company expands to capture emerging growth opportunities, it needs to rapidly secure the appropriate mix of trained, skilled and experienced personnel. In emerging growth countries, the developing nature presents potential political, social and economic risks from inadequate infrastructure, creditworthiness of customers and business partners, labor disruption and corruption, which could impact the company's ability to meet its growth objectives and to deliver to its clients around the world.

         IBM's Intellectual Property Portfolio may not prevent Competitive Offerings, and IBM may not be able to Obtain Necessary Licenses: The company's patents and other intellectual property may not prevent competitors from independently developing products and services similar to or duplicative to the company's, nor can there be any assurance that the resources invested by the company to protect its intellectual property will be sufficient or that the company's intellectual property portfolio will adequately deter misappropriation or improper use of the company's technology. In addition, the company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Also, there can be no assurances that IBM will be able to obtain from third parties the licenses it needs in the future.

         Breaches of Data Protection could impact the Company's Business: The company's products and services, as well as its internal systems and processes, involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers and others. Breaches in security could expose the company, its customers or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for the company, as well as the loss of existing or potential customers and damage to the company's brand and reputation. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

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         The Company's Revenues for Particular Periods are Difficult to Predict: IBM's revenues are affected by such factors as the introduction of new products and services, the length of the sales cycles, the structure of products and services contracts and the seasonality of technology purchases. As a result, the company's results are difficult to predict. These factors historically have resulted in lower revenue in the first quarter than in the immediately preceding fourth quarter. In addition, the high volume of products ordered at the end of each quarter, especially at the end of the fourth quarter, may affect IBM's ability to successfully ship all orders before the end of the quarter.

         Due to the Company's Global Presence, its Business and Operations could be impacted by Local Legal, Economic, Political and Health Conditions: The company is a globally integrated entity, operating in over 170 countries worldwide and deriving more than sixty percent of its revenues from sales outside the United States. Changes in the laws or policies of the countries in which the company operates, or inadequate enforcement of such laws or policies, could affect the company's business in that country and the company's overall results of operations. The company's results of operations also could be affected by economic and political changes in those countries and by macroeconomic changes, including recessions, inflation and currency fluctuations between the U.S. dollar and local currency. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue, or any terrorist activities, could adversely affect customer demand and the company's operations and its ability to source and deliver products and services to its customers.

         The Company could incur Substantial Costs for Environmental Matters: The company is subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment or otherwise related to environmental protection, including the U.S. Superfund law. The company could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if it were to violate or become liable under environmental laws and regulations. Compliance with environmental laws and regulations is not expected to have a material adverse effect on the company's financial position, results of operations and competitive position.

         Tax Matters could impact the Company's Results of Operations and Financial Condition: The company is subject to income taxes in both the United States and numerous foreign jurisdictions. IBM's provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact the company's results of operations and financial condition in future periods. In addition, IBM is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other tax authorities. The company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on the company's provision for income taxes and cash tax liability.

         The Company's Results of Operations and Financial Condition could be negatively impacted by its U.S. and non-U.S. Pension Plans: Adverse equity market conditions and volatility in the credit markets may have an unfavorable impact on the value of the company's pension trust assets and its future estimated pension liabilities. As a result, the company's financial results in any period could be negatively impacted. In addition, in a period of an extended financial market downturn, the company could be required to provide incremental pension plan funding with resulting liquidity risk which could negatively impact the company's financial flexibility. IBM's 2008 Annual Report to Stockholders includes information about potential impacts from pension funding and the use of certain assumptions regarding pension matters.

11


         Ineffective Internal Controls could impact the Company's Business and Operating Results: The company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the company experiences difficulties in their implementation, the company's business and operating results could be harmed and the company could fail to meet its financial reporting obligations.

         The Company's Use of Accounting Estimates involves Judgment and could impact the Company's Financial Results: The company's most critical accounting estimates are described in the Management Discussion in IBM's 2008 Annual Report to Stockholders, under "Critical Accounting Estimates." In addition, as discussed in note O, "Contingencies and Commitments" in IBM's 2008 Annual Report to Stockholders, the company makes certain estimates under the provisions of SFAS No. 5, "Accounting for Contingencies," including decisions related to legal proceedings and reserves. Because by definition these estimates and assumptions involve the use of judgment, actual financial results may differ.

         Competitive Conditions: The company operates in businesses that are subject to intense competitive pressures (see discussion about competition in Item 1. Business above).

         The Company Depends on Skilled Personnel and could be impacted by the loss of Critical Skills: Much of the future success of the company depends on the continued service, availability and integrity of skilled personnel, including technical, marketing and staff resources. Experienced personnel in the information technology industry are in high demand, and competition for their talents is intense. Changing demographics and labor work force trends may result in a loss of knowledge and skills as experienced workers retire. Further, many of IBM's key personnel receive a total compensation package that includes equity awards. New regulations, volatility in the stock market and other factors could diminish the company's use, and the value, of the company's equity awards, putting the company at a competitive disadvantage or forcing the company to use more cash compensation.

         The Company's Business could be impacted by its Relationships with Critical Suppliers: IBM's business employs a wide variety of components, supplies, services and raw materials from a substantial number of suppliers around the world. Certain of the company's businesses rely on single or a limited number of suppliers. Changes in the financial or business condition of these suppliers could subject the company to losses and affect its ability to bring products to market. Further, the failure of the company's suppliers to deliver components, supplies, services and raw materials in sufficient quantities and in a timely manner could adversely affect the company's business. In addition, any defective components, supplies or materials, or inadequate services, received from suppliers could reduce the reliability of the company's products and services and harm the company's reputation.

         The Company is exposed to Currency and Customer Financing Risks that could impact its Revenue and Business: The company derives a significant percentage of its revenues from its affiliates operating in local currency environments, and those results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Further, inherent in the company's customer financing business are risks related to the concentration of credit, client creditworthiness, interest rate and currency fluctuations on the associated debt and liabilities, the determination of residual values and the financing of other than traditional IT assets. The company employs a number of strategies to manage these risks, including the use of derivative financial instruments; derivatives involve the risk of non-performance by the counterparty. In addition, there can be no assurance that the company's efforts to manage its currency and customer financing risks will be successful.

         The Company's Financial Performance could be impacted by Changes in Market Liquidity Conditions and by Customer Credit Risk on Receivables: The company's financial performance is exposed to a wide

12



variety of industry sector dynamics worldwide. The company's earnings and cash flows, as well as its access to funding, could be negatively impacted by changes in market liquidity conditions. IBM's 2008 Annual Report to Stockholders includes information about the company's liquidity position. The company's client base includes many worldwide enterprises, from small and medium businesses to the world's largest organizations and governments, with a significant portion of the company's revenue coming from global clients across many sectors. Most of the company's sales are on an open credit basis and the company performs ongoing credit evaluations of its clients' financial conditions. If the company becomes aware of information related to the credit worthiness of a major customer, or, if future actual default rates on receivables in general differ from those currently anticipated, the company may have to adjust its reserves for uncollectible receivables, which could affect the company's consolidated net income in the period the adjustments are made.

         The Company's Reliance on Third Party Distribution Channels could impact its Business: The company offers its products directly and through a variety of third party distributors and resellers. Changes in the financial or business condition of these distributors and resellers could subject the company to losses and affect its ability to bring its products to market.

         Risks to the Company from Acquisitions and Alliances include Integration Challenges, Failure to Achieve Objectives, and the Assumption of Liabilities: The company has made and expects to continue to make acquisitions or enter into alliances from time to time. Acquisitions and alliances present significant challenges and risks relating to the integration of the business into the company, and there can be no assurances that the company will manage acquisitions and alliances successfully. The related risks include the company failing to achieve strategic objectives and anticipated revenue improvements and cost savings, as well as the failure to retain key personnel of the acquired business and the assumption of liabilities related to litigation or other legal proceedings involving the acquired business.

         Risk Factors Related to IBM Securities: The company and its subsidiaries issue debt securities in the worldwide capital markets from time to time, with a variety of different maturities and in different currencies. The value of the company's debt securities fluctuates based on many factors, including the methods employed for calculating principal and interest, the maturity of the securities, the aggregate principal amount of securities outstanding, the redemption features for the securities, the level, direction and volatility of interest rates, changes in exchange rates, exchange controls, governmental and stock exchange regulations and other factors over which the company has little or no control. The company's ability to pay interest and repay the principal for its debt securities is dependent upon its ability to manage its business operations, as well as the other risks described under this Item 1A. entitled "Risk Factors." There can be no assurance that the company will be able to manage any of these risks successfully.

        The company also issues its common stock from time to time in connection with various compensation plans, contributions to its pension plan and certain acquisitions. The market price of IBM common stock is subject to significant volatility, due to other factors described under this Item 1A. entitled "Risk Factors," as well as economic and geopolitical conditions generally, trading volumes, speculation by the press or investment community about the company's financial condition, and other factors, many of which are beyond the company's control. Since the market price of IBM's common stock fluctuates significantly, stockholders may not be able to sell the company's stock at attractive prices.

        In addition, changes by any rating agency to the company's outlook or credit ratings can negatively impact the value and liquidity of both the company's debt and equity securities. The company does not make a market in either its debt or equity securities and cannot provide any assurances with respect to the liquidity or value of such securities.

13



Item 1B. Unresolved Staff Comments:

        Not applicable.


Item 2. Properties:

        At December 31, 2008, IBM's manufacturing and development facilities in the United States had aggregate floor space of 19 million square feet, of which 15 million was owned and 4 million was leased. Of these amounts, 2 million square feet was vacant and 1 million square feet was being leased to non-IBM businesses. Similar facilities in 8 other countries totaled 6 million square feet, of which 2 million was owned and 4 million was leased. Of these amounts, 1 million square feet was being leased to non-IBM businesses.

        Although improved production techniques, productivity gains and infrastructure reduction actions have resulted in reduced manufacturing floor space, continuous maintenance and upgrading of facilities is essential to maintain technological leadership, improve productivity and meet customer demand.


Item 3. Legal Proceedings:

        Refer to note O, "Contingencies and Commitments" on pages 97 to 99 of IBM's 2008 Annual Report to Stockholders, which is incorporated herein by reference.


Item 4. Submission of Matters to a Vote of Security Holders:

        Not applicable.


PART II


Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:

        Refer to pages 121 and 125 of IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference solely as they relate to this item.

        IBM common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange. There were 561,442 common stockholders of record at February 10, 2009.

        The following table provides information relating to the company's repurchase of common stock for the fourth quarter of 2008.

 
  Total Number
of Shares
Purchased
  Average
Price Paid
per Share
  Total Number
of Shares Purchased
as Part of Publicly
Announced Program
  Approximate
Dollar Value
of Shares that
May Yet Be
Purchased Under
the Program(1)
 

October 1, 2008—
October 31, 2008

    6,297,500   $ 95.95     6,297,500   $ 5,646,743,392  

November 1, 2008—
November 30, 2008

              $ 5,646,743,392  

December 1, 2008—
December 31, 2008

              $ 5,646,743,392  
                     

Total

    6,297,500   $ 95.95     6,297,500        
                     

(1)
On February 26, 2008, the Board of Directors authorized $15.0 billion in funds for use in the company's common stock repurchase program; the company stated that it would repurchase shares on the open market

14


    or in private transactions depending on market conditions, and that it expects to use cash from operations for the repurchases. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.


Item 6. Selected Financial Data:

        Refer to pages 120 and 121 of IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference.


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:

        Refer to pages 18 through 57 of IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference.

        In addition to the information in the Management Discussion on page 19 of IBM's 2008 Annual Report, 2008 gross profit increased 9 percent (9 percent adjusted for currency) in growth markets and increased 11 percent (7 percent adjusted for currency) in major markets versus 2007.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk:

        Refer to the section titled "Market Risk" on pages 51 and 52 of IBM's 2008 Annual Report to Stockholders, which is incorporated herein by reference.


Item 8. Financial Statements and Supplementary Data:

        Refer to pages 60 through 119 of IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference. Also refer to the Financial Statement Schedule on page S-1 of this Form 10-K.


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

        Not applicable.


Item 9A. Controls and Procedures:

        The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report.

        Refer to "Report of Management" and "Report of Independent Registered Public Accounting Firm" on pages 58 and 59 of IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference. There has been no change in the company's internal control over financial reporting that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to material affect, the company's internal control over financial reporting.


Item 9B. Other Information:

        Not Applicable.

15



PART III

Item 10. Directors, Executive Officers and Corporate Governance:

        Refer to the information under the captions "Election of Directors for a Term of One Year," "General Information—Committees of the Board," "Audit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, all of which information is incorporated herein by reference. Also refer to Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant (at February 24, 2009)" on page 9 for additional information on the company's executive officers.


Item 11. Executive Compensation:

        Refer to the information under the captions "General Information—2008 Director Compensation Narrative," "2008 Director Compensation Table," "2008 Compensation Discussion and Analysis," "2008 Summary Compensation Table Narrative," "2008 Summary Compensation Table," "2008 Grants of Plan-Based Awards Table," "2008 Outstanding Equity Awards at Fiscal Year-End Narrative," "2008 Outstanding Equity Awards at Fiscal Year-End Table," "2008 Option Exercises and Stock Vested Table," "2008 Retention Plan Narrative," "2008 Retention Plan Table," "2008 Pension Benefits Narrative," "2008 Pension Benefits Table," "2008 Nonqualified Deferred Compensation Narrative," "2008 Nonqualified Deferred Compensation Table," "2008 Potential Payments Upon Termination Narrative," "2008 Potential Payments Upon Termination Table," "Compensation Committee Interlocks and Insider Participation" and "2008 Report of the Executive Compensation and Management Resources Committee of the Board of Directors" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, all of which information is incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:

        Refer to the information under the caption "Ownership of Securities—Security Ownership of Certain Beneficial Owners," "Ownership of Securities—Common Stock and Stock-Based Holdings of Directors and Executive Officers" and "Equity Compensation Plan Information" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, all of which information is incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions, and Director Independence:

        Refer to the information under the captions "General Information—Board of Directors" and "General Information—Certain Transactions and Relationships" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, which information is incorporated herein by reference.


Item 14. Principal Accounting Fees and Services:

        Refer to the information under the captions "Report of the Audit Committee of the Board of Directors" and "Audit and Non-Audit Fees" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, all of which information is incorporated herein by reference.

16



PART IV

Item 15. Exhibits, Financial Statement Schedules:

    (a)
    The following documents are filed as part of this report:

    1.
    Financial statements from IBM's 2008 Annual Report to Stockholders, which are incorporated herein by reference:

        Report of Independent Registered Public Accounting Firm (page 59).

        Consolidated Statement of Earnings for the years ended December 31, 2008, 2007 and 2006 (page 60).

        Consolidated Statement of Financial Position at December 31, 2008 and 2007 (page 61).

        Consolidated Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006 (page 62).

        Consolidated Statement of Stockholders' Equity at December 31, 2008, 2007 and 2006 (pages 63 through 65).

        Notes to Consolidated Financial Statements (pages 66 through 119).

      2.
      Financial statement schedules required to be filed by Item 8 of this Form:
Page
  Schedule
Number
   
 

24

       

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule.

 

S-1

    II  

Valuation and Qualifying Accounts and Reserves.

        All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the Consolidated Financial Statements or the notes thereto.

      3.
      Exhibits:
Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
  (2)   Plan of acquisition, reorganization, arrangement, liquidation or succession.      Not applicable  

 

(3)

 

Certificate of Incorporation and By-laws. 

 

 

 

 

 

 

 

The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The By-laws of IBM as amended through November 14, 2008, are Exhibit 3.2 to Form 8-K filed November 14, 2008, and is hereby incorporated by reference. 

 

 

 

 

 

(4)

 

Instruments defining the rights of security holders. 

 

 

 

 

 

 

 

The instruments defining the rights of the holders of the 7.50% Debentures due 2013 are Exhibits 4(a) through 4(l) to Registration Statement No. 33-49475(1) on Form S-3, filed May 24, 1993, and are hereby incorporated by reference. 

 

 

 

 

17


Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The instruments defining the rights of the holders of the 8.375% Debentures due 2019 are Exhibits 4(a)(b)(c) and (d) to Registration Statement No. 33-31732 on Form S-3, filed on October 24, 1989, and are hereby incorporated by reference.         

 

 

 

The instruments defining the rights of the holders of the 7.00% Debentures due 2025 and the 7.00% Debentures due 2045 are Exhibits 2 and 3 to Form 8-K, filed on October 30, 1995, and are hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 7.125% Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 6.22% Debentures due 2027 is Exhibit 3 to Form 8-K, filed on August 1, 1997, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 4.00% Notes due 2011 is Exhibit 2 to Form 8-K, filed on November 9, 2006, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 4.95% Notes due 2011 is Exhibit 2 to Form 8-K, filed on March 21, 2007, and is hereby incorporated by reference. 

 

 

 

 

 

 

 

The instrument defining the rights of the holders of the 6.625% Notes due 2014 is Exhibit 2 to Form 8-K, filed November 5, 2008, and is hereby incorporated by reference. 

 

 

 

 

 

(9)

 

Voting trust agreement

 

 

Not applicable

 

 

(10)

 

Material contracts

 

 

 

 

 

 

 

The IBM 2001 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-87708 on Form S-8, as such amended plan was filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

 

 

The IBM PWCC Acquisition Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-102872 on Form S-8, as such amended plan was filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

18


Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The IBM 1999 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-30424 on Form S-8, as such amended plan was filed as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*        

 

 

 

The IBM 1997 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-31305 on Form S-8, as such amended plan was filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

 

 

The IBM 1994 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 33-53777 on Form S-8, as such amended plan was filed as Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

 

 

Forms of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit award. Such equity award agreement forms and the related terms and conditions document effective January 1, 2008 were filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2007, are hereby incorporated by reference.*

 

 

 

 

 

 

 

Board of Directors compensatory plans, as described under the caption "General Information—2008 Director Compensation" in IBM's definitive Proxy Statement to be filed with the U.S. Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 28, 2009, are hereby incorporated by reference.*

 

 

 

 

 

 

 

The IBM Non-Employee Directors Stock Option Plan, contained in Registration Statement 33-60227 on Form S-8, is hereby incorporated by reference.*

 

 

 

 

 

 

 

The IBM Board of Directors Deferred Compensation and Equity Award Plan, a compensatory plan, as amended effective October 28, 2008.*

 

 

10.1

 

 

 

 

The IBM Supplemental Executive Retention Plan, a compensatory plan, as amended and restated through December 31, 2008.*

 

 

10.2

 

 

 

 

The IBM Excess 401(k) Plus Plan, a compensatory plan, as amended and restated through December 31, 2008 (formerly the IBM Executive Deferred Compensation Plan contained in Registration Statement No. 333-33692 on Form S-8), which amended and restated plan is hereby incorporated by reference.*

 

 

10.3

 

19


Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The IBM 401(k) Plus Plan, a compensatory plan, as amended and restated effective as of January 1, 2008, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2008 (formerly the IBM Tax Deferred Savings Plan, contained in Registration Statement No. 333-09055 on Form S-8), is hereby incorporated by reference.*        

 

 

 

The IBM 2003 Employees Stock Purchase Plan, contained in Registration Statement 333-104806 on Form S-8, as amended through April 1, 2005, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2005, is hereby incorporated by reference. 

 

 

 

 

 

 

 

Form of Noncompetition Agreement, filed as Attachment 1 to Form 8-K dated April 6, 2005, is hereby incorporated by reference.*

 

 

 

 

 

 

 

The $10,000,000,000 5-Year Credit Agreement dated as of June 28, 2006, among International Business Machines Corporation, each Subsidiary Borrower, the several banks and other financial institutions from time to time parties to the Credit Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, and Citibank, N.A., as Syndication Agent, which was filed as Exhibit 10.1 to Form 8-K dated June 29, 2006, is hereby incorporated by reference. 

 

 

 

 

 

 

 

The $11,500,000,000 Term Loan Agreement dated as of May 25, 2007, among IBM International Group B.V. (the "Borrower"), the several banks and other financial institutions from time to time parties thereto (the "Lenders"), Morgan Stanley Senior Funding, Inc., as administrative agent for the Lenders, Deutsche Bank AG Cayman Islands Branch, as Documentation Agent, and Lehman Commercial Paper, Inc., as Syndication Agent, which was filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007, is hereby incorporated by reference. 

 

 

 

 

 

 

 

First Amendment to Term Loan dated as of May 25, 2007, among IBM International Group B.V. (the "Borrower"), the several banks and other financial institutions from time to time parties thereto (the "Lenders"), Morgan Stanley Senior Funding, Inc., as administrative agent for the Lenders, Deutsche Bank AG Cayman Islands Branch, as Documentation Agent, and Lehman Commercial Paper, Inc., as Syndication Agent, which was filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2008, is hereby incorporated by reference. 

 

 

 

 

 

 

 

The Guaranty Agreement dated as of May 25, 2007, among International Business Machines Corporation ("Guarantor"), for the benefit of the Lenders from time to time party to the $11,500,000,000 Term Loan Agreement, and in favor of Morgan Stanley Senior Funding, Inc., as administrative agent for the Lenders, which was filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2007, is hereby incorporated by reference. 

 

 

 

 

20


Reference Number per Item 601 of Regulation S-K   Description of Exhibits   Exhibit Number
in this
Form 10-K
 
      The Accelerated Share Repurchase Schedule of Standard Terms and Conditions, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2007, is hereby incorporated by reference.         

 

 

 

Form of Parent Guarantee Agreement for Accelerated Stock Repurchase, which was filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2007, is hereby incorporated by reference. 

 

 

 

 

 

(11)

 

Statement re computation of per share earnings

 

 

 

 

 

 

 

The statement re computation of per share earnings is note R, "Earnings Per Share of Common Stock" on page 102 of IBM's 2008 Annual Report to Stockholders, and is hereby incorporated by reference. 

 

 

 

 

 

(12)

 

Statement re computation of ratios

 

 

12

 

 

(13)

 

Annual report to security holders**

 

 

13

 

 

(18)

 

Letter re change in accounting principles

 

 

Not applicable

 

 

(19)

 

Previously unfiled documents

 

 

Not applicable

 

 

(21)

 

Subsidiaries of the registrant

 

 

21

 

 

(22)

 

Published report regarding matters submitted to vote of security holders

 

 

Not applicable

 

 

(23.1)

 

Consent of experts

 

 

23.1

 

 

(24.1)

 

Powers of attorney

 

 

24.1

 

 

(24.2)

 

Resolutions of the IBM Board of Directors authorizing execution of this report by Powers of Attorney

 

 

24.2

 

 

(28)

 

Information from reports furnished to state insurance regulatory authorities

 

 

Not applicable

 

 

(31.1)

 

Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.1

 

 

(31.2)

 

Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

 

 

(32.1)

 

Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

32.1

 

 

(32.2)

 

Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

 

32.2

 

*
Management contract or compensatory plan or arrangement.

**
The Performance Graphs, set forth on pages 122 and 123 of IBM's 2008 Annual Report to Stockholders, are deemed to be furnished but not filed.

21



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant)

 

 

By:

 

/s/ SAMUEL J. PALMISANO

Samuel J. Palmisano
Chairman of the Board,
President and Chief Executive Officer

 

 

 

 

Date: February 24, 2009

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 

/s/ MARK LOUGHRIDGE


Mark Loughridge
 

Senior Vice President, Chief Financial Officer

  February 24, 2009

/s/ JAMES J. KAVANAUGH


James J. Kavanaugh
 

Vice President and Controller

 

February 24, 2009


    Alain J.P. Belda
  

    Cathleen Black
 
 
William R. Brody
 
 
Kenneth I. Chenault
 
  
Michael L. Eskew
  
  
Shirley Ann Jackson
  
  
Taizo Nishimuro
  
  
James W. Owens
  
  
Joan E. Spero
 
 
Sidney Taurel
 
 
Lorenzo H. Zambrano
    
Director
  
  
Director
  
  
Director
  
  
Director
  
  
Director
 
 
Director
 
 
Director
 
 
Director
 
  
Director
  
  
Director
  
  
Director
 






By:
 
 
 
    
 






/s/ Andrew Bonzani

Andrew Bonzani
Attorney-in-fact
February 24, 2009

22



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of
International Business Machines Corporation:

        Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 24, 2009 appearing in the 2008 Annual Report to Shareholders of International Business Machines Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 24, 2009

23



SCHEDULE II

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31:
(Dollars in Millions)

Description
  Balance at
Beginning
of Period
  Additions*   Writeoffs   Other**   Balance at
End of
Period
 

Allowance For Doubtful Accounts

                               

2008

                               

—Current

  $ 549   $ 170   $ (92 ) $ 5   $ 633  
                       

—Noncurrent

  $ 59   $ 138   $ (19 ) $ 2   $ 180  
                       

2007

                               

—Current

  $ 543   $ 79   $ (112 ) $ 40   $ 549  
                       

—Noncurrent

  $ 48   $ 23   $ (18 ) $ 5   $ 59  
                       

2006

                               

—Current

  $ 696   $ (10 ) $ (177 ) $ 34   $ 543  
                       

—Noncurrent

  $ 63   $ (2 ) $ (20 ) $ 7   $ 48  
                       

Allowance For Inventory Losses

                               

2008

  $ 669   $ 285   $ (248 ) $ (63 ) $ 643  
                       

2007

  $ 612   $ 315   $ (308 ) $ 50   $ 669  
                       

2006

  $ 641   $ 281   $ (330 ) $ 20   $ 612  
                       

Revenue Based Provisions

                               

2008

  $ 1,085   $ 6,145   $ (6,195 ) $ (52 ) $ 984  
                       

2007

  $ 990   $ 5,812   $ (5,722 ) $ 5   $ 1,085  
                       

2006

  $ 880   $ 5,399   $ (5,205 ) $ (85 ) $ 990  
                       

*
Additions for Allowance for Doubtful Accounts and Allowance for Inventory Losses are charged to expense and cost accounts, respectively, while Revenue Based Provisions are charged to revenue accounts.

**
Primarily comprises currency translation adjustments.

S-1




QuickLinks

PART I
PART II
PART III
PART IV
SIGNATURES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions)

EXHIBIT 10.1

 

Note  : This exhibit reflects amendments to the IBM Board of Directors Deferred Compensation and Equity Award Plan (DCEAP) to bring the plan into compliance with Section 409A of the Internal Revenue Code.

 

IBM Board of Directors

 

Deferred Compensation and Equity Award Plan

 

ARTICLE I.                    Purpose

 

International Business Machines Corporation (“IBM”) established the Deferred Compensation and Equity Award Plan (the “Plan”) to enable members of the Board of Directors (the “Board”) who are not then IBM employees (“Outside Directors”) to defer receipt of compensation for the services of Outside Directors to later years and to provide part of the compensation for the services of Outside Directors in a promise to deliver shares of IBM Capital Stock (“Shares”).

 

ARTICLE II.                   Maintenance of Records

 

IBM shall maintain two bookkeeping accounts for each Outside Director, a Cash Account and a Promised Fee Shares Account, which shall be credited in accordance with the terms of this Plan and the elections of each Outside Director pursuant to this Plan.

 

ARTICLE III.                  Payment and Deferral of Fees

 

(a)        Payment in Deferred Shares; Amounts Accrued Under Retirement Plan

 

Sixty percent of the annual retainer fees to be earned by each Outside Director (“Fees”) shall be payable in the form of a promise by IBM to deliver Shares (“Promised Fee Shares”) pursuant to ARTICLE V hereof.  The Payment of such Promised Fee Shares shall be deferred until the Outside Director ceases to be a member of the Board.

 

Notwithstanding anything herein to the contrary, the Promised Fee Shares included in the Promised Fee Shares Accounts of the Outside Directors pursuant to the resolutions adopted by the Board on January 30, 1996, with respect to the elimination of retirement payments to Outside Directors shall be payable solely in cash in accordance with the provisions of ARTICLE V hereof.  The payment of such Promised Fee Shares shall be deferred until the Outside Director ceases to be a member of the Board.  Payment shall be made at that time only to those Outside Directors who have served five or more years as a Board member, subject to the discretion of the board.

 

1



 

(b)        Eligibility and Election

 

Any Outside Director may elect to defer receipt of all or any portion of the remainder of the Fees to be earned by such Outside Director by indicating such election to the Secretary of IBM on an Election Form supplied by the Secretary (“Deferral Election”).  The Outside Director’s election must specify (i) the portion of such Fees to be deferred and (ii) the choice of deferral in cash or Promised Fee Shares, pursuant to ARTICLE V hereof.

 

“Election Term” shall mean the period beginning on January 1 of any calendar year and ending on December 31 of such year, provided, however that if an Outside Director joins or leaves the Board during such year, the Election Term shall begin or end on the date such director joins or leaves the Board, as the case may be.

 

(c)        Credit for Amounts Deferred

 

(i)           The Cash Account will be credited with the amount of Fees accrued and deferred as cash (such credit to be made when such Fees become payable), plus interest at an annual rate equal to the average of the first 26-week Treasury Bill issued in January and July of each year, computed from the date such Fees would have been paid had they not been deferred.

 

(ii)          The Promised Fee Shares Account will be credited with the number of Shares, including fractions, which could have been purchased had the amount of the Fees accrued and deferred as Promised Fee Shares been used to purchase Shares on the date such Fees would have been paid had they not been deferred, at a price equal to Fair Market Value on such date.

 

(iii)         “Fair Market Value” shall be the average of the high and low prices of Shares on the New York Stock Exchange on the date in question, or if no sales of Shares were made on said Exchange on that date, the average of the high and low prices reported for the preceding day on which sales of Shares were made on said Exchange.

 

(iv)         Promised Fee Shares do not have voting rights.

 

2



 

(d)        Advance Notice of Election

 

An Outside Director shall make a Deferral Election no later than 30 days after the effective date of initial election to the Board.  Each Outside Director that does not provide notice to the Secretary of a Deferral Election in accordance with the preceding sentence will be deemed to have elected to defer receipt of all Fees (other than Fees automatically deferred) in the form of Promised Fee Shares.

 

(e)        Duration of Election

 

Each Deferral Election is irrevocable with respect to the then current Election Term.  Any modification or termination of a Deferral Election by an Outside Director must be made in writing to the Secretary of IBM within 30 days prior to the end of the then current Election Term and will become effective for the subsequent Election Term.  A Deferral Election shall continue from Election Term to Election Term unless the Outside Director submits either (i) a written request to modify or terminate that election or (ii) a new Election Form, in each case in accordance herewith.

 

(f)         Financial Hardship

 

In the event that an Outside Director incurs a severe financial hardship, the Outside Director’s Deferral Election (including a deemed election pursuant to Article III(d) hereof) may be cancelled by the Outside Director upon written request approved by the Board (or an authorized Committee of the Board); in such case, the Outside Director shall be deemed to have elected to receive cash payment of Fees (other than Fees automatically deferred) for the remainder of the Election Term.  Such severe financial hardship must be caused by an accident, illness, or other unforeseeable emergency beyond the control of the Outside Director in accordance with applicable regulations and related authority.  The Outside Director may then make a Deferral Election for any subsequent Election Term in accordance with Article III(e) hereof.

 

ARTICLE IV.                  Dividends, Distributions and Adjustments

 

Whenever a cash dividend or any other distribution is paid with respect to Shares, the Promised Fee Shares Account of each Outside Director shall be credited with an additional number of Promised Fee Shares, equal to the number of Shares, including fractional Shares, that could have been purchased had such dividend or other distribution been paid on each Promised Fee Share in the Promised Fee Shares Account (on the record date for such dividend or distribution) and the amount of such dividend or value of such other distribution been used to acquire additional Shares at the Fair Market Value on the date such dividend or other distribution is paid.  The value of any such other distribution on or related to Shares shall, at the option of the Board

 

3



 

(or an authorized Committee of the Board), be either determined by the Board or independently established.

 

The number of Promised Fee Shares shall be fully adjusted upon the occurrence of any stock split, stock dividend, recapitalization, merger or similar event, and shall be appropriately adjusted for the value (determined in the manner provided above with respect to distributions) of any right, privilege or opportunity provided or offered by IBM to holders of Shares.

 

ARTICLE V.                   Delivery

 

Delivery of amounts from the Cash Account and Shares from the Promised Fee Shares

 

Account will be made to an Outside Director promptly (no later than 90 days) after the date on which the Outside Director ceases to be a member of the Board; provided , that when an Outside Director terminates service on account of any act of (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of IBM or any direct or indirect majority-owned subsidiary of IBM, any Shares that were converted to Promised Fee Shares and credited to such Outside Director’s Promised Fee Shares Account upon termination of the Restricted Equity Award Plan (as such Shares may have been increased as a result of any dividend, distribution or adjustment in accordance with ARTICLE IV) shall be forfeited.

 

In the event of an Outside Director’s death, such Outside Director’s estate or beneficiaries, as appropriate, shall be paid (no later than 90 days after such death) the amount credited to his or her Cash Account and an amount equal to the Fair Market Value on the date of death of the Promised Fee Shares credited to his or her Promised Fee Shares Account.

 

Upon becoming entitled to receive Shares, an Outside Director may elect to receive in lieu thereof a cash payment.  Such cash payment shall be equal to the Fair Market Value of the Shares on the first day after the date on which the Director ceases to be a member of the Board.

 

In any case when Shares are to be delivered, a cash payment will be so made in lieu of delivering a fractional share.

 

4



 

ARTICLE VI.                  Source of Shares

 

45,000 Shares as of July 27, 1993, plus an additional 25,000 Shares as of May 1, 1994, and as of each May 1 thereafter, shall be reserved and authorized for delivery under the Plan from time to time.  These Shares may be provided from newly-issued or repurchased Shares.  If any change is made in the number of Shares outstanding or in the rights of such outstanding Shares (such as by stock split, stock dividend, combination or reclassification, recapitalization, merger or similar event), the Board (or an authorized Committee of the Board) may make such adjustments in the number of or rights relating to Shares authorized to be delivered pursuant to the Plan as the Board (or such Committee) determines is equitable to preserve the respective rights of the participants in the Plan.  Shares forfeited under the Plan or settled in cash in lieu of delivery shall not reduce the number of Shares authorized under the Plan and shall not be deemed to have been delivered under the Plan; provided , that the number of Shares settled in cash in lieu of delivery shall not exceed the cumulative number of Shares authorized for delivery under the Plan (without deduction for Shares delivered).

 

ARTICLE VII.                Alienability

 

No amount due or payable under the Plan or any interest in the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy or like encumbrance.  No such amount shall in any manner be liable for or subject to the debts or liability of any Outside Director.  Prior to delivery of Shares by IBM pursuant to ARTICLE V, no director shall have any right to transfer or assign any Shares, or any right to receive any Share, credited to him under this Plan.  Any purported assignment shall be null and void.

 

ARTICLE VIII.               Outside Director’s Rights Unsecured

 

The right of an Outside Director to receive any cash payment or Shares hereunder shall rank as an unsecured claim against IBM.  Assets that may be set aside for IBM’s convenience with respect to the Plan shall not in any way be held in trust for, or be subject to any prior claim by, an Outside Director or beneficiary.

 

ARTICLE IX.                 Amendment and Termination

 

The Board or any authorized Committee of the Board may at any time terminate, and may at any time and from time to time and in any respect amend the Plan for any reason.

 

Amended:  October 28, 2008

 

5




 

Exhibit 10.2

 

Note :  This exhibit reflects amendments to the IBM Supplemental Executive Retention Plan to bring the plan into compliance with Section 409A of the Internal Revenue Code.

 

IBM SUPPLEMENTAL EXECUTIVE RETENTION PLAN

 

Effective January 1, 2009

 

(As Amended Through December 31, 2008)

 

 



 

Table of Contents

 

Article 1 - Purpose

1

Article 2 - Definitions

1

Article 3 - Coverage and Effect

5

Article 4 - Management and Administration

7

Article 5 - Claims Procedure

8

Article 6 - Service Credit

8

A. Non-U.S. Service

8

B. Service Credit for Leaves of Absence

8

Article 7 - Entitlement to Benefits

10

Article 8 - SERP Benefits

10

A. Formula

10

B. Reduction for Benefits Payable Prior to Age 60

11

C. Form and Method of Payment

11

C. Form and Method of Payment

12

D. Effective Date of Election

12

E. Revocation of Election

13

Article 9 — Preretirement Survivor Annuity

13

Article 10 - Suspension of Benefits For Re-Employed participants

13

Article 11 - Forfeiture

14

A. Detrimental Activities

14

B. Forfeiture and Rescission

14

Article 12 - Information For Benefit Calculations

15

Article 13 — Non-Alienation Of Benefits

15

Article 14 — Withholding Taxes

15

Article 15 — Distributions To Minors And Incompetents

15

Article 16 — No Right TO Employment

16

Article 17 — Unfunded Plan

16

Article 18 - Miscellaneous

16

A. Construction

16

B. Severability

16

C. Titles and Headings Not to Control

16

D. Complete Statement of the Plan

17

E. Booklets and Brochures

17

Article 19 — Situs Of Plan; Governing Law

17

Appendix A - Transition Rules

18

Appendix B - IBM Supplemental Executive Retirement Plan (the Prior Plan)

19

Article 1 - Purpose

20

Article 2 - Definitions

20

Article 3 — Coverage and Effect

22

Article 4 — Management and Administration

23

Article 5 — Claims Procedure

24

Article 6 — Service Credit

24

A. Foreign Service

24

B. Service Credit for Leaves of Absence

25

C. Other Service Credit

25

Article 7 — Retirement Date and Commencement of Benefits

25

A. Foreign Service

25

B. Early Retirement Date

25

C. Commencement of SERP Benefits

26

Article 8 — SERP Benefits

26

A. Normal Retirement Benefit

26

B. SERP Benefit

27

C. Form and Method of Payment

28

 

 



 

 

D. Effective Date of Election

29

E. Revocation of Election

29

F. SERP Benefits for Disabled Participants

29

Article 9 — Preretirement Spousal Annuity

30

Article 10 — Suspension of Benefits for Reemployed Retired Participants

30

Article 11 - Forfeitures

31

A. Competitive or Prejudicial Conduct

31

B. Disclosure of Confidential Information

31

C. Disclosure and Assignment of Rights

31

D. Forfeiture and Rescission

32

Article 12 - Information for Benefits Calculations

32

A. Incomplete or Incorrect Information

32

B. Overpayments

32

Article 13 — Alienation of Benefits

33

Article 14 — Withholding Taxes

33

Article 15 — Distributions to Minors and incompetents

33

Article 16 — No Right to Employment

34

Article 17 — Unfunded Plan

34

Article 18 - Miscellaneous

34

A. Construction

34

B. Severability

34

C. Titles and Headings Not to Control

34

D. Complete Statement of Plan

35

E. Booklets and Brochures

35

Article 19 — Situs of Plan; Governing Law

35

Appendix C — PwC SERP

36

Appendix D — IBM SECTION 409A UMBRELLA DOCUMENT

48

 

 



 

ARTICLE 1 - Purpose

 

International Business Machines Corporation, a New York corporation, has established the IBM Supplemental Executive Retention Plan (the “SERP” or the “Plan”) with the intention of attracting and retaining executives whose skills and talents are important to IBM’s operations by providing a monthly post-employment income that supplements benefits under the IBM Personal Pension Plan and the IBM Excess Personal Pension Plan.

 

ARTICLE 2 - Definitions

 

a.                                        409A Designated Payment Date - the date on which payment is designated to begin to be paid pursuant to Section 8.D.

 

b.                                       409A First Issue Date - means the date on which a benefit from the Plan actually begins to be paid to a Participant or, in the case of a pre-retirement death benefit, to the Participant’s Beneficiary.  The 409A First Issue Date is the 409A Designated Payment Date or any later date specified in the Plan that is treated as paid on the 409A Designated Payment Date in accordance with Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the date specified in the Plan and later within the same calendar year, or, if later, within 2-1/2 months following the date specified in the Plan, provided that the Participant is not permitted to designate the taxable year of payment.

 

c.                                        409A Key Employee - a specified employee under section 409A of the Code, determined as described in the IBM Section 409A Umbrella Document attached to this Plan as APPENDIX D.

 

d.                                       409A Separation from Service - a separation from service under section 409A of the Code (including the good faith compliance standard in effect before January 1, 2009), determined as described in the IBM Section 409A Umbrella Document attached to this Plan as APPENDIX D.

 

e.                                        Actuarial Equivalent - when comparing a benefit differing in time, period or manner of payment from another benefit, having the same value (as of the relevant Annuity Commencement Date unless otherwise specified in the Plan) as determined by the Plan Administrator based on the actuarial assumptions specified under the term “Actuarial Equivalent” in Section 2.1 of the IBM Personal Pension Plan.

 

f.                                          Annuity Commencement Date - the first day of the month following a Participant’s 409A Separation from Service, which is the date as of which SERP Benefits are calculated.

 

 

1



 

g.                                       Annuity Election Period - the period during which a Participant may elect among actuarially equivalent annuities in accordance with Treasury Regulation section 1.409A-2(b)(2)(ii).  The Annuity Election Period begins 180 days before a Participant’s 409A Separation from Service Date and ends on the first day of the second month following the 409A Separation from Service Date.

 

h.                                       Beneficiary - a person who is designated by a Participant or by the terms of the Plan to receive a SERP Benefit under the Plan in respect of a deceased Participant.  A Beneficiary shall not be considered a Participant by virtue of this definition.

 

i.                                           Benefit Service - an Executive’s Continuous Service while a Regular Employee or a Leave of Absence Employee and while accruing benefits under the IBM Personal Pension Plan or any predecessor plan, rounded to the next completed month, except that Benefit Service shall not exceed 35 years and shall not include periods of Continuous Service that occur prior to the latest date of hire or rehire with IBM except as provided in ARTICLE 6 hereof.

 

j.                                           Board - the Board of Directors of IBM.

 

k.                                        Choice 1 Employee - an individual who is defined as a Choice 1 Employee under the IBM Personal Pension Plan.

 

l.                                           Code - the Internal Revenue Code of 1986, as amended from time to time.  All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.

 

m.                                     Compensation - salary and recurring payments under any form of variable compensation plan (such as the Variable Pay Program and the Annual Incentive Program but not any Long-Term Incentive Plan) in the Plan Year when earned, even if such amounts are paid after the Participant terminates employment. Compensation includes additional compensation, including but not limited to payments for nonscheduled workdays, overtime and shift premium.

 

Effective on or after July 1, 1999, for a Participant who is a Sales Executive assigned commission targets (or similar results-based compensation targets, as designated by the Company), and effective on and after January 1, 2000 for any other Participant assigned commission targets (or similar results-based compensation targets, as designated by the Company), Compensation shall equal the sales plan target commission established for such a Participant based on the respective incentive plan payout tables, and is credited monthly on a pro rata basis.

 

Neither separation allowances, special termination incentives, payments under any individually-negotiated separation arrangement, special awards, cash in lieu of accrued unused vacation, nor deferred and accrued vacation payments to terminating Employees shall be considered Compensation. Compensation shall include only such additional items as are specifically approved by the Committee.

 

 

2



 

Otherwise eligible compensation deferred or reduced under the provisions of Section 125, 129, 132(f)(4), or 401(k) of the Code and amounts deferred under the IBM Executive Deferred Compensation Plan, or any predecessor or successor plan thereto (in the year the amounts are deferred instead of being paid) are included in this definition.

 

Compensation shall not include amounts paid under the LTD Plan.

 

 

n.                                       Continuous Service - service that is defined as Continuous Service under the IBM Personal Pension Plan except as provided in ARTICLE 6 hereof.

 

o.                                       Default Annuity Form - the form of annuity paid to a Participant who is entitled to an annuity form of benefit under the Plan and does not affirmatively elect the type of annuity. e.g., a single life annuity or joint and survivor annuity.  The Default Annuity Form is an annuity for the life of the Participant, except, if the Participant is married or has a Domestic Partner on the Annuity Commencement Date, the Excess Default Annuity Form is a joint and 50% survivor annuity with the Participant’s Spouse or Domestic Partner as the survivor annuitant.

 

p.                                       Domestic Partner - an individual who is defined as the Domestic Partner of a Participant under the IBM Personal Pension Plan.

 

q.                                       Domestic Subsidiary - a Subsidiary organized and existing under the laws of the United States or any state, territory or possession thereof, provided, however, that the Plan shall not be deemed to cover the employees of any Domestic Subsidiary unless so authorized by the chief human resources officer of IBM.

 

r.                                          Early Retirement Date - a date that is defined as an Early Retirement Date under the IBM Personal Pension Plan.

 

s.                                        Eligibility Service - an Executive’s Continuous Service while a Regular Employee or a Leave of Absence Employee, truncated to years and completed months, except that Eligibility Service shall not include periods of Continuous Service that occur prior to the latest date of hire or rehire with IBM except as provided in ARTICLE 6 hereof.

 

t.                                          ERISA - the Employee Retirement Income Security Act of l974, as amended from time to time.

 

u.                                       Executive - a Regular Employee who is classified as an Executive in the sole discretion of the Company’s chief human resources officer.

 

v.                                       Executive Compensation and Management Resources Committee (also, the “Committee”) - the Executive Compensation and Management Resources Committee of the Board or such other persons or group as said Board may appoint to serve as the Committee.

 

 

3



 

w.                                     IBM or Company - International Business Machines Corporation and its Domestic Subsidiaries, excluding foreign offices of IBM except as otherwise provided in these Articles.

 

x.                                         IBM Personal Pension Plan - the Plan which amends and restates the terms of the IBM Retirement Plan effective as of January 1, 1995.

 

y.                                       IBM Retirement Plan - the retirement plan established by IBM pursuant to a resolution of its Board effective December l8, l945, as amended from time to time which was amended and superseded by the IBM Personal Pension Plan.

 

z.                                         Leave of Absence Employee - an individual who commences a leave of absence granted under IBM’s various leave programs then in effect, who is a Regular Employee immediately before such leave of absence and who resumes the status of a Regular Employee for at least 30 consecutive days immediately following the completion of the leave of absence.  An individual who is on a bridge leave is not a Leave of Absence Employee.

 

aa.                                  Non-U.S. Service - service with a Subsidiary other than a Domestic Subsidiary or with a branch of IBM or of a Domestic Subsidiary that operates principally outside the United States, its territories or possessions.

 

bb.                                Normal Retirement Date - the date that is defined as the Normal Retirement Date under the IBM Personal Pension Plan.

 

cc.                                  Offset Amount - the annual single life annuity described in Section A of ARTICLE 8.

 

dd.                                Participant - an Executive who meets the requirements of ARTICLE 3, or a former Executive who is receiving SERP Benefits pursuant to the provisions of the Plan.  A Participant in the Plan shall not be deemed a participant in any Plan amendment nor have standing to make a claim for benefits under any Plan amendment except to the degree any such amendment specifically grants benefits to such Participant.

 

ee.                                  Pay - (i) the annual average of the Participant’s Compensation during the last 60 months in which Continuous Service is earned, or (ii) the highest annual average of the Participant’s Compensation during any five consecutive calendar years in which Continuous Service is earned, whichever is greater.

 

ff.                                      Pay Threshold - $250,000; provided that effective January 1, 2000 and each subsequent January 1, the Pay Threshold in effect on the preceding December 31 shall be increased by 5%, rounded to the nearest $100. The Pay Threshold described in the preceding sentence may be increased by any additional amount, and effective as of any date, by IBM’s chief human resources officer in his or her sole discretion.

 

 

4



 

gg.                                Personal Pension Account - the account that is defined as the Personal Pension Account under the IBM Personal Pension Plan.

 

hh.                                Plan Administrator - a person or a committee appointed pursuant to ARTICLE 4 which shall be responsible for overseeing reporting, disclosure, record keeping, claims review and related administrative matters under the Plan.  If a committee is appointed to serve as the Plan Administrator, any one of the members of the committee may act individually on behalf of the committee to fulfill the committee’s duties as Plan Administrator.

 

ii.                                        Plan Year - the calendar year.

 

jj.                                        Prior Plan - the IBM Supplemental Executive Retirement Plan as in effect on June 30, 1999, a copy of which is appended as APPENDIX B and which remains in effect only as described in APPENDIX A.

 

kk.                                  Qualifying Leave - a “Qualifying Leave” as defined in the IBM Excess Personal Pension Plan.

 

ll.                                        Regular Employee - an employee who is defined as a Regular Employee under the IBM Personal Pension Plan.

 

mm.                            SERP Benefit - a single payment or series of monthly payments made or due under the Plan.

 

nn.                                Spouse - a person who, on the earlier of (i) the date of the Participant’s death while employed by IBM or (ii) the Participant’s Annuity Commencement Date, is the husband or wife of a Participant, according to the marriage laws of the state (or country) of the Participant’s domicile.

 

oo.                                Subsidiary - a corporation, or other form of business organization, the majority interest of which is owned, directly or indirectly, by IBM.

 

ARTICLE 3 - Coverage and Effect

 

A.                                    This Plan amends and restates the terms of the Plan, effective January 1, 2009.  However, benefits that commenced under the Plan before January 1, 2005, shall be not be subject to this Plan document but instead shall be subject to the terms of the Plan in effect on October 3, 2004 (taking into account any subsequent amendments to the extent that such amendments do not constitute a material modification within the meaning of section 409A of the Code).  A Regular Employee who is an Executive employed by IBM on the United States payroll, and whose Pay after June 30, 1999 equals or exceeds the Pay Threshold shall be a Participant in the Plan, except as provided in Section B of this Article 3.  A Regular Employee who is described in APPENDIX C (relating to certain former partners of PwC) shall also be a Participant in the Plan, but such a Regular Employee’s SERP Benefits under the Plan shall be described solely in APPENDIX C.

 

 

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B.                                      Notwithstanding any other provision to the contrary, effective on and after May 1, 2004, an individual shall not be entitled to a SERP Benefit unless the individual would otherwise be entitled to a SERP Benefit under the terms of the Plan or any applicable appendix, and:

 

(1)                                   The individual is a former Executive who is receiving a SERP Benefit as of April 30, 2004 pursuant to the provisions of the Plan, or is a Participant who received a SERP Benefit that is suspended as of May 1, 2004 under ARTICLE 10,

 

(2)                                   The individual is entitled to a SERP Benefit under APPENDIX A and B, or C, or

 

(3)                                   The individual (a) is an Executive throughout the period commencing on April 30, 2004 and ending on his or her termination of employment with IBM, and (b) has Pay as of December 31, 2003 of at least $319,100, or has an annualized base salary and target incentive compensation as of May 1, 2004 of at least $319,100.

 

C.                                      Notwithstanding any other provision to the contrary other than the last paragraph of ARTICLE C5.A. (relating to the PwC SERP Participants with Prior C&L Legacy Annual SERP Benefits under Exhibit II), effective as of the close of business on December 20, 2005:

 

(1)                                   No individual shall accrue any benefits under the Plan after December 31, 2007.  Thus, no individual shall experience an increase or decrease in any retirement, ancillary, or other benefit he or she had already earned or accrued under the Plan as of December 31, 2007, except as provided in this paragraph.  The amount of an individual’s SERP Benefit shall be determined without regard to any change after December 31, 2007, in the individual’s Pay, the individual’s service, the Pay Threshold, the Earnings Threshold or the Breakpoint, provided, however, that any change in the individual’s age and service shall be taken into account for purposes of determining the individual’s eligibility to receive a SERP Benefit.  An individual is not considered to experience an increase or decrease in any SERP Benefit for purposes of this paragraph merely because the SERP Benefit (including the determination of any offset for the benefit payable under the IBM Personal Pension Plan or the IBM Excess Personal Pension Plan) is adjusted because of the time or form of payment.  Notwithstanding the foregoing, an individual’s SERP Benefit on or after January 1, 2008, may decrease to the extent that the offset for benefits under the IBM Personal Pension Plan or IBM Excess Personal Pension Plan is increased because of additional accruals after December 31, 2007.

 

(2)                                   If the SERP Benefit begins to be paid during 2006, the Pay Threshold shall be $386,100 and if the SERP Benefit begins to be paid after 2006, the Pay Threshold shall be $405,400.  With respect to the formula in APPENDIX B, if the SERP Benefit begins to be paid during 2006, the Breakpoint shall be $296,600 and the Earnings Threshold shall be $160,000, and if the SERP Benefit begins to be paid after 2006, the Breakpoint shall be $311,400 and the Earnings Threshold shall be $160,000.

 

 

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ARTICLE 4 - Management and Administration

 

The Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or the Committee, but only if the Committee’s action is not materially inconsistent with a prior action of the Board.  The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement.

 

The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated:  (a) the Board, (b) the Committee, (c) IBM’s chief human resources officer, and (d) the Plan Administrator and each person on any committee serving as the Plan Administrator.  Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.

 

The Board shall be responsible only for designating those persons who will serve on the Committee and for approving any resolution to terminate the Plan.

 

The Committee may, pursuant to a duly adopted resolution, delegate to IBM’s chief financial officer, chief human resources officer, or Treasurer, the Plan Administrator and/or any other officer or employee of IBM, authority to carry out any decision, directive or resolution of the Committee.

 

The Committee shall appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator.  The Plan Administrator shall have the full power and authority, in its sole discretion: (a) to promulgate and enforce such rules and regulations as it shall deem necessary or appropriate for the administration of the Plan; (b) to adopt any amendments to the Plan that are required by law; (c) to interpret the Plan consistent with the terms and intent thereof; (d) to resolve any possible ambiguities, inconsistencies and omissions in the Plan; and (e) to determine eligibility for SERP Benefits and the form, amount, and timing of SERP Benefits in accordance with the provisions of the Plan.  All such actions shall be conclusive provided they are in accordance with the terms and intent of the Plan and the Plan Administrator shall on a regular basis report such actions to the Committee.  Additionally, IBM’s chief human resources officer shall appoint and designate such other IBM employees as may be needed to provide adequate staff services to the Committee and the Plan Administrator.

 

The Committee and/or the Plan Administrator may engage the services of accountants, attorneys, actuaries, consultants and such other professional personnel as they deem necessary or advisable to assist them in fulfilling their responsibilities under the Plan.  The Committee, the Plan Administrator, and their delegates and assistants shall be entitled to act on the basis of all tables, valuations, certificates, opinions and reports furnished by such professional personnel.

 

To the maximum extent permitted by IBM’s by-laws, IBM shall indemnify each member of the Committee, the Plan Administrator, and each director, officer, and employee or agent of the Company against any expenses and liabilities that such person may incur as a result of any act or failure to act, in good faith, by such person in relation to the Plan.

 

 

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ARTICLE 5 - Claims Procedure

 

IBM’s Executive Compensation Department is responsible for advising Participants and Beneficiaries of their SERP Benefits under the Plan.  If a Participant or Beneficiary or putative Participant or Beneficiary believes he or she is entitled to SERP Benefits and has not received them, the Participant or Beneficiary must submit a written claim to the Executive Compensation Department, IBM Corporation, New Orchard Road, Armonk, New York 10504.  If the claim is wholly or partially denied, the Executive Compensation Department shall furnish to the claimant a written decision setting forth the Executive Compensation Department’s decision within 90 days after receipt of the claim (or 180 days, if an extension is required).

 

If the Executive Compensation Department denies a claim for SERP Benefits in whole or in part, the claimant may appeal the denial of the claim in writing within 60 days of receiving the Executive Compensation Department’s written decision.  If the claim denial is timely appealed, the Plan Administrator shall conduct a full and fair review of the claim.  The decision of the Plan Administrator shall be made not later than 60 days (or 120 days, if an extension is required) after the receipt of the appeal.

 

The following claims procedure applies for purposes of section 409A of the Code.  If a Participant or Beneficiary believes he or she is entitled to have received benefits but has not received them, the Participant or Beneficiary must accept any payment made under the Plan and make prompt and reasonable, good faith efforts to collect the remaining portion of the payment, as determined under Treasury Regulation section 1.409A-3(g).  For this purpose (and as determined under such regulation), efforts to collect the payment will be presumed not to be prompt, reasonable, good faith efforts, unless the Participant or Beneficiary provides notice to the Plan Administrator within 90 days of the latest date upon which the payment could have been timely made in accordance with the terms of the Plan and the regulations under Code Section 409A, and unless, if not paid, the Participant or Beneficiary takes further enforcement measures within 180 days after such latest date.  In addition, a Participant or Beneficiary must exhaust any other claims procedures established by the Plan Administrator before initiating litigation.

 

ARTICLE 6 - Service Credit

 

A.                                    Non-U.S. Service .  Non-U.S. Service will be deemed as Benefit Service and Eligibility Service; provided, that such Non-U.S. Service immediately precedes service as a Regular Employee, and that such Non-U.S. Service ended and such subsequent service as a Regular Employee started before July 1, 1999; and further provided, that a Participant with such Non-U.S. Service not immediately preceded by Continuous Service with IBM must, before credit for such Non-U.S. Service is given, complete one year of Continuous Service as a Regular Employee subsequent to such Non-U.S. Service.

 

B.                                      Service Credit for Leaves of Absence .

 

(1)                                   Leave of Absence .  An individual who commences a leave of absence granted under IBM’s various leave program practices then in effect, and who is a Regular Employee immediately before such leave of absence, but who does not resume the status of a Regular Employee for at least 30 consecutive days immediately following the completion of the leave of absence (and, therefore, is not a Leave of Absence Employee):

 

 

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(a)                                   shall not be credited with Benefit Service or Eligibility Service for the Continuous Service completed while a Regular Employee subsequent to such leave of absence, and

 

(b)                                  shall not be eligible for a SERP Benefit unless such individual was eligible for a SERP Benefit when such leave commenced.

 

(2)                                   Military Leave .

 

A Participant who commences a leave for the purpose of qualified military service as that term is defined by Section 414(u) of the Internal Revenue Code and who returns to employment within the time period specified by said Section and otherwise meets the requirements of said Section and of the Plan shall be deemed for all Plan purposes as having been a Regular Employee throughout the period of qualified military service and to have received Compensation during the leave at the rate in effect immediately before the military leave began.

 

 

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ARTICLE 7- Eligibility for SERP Benefits

 

A Participant shall be eligible for a SERP Benefit only if the Participant is an Executive on his or her 409A Separation from Service, the Participant has Pay in excess of the Pay Threshold on both January 1, 2007, and the date of his or her 409A Separation from Service, a forfeiture under ARTICLE 11 does not occur, and either:

 

A.                                    The Participant’s employment with IBM terminates for any reason other than cause on a date after the Participant has completed five years of Eligibility Service and has attained age 60; or

 

B.                                      The Participant’s 409A Separation from Service occurs on a date after the Participant has completed 15 years of Eligibility Service and has attained age 55, and either:

 

(1)                                   The Participant incurs a 409A Separation from Service because of the Participant’s total and permanent disability (as determined in accordance with the terms of the IBM Long-Term Disability Plan, as amended from time to time); or

 

(2)                                   Approval is granted at the discretion of:

 

(a)                                   the Board, in the case of the two highest paid officers of IBM,

 

(b)                                  the Committee and the Chairman and Chief Executive Officer of IBM, in the case of any other officer of IBM, and

 

(c)                                   the chief human resources officer and any other approvals required by the Chairman’s and Chief Executive Officer’s delegated powers matrix, in all other cases.

 

ARTICLE 8 - SERP Benefits

 

A .                                    Formula .

 

The Participant’s annual SERP Benefit, when expressed as a single life annuity commencing as of the first day of the month next following the Participant’s 409A Separation from Service, shall be calculated as follows:

 

(1)                                   1% times Pay up to the Pay Threshold for the year of 409A Separation from Service times the number of years of Benefit Service; plus

 

(2)                                   2.5% times Pay in excess of the Pay Threshold for the year of 409A Separation from Service times the number of years of Benefit Service.

 

There shall be offset from the amount calculated in (1) and (2), an Offset Amount.  The Offset Amount shall be the annual single life annuity the Participant is entitled to receive under the IBM Personal Pension Plan and the IBM Excess Personal Pension Plan beginning on the Annuity Commencement Date.  Notwithstanding the preceding sentence, in the case of a Choice 1 Employee who elected under Section 17.3 of the IBM Personal Pension Plan to have a Personal Pension Account, the Offset Amount

 

 

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shall be the single life annuity the Participant would have been entitled to receive under the IBM Personal Pension Plan and the IBM Excess Personal Pension Plan beginning on the Annuity Commencement Date if such Participant had elected under Section 17.3 of the IBM Personal Pension Plan not to have a Personal Pension Account.  For purposes of determining the Offset Amount, the single life annuity will be calculated based on what the Participant’s benefit under the IBM Personal Pension Plan would have been if the Participant had not received any distributions from the IBM Personal Pension Plan before the Annuity Commencement Date.  The Offset Amount shall first be calculated without regard to any settlement benefit due in connection with the litigation entitled, Cooper v. IBM .  The Offset Amount shall then be increased to reflect such settlement benefit in accordance with the methodology adopted by the Company on or before December 31, 2008.

 

In no event shall the SERP Benefit (before taking into account the Offset Amount) exceed 65% times Pay times a fraction the numerator of which is the number of years and completed months of the Participant’s Benefit Service and the denominator of which is 35.

 

In no event shall the SERP Benefit be less than what the SERP Benefit would be if the Participant’s Pay, the Participant’s Benefit Service, and the Pay Threshold were equal to the Participant’s Pay, the Participant’s Benefit Service, and the Pay Threshold on the December 31 preceding the Participant’s 409A Separation from Service, or, for a 409A Separation from Service after December 31, 2006, on December 31, 2006.

 

B.                                      Reduction for SERP Benefits Payable Prior to Age 60 and Calculation for Qualifying Leaves .

 

If the Participant’s Annuity Commencement Date is on or after his or her 60th birthday, the Participant’s SERP Benefit when paid in the form of a single life annuity, shall be equal to the SERP Benefit calculated in accordance with Section A of this ARTICLE 8.

 

If the Participant’s Annuity Commencement Date is before his or her 60th birthday, the Participant’s SERP Benefit, as calculated in the form of a single life annuity and before adjustment for the Offset Amount described in Section A of this ARTICLE 8, shall be reduced by ½ of 1% for each month that the Annuity Commencement Date precedes age 60.

 

If a Participant incurs a Qualifying Leave, the amount of the Participant’s monthly SERP Benefit shall be calculated using the same methodology that applies to calculate the amount of a Participant’s Excess Prior Plan Benefit under Section 5.02(d) of that plan (including the calculation of the Offset Amount), and the resulting monthly annuity shall be adjusted in the same manner as described in Section 5.02(e) of that plan.  Generally, the Participant’s SERP Benefit is calculated as of the expected end of a leave and then converted to an actuarially equivalent annuity beginning on the Participant’s Annuity Commencement Date.  For the avoidance of doubt, this paragraph regarding Qualifying Leaves does not modify the eligibility requirements for a SERP Benefit.

 

C.                                      Form and Method of Payment .

 

A Participant may elect to be paid under any monthly annuity form of payment described in Section 12.2(b)(2), (c)(1), (c)(2), or (c)(3) of the IBM Personal Pension Plan.  Any such election must be made in the manner and form prescribed by IBM’s

 

 

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Executive Compensation Department.  Each form of payment shall be the Actuarial Equivalent of a single life annuity payable to the Participant in accordance with this ARTICLE 8.

 

 D.                                  Time of Payment .

 

A Participant’s SERP Benefit will be calculated as of his or her Annuity Commencement Date and paid as of his or her 409A Designated Payment Date.  However, the first actual payment to a Participant will, under some circumstances, be delayed and will begin on the Participant’s 409A First Issue Date.  These payment terms are described below.

 

(1)                                   In General.

 

(A)                               The Participant’s Annuity Commencement Date is the first day of the month following the Participant’s 409A Separation from Service;

 

(B)                                 the Participant’s 409A Designated Payment Date is the Participant’s Annuity Commencement Date; and

 

(C)                                 the Participant’s 409A First Issue Date is the 15th day of the second month following the Participant’s Designated Payment Date,

 

except as provided in paragraph (2), below, with respect to certain 409A Key Employees.

 

(2)                                   Six-Month Delay for 409A Key Employees.  If a Participant is a 409A Key Employee upon his or her 409A Separation from Service, the Participant’s Annuity Commencement Date remains unchanged, but the Participant’s 409A Designated Payment Date and 409A First Issue Date become the first day of the seventh month following the Participant’s 409A Separation from Service.  Interest shall be added to each delayed annuity payment from the date the payment is due through the last day of the month coincident with or immediately preceding the Participant’s 409A First Issue Date at the “Interest Credit Percentage Rate” in effect on the Participant’s Annuity Commencement Date (as determined under the IBM Personal Pension Plan).

 

E.                                       Effective Date of Election .  The Participant may select an annuity form of payment as described in Section C, above, at any time during the Annuity Election Period in a form and manner determined by the Plan Administrator.  The death of a survivor annuitant before the end of the Annuity Election Period automatically revokes any such election.  The death of a survivor annuitant on or after the Annuity Election Period does not revoke the Participant’s election. If a Participant does not elect a form of annuity during the Annuity Election Period, the Participant shall receive the Default Annuity Form to which the Plan Administrator, in its sole discretion, determines that the Participant is entitled.  If the Participant disputes and establishes to the satisfaction of the Plan Administrator, within 45 days after the end of the Annuity Election Period, that the Plan Administrator’s determination of the Excess Default Annuity Form was incorrect, the Excess Default Annuity Form shall be changed accordingly and any underpayments will be paid and any overpayments will be recouped from a monthly benefit payment in accordance with the Plan Administrator’s procedures for distributing underpayments or recovering overpayments, provided that any correction is consistent with Treasury Regulation section 1.409A-3(g) (relating to disputed payments).

 

 

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F.                                       Revocation of Election .  A Participant may revoke an election he or she has made under this ARTICLE 8 at any time before the end of the Annuity Election Period.  In order to be effective, any such revocation must be received by IBM’s Executive Compensation Department before the end of the Annuity Election Period and must be made in the manner and form prescribed by IBM’s Executive Compensation Department.  A timely revocation of an election shall only become effective upon receipt by IBM’s Executive Compensation Department.

 

If a Participant revokes an election of an alternative form of payment, the Participant’s form of payment shall automatically revert to the default form of payment prescribed by this ARTICLE 8.  After revoking an election, the Participant may elect an alternative form of payment in accordance with this ARTICLE 8; however, in order to become effective, the Participant’s election of an alternative form of payment must be received by IBM’s Executive Compensation Department before the end of the Annuity Election Period.

 

ARTICLE 9 - Preretirement Survivor Annuity

 

A preretirement survivor annuity shall be payable only to the Spouse or Domestic Partner of a Participant who dies before his or her Annuity Commencement Date, but who, on the date of death, has a Spouse or Domestic Partner and who, on the date of death, has completed 15 years of Eligibility Service and has attained age 55, or has completed five years of Eligibility Service and has attained age 60.  The preretirement survivor annuity shall be the survivor annuity that the Participant’s Spouse or Domestic Partner would have received under the Plan had the Participant terminated employment on his or her date of death with a 50% joint and survivor annuity in effect in accordance with the provisions of ARTICLE 8.  The Spouse or Domestic Partner shall begin receiving the preretirement survivor annuity as of the first day of the month next following the Participant’s date of death.

 

ARTICLE 10 - Suspension of SERP Benefits for Re-Employed Participants

 

If a Participant is re-employed by IBM on or after January 1, 2009, and after the Participant’s Annuity Commencement Date, the Participant’s SERP Benefit with respect to such Annuity Commencement Date is not affected by the Participant’s re-employment.  If a Participant is re-employed by IBM before January 1, 2009, and the Participant’s benefit was suspended on account of the Participant’s re-hire, when the reemployed Participant subsequently incurs a 409A Separation from Service, the Participant shall receive a monthly SERP Benefit calculated in whichever of the following two methods produces the greater monthly SERP Benefit:

 

A.                                    A SERP Benefit based on (1) the amounts used as the Participant’s Benefit Service, the Participant’s Pay and the Pay Threshold to calculate the suspended SERP Benefit as of the date the Participant previously terminated employment, and (2) the Offset Amount as of the date the Participant subsequently terminates employment.  This net SERP Benefit shall be adjusted for early commencement and form of payment in accordance with Sections B and C of ARTICLE 8 in the same manner, and be payable in the same form, as the suspended SERP Benefit; or

 

B.                                      The SERP Benefit the Participant is eligible to receive under the terms of the Plan in effect on the date the Participant’s subsequent employment with IBM ceases, based on

 

 

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the Participant’s Pay, Benefit Service and Eligibility Service and the Pay Threshold as of that date, but reduced by the Actuarial Equivalent of any SERP Benefit paid before the Participant’s reemployment.

 

ARTICLE 11 - Forfeiture

 

A.                                    Detrimental Activities A Participant shall not engage in any “Detrimental Activity.”  For purposes of this ARTICLE 11, “Detrimental Activity” shall include: (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with IBM, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of IBM; (ii) the disclosure to anyone outside IBM, or the use in other than the Company’s business, without prior written authorization from IBM, of any confidential information or material, as defined in the Company’s Agreement Regarding Confidential Information and Intellectual Property, relating to the business of IBM, acquired by the Participant either during or after employment with IBM; (iii) the failure or refusal to disclose promptly and to assign to IBM, pursuant to the Company’s Agreement Regarding Confidential Information and Intellectual Property, all right, title and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by IBM, relating in any manner to the actual or anticipated business, research or development work of IBM or the failure or refusal to do anything reasonably necessary to enable IBM to secure a patent where appropriate in the United States and in other countries; (iv) activity that results in termination of the Participant’s employment for cause; (v) a violation of any rules, policies, procedures or guidelines of IBM, including but not limited to the Company’s Business Conduct Guidelines; (vi) any attempt directly or indirectly to induce any employee of IBM to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of IBM; (vii) the Participant being convicted of, or entering a guilty plea with respect to, a crime, whether or not connected with IBM; or (viii) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of IBM.

 

B.                                      Forfeiture and Rescission .  Upon termination of employment, and from time to time thereafter upon request by the Plan Administrator, a Participant shall certify in a form and manner acceptable to the Plan Administrator that he or she is in compliance with the terms and conditions of the Plan.  Failure to comply with the provisions of this ARTICLE 11 prior to termination of employment or prior to receipt of any SERP Benefit payment hereunder shall cause the forfeiture of all SERP Benefits even if the failure to comply is not discovered until SERP Benefits have commenced.  Failure to comply with the provisions of this ARTICLE 11 after SERP Benefits have commenced hereunder shall cause any such payments to be rescinded from the point in time when the conduct which led to the failure to comply occurred.  The Plan Administrator shall notify the Participant in writing of any such rescission, and within ten days after receiving a notice of rescission from IBM, the Participant shall pay to IBM in cash the amount of any payment that has been rescinded in accordance with this ARTICLE 11.

 

 

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ARTICLE 12 - Information For SERP Benefit Calculations

 

Any delay in receiving from a Participant or Beneficiary information requested by the Company’s Executive Compensation Department, including but not limited to information regarding a Participant’s Spouse, Domestic Partner or other factors necessary for the calculation of SERP Benefits, shall result in the SERP Benefits payable being based initially on the information then available to IBM’s Executive Compensation Department and the Plan Administrator, and their estimate of any unavailable information.  If additional or different information thereafter becomes available to IBM’s Executive Compensation Department or the Plan Administrator, SERP Benefits shall be adjusted appropriately as determined by the Plan Administrator in accordance with, and only to the extent permitted by, section 409A of the Code (including any correction procedure thereunder).

 

If any overpayment of SERP Benefits is made, the Plan Administrator may, consistent with section 409A of the Code (including any correction procedure thereunder) recover such overpayment by any means it wishes, in its sole discretion, including requiring the repayment of any overpaid amount (with a forfeiture of all future payments being one of the possible remedies for failure to repay), or offsetting the amount of the overpayment against further amounts payable to or on account of the person who received the overpayment until the overpayment has been recovered in full.

 

ARTICLE 13 - Non-Alienation Of SERP Benefits

 

No SERP Benefit payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy or like encumbrance.  No SERP Benefit under the Plan shall in any manner be liable for or subject to the debts or liabilities of any person entitled to SERP Benefits under the Plan. Notwithstanding the preceding, the Plan Administrator may withhold any SERP Benefit and use it to satisfy any debt or other obligation that the Participant has to IBM, but only to the extent permissible under section 409A of the Code, for example, where such debt is incurred in the ordinary course of the service relationship between the Participant and IBM, the entire amount of reduction in any of the Participant’s taxable years does not exceed $5,000, and the reduction is made at the same time and in the same amount as the debt otherwise would have been due and collected from the Participant.

 

ARTICLE 14 - Withholding Taxes

 

IBM and the Plan Administrator shall withhold such taxes and make such reports to governmental authorities as they reasonably believe to be required by law.

 

ARTICLE 15 - Distributions to Minors and Incompetents

 

If the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive SERP Benefits under the Plan is incompetent to care for his or her affairs, and in the absence of the appointment of a legal guardian of the property of the incompetent, payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee or other legal representative) may be made to the spouse, parent, brother

 

 

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or sister or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent.

 

In the absence of the appointment of a legal guardian of the property of a minor, any minor’s share of SERP Benefits under the Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor.

 

The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed before authorizing the payment of SERP Benefits in such situations.  SERP Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this ARTICLE 15 shall be a complete discharge of any obligation arising under the Plan with respect to such SERP Benefit payments.

 

ARTICLE 16 - No Right to Employment

 

Nothing herein contained shall be deemed to give any employee the right to be retained in the service of IBM or to interfere with the right of IBM to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan.

 

ARTICLE 17 - Unfunded Plan

 

The Plan shall be unfunded.  IBM shall not be required to segregate any assets to provide SERP Benefits, nor shall the Plan be construed as providing for such segregation, nor shall IBM or the Committee be deemed to be a trustee of any assets of the Plan.  Any liability of IBM to any Participant or Beneficiary with respect to SERP Benefits shall be based solely upon any contractual obligations created by the Plan.  No such obligation of IBM shall be deemed to be secured by any pledge or other encumbrance or any property of IBM.  Neither IBM nor the Committee shall be required to give any security or bond for the performance of any obligation created by the Plan.

 

ARTICLE 18 - Miscellaneous

 

A.                                    Construction .  Unless the contrary is plainly required by the context, wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the female gender, and vice versa, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form, and vice versa.

 

B.                                      Severability .  If any provision of the Plan is held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

 

C.                                      Titles and Headings Not to Control .  The titles to ARTICLES and the headings of Sections in the Plan are placed herein for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

 

 

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D.                                     Complete Statement of the Plan .  This document is a complete statement of the Plan.  The Plan may be amended, modified or terminated only in writing and then only as provided herein.

 

E.                                       Booklets and Brochures .  IBM may from time to time issue to Participants one or more booklets or brochures summarizing the Plan.  In the event of any conflict between the Plan document and the booklets and brochures, the Plan document shall control.

 

F.                                       Section 409A .  The Plan is intended, and shall be construed, to comply with section 409A of the Code.  However, in no event shall the Company, its officers, directors, employees, parents, subsidiaries, or affiliates be liable for any additional tax, interest, or penalty incurred by a Participant or Beneficiary as a result of the Plan’s failure to satisfy the requirements of Section 409A of the Code, or as a result of the Plan’s failure to satisfy any other applicable requirements for the deferral of tax.

 

ARTICLE 19 - Situs of Plan; Governing Law

 

The situs of the Plan shall be the State of New York.  The Plan shall be governed by ERISA to the extent not exempted there from, and to the extent not preempted by ERISA, the laws of the State of New York, without regard to the choice of law rules of any jurisdiction.

 

 

17



 

APPENDIX A

 

TRANSITION RULES

 

A.                                    A Participant who:

 

(1)                                   Had attained his or her Normal Retirement Age or Early Retirement Date or was within five years of attaining his or her Normal Retirement Age or Early Retirement Date on June 30, 1999,

 

(2)                                   Was a Regular Employee throughout the period commencing on July 1, 1998 and ending on July 1, 1999,

 

(3)                                   Was an Executive on June 30, 1999, and

 

(4)                                   Had Pay of at least $160,000 on December 31, 1998,

 

shall receive a SERP Benefit equal to the greater of the SERP Benefit described in the Plan without regard to the appendices (“Main Plan”) or the SERP Benefit under the Prior Plan as described in APPENDIX B (without regard to Section F of ARTICLE 8 of APPENDIX B).

 

B.                                      A Participant who is described in Section A(2), (3) and (4) of this APPENDIX A, but not Section A(1), shall receive a SERP Benefit equal to the greater of (1) the SERP Benefit described in the Plan without regard to the appendices, or (2) the SERP Benefit under the Prior Plan as described in APPENDIX B, but with such SERP Benefit calculated based on the Participant’s Pension Credit (as described in Section A of ARTICLE 8 of APPENDIX B) as of the earlier of termination of employment with IBM, or December 31, 2003, and on the Participant’s total annual single life annuity (as described in Section A(ii) of ARTICLE 8 of APPENDIX B) as of the Participant’s Annuity Commencement Date.

 

C.                                      A Participant who is described in Section A or B of this APPENDIX A, who terminates employment with IBM after June 30, 1999, and who is subsequently reemployed by IBM shall not be covered under Section A or B of this APPENDIX A unless such coverage is approved by the officers specified in Section B(2)(c) of ARTICLE 7.

 

D.                                     No person shall be entitled to a benefit provided under APPENDIX B, except as provided in Sections A, B, or C of this APPENDIX A.

 

E.                                       For purposes of this APPENDIX A, the SERP Benefit under the Prior Plan shall begin to be paid at the time determined under ARTICLE 8 of the Main Plan (including the election timing rules in Sections 8.E. and 8.F.).  In addition, the special calculation for a Qualifying Leave in Section 8.B of the Main Plan shall apply, using (to the extent applicable) the early retirement reduction factors in Section 8.B of APPENDIX B to calculate the Participant’s benefit at the expected end of the leave.  For the avoidance of doubt, this means that the forms available and the calculation of those forms with respect to the Appendix B SERP Benefit are determined under Section 8.C of APPENDIX B.

 

 

18



 

APPENDIX B

 

IBM Supplemental Executive Retirement Plan (the “Prior Plan”)

 

IBM SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

 

(Effective January 1, 1995)

 

 

19



 

ARTICLE 1 - Purpose

 

International Business Machines Corporation (“IBM”), a New York corporation, has established the IBM Supplemental Executive Retirement Plan (the “SERP” or the “Plan”) with the intention of attracting and retaining executives whose skills and talents are important to IBM’s operations by providing a monthly retirement income that supplements benefits under the IBM Retirement Plan.

 

ARTICLE 2 — Definitions

 

a.                                        Company - IBM and its Domestic Subsidiaries, excluding foreign offices of the Company except as otherwise provided in these Articles.

 

b.                                       Subsidiary - a corporation, or other form of business organization, the majority interest of which is owned, directly or indirectly, by the Company.

 

c.                                        Domestic Subsidiary - a Subsidiary organized and existing under the laws of the United States or any state, territory or possession thereof, provided, however, that the Plan shall not be deemed to cover the employees of any Domestic Subsidiary unless so authorized by the chief human resources officer of IBM.

 

d.                                       Board of Directors - the Board of Directors of IBM.

 

e.                                        Executive Compensation and Management Resources Committee (also, the “Committee”) - the Executive Compensation and Management Resources Committee of the Board of Directors or such other persons or group as said Board may appoint to serve as the Committee.

 

f.                                          Foreign Service - Service with a Foreign Subsidiary (i.e., a Subsidiary other than a Domestic Subsidiary) or with a Foreign Branch (i.e., a branch of the Company or of a Domestic Subsidiary that operates principally outside the United States, its territories or possessions).

 

g.                                       IBM Retirement Plan - the retirement plan established by IBM pursuant to a resolution of its Board of Directors effective December l8, l945, as amended from time to time.

 

 

20



 

h.                                       Regular Employee (also, “Employee”) - an employee so defined by the IBM Retirement Plan.

 

i.                                           Executive - A Regular Employee so classified in the sole discretion of the Company’s chief human resources officer.

 

j.                                           Participant - an Executive who meets the requirements of ARTICLE 3, or a former Executive who is accruing or receiving Benefits pursuant to the provisions of the Plan.

 

k.                                        Beneficiary - a person who is designated by a Participant or by the terms of the Plan to receive a Benefit under the Plan in respect of a deceased Participant.  A Beneficiary shall not be considered a Participant by virtue of this definition.

 

l.                                           ERISA - the Employee Retirement Income Security Act of l974, as amended from time to time.

 

m.                                     Plan Administrator - a person or a committee appointed pursuant to ARTICLE 4 hereof which shall be responsible for reporting, record keeping and related administrative matters under the Plan.  If a committee is appointed to serve as the Plan Administrator, any one of the members of the committee may act individually on behalf of the committee to fulfill the committee’s duties.

 

n.                                       Continuous Service - Service as defined in the IBM Retirement Plan except as provided in ARTICLE 6 hereof; provided that a Participant shall not in any event be considered to have more than 35 years of Continuous Service hereunder.

 

o.                                       Compensation - Compensation as defined in the IBM Retirement Plan except that in no event shall 1989 or 1994 Long-Term Incentive Plan awards or payments or payments under any successor plan be included in Compensation.

 

p.                                       Plan Year - the calendar year.

 

q.                                       Normal Retirement Age - age 65.

 

r.                                          Normal Retirement Date - the date specified by ARTICLE 7A hereof.

 

 

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s.                                        Early Retirement Date - the date on which a Participant retires from employment with the Company in accordance with the provisions of ARTICLE 7B hereof.

 

t.                                          Spouse - a person who, according to the laws of the state of a Participant’s domicile, is the Participant’s spouse on the earlier of (i) the date of the Participant’s death while employed by the Company or (ii) the Participant’s Annuity Commencement Date.

 

u.                                       Actuarial Equivalent - shall mean a form of payment that is equal in value to another form of payment, as determined by the Plan Administrator in accordance with the actuarial assumptions specified by the IBM Retirement Plan.

 

v.                                       Annuity Commencement Date - shall mean the date as of which SERP Benefits are scheduled to commence.

 

w.                                     SERP Benefit (also, “Benefit”) - a payment or series of payments made or due under the Plan.

 

x.                                         Pay - the average of the Participant’s annual Compensation over (i) the last five years of employment or (ii) the highest consecutive five calendar years of employment, whichever is greater.

 

y.                                       Breakpoint - $185,000, subject to such adjustments as may be made from time to time by IBM’s chief human resources officer in his or her sole discretion.

 

z.                                         Earnings Threshold - $150,000, subject to such adjustments as may be made from time to time by IBM’s chief human resources officer in his or her sole discretion.

 

ARTICLE 3 - Coverage and Effect

 

This document states the terms of the Plan as established by Resolution of the Board of Directors on October 24, 1994 and first effective on January 1, 1995.  Participation is limited to Executive Level Regular Employees in the United States whose Pay equals or exceeds the Earnings Threshold.

 

 

22



 

ARTICLE 4 - Management and Administration

 

The Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or the Committee, but only if the Committee’s action is not materially inconsistent with a prior action of the Board.  The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement.

 

The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated:  (a) the Board of Directors, (b) the Executive Compensation and Management Resources Committee, (c) IBM’s chief human resources officer, and (d) the Plan Administrator and each person on any committee serving as the Plan Administrator.  Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.

 

The Board of Directors shall be responsible only for designating those persons who will serve on the Committee and for approving any resolution to terminate the Plan.

 

The Committee may, pursuant to a duly adopted resolution, delegate to IBM’s chief financial officer, chief human resources officer, or Treasurer, the Plan Administrator and/or any other officer or employee of IBM, authority to carry out any decision, directive or resolution of the Committee.

 

The Committee shall appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator.  The Plan Administrator shall have the full power and authority, in its sole discretion: (a) to promulgate and enforce such rules and regulations as it shall deem necessary or appropriate for the administration of the Plan; (b) to adopt any amendments to the Plan that are required by law; (c) to interpret the Plan consistent with the terms and intent thereof; and (d) to resolve any possible ambiguities, inconsistencies and omissions in the Plan.  All such actions shall be in accordance with the terms and intent of the Plan and the Plan Administrator shall on a regular basis report such actions to the Committee.  Additionally, IBM’s chief human resources officer shall appoint and designate such other IBM employees as may be needed to provide adequate staff services to the Committee and the Plan Administrator.

 

The Committee and/or the Plan Administrator may engage the services of accountants, attorneys, actuaries, consultants and such other professional personnel as they deem necessary or advisable to assist them in fulfilling their responsibilities

 

 

23



 

under the Plan.  The Committee, the Plan Administrator, and their delegates and assistants shall be entitled to act on the basis of all tables, valuations, certificates, opinions and reports furnished by such professional personnel.

 

ARTICLE 5 - Claims Procedure

 

IBM’s Executive Compensation Department is responsible for advising Participants and Beneficiaries of their Benefits under the Plan.  If a Participant or Beneficiary believes he or she is entitled to Benefits and has not received them, the Participant or Beneficiary must submit a written claim to the Director of Executive Compensation, IBM Corporation, Old Orchard Road, Armonk, New York l0504.  The Plan Administrator shall furnish to the Participant or Beneficiary a written decision setting forth the Plan Administrator’s decision. If the Plan Administrator denies a claim for Benefits in whole or in part, the claimant may appeal the denial of the claim in writing within 60 days of receiving the Plan Administrator’s written decision.

 

ARTICLE 6 - Service Credit

 

A.            Foreign Service

 

All Foreign Service by a Regular Employee who is otherwise eligible for Benefits under the Plan will be deemed for all Plan purposes, in all respects as Continuous Service with the Company, except that there shall be deducted from the combined amount payable under the Plan and the IBM Retirement Plan, any amount paid or payable to the Participant or Beneficiary arising out of Foreign Service to the extent that credit is given for such Foreign Service under this ARTICLE 6A and pursuant to any pension, retirement, severance indemnity, provident fund or other similar plan—whether in the form of installments or lump sum and whether private or sponsored by a foreign government—to the extent not provided by direct contributions made by the Participant,

 

(l)                                      provided that a Participant with such Foreign Service immediately preceded by Continuous Service with the Company must, before credit for such Foreign Service is given, resume employment as a Regular Employee of the Company; and

 

(2)                                   further provided that a Participant with such Foreign Service not immediately preceded by Continuous Service with the Company must, before credit for such Foreign Service is given, complete one year of Continuous Service as a Regular Employee of the Company subsequent to such Foreign Service.

 

 

24



 

B.            Service Credit for Leaves of Absence

 

A Participant who commences a leave of absence granted under IBM’s human resources practices then in effect, and who resumes the status of an Executive Level Regular Employee upon completion of the leave, shall be deemed, for all Plan purposes, as having been an actively employed Participant throughout the leave and to have received Compensation during the leave at the rate in effect immediately before the leave began.  If the Participant does not so resume his or her status as an Executive Level Regular Employee for at least 30 days for any reason other than disability or death, the Participant shall be treated as having severed from service with the Company on the date immediately preceding the date the leave began (i.e., the last day worked), and neither the Participant nor the Participant’s Beneficiary shall be eligible for a SERP Benefit.

 

C.            Other Service Credit

 

IBM’s chief executive officer, or other senior officer designated by the Committee, in his or her sole discretion, may grant Continuous Service credit to an Executive in excess of actual Continuous Service subject to such limitations and conditions as the officer considers appropriate, if the officer deems this to be in the best interests of the Company.

 

ARTICLE 7 - Retirement Date and Commencement of Benefits

 

A.            Normal Retirement Date

 

A Participant’s Normal Retirement Date is the last working day of the month in which his or her 65th birthday occurs; provided that the Participant has completed one year of Continuous Service, and further provided that, if a Participant was born on the first day of the month, the Normal Retirement Date shall be the last day of the month immediately preceding the 65th anniversary of birth.

 

B.            Early Retirement Date

 

A Participant described in any of the following paragraphs may retire from employment on an Early Retirement Date specified in the applicable paragraph below:

 

1.                                        A Participant with 30 years or more of Continuous Service may retire on an Early Retirement Date at the end of any month,

 

 

25



 

2.                                        A Participant with 15 or more years of Continuous Service may retire on an Early Retirement Date at the end of any month at or after reaching age 55,

 

3.                                        A Participant with five or more years of Continuous Service who is eligible to receive Social Security benefits at age 62 may retire on an Early Retirement Date at the end of any month at or after reaching age 62;

 

provided that in order to retire on an Early Retirement Date a Participant must give the Company at least six months prior written notice, in a form approved by the Plan Administrator, of his or her intention to retire early and to have SERP Benefits commence, unless the Plan Administrator waives such notice requirement.

 

C.            Commencement of SERP Benefits

 

In addition to all other conditions, in no event shall payment of SERP Benefits commence unless and until the Participant applies for such Benefits before his or her Annuity Commencement Date.  In no event shall any SERP Benefit be paid under this Plan unless the Participant (1) meets the Plan’s eligibility conditions on the date of his or her retirement, disability, or death, (2) retires (or dies while eligible to retire) under the terms of the IBM Retirement Plan, (3) holds an Executive Level position (as determined by IBM’s chief human resources officer in his or her sole discretion) on the date of his or her retirement or death, and (4) complies with the requirements imposed by ARTICLE 11 hereof.

 

ARTICLE 8 - SERP Benefits

 

A.            Normal Retirement Benefit

 

The Participant’s SERP Benefit, when expressed as a single life annuity commencing as of the first day of the month next following the Participant’s Normal Retirement Date, shall be equal to one-twelfth of the Phase-In Percentage (defined below) multiplied by the excess of (i) the Pension Credit (defined below) over (ii) the total annual single life annuity benefit at Normal Retirement Age, including the single life annuity benefit attributable to the Personal Retirement Provision whether such is paid in annuity form or not, payable monthly to the Participant under the IBM Retirement Plan or under any pension arrangement between the Company and a Participant which is payable monthly for life after termination of employment.

 

                The Phase-In Percentage shall be determined on the date the Participant retires, and shall not be increased

 

 

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thereafter.  If the Participant retires on January 31, 1995, the Phase-In Percentage shall be 27%.  If the Participant retires after January 31, 1995, the Phase-In Percentage shall be 27% plus 2% for each succeeding month (3% for the month of December) up to and including the month of the Participant’s retirement, until the Phase-In Percentage reaches 100% for a Participant retiring on or after December 31, 1997.  The Phase-In Percentage shall in no event exceed 100%.

 

The Pension Credit shall be a single life annuity equal to the sum of:

 

(1) 1.7% of Pay up to the Breakpoint, plus 2.55% of Pay in excess of the Break Point (if any), multiplied by the Participant’s years of Continuous Service up to a maximum of 20 years,

 

(2) 1.3% of Pay multiplied by the Participant’s years of Continuous Service between 20 and 30 years (if any), plus

 

(3) .75% of Pay multiplied by the Participant’s Continuous Service between 30 and 35 years (if any).

 

B.            Early SERP Benefit

 

If the Participant elects to retire on an Early Retirement Date with an Annuity Commencement Date on or after his or her 60th birthday, the Participant’s SERP Benefit when paid in the form of a single life annuity, shall be equal to the SERP Benefit calculated in accordance with Section A of this ARTICLE 8 based on the Participant’s years of Continuous Service and Pay on the Participant’s Early Retirement Date.

 

If the Participant elects to retire on an Early Retirement Date with an Annuity Commencement Date before      his or her 60th birthday, the Participant’s SERP Benefit, when paid in the form of a single life annuity, shall be be the amount determined in accordance with the following table:

 

 

27


 

Participant’s Age at Annuity Commencement Date begins

 

SERP Benefit under ARTICLE 8A hereof, reduced by the following

 

 

 

59

 

3%

58

 

7%

57

 

11%

56

 

15%

55

 

20%

below 55

 

20% plus 5% per year for each year before the Participant’s 55th birthday

 

For each month of age falling between the ages or years shown above, one-twelfth of the difference between the respective factors should be added.

 

The reductions described in this Section 8B shall be applied to the Pension Credit calculation under ARTICLE 8A prior to the subtraction of any benefit payable under the IBM Retirement Plan.  The Phase-In Percentage shall be applied to the net SERP Benefit.

 

C.            Form and Method of Payment

 

The normal form of payment of the SERP Benefit for a Participant who is unmarried on his or her Annuity Commencement Date is a single life annuity for the Participant’s life.

 

The normal form of payment of the SERP Benefit for a Participant who is married on his or her Annuity Commencement Date is a joint and survivor annuity providing an annuity to the Participant for life, in a monthly amount that is less than that payable under a single life annuity, and a survivor annuity for the life of the Participant’s Spouse in a monthly amount equal to 50 percent of the monthly amount payable to the married Participant during his or her lifetime.  This form of payment, which constitutes a 50% joint and survivor annuity, shall be the Actuarial Equivalent of the single life annuity otherwise payable to the Participant, based on the age of the Participant and the age of the Participant’s Spouse as of the Annuity Commencement Date.

 

A Participant also may elect to be paid under any alternative form of payment available under the IBM Retirement Plan except for the Early Retirement Level Income Option.  Any such election must be made in the manner and form prescribed by IBM’s Executive Compensation Department which may, in certain instances, require the consent of the Participant’s Spouse to the alternative

 

 

28



 

form of payment.  Each alternative form of payment shall be the Actuarial Equivalent of the single life annuity payable to the Participant in accordance with this ARTICLE 8.

 

Payment of the SERP Benefit shall be made monthly as of the first day of the month beginning with the month following the month in which the Participant retires from employment with the Company.

 

D.                                     Effective Date of Election

 

Any election under this ARTICLE 8 shall be effective on the later of the Participant’s Annuity Commencement Date or 30 days after IBM’s Executive Compensation Department receives the election.  The death of a survivor annuitant before the Participant’s Annuity Commencement Date automatically revokes any such election.  The death of a survivor annuitant on or after the Participant’s Annuity Commencement Date does not revoke the Participant’s election.

 

E.                                       Revocation of Election

 

A Participant may revoke an election he or she has made under this ARTICLE 8 at any time before the Participant’s Annuity Commencement Date.  In order to be effective, any such revocation must be received by IBM’s Executive Compensation Department before the Annuity Commencement Date and must be made in the manner and form prescribed by IBM’s Executive Compensation Department.  A timely revocation of an election shall only become effective upon  receipt by IBM’s Executive Compensation Department.

 

If a Participant revokes an election of an alternative form of payment, the Participant’s form of payment shall automatically revert to the normal form of payment prescribed by this ARTICLE 8.  After revoking an election, the Participant may elect an alternative form of payment in accordance with this ARTICLE 8; however, in order to become effective, the Participant’s election of an alternative form of payment (other than the normal form of payment) must be received by IBM’s Executive Compensation Department before the Participant’s Annuity Commencement Date.  A timely election shall become effective as of the later of the Participant’s Annuity Commencement Date or 30 days after IBM’s Executive Compensation Department receives the election.

 

F.             SERP Benefits for Disabled Participants

 

A Participant who (i) becomes totally and permanently disabled (as determined in accordance with the terms of the IBM Long Term Disability Plan) after becoming eligible

 

 

29



 

to retire hereunder and while at Executive Level, (ii)remains so disabled until Normal Retirement Age, and (iii) receives benefits under the IBM Long Term Disability Plan, shall be eligible to receive a SERP Benefit upon reaching Normal Retirement Age, notwithstanding his or her ineligibility for that Benefit under other provisions of the Plan.

 

The Annuity Commencement Date for such disabled Participant shall be his or her Normal Retirement Date. The disabled Participant’s SERP benefit shall be based on the Participant’s Pay and Continuous Service on the date the Participant’s IBM Sickness and Accident Income Plan benefits cease.

 

ARTICLE 9 - Preretirement Spousal Annuity

 

A preretirement spousal annuity shall be payable to the Spouse of a Participant who dies before his or her Annuity Commencement Date, but who, on the date of death, is both married and eligible to retire immediately hereunder.  The preretirement spousal annuity shall be the survivor annuity that the Participant’s Spouse would have received under the Plan had the Participant retired on his or her date of death with a 50 percent joint and survivor annuity in effect in accordance with the provisions of ARTICLE 8 hereof.  In no event shall the preretirement spousal annuity be payable to anyone other than the Participant’s Spouse on the date of the Participant’s death.

 

ARTICLE 10 - Suspension of Benefits for Reemployed Retired Participants

 

If a retired Participant is reemployed by the Company, any SERP Benefits otherwise payable to the Participant shall be suspended during the period of reemployment.  If the reemployed Participant subsequently completes one year of Continuous Service and retires from the Company, the Participant shall be eligible for SERP Benefits under the terms of the Plan in effect on the date the Participant’s employment with the Company ceases, based on the Participant’s Pay and Continuous Service as of that date, but reduced by the Actuarial Equivalent of any Benefits paid before the Participant’s reemployment.  If the reemployed Participant again retires without having completed one year of Continuous Service during his or her period of reemployment, the SERP Benefits being paid to the Participant immediately before his or her reemployment shall resume, without adjustment, immediately following his or her retirement.

 

 

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ARTICLE 11 - Forfeiture

 

A.            Competitive or Prejudicial Conduct

 

A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the chief executive officer of the Company or other senior officer designated by the Committee, is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company.  For a Participant whose employment has terminated, the judgment of the chief executive officer shall be based on the Participant’s position and responsibilities while employed by the Company, the Participant’s post-employment responsibilities and position with the other organization or business, the extent of past, current and potential completion or conflict between the Company and the other organization or business, the effect on the Company’s customers, suppliers and competitors of the Participant assuming the post-employment position, the guidelines established in the then current edition of IBM’s booklet, Business Conduct Guidelines , and such other considerations as are deemed relevant given the applicable facts and circumstances.  A Participant who has retired shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a substantial investment to the Participant or a greater than 10 percent equity interest in the organization or business.

 

B.            Disclosure of Confidential Information

 

A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company, or use in other than the Company’s business, any confidential information or material, as defined in the Company’s Agreement Regarding Confidential Information and Intellectual Property, related to the business of the Company, acquired by the Participant either during or after employment with the Company.

 

C.            Disclosure and Assignment of Rights

 

A Participant, pursuant to the Company’s Agreement Regarding Confidential Information and Intellectual Property shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner

 

 

31



 

to the actual or anticipated business, research, or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries.

 

D.            Forfeiture and Rescission

 

Upon retirement, and from time to time thereafter upon request by the Committee, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of the Plan. Failure to comply with the provisions of Section A, B, or C of this ARTICLE prior to retirement or receipt of any Benefit payment hereunder shall cause the forfeiture of all SERP Benefits even if the failure to comply is not discovered until Benefits have commenced.  Failure to comply with the provisions of Section A, B, and C of this ARTICLE after SERP Benefits have commenced hereunder shall cause any such payments to be rescinded from the point in time when the conduct which led to the failure to comply occurred.  The Plan Administrator shall notify the Participant in writing of any such rescission, and within ten days after receiving a notice of rescission from the Company, the Participant shall pay to the Company in cash the amount of any payment that has been rescinded in accordance with this ARTICLE.

 

ARTICLE 12 - Information for Benefits Calculations

 

A.            Incomplete or Incorrect Information

 

Any delay in receiving from a Participant or Beneficiary information requested by the Company’s Executive Compensation Department, including but not limited to information regarding a Participant’s Spouse or other factors necessary for the calculation of Benefits under the Plan, shall result in the Benefits payable being based initially on the information then available to IBM’s Executive Compensation Department and the Plan Administrator, and their estimate of any unavailable information.  If additional or different information thereafter becomes available to IBM’s Executive Compensation Department or the Plan Administrator, Benefits shall be adjusted appropriately as determined by the Plan Administrator.

 

B.            Overpayments

 

If any overpayment of Benefits is made under the Plan, the amount of the overpayment may be set off against further amounts payable to or on account of the person who received the overpayment until the overpayment has been

 

 

32



 

recovered in full.  The foregoing remedy is not intended to be exclusive.

 

ARTICLE 13 - Alienation of Benefits

 

No Benefit payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy or like encumbrance.  No Benefit under the Plan shall in any manner be liable for or subject to the debts or liabilities of any person entitled to Benefits under the Plan.

 

ARTICLE 14 - Withholding Taxes

 

The Company and the Plan Administrator shall withhold such taxes and make such reports to governmental authorities as they reasonably believe to be required by law.

 

ARTICLE 15 - Distributions to Minors and Incompetents

 

If the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive Benefits under the Plan is incompetent to care for his or her affairs, and in the absence of the appointment of a legal guardian of the property of the incompetent, payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee or other legal representative) may be made to the spouse, parent, brother or sister or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent.

 

In the absence of the appointment of a legal guardian of the property of a minor, any minor’s share of Benefits under the Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor.

 

The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of any such incompetent or minor be appointed before authorizing the payment of Benefits in such situations.  Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this ARTICLE 15 shall be a complete discharge of any obligation arising under the Plan with respect to such Benefit payments.

 

 

33



 

ARTICLE 16 - No Right to Employment

 

Nothing herein contained shall be deemed to give any employee the right to be retained in the service of the Company or to interfere with the right of the Company to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan.

 

ARTICLE 17 - Unfunded Plan

 

The Plan shall be unfunded.  The Company shall not be required to segregate any assets to provide Benefits, nor shall the Plan be construed as providing for such segregation, nor shall the Company or the Committee be deemed to be a trustee of any assets of the Plan.  Any liability of the Company to any Participant or Beneficiary with respect to SERP Benefits shall be based solely upon any contractual obligations created by the Plan.  No such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance or any property of the Company.  Neither the Company nor the Committee shall be required to give any security or bond for the performance of any obligation created by the Plan.

 

ARTICLE 18 - Miscellaneous

 

A.            Construction

 

Unless the contrary is plainly required by the context, wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the female gender, and vice versa, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form, and vice versa.

 

B.            Severability

 

If any provision of the Plan is held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

 

C.            Titles and Headings Not to Control

 

The titles to ARTICLES and the headings of Sections in the Plan are placed herein for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

 

 

34



 

D.            Complete Statement of Plan

 

This document is a complete statement of the Plan.  The Plan may be amended, modified or terminated only in writing and then only as provided herein.

 

E.             Booklets and Brochures

 

The Company shall from time to time issue to Participants one or more booklets or brochures summarizing the Plan. In the event of any conflict between the Plan document and the booklets and brochures, the Plan document shall control.

 

ARTICLE 19 - Situs of Plan; Governing Law

 

The situs of the Plan shall be the State of New York.  The Plan shall be governed by ERISA, and to the extent not preempted by ERISA, the law of the State of New York.

 

 

35



 

APPENDIX C

 

Heritage PwCC Partner Plan

 

ARTICLE C1 - Purpose

 

This APPENDIX C, which is effective October 1, 2002, describes the SERP Benefit for a Regular Employee who is an Executive, as the term Executive is defined in ARTICLE C2.

 

ARTICLE C2 - Definitions

 

For purposes of this APPENDIX C, capitalized terms shall have the same meaning as they do in ARTICLE 2, except the following terms shall have the following meanings:

 

a.                                        Benefit Service - an Executive’s Continuous Service that occurs on or after October 1, 2002, while a Regular Employee or a Leave of Absence Employee, and while accruing benefits under the IBM Personal Pension Plan, rounded to the next completed month, except that Benefit Service shall not exceed 20 years minus the number of years of Partner Service, and shall not include periods of Continuous Service that occur prior to the latest date of hire or rehire with IBM.

 

b.                                       Continuous Service — shall have the same meaning as it does in ARTICLE 2, except that Continuous Service shall include Partner Service.

 

c.                                        Eligibility Service - shall have the same meaning as it does in ARTICLE 2, except that Eligibility Service shall include Partner Service.

 

d.                                       Executive — an individual who is listed in Exhibit I, which exhibit is maintained in the office of the Director of Executive Compensation of IBM.  Exhibit I contains a list of individuals who were partners with PwC immediately prior to October 1, 2002, and who became employed by IBM as of October 1, 2002.

 

e.                                        Offset Amount - the annual single life annuity described in Section A of ARTICLE C5.

 

f.                                          Pay — shall have the same meaning as it does in ARTICLE 2, except that Compensation and Continuous Service earned before October 1, 2002 shall not be considered.

 

g.                                       Partner Service — an Executive’s service while a partner with PwC prior to October 1, 2002, as determined based on the methodology for calculating Benefit Service under the IBM Personal Pension Plan and based on the date the Executive became a partner at PwC, as provided to IBM by PwC.

 

h.                                       PwC — PricewaterhouseCoopers.

 

i.                                           Target Percentage — a percentage that is determined based on age (to a maximum of 50 years) plus Partner Service (to a maximum of 20 years), as shown below:

 

 

36



 

If age on September 30, 2002 plus Partner Service is

 

Target Percentage is

60 or more

 

100%

56 but less than 60

 

90

52 but less than 56

 

80

48 but less than 52

 

70

44 but less than 48

 

60

40 but less than 44

 

50

Less than 40

 

0

 

ARTICLE C3 - Coverage and Effect

 

This Appendix C describes the SERP Benefit for a Regular Employee who is an Executive, as the term Executive is defined in ARTICLE C2.  The provisions of ARTICLES 2 through 19 shall apply in determining the SERP Benefit, except as otherwise provided in ARTICLES C2, C4, C5 and C6.

 

ARTICLE C4 - Eligibility for SERP Benefits

 

Notwithstanding ARTICLE 7, a Participant shall be eligible for a SERP Benefit only if the Participant is an Executive on his or her date of termination with IBM, a forfeiture under ARTICLE 11 does not occur, and the Participant’s employment with IBM terminates for any reason other than cause (i) on a date after the Participant has completed five years of Eligibility Service and has attained age 50, or (ii) solely with respect to the amount shown in Exhibit II, which exhibit is maintained in the office of the Director of Executive Compensation of IBM, on a date when such amount is greater than $0.

 

ARTICLE C5 - SERP Benefits

 

A.                                    Formula .

 

Notwithstanding Section A of ARTICLE 8, a Participant’s annual SERP Benefit, when expressed as a single life annuity commencing as of the first day of the month next following the Participant’s 409A Separation from Service, shall equal 1.5% times Pay times the number of years of Benefit Service (but not to exceed 20 years minus the number of years of Partner Service) times the Participant’s Target Percentage.

 

There shall be offset from the amount described in the preceding paragraph, an Offset Amount.  The Offset Amount shall equal (1) below if a Participant has a 409A Separation from Service after December 31, 2007, and the sum of (1) and (2) below if a Participant has a 409A Separation from Service before January 1, 2008 :

 

(1)  The annual single life annuity the Participant is entitled to receive under the IBM Personal Pension Plan and the IBM Excess Personal Pension Plan beginning on the Annuity Commencement Date.  For this purpose, the single life annuity will be

 

 

37



 

calculated based on what the Participant’s benefit under the IBM Personal Pension Plan and IBM Excess Personal Pension Plan would have been if the Participant had not received any distributions from such plans before the Annuity Commencement Date, and this offset shall first be calculated without regard to any settlement benefit due in connection with the litigation entitled, Cooper v. IBM ; the Offset Amount shall then be increased to reflect such settlement benefit in accordance with the methodology adopted by the Company on or before December 31, 2008; plus

 

(2)  The annual single life annuity that would be described in Section A(1) of this ARTICLE C5 if the Pay Credit Percentage described in Section 11.3(d) of the IBM Personal Pension Plan was 3% instead of 5%.

 

For purposes of calculating the Offset Amount in the case of a 409A Separation from Service on account of a Qualifying Leave, the Participant’s benefits under the IBM Personal Pension Plan and the IBM Excess Personal Pension Plan shall be calculated using the same methodology that applies to calculate the amount of a Participant’s Excess Prior Plan Benefit under Section 5.02(d) of the IBM Excess Personal Pension Plan.

 

A Participant who is listed in Exhibit II shall receive an additional annual single life annuity equal to the amount described in Exhibit II, which amount is dependent on the Participant’s Annuity Commencement Date, times the Participant’s Target Percentage.  If the Participant’s Annuity Commencement Date is after December 31, 2007, the amount described in Exhibit II shall be multiplied by a fraction, the numerator of which is the Participant’s Benefit Service (disregarding the 20 year cap) as of December 31, 2007, and the denominator of which is the sum of the numerator and the amount of Continuous Service the Participant earns after December 31, 2007 and before the Participant’s Annuity Commencement Date.  For Annuity Commencement Dates not listed in Exhibit II, linear interpolation shall be used.

 

B.            Reduction for SERP Benefits Payable Prior to Age 55 .

 

Notwithstanding Section B of ARTICLE 8, if the Participant’s Annuity Commencement Date is on or after his or her 55th birthday, the Participant’s SERP Benefit when paid in the form of a single life annuity, shall be equal to the SERP Benefit calculated in accordance with Section A of this ARTICLE C5.

 

If the Participant’s Annuity Commencement Date is before his or her 55th birthday, the Participant’s SERP Benefit, as calculated in the form of a single life annuity and before offsetting the Offset Amount described in Section A of this ARTICLE C5 and before adding the additional amount described in Exhibit II, shall be reduced by 2/3 of 1% for each month that the Annuity Commencement Date precedes age 55; however, if a Participant is eligible to receive a SERP Benefit on his or her Annuity Commencement Date without regard to this sentence and the Participant incurs a Qualifying Leave, the amount of the Participant’s monthly SERP Benefit shall be calculated using the same methodology that applies to calculate the amount of a Participant’s Excess Prior Plan Benefit under Section 5.02(d) of that plan, and the resulting monthly annuity shall be adjusted in the same manner as described in Section 5.02(e) of that plan.

 

 

38



 

ARTICLE C6 - Preretirement Survivor Annuity

 

 

 

Notwithstanding ARTICLE 9, a preretirement survivor annuity shall be payable only to the Spouse or Domestic Partner of a Participant who dies before his or her Annuity Commencement Date, but who, on the date of death, has a Spouse or Domestic Partner and who, on the date of death, has (i) completed five years of Eligibility Service and has attained age 50, or (ii) solely with respect to the amount shown in Exhibit II, has an amount that is greater than $0. The preretirement survivor annuity shall be the survivor annuity that the Participant’s Spouse or Domestic Partner would have received under the Plan had the Participant terminated employment on his or her date of death with a 50% joint and survivor annuity in effect in accordance with the provisions of ARTICLE 8.  The Spouse or Domestic Partner shall begin receiving the preretirement survivor annuity as of the first day of the month next following the Participant’s date of death.

 

 

39



 

EXHIBITS I and II

 

[Employee Data Redacted]

 

40


 

APPENDIX D

IBM SECTION 409A UMBRELLA DOCUMENT

 

For purposes of plans of International Business Machines or any member of its controlled group as determined under §414(b) or (c) of the Internal Revenue Code (collectively, “IBM”) that are subject to § 409A of the Internal Revenue Code (“§ 409A”), any benefit subject to § 409A that is paid on account of a separation from service shall be paid on account of a “409A Separation from Service,” as defined below.  In addition, for purposes of applying the six-month delay described in § 409A(a)(2)(B)(i), a “specified employee” is a 409A Key Employee, as defined below.

 

1.  The term “409A Key Employee” means, for each 12-consecutive-month period beginning on any April 1 that occurs after January 1, 2008 (an “effective period”), an individual who is a “specified employee” of IBM (within the meaning of Treas. Reg. § 1.409A-1(i)) within the 12-consecutive-month period ending on the December 31 immediately preceding the start of such effective period.  For purposes of the preceding sentence, “specified employees” include:

 

(a)                                   each employee of IBM on IBM’s U.S. payroll, not to exceed 50, who is designated by IBM as an officer and whose pay (as defined under Treas. Reg. § 1.415(c)-2(d)(4)) exceeds the dollar limitation under § 416(i)(1)(A)(i) of the Internal Revenue Code (“§ 416 Pay Limit”); plus

 

(b)                                   the highest paid Band A executives (as defined by IBM’s rules and regulations) on IBM’s U.S. payroll whose pay exceeds the § 416 Pay Limit (where pay is defined under Treas. Reg. § 1.415(c)-2(d)(4)), such that, when combined with the employees in subsection (a) (designated officers), there are no more than 50 “specified employees” on IBM’s U.S. payroll; plus

 

(c)                                   if the total number of individuals designated as “specified employees” under subsections (a) and (b) is less than 50, the highest paid other employees on IBM’s U.S. payroll (where pay is defined under Treas. Reg. § 1.415(c)-2(d)(4)), such that, when combined with the employees in subsections (a) (designated officers) and (b) (Band A executives), there are no more than 50 “specified employees” on IBM’s U.S. payroll; plus

 

(d)                                   each employee of IBM who:  (1) is entitled to a benefit that is subject to § 409A, (2) is not on a U.S. payroll, and (3) is considered to be an officer for purposes of identifying “specified employees” under Treas. Reg. § 1.409A-1(i).

 

2.  The term “409A Separation from Service” means, effective January 1, 2009, a separation from service within the meaning of Treas. Reg. § 1.409A-1(h), which shall include, but not be limited to, the following events:

 

(a)                                   A “termination of employment,” as that term is applied for purposes of the IBM 401(k) Plus Plan (except to the extent that an earlier event associated with such termination of employment is described in subsections (b) through (d), below);

 

(b)                                   The start of a bridge leave or a pre-retirement planning leave;

 

(c)                                   A permanent reduction in services to no more than 20% of the average level of services performed over the immediately preceding 36-month period (or the full period of services if less);

 

(d)                                   The six-month anniversary of a leave of absence, when no services are performed (including paid and unpaid leave and including disability leave or any combination thereof) other than a military leave.

 

From January 1, 2008 through December 31, 2008, a “409A Separation from Service” means a good faith interpretation of “separation from service,” within the meaning of § 409A(a)(2)(A)(i), and includes the following rules:

 

i.                                          A Participant who is on a bridge leave or a pre-retirement planning leave as of December 31, 2007, shall have a 409A Separation from Service as of December 31, 2007;

 

 



 

ii.                                      If a Participant—

 

(1)                                   during 2008 has an event described in paragraph (c) or has a six-month anniversary described in paragraph (d),

 

(2)                                   does not otherwise incur a separation from service prior to December 31, 2008, and

 

(3)                                   has not returned to active employment (or, in the case of an event described in (c), to full schedule employment) on or before December 31, 2008,

 

the Participant shall have a 409A Separation from Service as of December 31, 2008.

 

 


 



 

Exhibit 10.3

 

Note :  This exhibit reflects amendments to clarify the administrative structure of the IBM Excess 401(k) Plus Plan.

 

IBM EXCESS 401(k) PLUS PLAN

 

Effective January 1, 2008

(except as otherwise provided herein)

 

 

 


 

TABLE OF CONTENTS

 

 

ARTICLE I. INTRODUCTION

1

1.01.

Name of Plan and Effective Date

1

1.02.

Purpose

1

1.03.

Legal Status

1

1.04.

Section 409A

1

ARTICLE II. DEFINITIONS

3

ARTICLE III. ELIGIBILITY

9

3.01.

Eligibility for Elective Deferrals

9

3.02.

Eligibility for Matching and Match Maximizer Contributions

9

3.03.

Eligibility for Automatic Contributions and Transition Credits

9

3.04.

Eligibility for Section 415 Excess Credits

10

3.05.

Eligibility for Discretionary Awards

10

ARTICLE IV. ELECTIVE DEFERRALS AND MATCHING CONTRIBUTIONS

11

4.01.

Elective Deferrals

11

4.02.

Matching Contributions

12

ARTICLE V. NON-ELECTIVE CREDITS

14

5.01.

Automatic Contributions

14

5.02.

Transition Credits

14

5.03.

Section 415 Excess Credits

14

5.04.

Discretionary Awards

14

ARTICLE VI. VESTING, DEEMED INVESTMENT OF ACCOUNTS

15

6.01.

Individual Accounts

15

6.02.

Vesting of Accounts

15

6.03.

Deemed Investment of Accounts

15

 



 

Exhibit A

 

ARTICLE VII. PAYMENT OF GRANDFATHERED AMOUNTS

18

7.01.

Grandfathered Treatment of Grandfathered Amounts

18

7.02.

Payment of Grandfathered Amounts Upon Death

18

7.03.

Options for Payment of Grandfathered Amounts Upon Termination of Employment

18

7.04.

Payment of Grandfathered Amounts Upon Termination of Employment

19

ARTICLE VIII. PAYMENT OF NON-GRANDFATHERED AMOUNTS

20

8.01.

Payment of Non-Grandfathered Amounts Upon Death

20

8.02.

Form of Payment for Non-Grandfathered Amounts Paid Upon a 409A Separation from Service.

20

8.03.

Electing and Changing Payment Options for Non-Grandfathered Amounts

21

8.04.

Payment of Non-Grandfathered Upon a 409A Separation from Service

23

8.05.

Special Rules for Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service in First Quarter of 2008

24

8.06.

Valuation of Non-Grandfathered Accounts

24

8.07.

Effect of Rehire on Non-Grandfathered Payments

25

ARTICLE IX. ADMINISTRATION

26

9.01.

Amendment or Termination

26

9.02.

Responsibilities

26

ARTICLE X. GENERAL PROVISIONS

28

10.01.

Funding

28

10.02.

No Contract of Employment

28

10.03.

Facility of Payment

28

10.04.

Withholding Taxes

29

10.05.

Nonalienation

29

 

2



 

Exhibit A

 

10.06.

Administration

29

10.07.

Construction

29

ARTICLE XI. CLAIMS PROCEDURE

30

 

3



 

ARTICLE I. INTRODUCTION

 

1.01.       Name of Plan and Effective Date. The IBM Executive Deferred Compensation Plan (the “EDCP”) is hereby renamed and restated as the “IBM Excess 401(k) Plus Plan” (the “Plan”). The Plan is effective as of January 1, 2008 (the “Effective Date”), except as provided in Section 1.04, below, with respect to amounts earned before the Effective Date. In addition, the EDCP plan document in effect prior to the Effective Date (the “EDCP document”) continues to govern the portion of the Plan consisting of “deferred shares” (as defined in the EDCP document). The EDCP document is Appendix A (and will be attached when its restatement is first adopted after the Effective Date).

 

1.02.       Purpose. The purpose of the Plan is to attract and retain employees by providing a means for employees to defer their pay and obtain matching and other company contributions outside of the IBM 401(k) Plus Plan, which is subject to certain limits under the Internal Revenue Code of 1986, as amended (the “Code”). All Plan benefits are paid out of the general assets of the Company (as defined in ARTICLE II).

 

1.03.       Legal Status. The Plan consists of two separate plans:

 

(a) An unfunded deferred compensation plan for a select group of management or highly compensated employees (within the meaning of Sections 201(2), 301(a)(3), 401(a)(1), 4021(b)(6) of Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), except to the extent that the Plan provides benefits as described in subsection (b), below; and

 

(b) An “excess benefit plan” (within the meaning of Section 3(36) of ERISA), to the extent the Plan provides benefits that Section 415 of the Code prevents the IBM 401(k) Plus Plan from providing.

 

1.04.       Section 409A.

 

(a)  Grandfathered Amounts under Section 409A. Benefits earned and vested under the EDCP before January 1, 2005, as adjusted for earnings, gains, or losses on those benefits (“Grandfathered Amounts”) are treated as grandfathered for purposes of Section 409A of the Code. Grandfathered Amounts are subject to the terms of the EDCP in effect on October 3, 2004, except as provided herein or in Appendix A. For recordkeeping purposes, the Company will account separately for Grandfathered Amounts.

 

(b)  Non-Grandfathered Amounts. With respect to benefits under the Plan (including benefits earned before the Effective Date) other than Grandfathered Amounts (“Non-Grandfathered Amounts”), the Plan is intended, and shall be construed, to comply with the requirements of Section 409A of the Code. Non-Grandfathered Amounts earned before the Effective Date were subject, before

 



 

the Effective Date, to the terms of the EDCP, as amended, including, for example, the requirement that any payment to a 409A Key Employee (as defined in ARTICLE II) that would otherwise be paid in the first six months after a separation from service was instead paid in the seventh month. Notwithstanding anything to the contrary in this Section 1.04, in no event shall the Company, its officers, directors, employees, parents, subsidiaries, or affiliates be liable for any additional tax, interest, or penalty incurred by a Participant or Beneficiary as a result of the Plan’s failure to satisfy the requirements of Section 409A of the Code, or as a result of the Plan’s failure to satisfy any other applicable requirements for the deferral of tax.

 

2



 

ARTICLE II. DEFINITIONS

 

The following words and phrases as used herein have the following meanings unless a different meaning is required by the context:

 

“401(k) Plan” means the IBM 401(k) Plus Plan as in effect from time to time, including, with respect to periods before the Effective Date, the IBM Savings Plan and any other predecessor to the IBM 401(k) Plus Plan, as applicable.

 

“409A Key Employee” has the meaning described in the IBM Section 409A Umbrella Document, which is Appendix B.

 

“409A Separation from Service” has the meaning described in the IBM Section 409A Umbrella Document attached to this Plan as Appendix B.

 

“Account” means a record-keeping account maintained for a Participant under the Plan. A Participant’s Accounts under the Plan include, where applicable, a Pre-2005 Elective Deferral Account, a Pre-2005 Company Account, a Post-2004 Elective Deferral Account, and a Post-2004 Company Account.

 

“Actively Employed” means actively employed by the Company, including on a leave of absence other than a bridge leave, a pre-retirement planning leave, or a leave during which the individual is receiving LTD Benefits.

 

“Automatic Contribution” has the meaning provided in Section 5.01.

 

“Base Pay” means an Employee’s base pay (determined under the 401(k) Plan) from the Company for employment while on a U.S. payroll, determined before reduction for deferrals under the Plan or the 401(k) Plan or for amounts not included in income on account of salary reductions under Code section 125 or 132(f). However, Base Pay does not include any pay during a Deferral Period that is paid after an Employee’s 409A Separation from Service (except amounts paid in the pay period in which the Employee’s 409A Separation from Service occurs and Rehire Pay).

 

“Beneficiary” means a person who is designated by a Participant or by the terms of the Plan to receive a benefit under the Plan by reason of the Participant’s death. Each Participant’s Beneficiary under the Plan shall be the person or persons designated as the Participant’s Beneficiary under the Plan, in the form and manner prescribed by the Plan Administrator. If no such beneficiary designation is in effect under the Plan at the time of the Participant’s death, or if no designated beneficiary under the Plan survives the Participant, the Participant’s Beneficiary shall be the person or persons determined to be the Participant’s beneficiary under the 401(k) Plan (including the default beneficiary rules under the 401(k) Plan, if no beneficiary is designated under that plan).

 

“Board” means the Board of Directors of IBM.

 

3



 

“Code” means the Internal Revenue Code of 1986, as amended from time to time. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.

 

“Combined Base Pay Election” has the meaning provided in Section 4.01(a)(1).

 

“Company” means International Business Machines Corporation (“IBM”), a New York corporation having its principal place of business at Armonk, New York, and its Domestic Subsidiaries that are participating employers in the 401(k) Plan.

 

“Company Contributions” means amounts credited to a Participant’s Post-2004 Company Account, including Matching Contributions, Match Maximizer Contributions, Automatic Contributions, Transition Credits, Discretionary Awards, Section 415 Excess Credits, and any similar credits under the EDCP.

 

“Deferral Election” means an Eligible Employee’s election to defer Base Pay or Performance Pay under Section 4.01.

 

“Deferral Period” means a period that begins on or after the Effective Date that (a) starts on January 1 and ends on the next following December 31 for Base Pay and (b) starts on April 1 and ends on the next following March 31 for Performance Pay.

 

“Discretionary Award” means a credit to a Participant’s Account as described in Section 5.04.

 

“Domestic Subsidiary” means a “Domestic Subsidiary” as defined in the 401(k) Plan.

 

“EDCP” means the IBM Executive Deferred Compensation Plan in effect before the Effective Date.

 

“Effective Date” means January 1, 2008.

 

“Elective Deferrals” means deferrals of Base Pay or Performance Pay credited to the Participant’s Post-2004 Elective Deferral Account pursuant to a Participant’s election under Section 4.01(a) or any similar provision of the EDCP.

 

“Eligible Employee” means, with respect to a Plan Year, an Employee who is eligible to make Elective Deferrals or to receive Company Contributions during the Plan Year pursuant to ARTICLE III.

 

“Employee” means an employee of the Company who is eligible to participate in the 401(k) Plan and is not a Supplemental Employee. Notwithstanding the foregoing, an individual who, on or after January 1, 2009, was an Employee and becomes a Supplemental Employee or begins receiving LTD Benefits before or during a Deferral Period with respect to which the individual has a valid, irrevocable Deferral Election and

 

4



 

without first incurring a 409A Separation from Service shall continue to be considered to be an Employee solely for purposes of the individual’s eligibility during such Deferral Period to make Elective Deferrals (but not for purposes of the individual’s eligibility for any Company Contribution). For example, an individual who is receiving LTD Benefits is not eligible to participate in the 401(k) Plan (as in effect on the Effective Date) and is therefore not an Employee, except that if the individual has not incurred a 409A Separation from Service, the Employee’s Elective Deferrals shall continue pursuant to any irrevocable Deferral Election.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

“Excess 401(k) Eligible Pay” means, for each payroll period that ends after an Eligible Employee reaches his or her Program Eligibility Date, the excess, if any, of (A) the Eligible Employee’s eligible compensation under the 401(k) Plan for such payroll period determined without regard to the Pay Limit, over (B) the Eligible Employee’s eligible compensation under the 401(k) Plan during such payroll period determined taking into account the Pay Limit. Solely for purposes of each payroll period in Plan Year 2008:

 

(a)           Excess 401(k) Eligible Pay of an Eligible Employee who is an executive includes Performance Pay that is paid during the payroll period and is not eligible compensation under the 401(k) Plan minus Elective Deferrals made with respect to such Performance Pay; and

 

(b)          solely for purposes of calculating Match Maximizer Contributions, Excess 401(k) Eligible Pay does not include Growth Driven Profit-Sharing amounts and employee sales or services incentives that are paid in the first quarter of 2008 (however, these amounts are Excess 401(k) Eligible Pay for purposes of calculating Automatic Contributions and Transition Credits).

 

“Grandfathered Amounts” has the meaning provided in Section 1.04(a).

 

“IBM” means International Business Machines Corporation, any predecessor, or any successor by merger, purchase, or otherwise.

 

“LTD Benefits” means benefits under the Company’s long-term disability plan.

 

“Matching Contribution” has the meaning provided in Section 4.02(a).

 

“Match Maximizer Contribution” has the meaning provided in Section 4.02(b).

 

“Non-Grandfathered Amounts” has the meaning provided in Section 1.04(b).

 

“Participant” means an individual who has a positive balance in an Account under the Plan.

 

5



 

“Pay Limit” means, for a Plan Year, the limit on compensation that may be taken into account during such Plan Year under a tax-qualified plan as determined under Code Section 401(a)(17).

 

“Performance Pay” means an Employee’s performance pay (determined under the 401(k) Plan) from the Company for employment while on a U.S. payroll, determined before reduction for deferrals under the Plan or the 401(k) Plan or for amounts not included in income on account of salary reductions under Code section 125 or 132(f). However, Performance Pay does not include any pay during a Deferral Period that is paid after an Employee’s 409A Separation from Service (except amounts paid in the pay period in which the Employee’s 409A Separation from Service occurs and Rehire Pay). Notwithstanding this definition, Performance Pay that is paid in the first quarter of 2008 is subject to the following special rules:

 

(a)           such Performance Pay does not include Growth Driven Profit-Sharing and employee sales or services incentives;

 

(b)          such Performance Pay includes incentive pay (such as Annual Incentive Plan payments or sales or services incentives) that is paid to an executive; and

 

(c)           an Employee’s deferral election with respect to such Performance Pay is subject to the advance election and deferral percentage limit terms of the EDCP.

 

“Plan” means this IBM Excess 401(k) Plus Plan.

 

“Plan Administrator” means the VP HR with functional responsibilities for IBM’s benefit programs, or such other person or committee appointed pursuant to ARTICLE IX, which shall be responsible for reporting, recordkeeping, and related administrative requirements. If appointed as a committee, any one of the members of the committee may act individually on behalf of the committee to fulfill the committee’s duties.

 

“Plan Year” means the calendar year.

 

“Pre-2005 Accounts” means a Participant’s Pre-2005 Company Account and Pre-2005 Elective Deferral Account.

 

“Pre-2005 Company Account” means, for any Participant, the aggregate of the company contributions (including any discretionary awards) credited to the Participant under the EDCP before January 1, 2005, to the extent such contributions were vested as of December 31, 2004, and earnings, gains, or losses credited on those contributions, but reduced for any prior distribution under the EDCP or the Plan.

 

“Pre-2005 Elective Deferral Account” means, for any Participant, the aggregate of the elective deferrals credited to the Participant under the EDCP before January 1, 2005, and earnings, gains, or losses credited on those elective deferrals, but reduced for any prior distribution under the EDCP or the Plan.

 

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“Post-2004 Accounts” means a Participant’s Post-2004 Company Account and Post-2004 Elective Deferral Account.

 

“Post-2004 Company Account” means, for any Participant, the aggregate of (a) the Company Contributions credited to the Participant under the EDCP or the Plan on or after January 1, 2005, plus (b) any such contributions credited under the EDCP before January 1, 2005, to the extent such contributions were not vested as of December 31, 2004, and earnings, gains, or losses credited on amounts described in (a) and (b), but reduced for any prior distribution under the EDCP or the Plan.

 

“Post-2004 Elective Deferral Account” means, for any Participant, the aggregate of the Elective Deferrals credited to the Participant under the EDCP or the Plan on or after January 1, 2005, and earnings, gains, or losses credited on those Elective Deferrals, but reduced for any prior distribution under the EDCP or the Plan.

 

“Program Eligibility Date” means an Eligible Employee’s “Program Eligibility Date” under the 401(k) Plan.

 

“Rehire Pay” means Base Pay or Performance Pay, as applicable, that is payable on or after the date an Employee returns to active employment with the Company following a 409A Separation from Service or, if later, after the end of the Deferral Period in which the Employee’s 409A Separation from Service occurred. For example, if an Employee incurs a 409A Separation from Service in April 2009 (whether on account of a leave in excess of six months or because of a termination of employment with IBM) and returns to active employment with IBM in November 2009, the Employee’s Rehire Pay would include (a) Base Pay payable on or after January 1, 2010 (i.e., the beginning of the Base Pay Deferral Period after the 409A Separation from Service), and (b) Performance Pay payable on or after April 1, 2010 (i.e., the beginning of the Performance Pay Deferral Period after the 409A Separation from Service). By contrast, if instead the Employee returned to active employment on February 1, 2010, the Employee’s Rehire Pay would include (a) Base Pay payable on or after on February 1, 2010, and (b) Performance Pay payable on or after April 1, 2010.

 

“Retirement-Eligible Participant” means a Participant who:

 

(a)           when his or her 409A Separation from Service occurs, (1) is at least age 55 with at least 15 years of service, (2) is at least age 62 with at least 5 years of service, (3) is at least age 65 with at least 1 year of service, or (4) begins to receive LTD Benefits;

 

(b)          as of June 30, 1999, had at least 25 years of service and, when his or her 409A Separation from Service occurs, has at least 30 years of service; or

 

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(c)           as of June 30, 1999, was at least age 40 with at least 10 years of service and, when his or her 409A Separation from Service occurs, has at least 30 years of service.

 

For purposes of this definition, “year of service” means a year of “Eligibility Service” as defined in the IBM Personal Pension Plan. In addition, for purposes of Section 7.04 (payment of grandfathered amounts upon termination of employment), this definition of “Retirement-Eligible Participant” is applied by replacing “409A Separation from Service” with “termination of employment.” Furthermore, the conditions in (a), (b), and/or (c) above are modified to the extent necessary to be consistent with the retirement-eligibility criteria in the EDCP.

 

“Section 415 Excess Credit” means a credit to a Participant’s Account as described in Section 5.03.

 

“Subsidiary” means a “Subsidiary” as defined in the 401(k) Plan.

 

“Supplemental Employee” means an employee who is designated by the Company as a “long-term supplemental employee” or a “supplemental employee” in accordance with the Company’s established personnel practices.

 

“Transition Credit” means a credit to a Participant’s Account as described in Section 5.02.

 

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ARTICLE III. ELIGIBILITY

 

3.01.       Eligibility for Elective Deferrals. An Employee shall be eligible to make Elective Deferrals for a Deferral Period if:

 

(a) he or she qualifies as an Employee (i.e., an employee of the Company who is eligible to participate in the 401(k) Plan and is not a Supplemental Employee) and is Actively Employed on both August 31 and December 31 immediately preceding the first day of the Deferral Period;

 

(b) the Plan Administrator, in its sole discretion, estimates as of the September 1 immediately preceding the first day of the Deferral Period (or such other date prescribed by the Plan Administrator) that the Employee’s pay for the calendar year immediately preceding the first day of the Deferral Period will exceed the Pay Limit as then in effect; and

 

(c) the Plan Administrator notifies the Employee between September 1 and December 31 immediately preceding the Deferral Period that he or she will be eligible to make Elective Deferrals under the Plan during the Deferral Period.

 

3.02.       Eligibility for Matching and Match Maximizer Contributions. An Employee shall be eligible for Matching and Match Maximizer Contributions for a payroll period that ends after the Employee has reached his or her Program Eligibility Date, provided that the Employee is eligible for, and makes, Elective Deferrals during the Plan Year in which the payroll period ends . However, an Employee shall not be eligible for Matching and Match Maximizer Contributions during any payroll period:

 

(a)  beginning after the Employee has a 409A Separation from Service and ending before the Employee returns to active employment as an Employee;

 

(b)  beginning after the Employee receives a hardship withdrawal under the 401(k) Plan and within the same Plan Year as such hardship withdrawal occurs; or

 

(c)  beginning after the Employee becomes a Supplemental Employee or begins to receive LTD Benefits (whether or not he or she makes Elective Deferrals) and ending before he again becomes an Employee.

 

3.03.       Eligibility for Automatic Contributions and Transition Credits.

 

(a)  General Rule. Except as provided in subsection (b) (regarding Employees hired before September 1, 2007) and subsection (c) (regarding the period following a 409A Separation from Service), an Employee shall be eligible for Automatic Contributions and Transition Credits during a payroll period if:

 

(1) with respect to eligibility for Automatic Contributions, the Employee is eligible during that payroll period for “automatic contributions”

 

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under the 401(k) Plan, and, with respect to eligibility for Transition Credits, the Employee is eligible during that payroll period for “transition credits” under the 401(k) Plan; and

 

(2) the Employee is eligible to make Elective Deferrals during the payroll period (regardless of whether the Employee has elected to make Elective Deferrals for the payroll period).

 

If the individual is eligible to make Elective Deferrals during the Plan Year only with respect to Performance Pay during the Performance Pay Deferral Period that ends in the Plan Year, the individual is eligible for Automatic Contributions and Transition Credits, if at all, only during payroll periods ending during such Performance Pay Deferral Period and only with respect to the portion of the Performance Pay actually deferred under this Plan (except as provided in subsection (b), below). For example, if an individual is eligible to make Elective Deferrals for Deferral Periods that begin in 2008 but is not eligible to make Elective Deferrals for Deferral Periods that begin in 2009, the individual is not eligible for Automatic Contributions and Transition Credits in 2009 except with respect to any Elective Deferrals of Performance Pay for the Performance Pay Deferral Period ending March 31, 2009 (and except as provided in subsection (b), below).

 

(b)  Employees Hired Before September 1, 2007 .           Notwithstanding subsection (a), above, an Employee who is continuously employed by the Company since August 31, 2007, shall be eligible for Automatic Contributions and Transition Credits during a payroll period if the Employee is eligible during that payroll period, respectively, for “automatic contributions” and “transition credits” under the 401(k) Plan as described in subsection (a)(1), above, even if the Employee is not eligible to make Elective Deferrals during the payroll period .

 

(c)  Eligibility after 409A Separation from Service . An Employee shall not be eligible for Automatic Contributions or Transition Credits during any payroll period that begins after the Employee has a 409A Separation from Service and ends before the Employee returns to active employment as an Employee.

 

3.04.       Eligibility for Section 415 Excess Credits. An Employee shall be eligible for Section 415 Excess Credits during a payroll period if the Employee’s allocations during the payroll period under the 401(k) Plan are limited by Section 415 of the Code. However, an Employee shall not be eligible for Section 415 Excess Credits during any payroll period that begins after the Employee has a 409A Separation from Service and ends before the Employee returns to active employment as an Employee.

 

3.05.       Eligibility for Discretionary Awards. An Employee shall be eligible for Discretionary Awards during a Plan Year as determined by the Company, in its discretion.

 

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ARTICLE IV. ELECTIVE DEFERRALS AND MATCHING CONTRIBUTIONS

 

4.01.       Elective Deferrals.   Beginning with the payroll period that includes the Effective Date , Elective Deferrals made pursuant to an Eligible Employee’s Deferral Election, as described below, shall be credited to the Employee’s Post-2004 Elective Deferral Account on the date on which the amount would otherwise be paid to the Eligible Employee absent a Deferral Election.

 

(a)  Amount of Elective Deferrals .

 

(1)  Amount of Base Pay Deferrals .  An Employee who, pursuant to Section 3.01, is eligible to make Elective Deferrals under the Plan for a Deferral Period with respect to Base Pay may elect to defer Base Pay in the amounts specified below, subject to any restriction imposed by the Plan Administrator to ensure sufficient pay remains for other deductions and withholding, which limitations shall be imposed prior to the date on which the election becomes irrevocable.

 

i.              Standard Base Pay Election .  From 1% to 80%, in 1% increments, of the Eligible Employee’s Base Pay, if any, for each payroll period that ends during the Deferral Period; or
 
ii.           Combined Base Pay Election .  From 1% to 80%, in 1% increments, of the Eligible Employee’s Base Pay, if any, for each payroll period that ends during the Deferral Period, reduced (but not below zero) by the product of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan and (B) 1/24 of the Pay Limit in effect for the Deferral Period.
 

(2)  Amount of Performance Pay Deferrals .  An Employee who, pursuant to Section 3.01, may elect to make Elective Deferrals under the Plan for a Deferral Period with respect to Performance Pay may elect to make Deferrals from 1% to 80%, in 1% increments, of his or her Performance Pay, if any, paid during the Deferral Period.

 

(b)  Timing of Deferral Elections.   An Eligible Employee’s Deferral Elections under subsection (a), above, shall be made as follows:

 

(1)  Election Period.   The election must be made while the individual is an Employee and Actively Employed, in the form and manner prescribed by the Plan Administrator, and during the time period prescribed by the Plan Administrator, which shall begin no earlier than the September 1 and end no later than the December 31 of the Plan Year

 

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immediately preceding the first day of the Deferral Period to which the election applies.

 

(2)  Irrevocability .  The election must become irrevocable on the December 31st immediately preceding the Plan Year during which the applicable Deferral Period begins.  Once a Deferral Election becomes irrevocable, a n Eligible Employee’s Deferral Election shall apply for the entire Deferral Period to which it relates and shall cease to apply after such Deferral Period except to the extent that the individual makes a new Deferral Election in accordance with this Section for subsequent Deferral Periods , subject to the cancellation rules in subsection (c), below.

 

(c)  Cancellation of Deferral Election upon a 401(k) Plan Hardship Distribution . Notwithstanding the irrevocability of elections in subsection (b)(2), above, an individual’s Deferral Election shall not apply with respect to:

 

(1) any payroll period that ends after the Employee receives a hardship withdrawal under the 401(k) Plan and within the same Plan Year as the hardship withdrawal occurs; or

 

(2) any payroll period for which Performance Pay would, absent a Deferral Election, be paid to the individual during a Deferral Period that begins during the Plan Year in which the hardship withdrawal occurs.

 

For example, if an individual receives a hardship withdrawal on June 1, 2009, the individual’s Deferral Election with respect to Performance Pay is cancelled for the remainder of the Deferral Period ending March 31, 2010.  Furthermore, if the individual instead receives a hardship withdrawal on March 1, 2009, the individual’s Deferral Election is cancelled with respect to the remainder of the Deferral Period ending on March 31, 2009, and for the Deferral Period beginning on April 1, 2009, and ending on March 31, 2010.

 

4.02.       Matching Contributions.  Beginning with the payroll period that includes the Effective Date , Matching Contributions and Match Maximizer Contributions shall be credited to the Post-2004 Company Account for each Eligible Employee who satisfies the eligibility requirements described in Section 3.02 for such payroll period in an amount equal to the sum of the Matching Contribution and Match Maximizer Contribution described below.

 

(a)  Matching Contribution .  An Eligible Employee’s Matching Contribution is the sum of the following:

 

(1) the lesser of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (B) the Elective Deferral percentage elected by the Eligible Employee (without regard to any Combined Base Pay Election) for such payroll period,

 

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multiplied by the Eligible Employee’s Elective Deferrals for such payroll period; and

 

(2) the lesser of (A) the company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (B) the Elective Deferral percentage elected by the Eligible Employee (without regard to any Combined Base Pay Election) for such payroll period, multiplied by the Eligible Employee’s Excess 401(k) Eligible Pay for such payroll period;

 

provided that the sum of (1) and (2) shall not exceed the Elective Deferrals credited to the Eligible Employee for such payroll period.

 

(b)  Match Maximizer Contribution .  An Eligible Employee’s Match Maximizer Contribution for a payroll period is determined as described below.  The formula differs (as noted in paragraph (ii), below) depending on whether or not the Eligible Employee elected the Combined Base Pay Election for the Plan Year. The Match Maximizer Contribution shall equal:

 

The lesser of: (1) The company matching contribution percentage applicable to the Eligible Employee under the 401(k) Plan or (2) the percentage derived from the ratio of:

 

 (i)                                   the aggregate Elective Deferrals previously credited to the Eligible Employee’s Post-2004 Elective Deferral Account for the portion of the Plan Year after the Eligible Employee’s Program Eligibility Date, to

 

(ii)                                   the sum, aggregated for the portion of the Plan Year that is after the Eligible Employee’s Program Eligibility Date and determined as of the date the applicable payroll period ends , of (A) the Eligible Employee’s Elective Deferrals, (B) the Eligible Employee’s Excess 401(k) Eligible Pay, and (C) if the Eligible Employee did not elect a Combined Base Pay Election for the Plan Year, the compensation eligible for a matching contribution under the 401(k) Plan.

 

Multiplied by: The Eligible Employee’s Excess 401(k) Eligible Pay plus the Eligible Employee’s Elective Deferrals, each aggregated only for the portion of the Plan Year that is after the Eligible Employee’s Program Eligibility Date and until the applicable payroll period ends.

 

Minus: The Matching Contributions and Match Maximizer Contributions previously credited to the Eligible Employee through the date the applicable payroll period ends.

 

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ARTICLE V.  NON-ELECTIVE CREDITS

 

5.01.       Automatic Contributions.   Beginning with the payroll period that includes the Effective Date, an Automatic Contribution shall be credited to the Post-2004 Company Account of an Employee who is eligible for Automatic Contributions under Section 3.03 in an amount equal to the sum of:

 

(a) the Employee’s “automatic contribution percentage” under the 401(k) Plan multiplied by the Employee’s Elective Deferrals, if any, for the applicable payroll period; plus

 

(b) the Employee’s “automatic contribution percentage” under the 401(k) Plan multiplied by the Employee’s Excess 401(k) Eligible Pay, if any, for the applicable payroll period.

 

5.02.       Transition Credits.   Beginning with the payroll period that includes the Effective Date, a Transition Credit shall be credited to the Post-2004 Company Account of an Employee who is eligible for Transition Credits under Section 3.03 in an amount equal to the sum of:

 

(a) the Employee’s “transition credit percentage” under the 401(k) Plan multiplied by, if any, the Employee’s Elective Deferrals for the applicable payroll period; plus

 

(b) the Employee’s “transition credit percentage” under the 401(k) Plan multiplied by the Employee’s Excess 401(k) Eligible Pay, if any, for the applicable payroll period.

 

5.03.       Section 415 Excess Credits.   Beginning with the payroll period that includes the Effective Date, a Section 415 Excess Credit shall be credited to the Post-2004 Company Account of an Employee who is eligible for Section 415 Excess Credits under Section 3.04 in an amount equal to the excess of (A) the amount that would have been allocated to the Employee’s account under the 401(k) Plan (including any forfeiture that would have been allocated to such account in lieu of such a contribution) for such payroll period if the limits imposed by Section 415 of the Code did not apply to such allocation over (B) the amount actually allocated to such Employee’s account under the 401(k) Plan (including any forfeiture allocated in lieu of such a contribution) for such payroll period.

 

5.04.       Discretionary Awards.   From time to time on and after the Effective Date, the Company, in its discretion, may credit an Eligible Employee’s Post-2004 Company Account with an amount determined under an agreement evidencing the Discretionary Award, and such award shall be subject to the terms specified in such agreement in addition to the terms of this Plan.

 

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ARTICLE VI. VESTING, DEEMED INVESTMENT OF ACCOUNTS

 

6.01.       Individual Accounts.  For record-keeping purposes only, the Plan Administrator shall maintain, or cause to be maintained, records showing the individual balances of each Account maintained for a Participant from time to time under the Plan.  Periodically, each Participant shall be furnished with a statement setting forth the value of his or her Accounts under the Plan.

 

6.02.       Vesting of Accounts.   A Participant shall be fully vested in all Accounts maintained for the Participant under the Plan; provided, however, that Discretionary Awards credited to a Participant’s Post-2004 Company Account and earnings, gains, or losses on those contributions, shall become vested only as set forth in the agreement evidencing the award and, to the extent not vested, shall not be paid.

 

6.03.       Deemed Investment of Accounts.   A Participant’s Accounts under the Plan shall be adjusted for deemed earnings, gains, or losses.  Earnings, gains, or losses for any period before the Effective Date shall be determined in accordance with the applicable provisions of the EDCP.  Earnings, gains, or losses for any period on or after the Effective Date shall be determined in accordance with the following:

 

(a)  Deemed Investment Options Available .

 

(1)  General Rule .  A Participant’s Account shall be treated as if the Participant had invested such accounts in certain 401(k) Plan investment funds in accordance with subsection (b), below, except with respect to certain amounts credited before the Effective Date and attributable to Matching Contributions or the Buy-First Program as described in paragraphs (2) and (3), below.

 

(2)  Matching Contributions Credited Before the Effective Date .  The portion of a Participant’s Pre-2005 Company Account (if any) and the Participant’s Post-2004 Company Account attributable to Matching Contributions credited to the Participant before the Effective Date (and related earnings but not dividend equivalents) shall be treated as if invested at all times in the IBM Stock Fund under the 401(k) Plan.  Notwithstanding the foregoing, if a Participant has a termination of employment for purposes of the 401(k) Plan and his or her entire Plan benefit is not immediately payable in a lump sum, amounts described in this paragraph (2) shall no longer be subject to the restrictions of this paragraph (2) and may be invested as described in paragraph (1), above.

 

(3)  Amounts Attributable to Buy-First Executive Equity Program . Any portion of a Participant’s Post-2004 Elective Deferral Account that is attributable to a Participant’s deferrals under the EDCP through the IBM Buy-First Executive Equity Program before the Effective Date (and related earnings but not dividend equivalents) shall, for the three-year period

 

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following the date such deferrals were credited, be treated as if invested in the IBM Stock Fund under the 401(k) Plan; provided, however, that if a Participant has a termination of employment for purposes of the 401(k) Plan before the end of such three-year period and his or her entire Plan benefit is not immediately payable in a lump sum, amounts described in this paragraph (3) shall no longer be subject to the restrictions of this paragraph (3) and may be invested as described in paragraph (1), above.

 

(b)  Elections for Deemed Investment Options.

 

(1)  Initial Election For Future Credits .  A Participant shall designate, in such form and at such time in advance as may be prescribed by the Plan Administrator, the proportions (in multiples of 1%) in which Elective Deferrals and Company Contributions credited to his or her Plan Accounts on or after the Effective Date shall be treated as if they had been allocated among any or all of the investment funds that are available under the 401(k) Plan (other than the mutual fund window) at the time such amounts are credited.  If the Participant makes no such designation, the Participant shall be deemed to have designated the default investment fund under the 401(k) Plan.

 

(2)  Change in Election for Future Credits .  A Participant may elect, in such form and at such time in advance as may be prescribed by the Plan Administrator, to change his or her investment elections for future Elective Deferrals and Company Contributions credited to his or her Plan Accounts.  Any restrictions on investment election changes that apply under the 401(k) Plan shall also apply under the Plan.

 

(3)  Transfers Among Deemed Investment Options .  A Participant may elect, in such form and at such time in advance as may be prescribed by the Plan Administrator, to transfer balances in his or her Plan Accounts (other than amounts described in subsections (a)(1), (a)(2), or (a)(3) that are required to be treated as invested in IBM stock or the IBM Stock Fund) among the available investment funds, provided that:

 

i.              Transfers must be made in multiples of 1%, provided that the minimum amount transferred shall be $250 if that is greater than 1% (provided, however, that the Plan Administrator may specify a different percentage and/or a different dollar amount to be applied in this paragraph);
 
ii.           Any restrictions on transfers into or out of investment funds that apply under the 401(k) Plan shall also apply under the Plan; and
 
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iii.        Plan Administrator may impose such additional rules and limits upon transfers between investment funds as the Plan Administrator may deem necessary or appropriate.
 

(c)  Administrative Fee .  Each calendar quarter, an administrative fee shall be deducted pro rata from each Participant’s Accounts.  The amount of the fee shall be determined by the Plan Administrator and, as of the Effective Date is $8 each quarter.

 

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ARTICLE VII. PAYMENT OF GRANDFATHERED AMOUNTS

 

7.01.       Grandfathered Treatment of Grandfathered Amounts.   Pre-2005 Accounts are paid in accordance with the EDCP in effect on October 3, 2004, except as the EDCP is amended, where each such amendment does not constitute a “material modification,” as determined under Section 409A of the Code.  This ARTICLE VII describes the key provisions of the EDCP (as amended), as it applies to Grandfathered Amounts on and after the Effective Date.

 

7.02.       Payment of Grandfathered Amounts Upon Death.    If a Participant dies before his or her Pre-2005 Accounts have been distributed in full, the value of his or her Pre-2005 Accounts shall be paid in a lump sum to the Participant’s Beneficiary as soon as practicable after the Participant’s death.

 

7.03.       Options for Payment of Grandfathered Amounts Upon Termination of Employment.

 

(a)  Forms of Payment.   A Participant may elect, at the time and in the manner described in subsection (b), below, to have the value of his or her Pre-2005 Accounts paid under one of the following options, subject to the limits in Section 7.04, below (regarding retirement-eligibility and $25,000 cash-out limit):

 

(1) A lump sum payment as soon as practicable following the Participant’s termination from employment;

 

(2) A lump sum payment as of the last business day in January of the calendar year immediately following the calendar year in which the Participant’s termination from employment occurs; or

 

(3) From two to 10 annual installments (as elected by the Participant), each paid as of the last business day in January beginning with the January immediately following the calendar year in which the Participant’s termination from employment occurs, until the elected number of installments have been paid.

 

Solely for purposes of this subsection (a), termination of employment includes the date on which a Participant begins to receive LTD Benefits.

 

(b)  Election of Payment Option.   A Participant shall elect a payment option for his or her Pre-2005 Accounts in the form and manner prescribed by the Plan Administrator.  A payment election made before January 1, 2008, applies to a termination of employment that occurs at least six months after, and in a calendar year after, the payment election is made.  A payment election made on or after January 1, 2008, applies to a termination of employment that occurs at least twelve months after the payment election is made.

 

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7.04.       Payment of Grandfathered Amounts Upon Termination of Employment. The Participant’s Pre-2005 Accounts shall be paid to the Participant in the form and at the time described below:

 

(a)  Non-Retirement-Eligible or Benefit Is Less than $25,000 .  If the Participant is not a Retirement-Eligible Participant or if the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is less than $25,000 when the Participant terminates employment, the Participant’s Pre-2005 Accounts shall be paid in an immediate lump sum;

 

(b)  Retirement-Eligible Without Valid Payment Election .  If the Participant is a Retirement-Eligible Participant but has not made a valid payment election, the Participant’s Pre-2005 Accounts shall be paid in a lump sum as of the last business day in January immediately following the calendar year of the Participant’s termination of employment, provided that the aggregate value of all of the Participant’s Accounts (including, for this purpose, “deferred shares” as defined in the EDCP) under the Plan is at least $25,000 when the Participant terminates employment.

 

(c)  Retirement-Eligible With Valid Payment Election .  If the Participant is a Retirement-Eligible Participant and has made a valid payment election, the Participant’s Pre-2005 Accounts shall be paid in accordance with the payment option elected, provided that the aggregate value of all of the Participant’s Accounts under the Plan is at least $25,000 (including, for this purpose, “deferred shares” as defined in the EDCP) when the Participant terminates employment.

 

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ARTICLE VIII. PAYMENT OF NON-GRANDFATHERED AMOUNTS

 

8.01.       Payment of Non-Grandfathered Amounts Upon Death.   If a Participant dies before his or her Post-2004 Accounts have been distributed in full, the value of his or her Post-2004 Accounts shall be paid in a lump sum to the Participant’s Beneficiary on the date that is 30 days after the date of the Participant’s death (or, if that date is not a business day, the first business day thereafter).  However, the Plan Administrator may make payment on any other day to the extent that such payment is treated as being paid on the date specified in the previous sentence under Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Participant is not permitted to designate the taxable year of payment.  For purposes of determining the amount payable to the Beneficiary, the Participant’s Post-2004 Accounts will be valued as of the date the payment is processed.

 

8.02.       Form of Payment for Non-Grandfathered Amounts Paid Upon a 409A Separation from Service.   A Participant may elect, at the time and in the manner described in Section 8.03, below, to have the value of his or her Post-2004 Accounts paid under one of the following options, subject to the limits in Section 8.04, below (regarding delays for 409A Key Employees) and Section 8.05, below (special rules for separations during the first quarter of 2008):

 

(a) A lump sum payment as of the first business day that is at least 30 days after the Participant’s 409A Separation from Service;

 

(b) A lump sum payment as of the last business day in January of the calendar year immediately following the calendar year in which the Participant’s 409A Separation from Service occurs; or

 

(c) From two to 10 annual installments (as elected by the Participant), each paid as of the last business day in January beginning with the January immediately following the calendar year in which the Participant’s 409A Separation from Service occurs, until the elected number of installments have been paid, subject to Section 8.04(c) (involuntary cash-outs).  This installment option is treated as the entitlement to a single payment for purposes of Treasury Regulation section 1.409A-2(b)(2)(iii).

 

However, the Plan Administrator may make payment on any other day to the extent that such payment is treated as being paid on the date specified above under Treasury Regulation section 1.409A-3(d), which permits payment to be made within thirty days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Participant is not permitted to designate the taxable year of payment.

 

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8.03.       Electing and Changing Payment Options for Non-Grandfathered Amounts.

 

(a)  Election of Payment Option.   A Participant shall elect a payment option for his or her Post-2004 Accounts in the form and manner prescribed by the Plan Administrator and during whichever of the following election periods applies to the Participant (except as provided in Section 8.05, below, with respect to a separation during the first quarter of 2008):

 

(1)  Special Election Period in 2007 .  During the special election period designated by the Plan Administrator and ending no later than December 31, 2007, an Employee may elect the payment option that will apply to his or her Post-2004 Accounts under the Plan in the event his 409A Separation from Service occurs on or after April 1, 2008, if the Employee:

 

i.              is eligible to make Elective Deferrals in 2008;
 
ii.           on October 31, 2007, had a balance in his or her EDCP Accounts; or
 
iii.        on October 31, 2007, had a valid EDCP election on file for deferrals in 2007.
 

Accordingly, an individual who first became an executive after October 31, 2007 and who is not eligible to make Elective Deferrals in 2008, is not eligible to make a payment election under this paragraph (1), even if he or she deferred pay under the EDCP in 2007.

 

(2)  Election in Plan Year Before Initial Eligibility .  An individual who is first eligible to make Elective Deferrals in a Plan Year beginning after the Effective Date, and who before such Plan Year has not earned any other benefit under the Plan (including the EDCP) may, during the annual enrollment period prescribed by the Plan Administrator that immediately precedes such Plan Year, elect the payment option that will apply to his or her Post-2004 Accounts under the Plan, whether or not the individual also elects to make Elective Deferrals during such enrollment period.

 

(3)  Initial Election for Pre-September 1, 2007 Hire .  If, during a Plan Year, an Eligible Employee earns for the first time Automatic Contributions and/or Transition Credits (but not Section 415 Excess Credits), and the benefit the Eligible Employee earns under the Plan for the Plan Year is equal only to the excess of amounts that would otherwise be allocated to the Participant’s account in the 401(k) Plan in the absence of one or more limits applicable to tax-qualified plans over the amount actually credited to the Participant’s account in the 401(k) Plan, the Participant may elect, in accordance with Treas. Reg. § 1.409A-2(a)(7)(iii), the payment option that

 

21



 

will apply to his or her Post-2004 Accounts under the Plan during the period determined by the Plan Administrator that ends no later than January 31st of the calendar year immediately following the calendar year in which the Automatic and/or Transition Credit is credited, but only if the Participant:

 

i.              was hired by the Company before September 1, 2007 and has been employed continuously since his or her hire date;
 
ii.           was not, during the Plan Year of such credit or any previous Plan Year beginning on or after the Effective Date, eligible to make an Elective Deferral;
 
iii.        was not previously eligible to elect a payment option under this subsection (a);
 
iv.       has not, in any calendar year prior to the calendar year of the contribution, accrued a benefit or deferred compensation under a plan as determined under Treas. Reg. § 1.409A-2(a)(7)(iii).
 

(b)  Irrevocability and Default Payment Option .  If a Participant does not make an election under paragraphs (a)(1), (a)(2), or (a)(3), above (including a Participant who is not eligible to make an election under any of those paragraphs), the Participant’s initial payment election shall be the payment option described in subsection 8.02(a) (immediate lump sum), above.  A Participant’s initial payment election (including the default option described in the previous sentence) becomes irrevocable, and can be changed only in accordance with subsection (c), below, after (i) the deadline specified in paragraphs (a)(1) or (a)(3), for Participants eligible to make elections under those paragraphs, and (ii) December 31 of the Plan Year preceding the Plan Year in which the Participant first earns a credit under the Plan, for all other Participants.

 

(c)  Changing Payment Options .  A Participant may elect, in the form and manner prescribed by the Plan Administrator, to change the Participant’s initial payment option determined under this Section 8.03, provided that:

 

(1) The Participant must make such election at least 12 months before the date of his 409A Separation from Service;

 

(2) If the election is made on or after January 1, 2009, the payment date for any lump sum or the start date for any series of installments provided for under the new payment option shall be the fifth anniversary of the payment date or start date that would have applied absent a change in payment option; and

 

(3) The Participant may change his or her payment option:

 

22



 

i.              only once during 2008; and
 
ii.           only once on or after January 1, 2009.
 

8.04.       Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service.   The value of a Participant’s Post-2004 Accounts shall be paid to the Participant upon his or her 409A Separation from Service on or after the Effective Date in the form and at the time provided in Sections 8.02 and 8.03, above (except as provided in Section 8.05, below (special rules for first quarter of 2008)), subject to the following:

 

(a)  Delay for 409A Key Employees .  If the Participant is a 409A Key Employee on the date of his or her 409A Separation from Service, the payment date for any lump sum or the start date for any series of installments provided for under the applicable payment option shall be the later of (I) the first business day that is six months after the date of the Participant’s 409A Separation from Service, or (II) the otherwise applicable payment date or start date, subject to subsection (b) (death).  If the start date of a series of installments occurs other than as of  the last business day in January due to application of this paragraph, installments after the first installment shall be paid as of the last business day in January of each subsequent year, as scheduled without regard to the delay described in this subsection (a).

 

(b)  Death of Participant After 409A Separation from Service .  If the death of a Participant (including a 409A Key Employee described in subsection (a), above) occurs before the payment date for any lump sum or installment provided for under the applicable payment option, payment shall be made to the Participant’s Beneficiary as provided in Section 8.01.

 

(c)  Involuntary Cash-Out .  If (i) the applicable payment option is the installment option described in subsection 8.02(c), above, and (ii) the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) determined as of the date of his or her 409A Separation from Service is less than 50% of the Pay Limit in effect for the calendar year in which the Participant’s 409A Separation from Service occurs, the value of the Participant’s Post-2004 Accounts shall be distributed in a lump sum on the start date that would otherwise have applied for the elected installments, taking into account any applicable delay for a 409A Key Employee described in subsection (a), above.

 

23



 

8.05.       Special Rules for Payment of Non-Grandfathered Amounts Upon a 409A Separation from Service in First Quarter of 2008.   If a Participant’s 409A Separation from Service occurs on or after January 1, 2008, and before April 1, 2008, the Participant’s Post-2004 Accounts shall be paid to the Participant in the form and at the time described below, except that such payments shall be subject to Section 8.04(a) (delay for 409A Key Employees) and Section 8.04(b) (death of Participant after 409A Separation from Service):

 

(a)  Non-Retirement-Eligible or Benefit Is Less than $25,000 .  If the Participant is not a Retirement-Eligible Participant or if the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is less than $25,000 as of the date of his or her 409A Separation from Service, the Participant’s Post-2004 Accounts shall be paid in an immediate lump sum as described in Section 8.02(a), above;

 

(b)  Retirement-Eligible Without Valid Payment Election .  If the Participant is a Retirement-Eligible Participant but has not made a valid payment election, the Participant’s Post-2004 Accounts shall be paid in a lump sum as of the last business day in January immediately following the calendar year of the Participant’s 409A Separation from Service as described in Section 8.02(b), above, provided that the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is at least $25,000 as of the date of his or her 409A Separation from Service.

 

(c)  Retirement-Eligible With Valid Payment Election .  If the Participant is a Retirement-Eligible Participant and has made a valid payment election, the Participant’s Post-2004 Accounts shall be paid in accordance with the payment option elected, as described in Section 8.02, above, provided that the aggregate value of all of the Participant’s Accounts under the Plan (including, for this purpose, “deferred shares” as defined in the EDCP) is at least $25,000 as of the date of his or her 409A Separation from Service.

 

For purposes of this Section 8.04, a valid payment election is a payment election made at least six months before the Participant’s 409A Separation from Service in a manner prescribed by the Plan Administrator.  If a Participant did not make a valid payment election for his or her Post-2004 Accounts, the Participant’s valid payment election shall be his or her valid payment election for his or her Pre-2005 Accounts, if any.

 

8.06.       Valuation of Non-Grandfathered Accounts.   For purposes of determining the amount of any payment of the Participant’s Post-2004 Accounts, the Participant’s Post-2004 Accounts will be valued as of the date the payment is processed, except that if payment is required under the terms of the Plan to be made as of the last business day in January of a Plan Year (for example, pursuant to Section 8.02(b)), the Participant’s Post-2004 Accounts with respect to such payment shall be valued as of such last business day in January.  For purposes of determining the amount of any annual installment payment of the Participant’s Post-2004 Accounts, the

 

24



 

 

value of the Participant’s Post-2004 Accounts on the valuation date shall be divided by the remaining number of installments.  No adjustment shall be made to the amount of any lump sum or installment after the valuation date.

 

8.07.       Effect of Rehire on Non-Grandfathered Payments.   If a Participant becomes eligible for a payment of benefits on account of a 409A Separation from Service and is rehired as an Employee before his or her Post-2004 Accounts have been distributed in full, payments shall be made as if the Participant had not been rehired.  If the Participant again becomes eligible to make Elective Deferrals or receive Company Contributions following his or her rehire, the Plan Administrator shall arrange separate accounting for Elective Deferrals and Company Contributions (and related earnings, gains, or losses) credited to the Participant’s Post-2004 Accounts following the Participant’s rehire, and the Participant’s opportunity to make an initial distribution election under subsection 8.03(a)(2) (election in Plan Year before initial eligibility) shall be determined without regard to the benefits earned under the Plan prior to the Participant’s rehire.

 

25



 

ARTICLE IX.  ADMINISTRATION

 

9.01.       Amendment or Termination.   This Plan may be amended from time to time for any purpose permitted by law or terminated at any time by written resolution of the Board or by IBM’s chief human resources officer, but only if the chief human resource officer’s action is not materially inconsistent with a prior action of the Board.  The authority to amend or terminate the Plan shall include the authority to amend the procedure for amending or terminating the Plan and the authority to amend or terminate any related instrument or agreement.

 

9.02.       Responsibilities.

 

(a) The following persons and groups of persons shall severally have the authority to control and manage the operation and administration of the Plan as herein delineated:

 

(1) the Board,

 

(2) IBM’s chief human resources officer, and

 

(3) the Plan Administrator and each person on any committee serving as the Plan Administrator.

 

Each person or group of persons shall be responsible for discharging only the duties assigned to it by the terms of the Plan.

 

(b) The Board shall be responsible only for approval of a resolution in accordance with Section 9.01 to amend or terminate the Plan.

 

(c) IBM’s chief human resources officer may, pursuant to a duly adopted resolution, delegate to any officer or employee of IBM, or a committee thereof, authority to carry out any decision, directive, or resolution of IBM’s chief human resources officer. IBM’s chief human resources officer may appoint one or more executives employed by IBM to serve as Plan Administrator or as a committee to fulfill the function of Plan Administrator.  The VP HR with functional responsibilities for IBM’s benefit programs shall serve as the Plan Administrator if no such appointment is made by IBM’s chief human resources officer.

 

(d) In the sole discretion of the Plan Administrator, the Plan Administrator shall have the full power and authority to:

(1) promulgate and enforce such rules and regulations as shall be deemed to be necessary or appropriate for the administration of the Plan;

 

(2) adopt any amendments to the Plan that are required by law;

 

(3) interpret the Plan consistent with the terms and intent thereof; and

 

26



 

(4) resolve any possible ambiguities, inconsistencies, and omissions.

 

All such determinations and interpretations shall be in accordance with the terms and intent of the Plan, and the Plan Administrator shall report such actions to IBM’s chief human resources officer on a regular basis .

 

(e) IBM’s chief human resources officer and the Plan Administrator may engage the services of accountants, attorneys, actuaries, investment consultants, and such other professional personnel as are deemed necessary or advisable to assist them in fulfilling their responsibilities under the Plan.  IBM’s chief human resources officer, the Plan Administrator, and their delegates and assistants will be entitled to act on the basis of all tables, valuations, certificates, opinions, and reports furnished by such professional personnel.

 

27



 

ARTICLE X.  GENERAL PROVISIONS

 

10.01.     Funding.

 

(a) All amounts payable in accordance with this Plan shall constitute a general unsecured obligation of the Company.  Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company.  In the sole discretion of IBM’s chief human resources officer , a Participant’s accounts under the Plan may be reduced to reflect allocable administrative expenses.

 

(b) The Company, the IBM’s chief human resources officer, and the Plan Administrator do not guarantee the investment alternatives available under the Plan in any manner against loss or depreciation.

 

10.02.     No Contract of Employment.   Nothing herein contained shall be deemed to give any employee the right to be retained in the service of the Company or an affiliate or to interfere with the right of the Company or an affiliate to discharge any employee at any time without regard to the effect that such discharge may have upon the employee under the Plan.  Nothing appearing in or done pursuant to the Plan shall be held or construed to create a contract of employment with the Company, to obligate the Company to continue the services of any employee, or to affect or modify any employee’s terms of employment in any way or to give any person any legal or equitable right or interest in the Plan or any part thereof or distribution therefrom or against the Company except as expressly provided herein.

 

10.03.     Facility of Payment.   In the event the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive benefits under the Plan is incompetent to care for his or her affairs and in the absence of the appointment of a legal guardian of the property of the incompetent, benefit payments due under the Plan (unless prior claim thereto has been made by a duly qualified guardian, committee, or other legal representative) may be made to the spouse, parent, brother or sister, or other person, including a hospital or other institution, deemed by the Plan Administrator to have incurred or to be liable for expenses on behalf of such incompetent.  In the absence of the appointment of a legal guardian of the property of a minor, any minor’s share of benefits payable under the Plan may be paid to such adult or adults as in the opinion of the Plan Administrator have assumed the custody and principal support of such minor.  The Plan Administrator, however, in its sole discretion, may require that a legal guardian for the property of such incompetent or minor be appointed before authorizing the payment of benefits in such situation.  Benefit payments made under the Plan in accordance with determinations of the Plan Administrator pursuant to this Section 10.03 shall be a complete discharge of any obligation arising under the Plan with respect to such benefit payments.

 

28



 

10.04.     Withholding Taxes. The Plan Administrator shall have the right to withhold all applicable taxes or other payments from benefits hereunder and to report information to government agencies when required to do so by law.

 

10.05.     Nonalienation.   No benefits payable under the Plan shall be subject to alienation, sale, transfer, assignment, pledge, attachment, garnishment, lien, levy, or like encumbrance.  No benefit under the Plan shall in any manner be liable for or subject to the debts or liabilities of any person entitled to benefits under the Plan. On and after the Effective Date, compliance with any domestic relations order relating to a Participant’s Account that the Plan Administrator determines must be complied with under applicable law shall not be considered a violation of this provision; provided, however, that an administrative fee determined by the Plan Administrator shall be deducted from any Participant’s Account that is subject to a domestic relations order.

 

10.06.     Administration.   All decisions, determinations, or interpretations the Board, IBM’s chief human resources officer, the Plan Administrator, the Company, or any member, officer or employee thereof are authorized to make under the Plan (including the delegation of any authority hereunder to another party) shall be made in that party’s sole discretion and shall be final, binding, and conclusive on all interested persons.

 

10.07.     Construction.   All rights hereunder shall be governed by and construed in accordance with federal law and, to the extent not preempted by federal law, the laws of the State of New York without regarding to the choice of law rules of any jurisdiction.

 

29



 

ARTICLE XI.   CLAIMS PROCEDURE

 

If a Participant or Beneficiary believes he or she is entitled to have received benefits but has not received them, the Participant or Beneficiary must accept any payment made under the Plan and make prompt and reasonable, good faith efforts to collect the remaining portion of the payment, as determined under Treas. Reg. § 1.409A-3(g).  For this purpose (and as determined under such regulation), efforts to collect the payment will be presumed not to be prompt, reasonable, good faith efforts, unless the Participant or Beneficiary provides notice to the Plan Administrator within 90 days of the latest date upon which the payment could have been timely made in accordance with the terms of the Plan and the regulations under Code Section 409A, and unless, if not paid, the Participant or Beneficiary takes further enforcement measures within 180 days after such latest date.  In addition, a Participant or Beneficiary must exhaust any other claims procedures established by the Plan Administrator before initiating litigation.

 

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EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING
OPERATIONS TO FIXED CHARGES
(Unaudited)

 
  Years Ended December 31:  
(Dollars in millions)
  2008   2007*   2006*   2005   2004  

Income from continuing operations before income taxes(1)

  $ 16,742   $ 14,492   $ 13,322   $ 12,236   $ 10,546  

Add:

                               

Fixed charges, excluding capitalized interest

    2,021     1,942     1,452     1,188     1,048  
                       

Income as adjusted before income taxes

  $ 18,763   $ 16,434   $ 14,774   $ 13,424   $ 11,594  
                       

Fixed charges:

                               

Interest expense

  $ 1,461   $ 1,422   $ 970   $ 745   $ 567  

Capitalized interest

    15     9     11     16     4  

Portion of rental expense representative of interest

    560     520     482     443     481  
                       

Total fixed charges

  $ 2,036   $ 1,951   $ 1,463   $ 1,204   $ 1,052  
                       

Ratio of income from continuing operations to fixed charges

    9.2     8.4     10.1     11.1     11.0  

*
Rental expense in 2007 and 2006 is presented to conform with 2008 presentation, inclusive of rental expenses associated with automobile leases within certain countries.

(1)
Income from continuing operations before income taxes excludes (a) amortization of capitalized interest and (b) the company's share in the income and losses of less-than-fifty percent owned affiliates.



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COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES (Unaudited)

 

Report of Financials

 

INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies

 

MANAGEMENT DISCUSSION

 

 

Road Map

 

18

Forward-Looking and Cautionary Statements

 

18

Management Discussion Snapshot

 

19

Description of Business

 

20

Year in Review

 

25

Prior Year in Review

 

39

Discontinued Operations

 

44

Other Information

 

44

Looking Forward

 

44

Liquidity and Capital Resources

 

45

Critical Accounting Estimates

 

48

Currency Rate Fluctuations

 

51

Market Risk

 

51

Financing Risks

 

52

Employees and Related Workforce

 

52

Global Financing

 

53

 

 

 

REPORT OF MANAGEMENT

 

58

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

59

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

Earnings

 

60

Financial Position

 

61

Cash Flows

 

62

Stockholders’ Equity

 

63

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

A

Significant Accounting Policies

 

66

B

Accounting Changes

 

76

C

Acquisitions/Divestitures

 

78

D

Fair Value

 

84

E

Financial Instruments (Excluding Derivatives)

 

85

F

Inventories

 

86

G

Financing Receivables

 

86

H

Plant, Rental Machines and Other Property

 

86

I

Investments and Sundry Assets

 

87

J

Intangible Assets Including Goodwill

 

87

K

Borrowings

 

88

L

Derivatives and Hedging Transactions

 

90

M

Other Liabilities

 

94

N

Stockholders’ Equity Activity

 

95

O

Contingencies and Commitments

 

97

P

Taxes

 

99

Q

Research, Development and Engineering

 

101

R

Earnings Per Share of Common Stock

 

102

S

Rental Expense and Lease Commitments

 

103

T

Stock-Based Compensation

 

103

U

Retirement-Related Benefits

 

106

V

Segment Information

 

116

W

Subsequent Event

 

119

 

 

 

 

FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA

 

120

 

 

 

SELECTED QUARTERLY DATA

 

121

 

 

 

PERFORMANCE GRAPHS

 

122

 

 

 

BOARD OF DIRECTORS AND SENIOR LEADERSHIP

 

124

 

 

 

STOCKHOLDER INFORMATION

 

125

 

17



 

Management Discussion

 

INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies

 

Road Map

 

The financial section of the International Business Machines Corporation (IBM or the company) 2008 Annual Report consists of this Management Discussion, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. This Road Map is designed to provide the reader with some perspective regarding the information contained in the financial section.

 

ORGANIZATION OF INFORMATION

 

·                   The Management Discussion is designed to provide readers with a narrative on the company’s financial results and certain factors that may affect future prospects from the perspective of the company’s management. The “Management Discussion Snapshot” on pages 19 and 20 presents an overview of the key performance drivers in 2008.

 

·                   Beginning with the “Year in Review” on page 25, the Management Discussion contains the results of operations for each segment of the business, a discussion of the company’s financial position and cash flows, in addition to other key information and data. It is useful to read the Management Discussion in conjunction with note V, “Segment Information,” on pages 116 to 119.

 

·                   Global Financing is a reportable segment that is measured as if it were a standalone entity. A separate “Global Financing” section is included beginning on page 53. The information presented in this section is consistent with this separate company view.

 

·                   The Consolidated Financial Statements are presented on pages 60 through 65. These statements provide an overview of the company’s income and cash flow performance and its financial position.

 

·                   The notes follow the Consolidated Financial Statements. Among other items, the notes contain the company’s accounting policies (pages 66 to 76), acquisitions and divestitures (pages 78 through 83), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 97 to 99), and retirement-related benefits information (pages 106 to 116).

 

·                   The reference to “adjusted for currency” in the Management Discussion is made so that certain financial results can be viewed without the impacts of fluctuating foreign currency exchange rates and therefore facilitates a comparative view of business performance. See “Currency Rate Fluctuations” on page 51 for additional information.

 

·                   Within the financial tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported in the financial tables throughout this Annual Report are calculated from the underlying whole-dollar numbers.

 

DISCONTINUED OPERATIONS

 

On December 31, 2002, the company sold its hard disk drive (HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was accounted for as a discontinued operation under generally accepted accounting principles (GAAP) and therefore, the HDD results of operations and cash flows have been removed from the company’s results of continuing operations and cash flows for all periods presented in this document except 2008, in which there was no activity. See page 44 for additional information.

 

Forward-Looking and Cautionary Statements

 

Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including the company’s 2008 Form 10-K filed on February 24, 2009.

 

Management Discussion

18

ROAD MAP

18

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

18

MANAGEMENT DISCUSSION SNAPSHOT

19

DESCRIPTION OF BUSINESS

20

YEAR IN REVIEW

25

PRIOR YEAR IN REVIEW

39

DISCONTINUED OPERATIONS

44

OTHER INFORMATION

44

GLOBAL FINANCING

53

Report Of Management

58

Report Of Independent Registered Public Accounting Firm

59

Consolidated Statements

60

Notes

66

 

18



 

Management Discussion Snapshot

( AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS )
For the year ended December 31:

 

2008

 

2007

 

Yr.-to-Yr.
Percent/
Margin
Change

 

Revenue