UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10 - Q

 

QUARTERLY REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTER ENDED MARCH 31, 2005

 

1-2360

(Commission file number)

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

 

New York

 

13-0871985

(State of incorporation)

 

( IRS employer identification number)

 

 

 

Armonk, New York

 

10504

(Address of principal executive offices)

 

(Zip Code)

 

 

 

914-499-1900

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 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 whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes   ý     No   o

 

The registrant has 1,613,320,501 shares of common stock outstanding at March 31, 2005.

 

 



 

Index

 

Part I - Financial Information:

 

 

 

Item 1. Consolidated Financial Statements

 

 

 

Consolidated Statement of Earnings for the three months ended March 31, 2005 and 2004

 

 

 

Consolidated Statement of Financial Position at March 31, 2005 and December 31, 2004

 

 

 

Consolidated Statement of Cash Flows for the three months ended March 31, 2005 and 2004

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

 

 

Item 4. Controls and Procedures

 

 

 

Part II - Other Information

 

 

 

Item 1. Legal Proceedings

 

 

 

Item 2. Unregistered Sale of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

 

 

Item 6. Exhibits

 

 



 

Part I - Financial Information

 

ITEM 1 . Consolidated Financial Statements

 

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

 

(Dollars in millions except
per share amounts)

 

Three Months Ended
March 31,

 

 

 

2005

 

2004*

 

Revenue:

 

 

 

 

 

Global Services

 

$

11,696

 

$

11,024

 

Hardware

 

6,749

 

6,735

 

Software

 

3,551

 

3,466

 

Global Financing

 

580

 

662

 

Enterprise Investments/Other

 

332

 

288

 

Total revenue

 

22,908

 

22,175

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

Global Services

 

8,858

 

8,409

 

Hardware

 

4,891

 

4,952

 

Software

 

482

 

487

 

Global Financing

 

266

 

261

 

Enterprise Investments/Other

 

157

 

174

 

 

 

 

 

 

 

Total cost

 

14,654

 

14,283

 

 

 

 

 

 

 

Gross profit

 

8,254

 

7,892

 

 

 

 

 

 

 

Expense and other income:

 

 

 

 

 

Selling, general and administrative

 

4,933

 

4,658

 

Research, development and engineering

 

1,459

 

1,416

 

Intellectual property and custom development income

 

(219

)

(180

)

Other (income) and expense

 

22

 

13

 

Interest expense

 

49

 

35

 

Total expense and other income

 

6,244

 

5,942

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

2,010

 

1,950

 

Provision for income taxes

 

603

 

586

 

 

 

 

 

 

 

Income from continuing operations

 

1,407

 

1,364

 

 


* Restated to include the impact of share-based compensation expense and changes to previously reported first quarter results; see Notes 2 and 3 on page 6 for additional information.

 

(The accompanying notes are an integral part of the financial statements.)

 

1



 

(Dollars in millions except
per share amounts)

 

Three Months Ended
March 31,

 

 

 

 

2005

 

2004*

 

 

Discontinued operations

 

 

 

 

 

Loss from discontinued operations

 

5

 

1

 

Net income

 

$

1,402

 

$

1,363

 

 

 

 

 

 

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

 

 

 

 

Continuing operations

 

$

0.85

 

$

0.79

 

Discontinued operations

 

0.00

 

0.00

 

Total

 

$

0.84

**

$

0.79

 

 

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

0.86

 

$

0.81

 

Discontinued operations

 

0.00

 

0.00

 

Total

 

$0.86

 

$

0.81

 

 

 

 

 

 

 

Weighted average number of common shares outstanding: (millions)

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

1,660.6

 

1,727.4

 

 

 

 

 

 

 

Basic

 

1,628.7

 

1,691.7

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.18

 

$

0.16

 

 


* Restated to include the impact of share-based compensation expense and changes to previously reported first quarter results; see Notes 2 and 3 on page 6 for additional information.

 

** Does not total due to rounding.

 

(The accompanying notes are an integral part of the financial statements.)

 

2



 

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)


ASSETS

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004*

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,637

 

$

10,053

 

Marketable securities

 

14

 

517

 

Notes and accounts receivable — trade (net of allowances of $275 in 2005 and $277 in 2004)

 

9,708

 

10,522

 

Short-term financing receivable (net of allowances of $562 in 2005 and $681 in 2004)

 

13,333

 

15,801

 

Other accounts receivable (net of allowances of $12 in 2005 and $13 in 2004)

 

1,538

 

1,813

 

Inventories, at lower of average cost or net realizable value:

 

 

 

 

 

Finished goods

 

1,176

 

1,179

 

Work in process and raw materials

 

2,241

 

2,137

 

Total inventories

 

3,417

 

3,316

 

Deferred taxes

 

1,950

 

2,413

 

Prepaid expenses and other current assets

 

2,746

 

2,708

 

Total current assets

 

41,343

 

47,143

 

 

 

 

 

 

 

Plant, rental machines and other property

 

35,506

 

36,385

 

Less: Accumulated depreciation

 

20,798

 

21,210

 

Plant, rental machines and other property — net

 

14,708

 

15,175

 

Long-term financing receivable

 

9,799

 

10,950

 

Prepaid pension assets

 

21,779

 

20,394

 

Intangible assets — net

 

1,739

 

1,789

 

Goodwill

 

8,593

 

8,437

 

Investments and sundry assets

 

6,938

 

7,115

 

 

 

 

 

 

 

Total assets

 

$

104,899

 

$

111,003

 

 


* Restated to include the impact of share-based compensation expense; see Notes 2 and 3 on page 6 for additional information.

 

(The accompanying notes are an integral part of the financial statements.)

 

3



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004*

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Taxes

 

$

3,838

 

$

4,728

 

Short-term debt

 

6,329

 

$

8,099

 

Accounts payable and accruals

 

23,655

 

26,959

 

Total current liabilities

 

33,822

 

39,786

 

 

 

 

 

 

 

Long-term debt

 

17,083

 

14,828

 

Retirement and nonpension postretirement benefit obligations

 

15,596

 

15,883

 

Other liabilities

 

8,478

 

8,818

 

Total liabilities

 

74,979

 

79,315

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $0.20 per share, and additional paid-in capital

 

27,296

 

26,673

 

 

 

 

 

 

 

Shares authorized: 4,687,500,000

 

 

 

 

 

Shares issued:

2005 - 1,968,498,504

 

 

 

 

 

 

2004 - 1,962,687,087

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

39,219

 

38,148

 

 

 

 

 

 

 

Treasury stock - at cost

 

(34,432

)

(31,072

)

Shares:

2005 - 355,178,003

 

 

 

 

 

 

2004 - 317,094,633

 

 

 

 

 

 

 

 

 

 

 

Accumulated gains and (losses) not affecting retained earnings

 

(2,163

)

(2,061

)

 

 

 

 

 

 

Total stockholders’ equity

 

29,920

 

31,688

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

104,899

 

$

111,003

 

 


* Restated to include the impact of share-based compensation expense; see Notes 2 and 3 on page 6 for additional information.

 

(The accompanying notes are an integral part of the financial statements.)

 

4



 

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)

 

(Dollars in millions)

 

2005

 

2004*

 

Cash flow from operating activities from   continuing operations:

 

 

 

 

 

Income from continuing operations

 

$

1,407

 

$

1,364

 

Adjustments to reconcile income from continuing operations to cash provided from operating activities:

 

 

 

 

 

Depreciation

 

1,032

 

998

 

Amortization of intangibles

 

250

 

239

 

Stock-based compensation

 

286

 

396

 

Gain on disposition of fixed and other assets

 

(8

)

(71

)

Changes in operating assets and liabilities

 

(887

)

706

 

 

 

 

 

 

 

Net cash provided by operating activities from   continuing operations

 

2,080

 

3,632

 

 

 

 

 

 

 

Cash flow from investing activities from continuing operations:

 

 

 

 

 

Payments for plant, rental machines and other property, net of proceeds from dispositions

 

(749

)

(771

)

Investment in software

 

(207

)

(155

)

Acquisition of businesses

 

(242

)

(62

)

Purchases of marketable securities and other investments

 

(593

)

(2,181

)

Proceeds from sale of marketable securities and other investments

 

1,111

 

1,462

 

 

 

 

 

 

 

Net cash used in investing activities from continuing operations

 

(680

)

(1,707

)

 

 

 

 

 

 

Cash flow from financing activities from   continuing operations:

 

 

 

 

 

Proceeds from new debt

 

2,430

 

153

 

Payments to settle debt

 

(1,649

)

(148

)

Short-term borrowings/(repayments) less than 90 days — net

 

80

 

(198

)

Common stock transactions — net

 

(3,154

)

(1,217

)

Cash dividends paid

 

(294

)

(271

)

 

 

 

 

 

 

Net cash used in financing activities from   continuing operations

 

(2,587

)

(1,681

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(227

)

(15

)

 

 

 

 

 

 

Net cash used in discontinued operations

 

(2

)

(69

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(1,416

)

160

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

10,053

 

7,290

 

Cash and cash equivalents at March 31

 

$

8,637

 

$

7,450

 

 


* Restated to include the impact of share-based compensation expense and changes to previously reported first quarter results; see Notes 2 and 3 on page 6 for additional information; also, reclassified to conform with 2005 presentation.

 

(The accompanying notes are an integral part of the financial statements.)

 

5



 

Notes to Consolidated Financial Statements

 

1.     In the opinion of the management of International Business Machines Corporation (the company), all adjustments, which are of a normal recurring nature, necessary to a fair statement of the results for the unaudited three-month periods have been made.

 

2.     As discussed in Note 3 below, the company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) in the first quarter.  Due to the timing of the issuance of the Securities and Exchange Commission Staff Accounting Bulletin No. 107 and the company’s subsequent adoption,  this expense was not part of the company’s management and measurement systems in the quarter.  Therefore, the results for the quarters ended March 31, 2005 and March 31, 2004 reflect the compensation charge with the exception of the segment results presented in this Form 10-Q.  Management will implement SFAS 123(R) in its management and measurement system and segment reporting going forward.

 

In addition, 2004 results have been restated in this Form 10-Q to reflect a subsequent event reported in IBM’s 2004 Annual Report.  See IBM’s 2004 Annual Report, “Subsequent Event”, page 12 for additional information.

 

3.     Effective January 1, 2005, the company adopted the provisions of SFAS 123(R). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period.  The company previously applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The company elected to adopt the modified retrospective application method as provided by SFAS 123(R) and accordingly, financial statement amounts for the prior period presented in this Form 10-Q have been restated to reflect the fair value method of expensing prescribed by SFAS 123(R).

 

The following table shows total stock-based compensation expense (see page 8 for types of stock-based awards) included in the Consolidated Statement of Earnings:

 

(Dollars in millions)
For the quarter ended March 31:

 

2005

 

2004

 

 

 

 

 

 

 

Cost

 

$

91

 

$

117

 

Selling general and administrative

 

165

 

230

 

Research development and engineering

 

30

 

49

 

Income tax benefits

 

(95

)

(120

)

Total stock-based compensation expense

 

$

191

 

$

276

 

 

 

As of March 31, 2005, $2,175 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of 3 years.

 

There were no significant capitalized stock-based compensation costs at March 31, 2005 and 2004.

 

6



 

As previously discussed, the company elected to adopt SFAS 123(R) under the modified retrospective application method.  The company believes that the modified retrospective application of this standard achieves the highest level of clarity and comparability among the presented periods. Accordingly, financial statement amounts for the prior period presented in this Form 10-Q have been restated to reflect the fair value method of expensing prescribed by SFAS 123(R).

 

The following table details the retroactive application impact of SFAS 123(R)  on previously reported results:

 

(Dollars in millions, except per share amounts)
For the quarter ended March 31, 2004

 

Restated

 

As
previously reported

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

$

1,950

 

$

2,290

 

Income from continuing operations

 

$

1,364

 

$

1,603

 

Net income

 

$

1,363

 

$

1,602

 

Earnings per share of common stock:

 

 

 

 

 

Basic earnings per share from continuing operations

 

$

0.81

 

$

0.95

 

Diluted earnings per share from continuing operations

 

$

0.79

 

$

0.93

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

$

3,632

 

$

3,661

 

Net cash used in financing activities from continuing operations

 

$

(1,681

)

$

(1,710

)

 

 

 

 

 

 

At December 31, 2004:

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

$

2,413

 

$

2,229

 

Total current assets

 

$

47,143

 

$

46,970

 

Investment and sundry assets

 

$

7,115

 

$

5,468

 

Total assets

 

$

111,003

 

$

109,183

 

 

 

 

 

 

 

Total current liabilities

 

$

39,786

 

$

39,798

 

Other liabilities

 

$

8,818

 

$

8,927

 

Total liabilities

 

$

79,315

 

$

79,436

 

 

 

 

 

 

 

Common stock and additional paid-in capital

 

$

26,673

 

$

18,355

 

Retained earnings

 

$

38,148

 

$

44,525

 

Total stockholders’ equity

 

$

31,688

 

$

29,747

 

Total liabilities and stockholders’ equity

 

$

111,003

 

$

109,183

 

 

7



 

Incentive Awards

 

Stock-based incentive awards are provided to employees under the terms of the company’s plans (the “Plans”). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the “Committee”). Awards under the Plans may include at-the-money stock options, premium-priced stock options, restricted stock (units), performance share units, stock appreciation rights, cash or stock awards, or any combination thereof.  The non-management members of the IBM Board of Directors also receive stock options under a Plan (director stock option plan).

 

Restricted Stock Units (“RSUs”) are stock awards that are granted to employees and entitle the holder to shares of common stock as the award vests, typically over a two to five year period. The fair value of the awards is determined and fixed on the grant date based on the company’s stock price.

 

Performance Share Units (“PSUs”) are stock awards where the number of shares ultimately received by the employee depends on company performance against specified targets and typically vest over a three year period. The fair value of each PSU is determined on the date of grant, based on the fair value of the company’s stock, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets.  The ultimate number of shares issued and the related compensation cost recognized will be based on a comparison of the final performance metrics to the specified targets.

 

Stock options are awards which allow the employee to purchase shares of the company’s stock at a fixed price.  Stock options are granted at an exercise price equal to or greater than the company stock price at the date of grant. These awards, which vest 25 percent per year, are fully vested four years from the grant date and have a contractual term of ten years.  In 2004, the company implemented a new program for equity awards for its senior executives, designed to drive improved performance and increase the ownership executives have in the company.  Under this program, the company’s top executives now receive stock options priced at a 10 percent premium to the average market price of IBM stock on the grant date.  In addition, these executives have the opportunity to receive at-the-money options by agreeing to defer a certain percentage of their annual incentive compensation into IBM equity, where it is held for three years or until retirement.  These options become 100 percent vested three years from the date of grant and have a contractual term of ten years.

 

The following tables summarize option activity under the Plans during the first quarter of 2005:

 

 

 

WTD. AVG.
EXERCISE
PRICE

 

NO. OF
SHARES
UNDER
OPTION

 

WTD. AVG.
REMAINING
CONTRACTUAL
LIFE (IN YEARS)

 

Balance at December 31, 2004

 

$

 89

 

249,347,906

 

 

 

Options granted

 

101

 

11,736,944

 

 

 

Options exercised

 

39

 

(4,443,135

)

 

 

Options canceled/expired

 

91

 

(1,854,516

)

 

 

Balance at March 31, 2005

 

$

90

 

254,787,199

 

6

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2005

 

$

91

 

168,972,412

 

5

 

 

8



 

The shares under option at March 31, 2005, were in the following exercise price ranges:

 

 

 

OPTIONS OUTSTANDING

 

OPTIONS CURRENTLY
EXERCISABLE

 

EXERCISE
PRICE
RANGE

 

WTD. AVG.
EXERCISE
PRICE

 

NO. OF
OPTIONS

 

AGGREGATE
INTRINSIC
VALUE

 

WTD. AVG.
EXERCISE
PRICE

 

NO. OF
OPTIONS

 

AGGREGATE
INTRINSIC
VALUE

 

$18-$60

 

$

48

 

41,712,278

 

$

1,800,508,607

 

$

45

 

35,377,563

 

$

1,608,368,895

 

$61-$85

 

77

 

54,481,476

 

735,084,788

 

76

 

22,514,671

 

337,161,966

 

$86-$105

 

98

 

91,559,817

 

20,371,591

 

98

 

49,691,695

 

16,812,784

 

$106 and over

 

117

 

67,033,628

 

 

117

 

61,388,483

 

 

 

 

$

90

 

254,787,199

 

$

2,555,964,986

 

$

91

 

168,972,412

 

$

1,962,343,645

 

 

In connection with the adoption of SFAS 123(R), the company reassessed its valuation technique and related assumptions.  The company estimates the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 107 and the company’s prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS 123). Key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. The company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair values of IBM stock options granted in the quarter ended March 31, 2005 and are consistent with those used in prior periods as disclosed in the footnotes to the 2004 IBM Annual Report.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company under SFAS 123(R).

 

The fair value of stock option grants was estimated using a Black-Scholes valuation model with the following assumptions:

 

For the quarter ended March 31:

 

2005

 

2004

 

Option term (years)*

 

5

 

5

 

Volatility**

 

34.9

%

38.6

%

Risk-free interest rate (zero coupon U.S. treasury note)

 

4.04

%

2.9

%

Dividend yield

 

0.8

%

0.7

%

Weighted-average fair value per option granted

 

$

29

 

$

35

 

 


*      The option term is the number of years that the company estimates, based primarily on history, that options will be outstanding prior to settlement.

 

**   Measured using historical daily price changes of the company’s stock over the respective term of the option.

 

The weighted average fair value of options granted during the quarter ended March 31, 2005 declined, when compared to the corresponding quarter of the prior year.  This decrease was the result of a lower stock price on the grant date in 2005 and a greater number of premium priced stock options granted in the first quarter of 2005, which generally have a lower fair value.

 

9



 

Exercises of employee stock options

 

The total intrinsic value of options exercised during the three month periods ended March 31, 2005 and 2004, was $242 million and $311 million, respectively. The total cash received from employees as a result of employee stock option exercises for the quarters ended March 31, 2005 and 2004 was approximately $178 million and $237 million, respectively.  In connection with these exercises, the tax benefits realized by the company for the quarters ended March 31, 2005 and 2004 were $76 million and $106 million, respectively.

 

The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury shares. Total treasury shares held at March 31, 2005 were approximately 355 million shares.

 

IBM Employees Stock Purchase Plan

 

The Company maintains an Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to purchase full or fractional shares of IBM common stock through payroll deductions of up to 10 percent of eligible compensation. The ESPP provides for offering periods during which shares may be purchased and continues as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. The share price paid by an employee shall not be lower than the lesser of 85 percent of the average market price on the first business day of each offering period or 85 percent of the average market price on the last business day of each pay period. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering period. Prior to April 1, 2005, the ESPP was compensatory.

 

Effective April 1, 2005, eligible participants may purchase full or fractional shares of IBM common stock under the ESPP at a five percent discount off the average market price on the day of purchase.  In accordance with the provisions of SFAS 123(R), effective April 1, 2005, the ESPP is not compensatory.

 

 

10



 

4.     The following table summarizes Net income plus gains and losses not affecting retained earnings.

 

(Dollars in millions)

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

Net income

 

$

1,402

 

$

1,363

 

Gains and losses not affecting retained earnings (net of tax):

 

 

 

 

 

Foreign currency translation adjustments

 

(472

)

(173

)

Minimum pension liability adjustments

 

(1

)

55

 

Net unrealized gains on marketable securities

 

12

 

28

 

Net unrealized gains on cash flow hedge derivatives

 

359

 

193

 

Total net (losses)/gains not affecting retained earnings

 

(102

)

103

 

Net income plus gains and losses not affecting retained earnings

 

$

1,300

 

$

1,466

 

 

5.     As discussed on pages 40 and 41, the American Jobs Creation Act of 2004 (the Act) introduces a temporary incentive for the company to repatriate earnings accumulated outside the U.S.  In the fourth quarter of 2004, the company adopted the provisions of FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.”  According to FSP FAS 109-2, the company is allowed time beyond the financial reporting period of enactment to evaluate the effects of the Act on its plan for repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The company has not yet completed its evaluation of the possible effect of the Act on its plan for repatriation of foreign earnings. Accordingly, the company has not adjusted its income tax expense or deferred tax liability as of March 31, 2005 to reflect the possible effect of the new repatriation provision.  Income tax expense, if any, associated with any repatriation under the Act will be provided in the company’s financial statements in the reporting period in which the required management and Board of Directors approvals have been completed.

 

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47).  FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. The Interpretation is effective no later than December 31, 2005. The cumulative effect of initially applying the Interpretation will be recognized as a change in accounting principle. The company is in the process of evaluating the expected effect of FIN 47 on its Consolidated Financial Statements.

 

 

11



 

6.     The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits.  The following table provides the total retirement-related benefit plans’ impact on income before income taxes.

 

(Dollars in millions)
For the three months ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent
Change

 

Retirement-related plans - cost:

 

 

 

 

 

 

 

Defined benefit and contribution pension plans - cost

 

$

456

 

$

199

 

129.1

%

Nonpension postretirement benefits costs

 

93

 

103

 

(9.7

)

Total

 

$

549

 

$

302

 

81.8

%

 

The following table provides the components of the cost/(income) for the company’s pension plans.

 

Cost/(Income) of Pension Plans

 

(Dollars in millions)
Three Months Ended March 31:

 

U.S. Plans

 

Non-U.S. Plans 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

 175

 

$

 160

 

$

 180

 

$

 153

 

Interest cost

 

615

 

612

 

425

 

406

 

Expected return on plan assets

 

(918

)

(904

)

(585

)

(595

)

Amortization of transition assets

 

 

(18

)

(1

)

(2

)

Amortization of prior service cost

 

15

 

15

 

17

 

9

 

Recognized actuarial losses

 

144

 

53

 

133

 

49

 

Net periodic pension cost/(income)—U.S. Plan and material non-U.S. Plans

 

31

*

(82

)*

169

**

20

**

Cost of other defined benefit plans

 

32

 

34

 

35

 

34

 

Total net periodic pension cost/(income) for all defined benefit plans

 

63

 

(48

)

204

 

54

 

Cost of defined contribution plans

 

103

 

101

 

86

 

92

 

Total retirement plan cost recognized in the Consolidated Statement of Earnings

 

$

166

 

$

53

 

$

290

 

$

146

 

 


*    Represents the qualified portion of the IBM Personal Pension Plan.

**  Represents the qualified and non-qualified portion of material non-U.S. plans.

 

In 2005, the company expects to contribute to its material non-U.S. Defined Benefit Plans an amount of between $361 million and $583 million.  The legally mandated minimum contribution included in the amount above for the company’s non-U.S. plans is expected to be $361 million.  In the first quarter of 2005, the company contributed approximately $86 million to its non-U.S. plans.  In addition, the company contributed $1.7 billion to the qualified portion of the IBM Personal Pension Plan (PPP) in January 2005.

 

12



 

The following table provides the components of the cost for the company’s nonpension postretirement benefits.

 

Cost of Nonpension Postretirement Benefits

 

(Dollars in millions)

 

Three Months Ended
March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Service cost

 

$

12

 

$

10

 

Interest cost

 

80

 

88

 

Amortization of prior service cost

 

(16

)

(16

)

Recognized actuarial losses

 

6

 

9

 

Net periodic postretirement benefit cost - U.S. Plan

 

82

 

91

 

Cost of non-U.S. Plans

 

11

 

12

 

Total nonpension postretirement plan cost recognized in the Consolidated Statement of Earnings

 

$

93

 

$

103

 

 

The Medicare Prescription Drug Improvement and Modernization Act of 2003 did not have a material impact on the company’s Consolidated Financial Statements as of or for the period ended March 31, 2005.

 

7.     The changes in the carrying amount of goodwill, by external reporting segment, for the quarter ended March 31, 2005, are as follows:

 

(Dollars in millions)
Segment

 

Balance
12/31/04

 

Goodwill
Additions

 

Purchase
Price
Adjustments

 

Divestitures

 

Foreign
Currency
Translation
and Other
Adjustments

 

Balance
3/31/05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Services

 

$

5,171

 

$

217

 

$

(8

)

$

 

$

(111

)

$

5,269

 

Systems and

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology Group

 

169

 

 

 

 

 

169

 

Personal Systems Group

 

76

 

 

 

 

 

76

 

Software

 

3,021

 

64

 

(4

)

 

(2

)

3,079

 

Global Financing

 

 

 

 

 

 

 

Enterprise Investments

 

 

 

 

 

 

 

Total

 

$

8,437

 

$

281

 

$

(12

)

$

 

$

(113

)

$

8,593

 

 

There were no goodwill impairment losses recorded during the quarter.

 

13



 

The following schedule details the company’s intangible asset balances by major asset class:

 

 

 

At March 31, 2005

 

(Dollars in millions)
Intangible asset class

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

Capitalized software

 

$

1,704

 

$

(768

)

$

936

 

Client-related

 

842

 

(368

)

474

 

Completed technology

 

338

 

(200

)

138

 

Strategic alliances

 

1 04

 

(52

)

52

 

Patents/Trademarks

 

33

 

(13

)

20

 

Other(a)

 

244

 

(125

)

119

 

Total

 

$

3,265

 

$

(1,526

)

$

1,739

 

 

 

 

At December 31, 2004

 

(Dollars in millions)
Intangible asset class

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

Capitalized software

 

$

1,565

 

$

(680

)

$

885

 

Client-related

 

861

 

(335

)

526

 

Completed technology

 

364

 

(206

)

158

 

Strategic alliances

 

104

 

(47

)

57

 

Patents/Trademarks

 

33

 

(11

)

22

 

Other(a) 

 

247

 

(106

)

141

 

Total

 

$

3,174

 

$

(1,385

)

$

1,789

 

 


(a) Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems, and impacts from currency translation.

 

The net carrying amount of intangible assets decreased $50 million during the first quarter of 2005, primarily due to the amortization of acquired intangibles, partially offset by increases in capitalized software.  The aggregate intangible amortization expense was $250 million and $239 million for the quarters ended March 31, 2005 and 2004, respectively.

 

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at March 31, 2005:

 

2005 (for Q2-Q4)

 

$

688 million

 

2006

 

$

534 million

 

2007

 

$

312 million

 

2008

 

$

98 million

 

2009

 

$

70 million

 

 

14



 

8.     During the three months ended March 31, 2005, the company completed 3 acquisitions at an aggregate cost of $320 million. The acquisitions were Corio, Inc. (Corio) for $211 million, SRD for $69 million and Equitant for $40 million.

 

Corio is a publicly-held enterprise application service provider that delivers best-of-breed enterprise applications over a secure global network for a fixed monthly fee.  The acquisition strengthens the company’s application services offerings and helps companies manage rising costs, increasing complexity and regulatory compliance issues as they implement and manage enterprise software in today’s environment.

 

SRD is a privately-held provider of analytics software that increases business insight by delivering an accurate view into individuals and business relationships in near real-time.

 

Equitant is a business transformation outsourcing provider that focuses on the management and optimization of the order-to-cash cycle for large global companies.  The acquisition enables the company to build additional capabilities to address opportunities in the Business Performance Transformation Services marketplace.

 

Purchase price consideration was paid primarily in cash and includes certain amounts subject to holdbacks that expire with the passage of time.  These acquisitions are disclosed in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

 

The table below presents the purchase price related to the acquisitions and purchase price allocations as of March 31, 2005:

 

(Dollars in millions)

 

Amortization
Life (yrs.)

 

Purchase
Price

 

Current assets

 

 

 

$

50

 

Fixed assets/non-current

 

 

 

18

 

Intangible assets:

 

 

 

 

 

Goodwill

 

N/A

 

281

 

Completed technology

 

3

 

9

 

Client relationships

 

5

 

1

 

Total assets acquired

 

 

 

359

 

Current liabilities

 

 

 

(25

)

Non-current liabilities

 

 

 

(14

)

Total liabilities assumed

 

 

 

(39

)

Total purchase price

 

 

 

$

320

 

 

The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. None of the goodwill is deductible for tax purposes.  The overall weighted-average life of the identified amortizable intangible assets acquired is 3.2 years.  With the exception of goodwill, these identified intangible assets will be

 

15



 

amortized on a straight-line basis over their useful lives.  Goodwill of $281 million has been assigned to the Software ($64 million) and Global Services ($217 million) segments.

 

9.     The tables on pages 57 and 58 of this Form 10-Q reflect the results of the company’s segments consistent with the management system used by the company’s chief operating decision maker. These results are not necessarily a depiction that is in conformity with generally accepted accounting principles (GAAP). For example, employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount. A different result could occur for any segment if actuarial assumptions unique to each segment were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.

 

The individual segment results do not include the effect of the adoption of SFAS No. 123(R), “Share-Based Payment.”  The impact of this change is shown in the reconciliation to IBM as Reported on page 57.

 

On April 20, 2005, the company announced that the Printing Systems Division and Retail Store Solutions (divisions of the Personal Systems Group segment) will become part of the Systems and Technology Group.

 

The segment information, on pages 57 and 58, for the quarters ended March 31, 2005 and March 31, 2004 does not include this organizational change.  In this Form 10-Q, these units are reported as part of the company's Personal Systems Group, consistent with the company's measurement and management system in the quarters reported.

 

16



 

10.   The following table provides the liability balances for actions taken in the second-quarter of 2002 associated with the Microelectronics Division and the rebalancing of both the company’s workforce and leased space resources, fourth-quarter 2002 actions associated with the acquisition of the PricewaterhouseCoopers consulting business, the 2002 actions associated with the hard disk drive ( HDD ) business for reductions in workforce, manufacturing capacity and space, actions in 1999, and actions that took place through 1993.

 

(Dollars in millions)

 

Liability
as of
12/31/2004

 

Payments

 

Other Adj. *

 

Liability
as of
3/31/2005

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

Workforce

 

$

139

 

$

35

 

$

18

 

$

122

 

Space

 

86

 

20

 

10

 

76

 

Other

 

9

 

2

 

 

7

 

Total

 

$

234

 

$

57

 

$

28

 

$

205

 

Non-current:

 

 

 

 

 

 

 

 

 

Workforce

 

$

543

 

$

 

$

(39

)

$

504

 

Space

 

244

 

 

(19

)

225

 

Total

 

$

787 

 

$

 

$

(58)

 

$

729

 

 


* The other adjustments column in the table above includes the reclassification of non-current to current as well as foreign currency translation adjustments.  In addition, net adjustments of approximately $7 million were made in the first quarter of 2005 to reduce previously recorded liabilities.  These net adjustments were for changes in the estimated cost of employee terminations and vacant space for the 2002 actions ($6 million), and actions prior to 1999 ($1 million).  Of the $7 million of net adjustments,  $8 million credit is included in Other (income) and expense and a $1 million debit is included in Selling, general and administrative expense in the Consolidated Statement of Earnings.

 

11.   The company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, securities, and environmental matters. The following is a discussion of some of the more significant legal matters involving the company.

 

On July 31, 2003, the U.S. District Court for the Southern District of Illinois, in Cooper et al. vs. The IBM Personal Pension Plan and IBM Corporation, held that the company ‘s pension plan violated the age discrimination provisions of the Employee Retirement Income Security Act of 1974 (ERISA). On September 29, 2004, the company announced that IBM and plaintiffs agreed in principle to resolve certain claims in the litigation. Under the terms of the agreement, plaintiffs will receive an incremental pension benefit in exchange for the settlement of some claims, and a stipulated remedy on remaining claims if plaintiffs prevail on appeal. Under the terms of the settlement, the judge will issue no further rulings on remedies. This settlement, together with a previous settlement of a claim referred to as the partial plan termination claim resulted in the company taking a one-time charge of $320 million in the third quarter of 2004.

 

This agreement ends the litigation on all claims except the two claims associated with IBM’s cash balance formula. The company will appeal the rulings on these claims. The company

 

17



 

continues to believe that its pension plan formulas are fair and legal. The company has reached this agreement in the interest of the business and the company shareholders, and to allow for a review of its cash balance formula by the Court of Appeals. The company continues to believe it is likely to be successful on appeal.

 

The agreement stipulates that if the company is not successful on appeal of the two remaining claims, the agreed remedy will be increased by up to $1.4 billion — $780 million for the claim that the company’s cash balance formula is age discriminatory, and $620 million for the claim that the method used to establish opening account balances during the 1999 conversion discriminated on the basis of age (referred to as the “always cash balance “ claim). The maximum additional liability the company could face in this case if it is not successful on appeal is therefore capped at $1.4 billion.

 

In the coming months, class members will receive formal notice of the settlement and the judge will hold a fairness hearing. Once the settlement is approved, IBM will appeal the liability rulings for the cash balance claims. As a result, the entire process could take up to 2 years before reaching final conclusion.

 

On March 21, 2005, the company and the Compuware Corporation entered into a business relationship as part of an agreement that settled all outstanding litigation matters between the parties. Under this relationship, the company will, over a four year period, license $140 million of software and offer to procure $260 million of selected services from Compuware to be used in the company’s Global Services business.  In the fourth quarter of 2004, the company established a provision for this suit, which fully covers the company’s remaining liability under this settlement agreement with respect to the software commitment.

 

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by The SCO Group. The company removed the case to Federal Court in Utah. Plaintiff is successor in interest to some of AT&T’s Unix IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and contribution of unspecified code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, patent infringement, promissory estoppel and copyright infringement. Trial was scheduled for November 1, 2005 but the scheduling order has been suspended and is under revision.

 

On June 2, 2003 the company announced that it received notice of a formal, nonpublic investigation by the Securities and Exchange Commission (SEC). The SEC is seeking information relating to revenue recognition in 2000 and 2001 primarily concerning certain types of client transactions. The company believes that the investigation arises from a separate investigation by the SEC of Dollar General Corporation, a client of the company’s Retail Stores Solutions unit, which markets and sells point of sale products.

 

On January 8, 2004, the company announced that it received a “Wells Notice” from the staff of the SEC in connection with the staff’s investigation of Dollar General Corporation, which as noted above, is a client of the company’s Retail Stores Solutions unit. It is the company’s understanding that an employee in the company’s Sales & Distribution unit also

 

 

18



 

received a Wells Notice from the SEC in connection with this matter. The Wells Notice notifies the company that the SEC staff is considering recommending that the SEC bring a civil action against the company for possible violations of the U.S. securities laws relating to Dollar General’s accounting for a specific transaction, by participating in and aiding and abetting Dollar General’s misstatement of its 2000 results. In that transaction, the company paid Dollar General $11 million for certain used equipment as part of a sale of IBM replacement equipment in Dollar General’s 2000 fourth fiscal quarter. Under the SEC’s procedures, the company responded to the SEC staff regarding whether any action should be brought against the company by the SEC. The separate SEC investigation noted above, relating to the recognition of revenue by the company in 2000 and 2001 primarily concerning certain types of client transactions, is not the subject of this Wells Notice.

 

In January 2004, the Seoul District Prosecutors Office in South Korea announced it had brought criminal bid rigging charges against several companies, including IBM Korea and LG IBM (a joint venture between IBM Korea and LG Electronics) and had also charged employees of some of those entities with, among other things, bribery of certain officials of government-controlled entities in Korea, and bid rigging. IBM Korea and LG IBM cooperated fully with authorities in these matters. A number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. IBM Korea has been debarred from doing business directly with certain government controlled entities in Korea. The orders, imposed at different times, cover a period of no more than a year from the date of issuance. The orders do not prohibit IBM Korea from selling products and services to business partners who sell to government controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter.

 

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations or remediations at or in the vicinity of several current or former operating sites pursuant to permits, administrative orders or agreements with state environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

 

In accordance with SFAS No. 5, “Accounting for Contingencies,” the company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities for the above items, including any changes to such liabilities for the three months ended March 31, 2005, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters referred to above are not a meaningful indicator of the potential liability. Litigation is inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. While the company will continue to defend itself vigorously in all such matters, it is possible that the company’s business, financial condition, results of operations, or cash flows could be affected in any particular period by the resolution of one or more of these matters.

 

19



 

Whether any losses, damages or remedies finally determined in any such claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations, or cash flow will depend on a number of variables, including the timing and amount of such losses or damages, the structure and type of any such remedies, the significance of the impact any such losses, damages or remedies may have on the company’s Consolidated Financial Statements, and the unique facts and circumstances of the particular matter which may give rise to additional factors.

 

12.   The company’s extended lines of credit include unused amounts of $3,160 million and $2,714 million at March 31, 2005 and December 31, 2004, respectively.  A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company committed to provide future financing to its customers in connection with customer purchase agreements for approximately $1,902 million and $1,686 million at March 31, 2005 and December 31, 200 4, respectively.

 

The company has applied the disclosure provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5, “Accounting for Contingencies”, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

 

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain IP rights, specified environmental matters, and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other party’s claims. Further, the company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the company may have recourse against third parties for certain payments made by the company.

 

It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements did not have a material effect on the company’s business, financial condition or results of operations.  The company believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the company’s business, financial condition or results of operations.

 

 

20



 

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $55 million and $58 million at March 31, 2005 and December 31, 2004, respectively.

 

Changes in the company’s warranty liability balance are presented in the following table:

 

(Dollars in millions)

 

2005

 

2004

 

Balance at January 1

 

$

944

 

$

780

 

Current period accruals

 

219

 

205

 

Accrual adjustments to reflect actual experience

 

6

 

28

 

Charges incurred

 

(223

)

(207

)

Balance at March 31

 

$

946

 

$

806

 

 

The increase in the balance was primarily driven by increased warranty activity associated with personal computers due to increased sales volumes throughout 2004 and the first quarter of 2005.

 

13.   Subsequent Events:

 

On April 26, 2005, the company announced that the Board of Directors approved an increase in the quarterly dividend of 11.1 percent from $0.18 to $0.20 per common share.  The dividend is payable June 10, 2005, to shareholders of record on May 10, 2005.

 

On April 26, 2005, the company announced that the Board of Directors authorized the company to repurchase up to an additional $5.0 billion of IBM common shares.  The company plans to repurchase the shares in the open market or in private transactions from time to time, based on market conditions.

 

21



 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2005*

 

Snapshot

 

(Dollars in millions except per share amounts)
Three months ended March 31:

 

2005

 

2004 **  

 

Yr. To Yr.
Percent/
Margin
Change

 

Revenue

 

$

22,908

 

$

22,175

 

3.3

%+

Gross profit margin

 

36.0

%

35.6

%

0.4

pts.

Total expense and other income

 

$

6,244

 

$

5,942

 

5.1

 %

Total expense and other income to revenue ratio

 

27.3

%

26.8

%

0.5

pts 

Provision for income taxes

 

$

603

 

$

586

 

2.8

 %

Income from continuing operations

 

$

1,407

 

$

1,364

 

3.2

 %

Earnings per share from continuing operations:

 

 

 

 

 

 

 

Assuming dilution

 

$

0.85

 

$

0.79

 

7.6

 %

Basic

 

$

0.86

 

$

0.81

 

6.2

 %

Weighted average shares outstanding:

 

 

 

 

 

 

 

Assuming dilution

 

1,660.6

 

1,727.4

 

(3.9%

)

Basic

 

1,628.7

 

1,691.7

 

(3.7%

)

 

 

 

3/31/05

 

12/31/04 **

 

 

 

Assets

 

$

104,899

 

$

111,003

 

(5.5%

)

Liabilities

 

$

74,979

 

$

79,315

 

(5.5%

)

Equity

 

$

29,920

 

$

31,688

 

(5.6%

)

 


* The following Results of Continuing Operations discussion does not include the HDD business that the company sold to Hitachi, Ltd. on December 31, 2002. The HDD business was accounted for as a discontinued operation under generally accepted accounting principles.  Loss from Discontinued Operations for the three-months ended March 31, 2005 and 2004 was $5 million and $1 million, respectively.

** Restated to include the impact of share-based compensation expense.

 

The selected reference to “adjusting for currency” in the Management Discussion is made so that the financial results can be viewed without the impacts of changing foreign currency exchange rates and therefore facilitates a comparative view of business growth. In the first quarter of 2005, the U.S. dollar was generally weaker against other currencies compared to the first quarter of 2004, so growth rates that are adjusted for currency exchange rates were lower than growth at actual currency exchange rates.

+   0.7 percent adjusting for currency

 

Total revenue increased 3 percent as reported, 1 percent adjusting for currency.  Pre-tax income was $2 billion, up 3 percent versus the first quarter of 2004.  Diluted earnings per share from continuing operations of $0.85 was an 8 percent improvement year-to-year.  Diluted earnings per share included an incremental $0.10 impact related to equity compensation, based

 

 

22



 

on the company’s implementation in the first quarter of SFAS 123(R), compared to $0.14 in the first quarter of 2004.

 

The first quarter of 2005 had a strong start but did not play out as the company expected.  The company experienced a significant drop-off in March when monthly revenue declined versus March 2004.  Given the skew of business within the quarter, the March shortfall significantly impacted the first quarter’s overall growth rate and profitability.

 

There were some specific items that impacted the results:

 

                  First, the company's Global Services segment did not meet expectations in the quarter.  Contributing to the shortfall was a decline in short-term signings, that impacted not only the total reported signings, but also the company’s revenue and profit.

                  Second, the company experienced an elongated sales cycle in a few of its product areas due to both sales execution and customer deferrals.  The company always has transactions that don’t close, however more than a normal level of transactions slipped this quarter.

                  Third, while the company had good customer acceptance of its new storage products, the company’s results were impacted by late product availability.

 

This quarter, the business fell off very late in the period, and while the company was able to take some actions to improve performance, it was not able to deliver to the level that it had planned.

 

To put this in perspective:

 

                  The annuity-like stream of revenue and profit provided stability, even when the transaction business fell off.

                  The company’s products remained extremely competitive.

                  The company is taking actions to address the issues and improve its overall performance.

 

The gross profit margin was 36.0 percent, an improvement of 0.4 points versus the prior year.  Total expense and other income increased primarily due to increased expense for retirement-related plans and currency impact.  The ratio of Total expense and other income to revenue increased by 0.5 points.

 

The company’s effective tax rate for the first three months of 2005 and 2004 was 30.0 percent and 30.1 percent, respectively.

 

Assets declined $6.1 billion, primarily driven by a reduction in receivables of $4.7 billion related to the collection of higher year-end revenue amounts.

 

Cash and cash equivalents declined $1.4 billion, driven by the company’s U.S. pension plan contribution of $1.7 billion in January 2005.

 

Global Services signings were $10.0 billion for the quarter, down 4.5 percent compared to the first quarter of 2004.  The estimated Global Services backlog ended at $110 billion, versus an estimated backlog of $111 billion at December 31, 2004.

 

23



 

Quarter in Review

 

Results of Continuing Operations

 

Revenue

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent
Change

 

Yr. to Yr.
Percent
Change
Adjusting
for
Currency

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings Revenue Presentation:

 

 

 

 

 

 

 

 

 

Global Services

 

$

11,696

 

$

11,024

 

6.1

%

3.3

%

Hardware

 

6,749

 

6,735

 

0.2

 

(2.1

)

Software

 

3,551

 

3,466

 

2.4

 

(0.3

)

Global Financing

 

580

 

662

 

(12.5

)

(14.6

)

Enterprise Investments/Other

 

332

 

288

 

15.2

 

11.8

 

Total

 

$

22,908

 

$

22,175

 

3.3

%

0.7

%

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004 *

 

Yr. to Yr.
Percent
Change

 

Yr. to Yr.
Percent
Change
Adjusting
for
Currency

 

 

 

 

 

 

 

 

 

 

 

Industry Sector**:

 

 

 

 

 

 

 

 

 

Financial Services

 

$

5,723

 

$

5,507

 

3.9

%

1.0

%

Public

 

3,369

 

3,253

 

3.6

 

1.1

 

Industrial

 

2,997

 

3,042

 

(1.5

)

(4.2

)

Distribution

 

2,186

 

2,086

 

4.8

 

2.1

 

Communications

 

2,085

 

2,063

 

1.1

 

(1.3

)

Small & Medium

 

5,110

 

4,769

 

7.2

 

4.3

 

OEM

 

691

 

671

 

2.9

 

2.8

 

Other

 

747

 

784

 

(4.7

)

(6.7

)

Total

 

$

22,908

 

$

22,175

 

3.3

%

0.7

%

 


*             Reclassified to conform with 2005 presentation.

**      The majority of the company’s enterprise business, which excludes the company’s original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors around which the company’s sales and distribution activities, as well as an increasing number of its services and products businesses are organized. The majority of the businesses in the Small & Medium category have fewer than 1,000 employees.

 

 

24



 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr.to Yr.
Percent
Change

 

Yr. To Yr.
Percent
Change
Adjusting for
Currency

 

 

 

 

 

 

 

 

 

 

 

Geographies:

 

 

 

 

 

 

 

 

 

Americas

 

$

9,297

 

$

9,097

 

2.2

%

1.2

%

Europe/Middle East/Africa

 

7,734

 

7,251

 

6.7

 

1.8

 

Asia Pacific

 

5,186

 

5,156

 

0.6

 

(2.1

)

OEM

 

691

 

671

 

2.9

 

2.8

 

Total

 

$

22,908

 

$

22,175

 

3.3

%

0.7

%

 

Revenue from four of the five industry sectors, as well as Small and Medium Business increased in the first quarter of 2005 when compared to the first quarter of 2004, on an as-reported basis, reflecting the company’s continuing go-to-market strategy of designing industry and client-specific solutions.  Revenue from Small & Medium Business led the growth in the first quarter, with growth in all geographies.  The Financial Services sector growth was primarily driven by growth in Banking (6 percent), while the Public sector revenue growth was primarily driven by Health (15 percent) and Government in the Americas (3 percent).  The Communications sector revenue increase was driven by increased revenue in Telecommunications (4 percent), while the Distribution sector revenue growth was driven by Travel and Transportation (16 percent).

 

Revenue increased slightly in all geographies, except Asia Pacific, after adjusting for currency.  There were four major countries that had revenue declines after adjusting for currency. Japan declined 4 percent, Germany 8 percent, France 3 percent and Italy 7 percent. Together these countries represent over a quarter of the company’s revenue, and they were down 5 percent in the quarter.

 

These four countries are all facing economic challenges, and spending has lagged other countries.  In light of this environment, the company has been looking at its structure and operating model to ensure that it serves its clients in the most efficient and effective way possible.  This includes reexamining its operations and organizational structure in Europe. This activity created some sales execution disruption toward the end of the quarter.

 

Helping to offset these challenges is the company’s continued pattern of revenue growth in emerging countries.  China (6 percent), Russia (33 percent), India (45 percent) and Brazil (24 percent) together grew 18 percent in the first quarter to over $1 billion.  The company will continue to shift investments to these areas to better address these important markets.

 

Global Services revenue increased 6.1 percent year-to-year; however, contrary to the trend the company saw in the second half of 2004, short-term signings declined more rapidly than long-term signings, which resulted in a deceleration in the revenue growth rate from 2004 quarterly periods.

 

25



 

Revenue was essentially flat for Hardware as pSeries server revenue grew 11.6 percent, xSeries revenue growth decelerated to 8.2 percent and iSeries server revenue returned to growth increasing 0.8 percent.  Storage products revenue increased 5.1 percent despite late availability of the company’s new products.  These increases were offset by an expected decline in zSeries server revenue, following a strong first half of 2004, and lower personal computer revenue which was impacted by the pending sale of this business to Lenovo Group.

 

Software revenue increased 2.4 percent as results were consistent with the company’s performance in the second half of 2004.  Total Middleware software increased 2.9 percent, driven by strong growth in many of the company’s strategic offerings.  Operating Systems products declined 2.2 percent.

 

Global Financing revenue declined in the first quarter of 2005 versus the first quarter of 2004 primarily due to a decline in the income-generating asset base and lower external used equipment sales.  See pages 43 to 49 for additional information regarding Global Financing results.

 

The following table presents each segment’s revenue as a percentage of the company’s total:

 

For the period ended March 31:

 

2005

 

2004

 

Global Services

 

51.1

%

49.7

%

Hardware

 

29.5

 

30.4

 

Software

 

15.5

 

15.6

 

Global Financing

 

2.5

 

3.0

 

Enterprise Investments/Other

 

1.4

 

1.3

 

Total

 

100.0

%

100.0

%

 

Gross Profit

 

For the period ended March 31:

 

2005

 

2004

 

Yr. To Yr
Change

 

 

 

 

 

 

 

 

 

Gross Profit Margin:

 

 

 

 

 

 

 

Global Services

 

24.3

%

23.7

%

0.6 pts.

 

Hardware

 

27.5

 

26.5

 

1.0

 

Software

 

86.4

 

8 5.9

 

0.5

 

Global Financing

 

54.2

 

60.5

 

(6.3

)

Enterprise Investments/Other

 

52.5

 

39.5

 

13.0

 

Total

 

36.0

%

35.6

%

0.4pts.

 

 

The increase in  Hardware gross profit margin was due to year-to-year manufacturing yield improvements in the Microelectronics business and continued focus on cost in personal computers, offsetting a decline in Storage Systems.  The increase in Software gross profit margin was primarily driven by the growth in Software revenue and the positive impact from currency.  The decrease in Global Financing gross profit margin was primarily due to declining financing margins as a result of declining asset yields, as well as a change in mix away from higher margin financing income and towards lower margin used equipment sales.  In addition, an increase in

 

 

26



 

retirement-related plan costs of approximately $159 million compared to the first quarter of 2004 impacted the overall gross profit margin, partially offset by lower equity compensation costs ($26 million).

 

Expense

 

The Total expense and other income to revenue ratio increased 0.5 points to 27.3 percent in the first quarter of 2005 versus the first quarter of 2004.  For additional information regarding Total expense and other income, see the following analyses by category.

 

Selling, general and administrative expense

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. To Yr.
Percent
Change

 

Selling, general and administrative expense:

 

 

 

 

 

 

 

Selling, general and administrative - base

 

$

4,548

 

$

4,181

 

8.8

%

Advertising and promotional expense

 

325

 

311

*

4.5

 

Workforce reductions - ongoing

 

94

 

163

 

(42.3

)

Bad debt expense

 

(34

)

3

 

nm

 

Total

 

$

4,933

 

$

4,658

 

5.9

%

 


* Reclassified to conform with 2005 presentation.

nm - not meaningful

 

Total Selling, general and administrative (SG&A) expense increased 5.9 percent (4 percent adjusting for currency) in the first quarter of 2005 primarily due to increased expense for retirement-related plans ($64 million), effects of currency ($90 million) and increased salaries and sales commissions ($120 million). These increases were partially offset by reduced expense associated with ongoing workforce reduction actions and lower Bad debt expense primarily due to lower reserve requirements associated with improved economic conditions and improved credit quality, as well as the lower asset base of the Global Financing receivable portfolio (see pages 46 and 47).  In addition, equity compensation expense decreased $65 million in first quarter of 2005 versus the first quarter of 2004.

 

27



 

Other (income) and expense

 

 

 

 

 

 

 

Yr. to Yr.

 

(Dollars in millions)

 

 

 

 

 

Percent

 

For the period ended March 31:

 

2005

 

2004

 

Change

 

Other (income) and expense:

 

 

 

 

 

 

 

Foreign currency transaction losses

 

$

81

 

$

112

 

(27.7

)%

Interest income

 

(57

)

(39

)

46.2

 

Net gains from securities and investment assets

 

(3

)

(4

)

(25.0

)

Net realized (gains)/losses from certain real estate activities

 

1

 

(4

)

nm

 

Other

 

 

(52

)

nm

 

Total

 

$

22

 

$

13

 

71.3

%

 


nm - not meaningful

 

Other (income) and expense increased in the first quarter 2005 versus the first quarter of 2004.  The increase was primarily a result of gains on asset sales, as well as adjustments associated with previously recorded vacant space actions recorded in the first quarter of 2004, with no corresponding activity in the first quarter of 2005.  This increase in expense was partially offset by lower foreign currency transaction losses and increased interest income in the first quarter of 2005 versus 2004.

 

Research, Development and Engineering

 

 

 

 

 

 

 

Yr. to Yr.

 

(Dollars in millions)

 

 

 

 

 

Percent

 

For the period ended March 31:

 

2005

 

2004

 

Change

 

Research, development and engineering:

 

 

 

 

 

 

 

Total

 

$

1,459

 

$

1,416

 

3.0

%

 

Research, development and engineering expense increased in the first quarter of 2005 versus the first quarter of 2004 primarily due to increased spending in the Systems and Technology Group for server and storage products (approximately $60 million),  partially offset by lower spending in Microelectronics ($22 million) as well as increased spending in Software (approximately $27 million).  In addition, retirement-related plans expense increased by $24 million, partially offset by a decrease in equity compensation expense of $19 million.

 

Intellectual Property and Custom Development Income

 

 

 

 

 

 

 

Yr. to Yr.

 

(Dollars in millions)

 

 

 

 

 

Percent

 

For the period ended March 31:

 

2005

 

2004

 

Change

 

Intellectual Property and Custom Development Income:

 

 

 

 

 

 

 

Sales and other transfers of intellectual property

 

$

34

 

$

22

 

54.5

%

Licensing/royalty-based fees

 

106

 

90

 

17.8

 

Custom development income

 

79

 

68

 

16.2

 

Total

 

$

219

 

$

180

 

21.9

%

 

28



 

Intellectual Property and Custom Development Income increased across all categories in the first quarter of 2005 versus the same period of 2004.  The timing and amount of Sales and other transfers of IP may vary significantly from period to period depending upon the timing of divestitures, economic conditions, industry consolidation and the timing of new patents and know-how development.  There were no significant IP transactions in the quarter.

 

Interest Expense

 

 

 

 

 

 

 

Yr. to Yr.

 

(Dollars in millions)

 

 

 

 

 

Percent

 

For the period ended March 31:

 

2005

 

2004

 

Change

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Total

 

$

49

 

$

35

 

40.0

%

 

The increase in Interest expense was primarily due to higher interest rates and higher average non-Global Financing debt in the first quarter of 2005 versus first quarter of 2004.

 

Interest expense is presented in Cost of Global Financing in the Consolidated Statement of Earnings only if the related external borrowings are to support the Global Financing external business.  See page 48 for additional information regarding Global Financing debt and interest expense.

 

Retirement-Related Benefits

 

The following table provides the total pre-tax cost for all retirement-related plans.  Cost amounts are included as an addition to the company’s cost and expense amounts in the Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the individuals participating in the plans.

 

 

 

 

 

 

 

Yr. to Yr.

 

(Dollars in millions)

 

 

 

 

 

Percent

 

For the period ended March 31:

 

2005

 

2004

 

Change

 

Retirement-related plans - cost:

 

 

 

 

 

 

 

Defined benefit and contribution pension plans - cost

 

$

456

 

$

199

 

129.1

%

Nonpension postretirement benefits costs

 

93

 

103

 

(9.7

)

Total

 

$

549

 

$

302

 

81.8

%

 

Included in the amounts above, the company had costs of approximately $267 million and $6 million associated with its defined benefit pension plans for the quarter ended March 31, 2005 and 2004, respectively.  This increase was driven by several factors including changes in the U.S. and non-U.S. discount rate assumptions, changes in the non-U.S. expected long-term return on asset assumptions, and recognition of previously deferred pension costs in accordance with SFAS 87, “Employers’ Accounting for Pensions,” partially offset by the company’s contributions.  The year-to-year increase impacted gross profit, SG&A expense and RD&E expense by approximately $159 million, $64 million and $24 million, respectively.

 

29



 

Provision for Income Taxes

 

The effective tax rate for the first three months of 2005 and 2004 was 30.0 percent and 30.1 percent, respectively.

 

In October 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for the company to repatriate earnings accumulated outside the U.S. by allowing the company to reduce its taxable income by 85 percent of certain eligible dividends received from non-U.S. subsidiaries by the end of 2005. In order to benefit from this incentive, the company must reinvest the qualifying dividends in the U.S. under a domestic reinvestment plan approved by the chief executive officer and board of directors.  The company has commenced an evaluation of the possible effects of the Act’s repatriation provision and expects to complete this evaluation within a reasonable period of time following the issuance of additional clarifying language and guidance from Congress and the Treasury Department on key elements of the repatriation provision. It is reasonably possible that the company may repatriate up to approximately $8 billion of the undistributed earnings under the Act and the corresponding income tax expense may be as much as approximately $550 million. The resulting income tax expense, if any, will be provided in the company’s financial statements in the quarter in which the evaluation and approvals have been completed.

 

Weighted-Average Common Shares

 

For the period ended March 31:

 

2005

 

2004

 

Yr. To Yr.
Percent
Change

 

Earnings per share from continuing operations:

 

 

 

 

 

 

 

Assuming dilution

 

$

0.85

 

$

0.79

 

7.6

%

Basic

 

$

0.86

 

$

0.81

 

6.2

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding: (in millions)

 

 

 

 

 

 

 

Assuming dilution

 

1, 660.6

 

1,727.4

 

(3.9

)%

Basic

 

1,628.7

 

1,691.7

 

(3.7

)

 

The amount of shares actually outstanding at March 31, 2005 was 1,613.3 million.

 

The weighted average number of common shares outstanding assuming dilution was lower by 66.8 million in the first quarter of 2005 compared to the first quarter of 2004, primarily as a result of the company’s common share repurchase program.

 

Segment Details

 

The following is an analysis of the first quarter 2005 versus first quarter 2004 external segment results. The external segment results do not include the effect of the company’s implementation of SFAS 123(R) in the first quarter of 2005 as discussed on pages 31 to 35.

 

30



 

Global Services

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent
Change

 

 

 

 

 

 

 

 

 

Global Services Revenue:

 

$

11,696

 

$

11,024

 

6.1

%

Strategic Outsourcing

 

$

5,004

 

$

4,616

 

8.4

 

Business Consulting

 

3,442

 

3,286

 

4.7

 

Integrated Technology

 

1,801

 

1,699

 

6.0

 

Maintenance

 

1,449

 

1,423

 

1.9

 

 

Global Services revenue increased 6.1 percent (3 percent adjusting for currency) in the first quarter of 2005 versus the first quarter of 2004.  Strategic Outsourcing (SO) continued its trend of double digit revenue growth in EMEA and also had growth in Asia Pacific.  The Americas declined, reflecting the cumulative effect of lower signings.  The company over the past couple of quarters has been able to maintain acceptable revenue growth while signings were declining, due primarily to increases in yield and scope expansion in existing contracts.

 

This quarter, many of the signings were late in the quarter, and the company had a higher percentage of its total signings come from extensions to existing contracts.  While these extensions are positive for client satisfaction and drive revenue over future periods, they didn’t contribute to the company’s current period revenue.

 

Although the company’s SO yields continued to increase year-to-year, the increase was not sufficient to offset the impact from short-term signings.

 

Business Consulting Services (BCS) revenue increased with double digit growth in the Americas offset by a decline in Asia Pacific.  In Consulting and Systems Integration, the company had modest signings growth in the Americas and EMEA, and signing declines in Asia Pacific, driven primarily by weakness in Japan.  Revenue was impacted in the quarter by signing delays in Asia, and yield declines in EMEA.

 

Integrated Technology Services (ITS) revenue grew in the quarter, but it is more dependent upon signings in the quarter.  ITS signings were flat to down across all geographies, due to weakness in small transactions.

 

Business Transformation Outsourcing (BTO) signings nearly doubled year-to-year, and continued to show strong revenue growth year-to-year.

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent/
Margin
Change

 

Global Services:

 

 

 

 

 

 

 

Gross profit

 

$

2,920

 

$

2,717

 

7.5

%

Gross profit margin

 

25.0

%

24.6

%

0.4 pts.

 

 

 

31



 

Global Services gross profit dollars and margin increased primarily due to the corresponding increase in revenue.

 

Hardware

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent
Change

 

Hardware Revenue:

 

$

6,608

 

$

6,602

 

0.1

%

 

 

 

 

 

 

 

 

Systems and Technology Group

 

$

3,869

 

$

3,776

 

2.5

%

z Series

 

 

 

 

 

(15.6

)

i Series

 

 

 

 

 

0.8

 

p Series

 

 

 

 

 

11.6

 

x Series

 

 

 

 

 

8.2

 

Storage Systems

 

 

 

 

 

5.1

 

Microelectronics

 

 

 

 

 

2.3

 

Engineering and Technology Services

 

 

 

 

 

55.7

 

Personal Systems Group

 

2,739

 

2,826

 

(3.1

)

Personal Computers

 

 

 

 

 

(2.4

)

Retail Store Solutions

 

 

 

 

 

(10.9

)

Printer Systems

 

 

 

 

 

(3.9

)

 

Systems and Technology Group revenue increased 2.5 percent (flat when adjusted for currency) in the first quarter of 2005 versus the first quarter of 2004.  The pSeries server revenue increased with growth in all geographies. The company expects that when external share results are reported, pSeries will again grow share in the UNIX market. xSeries growth decelerated to 8.2 percent year over year.  xSeries had double-digit growth in both the Americas and Asia.  Competitive pricing pressure was especially strong in Europe, contributing to modest revenue declines.  This was compounded by a product transition in xSeries high-end servers, which were not available until late in the quarter.  xSeries’ momentum in Blades, the fastest growing server platform, remained strong with revenue growth of nearly 90 percent year-to-year.  iSeries server returned to modest revenue growth after several quarters of product transition driven decline. zSeries revenue declined, which was expected, following strong performance in 2004.  MIPS (millions of instructions per second) shipments decreased by 11 percent.  zSeries experienced weakness in Europe and Japan as customers delayed a number of sizable transactions. Total Storage revenue increased  as enterprise disk grew over 20 percent, tape improved 3 percent and SAN declined.  The company’s new disk products, the DS8000 and DS6000, began volume shipments late in the quarter and have been well received by clients.  When data becomes available the company believes it will have gained share in the external disk and tape markets.  The storage product transition impacted the company’s profitability.  Before the new products were available, in order to meet client demand the company substituted predecessor product at steep discounts, significantly impacting the margin.  The new products will be available for the entire second quarter, and the company expects to return to more normal profit levels.  Microelectronics revenue increased and yield stability continues to improve in the company’s East Fishkill fab.  Engineering & Technology Services (E&TS) revenue grew over 55 percent year-to-year.  This business unit enables customers to leverage the company’s design skills, know-how, and technical capabilities to meet their needs.

 

32



 

Personal Systems Group revenue declined driven by desktops, as the overall personal computer business was impacted by the pending sale of this business.  The company remains on track to close the sale of its Personal Computer business to Lenovo in the second quarter.

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent/
Margin
Change

 

 

 

 

 

 

 

 

 

Hardware:

 

 

 

 

 

 

 

Gross profit

 

$

1,967

 

$

1,904

 

3.3

%

Gross profit margin

 

29.8

%

28.8

%

1.0 pts.

 

 

The increase in gross profit dollars was primarily driven by improved year-to-year margins in Microelectronics and personal computers, offsetting a margin decline in Storage Systems driven by product discounting as described above.  Microelectronics improvement was driven by improved manufacturing yields versus the first quarter of 2004 and the personal computer improvement was a result of a continued focus on cost management.

 

Overall Hardware margin improved 1.0 points versus 2004.  The improvements in Microelectronics and personal computers contributed 1.1 points and 0.9 points, respectively, to the overall margin improvement.  These improvements were partially offset by the lower margins in Storage Systems and reduced zSeries volumes which impacted the overall margin by 0.6 points and 0.4 points, respectively.

 

Differences between the hardware segment gross margin and profit amounts above and the amounts reported on page 26 (and derived from page one) primarily relate to the impact of certain hedging transactions  (see Anticipated Royalties and Cost Transactions on page 66 of the IBM 2004 Annual Report). The recorded amounts for such impact are considered unallocated corporate amounts for purposes of measuring the segment’s gross margin performance and therefore are not included in the segment results above.

 

33



 

Software

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent
Change

 

 

 

 

 

 

 

 

 

Software Revenue:

 

$

3,551

 

$

3,466

 

2.4

%

Middleware

 

$

2,795

 

$

2,716

 

2.9

%

WebSphere Family

 

 

 

 

 

11.0

 

Information Management

 

 

 

 

 

5.1

 

Lotus

 

 

 

 

 

10.8

 

Tivoli

 

 

 

 

 

14.9

 

Rational

 

 

 

 

 

0.0

 

Other Middleware

 

 

 

 

 

(3.5

)

Operating Systems

 

590

 

604

 

(2.2

)

Other

 

166

 

146

 

12.6

 

 

Software revenue increased 2.4 percent (essentially flat adjusting for currency) in the first quarter of 2005 versus the first quarter of 2004.  Software demand was mixed by geography, with strength in the Americas offset by weakness in Europe and Asia.  In the quarter, the company had a more pronounced mix to small transactions.

 

The WebSphere family of software offerings revenue increased as clients focused on higher function products such as WebSphere Portal software (17 percent) and WebSphere Application Server software (14 percent).  Information Management software revenue increased driven by DB2 database family which grew 9 percent year-to-year.  The company announced two significant acquisitions in its Information Management business in the first quarter.  In January, the company acquired SRD, whose technology provides fraud detection and business intelligence capabilities.  In March, the company announced the intent to acquire Ascential Software, a leader in enterprise data integration, which is expected to complement the company’s DB2 and WebSphere products for integrating applications and business information.  Tivoli software increased driven by strong growth in security (19 percent), storage (14 percent) and systems management (16 percent).  Lotus software increased driven by Notes/Domino growth of 13 percent and continued acceptance of the company’s Workplace product.  Rational software was flat with growth in Americas and Asia offset by declines in Europe.

 

Revenue from Other Middleware products, including traditional host software products such as AIM tools and Other Storage and Printer software, declined in the first quarter of 2005 versus the first quarter of 2004.

 

Operating systems software revenue decreased driven by revenue declines in zSeries and pSeries, partially offset by increases in iSeries and xSeries revenue.

 

34



 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

Yr. to Yr.
Percent/
Margin
Change

 

Software:

 

 

 

 

 

 

 

Gross Profit

 

$

3,071

 

$

2,982

 

3.0

%

Gross Profit Margin

 

86.5

%

86.0

%

0.5 pts.

 

 

The increase in Software gross profit dollars and gross profit margin was primarily driven by growth in Software revenue and the positive impact of currency.

 

Global Financing

 

See pages 43 and 44 for a discussion of Global financing’s revenue and gross profit.

 

Enterprise Investments

 

Revenue from Enterprise Investments increased 5.9 percent (2 percent adjusting for currency) in the first quarter of 2005 versus the first quarter of 2004.  The increase was attributable to demand for product life-cycle management software primarily in Small & Medium Business.

 

Gross profit dollars increased 13.3 percent and gross profit margin increased 3.0 points to 46.4 percent in the first quarter of 2005 versus the first quarter of 2004.  The increase in gross profit dollars was driven by increased software revenue and an increased gross profit margin for software driven by lower vendor costs.

 

Business Performance Transformation Services

 

Business Performance Transformation Services, or BPTS, continues to gain traction and is a major growth opportunity that the company launched nearly a year ago.  The company’s objective is to capture opportunities that lie beyond what enterprises have traditionally spent on information technology products and services.  The company sees strong demand in BPTS as clients look for strategic partners in the marketplace for business services.

 

In the quarter, BPTS revenue was almost $900 million, up 40 percent year-to-year.  The revenue growth was led by Business Transformation Outsourcing, which also had signings growth of almost 90 percent over last year.  The company closed a significant new deal in which the client was looking for a strategic partner not only to redesign processes like payroll and benefits, but also to transform human capital management in areas like recruiting and training.  The company also signed two other major HR BTO agreements.  One was the company’s first large HR win in Latin America, and the other leverages the company’s own e-learning assets.  In Asia, the company signed its first BTO deal focused exclusively on transforming and operating a client’s sales operation.

 

The company’s Engineering and Technology Services business takes IBM assets and expertise and applies them to transform a client’s engineering or R&D capability.   This quarter the company had about $200 million of signings in E&TS, a significant increase over last year.

35



 

These signings included the company’s largest telematics engagement ever.  The company also made a significant announcement centered around the Cell microprocessor.  The company’s engineers will now develop for other companies “made to order” products which incorporate the revolutionary technology, helping clients that range from government agencies to device manufacturers solve their most challenging technical problems.

 

The company is encouraged by its progress, and is continuing to invest to build capabilities to address the BPTS opportunities.

 

Financial Position

 

Dynamics

 

The assets and debt associated with the company’s Global Financing business are a significant part of IBM ’s financial position. Accordingly, although the financial position amounts appearing on pages 36 to 38 are the company’s consolidated amounts including Global Financing, to the extent the Global Financing business is a major driver of the Consolidated Financial Position, reference in the narrative section will be made to a separate Global Financing section in this Management Discussion on pages 43 through 49. The amounts appearing in the separate Global Financing section are supplementary data presented to facilitate an understanding of the company’s Global Financing business.

 

Working Capital

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004

 

 

 

 

 

 

 

Current assets

 

$

41,343

 

$

47,143

 

Current liabilities

 

33,822

 

39,786

 

Working capital

 

$

7,521

 

$

7,357

 

 

 

 

 

 

 

Current ratio

 

1.22:1

 

1.18:1

 

 

Current assets decreased $5,800 million due to declines of: $3,557 million in short-term receivables mainly due to collection of typically higher year-end revenue volumes; $621 million due to the effects of currency from short-term receivables; and $1,919 million in Cash and cash equivalents and Marketable securities due to pension funding, share repurchase, and variable compensation requirements in the quarter (see Cash Flow analysis on page 37).

 

Current liabilities decreased $5,964 million due to declines of: $3,304 million in Accounts payable and accruals; and $890 million in Taxes payable– both resulting from declines in these balances from typically higher year-end levels; $585 million due to the effects of currency from accounts payable and Taxes payable; and $1,770 million in short-term debt which was driven by the settlement of instruments that matured in the first quarter of 2005.

 

36



 

Cash Flow

 

The company’s cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 5, is summarized in the table below. These amounts include the cash flows associated with the company’s Global Financing business.  See pages 43 through 49.

 

Cash Flow

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in millions)

 

2005

 

2004

 

Net cash provided by/(used in) continuing operations:

 

 

 

 

 

Operating activities

 

$

2,080

 

$

3,632

 

Investing activities

 

(680

)

(1,707

)

Financing activities

 

(2,587

)

(1,681

)

Effect of exchange rate changes on cash and cash equivalents

 

(227

)

(15

)

Net cash used in discontinued operations

 

(2

)

(69

)

Net change in cash and cash equivalents

 

$

(1,416

)

$

160

 

 

The decrease in net cash provided by operating activities for the first quarter of 2005 as compared to the first quarter of 2004 was driven by the $1.7 billion funding of the PPP in January 2005.

 

The decrease in net cash flows used in investing activities was attributable to lower net marketable securities and other investments of approximately $1.2 billion due primarily to the other cash requirements in the quarter discussed on page 36.

 

The increase in the net cash flows used in financing activities was primarily the result of increased stock repurchases in the first quarter of 2005 compared with the same period of 2004, partially offset by $1.1 billion in net new debt issuances.

 

Non-Current Assets and Liabilities

 

(Dollars in millions)

 

A t March 31,
2005

 

At December 31,
2004

 

Non-current assets

 

$

63,556

 

$

63,860

 

Long-term debt

 

17,083

 

14,828

 

Non-current liabilities (excluding debt)

 

24,074

 

24,701

 

 

The decrease in Non-current assets was due to a $1,151 million decrease in long-term financing receivables (see pages 46 and 47) and a $467 million decrease in Plant, rental machine and other property-net, approximately half of which was driven by the effects of currency.  These declines were partially offset by a $1,385 million increase in Prepaid pension assets due to the $1.7 billion funding of the PPP.

 

37



 

Long-term debt increased $2,255 million due to new debt issuances in the first quarter of 2005.  The company continually monitors interest rates and manages its short and long-term debt portfolios accordingly.

 

Non-current liabilities (excluding debt) decreased $627 million due to decreases of $287 million in Retirement and nonpension postretirement obligations and $340 million in other liabilities.  These declines were primarily due to the effect of currency.

 

Debt

 

The company’s funding requirements are also continually monitored and strategies are executed to manage the company’s overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed.

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004

 

 

 

 

 

 

 

Total company debt

 

$

23,412

 

$

22,927

 

Non-global financing debt *

 

$

1,505

 

$

607

 

Non-global financing debt/capitalization

 

5.3

%

2.2

%

 


*  Non-global financing debt is the company’s total external debt less the Global Financing debt described in the Global Financing balance sheet on page 44.

 

The non-global financing debt-to-capitalization ratio of 5.3 percent is within the company’s target range.

 

Equity

 

Stockholders’ equity decreased $1,768 million from December 31, 2004, primarily due to the company’s ongoing stock repurchase program, partially offset by an increase in retained earnings driven by net income.

 

Looking Forward

 

The following key drivers impacting IBM’s business are described in more detail in the 2004 IBM Annual Report on page 17.

 

                  Economic environment and corporate IT spending budgets

                  Internal business transformation and efficiency initiatives

                  Innovation initiatives

                  Open standards

                  Emerging business opportunities

 

As previously discussed, the first quarter of 2005 did not play out as the company expected. The company is reviewing targeted actions to drive improvement in its future performance.

 

38



 

Examples of these actions are:

 

                  Addressing sales execution issues across hardware, software and Global Services

                  Shifting investments from low yielding areas to areas of growth

                  Optimizing the company’s operating model to ensure that the company has the most efficient and effective client-facing capabilities

 

Given the company’s first quarter performance, the company intends to accelerate these plans.  These actions may require restructuring activities, primarily designed to move decision making closer to the client and improve the speed of execution at the client level.  The company is formulating its plans and currently expects to finalize them in the second quarter.  The actions the company is considering to take in the second quarter are designed to yield results in the second half of 2005.

 

The divestiture of the company’s Personal Computer Division announced in December 2004, is expected to close in the second quarter of 2005.

 

Also, in March, the company announced an agreement to acquire Ascential Software, a leader in enterprise data integration, which is expected to compliment the company’s Web Sphere and DBA product lines.  This transaction is expected to close in the second quarter.

 

The company’s strategies, investments and specific operational actions are all designed to deliver on its business model based on innovation and to best position the company for the longer term.  Looking forward, the company remains committed to its longer-term model to deliver double-digit earnings per share growth.

 

Global Services Signings

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

 

 

 

 

 

 

Longer-term*

 

$

5,455

 

$

5,446

 

Shorter-term*

 

4,571

 

5,053

 

Total

 

$

10,026

 

$

10,499

 

 


* Longer-term contracts are generally 7 to 10 years in length and represent SO and longer-term business transformation outsourcing contracts as well as BCS contracts with the U.S. Federal government and its agencies. Shorter-term are contracts generally 3 to 9 months in length and represent the remaining BCS and ITS contracts.  These amounts have been adjusted to exclude the impact of  year-to-year currency changes.

 

Global Services signings are management’s initial estimate of the value of a client’s commitment under a Global Services contract. Signings are used by management to assess period performance of Global Services management. There are no third party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs. For example, for longer-term contracts that require significant up-front investment by the company, the portions of these contracts that are counted as a signing are those periods in which there is a significant economic impact on the client if the commitment is not achieved, usually through a termination charge or the customer incurring significant wind-down costs as a result of the termination. For

 

39



 

shorter-term contracts that do not require significant up-front investments, a signing is usually equal to the full contract value.

 

Signings includes SO, BCS and ITS contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Maintenance is not included in signings as maintenance contracts tend to be more steady-state, where revenues equal renewals, and therefore, the company does not think they are as useful a predictor of future performance.

 

Backlog includes SO, BCS, ITS and Maintenance. Backlog is intended to be a statement of overall work under contract and therefore does include Maintenance. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in scope of contracts (mainly long-term contracts), periodic revalidations, and currency assumptions used to approximate constant currency.

 

Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. A new signing

will be recognized if a new services agreement is signed incidental or coincident to an acquisition.

 

The estimated services backlog  was $110 billion at March 31, 2005, down approximately $1 billion from year-end 2004. Backlog estimates are subject to change and are affected by several factors, including changes in scope of contracts (mainly long-term contracts), periodic revalidations, and currency assumptions used to approximate constant currency.

 

In addition to these signings and backlog amounts there were about $200 million of E&TS  signings to provide E&TS clients with design skills and technical capabilities.

 

The amount of IP and custom development income has been declining in recent years.  Although it increased in the first quarter of 2005, the overall declining trend may continue

as the company does not expect IP and custom development income to be a contributor to growth in earnings.

 

Total Retirement-related benefits expense increased in the first quarter 2005 as compared with the 2004 first quarter by $247 million as discussed on page 29.  The company expects this trend to continue during the remaining quarters of 2005.  It is expected that the full year 2005 impact will be approximately $1.0 billion higher than in 2004, excluding the 2004 one-time charge of $320 million related to the partial settlement of certain legal claims against the PPP.

 

In the normal course of business, the company expects that its effective tax rate will approximate 30 percent. The rate will change year-to-year based on nonrecurring events (such as a possible repatriation charge in 2005 as described in “Provision for Income Taxes” on page 30) as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividends, state and local taxes, and the interaction of various global tax strategies.

 

In 2001, the World Trade Organization (WTO) determined that tax provisions of the FSC Repeal and Extraterritorial Income (ETI) Exclusion Act of 2000 constitute an export subsidy

 

40



 

prohibited by the WTO Agreement on Subsidies and Countervailing Measures Agreement.  As a result, the U.S. enacted the American Jobs Creation Act of 2004 (the “Act”) in October 2004.  The Act repeals the export subsidy for transactions after 2004 with two years of transition relief (2005-2006).  The Act also provides a nine-percent deduction for income from qualified domestic production activities which will be phased in over 2005-2010.  While the net impact of certain legislative provisions is still being evaluated, the company does not expect this legislation to affect its ongoing effective tax rate for 2005 or 2006.

 

Also, the Act includes a temporary incentive for the company to repatriate earnings accumulated outside the U.S.  The current status of the company’s evaluation and potential impacts are discussed in “Provision for Income Taxes” on page 30.

 

Currency Rate Fluctuations

 

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect the company’s results. At March 31, 2005, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end 2004. The company uses a variety of financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions. Further discussion of currency and hedging appears in the 2004 IBM Annual Report in note l, “Derivatives and Hedging Transactions,” on pages 65 to 67.

 

The company earned approximately 40 percent of its net income in currencies other than the U.S. dollar in the first quarter of 2005.  In general, these currencies were stronger against the U.S. dollar during the first quarter of 2005 compared to the first quarter of 2004  so earnings in these countries translated into more dollars than they would have in the first quarter of 2004.  The company also maintains hedging programs to limit the volatility of currency impacts on the company’s financial results.  These hedging programs limit the impact of currency changes on the company’s financial results but do not eliminate them.  In addition to the translation of earnings and the company’s hedging programs, the impact of currency changes also may affect the company’s pricing and sourcing actions, although the impact of these actions on net income is difficult to track and quantify.  For these reasons, the company believes that extended periods of dollar weakness are positive for net income and extended periods of dollar strength are negative, although the precise impact is difficult to assess.

 

For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations, as required by SFAS No. 52, “Foreign Currency Translation.” Generally, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars and by entering into foreign currency hedge contracts.

 

Liquidity and Capital Resources

 

On pages 30 and 31 of the company’s 2004 IBM Annual Report, there is a discussion of the company’s liquidity including two tables that present five years of data.  One table, on page 30, includes each of the past five years of the company’s Net cash from operating activities, Cash and marketable securities, and the size of the company’s global credit facilities and committed trade receivables securitization facility.  For the three months ended or as of, as applicable,

 

41



 

March 31, 2005, those amounts are $2.1 billion, $8.7 billion, $10 billion and $0.5 billion, respectively.

 

The major rating agencies’ ratings on the company’s debt securities at March 31, 2005 appear in the table below and remain unchanged  from December 31, 2004.  The company has no contractual arrangements which, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.

 

 

 

STANDARD
AND
POOR’S

 

MOODY’S
INVESTORS
SERVICE

 

FITCH
RATINGS

 

 

 

 

 

 

 

 

 

Senior long-term debt

 

A+

 

A1

 

AA-

 

Commercial paper

 

A-1

 

Prime-1

 

f-1+

 

 

The second table, appearing on page 31 of the 2004 IBM Annual Report, presents the way in which management reviews its cash flows for each of the past five years and is accompanied by a description of the way cash flow is managed, measured and reviewed.  While the company prepares its Consolidated Statement of Cash Flows in accordance with SFAS No. 95, “Statement of Cash Flows,” on page 5 of this Form 10-Q and discusses causes and events underlying sources and uses of cash in that format on page 36 of this Form 10-Q, the following is the management view of cash flows for the first quarter of 2005 and 2004 prepared in a manner consistent with the table on page 31 of the 2004 IBM Annual Report:

 

Use of non-Global Financing Receivable Sources and Uses of Cash

 

(Dollars in millions)
For the period ended March 31:

 

2005

 

2004

 

 

 

 

 

 

 

Net cash from operating activities (comprised of):

 

$

2,080

 

$

3,632

 

Cash from Global Financing accounts receivable

 

3,022

 

3,138

 

Cash available for investment and for distribution to shareholders

 

(942

)

494

 

 

 

 

 

 

 

Net Global Financing receivable

 

3,086

 

2,928

 

Net capital expenditures

 

(956

)

(926

)

Net acquisitions

 

(242

)

(62

)

Returns to shareholders

 

(3,800

)

(2,027

)

Other

 

1,438

 

(247

)

Net change in cash and cash equivalents

 

$

(1,416

)

$

160

 

 

Events that could temporarily change the historical cash flow dynamics discussed and referenced above include unexpected adverse impacts from litigation or future pension funding  during periods of severe and prolonged downturns in the capital markets. Whether any litigation  has such an adverse impact will depend on a number of variables, which are more completely described in Note 11 on pages 17 to 20 of this Form 10-Q. With respect to pension funding, on January  19, 2005 the company contributed $1.7 billion to the qualified portion of the company’s PPP.

 

42



 

This contribution fulfilled a number of short-term and long-term strategic objectives.  This contribution reduces the probability of large future U.S. pension contributions by building a funding buffer above the current liability level.  In addition, it positions the company to further  reduce volatility in pension contributions and earnings over the long term.  Finally, the company  will benefit from the return on these additional pension assets in 2005.  The increase in pension  income will partially offset the impact of year-end 2004 pension assumption changes.  The company is not quantifying any further impact from pension funding because it is not possible to  predict future movements in the capital markets.

 

However, for 2005, if the full year actual return on plan assets for the PPP is less than approximately 1 percent, the PPP's Accumulated Benefit Obligation would be greater than its' Plan assets, assuming a 5.75 percent discount rate. As discussed on pages 32 and 79 of IBM's 2004 Annual Report, such a situation may result in a voluntary contribution of cash or stock to the PPP or a charge to stockholders' equity.  Actual return on the PPP plan assets for the first three months of 2005 was negative 0.54 percent.

 

Global Financing

 

Global Financing is a business segment within IBM which is managed on an arm’s-length basis and measured as if it were a standalone entity. Accordingly, the information presented in this section is consistent with this separate company view.

 

Results of Operations

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in millions)

 

2005

 

2004

 

 

 

 

 

 

 

External revenue

 

$

579

 

$

665

 

Internal revenue

 

449

 

280

 

Total revenue

 

1,028

 

945

 

Total cost

 

488

 

380

 

Gross profi t

 

$

540

 

$

565

 

Gross profit margin

 

52.5

%

59.8

%

Pre-tax income

 

$

396

 

$

374

 

After-tax income

 

$

249

 

$

244

 

Return on equity *

 

30.6

%

28.7

%

 


*  See page 49 for the details of the after-tax income and the return on equity calculation.

 

Global Financing revenue increased in the first quarter of 2005 versus the same period in 2004. External revenue decreased 12.9 percent (14.9 percent adjusted for currency) in the first quarter of 2005 versus the first quarter of 2004 driven by  a 14.5 percent decrease in financing income to $428 million due to a decrease in the average asset balance and declining asset yields, as well as external used equipment sales of $151 million which declined 7.8 percent. Internal revenue increased 60.4 percent in the first quarter of 2005 versus the same period in 2004 driven by internal used equipment sales of $291 million versus $127 million in 2004, an increase of 129.1 percent, due primarily to the early termination of internal leases and subsequent sale of the equipment to Global Services.

 

43



 

Global Financing gross profit dollars decreased 4.4 percent and gross profit margin decreased 7.3 points in the first quarter of 2005 versus the same period in 2004. The decrease in gross profit dollars was primarily driven by a decrease in the total financing revenue discussed above, partially offset by internal equipment sales profit of $93 million in 2005 versus $53 million in 2004, an increase of 74.2 percent due to increased  zSeries revenue.  The decrease in gross profit margin was driven by declining financing margins due to declining asset yields, as

 

well as a change in mix away from higher margin financing income and towards lower margin equipment sales.

 

Global Financing’s pre-tax income increased 5.9 percent in the first quarter of 2005 versus  2004. The increase in pre-tax income was driven by a decrease of $32M in bad debt expense and a decrease of $11 million in other charges, partially offset by the decrease in gross profit of $25 million discussed above.  The decrease in bad debt expense is reflective of an improved economic environment, and improved credit quality, as well as the lower asset base of the receivable portfolio.

 

The increase in return on equity in the first quarter of 2005 compared to 2004 was due to a 2.0 percent improvement in after-tax income primarily associated with a decrease in provisions for bad debt expense, as well as a decrease in average equity .

 

Financial Condition

 

Balance Sheet

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004

 

 

 

 

 

 

 

Cash

 

$

996

 

$

850

 

Net investment in sales-type leases

 

10,181

 

11,141

 

Equipment under operating leases:

 

 

 

 

 

External customers

 

1,743

 

1,817

 

Internal customers(a) (b)

 

1,750

 

1,906

 

Customer loans

 

9,036

 

9,889

 

Total customer financing assets

 

22,710

 

24,753

 

Commercial financing receivables

 

3,909

 

5,710

 

Intercompany financing receivables(a) (b)

 

1,793

 

2,172

 

Other receivables

 

185

 

223

 

Other assets

 

884

 

881

 

Total financing assets

 

$

30,477

 

$

34,589

 

 

 

 

 

 

 

Intercompany payables(a)

 

$

3,377

 

$

6,394

 

Debt(c)

 

21,907

 

22,320

 

Other liabilities

 

1,918

 

2,620

 

Total financing liabilities

 

27,202

 

31,334

 

Total financing equity

 

3,275

 

3,255

 

Total financing liabilities and equity

 

$

30,477

 

$

34,589

 

 


(a) Amounts eliminated for purposes of IBM’s consolidated results and therefore do not appear on pages 3 and 4.

(b) These assets, along with all other financing assets in this table, are leveraged using Global Financing debt.

(c) Global Financing debt includes debt of the company and of the Global Financing units that support the Global Financing business.

 

44



 

Sources and Uses of Funds

 

The primary use of funds in Global Financing is to originate customer and commercial financing assets. Customer financing assets for end users consist primarily of IBM hardware, software and services, but also include non-IBM equipment, software and services to meet IBM customers’ total solutions requirements. Customer financing assets are primarily sales-type, direct financing and operating leases for equipment as well as loans for hardware, software and services with terms generally for two to five years. Customer financing also includes internal activity as described on page 35 of the 2004 IBM Annual Report.

 

Commercial financing originations arise primarily from inventory and accounts receivable financing for dealers and remarketers of IBM and non- IBM products. Payment terms for inventory financing generally range from 30 to 75 days. Payment terms for accounts receivable financing generally range from 30 to 90 days.

 

Originations

 

The following are total external and internal financing originations.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in millions)

 

2005

 

2004

 

 

 

 

 

 

 

Customer finance:

 

 

 

 

 

External

 

$

2,272

 

$

2,360

 

Internal

 

233

 

284

 

Commercial finance

 

6,168

 

5,418

 

Total

 

$

8,673

 

$

8,062

 

 

Cash collections of both customer and commercial financing assets exceeded new financing originations in both the first quarter of 2005 and 2004, which resulted in a net decline in financing assets in these periods. The increase in originations was primarily due to favorable currency movements.

 

Cash generated by Global Financing was deployed to pay the intercompany payables and dividends to IBM as well as to reduce debt.

 

45



 

Financing Assets by Sector

 

The following are the percentage of external financing assets by industry sector.

 

 

 

At March 31,
2005

 

At December 31,
2004

 

 

 

 

 

 

 

Financial Services

 

32

%

30

%

Industrial

 

22

 

20

 

Business Partners *

 

15

 

19

 

Public

 

10

 

9

 

Distribution

 

9

 

9

 

Communications

 

8

 

9

 

Other

 

4

 

4

 

Total

 

100

%

100

%

 


* Business Partners financing assets represent a portion of commercial financing inventory and accounts receivable financing for terms generally less than 90 days.

 

Financing Receivables and Allowances

 

The following table presents financing receivables, excluding residual values, and the allowance for doubtful accounts.

 

(Dollars in millions)

 

At March 31,
2005

 

At December 31,
2004

 

 

 

 

 

 

 

Gross financing receivables

 

$

23,094

 

$

26,836

 

Specific allowance for doubtful accounts

 

569

 

654

 

Unallocated allowance for doubtful accounts

 

95

 

127

 

Total allowance for doubtful accounts

 

664

 

781

 

Net financing receivables

 

$

22,430

 

$

26,055

 

Allowance for doubtful account coverage

 

2.9

%

2.9

%

 

Roll-Forward of Financing Receivables Allowance for Doubtful Accounts

 

(Dollars in millions)

 

Dec. 31,
2004

 

Reserve
Used
*

 

Additions/
(Reductions)
Bad Debt
Expense

 

Other **

 

March 31,
2005

 

$

781

 

$

(51

)

$

(48

)

$

(18

)

$

664

 

 


*                  Represents reserved receivables, net of recoveries, that were disposed of during the period.

**           Primarily represents translation adjustments.

 

46



 

The percentage of financing receivables reserved for at December 31, 2004, and at March 31, 2005 was 2.9 percent.  Unallocated reserves decreased 25.2 percent from $127 million at December 31, 2004 to $95 million at  March 31, 2005.  The decrease in Unallocated reserves is due to a decline in assets combined with improved economic conditions and improved credit quality of the portfolio.  Specific reserves decreased 13.0 percent from $654 million to $569 million in 2005.  The decrease in specific reserves was due to the disposal of reserved receivables during the period combined with lower requirements for additional specific reserves.

 

Global Financing’s bad debt expense was a reduction of  $48 million for the quarter ended March 31, 2005,  compared with a reduction of $16 million for the quarter ended March 31, 2004.  The decline was primarily attributed to the  improvement in economic conditions and improved credit quality of the portfolio in the first quarter of 2005 as compared to the first quarter of 2004, as well as the overall reduction in the financing asset portfolio.

 

Residual Value

 

Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values.  Global Financing has  insight into product plans and cycles for the IBM products under lease.  Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them to the residual values reflected in the portfolio.

 

Global Financing recovers its residual values in several ways, primarily through sales & leases of used equipment. Sales of equipment, which are primarily sourced from equipment returned at end of lease, represented 43.0 percent of Global Financing’s revenue in the first quarter of 2005 and 30.7 percent in the first quarter of 2004.  The increase was driven primarily by higher internal used equipment sales.  The gross margin on these sales was 25.1 percent and 24.0 percent in 2005 and 2004, respectively.  The increase in gross margin was primarily due to a mix towards higher margin internal equipment sales.  In addition to selling assets sourced from end of lease, Global Financing optimizes the recovery of residual values by leasing used equipment to new customers or extending leasing arrangements with current customers.  The following table presents the recorded amount of unguaranteed residual value for sales-type and operating leases at December 31, 2004 and March 31, 2005.  In addition, the table presents the residual value as a percentage of the original amount financed, and a run out of the unguaranteed residual value over the remaining lives of these leases as of March 31, 2005.  In addition to the unguaranteed residual value below, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment scheduled to be returned at end of lease. These third-party guarantees are used in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets. The aggregate asset value associated with the guarantees was $104 million and $109 million for financing transactions originated during the quarters ended March 31, 2005 and March 31, 2004, respectively. The associated aggregate guaranteed future value at the scheduled end of lease was $5 million and $6 million for financing transactions originated during the same periods, respectively. The cost of guarantees was $1.2 million for each year.

 

47



 

Residual Value

 

 

 

Amortization of March 31, 2005 Balance

 

(Dollars in millions)

 

Dec. 31,
2004

 

Mar. 31,
2005

 

2005

 

2006

 

200 7

 

2008 and
beyond

 

Sales-type leases

 

$

836

 

$

813

 

$

225

 

$

258

 

$

253

 

$

77

 

Operating leases

 

164

 

171

 

72

 

49

 

42

 

8

 

Total unguaranteed residual value

 

$

1,000

 

$

984

 

$

297

 

$

307

 

$

295

 

$

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related original amount financed

 

$

25,982

 

$

24,565

 

 

 

 

 

 

 

 

 

Percentage

 

3.8

%

4.0

%

 

 

 

 

 

 

 

 

 

Debt

 

 

 

At March 31, 2005

 

At December 31, 2004

 

Debt to equity ratio

 

6.7x

 

6.9x

 

 

Global Financing funds its operations primarily through borrowings using a debt-to-equity ratio target of approximately 7 to 1.  The debt is used to fund Global Financing assets. The debt is composed of intercompany loans and external debt. The terms of the intercompany loans are

set by the company to substantially match the term and currency underlying the receivable. The inter-company loans are based on arm’s-length pricing.

 

The company’s Global Financing business provides funding predominantly for the company’s external customers but also provides intercompany financing for the company (internal).  See page 45 for further information.  As previously stated, the company manages and measures Global Financing as if it were a standalone entity and accordingly, interest expense relating to debt supporting Global Financing’s external customer and internal business is included in the “Global Financing Results of Operations” on page 43 and in Segment Information on pages 57 and 58.

 

In the company’s Consolidated Statement of Earnings on page one, however, the interest expense supporting Global Financing’s internal financing to the company is reclassified from Cost of financing to Interest expense.

 

Liquidity and Capital Resources

 

Global Financing is a segment of the company and as such is supported by the company’s liquidity position and access to capital markets. Cash generated from operations was deployed to reduce debt and pay dividends to the company in order to maintain an appropriate debt to equity ratio.

 

48



 

Return on Equity

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in millions)

 

2005

 

2004

 

Numerator :

 

 

 

 

 

Global Financing after tax income *

 

$

249

 

$

244

 

Annualized after tax income (A)

 

$

998

 

$

976

 

Denominator:

 

 

 

 

 

Average Global Financing equity (B) **

 

$

3,265

 

$

3,397

 

Global Financing Return on Equity(A)/(B)

 

30.6

%

28.7

%

 


*  Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM ‘s provision for income taxes is determined on a consolidated basis.

**  Average of the ending equity for Global Financing for the last 2 quarters.

 

Looking Forward

 

Given Global Financing’s mission of supporting IBM’s hardware, software, and services businesses, originations for both customer and commercial finance businesses will be dependent upon the overall demand for IT hardware, software, and services, as well as customer participation rates.

 

Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and gross profit. The company’s interest rate risk management policy, however, combined with the Global Financing funding strategy should mitigate gross margin erosion due to changes in interest rates.  The company’s policy of matching asset and liability positions in foreign currencies will limit the impacts of currency fluctuations.

 

The economy could impact the credit quality of the Global Financing receivable portfolio and therefore the level of provision for bad debt. Global Financing will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio.

 

As discussed above, Global Financing has historically been able to manage residual value risk through both insight into the product cycles as well as through its remarketing business.

 

Global Financing has policies in place to manage each of the key risks involved in financing. These policies, combined with product and customer knowledge, should allow for the prudent management of the business going forward, even during periods of uncertainty with respect to the economy.

 

49



 

Forward Looking and Cautionary Statements

 

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q 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 differ materially, including the company’s failure to continue to develop and market new and innovative products and services and to keep pace with technological change; competitive pressures; failure to obtain or protect intellectual property rights; quarterly fluctuations in revenues and volatility of stock prices; the company’s ability to attract and retain key personnel; currency fluctuations and customer financing risks; dependence on certain suppliers; changes in the financial or business condition of the company’s distributors or resellers; the company’s ability to successfully manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in the company’s other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

 

ITEM 4. 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.  There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

 

50



 

Part  II - Other Information

 

ITEM 1.  Legal Proceedings.

 

Refer to Note 11 on pages 17 to 20 of this Form 10-Q.

 

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

 

The following table provides information relating to the company’s repurchase of common stock for the first quarter of 2005.

 

Period

 

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)

 

 

 

 

 

 

 

 

 

 

 

January 1, 2005 -

 

 

 

 

 

 

 

 

 

January 31, 2005

 

11,952,700

 

$

93.83

 

11,952,700

 

$

2,564,905,313

 

 

 

 

 

 

 

 

 

 

 

February 1, 2005 -

 

 

 

 

 

 

 

 

 

February 28, 2005

 

15,176,900

 

$

93.49

 

15,176,900

 

$

1,146,088,881

 

 

 

 

 

 

 

 

 

 

 

March 1, 2005 -

 

 

 

 

 

 

 

 

 

March 31, 2005

 

9,767,500

 

$

91.45

 

9,767,500

 

$

252,845,380

 

 

 

 

 

 

 

 

 

 

 

Total

 

36,897,100

 

$

93. 06

 

36,897,100

 

 

 

 


(1)  On October 26, 2004, the IBM Board of Directors authorized up to $4.0 billion in additional funds for use in the company’s common stock repurchase program.  IBM has announced that under its repurchase program, it will repurchase shares on the open market or in private transactions from time to time, depending on market conditions.  The 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 witholding obligations in connection with employee equity awards.

 

ITEM 6. Exhibits

 

Exhibit Number

 

3                   The By-laws of IBM as amended through April 26, 2005.

 

10             Material Contracts

 

10.1

 

The IBM Savings Plan, a compensatory plan, as amended and restated effective as of January 1, 2005, which plan was previously filed as Exhibit 4 to Registration Statement No. 333-09055 on Form S-8 dated July 29, 1996.

 

 

 

 

 

51



 

 

10.2

 

Amendments to the IBM Executive Deferred Compensation Plan, a compensatory plan, which plan was previously filed as Exhibit 4 to Registration Statement No. 333-33692 on Form S-8 dated March 31, 2000.

 

 

 

10.3

 

The IBM 2003 Employees Stock Purchase Plan, as amended through April 1, 2005, which plan was previously filed as Appendix A to IBM’s definitive proxy statement dated March 10, 2003.

 

11             Statement re: computation of per share earnings.

 

12             Statement re: computation of ratios.

 

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.

 

 

 

31.2

 

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.

 

 

 

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.

 

 

 

32.2

 

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

 

SIGNATURE

 

Pursuant to the requirements 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)

 

 

Date:April 26, 2005

 

 

 

 

 

By:

 

 

 

 

/s/ Timothy S. Shaughnessy

 

 

 

 

 

 

 

Timothy S. Shaughnessy

 

 

 

Vice President and Controller

 

 

52


Exhibit 3

 

BY-LAWS

 

of

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

 

Adopted April 29, 1958

 

As Amended Through

 

April 26, 2005

 



 

TABLE OF CONTENTS

 

ARTICLE I

 

 

 

Definitions

 

 

 

ARTICLE II

 

 

 

MEETINGS OF STOCKHOLDERS

 

 

 

 

SEC. 1.

Place of Meetings

 

 

SEC. 2.

Annual Meetings

 

 

SEC. 3.

Special Meetings

 

 

SEC. 4.

Notice of Meetings

 

 

SEC. 5.

Quorum

 

 

SEC. 6.

Organization

 

 

SEC. 7.

Items of Business

 

 

SEC. 8.

Voting

 

 

SEC. 9.

List of Stockholders

 

 

SEC. 10.

Inspectors of Election

 

 

 

ARTICLE III

 

 

 

BOARD OF DIRECTORS

 

 

 

 

SEC. 1.

General Powers

 

 

SEC. 2.

Number; Qualifications; Election; Term of Office

 

 

SEC. 3.

Place of Meetings

 

 

SEC. 4.

First Meeting

 

 

SEC. 5.

Regular Meetings

 

 

SEC. 6.

Special Meetings

 

 

SEC. 7.

Notice of Meetings

 

 

SEC. 8.

Quorum and Manner of Acting

 

 

SEC 9.

Organization

 

 

SEC. 10.

Resignations

 

 

SEC. 11.

Vacancies

 

 

SEC. 12.

Retirement of Directors

 

 

i



 

ARTICLE IV

 

 

 

EXECUTIVE AND OTHER COMMITTEES

 

 

 

 

SEC. 1.

Executive Committee

 

 

SEC. 2.

Powers of the Executive Committee

 

 

SEC. 3.

Meetings of the Executive Committee

 

 

SEC. 4.

Quorum and Manner of Acting of the Executive Committee

 

 

SEC. 5.

Other Committees

 

 

SEC. 6.

Changes in Committees; Resignations; Removals; Vacancies

 

 

 

ARTICLE V

 

 

 

OFFICERS

 

 

 

 

SEC. 1.

Number and Qualifications

 

 

SEC. 2.

Resignations

 

 

SEC. 3.

Removal

 

 

SEC. 4.

Vacancies

 

 

SEC. 5.

Chairman of the Board

 

 

SEC. 6.

Vice Chairman of the Board

 

 

SEC. 7.

President

 

 

SEC. 8.

Designated Officers

 

 

SEC. 9.

Executive Vice Presidents, Senior Vice Presidents and Vice Presidents

 

 

SEC. 10.

Treasurer

 

 

SEC. 11.

Secretary

 

 

SEC. 12.

Controller

 

 

SEC. 13.

Compensation

 

 

ii



 

ARTICLE VI

 

 

 

CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

 

 

 

 

SEC. 1.

Execution of Contracts

 

 

SEC. 2.

Loans

 

 

SEC. 3.

Checks, Drafts, etc

 

 

SEC. 4.

Deposits

 

 

SEC. 5.

General and Special Bank Accounts

 

 

SEC. 6.

Indemnification

 

 

 

ARTICLE VII

 

 

 

SHARES

 

 

 

 

SEC. 1.

Stock Certificates

 

 

SEC. 2.

Books of Account and Record of Stockholders

 

 

SEC. 3.

Transfers of Stock

 

 

SEC. 4.

Regulations

 

 

SEC. 5.

Fixing of Record Date

 

 

SEC. 6.

Lost, Destroyed or Mutilated Certificates

 

 

SEC. 7.

Inspection of Records

 

 

SEC. 8.

Auditors

 

 

 

ARTICLE VIII

 

 

 

OFFICES

 

 

 

 

SEC. 1.

Principal Office

 

 

SEC. 2.

Other Offices

 

 

 

ARTICLE IX

 

 

 

Waiver of Notice

 

 

iii



 

ARTICLE X

 

 

 

Fiscal Year

 

 

 

ARTICLE XI

 

 

 

Seal

 

 

 

ARTICLE XII

 

 

 

Amendments

 

 

iv



 

BY-LAWS

 

OF

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

 

ARTICLE I

 

DEFINITIONS

 

In these By-laws, and for all purposes hereof, unless there be something in the subject or context inconsistent therewith:

 

(a) ‘Corporation’ shall mean International Business Machines Corporation.

 

(b) ‘Certificate of Incorporation’ shall mean the restated Certificate of Incorporation as filed on May 27, 1992, together with any and all amendments and subsequent restatements thereto.

 

(c) ‘Board’ shall mean the Board of Directors of the Corporation.

 

(d) ‘stockholders’ shall mean the stockholders of the Corporation.

 

(e) ‘Chairman of the Board’, ‘Vice Chairman of the Board’, ‘Chairman of the Executive Committee’, ‘Chief Executive Officer,’ ‘Chief Financial Officer’, ‘Chief Accounting Officer’, ‘President’, ‘Executive Vice President’, ‘Senior Vice President’, ‘Vice President’, ‘Treasurer’, ‘Secretary’, or ‘Controller’, as the case may be, shall mean the person at any given time occupying the particular office with the Corporation.

 

ARTICLE II

 

MEETINGS OF STOCKHOLDERS

 

SECTION 1 .  Place of Meetings.  Meetings of the stockholders of the Corporation shall be held at such place either within or outside the State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.

 

SECTION 2 .  Annual Meetings.  The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the last Tuesday of April of each year, if not a legal holiday, or, if such day shall be a legal holiday, then on the next succeeding day not a legal holiday.  If any annual meeting shall not be held on the day designated herein, or if the directors to be elected at such annual

 

1



 

meeting shall not have been elected thereat or at any adjournment thereof, the Board shall forthwith call a special meeting of the stockholders for the election of directors to be held as soon thereafter as convenient and give notice thereof as provided in these By-laws in respect of the notice of an annual meeting of the stockholders.  At such special meeting the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held.

 

SECTION 3 .  Special Meetings.  Special meetings of the stockholders, unless otherwise provided by law, may be called at any time by the Chairman of the Board or by the Board.

 

SECTION 4 .  Notice of Meetings.  Notice of each meeting of the stockholders, annual or special, shall be given in the name of the Chairman of the Board, a Vice Chairman of the Board or the President or a Vice President or the Secretary.  Such notice shall state the purpose or purposes for which the meeting is called and the date and hour when and the place where it is to be held.  A copy thereof shall be duly delivered or transmitted to all stockholders of record entitled to vote at such meeting, and all stockholders of record who, by reason of any action proposed to be taken at such meeting, would be entitled to have their stock appraised if such action were taken, not less than ten or more than sixty days before the day on which the meeting is called to be held.  If mailed, such copy shall be directed to each stockholder at the address listed on the record of stockholders of the Corporation, or if the stockholder shall have filed with the Secretary a written request that notices be mailed to some other address, it shall be mailed to the address designated in such request.  Nevertheless, notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall waive notice thereof as hereinafter provided in Article IX of these By-laws.  Except when expressly required by law, notice of any adjourned meeting of the stockholders need not be given nor shall publication of notice of any annual or special meeting thereof be required.

 

SECTION 5 .  Quorum.  Except as otherwise provided by law, at all meetings of the stockholders, the presence of holders of record of a majority of the outstanding shares of stock of the Corporation having voting power, in person or represented by proxy and entitled to vote thereat, shall be necessary to constitute a quorum for the transaction of business.  In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or represented by proxy and entitled to vote thereat, or, in the absence of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting, may adjourn such meeting from time to time without further notice, other than by announcement at the meeting at which such adjournment shall be taken, until a quorum shall be present thereat.  At any adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called.

 

2



 

SECTION 6 .  Organization.  At each meeting of the stockholders, the Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice Chairman of the Board, or if the Chairman of the Board, the President, and all Vice Chairmen of the Board shall be absent therefrom, an Executive Vice President, or if the Chairman of the Board, the President, all Vice Chairmen of the Board and all Executive Vice Presidents shall be absent therefrom, a Senior Vice President shall act as chairman.  The Secretary, or, if the Secretary shall be absent from such meeting or unable to act, the person whom the Chairman of such meeting shall appoint secretary of such meeting shall act as secretary of such meeting and keep the minutes thereof.

 

SECTION 7 .  Items of Business.  The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows:

 

Call to order.

 

Proof of notice of meeting or of waiver thereof.

 

Appointment of inspectors of election, if necessary.

 

A quorum being present.

 

Reports.

 

Election of directors.

 

Other business specified in the notice of the meeting.

 

Voting.

 

Adjournment.

 

Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine.

 

No other business shall be transacted at any annual meeting of stockholders, except business as may be: (i) specified in the notice of meeting (including stockholder proposals included in the Corporation’s proxy materials under Rule 14a-8 of Regulation 14A under the Securities Exchange Act of 1934), (ii) otherwise brought before the meeting by or at the direction of the Board of Directors, or (iii) a proper subject for the meeting which is timely submitted by a stockholder of the Corporation entitled to vote at such meeting who complies fully with the notice requirements set forth below.

 

For business to be properly submitted by a stockholder before any annual meeting under subparagraph (iii) above, a stockholder must give timely notice in writing of such business to the Secretary of the Corporation.  To be considered timely, a stockholder’s notice must be received by the Secretary at the principal

 

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executive offices of the Corporation not less than 120 calendar days nor more than 150 calendar days before the date of the Corporation’s proxy statement released to stockholders in connection with the prior year’s annual meeting.

 

However, if no annual meeting was held in the previous year, or if the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, a stockholder’s notice must be received by the Secretary not later than 60 days before the date the Corporation commences mailing of its proxy materials in connection with the applicable annual meeting.

 

A stockholder’s notice to the Secretary to submit business to an annual meeting of stockholders shall set forth: (i) the name and address of the stockholder, (ii) the number of shares of stock held of record and beneficially by such stockholder, (iii) the name in which all such shares of stock are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions intended to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (vi) any personal or other material interest of the stockholder in the business to be submitted, and (vii) all other information relating to the proposed business which may be required to be disclosed under applicable law.  In addition, a stockholder seeking to submit such business at the meeting shall promptly provide any other information reasonably requested by the Corporation.

 

The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including, but not limited to, the items of business, as well as the maintenance of order and decorum.  The chairman shall, if the facts warrant, determine and declare that any putative business was not properly brought before the meeting in accordance with the procedures prescribed by this Section 7, in which case such business shall not be transacted.

 

Notwithstanding the foregoing provisions of this Section 7, a stockholder who seeks to have any proposal included in the Corporation’s proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Securities Exchange Act of 1934, as amended.

 

SECTION 8 .  Voting.  Except as otherwise provided by law, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in the stockholder’s name on the record of stockholders of the Corporation:

 

(a) on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-laws as the record date for the determination of the stockholders who shall be entitled to vote at such meeting, or

 

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(b) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting shall have been given, or

 

(c) if such record date shall not have been so fixed and if no notice of such meeting shall have been given, then at the time of the call to order of such meeting.

 

Any vote on stock of the Corporation at any meeting of the stockholders may be given by the stockholder of record entitled thereto in person or by proxy appointed by such stockholder or by the stockholder’s attorney thereunto duly authorized and delivered or transmitted to the secretary of such meeting at or prior to the time designated in the order of business for turning in proxies.  At all meetings of the stockholders at which a quorum shall be present, all matters (except where otherwise provided by law, the Certificate of Incorporation or these By-laws) shall be decided by the vote of a majority in voting interest of the stockholders present in person or represented by proxy and entitled to vote thereat.  Unless required by law, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot.  On a vote by ballot, each ballot shall be signed by the stockholder voting, or by the stockholder’s proxy as such, if there be such proxy.

 

SECTION 9 .  List of Stockholders.  A list, certified by the Secretary, of the stockholders of the Corporation entitled to vote shall be produced at any meeting of the stockholders upon the request of any stockholder of the Corporation pursuant to the provisions of applicable law, the Certificate of Incorporation or these By-laws.

 

SECTION 10 .  Inspectors of Election.  Prior to the holding of each annual or special meeting of the stockholders, two inspectors of election to serve thereat shall be appointed by the Board, or, if the Board shall not have made such appointment, by the Chairman of the Board.  If there shall be a failure to appoint inspectors, or if, at any such meeting, any inspector so appointed shall be absent or shall fail to act or the office shall become vacant, the chairman of the meeting may, and at the request of a stockholder present in person and entitled to vote at such meeting shall, appoint such inspector or inspectors of election, as the case may be, to act thereat.  The inspectors of election so appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting, with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them.  Such inspectors of election shall take charge of the polls, and, after the voting on any question, shall make a certificate of the results of the vote taken.  No director or candidate for the office of director shall act as an inspector of an election of directors.  Inspectors need not be stockholders.

 

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ARTICLE III

 

BOARD OF DIRECTORS

 

SECTION 1 .  General Powers.  The business and affairs of the Corporation shall be managed by the Board.  The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these By-laws, directed or required to be exercised or done by the stockholders.

 

SECTION 2 .  Number; Qualifications; Election; Term of Office.  The number of directors of the Corporation shall be twelve, but the number thereof may be increased to not more than twenty-five, or decreased to not less than nine, by amendment of these By-laws.  The directors shall be elected at the annual meeting of the stockholders.  At each meeting of the stockholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes at such election shall be elected.  Each director shall hold office until the annual meeting of the stockholders which shall be held next after the election of such director and until a successor shall have been duly elected and qualified, or until death, or until the director shall have resigned as hereinafter provided in Section 10 of this Article III.

 

SECTION 3 .  Place of Meetings.  Meetings of the Board shall be held at such place either within or outside State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.

 

SECTION 4 .  First Meeting.  The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, on the same day the annual meeting of stockholders is held.  Notice of such meeting need not be given.  Such meeting may be held at any other time or place which shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III.

 

SECTION 5 .  Regular Meetings.  Regular meetings of the Board shall be held at times and dates fixed by the Board or at such other times and dates as the Chairman of the Board shall determine and as shall be specified in the notice of such meetings.  Notice of regular meetings of the Board need not be given except as otherwise required by law or these By-laws.

 

SECTION 6 .  Special Meetings.  Special meetings of the Board may be called by the Chairman of the Board.

 

SECTION 7 .  Notice of Meetings.  Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time, place and, if required by law or these By-laws, the purposes of such meeting.  Notice of each such meeting shall be mailed, postage prepaid, to each director, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such

 

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meeting is to be held.  Notice of any such meeting need not be given to any director who shall waive notice thereof as provided in Article IX of these By-laws.  Any meeting of the Board shall be a legal meeting without notice thereof having been given, if all the directors of the Corporation then holding office shall be present thereat.

 

SECTION 8 .  Quorum and Manner of Acting.  A majority of the Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting.  Participation in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence in person at a meeting.  Except as otherwise expressly required by law or the Certificate of Incorporation and except also as specified in Section 1, Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article XII of these By-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board.  In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat.  Notice of any adjourned meeting need not be given.  At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.  The directors shall act only as a Board and the individual directors shall have no power as such.

 

SECTION 9 .  Organization.  At each meeting of the Board, the Chairman of the Board, or in the case of the Chairman’s absence therefrom, the President, or in the case of the President’s absence therefrom, a Vice Chairman, or in the case of the absence of all such persons, another director chosen by a majority of directors present, shall act as chairman of the meeting and preside thereat.  The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.

 

SECTION 10 .  Resignations.  Any director of the Corporation may resign at any time by giving written notice of resignation to the Board or the Chairman of the Board or the Secretary.  Any such resignation shall take effect at the time specified therein, or if the time when it shall become effective shall not be specified therein, then it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

SECTION 11 .  Vacancies.  Any vacancy in the Board, whether arising from death, resignation, an increase in the number of directors or any other cause, may be filled by the Board.

 

SECTION 12 .  Retirement of Directors.  The Board may prescribe a retirement policy for directors on or after reaching a certain age, provided, however, that such

 

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retirement shall not cut short the annual term for which any director shall have been elected by the stockholders.

 

ARTICLE IV

 

EXECUTIVE AND OTHER COMMITTEES

 

SECTION 1 .  Executive Committee.  The Board, by resolution adopted by a majority of the Board, may designate not less than four of the directors then in office to constitute an Executive Committee, each member of which unless otherwise determined by resolution adopted by a majority of the whole Board, shall continue to be a member of such Committee until the annual meeting of the stockholders which shall be held next after designation as a member of such Committee or until the earlier termination as a director.  The Chief Executive Officer shall always be designated as a member of the Executive Committee.  The Board may by resolution appoint one member as the Chairman of the Executive Committee who shall preside at all meetings of such Committee.  In the absence of said Chairman, the Chief Executive Officer shall preside at all such meetings.  In the absence of both the Chairman of the Executive Committee and the Chief Executive Officer, the Chairman of the Board shall preside at all such meetings.  In the absence of the Chairman of the Executive Committee and the Chief Executive Officer and the Chairman of the Board, the President shall preside at all such meetings.  In the absence of all such persons, a majority of the members of the Executive Committee present shall choose a chairman to preside at such meetings.  The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.

 

SECTION 2 .  Powers of the Executive Committee.  To the extent permitted by law, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, to the extent permitted by law, the Executive Committee shall have, and may exercise, all the powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but excluding the power to appoint a member of the Executive Committee) in such manner as the Executive Committee shall deem to be in the best interests of the Corporation and not inconsistent with any prior specific action of the Board.  An act of the Executive Committee taken within the scope of its authority shall be an act of the Board.  The Executive Committee shall render in the form of minutes a report of its several acts at each regular meeting of the Board and at any other time when so directed by the Board.

 

SECTION 3 .  Meetings of the Executive Committee.  Regular meetings of the Executive Committee shall be held at such times, on such dates and at such places as shall be fixed by resolution adopted by a majority of the Executive Committee,

 

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of which regular meetings notice need not be given, or as shall be fixed by the Chairman of the Executive Committee or in the absence of the Chairman of the Executive Committee the Chief Executive Officer and specified in the notice of such meeting.  Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or by the Chief Executive Officer.  Notice of each such special meeting of the Executive Committee (and of each regular meeting for which notice shall be required), stating the time and place thereof shall be mailed, postage prepaid, to each member of the Executive Committee, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held; but notice need not be given to a member of the Executive Committee who shall waive notice thereof as provided in Article IX of these By-laws, and any meeting of the Executive Committee shall be a legal meeting without any notice thereof having been given, if all the members of such Committee shall be present thereat.

 

SECTION 4 .  Quorum and Manner of Acting of the Executive Committee.  Four members of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of the members of the Executive Committee present at a meeting at which a quorum shall be present shall be the act of the Executive Committee.  Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of the Executive Committee.  The members of the Executive Committee shall act only as a committee and individual members shall have no power as such.

 

SECTION 5 .  Other Committees.  The Board may, by resolution adopted by a majority of the Board, designate members of the Board to constitute other committees, which shall have, and may exercise, such powers as the Board may by resolution delegate to them, and shall in each case consist of such number of directors as the Board may determine; provided, however, that each such committee shall have at least three directors as members thereof.  Such a committee may either be constituted for a specified term or may be constituted as a standing committee which does not require annual or periodic reconstitution.  A majority of all the members of any such committee may determine its action and its quorum requirements and may fix the time and place of its meetings, unless the Board shall otherwise provide.  Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of such other committees.

 

In addition to the foregoing, the Board may, by resolution adopted by a majority of the Board, create a committee of indeterminate membership and duration and not subject to the limitations as to the membership, quorum and manner of meeting and acting prescribed in these By-laws, which committee, in the event of a major disaster or catastrophe or national emergency which renders the Board

 

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incapable of action by reason of the death, physical incapacity or inability to meet of some or all of its members, shall have, and may exercise all the powers of the Board in the management of the business and affairs of the Corporation (including, without limitation, the power to authorize the seal of the Corporation to be affixed to all papers which may require it and the power to fill vacancies in the Board). An act of such committee taken within the scope of its authority shall be an act of the Board.

 

SECTION 6 .  Changes in Committees; Resignations; Removals; Vacancies.  The Board shall have power, by resolution adopted by a majority of the Board, at any time to change or remove the members of, to fill vacancies in, and to discharge any committee created pursuant to these By-laws, either with or without cause.  Any member of any such committee may resign at any time by giving written notice to the Board or the Chairman of the Board or the Secretary.  Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective.  Any vacancy in any committee, whether arising from death, resignation, an increase in the number of committee members or any other cause, shall be filled by the Board in the manner prescribed in these By-laws for the original appointment of the members of such committee.

 

ARTICLE V

 

OFFICERS

 

SECTION 1 .  Number and Qualifications.  The officers of the Corporation shall include the Chairman of the Board, and may include one or more Vice Chairmen of the Board, the President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice Presidents or as Senior Vice Presidents or by other designations), the Treasurer, the Secretary and the Controller.  Officers shall be elected from time to time by the Board, each to hold office until a successor shall have been duly elected and shall have qualified, or until death, or until resignation as hereinafter provided in Section 2 of this Article V, or until removed as hereinafter provided in Section 3 of this Article V.

 

SECTION 2 .  Resignations.  Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary.  Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall become effective upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

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SECTION 3 .  Removal.  Any officer of the Corporation may be removed, either with or without cause, at any time, by a resolution adopted by a majority of the Board at any meeting of the Board.

 

SECTION 4 .  Vacancies.  A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of office which shall be vacant, in the manner prescribed in these By-laws for the regular election or appointment to such office.

 

SECTION 5 .  Chairman of the Board.  The Chairman of the Board shall, if present, preside at each meeting of the stockholders and of the Board and shall perform such other duties as may from time to time be assigned by the Board.  The Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By- laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it.  The Chairman of the Board, when there is no President or in the absence or incapacity of the President, shall perform all the duties and functions and exercise all the powers of the President.

 

SECTION 6 .  Vice Chairman of the Board.  Each Vice Chairman of the Board shall assist the Chairman of the Board and have such other duties as may be assigned by the Board or the Chairman of the Board.  The Vice Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it.

 

SECTION 7 .  President.  The President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board.  The President may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered, and affix the seal of the Corporation to any instrument which shall require it; and, in general, perform all duties incident to the office of President.  The President shall in the absence or incapacity of the Chairman of the Board, perform all the duties and functions and exercise all the powers of the Chairman of the Board.

 

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SECTION 8 .  Designated Officers.  (a) Chief Executive Officer.  Either the Chairman of the Board, or the President, as the Board of Directors may designate, shall be the Chief Executive Officer of the Corporation.  The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in Section 5 or 7 of this Article V, general and active supervision over the business and affairs of the Corporation and over its several officers, agents, and employees, subject, however, to the control of the Board.  The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, be an ex officio member of all committees of the Board (except the Audit Committee, the Directors and Corporate Governance Committee, and committees specifically empowered to fix or approve the Chief Executive Officer’s compensation or to grant or administer bonus, option or other similar plans in which the Chief Executive Officer is eligible to participate), and, in general, shall perform all duties incident to the position of Chief Executive Officer and such other duties as may from time to time be assigned by the Board.  (b) Other Designated Officers.  The Board of Directors may designate officers to serve as Chief Financial Officer, Chief Accounting Officer and other such designated positions and to fulfill the responsibilities of such designated positions in addition to their duties as officers as set forth in this Article V.

 

SECTION 9 .  Executive Vice Presidents, Senior Vice Presidents and Vice Presidents.  Each Executive and Senior Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President.  Each Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or a Senior Vice President.  Any Vice President may sign certificates representing shares of stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws.

 

SECTION 10 .  Treasurer.  The Treasurer shall:

 

(a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, and may invest the same in any securities, may open, maintain and close accounts for effecting any and all purchase, sale, investment and lending transactions in securities of any and all kinds for and on behalf of the Corporation or any employee pension or benefit plan fund or other fund established by the Corporation, as may be permitted by law;

 

(b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation;

 

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(c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board or the Executive Committee;

 

(d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever;

 

(e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor;

 

(f) render to the Board, whenever the Board may require, an account of all transactions as Treasurer; and

 

(g) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

 

SECTION 11 .  Secretary.  The Secretary shall:

 

(a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the Executive Committee and other committees of the Board and the stockholders;

 

(b) see that all notices are duly given in accordance with the provisions of these By-laws and as required by law;

 

(c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal;

 

(d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and

 

(e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

 

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SECTION 12 .  Controller.  The Controller shall:

 

(a) have control of all the books of account of the Corporation;

 

(b) keep a true and accurate record of all property owned by it, of its debts and of its revenues and expenses;

 

(c) keep all accounting records of the Corporation (other than the accounts of receipts and disbursements and those relating to the deposits of money and other valuables of the Corporation, which shall be kept by the Treasurer);

 

(d) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation; and

 

(e) in general, perform all the duties incident to the office of Controller and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

 

SECTION 13 .  Compensation.  The compensation of the officers of the Corporation shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee the power to fix or approve the compensation of any officers.  An officer of the Corporation shall not be prevented from receiving compensation by reason of being also a director of the Corporation; but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to such officer.

 

ARTICLE VI

 

CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

 

SECTION 1 .  Execution of Contracts.  Except as otherwise required by law or these By-laws, any contract or other instrument may be executed and delivered in the name and on behalf of the Corporation by any officer (including any assistant officer) of the Corporation.  The Board or the Executive Committee may authorize any agent or employee to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board or such Committee, as the case may be, may by resolution determine.

 

SECTION 2 .  Loans.  Unless the Board shall otherwise determine, the Chairman of the Board or a Vice Chairman of the Board or the President or any Vice President, acting together with the Treasurer or the Secretary, may effect loans and advances at any time for the Corporation from any bank, trust company or other

 

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institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board.

 

SECTION 3 .  Checks, Drafts, etc.  All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board or the Executive Committee or authorized by the Treasurer acting together with either the General Manager of an operating unit or a nonfinancial Vice President of the Corporation, which authorization may be general or confined to specific instances.

 

SECTION 4 .  Deposits.  All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board or the Executive Committee may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee.  For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer, employee or agent of the Corporation.

 

SECTION 5 .  General and Special Bank Accounts.  The Board or the Executive Committee may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board or the Executive Committee may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee.  The Board or the Executive Committee may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient.

 

SECTION 6 .  Indemnification.  The Corporation shall, to the fullest extent permitted by applicable law as in effect at any time, indemnify any person made, or threatened to be made, a party to an action or proceeding whether civil or criminal (including an action or proceeding by or in the right of the Corporation or any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, for which any director or officer of the Corporation served in any capacity at the request of the Corporation), by reason of the fact that such person or such person’s testator or intestate was a director or officer of the Corporation, or served such other corporation, partnership, joint

 

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venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein.  Such indemnification shall be a contract right and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, consistent with the provisions of applicable law in effect at any time.  Indemnification shall be deemed to be ‘permitted’ within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time.

 

ARTICLE VII

 

SHARES

 

SECTION 1 .  Stock Certificates.  The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares.  Each owner of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board, certifying the number of shares of stock of the Corporation owned.  To the extent that shares are represented by certificates, such certificates of stock shall be signed in the name of the Corporation by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is signed by a registrar, other than the Corporation or its employee, the signatures of the Chairman of the Board, a Vice Chairman of the Board, the President, the Secretary, and transfer agent or a transfer clerk acting on behalf of the Corporation upon such certificates may be facsimiles, engraved or printed.  In case any officer, transfer agent or transfer clerk acting on behalf of the Corporation ceases to be such officer, transfer agent, or transfer clerk before such certificates shall be issued, they may nevertheless be issued by the Corporation with the same effect as if they were still such officer, transfer agent or transfer clerk at the date of their issue.

 

SECTION 2 .  Books of Account and Record of Stockholders.  There shall be kept at the office of the Corporation correct books of account of all its business and transactions, minutes of the proceedings of stockholders, Board, and Executive Committee, and a book to be known as the record of stockholders, containing the names and addresses of all persons who are stockholders, the number of shares of stock held, and the date when the stockholder became the owner of record thereof.

 

SECTION 3 .  Transfers of Stock.  Transfers of shares of stock of the Corporation shall be made on the record of stockholders of the Corporation only upon authorization by the registered holder thereof, or by an attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed, provided such shares are represented by a certificate, or accompanied by a duly executed stock transfer power and the payment of all taxes thereon.  The person in whose names shares of stock shall stand on the

 

16



 

record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation.  Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer.

 

SECTION 4 .  Regulations.  The Board may make such additional rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificated or uncertificated shares of stock of the Corporation.  It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates of stock to bear the signature or signatures of any of them.

 

SECTION 5 .  Fixing of Record Date.  The Board shall fix a time not exceeding sixty nor less than ten days prior to the date then fixed for the holding of any meeting of the stockholders or prior to the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose without a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were holders of record of voting stock at such time, and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be.  The Board may fix a time not exceeding sixty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of capital stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests.

 

SECTION 6 .  Lost, Destroyed or Mutilated Certificates.  The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Corporation may, in its discretion, require such owner or the owner’s legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate.  Anything to the contrary notwithstanding, the Corporation, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of New York.

 

17



 

SECTION 7 .  Inspection of Records.  The record of stockholders and minutes of the proceedings of stockholders shall be available for inspection, within the limits and subject to the conditions and restrictions prescribed by applicable law.

 

SECTION 8 .  Auditors.  The Board shall employ an independent public or certified public accountant or firm of such accountants who shall act as auditors in making examinations of the consolidated financial statements of the Corporation and its subsidiaries in accordance with generally accepted auditing standards.  The auditors shall certify that the annual financial statements are prepared in accordance with generally accepted accounting principles, and shall report on such financial statements to the stockholders and directors of the Corporation.  The Board’s selection of auditors shall be presented for ratification by the stockholders at the annual meeting.  Directors and officers, when acting in good faith, may rely upon financial statements of the Corporation represented to them to be correct by the officer of the Corporation having charge of its books of account, or stated in a written report by the auditors fairly to reflect the financial condition of the Corporation.

 

ARTICLE VIII

 

OFFICES

 

SECTION 1 .  Principal Office.  The principal office of the Corporation shall be at such place in the Town of North Castle, County of Westchester and State of New York as the Board shall from time to time determine.

 

SECTION 2 .  Other Offices.  The Corporation may also have an office or offices other than said principal office at such place or places as the Board shall from time to time determine or the business of the Corporation may require.

 

ARTICLE IX

 

WAIVER OF NOTICE

 

Whenever under the provisions of any law of the State of New York, the Certificate of Incorporation or these By-laws or any resolution of the Board or any committee thereof, the Corporation or the Board or any committee thereof is authorized to take any action after notice to the stockholders, directors or members of any such committee, or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of any period of time, if, at any time before or after such action shall be completed, such notice or lapse of time shall be waived by the person or persons entitled to said notice or entitled to participate in

 

18



 

the action to be taken, or, in the case of a stockholder, by an attorney thereunto authorized.  Attendance at a meeting requiring notice by any person or, in the case of a stockholder, by the stockholder’s attorney, agent or proxy, shall constitute a waiver of such notice on the part of the person so attending, or by such stockholder, as the case may be.

 

ARTICLE X

 

FISCAL YEAR

 

The fiscal year of the Corporation shall end on the thirty-first day of December in each year.

 

ARTICLE XI

 

SEAL

 

The Seal of the Corporation shall consist of two concentric circles with the IBM logotype appearing in bold face type within the inner circle and the words ‘International Business Machines Corporation’ appearing within the outer circle.

 

ARTICLE XII

 

AMENDMENTS

 

These By-laws may be amended or repealed or new By-laws may be adopted by the stockholders at any annual or special meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting.  These By-laws, subject to the laws of the State of New York, may also be amended or repealed or new By-laws may be adopted by the affirmative vote of a majority of the Board given at any meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting.

 

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INTERNATIONAL BUSINESS MACHINES CORPORATION

 

The undersigned does hereby certify that the foregoing is a true and complete copy of the By-laws of International Business Machines Corporation, including all amendments thereto, and the same is in force at the date hereof.

 

IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation, this           day of                                         2005.

 

 

 

 

 

 

 

 

 

Title:

 

 

 

20


Exhibit 10.1

 

IBM SAVINGS PLAN

 

(As Amended and Restated effective as of January 1, 2005 )

 



 

IBM SAVINGS PLAN

 

TABLE OF CONTENTS
 

PREAMBLE

 

 

 

 

ARTICLE 1.

DEFINITIONS

 

 

 

 

ARTICLE 2.

PARTICIPATING EMPLOYERS

 

 

2.01

Participation of IBM

 

 

2.02

Participation by Domestic Subsidiaries

 

 

 

ARTICLE 3.

ELIGIBILITY AND PARTICIPATION

 

 

3.01

Eligibility

 

 

3.02

Participation

 

 

3.02A

Participation by 401(k) Pension Program Participants after December 31, 2004

 

 

3.03

Reemployment of Certain Former Employees and Former Participants

 

 

3.04

Effect of Status Change on Participation

 

 

3.05

Termination of Participation

 

 

 

 

ARTICLE 4.

CONTRIBUTIONS

 

 

 

4.01

Deferred Cash Contributions and Catch-Up Contributions

 

 

4.02

Employer Matching Contributions

 

 

4.03

Rollover Contributions

 

 

4.04

Changes in Contribution Rates

 

 

4.05

Suspension and Resumption of Contributions

 

 

4.06

Actual Deferral Percentage Test

 

 

4.07

Actual Contribution Percentage Test

 

 

4.08

Aggregate Contribution Limitation

 

 

4.09

Additional Discrimination Testing Provisions

 

 

4.10

Maximum Annual Additions

 

 

4.11

Contributions for Periods of Military Leave

 

 

4.12

Return of Contributions

 

 

 

 

ARTICLE 5.

INVESTMENT OF CONTRIBUTIONS AND ELECTIVE DISTRIBUTION OF DIVIDENDS PAYABLE ON STOCK HELD IN IBM STOCK FUND

 

 

5.01

Investment Funds

 

 

5.01A

Mutual Fund Window Program

 

 

5.02

Investment of Contributions to Participants’ Accounts

 

 

5.03

Change of Investment Election

 

 



 

 

5.04

Reallocation of Accounts Among the Funds

 

 

5.05

Limitations Imposed by Contract

 

 

5.06

Responsibility for Investments

 

 

5.07

Voting of IBM Shares

 

 

5.08

ERISA Section 404(c) Compliance

 

 

5.09

Elective Distribution of Dividends Payable on Stock Held in IBM Stock Fund

 

 

 

 

Article 5A –

Disability Protection Program

 

 

5A.01

Eligibility

 

 

5A.02

Levels of Coverage under Disability Protection Program

 

 

5A.03

Enrollment Procedures

 

 

5A.04

Requirements for Commencement of Coverage under Disability Protection Program

 

 

5A.05

Investment in Premiums under Disability Insurance Policy and Assessment of Administrative Fee

 

 

5A.06

Benefits Payable under Disability Protection Program

 

 

5A.07

Termination of Coverage under Disability Protection Program

 

 

5A.08

Claims Procedure and Incorporation of Disability Insurance Policy

 

 

 

 

ARTICLE 6.

VALUATION OF UNITS AND CREDITS TO ACCOUNTS

 

 

6.01

Units of Participation

 

 

6.02

Valuation of Units

 

 

6.03

Crediting the Accounts

 

 

6.04

Statements of Participant Accounts

 

 

 

 

ARTICLE 7.

VESTED STATUS OF ACCOUNTS

 

 

7.01

Nonforfeitability of Deferred Account, Employer Account, and Rollover Account

 

 

 

 

ARTICLE 8.

IN-SERVICE WITHDRAWALS

 

 

8.01

Withdrawal After Age 59½

 

 

8.01A

Withdrawal from After-Tax Account

 

 

8.02

Hardship Withdrawal

 

 

8.03

Procedures and Restrictions

 

 

8.04

Distributions at Age 70½

 

 

 

 

ARTICLE 9.

LOANS TO PARTICIPANTS

 

 

9.01

Loan Amounts Available and Interest Rate

 

 

9.02

Terms

 

 

 

 

ARTICLE 10.

DISTRIBUTION OF ACCOUNTS UPON TERMINATION OF EMPLOYMENT, DISABILITY, OR DEATH

 

 

10.01

Applicability

 

 

10.02

Forms of Distribution

 

 

10.03

Mandatory Distribution of Small Accounts

 

 

10.04

Withdrawals From Account After Termination of Employment

 

 

10.05

Commencement of Payments

 

 

10.06

Required Distributions at Age 70½

 

 

10.07

Effect of Reemployment

 

 

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10.08

Distribution of Account Upon Death

 

 

10.09

Designation of Beneficiary

 

 

10.10

Proof of Death and Right of Beneficiary or Other Person

 

 

10.11

Status of Accounts Pending Distribution

 

 

10.12

Procedures and Form of Payment

 

 

10.13

Distribution Limitation

 

 

10.14

Direct Rollover of Certain Distributions

 

 

10.15

Waiver of Notice Period

 

 

10.16

Distribution of Accounts Upon a Sale of Assets or a Sale of a Subsidiary prior to December 31, 2001

 

 

 

 

ARTICLE 11.

ADMINISTRATION OF PLAN

 

 

11.01

Named Fiduciaries

 

 

11.02

Exclusive Authority of the Board of Directors

 

 

11.03

Responsibilities of Committee

 

 

11.04

Appointment of Plan Administrator

 

 

11.05

Responsibilities of Plan Administrator and Effect of Decisions of Plan Administrator

 

 

11.06

Retention of Professional Advisors

 

 

11.07

Prudent Conduct

 

 

11.08

Service in More Than One Fiduciary Capacity

 

 

11.09

Compensation and Bonding

 

 

11.10

Limitation of Liability

 

 

11.11

Individual Accounts

 

 

 

 

ARTICLE 12.

MANAGEMENT OF FUNDS

 

 

12.01

Trust Agreement

 

 

12.02

Exclusive Benefit Rule

 

 

 

 

ARTICLE 13.

AMENDMENT, MERGER, TRANSFERS, AND TERMINATION

 

 

13.01

Amendment of Plan

 

 

13.02

Merger, Consolidation or Transfer of Assets and Liabilities

 

 

13.03

Termination by Participating Employers

 

 

13.04

Termination of Plan

 

 

 

 

ARTICLE 14.

GENERAL PROVISIONS

 

 

14.01

Nonalienation and Payment Pursuant to Qualified Domestic Relations Orders

 

 

14.02

Facility of Payment

 

 

14.03

Tax Withholding

 

 

14.04

Prevention of Escheat

 

 

14.05

Elections and Notifications

 

 

14.06

Information

 

 

14.07

Conditions of Employment Not Affected by Plan

 

 

14.08

Construction

 

 

 

 

APPENDIX A.

SPECIAL PROVISIONS FOR MiCRUS

 

 

 

 

APPENDIX B.

SPECIAL PROVISIONS FOR TECHNOLOGY SERVICE SOLUTIONS (“TSS”)

 

 

iii



 

APPENDIX C.

SPECIAL RULES APPLICABLE TO PUERTO RICO EMPLOYEES

 

 

 

 

APPENDIX D.

TOP-HEAVY PROVISIONS

 

 

 

 

APPENDIX E.

SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS IN UNISON, INC. 401(k) SAVINGS AND INVESTMENT PLAN

 

 

 

 

APPENDIX F:

SPECIAL PROVISIONS APPLICABLE TO FORMER EMPLOYEES OF PRICEWATERHOUSE COOPERS, LLP

 

 

 

 

APPENDIX G.

SPECIAL PROVISIONS APPLICABLE TO FORMER EMPLOYEES OF VF CORPORATION

 

 

iv



 

PREAMBLE

 

International Business Machines Corporation (“IBM”) has established the IBM Tax Deferred Savings Plan (the “Plan”) to assist eligible employees in saving for retirement.  The Plan was initially effective as of July 1, 1983 and has since been amended from time to time.  Effective as of July 1, 1999, the name of the Plan was changed to the IBM TDSP 401(k) Plan.  The Plan was renamed the IBM Savings Plan, effective October 1, 2002.

 

The Plan is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code (the “Code”) that includes a qualified cash or deferred arrangement pursuant to Section 401(k) of the Code.  Effective as of January 1, 2002, the Plan is intended to comprise two constituent plans: a qualified plan under Section 401(a) of the Code that includes a qualified cash or deferred arrangement pursuant to Section 401(k) of the Code, and an employee stock ownership plan, within the meaning of Section 4975(e)(7) of the Code (“the ESOP”).  Except as otherwise explicitly provided, the provisions set forth herein shall apply to each such constituent plan.

 

The Plan is also intended to be a qualified plan under Section 1165(a) of Puerto Rico Internal Revenue Code (the “Puerto Rico Code”), including a qualified cash or deferred contributions arrangement under Section 1165(e) of the Puerto Rico Code, in furtherance of which intention, special provisions applicable to employees employed in Puerto Rico are incorporated in the

 



 

Plan in Appendix C.  The Plan shall, at all times, be construed and administered in a manner consistent with such intentions.

 

From time to time, the Plan has included and may include, as participating employers, and has covered or may cover eligible employees of, certain entities in which IBM had or has an ownership interest, but which were or are not members of any controlled group of corporations, within the meaning of Section 414(b) of the Code, that included or includes IBM, and were or are not trades or business under common control, within the meaning of Section 414(c) of the Code, with IBM.  Accordingly, at such times, the Plan shall be deemed a plan maintained by more than one employer, within the meaning of Section 413(c) of the Code.  The Plan shall, at such times, be construed and administered in a manner consistent with its status as a multiple employer plan.  All provisions of the Plan shall be applicable to all participating employers and to the employees of all participating employers, except to the extent that any such provision is modified by an Appendix to the Plan that is specifically made applicable to a named participating employer and its employees.

 

The Plan was most recently amended and restated as of January 1, 2002 (“the January 1, 2002 Restatement”).  This Amendment, Restatement, and Recodification of the Plan as of January 1, 2005 (“the January 1, 2005 Recodification”) incorporates amendments heretofore made to the Plan, including amendments adopted pursuant to Section 401(b) of the Code in connection with and pursuant to the issuance of a favorable determination letter by the Internal Revenue Service on September 10, 2004, and makes additional amendments to the Plan.  This January 1, 2005 Recodification shall generally be effective as of January 1, 2005, provided, however, that the amendments heretofore made to the January 1, 2002 Restatement are

 

2



 

effective as specified in the instruments by which such amendments were adopted, and provided further, however, that the effective date of any provision or provisions of the Plan shall, to the extent required by specific provisions of the Plan, the Uruguay Round Agreements Act, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Internal Revenue Service Restructuring and Reform Act of 1998, the Community Renewal Tax Relief Act of 2000, the Economic Growth and Tax Relief Reconciliation Act of 2001, or other law, be any such earlier or other effective date required by the Plan, such acts, or such law.

 

This January 1, 2005 Recodification includes all provisions of the Plan that are applicable as of its effective date.

 

3



 

ARTICLE 1.   DEFINITIONS

 

1.01                            Account ” means, with respect to each Participant, the total of his Deferred Account, Employer Account, Rollover Account, Catch-Up Account, and any other sub-account established by the Plan Administrator pursuant to Section 13.02(d).  That portion of his Account, if any, that is invested in the IBM Stock Fund pursuant to the provisions of Article 5, and any separate sub-account established in accordance with Section 5.09(d) shall be deemed to be his ESOP Account.

 

1.02                            Actual Contribution Percentage ” means, with respect to a specified group of Employees, the average of the ratios, calculated separately for each Employee in that group, of (a) the sum of (i) the Employee’s Matching Contributions for that Plan Year, excluding any Matching Contributions forfeited under the provisions of Sections 4.01(f) and 4.06(c)(iii) plus (ii) the Employee’s After-Tax Contributions for that Plan Year, to (b) his Statutory Compensation for that Plan Year.  The Actual Contribution Percentage for each group and the ratio determined for each Employee in the group shall be calculated to the nearest one one-hundredth of 1% (0.0001).  Any Matching Contributions that are taken into account in determining the Actual Deferral Percentage for any group of Employees for a Plan Year shall not be taken into account in determining the Actual Contribution Percentage for such group of Employees for such Plan Year.

 

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1.03                            Actual Contribution Ratio ” means the ratio taken into account with respect to an Employee in the determination of the Actual Contribution Percentage for a group of Employees in which he is included.

 

1.04                            Actual Deferral Percentage ” means, with respect to a specified group of Employees, the average of the ratios, calculated separately for each Employee in that group, of (a) the amount of Deferred Cash Contributions made pursuant to Section 4.01 for a Plan Year, including Deferred Cash Contributions returned to a Highly Compensated Employee under Section 4.01(d) and Deferred Cash Contributions returned to any Employee pursuant to Section 4.01(e), to (b) the Employees’ Statutory Compensation for that Plan Year.  The Actual Deferral Percentage for each group and the ratio determined for each Employee in the group shall be calculated to the nearest one one-hundredth of 1% (0.0001).  For purposes of determining the Actual Deferral Percentage for a Plan Year, Deferred Cash Contributions may be taken into account for a Plan Year only if they:

 

(i)                                      relate to compensation that either would have been received by the Employee in the Plan Year but for his deferral election, or are attributable to services performed by the Employee in the Plan Year and would have been received by the Employee within 2½ months after the close of the Plan Year but for his deferral election,

 

(ii)                                   are allocated to the Employee as of a date within that Plan Year and are not contingent on the participation or performance of service after such date, and

 

(iii)                                are actually paid to the Trustee no later than 12 months after the end of the Plan Year to which the contributions relate.

 

5



 

At the election of the Plan Administrator, which election may be made or changed each Plan Year, all or any portion of Matching Contributions made pursuant to Section 4.02 with respect to such Plan Year may be taken into account in determining the Average Deferral Percentage of any group or groups of Employees, in accordance with Section 1.401(k)-1(b)(5) of the Regulations.

 

1.05                            Actual Deferral Ratio ” means the ratio taken into account with respect to an Employee in the determination of the Actual Deferral Percentage.

 

1.06                            Affiliate ” means, with respect to any Employer, any company that is a member of a controlled group of corporations, as defined in Section 414(b) of the Code, which also includes such Employer as a member; any trade or business under common control, as defined in Section 414(c) of the Code, with such Employer; any organization, whether or not incorporated, which is a member of an affiliated service group, as defined in Section 414(m) of the Code, which includes such Employer; and any other entity required to be aggregated with such Employer pursuant to Regulations under Section 414(o) of the Code.  Solely for the purpose of determining whether an individual is a Leased Employee and for purposes of Section 4.10, the definitions in Sections 414(b) and (c) of the Code shall be modified by substituting the phrase “more than 50 percent” for the phrase “at least 80 percent” in each place it appears in Section 1563(a)(1) of the Code.

 

1.06A                  After-Tax Account means the account credited with the After-Tax Contributions made by a Participant and earnings on those contributions.

 

6



 

1.06B                    After-Tax Contributions means amounts contributed to the Plan in accordance with Section 4.01(h).

 

1.07                            Annual Dollar Limit ” means, for Plan Years commencing after December 31, 1993 and prior to January 1, 2002, $150,000, as adjusted from time to time in accordance with Section 401(a)(17)(B) of the Code, as in effect for Plan Years commencing prior to January 1, 2002; and, effective January 1, 2002, $200,000, as adjusted from time to time in accordance with Section 401(a)(17)(B) of the Code as in effect for Plan Years commencing after December 31, 2001.

 

1.08                            Attributed Earnings ” means the amount of investment income attributed to Excess Contributions or Excess Deferrals or to any Deferred Cash Contributions in excess of the limit described in Section 4.10(a), that are required to be returned to the Participant in accordance with Sections 4.01(f), 4.06(c), or 4.10(d)(i) or (ii), as applicable, and the amount of investment income attributed to Excess Aggregate Contributions or any Matching Contributions in excess of the limit described in Section 4.10(a), that are required to be forfeited in accordance with Section 4.07(c) or 4.10(d)(ii).  Attributed Earnings on Excess Deferrals, Excess Contributions, or Deferred Cash Contributions required to be returned shall be determined by multiplying the income earned on the Deferred Account for the Plan Year by a fraction, the numerator of which is the Excess Deferrals, Excess Contributions, or Deferred Cash Contributions that are required to be returned for the Plan Year and the denominator of which is the Deferred Account balance at the end of the Plan Year, disregarding any income or loss occurring during

 

7



 

the Plan Year.  Attributed Earnings on Excess Aggregate Contributions or Matching Contributions that are required to be forfeited shall be determined in a similar manner by substituting the Employer Account for the Deferred Account, and the Excess Aggregate Contributions or Matching Contributions required to be forfeited for the Excess Deferrals, Excess Contributions, or Deferred Cash Contributions required to be returned in the preceding sentence.

 

1.09                            Beneficiary ” means any person, persons or entity designated, or deemed to have been designated, by a Participant to receive any benefits payable in the event of the Participant’s death in accordance with the provisions of Section 10.09.

 

1.10                            Board of Directors ” or “ Board ” means the Board of Directors of IBM.

 

1.11                            Catch-Up Account ” means the account credited with the Catch-Up Contributions made on a Participant’s behalf and earnings on those contributions.

 

1.12                            Catch-Up Contributions ” means amounts contributed to the Plan that satisfy the requirements of Section 4.01(g).

 

1.12A                  “Certificate of Disability Insurance” means the certificate issued in accordance with the terms of the Disability Insurance Policy by the Disability Insurer and furnished to a Participant who has elected, in accordance with Section 5A.03(a), to invest a portion of his Account in the payment of premiums under the Disability Insurance Policy.

 

8



 

1.13                            Code ” means the Internal Revenue Code of 1986, as amended from time to time.  References to specific sections of the Code shall be deemed to refer to such sections as they may be amended or redesignated.

 

1.14                            Committee ” means Retirement Plans Committee of IBM, comprising the persons named by the Board of Directors to supervise the administration of the Plan as provided in Article 11.

 

1.15                            Compensation ” means the cash remuneration paid to an Employee for services rendered to the Employer, including salary, commission payments, and recurring payments under any form of variable compensation plan and additional compensation paid for nonscheduled workdays, overtime, and shift premium, determined prior to any reduction pursuant to Section 4.01 or pursuant to a cafeteria plan under Section 125 of the Code, or pursuant to a qualified transportation fringe under Section 132(f) of the Code, but excluding special awards, expenses or relocation reimbursements, sign-on bonuses, separation pay, termination incentive payments, and payments for accrued or deferred vacations.  Amounts other than Variable Pay paid subsequent to the first regularly scheduled payroll date coincident with or next following the date of an Employee’s termination of employment shall not be taken into account as Compensation.  Any amount of Variable Pay that is otherwise subject to being taken into account as Compensation shall nonetheless not be taken into account if the payroll processing for an Employee’s termination of employment preceded the payroll processing date for such Variable Pay.  The Plan Administrator, in its discretion, shall determine whether any form of remuneration not described in this Section shall be

 

9



 

treated as Compensation for purposes of the Plan.  Compensation taken into account for a Plan Year shall not exceed the Annual Dollar Limit.

 

1.16                            Deferred Account ” means the account credited with the Deferred Cash Contributions made on a Participant’s behalf and earnings on those contributions.

 

1.17                            Deferred Cash Contributions ” means amounts contributed pursuant to Section 4.01(a).

 

1.17A                  “Designated Mutual Fund” means a mutual fund that is established and maintained in accordance with the requirements of Investment Company Act of 1940, that offers shares for purchase by the general public, and that is designated by the Committee, in accordance with Section 5.01A(a), to be available to Participants for investment under the terms of the Mutual Fund Window Program, effective as of January 1, 2005.  A Designated Mutual Fund shall not be deemed an Investment Fund for purposes of Section 5.01.

 

1.17B                    “Disability Insurance Policy” means the insurance policy underwritten by the Disability Insurer under which premiums are paid through investments made in accordance with the Disability Protection Program and benefits are payable in accordance with the Disability Protection Program.

 

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1.17C                    “Disability Insurer” means the insurance company selected by the Plan Administrator that underwrites the Disability Insurance Policy.  Effective January 1, 2005, the Disability Insurer is Metropolitan Life Insurance Company.

 

1.17D                   “Disability Protection Program” means the program provided in Article 5A, effective as of January 1, 2005, under which a Participant who satisfies specified eligibility requirements is permitted to elect to invest a portion of his Account in the payment of premiums under the Disability Insurance Policy and pursuant to which benefit payments made from the Disability Insurance Policy and in accordance with the Certificate of Disability Insurance are allocated to the Accounts of Participants who have suffer a Total and Permanent Disability while enrolled thereunder.

 

1.18                            Domestic Subsidiary ” means a Subsidiary organized and existing under the laws of the United States, or any state, territory, or possession thereof.

 

1.19                            Effective Date ” means July 1, 1983.  The Effective Date of this amendment and recodification of the Plan shall be January 1, 2005, except as otherwise specified herein, and subject to the Preamble hereto.

 

1.20                            Employee ” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract.  The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan.  Any person deemed to be an independent contractor by any

 

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Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.

 

1.21                            Employer ” means IBM or any successor by merger, purchase or otherwise, with respect to its employees, or any other entity participating in the Plan as provided in Article 2, with respect to its employees.  All entities that are members of a controlled group of corporations, within the meaning of Section 414(b) of the Code, or a group of trades or businesses under common control, within the meaning of Section 414(c) of the Code, and that are participating in the Plan in accordance with Article 2 shall be deemed to be a single Employer for all purposes under the Plan.

 

1.22                            Employer Account ” means the account credited with Matching Contributions and earnings on those contributions

 

1.23                            Enrollment Date ” means the date on which a Participant makes the election described in Section 4.01.

 

1.24                            Excess Aggregate Contributions ” means the amount of Matching Contributions and, effective as of January 1, 2004, After-Tax Contributions on behalf of Highly

 

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Compensated Employees in excess of the limitation described in Section 4.07(a) for a Plan Year, as determined in accordance with Section 4.07(c)(i).

 

1.25                            Excess Contributions ” means the amount of Deferred Cash Contributions on behalf of Highly Compensated Employees in excess of the limitation described in Section 4.06(a) for a Plan Year, as determined in accordance with Section 4.06(c)(i).

 

1.26                            Excess Deferrals ” means the amount of Deferred Cash Contributions on behalf of a Participant that, taken together with similar contributions on his behalf to any other plan described in Section 401(a)(30) of the Code, exceed the dollar limitation described in Section 4.01(c) for a calendar year.

 

1.27                            ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.  References to sections of ERISA shall be deemed to refer to such sections as they may be amended or redesignated.

 

1.27A                  “Executive Employee” means an Employee who is classified as an executive, based on the compensation band to which he is assigned, in accordance with the personnel policies and practices of his Employer.

 

1.28                            Five Percent Owner ” means with respect to a corporation, any person who owns or is considered as owning within the meaning of Section 318 of the Code more than 5% of the outstanding stock of the corporation, or stock possessing more than 5% of the total voting power of the corporation.

 

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1.29                            Foreign Branch ” means a branch, division, or other unit of IBM or a Domestic Subsidiary that operates principally outside the United States, its territories, or possessions.

 

1.29A                  “401(k) Pension Program Participant” means a Participant who is admitted to participation in the Plan in accordance with Section 3.02A.

 

1.30                            Fund ” or “ Investment Fund ” means the separate funds authorized by the Committee in accordance with Section 5.01(a) in which contributions to the Plan are invested.  Amounts invested under the Mutual Fund Window Program, effective as of January 1, 2005, shall not be deemed to be invested in any of the Investment Funds.

 

1.31                            Highly Compensated Employee ” means for a Plan Year commencing on or after January 1, 1997, any employee of the Employer or an Affiliate, whether or not eligible to participate in the Plan, who

 

(i)                                      was a Five Percent Owner for such Plan Year or the prior Plan Year, or

 

(ii)                                   for the preceding Plan Year received Statutory Compensation in excess of $80,000, and, effective with respect to Plan Years commencing on or after January 1, 2002, was among the highest 20% of employees for the preceding Plan Year when ranked by Statutory Compensation paid for that year.  No employee shall be excluded under Section 414(q)(5) of the Code for purposes of determining the number of such employees.  The $80,000 dollar amount in this

 

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paragraph (ii) shall be adjusted from time to time in accordance with Section 414(q)(1) of the Code.

 

Notwithstanding the foregoing, employees who are nonresident aliens and who receive no earned income from the Employer or an Affiliate which constitutes income from sources within the United States shall be disregarded for all purposes of this Section.

The provisions of this Section shall be further subject to such additional requirements as shall be described in Section 414(q) of the Code and Regulations thereunder, which shall override any provisions of this Section inconsistent therewith.

 

1.32                            Hour of Service ” means each hour for which an employee is paid or entitled to payment for the performance of duties for the Employer or an Affiliate.

 

1.33                            IBM ” means International Business Machines Corporation, a corporation organized and existing under the laws of the State of New York.

 

1.34                            IBM Staff Investment Manager ” means one or more IBM employees who have been appointed by the Committee to direct, either jointly or severally, the management of the acquisition and disposition of all or any portion of the assets of the Trust Fund.

 

1.35                            IBM Stock Fund ” means the Investment Fund of the Plan that is invested primarily in common stock of IBM, in accordance with Section 5.01(a) and which shall be included within the ESOP.

 

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1.36                            Independent Investment Manager ” means any person or entity that satisfies the requirements of Section 3(38)(B) of ERISA, which has been appointed by the Committee to manager, acquire, and dispose of all or any portion of the assets of the Trust Fund and which has acknowledged in writing that it is a fiduciary with respect to the Plan.

 

1.37                            Investment Manager ” means any Independent Investment Manager or any IBM Staff Investment Manager.

 

1.38                            Leased Employee ” means any person (other than a common law employee of the Employer) who, pursuant to an agreement between the Employer and any other person (“leasing organization”), has performed services for the Employer or any related persons determined in accordance with Section 414(n)(6) of the Code on a substantially full-time basis for a period of at least one year and such services are performed under the primary direction of or control by the Employer.  In the case of any person who is a Leased Employee before or after a period of service as an Employee, the entire period during which he has performed services as a Leased Employee shall be counted as service as an Employee for all purposes of the Plan, except that he shall not, by reason of that status, become a participant in the Plan.

 

1.38A                  “Long-Term Supplemental Employee” means, effective as of January 1, 2004, a Supplemental Employee so designated by his Employer, in accordance with its established personnel practices.  A Supplemental Employee who has not been explicitly

 

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designated as a Long-Term Supplemental Employee by his Employer shall not be deemed to be a Long-Term Supplemental Employee.

 

1.39                            Matching Contributions ” means amounts contributed pursuant to Section 4.02.  For purposes of Section 1.401(k)-1(b)(5) of the Regulations, Matching Contributions made under the Plan shall be deemed “Qualified Matching Contributions,” provided, however, that, for the period commencing on January 1, 2002 and ending on December 31, 2004, Matching Contributions that are determined on the basis of Catch-Up Contributions made on a Participant’s behalf shall not be deemed “Qualified Matching Contributions”.

 

1.39A                  “Mutual Fund Window Program” means the program provided in Section 5.01A, effective as of January 1, 2005, pursuant to which a Participant is permitted to elect to invest a portion of his Account in one or more Designated Mutual Funds.

 

1.39B                    “Non-Executive Employee” means an Employee who is not an Executive Employee.

 

1.40                            Non-Highly Compensated Employee ” means for any Plan Year an employee of the Employer or an Affiliate who is not a Highly Compensated Employee for that Plan Year.

 

1.41                            Notice ” means a specification by the Employee of his designation, election, or intention under any provision of the Plan, through written, electronic, or telephonic means, as provided for the particular purpose by the Plan Administrator, pursuant to Section 14.05.

 

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1.41A                  “One-Year Period of Service” means with respect to any employee, effective as of January 1, 2005, a 12-month period of employment with the Employer or any Affiliate, whether or not as an Employee, beginning on the date he first completes an Hour of Service.  For the purpose of determining whether an employee has completed a One-Year Period of Service, the following rules shall apply:

 

(a)                                   If an employee’s employment is terminated and he is later reemployed within one year of the date that is the earlier of (i) his date of termination of service or (ii) the first day of an absence from service immediately preceding his date of termination, the period between such date and his date of reemployment shall be included as a period of employment in determining whether he has completed a One-Year Period of Service.

 

(b)                                  If an employee’s employment is terminated and he is later reemployed more than one year after the date that is the earlier of (a) his date of termination of service or (b) the first day of an absence from service immediately preceding his date of termination, his period of employment prior to such date shall be aggregated with his period of employment after his reemployment in determining whether he has completed a One-Year Period of Service.

 

(c)                                   For the purpose of determining whether an employee has completed a One-Year Period of Service, his Recognized Predecessor Employment shall be taken into account as if it were employment with an Employer.

 

1.42                            Participant ” means any person who has been admitted to participation in the Plan in accordance with Section 3.02 or Section 3.02A and has not ceased to be a Participant in accordance with Section 3.05.  Except to the extent otherwise specified, references to a

 

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Participant shall be deemed also to refer to a 401(k) Pension Program Participant and provisions of the Plan that apply to Participants shall apply equally to 401(k) Pension Program Participants.

 

1.43                            Plan ” means the IBM Savings Plan, as set forth in this document or as amended from time to time.  Effective as of January 1, 2002, the IBM Stock Fund maintained pursuant to Section 5.01, together with any separate sub-account established pursuant to Section 5.09(d) shall be designated as an ESOP, within the meaning of Section 4975(e)(7) of the Code and shall be a separate constituent plan.

 

1.44                            Plan Year ” means the 12-month period beginning on any January 1, on or after the Effective Date.

 

1.44A                  “Predecessor Employment” means employment with any entity prior to the date that (a) such entity becomes a member of a controlled group of corporations that also includes any Employer as a member, (b) substantially all of the assets of such entity are acquired by a member of a controlled group of corporations that includes any Employer as a member, or (c) such entity enters into a contractual relationship with an Employer pursuant to which employees of such entity become Employees.  For purposes of this Section, the term “controlled group of corporations” shall have the meaning specified in Section 414(b) of the Code.

 

1.45                            Profits ” means both (a) the accumulated earnings and profits of an Employer and (b) an Employer’s current net taxable income, before deduction of Federal, state, or local

 

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income taxes and before any contributions made by the Employer to this Plan or any other employee benefit plan, as determined by its independent public accountants in accordance with generally accepted accounting principles.

 

1.45A                  “Program Eligibility Date” means, with respect to a 401(k) Pension Program Participant, the earliest day during his employment or reemployment as a Regular Employee that is coincident with or next following the date as of which he completes or is deemed to have completed a One-Year Period of Service.

 

1.45B                    “Recognized Predecessor Employment” means Predecessor Employment that is taken into account under the Plan pursuant to rules established by the Plan Administrator, which rules shall apply uniformly to all individuals who become employees as the result of the same transaction.

 

1.46                            Regular Employee ” means an Employee as so defined by the rules and regulations of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.

 

1.47                            Regulations ” means the Income Tax Regulations codified at Title 26 of the Code of Federal Regulations, as amended from time to time.  References to specific sections of the Regulations shall be deemed to refer to such sections as they may be amended or redesignated.

 

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1.48                            Rollover Account ” means the account credited with the Rollover Contributions made by a Participant and earnings on those contributions.

 

1.49                            Rollover Contributions ” means amounts contributed pursuant to Section 4.03.

 

1.50                            Severance Date ” means the earlier of (a) the date an employee quits, retires, is discharged or dies, or (b) the first anniversary of the date on which an employee is first absent from service, with or without pay, but without interruption, for any reason such as vacation, sickness, disability, layoff or leave of absence.

 

1.51                            Statutory Compensation ” means the wages, salaries, and other amounts paid in respect of an employee for services actually rendered to an Employer or an Affiliate, including, by way of example, overtime, bonuses and commissions, but excluding deferred compensation, stock options and other distributions which receive special tax benefits under the Code.  For purposes of determining Highly Compensated Employees and key employees under Appendix D, Statutory Compensation shall include amounts contributed by the Employer pursuant to a salary reduction agreement which are not includible in the gross income of the employee under Sections 125, 132(f)(4) (with respect to Plan Years commencing after December 31, 2000), 402(e)(3) (with respect to Plan Years commencing prior to January 1, 1998), 402(g)(3) (with respect to Plan Years beginning after December 31, 1997), 402(h) or 403(b), or 457 of the Code.  For all other purposes, Statutory Compensation shall also include the amounts referred to in the preceding sentence, unless the Plan Administrator directs otherwise for a particular Plan Year.  For Plan Years beginning after 1988, Statutory Compensation shall not exceed

 

21



 

the Annual Dollar Limit, provided that such Annual Dollar Limit shall not be applied in the determination of Highly Compensated Employees.

 

In determining the compensation of a Participant for purposes of the application of the Annual Dollar Limit, for Plan Years commencing prior to January 1, 1997, the rules of Section 414(q)(6) (as in effect on the day before the date of enactment of Public Law 104-188) shall apply, except that in applying such rules, the term “family” shall include only the Spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year.  If, as a result of the application of such rules, the Annual Dollar Limit is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual’s compensation as determined prior to the application of this limitation.

 

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

 

1.53                            Supplemental Employee ” means an Employee so designated by his Employer in accordance with its established personnel practices who is not classified as a Regular Employee.

 

1.53A                  “Total and Permanent Disability” means a condition that provides a predicate for the payment of benefits from the Disability Insurance Policy, and shall be determined in accordance with the terms of Disability Insurance Policy and the Certificate of Disability Insurance.

 

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1.54                            Trust ” or “ Trust Fund ” means the fund established as part of the Plan into which contributions are to be made and from which benefits are to be paid in accordance with the terms of the Plan.

 

1.55                            Trustee ” means the trustee holding the funds of the Plan as provided in Article 12.

 

1.56                            Valuation Date ” means each trading day of the New York Stock Exchange, except as may be determined by the Plan Administrator in accordance with Section 6.02(b).

 

1.57                            Variable Pay ” means that portion of a Participant’s Compensation which is determined and paid in accordance with the provisions of the Employer’s annual performance-based compensation program.

 

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ARTICLE 2.   PARTICIPATING EMPLOYERS

 

2.01                            Participation of IBM

 

IBM shall be a participating Employer under the Plan, provided, however, that no Foreign Branch of IBM shall be included as an Employer and IBM shall not be a participating Employer with respect to the employees of any Foreign Branch.

 

2.02                            Participation by Domestic Subsidiaries

 

(a)                                   Domestic Subsidiaries of IBM that were acquired or established prior to July 1, 1983 shall be participating Employers under the Plan, and shall be subject to subsection (c).

 

(b)                                  Any entity that becomes, is established as, or is acquired as a Domestic Subsidiary on or after July 1, 1983 shall become a participating Employer under the Plan if and only if the Committee authorizes its participation by resolution and such entity takes such actions as may be necessary for it to adopt the Plan.  With the consent of the Plan Administrator, a Domestic Subsidiary that adopts the Plan may also adopt special provisions that shall be applicable to its employees, which special provisions shall be set forth in an Appendix to the Plan.  A Domestic Subsidiary that becomes a participating Employer shall be subject to the provisions of subsection (c).

 

(c)                                   No Foreign Branch of a Domestic Subsidiary shall be included as an Employer under the Plan and no Domestic Subsidiary shall be a participating Employer under the Plan with respect to the employees of a Foreign Branch.

 

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ARTICLE 3.   ELIGIBILITY AND PARTICIPATION

 

3.01                            Eligibility

 

(a)                                   Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

 

(b)                                  Effective as of January 1, 2004, each Employee of an Employer shall be eligible to become a Participant at any time during service as a Long-Term Supplemental Employee.

 

(c)                                   Effective as of January 1, 2005, subsection (a) shall be applicable only to an Employee who, (i) as of December 31, 2004, was (A) actively employed as a Regular Employee, or (B) on authorized leave of absence from employment as a Regular Employee and (ii) has remained in employment as a Regular Employee from December 31, 2004 through the date as of which he files a Notice described in Section 3.02(a) or (b).  An Employee for whom subsection (a) is made inapplicable by this subsection shall be eligible to become a Participant only in accordance with subsection (b) or Section 3.02A.

 

3.02                            Participation

 

An eligible Employee who is eligible to become a Participant in accordance with Section 3.01(a) or 3.01(b) shall become a Participant as of:

 

(a)                                   the first day of the first payroll period beginning after the date he files with the Plan Administrator the Notice prescribed by the Plan Administrator in which he:

 

(i)                                      makes the election described in Section 4.01, and

 

(ii)                                   authorizes the Employer to reduce his Compensation by the percentage specified in his election; or, if earlier,

 

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(b)                                  the first day of the first payroll period beginning after July 1, 2004 after the date he files with the Plan Administrator the Notice prescribed by the Plan Administrator in which he

 

(i)                                      makes the election described in Section 4.01(h), and

 

(ii)                                   authorizes the Employer to withhold from his Compensation, on an after-tax basis, the percentage specified in his election and to pay the amount so withheld to the Plan on his behalf.

 

3.02A                  Participation by 401(k) Pension Program Participants after December 31, 2004

 

(a)                                   The provisions of this Section shall be applicable to any Employee who becomes a Regular Employee after December 31, 2004.

 

(b)                                  An Employee described in subsection (a) shall be eligible to become a 401(k) Pension Program Participant as of the first payroll processing date that occurs on or after the 30 th day following his date of hire.

 

(c)                                   An Employee who is eligible to become a 401(k) Pension Program Participant in accordance with subsection (b) shall be deemed to have made an election in accordance with Section 4.01(a), effective as of the date he first becomes eligible to become a Participant, to reduce his Compensation by 3% and to have that amount contributed to the Plan by his Employer as a Deferred Cash Contribution, and shall become a 401(k) Pension Program Participant as of such date, unless he revokes such deemed election in advance of the effective date thereof, by electing, in accordance with Section 4.04(f), not to reduce his Compensation.

 

(d)                                  An Employee who is eligible to become a 401(k) Pension Program Participant in accordance with subsection (b) but who does not become a Participant in accordance

 

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with subsection (c), because he made an election in accordance with Section 4.04(f) not to reduce his Compensation, shall remain eligible to become a Participant and shall become a Participant in accordance with the procedures set forth in Section 3.02.  An Employee who becomes a Participant in accordance with this subsection shall be a 401(k) Pension Program Participant.

 

(e)                                   For purposes of this Section, an Employee described in subsection (a) who had become a Participant prior to January 1, 2005 and whose participation had not terminated, in accordance with Section 3.05, prior to the first date subsequent to December 31, 2004 on which he becomes a Regular Employee shall nonetheless be deemed not to be a Participant as of such date.  The provisions of this subsection shall not have any effect on the Employee’s rights under the Plan with respect to that portion of his Account attributable to contributions made prior to January 1, 2005.

 

3.03                            Reemployment of Certain Former Employees and Former Participants

 

(a)                                   Any person who is reemployed by an Employer after December 31, 2003 as a Long-Term Supplemental Employee and who had not become a Participant prior to the date of his reemployment, shall become a Participant upon the filing of Notice in accordance with Section 3.02.

 

(b)                                  Any person who is reemployed by an Employer after December 31, 2003 as a Long-Term Supplemental Employee, who had become a Participant prior to the date of his reemployment, but who had subsequently ceased to be a Participant in accordance with Section 3.05, shall again become a Participant upon the filing of Notice in accordance with Section 3.02.

 

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(c)                                   Any person who is reemployed by an Employer after December 31, 2003 as a Long-Term Supplemental Employee, who had become a Participant prior to the date of his reemployment, and who has not ceased to be a Participant in accordance with Section 3.05, shall be permitted to make an election under Section 4.01 immediately upon reemployment by an as a Long-Term Supplemental Employee.

 

3.04                            Effect of Status Change on Participation

 

(a)                                   Except as provided in subsection (b), a Participant who

 

(i)                                      had been employed by the Employer or an Affiliate as a Regular Employee, then

 

(ii)                                   ceases to be a Regular Employee, but

 

(iii)                                remains in the employ of an Employer or an Affiliate

 

shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

 

(b)                                  Notwithstanding the provisions of subsection (a), a Participant who

 

(i)                                      had been employed by the Employer or an Affiliate as a Regular Employee, then

 

(ii)                                   ceases to be a Regular Employee, but

 

(iii)                                remains in the employ of an Employer or an Affiliate as a Long-Term Supplemental Employee after December 31, 2003

 

shall , effective as of January 1, 2004, be eligible to receive allocations of Deferred Cash Contributions, and shall.  effective July 1, 2004, be eligible to make After-Tax Contributions, but ineligible to receive allocations of Matching Contributions, while his employment status remains that of a Long-Term Supplemental Employee.

 

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(c)                                   A Participant who

 

(i)                                      had been employed by the Employer or an Affiliate as a Long-Term Supplemental Employee after December 31, 2003, then

 

(ii)                                   ceases to be a Long-Term Supplemental Employee, but

 

(iii)                                remains in the employ of the Employer or an Affiliate (other than as a Regular Employee)

 

shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions and shall not be eligible to make After-Tax Contributions.

 

(d)                                  A Participant who

 

(i)                                      had been employed by the Employer or an Affiliate as a Long-Term Supplemental Employee after December 31, 2003, then

 

(ii)                                   ceased to be a Long-Term Supplemental Employee prior to January 1, 2005, but

 

(iii)                                upon ceasing to be a Long-Term Supplemental Employee remained in the employ of the Employer as a Regular Employee, which status became effective for the Participant prior to January 1, 2005,

 

shall continue to be a Participant in the Plan, shall continue to be eligible to receive allocations of Deferred Cash Contributions, shall be eligible to receive allocations of Matching Contributions, and shall be eligible to make After-Tax Contributions.

 

3.05                            Termination of Participation

 

Participation shall terminate on the latest of (a) the date a Participant is no longer employed by an Employer or any Affiliate, (b) the date that a Participant receives a

 

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distribution that reduces the balance of his Account to zero, or (c) the date of the Participant’s death.

 

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ARTICLE 4.   CONTRIBUTIONS

 

4.01                            Deferred Cash Contributions and Catch-Up Contributions

 

(a)                                   A Participant may elect in the Notice filed under Section 3.02(a), or Section 4.04(c), or Section 4.05(b), as applicable, to reduce his Compensation payable while a Participant by at least 1% and not more than 15%, in multiples of 1%, and have that amount contributed to the Plan by his Employer as Deferred Cash Contributions.  Effective as of January 1, 2002, the 15% maximum specified in the foregoing sentence shall be increased to 80%.  The amount of the reduction may, in the discretion of the Plan Administrator, be rounded to the next higher or lower multiple of $1.00 per pay period.  Deferred Cash Contributions shall be further limited as provided in subsections (c), (d), and (e) and in Sections 4.06, 4.09 and 4.10.  A Participant’s election pursuant to this subsection shall become effective as soon as administratively practicable after his provision of Notice, but shall in any event be effective as of the first day of a payroll period.  Any Deferred Cash Contributions shall be paid to the Trustees as soon as practicable and shall be allocated to the Participant’s Deferred Account.  An election made by a Participant in accordance with this subsection shall remain in effect until it is changed in accordance with Section 4.04 or suspended in accordance with Sections 4.05, 8.02(c)(iii), or 9.02(c)(i), provided however, that any election shall cease to be effective upon a Participant’s termination of employment.   Effective for the period beginning on January 1, 2002 and ending on December 31, 2004, a Participant may make separate Deferred Cash Contribution elections with respect to that portion of his Compensation that is not Variable Pay and with respect to that portion of his Compensation that is Variable Pay.  Effective January 1, 2005, a Participant may make

 

31



 

separate Deferred Cash Contribution Elections with respect to that portion of his Compensation that is not Variable Pay and with respect to any portion of his Compensation that is Variable Pay paid under a program maintained by an Employer for Non-Executive Employees.  Effective January 1, 2005, a Participant’s Deferred Cash Contribution Election shall apply only to his Compensation as determined without regard to any Variable Pay paid under any program maintained by an Employer for Executive Employees and shall not be effective with respect to any portion of his Compensation that is Variable Pay paid under any program maintained by an Employer for Executive Employees.   Effective January 1, 2002, Deferred Cash Contributions that are allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be contributions to the ESOP.

 

(b)                                  Notwithstanding any other provision of this Section, the Plan Administrator, in its sole discretion, may restrict the percentage of Compensation reduction that may be elected by any Highly Compensated Employee, in order to achieve or maintain compliance with the limitations described in Sections 4.06, 4.07, and 4.08.

 

(c)                                   In no event shall the Participant’s Deferred Cash Contributions and similar contributions made on his behalf by an Employer or an Affiliate to all plans, contracts or arrangements subject to the provisions of Section 401(a)(30) of the Code, in any calendar year commencing prior to January 1, 2002, exceed $7,000, as adjusted from time to time pursuant to Section 402(g)(5) of the Code (as in effect on the day before the date of enactment of Public Law 107-16).  The Participant’s Deferred Cash Contributions and similar contributions made on his behalf by an Employer or an Affiliate to all plans contracts or arrangements subject to the provisions of Section 401(a)(30) in calendar

 

32



 

years beginning after December 31, 2001 and prior to January 1, 2007 shall be limited in accordance with the following table:

 

Calendar Year

 

Dollar Limitation

 

2002

 

$

11,000

 

2003

 

$

12,000

 

2004

 

$

13,000

 

2005

 

$

14,000

 

2006

 

$

15,000

 

 

Deferred Cash Contributions made on a Participant’s behalf with respect to any calendar year beginning after December 31, 2006 are limited to $15,000 (or such higher dollar limit as may be in effect with respect to such year in accordance with Section 402(g)(4) of the Code (as amended and redesignated by Public Law 107-16), as in effect for calendar years beginning after December 31, 2001).  If a Participant’s Deferred Cash Contributions in a calendar year reach the dollar limitation in effect for such calendar year, his election of Deferred Cash Contributions for the remainder of the calendar year will be canceled.  As of the first pay period of the calendar year following such cancellation, the Participant’s election of Deferred Cash Contributions shall again become effective in accordance with his previous election.

 

(d)                                  If a Participant makes elective deferrals, within the meaning of Section 402(g)(3) of the Code, under any other qualified defined contribution plan maintained by an Employer or Affiliate for any calendar year and the sum of such elective deferrals and his Deferred Cash Contributions under the Plan exceed the dollar limitation specified in subsection (c) for that calendar year, then the amount by which such sum exceeds such limitation shall be deemed Excess Deferrals for such calendar year.  The Participant shall be deemed to have elected to receive a return from this Plan of the full amount of any Excess Deferrals determined in accordance with this subsection.  A return of

 

33



 

Excess Deferrals pursuant to this subsection shall be subject to the provisions of subsection (f).

 

(e)                                   If a Participant makes elective deferrals, within the meaning of Section 402(g)(3) of the Code, under a qualified defined contribution plan maintained by an employer other than any Employer or any Affiliate for any calendar year, and the sum of such elective deferrals and his Deferred Cash Contributions under the Plan exceed the dollar limitation specified in Section 4.01(c) for that calendar year, then the amount by which such sum exceeds such limitation shall be deemed Excess Deferrals for such calendar year.  The Participant may elect to receive a return from this Plan of all or a portion of any Excess Deferrals determined in accordance with this subsection, provided, however, that the Plan shall not be required to make a return of Excess Deferrals, unless the Participant notifies the Plan Administrator, in writing, by March 1 of the following calendar year of the amount of the Excess Deferrals that the Participant wishes to have returned by this Plan.  A return of Excess Deferrals pursuant to this subsection shall be subject to the provisions of subsection (f).

 

(f)                                     Any return of Excess Deferrals required under subsection (d) or (e) shall include Attributed Earnings and shall be made no later than the April 15 following the end of the calendar year in which the Excess Deferrals were made.  The amount of Excess Deferrals to be returned for any calendar year shall be reduced by any Deferred Cash Contributions previously returned to the Participant under Section 4.06 for that calendar year.  In the event any Deferred Cash Contributions required to be returned under subsection (d) or (e) were matched by Matching Contributions under Section 3.02, those Matching Contributions, together with Attributed Earnings, shall be forfeited and used to reduce Employer contributions.

 

34



 

(g)                                  Effective for Plan Years commencing after December 31, 2001, a Participant who satisfies the requirements of paragraph (i) for a Plan Year may elect, in accordance with paragraph (ii), to reduce his Compensation and to have the amount by which his Compensation is so reduced contributed to the Plan by his Employer as a Catch-Up Contribution, provided, however, that such Catch-Up Contributions shall be subject to the conditions set forth in paragraphs (iii), (iv), and (v).

 

(i)                                      A Participant satisfies the requirements of this paragraph for a Plan Year if:

 

(A)                               his 50 th birthday is coincident with or prior to the last day of the Plan Year; and

 

(B)                                 the Deferred Cash Contributions made on his behalf for the Plan Year have reached the applicable dollar limitation for the calendar year coincident with such Plan Year, as set forth in subsection (c).

 

(ii)                                   A Participant described in paragraph (i) shall be deemed to have elected to continue to reduce his Compensation at the rate in effect under his most recent Deferred Cash Contribution election and to have the amount contributed to the Plan by his Employer as a Catch-Up Contribution, unless he provides Notice, in accordance with procedures established by the Plan Administrator, that he elects not to continue to reduce his Compensation.

 

(iii)                                Any Catch-Up Contributions shall be paid to the Trustees as soon as practicable and shall be allocated to the Participant’s Catch-Up Account.

 

(iv)                               A Participant’s Catch-Up Contributions in calendar years beginning after December 31, 2001 and prior to January 1, 2007 shall be limited in accordance with the following table:

 

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Calendar Year

 

Dollar Limitation

 

2002

 

$

1,000

 

2003

 

$

2,000

 

2004

 

$

3,000

 

2005

 

$

4,000

 

2006

 

$

5,000

 

 

Catch-Up Contributions made on a Participant’s behalf with respect to any calendar year beginning after December 31, 2006 shall limited to $5,000, as adjusted in accordance with Section 414(v)(2)(C) of the Code.  In no event shall the Participant’s Catch-Up Contributions for a Plan Year exceed the excess of his Statutory Compensation for such Plan Year over his Deferred Cash Contributions for such Plan Year.

 

(v)                                  Catch-Up Contributions that are allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be contributions to the ESOP.

 

(vi)                               The provisions of this subsection shall be subject to the requirements of Section 414(v) of the Code and Regulations thereunder.

 

(h)                                  Effective July 1, 2004, a Participant may elect in the Notice filed under Section 3.02(b) or Section 4.04(e), or Section 4.05(b), as applicable, to make After-Tax Contributions, provided, however, that After-Tax Contributions shall be subject to the conditions set forth in paragraphs (i), (ii), and (iii).

 

(i)                                      The Participant’s election to make After-Tax Contributions shall specify the rate of After-Tax Contributions as a percentage of his Compensation, which rate shall not exceed 10% and shall be an integral multiple of 1%.

 

(ii)                                   Any After-Tax Contributions shall be paid to the Trustee as soon as practicable and shall be allocated to the Participant’s After-Tax Account.

 

36



 

(iii)                                After-Tax Contributions that are allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be contributions to the ESOP.

 

4.02                            Employer Matching Contributions

 

(a)                                   (i)                                      Each Employer shall contribute, out of its Profits, on behalf of each of its Participants who is not a 401(k) Pension Program Participant and who elects to make Deferred Cash Contributions, an amount equal to 50% of the Deferred Cash Contributions made on behalf of the Participant to the Plan during each payroll period, provided, however, that for this purpose Deferred Cash Contributions in excess of 6% of the Participant’s Compensation for a payroll period shall not be taken into account.  In no event shall the Matching Contributions pursuant to this Section with respect to a Plan Year exceed 3% of the Participant’s Compensation while a Participant during such Plan Year.  Employer Matching Contributions that are allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be contributions to the ESOP.

 

(ii)                                   Each Employer shall contribute, out of its Profits, on behalf of each of its Participants who (A) is a 401(k) Pension Program Participant, (B) elects or is deemed to have elected to make Deferred Cash Contributions, and (C) has, on or before the last day of the payroll period, attained his Program Eligibility Date an amount equal to 100% of the Deferred Cash Contributions made on behalf of the Participant to the Plan during each payroll period, provided, however, that for this purpose Deferred Cash Contributions in excess of 6% of the Participant’s Compensation for a payroll period shall not be taken into account.  In no event shall the Matching Contributions pursuant to

 

37



 

this Section with respect to a Plan Year exceed 6% of the Participant’s Compensation while a Participant during such Plan Year.

 

(iii)                                Employer Matching Contributions made in accordance with paragraph (i) or paragraph (ii) shall be paid to the Trustee as soon as practicable and shall be allocated to the Participant’s Employer Account.

 

(iv)                               Effective as of January 1, 2005, if as of the last day of the Plan Year, the amount of Matching Contributions allocated in accordance with paragraph (ii) for such Plan Year to the Employer Account of a 401(k) Pension Program Participant, who has been a Non-Executive Employee at all times during such Plan Year and who remains in employment with the Employer on the last day of such Plan Year, is less than the lesser of (A) 6% of his Compensation or (B) the amount contributed on behalf of such Participant as Deferred Cash Contributions for the Plan Year, the Employer shall make a special Matching Contribution on behalf of such Participant in an amount equal to the lesser of (X) such difference or (Y) the excess of (I) the dollar limitation determined in accordance with Section 4.01(c) over (II) the amount of Matching Contributions allocated in accordance with paragraph (ii). For purposes of this paragraph, a Participant’s Compensation shall not include any amount earned prior to the first day of the payroll period that includes his Program Eligibility Date, shall not include any amount earned during a period in which Deferred Cash Contributions were not permitted to be made on his behalf in accordance with Sections 8.02(c) or 9.02(c)(i), and shall not include any amount of Variable Pay attributable to any period in any prior Plan Year during which he was an Executive Employee.  Any special Matching Contribution made pursuant to this paragraph shall be paid to the Trustees as soon as practicable following the close of the

 

38



 

Plan Year to which it relates and the determination of the amount thereof by the Plan Administrator or its designee.

 

(v)                                  Employer Matching Contributions that are allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be contributions to the ESOP.

 

(b)                                  Matching Contributions are made expressly conditional on the Plan satisfying the provisions of Sections 4.01(c), (d), and (e), 4.06, 4.07, and 4.08.  If any portion of the Deferred Cash Contribution to which a Matching Contribution relates is returned to the Participant pursuant to Section 4.01(d) or (e), 4.06(c), or 4.08, the corresponding Matching Contribution shall be forfeited and if any amount of the Matching Contribution is deemed an Excess Aggregate Contribution under Section 4.07 such amount shall be forfeited in accordance with the provisions of that Section.

 

(c)                                   Effective only for the period beginning on January 1, 2002 and ending on December 31, 2004, and solely for purposes of subsection (a), a Participant’s Deferred Cash Contributions shall be deemed to include his Catch-Up Contributions.

 

(d)                                  Effective January 1, 2004, and solely for purposes of subsection (a), a Participant’s Compensation shall not include any amount earned while employed by the Employer or an Affiliate as a Long-Term Supplemental Employee.

 

4.03                            Rollover Contributions

 

(a)                                   Without regard to any limitations on contributions set forth in this Article 4, the Plan may receive from or on behalf of a Participant who is then a Regular Employee, in cash, as a Rollover Contribution, any amount previously distributed or deemed to be distributed to him

 

39



 

(i)                                      from a plan that satisfies the requirements of Section 401(a) of the Code, or

 

(ii)                                   from an individual retirement account described in Section 408(a) of the Code, or

 

(iii)                                from an eligible deferred compensation plan described in Section 457(b) of the Code that is maintained by an employer that is described in Section 457(e)(1)(A) of the Code,

 

(iv)                               from an annuity contract described in Section 403(b) of the Code, or

 

(v)                                  from the Federal Thrift Savings Plan, in a distribution described in Section 8433(c) of Title 5 of the United States Code,

 

provided, however, clauses (ii), (iii), and (iv) of this sentence shall be effective only with respect to Rollover Contributions made subsequent to March 31, 2002 and clause (v) of this sentence shall be effective only with respect to Rollover Contributions made subsequent to December 31, 2001.  The Plan may receive such amount either directly from the Participant, or from an individual retirement account that satisfies the requirements of Section 408(d)(3)(A)(ii) of the Code, or from a qualified plan in the form of a direct rollover that satisfies the requirements of Section 401(a)(31) of the Code.

 

(b)                                  Without regard to any limitations on contributions set forth in this Article 4, the Plan may receive from or on behalf of a Participant who has terminated employment with the Employer subsequent to June 30, 1999, in cash, as a Rollover Contribution, any amount previously distributed or deemed to be distributed to him from a retirement plan sponsored by IBM that is qualified under Section 401(a) of the Code.  The Plan may receive such amount either directly from the Participant, or from such qualified plan in the form of a direct rollover that satisfies the requirements of Section 401(a)(31) of the Code.

 

40



 

(c)                                   Notwithstanding the provisions of subsections (a) or (b), the Plan shall not accept any amount as a Rollover Contribution, unless such amount is eligible to be rolled over to a qualified trust in accordance with applicable law and the Participant provides evidence satisfactory to the Plan Administrator that such amount qualifies as an eligible rollover distribution, within the meaning of Section 402(c)(4) of the Code.  Unless received by the Plan in the form of a direct rollover, the Rollover Contribution must be paid to the Trustee on or before the 60th day after the day it was received by the Employee.  For purposes of this Section, the terms “eligible rollover distribution” and “direct rollover” shall have the meaning specified in Section 10.14.

 

(d)                                  Any Rollover Contribution shall be allocated to a Participant’s Rollover Account.  Any Rollover Contribution that is allocated to the IBM Stock Fund in accordance with the provisions of Section 5.02 shall be deemed to be a contribution to the ESOP.

 

4.04                            Changes in Contribution Rates

 

(a)                                   The percentage of Compensation designated by a Participant under Section 4.01(a) shall automatically apply to increases and decreases in his Compensation.  A Participant may change his election under Section 4.01(a) at any time during the Plan Year by giving such advance Notice as the Plan Administrator shall prescribe.  The changed percentage shall become effective as of the first day of the first payroll period beginning after the provision of the Notice, or as soon thereafter as may be administratively practicable.

 

(b)                                  Effective as of January 1, 2004, and solely for purposes of subsection (a), a Participant’s deemed election to make Catch-Up Contributions, in accordance with Section 4.01(g)(ii), shall be treated as a designation under Section 4.01(a) for the period

 

41



 

beginning on the date that the Participant first satisfies the condition set forth in Section 4.01(g)(i)(B) for a Plan Year and ending on the last day of such Plan Year.

 

(c)                                   If an eligible Employee has become a Participant in accordance with Section 3.02(b), then he shall be permitted to make an initial designation under Section 4.01(a) at any time thereafter, in accordance with the procedure specified in subsection (a).

 

(d)                                  The percentage of Compensation designated by a Participant under Section 4.01(h) shall automatically apply to increases and decreases in his Compensation.  A Participant may change his election under Section 4.01(h) at any time during the Plan Year by giving such advance Notice as the Plan Administrator shall prescribe.  The changed percentage shall become effective as of the first day of the first payroll period beginning after the provision of the Notice, or as soon thereafter as may be administratively practicable.

 

(e)                                   If an eligible Employee has become a Participant in accordance with Section 3.02(a), then he shall be permitted to make an initial election under Section 4.01(h) at any time thereafter, in accordance with the procedure specified in subsection (a).

 

(f)                                     An eligible Employee who is deemed, in accordance with Section 3.02A(c), to have made an election under Section 4.01(a) to commence Deferred Cash Contributions, shall be permitted to change such election, either before the first payroll period for which it is effective, or at any time thereafter, in accordance with the procedure specified in subsection (a).  An election in accordance with this subsection to reduce the percentage of his Deferred Cash Contributions to 0% shall be deemed a revocation of such election for purposes of Section 4.05.

 

42



 

(g)                                  If an eligible Employee has become a Participant in accordance with Section 3.02A(c), then he shall be permitted to make an initial election under Section 4.01(h) at any time thereafter, in accordance with the procedure specified in subsection (a).

 

4.05                            Suspension and Resumption of Contributions

 

(a)                                   A Participant may suspend and/or revoke his election under Section 4.01(a) or Section 4.01(h) by giving such advance Notice as the Plan Administrator shall prescribe.  The suspension or revocation shall become effective as of the first day of the first payroll period beginning after the provision of the Notice, or as soon thereafter as may be administratively practicable.

 

(b)                                  A Participant who has suspended and/or revoked his election under Section 4.01(a) or Section 4.01(h) may elect to reinstate such election by giving such advance Notice as the Plan Administrator shall prescribe.  Such reinstatement shall be effective as of the first day of the first payroll period beginning after the provision of the Notice, or as soon thereafter as may be administratively practicable.

 

4.06                            Actual Deferral Percentage Test

 

(a)                                   With respect to each Plan Year commencing on or after January 1, 1997, the Actual Deferral Percentage for that Plan Year for Highly Compensated Employees of each Employer who are Participants or eligible to become Participants for that Plan Year shall not exceed the greater of:

 

(i)                                      the product of:

 

(A)                               Actual Deferral Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year

 

43



 

who were Participants or eligible to become Participants during such preceding Plan Year, and

 

(B)                                 1.25, or

 

(ii)                                   the lesser of:

 

(A)                               the sum of:

 

(I)                                     the Actual Deferral Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year, and

 

(II)                                 2.00%, or

 

(B)                                 the product of:

 

(I)                                     the Actual Deferral Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year, and

 

(II)                                 2.00.

 

(b)                                  For purposes of subsection (a), an Employer, with the consent of the Plan Administrator, may elect to use the Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year being tested rather than the preceding Plan Year, provided that any such election, except an election applicable to a Plan Year ending before January 1, 2000, may not be changed for any subsequent Plan Year, except as provided by the Secretary of the Treasury, and that any such election is incorporated in an amendment to the Plan adopted by the Plan Administrator, pursuant to Section 13.01(c).

 

44



 

(c)                                   If the Plan Administrator determines that the limitation under subsection (a) has been exceeded in any Plan Year, with respect to the Highly Compensated Employees of any Employer, the following provisions shall apply with respect to such group of Highly Compensated Employees:

 

(i)                                      The Actual Deferral Ratio of the Highly Compensated Employee with the highest Actual Deferral Ratio shall be reduced to the extent necessary to satisfy the limitation set forth in subsection (a) or to cause such ratio to equal the Actual Deferral Ratio of the Highly Compensated Employee with the next highest ratio.  This process shall be repeated until the limitation set forth in subsection (a) is satisfied.  The sum of the amounts of Deferred Cash Contributions made by each Highly Compensated Employee in excess of the amount permitted under his revised deferral ratio shall be deemed to be Excess Contributions.  This total dollar amount of Excess Contributions shall then be allocated to some or all Highly Compensated Employees in accordance with the provisions of paragraph (ii).

 

(ii)                                   The Deferred Cash Contributions of the Highly Compensated Employee with the highest dollar amount of Deferred Cash Contributions shall be reduced by the lesser of (A) the amount required to cause that Participant’s Deferred Cash Contributions to equal the dollar amount of the Deferred Cash Contributions of the Highly Compensated Employee with the next highest dollar amount of Deferred Cash Contributions, or (B) an amount equal to the total Excess Contributions.  This procedure shall be repeated until all Excess Contributions are allocated.  The amount of Excess Contributions allocated to each Highly

 

45



 

Compensated Employee, together with Attributed Earnings, shall be distributed to him in accordance with the provisions of paragraph (iii).

 

(iii)                                The Excess Contributions allocated to a Participant shall be paid to the Participant before the close of the Plan Year following the Plan Year in which the Excess Contributions were made, and to the extent practicable, within 2½ months of the close of the Plan Year in which the Excess Contributions were made.  Any Excess Contributions for any Plan Year shall be reduced by any Deferred Cash Contributions previously returned to the Participant under Section 4.01 for that Plan Year.  In the event any Deferred Cash Contributions returned under this Section were matched by Matching Contributions under Section 4.02, such corresponding Matching Contributions, with Attributed Earnings, shall be forfeited and used to reduce Employer contributions.

 

(d)                                  For Plan Years commencing after December 31, 2001, the Actual Deferral Percentage Test described in this Section shall be applied separately with respect to Deferred Cash Contributions that are deemed, pursuant to Section 4.01(a) to be contributions to the ESOP and with respect to Deferred Cash Contributions that are not deemed to be contributions to the ESOP.

 

4.07                            Actual Contribution Percentage Test

 

(a)                                   With respect to each Plan Year commencing on or after January 1, 1997, the Actual Contribution Percentage for that Plan Year for Highly Compensated Employees of each Employer who are Participants or eligible to become Participants for that Plan Year shall not exceed the greater of:

 

(i)                                      the product of:

 

46



 

(A)                               the Actual Contribution Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year, and

 

(B)                                 1.25, or

 

(ii)                                   the lesser of:

 

(A)                               the sum of

 

(I)                                     the Actual Contribution Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year and

 

(II)                                 2.00%, or

 

(B)                                 the product of:

 

(I)                                     the Actual Contribution Percentage for the preceding Plan Year for all Non-Highly Compensated Employees of such Employer for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year, and

 

(II)                                 2.00.

 

(b)                                  For purposes of subsection (a), an Employer, with the consent of the Plan Administrator, may elect to use the Actual Contribution Percentage for Non-Highly Compensated Employees for the Plan Year being tested rather than the preceding Plan Year, provided that any such election, except an election applicable to a Plan Year ending before January 1, 2000, once made may not be changed for any subsequent Plan Year, except as provided by the Secretary of the Treasury and that any such election is incorporated

 

47



 

in an amendment to the Plan adopted by the Plan Administrator, pursuant to Section 13.01(c).

 

(c)                                   If the Plan Administrator determines that the limitation under subsection (a) has been exceeded in any Plan Year with respect to the Highly Compensated Employees of any Employer, the following provisions shall apply with respect to such group of Highly Compensated Employees:

 

(i)                                      The Actual Contribution Ratio of the Highly Compensated Employee with the highest Actual Contribution Ratio shall be reduced to the extent necessary to satisfy the limitation set forth in subsection (a) or to cause such ratio to equal the Actual Contribution Ratio of the Highly Compensated Employee with the next highest Actual Contribution Ratio.  This process shall be repeated until the limitation set forth in subsection (a) is satisfied.  The sum of the amounts of Matching Contributions on behalf of plus After-Tax Contributions made by each Highly Compensated Employee in excess of the amount permitted under his revised contribution ratio shall be deemed Excess Aggregate Contributions.  This total dollar amount of Excess Aggregate Contributions shall then be allocated to some or all Highly Compensated Employees in accordance with the provisions of paragraph (ii).

 

(ii)                                   The sum of the Matching Contributions and After-Tax Contributions of the Highly Compensated Employee with the highest dollar amount of such contributions shall be reduced by the lesser of (A) the amount required to cause the sum of that Participant’s Matching Contributions and After-Tax Contributions to equal the dollar amount of such contributions of the Highly Compensated Employee with the next highest dollar amount of such contributions, or (B) an amount equal

 

48



 

to the total Excess Aggregate Contributions.  This procedure shall be repeated until all Excess Aggregate Contributions are allocated.  Effective for Plan Years beginning after December 31, 2003he amount of Excess Aggregate Contributions allocated to each Highly Compensated Employee, together with Attributed Earnings, shall be distributed or forfeited in accordance with the provisions of paragraph (iii).

 

(iii)                                Excess Aggregate Contributions allocated to a Highly Compensated Employee under paragraph (ii) shall be distributed or forfeited as follows:

 

(A)                               After-Tax Contributions, to the extent of the Excess Aggregate Contributions, together with Attributed Earnings, shall be paid to the Participant and then, if necessary,

 

(B)                                 so much of the Matching Contributions together with Attributed Earnings, as shall be necessary, as shall be necessary to equal the balance of the Excess Aggregate Contributions shall be forfeited and applied to reduce Employer contributions.

 

(iv)                               Any repayment or forfeiture of Excess Aggregate Contributions shall be made before the close of the Plan Year following the Plan Year for which the Excess Aggregate Contributions were made, and to the extent practicable, any repayment or forfeiture shall be made within 2½ months of the close of the Plan Year in which the Excess Aggregate Contributions were made.

 

(d)                                  For Plan Years commencing after December 31, 2001 and prior to January 1, 2004, the Actual Contribution Percentage Test described in this Section shall be applied separately with respect to Employer Matching Contributions that are deemed, pursuant to Section 4.02(a) to be contributions to the ESOP and with respect to Employer

 

49



 

Matching Contributions that are not deemed to be contributions to the ESOP.  For Plan Years commencing after December 31, 2003, the Actual Contribution Percentage Test described in this Section shall be applied separately (i) with respect to the sum of Employer Matching Contributions that are deemed, pursuant to Section 4.02(a), to be contributions to the ESOP and After-Tax Contributions that are deemed, pursuant to Section 4.01(h)(iii), to be contributions to the ESOP, and (ii) with respect to the sum of Employer Matching Contributions and After-Tax Contributions that are not deemed to be contributions to the ESOP.

 

4.08                            Aggregate Contribution Limitation

 

Notwithstanding the provisions of Sections 4.06 and 4.07, for Plan Years commencing prior to January 1, 2002, in no event shall the sum of the Actual Deferral Percentage of the group of eligible Highly Compensated Employees of any Employer and the Actual Contribution Percentage of such group, after applying the provisions of Sections 4.06 and 4.07, exceed the “aggregate limit” as provided in Section 401(m)(9) of the Code and the Regulations issued thereunder.  In the event the aggregate limit is exceeded for any Plan Year, the Contribution Percentages of the Highly Compensated Employees of such Employer shall be reduced to the extent necessary to satisfy the aggregate limit in accordance with the procedure set forth in Section 4.07.

 

4.09                            Additional Discrimination Testing Provisions

 

(a)                                   If any Highly Compensated Employee is a member of another qualified plan of the Employer or an Affiliate, other than an employee stock ownership plan described in Section 4975(e)(7) of the Code or any other qualified plan which must be mandatorily

 

50



 

disaggregated from this Plan under Section 410(b) of the Code, which includes a qualified cash or deferred arrangement within the meaning of Section 401(k) of the Code or matching contributions within the meaning of Section 401(m) of the Code, or under which the Highly Compensated Employee may make employee contributions other than by elective deferral, within the meaning of Section 402(g)(3) of the Code, the Plan Administrator shall implement rules, which shall be uniformly applicable to all employees similarly situated, to take into account all such contributions by or on behalf of the Highly Compensated Employee under all such plans in applying the limitations of Sections 4.06, 4.07, and 4.08.  If any other such qualified plan has a plan year other than the Plan Year, the contributions to be taken into account in applying the limitations of Sections 4.06, 4.07, and 4.08 will be those made in the plan years ending with or within the same calendar year.

 

(b)                                  In the event that this Plan is aggregated with one or more other plans to satisfy the requirements of Sections 401(a)(4) or 410(b) of the Code, other than for purposes of the average benefit percentage test under Section 410(b)(2)(A)(ii) of the Code, or if one or more other plans is aggregated with this Plan to satisfy the requirements of such sections of the Code, then the provisions of Sections 4.06, 4.07, and 4.08 shall be applied by determining the Actual Deferral Percentage and Actual Contribution Percentage of employees as if all such plans were a single plan.  If this Plan is permissively aggregated with any other plan or plans for purposes of satisfying the provisions of Section 401(k)(3) of the Code, the aggregated plans must also satisfy the requirements of Sections 401(a)(4) and 410(b) of the Code as though they were a single plan.  Plans may be aggregated under this subsection (b) only if they have the same plan year.

 

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(c)                                   Notwithstanding any provision of the Plan to the contrary, if employees included in a unit of employees covered by a collective bargaining agreement are participating in the Plan and not more than 2% of such employees are Highly Compensated Employees or professionals, within the meaning of Section 1.410(b)-9 of the Regulations, then such employees shall be disregarded in applying the provisions of Section 4.06, 4.07, and 4.08.  However, Section 4.06 shall be applied separately for each group of collectively bargained employees.

 

4.10                            Maximum Annual Additions

 

(a)                                   The annual addition to a Participant’s Account for any Plan Year, when added to the Participant’s annual addition for that Plan Year under any other qualified defined contribution plan of the Employer or an Affiliate, shall not exceed an amount which is equal to the lesser of:

 

(i)                                      for Plan Years commencing prior to January 1, 2002, 25% of his aggregate remuneration for that Plan Year and for Plan Years commencing subsequent to December 31, 2001, 100% of his remuneration for that Plan Year; or

 

(ii)                                   for Plan Years commencing prior to January 1, 2002, $30,000, and for Plan Years commencing subsequent to December 31, 2001, $40,000, each as adjusted pursuant to Section 415(d) of the Code.

 

The Plan Year shall be the “limitation year” for purposes of Section 415 of the Code.

 

(b)                                  For purposes of this Section, the “annual addition” to a Participant’s Account under this Plan or any other qualified defined contribution plan maintained by the Employer or an Affiliate, including any provision of a qualified defined benefit plan that is required to be

 

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treated as a defined contribution plan in accordance with Section 414(k)(2) of the Code shall be the sum of:

 

(i)                                      the total contributions, including Deferred Cash Contributions, made on the Participant’s behalf by the Employer and all Affiliates,

 

(ii)                                   all Participant contributions, exclusive of any Rollover Contributions, and

 

(iii)                                forfeitures, if applicable, that have been allocated to the Participant’s Accounts under this Plan or his accounts under any other such qualified defined contribution plan, and

 

(iv)                               amounts described in Sections 415(1)(1) and 419A(d)(2) allocated to the Participant solely for purposes of clause (ii) of subsection (a).

 

For purposes of this subsection, any Deferred Cash Contributions distributed under the provisions of Section 4.01 or 4.06, any After-Tax Contributions distributed under the provisions of Section 4.07, and any Matching Contributions distributed or forfeited under the provisions of Section 4.07 or 4.08 shall be included in the annual addition for the year allocated.

 

(c)                                   For purposes of this Section, the term “remuneration” with respect to any Participant shall mean the wages, salaries and other amounts paid in respect of such Participant by the Employer or an Affiliate for personal services actually rendered, and shall include elective deferrals within the meaning of Section 402(g)(3) of the Code and amounts contributed or deferred by the Employer at the election of the Participant which are not includible in the gross income of the Participant under Sections 125, 132(f)(4) (with respect to Plan Years beginning after December 31, 2000), or 457 of the Code, but shall exclude deferred compensation, stock options and other distributions which receive special tax benefits under the Code.  Notwithstanding the foregoing, for limitation years

 

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commencing prior to January 1, 1998, remuneration shall exclude amounts contributed by the Employer pursuant to a salary reduction agreement which are not includible in the gross income of the employee under Sections 125, 402(e)(3) or 457 of the Code.

 

(d)                                  If the annual addition to a Participant’s Account for any Plan Year, prior to the application of the limitation set forth in subsection (a) above, exceeds that limitation due to a reasonable error in estimating a Participant’s annual compensation or in determining the amount of Deferred Cash Contributions that may be made with respect to a Participant under Section 415 of the Code, or as the result of the allocation of forfeitures, then the amount of contributions credited to the Participant’s Account in that Plan Year shall be adjusted to the extent necessary to satisfy that limitation in accordance with the following order of priority:

 

(i)                                      Effective for Plan Years beginning after December 31, 2003, the Participant’s After-Tax Contributions under Section 4.01(h) shall be reduced to the extent necessary.  The amount of the reduction shall be returned to the Participant, together with any Attributed Earnings.

 

(ii)                                   The Participant’s unmatched Deferred Cash Contributions under Section 4.01 shall be reduced to the extent necessary.  The amount of the reduction shall be returned to the Participant together with any Attributed Earnings.

 

(iii)                                The Participant’s matched Deferred Cash Contributions and corresponding Matching Contributions shall be reduced to the extent necessary.  The amount of the reduction attributable to the Participant’s matched Deferred Cash Contributions shall be returned to the Participant together with any Attributed Earnings, and the amount attributable to the Matching Contributions together

 

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with any Attributed Earnings shall be forfeited and used to reduce subsequent contributions payable by the Employer.

 

Any Deferred Cash Contributions returned to a Participant under this subsection shall be disregarded in applying the dollar limitation on Deferred Cash Contributions under Section 4.01(c), and in performing the Actual Deferral Percentage Test under Section 4.06.

 

(e)                                   For Plan Years beginning prior to January 1, 2000, if a Participant is a participant in any qualified defined benefit plan maintained by the Employer or an Affiliate that is required to be taken into account for purposes of applying the combined plan limitations contained in Section 415(e) of the Code, then for any year the sum of the defined benefit plan fraction and the defined contribution plan fraction, as such terms are defined in said Section 415(e), shall not exceed 1.0.  If for any year the foregoing combined plan limitation would be exceeded, the benefits provided under any defined benefit plan maintained by an Employer or Affiliate and the contributions allocated under any other defined contribution plan maintained by the Employer or an Affiliate shall be discontinued, suspended or reduced, as applicable, before any adjustments to a Participant’s Account are made in accordance with subsection (d).

 

4.11                            Contributions for Periods of Military Leave

 

The provisions of this Section 4.11 are effective as of December 12, 1994.

 

(a)                                   Without regard to any limitations on contributions set forth in this Article 4, a Participant who is absent from employment because of a period of service in the uniformed services of the United States beginning on or after August 1, 1990 and whose right to reemployment is protected under the Uniformed Services Employment and

 

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Reemployment Rights Act of 1994, may, subsequent to his return to employment as a Regular Employee, elect to contribute to the Plan, as a make-up contribution, the Deferred Cash Contributions that could have been contributed to the Plan in accordance with the provisions of the Plan, had he remained continuously employed by the Employer throughout such period of absence.  The amount of make-up contributions shall be determined on the basis of the Participant’s Compensation in effect immediately prior to the period of absence, and the terms of the Plan at such time.  Any Deferred Cash Contributions so determined shall be subject to the limitations provided in Sections 4.01(c), 4.06, 4.07, and 4.08 with respect to the Plan Year or Plan Years to which such contributions relate, rather than the Plan Year in which payment is made.  Any payment to the Plan described in this subsection must be made during the applicable repayment period.  The applicable repayment period shall begin on the latest of:  (i) the Participant’s date of reemployment, (ii) October 13, 1996, or (iii) date on which the Employer notifies the Employee of his rights under this Section.  The applicable repayment period shall continue for a period of whole months equal to the lesser of (i) the number of whole months of the Participant’s period of absence multiplied by 3, or (ii) 60 months.

 

(b)                                  With respect to a Participant who makes the election described in subsection (a), the Employer shall make Matching Contributions on such make-up contributions in an amount determined in accordance with the provisions of Section 4.02, as in effect for the Plan Year to which such make-up contributions relate.  Any Matching Contributions so determined shall be subject to the limitations provided in Sections 4.02, 4.06, 4.07, and 4.08 with respect to the Plan Year or Plan Years to which such contributions relate, rather than the Plan Year or Plan Years in which payment is made.  Employer Matching

 

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Contributions under this subsection shall be made during the applicable repayment period described in subsection (a).

 

(c)                                   All contributions under this Section shall be considered “annual additions,” as defined in Section 415(c)(2) of the Code, and shall be limited in accordance with the provisions of Section 4.10 with respect to the Plan Year or Plan Years to which such contributions relate rather than the Plan Year in which payment is made.

 

(d)                                  Earnings (or losses) on make-up contributions made pursuant to subsection (a) and Matching Contributions made pursuant to subsection (b) shall be credited in accordance with Article 6, commencing with the date such contributions are made.

 

4.12                            Return of Contributions

 

(a)                                   If all or part of an Employer’s deductions for contributions to the Plan are disallowed by the Internal Revenue Service, the portion of the contributions to which that disallowance applies shall be returned to the Employer, upon written request to the Trustee, without interest, but reduced by any investment loss attributable to those contributions, provided that such contributions are returned within one year after the disallowance of deduction.  For this purpose, all contributions made by each Employer are expressly declared to be conditioned upon their deductibility under Section 404 of the Code.

 

(b)                                  Upon written request to the Trustee, the Employer may recover without interest the amount of its contributions to the Plan made on account of a mistake of fact, reduced by any investment loss attributable to those contributions, if recovery is made within one year after the date of those contributions.

 

(c)                                   In the event that Deferred Cash Contributions made under Section 4.01 are returned to the Employer in accordance with the provisions of subsection (a) or (b), the elections to

 

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reduce Compensation which were made by Participants on whose behalf those contributions were made shall be deemed void retroactively to the beginning of the period for which those contributions were made.  The Deferred Cash Contributions so returned shall be distributed in cash to those Participants for whom those contributions were made, provided, however, that the amount of Deferred Cash Contributions to be distributed to Participants shall be adjusted to reflect any investment gains or losses attributable to those contributions.

 

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ARTICLE 5 .  INVESTMENT OF CONTRIBUTIONS AND ELECTIVE DISTRIBUTION
OF DIVIDENDS PAYABLE ON STOCK HELD IN IBM STOCK FUND

 

5.01                            Investment Funds

 

(a)                                   Contributions to the Plan shall be invested in one or more Investment Funds, as authorized by the Committee from time to time, except to the extent invested under the Mutual Fund Window Program.  The Investment Funds authorized by the Committee may include such equity funds, international equity funds, fixed income funds, money market funds, and such other funds as the Committee, in its discretion, elects to provide, and which shall include the IBM Stock Fund, which Fund shall constitute the ESOP.  Each Fund shall be managed by the Trustee or one or more Investment Managers appointed by the Committee in accordance with Section 11.03(a)(i).

 

(b)                                  The Trustee or Investment Manager may keep such amounts of cash as it, in its sole discretion, shall deem necessary or advisable as part of the Investment Funds, all within the limitations specified in the trust agreement or investment management agreement, provided, however, that the IBM Stock Fund shall remain primarily invested in common stock of IBM at all times.

 

(c)                                   Dividends, interest, and other distributions received on the assets held by the Trustee in respect to each of the above Investment Funds shall be reinvested in the respective Fund, except to the extent otherwise provided in Section 5.09.

 

5.01A                  Mutual Fund Window Program

 

(a)                                   Effective as of January 1, 2005, the Committee shall establish an inventory of Designated Mutual Funds that shall be available for the investment of a portion of a

 

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Participant’s Account under the Mutual Fund Window Program, in accordance with the provisions of this Section.

 

(b)                                  A Participant may elect, in accordance with 5.04(a) and subject to the limitations prescribed in subsection (c), that a portion of his Account shall be reallocated from one or more of the Investment Funds to be invested under the Mutual Fund Window Program.

 

(c)                                   The Plan Administrator or its designee shall establish rules for the reallocation of Participant Accounts from the Investment Funds to investment under the Mutual Fund Window Program, and may change such rules from time to time in its sole discretion.  Such rules may include:

 

(i)                                      A limit on the portion of a Participant’s Account that is available for investment under the Mutual Fund Window Program, which limit may take the form of a minimum dollar amount or minimum percentage, or both a minimum dollar amount and a minimum percentage, of a Participant’s Account that must be invested in the Investment Funds.

 

(ii)                                   A minimum amount that a Participant who elects to invest a portion of his Account under the Mutual Fund Window Program is required to reallocate from investment in the Investment Funds to investment under the Mutual Fund Window Program, in order to commence investment under the Mutual Fund Window Program, and a minimum amount that a Participant who elects to increase the portion of his Account that is invested under the Mutual Fund Window Program is required to reallocate from investment in the Investment Funds to investment under the Mutual Fund Window Program.

 

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A Participant shall not be permitted to elect an investment reallocation in accordance with Section 5.04(a) that would cause the portion of his Account that is invested in the Investment Funds Program, as determined as of the date of such reallocation, to be less than the minimum dollar amount or minimum percentage established by the Plan Administrator or its designee in accordance with this paragraph (i), or that fails to comply with the minimum reallocation requirements established by the Plan Administrator or its designee in accordance with paragraph (ii), as in effect as of the date of such reallocation.

 

(d)                                  A Participant who elects, in accordance with subsection (b), to reallocate a portion of his Account to be invested under the Mutual Fund Window Program shall specify the Designated Mutual Fund or Designated Mutual Funds in which such portion of his Account shall be invested, by giving such Notice of such specification as the Plan Administrator or its designee shall prescribe and, if he specifies more than one Designated Mutual Fund, shall further specify, in multiples of 1%, the percentage of the amount so reallocated that shall be invested in each such fund.

 

(e)                                   A Participant may elect to reallocate the portion of his Account that is invested under the Mutual Fund Window Program, among the Designated Mutual Funds, in multiples of 1%, by giving such advance Notice as the Plan Administrator or its designee shall prescribe.  Such reallocation shall be effective as soon as administratively practicable following provision of such Notice.

 

(f)                                     A Participant who elects, pursuant to Section 5.04(a), to reallocate any portion of his Account that is invested under the Mutual Fund Window Program to be invested in one of more of the Investment Funds shall specify the Designated Mutual Fund or Designated Mutual Funds from which the amount to be so reallocated shall be taken, by

 

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giving such Notice of such specification as the Plan Administrator or its designee shall prescribe.

 

(g)                                  If any portion of a Participant’s Account is invested under the Mutual Fund Window Program as of the date selected by the Plan Administrator as the date of reference for the assessment of administrative fees for a calendar quarter, an administrative fee shall be charged against his Account, in an amount determined by the Committee, which fee shall be debited proportionally from the Investment Funds in which his Account is invested as of such date.

 

(h)                                  Upon the occurrence of an event described in paragraph (i), the Plan Administrator or its designee may, without the consent of the Participant, cause the mandatory reallocation of the Participant’s Account from investment under the Mutual Fund Window Program to investment under the Investment Funds.  The amount so reallocated shall be determined in accordance with paragraph (ii); such amount shall be debited from the amounts invested in Designated Mutual Funds in accordance with paragraph (iii); and, to the extent available for investment, shall be invested in accordance with paragraph (iv).

 

(i)                                      A Participant’s Account shall be subject to mandatory reallocation in any of the following circumstances:

 

(A)                               as of the date an administrative fee is assessed in accordance with subsection (g), the portion of the Participant’s Account that is invested in any of the Investment Funds is less than the amount of such fee;

 

(B)                                 the balance of the Participant’s Account is required to be paid to the Participant’s Beneficiary in accordance with Section 10.01(b);

 

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(C)                                 the amount of an installment distribution that is required to be made to a Participant pursuant to his election in accordance with Section 10.02(b)(i) exceeds the portion of the Participant’s Account that is invested in the Investment Funds;

 

(D)                                the Participant’s Account is subject to mandatory distribution in accordance with Section 10.03;

 

(E)                                  the amount required to be distributed to the Participant in accordance with Section 10.06 exceeds the portion of the Participant’s Account that is invested in the Investment Funds, determined as of the date such distribution is required to be made;

 

(F)                                  the portion of a Participant’s Account that is required to be distributed to an alternate payee, or allocated to an account established for an alternate payee, in accordance with Section 14.02(c) exceeds the portion of the Participant’s Account that is invested in the Investment Funds; or

 

(G)                                 an adjustment is required to be made to the Participant’s Account in accordance with rules established by the Plan Administrator or its designee

 

(ii)                                   In any of the circumstances described in paragraph (i), the amount that the Plan Administrator or its designee shall cause to be reallocated from investment under the Mutual Fund Window Program shall be the lesser of:

 

(A)                               the sum of (X) the product of (I) 1.05 and (II) the excess of the amount of the amount of the required distribution, reallocation or administrative fee, as applicable, over the amount then invested in any of the Investment

 

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Funds, plus (Y) the minimum dollar amount, if any, then in effect in accordance with subsection (c)(ii); or

 

(B)                                 the portion of the Participant’s Account that is invested under the Mutual Fund Window Program.

 

(iii)                                In the event that the portion of the Participant’s Account that is invested under the Mutual Fund Window Program as of the date of a reallocation described in paragraph (i) is invested in more than one Designated Mutual Fund, then the amount of such reallocation, as determined in accordance with paragraph (ii), shall be taken ratably from the amount invested in each such fund.

 

(iv)                               To the extent that a portion of an amount that is the subject of a mandatory reallocation in accordance with paragraph (i) is available for investment, it shall be invested in the Investment Fund specified in Section 5.02(b).

 

(i)                                      The Plan Administrator or its designee is authorized to establish procedures for the maintenance of the Mutual Fund Window Program and the investment of Participant Accounts thereunder which rules may include provisions for the establishment of transition accounts to which amounts reallocated pursuant to subsection (b) shall be credited, pending investment in the Designated Mutual Fund specified by the Participant, or to which amounts reallocated pursuant to subsection (f) shall be credited, pending reallocation to one or more of the Investment Funds.

 

5.02                            Investment of Contributions to Participants’ Accounts

 

(a)                                   A Participant shall make an investment election which shall specify the manner in which the Deferred Cash Contributions, Catch-Up Contributions, Employer Matching

 

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Contributions, After-Tax Contributions, and Rollover Contributions allocated to his Account shall be invested.  Such election shall provide for the investment of such contributions in one or more than one of the Investment Funds, as designated by the Participant, apportioned in multiples of 1%.

 

(b)                                  Effective as of January 1, 2005, if a Participant fails to make an investment election in accordance with subsection (a), any contributions made by or on behalf of the Participant shall be invested in the Investment Fund designated by the Committee from time to time, which designation shall be deemed to be an amendment to the Plan in accordance with Section 13.01(b), provided, however, that any such designation, as in effect from time to time, shall apply to all contributions by or on behalf of all Participants who have failed to make an investment election.

 

(c)                                   An election by a Participant pursuant to subsection (a) that specifies that a all or any portion of his Deferred Cash Contributions, Catch-Up Contributions, Employer Matching Contributions, After-Tax Contributions, or Rollover Contribution shall be invested in the IBM Stock Fund shall be deemed to be an election that such amount shall be contributed to the ESOP.

 

5.03                            Change of Investment Election

 

A Participant may change his investment election under Section 5.02 at any time by giving such advance Notice as the Plan Administrator shall prescribe.  Such changed investment election shall become effective as of the first day of the first payroll period beginning after the provision of the Notice, or soon thereafter as administratively practicable, and shall be effective only with respect to contributions allocated subsequent thereto.

 

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5.04                            Reallocation of Accounts Among the Funds

 

(a)                                   Subject to the provisions of subsection (b) and Section 5.05, a Participant may elect to reallocate his Account among the Investment Funds, or, effective as of January 1, 2005, among the Investment Funds and the Mutual Fund Window Program, at any time, in multiples of 1%, or in specified whole dollar amounts, by giving such advance Notice as the Plan Administrator shall prescribe, provided, however, that any election that reallocates any portion of his Account to be invested under the Mutual Fund Window Program shall be subject to the limitations of Section 5.01A(c).  Such reallocation shall be effective as soon as administratively practicable following provision of such Notice, provided, however, that no such reallocation shall be effective as of a Valuation Date for which the Plan Administrator has made a direction pursuant to Section 6.02(b).

 

(b)                                  The Plan Administrator may assess an administrative fee for investment reallocations under subsection (a), the amount of which fee may be changed from time to time, and may further provide that such fee shall be assessed only if the number of investment reallocations made by a Participant in a Plan Year exceeds a specified limit, which limit may be changed from time to time.  Any such fee shall be deducted from the amount so reallocated and charged to the Participant’s Deferred Account, Employer Account, and Rollover Account on a proportional basis.

 

(c)                                   An election by a Participant pursuant to subsection (a) that causes any portion of his Account to be reallocated to the IBM Stock Fund shall be deemed to be an election to transfer such portion of his Account to the ESOP.  An election by a Participant that reallocates any portion of his Account from the IBM Stock Fund to any other Fund shall be deemed to be an election to transfer such portion of his Account from the ESOP.

 

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(d)                                  Effective as of January 1, 2004, the Plan Administrator may, in its discretion, impose restrictions on short-term trading by Participants.  Such restrictions may, in the discretion of the Plan Administrator, be applied to Participants on an individual basis or to all Participants.  For purposes of this subsection, “short-term trading” shall be deemed to include, without limitation, a series of transactions through which a Participant reallocates a portion of his Account out of an Investment Fund and then reallocates a portion of his Account into such Investment Fund within a period of no more than 5 business days, and a series of transactions through which a Participant reallocates a portion of his Account into an Investment Fund and then reallocates a portion of his Account out of such Investment Fund within a period of no more than 5 business days.

 

5.05                            Limitations Imposed by Contract

 

Notwithstanding anything in this Article to the contrary, any amounts invested in a fund that holds in its assets any contractual instruments, including, without limitation, a fund of guaranteed investment contracts, shall be subject to any and all terms of such contracts, including any limitations therein placed on the right of a Participant to reallocate such amounts pursuant to Section 5.04(a) or on the exercise of any rights otherwise granted to a Participant under any other provisions of this Plan with respect to such amounts.

 

5.06                            Responsibility for Investments

 

Each Participant is solely responsible for the selection of his or her investment options.  The Trustee, the Investment Managers, the Committee, the Plan Administrator, the Employer, and the officers, supervisors and other employees of the Employer are not

 

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empowered to advise a Participant as to the manner in which his Account shall be invested.  The fact that an Investment Fund is available to Participants for investment under the Plan shall not be construed as a recommendation for investment in the Investment Fund by any Participant.  The fact that the Mutual Fund Window Program is available to Participants under the Plan shall not be construed as a recommendation for investment under the Mutual Fund Window Program by any Participant; and the fact that any mutual fund is determined to be a Designated Mutual Fund shall not be construed as a recommendation for investment in such mutual fund by any Participant.

 

5.07                            Voting of IBM Shares

 

Shares of IBM held in the IBM Stock Fund shall be voted by the Trustee in accordance with instructions received from each Participant who has allocated any portion of his Account to such Fund.  The instructions given by a Participant shall apply to that portion of the shares of IBM held in the Fund equal to the ratio of the units of the Fund allocated to his Account under Article 6 to the total number of units in the Fund.  The Trustee shall vote the shares of IBM for which it does not receive such instructions in the same proportion as it votes the shares of IBM for which it does receive such instructions.

 

5.08                            ERISA Section 404(c) Compliance

 

This Plan is intended to constitute a plan described in Section 404(c) of ERISA.

 

5.09                            Elective Distribution of Dividends Payable on Stock Held in IBM Stock Fund

 

(a)                                   Effective January 1, 2002, a Participant whose Account includes an amount invested in the IBM Stock Fund shall be permitted to elect:

 

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(i)                                      to receive a cash distribution of his allocable share of the dividends payable on common stock of IBM held in the IBM Stock Fund, or

 

(ii)                                   to direct that his allocable share of the dividends payable on common stock of IBM held in the IBM Stock Fund be reinvested in common stock of IBM.

 

For purposes of this Section, a Participant’s allocable share of the dividends payable on the common stock of IBM shall be that portion of each dividend payment made to such Fund that bears the same ratio to the total dividend payment that the number of units of such Fund credited to his Account bears to the total number of units of such Fund that are outstanding on the date of such dividend payment.

 

(b)                                  A Participant shall provide Notice of his election pursuant to subsection (a) in the manner specified in rules established by the Plan Administrator pursuant to Section 14.05, provided, however, that an election to receive a distribution of dividends payable on any dividend payment date declared by IBM shall not be effective unless Notice thereof is filed on or before the ex-dividend date with respect to such dividends, or such earlier date or time as may be specified by the Plan Administrator.  A Participant who has not provided timely Notice of his election pursuant subsection (a) with respect to the dividends payable on any dividend payment date declared by IBM shall be deemed to have directed that his allocable share of such dividends be reinvested in common stock of IBM, pursuant to subsection (a)(ii).

 

(c)                                   An election made by a Participant in accordance with subsection (b) shall remain in effect until changed by the Participant.  A Participant shall be permitted to change an election made in accordance with subsection (b) at any time, by providing Notice of a new election in accordance with subsection (b), which new election shall become effective as provided in subsection (b).

 

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(d)                                  In the event that a Participant elects to receive a distribution of his allocable share of any dividends, in accordance with the provisions of subsection (a)(i), the dividends that are subject to such election in each Plan Year shall be paid to him in accordance with paragraph (i) or paragraph (ii) as applicable:

 

(i)                                      Dividends declared in 2002 shall be segregated and credited to the Participant in a separate sub-account of the ESOP, which sub-account shall be invested in short-term securities or money market instruments, in the discretion of the Investment Manager designated in accordance with Section 11.03. The total amount of dividends that are subject to the Participant’s distribution election for such Plan Year shall then be paid to him in cash subsequent to the latest dividend payment date declared by IBM in such Plan Year, but in no event, later than 90 days after the close of the Plan Year in which such dividends were paid to the Plan.  The interest income or other investment earnings credited to the Participant’s separate sub-account in each month shall be reallocated to the IBM Stock Fund at the end of the month.

 

(ii)                                   Dividends declared after 2002 that are subject to the Participant’s distribution election shall be distributed to the Participant as soon as practicable following the payment of such dividends, provided, however, that such distribution shall in any event be made no later than 90 days after the close of the Plan Year in which such dividends were paid to the Plan.

 

(e)                                   In the event that a Participant has directed, or is deemed to have directed, that his allocable share of any dividends be reinvested in common stock of IBM, in accordance with the provisions of subsection (a)(ii), such dividends shall be reinvested in accordance with Section 5.01(c).

 

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Article 5A – Disability Protection Program

 

5A.01                  Eligibility

 

A Participant who is a Regular Employee of an Employer and who made Deferred Cash Contributions during a calendar year commencing on or after January 1, 2004 shall be eligible to enroll in the Disability Protection Program for the next succeeding calendar year, in accordance with the provisions of Section 5A.03.

 

5A.02                  Levels of Coverage under Disability Protection Program

 

(a)                                   An eligible Participant who enrolls in the Disability Protection Program shall specify the scope of coverage for which he is enrolling, from among the following options:

 

Option 1:                                                Coverage for Deferred Cash Contributions only;

 

Option 2:                                                Coverage for Employer Matching Contributions only; or

 

Option 3:                                                Coverage for both Deferred Cash Contributions and Employer Matching Contributions.

 

The scope of coverage specified by the Participant shall be taken into account in accordance with Section 5A.05 in the determination of the amount of premium required to be paid during the term of such coverage and in accordance with Section 5A.06 in the determination of the amount of benefits payable in the event that the Participant incurs a Total and Permanent Disability during the term of such coverage.

 

(b)                                  For purposes of this Article, a Participant’s Deferred Cash Contributions for any year shall be deemed to include any Catch-Up Contributions made in accordance with Section 4.02(g) for such year.

 

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5A.03                  Enrollment Procedures

 

(a)                                   An eligible Participant may enroll in the Disability Protection Program for a calendar year commencing after December 31, 2004, by providing such Notice as the Plan Administrator may prescribe, including the specification of the scope of his coverage in accordance with Section 5A.02, during the period prior to the first day of such calendar year specified by the Plan Administrator as the open enrollment period.  The Notice provided by the Participant shall include his election to invest a portion of his Account, as determined in accordance with Section 5A.05, in the payment of premiums under the Disability Insurance Policy.

 

(b)                                  A Participant who was enrolled in the Disability Protection Program for a calendar year shall automatically continue to be enrolled in the Disability Protection Program, with the same scope of coverage, for the next succeeding calendar year, provided that he satisfies the eligibility requirements prescribed in Section 5A.01 as of the first day of such next succeeding year, unless he either elects to terminate his coverage by providing such Notice as the Plan Administrator may prescribe, or elects to enroll for a different scope of coverage, in accordance with the provisions of subsection (a).

 

(c)                                   A Participant’s enrollment in the Disability Protection Program shall become effective on the first day of the calendar year to which such enrollment relates, provided that the Participant satisfies the requirements of Section 5A.04 as of such date.  In the event that a Participant fails to satisfy the requirements of Section 5A.04 as of the first day of a calendar year to which his enrollment relates, his enrollment in the Disability Protection Program for such year shall be void and without effect.

 

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5A.04                  Requirements for Commencement of Coverage under Disability Protection Program

 

A Participant who has enrolled in the Disability Protection Program for a calendar year, in accordance with Section 5A.03(a), or who is automatically enrolled in the Disability Protection Program for a calendar year, in accordance with Section 5A.03(b), shall commence coverage under the Program only if he satisfies the requirements of the Disability Insurance Policy as of the first day of such calendar year.

 

5A.05                  Investment in Premiums under Disability Insurance Policy and Assessment of Administrative Fee

 

(a)                                   For each month that a Participant is enrolled in the Disability Protection Program, the amount determined in accordance with subsection (b) shall be invested in premiums under the Disability Insurance Policy.  The amount so invested shall be paid by the Plan to the Disability Insurer in accordance with the terms of the Disability Insurance Policy.

 

(b)                                  The amount of the premium charged against a Participant’s Account for coverage under the Disability Protection Program for a calendar year shall be determined in accordance with the terms of the Disability Insurance Policy on the basis of:

 

(i)                                      the Participant’s age as of the first day of the calendar year,

 

(ii)                                   for a Participant who has elected the scope of coverage described as Option 1 or Option 3 in Section 5A.02, the amount of the Deferred Cash Contributions allocated to the Participant’s Account for the preceding calendar year, and

 

(iii)                                for a Participant who has elected the scope of coverage described as Option 2 or Option 3 in Section 5A.02, the amount of the Employer Matching Contributions allocated to the Participant’s Account for the preceding calendar year.

 

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(c)                                   The premium amount for each month, as determined in accordance with subsection (b), required to be paid by the Plan to the Disability Insurer in accordance with subsection (a) shall be debited from the Participant’s Deferred Account.

 

(d)                                  For each month that a Participant is enrolled in the Disability Protection Program, an amount determined by the Plan Administrator or its designee shall be debited from his Deferred Account, as an administrative fee for the maintenance of such coverage, which administrative fee shall be in addition to the premium amount determined in accordance with subsection (b).

 

(e)                                   The amounts debited from a Participant’s Deferred Account in accordance with subsections (c) and (d) shall be apportioned among the Investment Funds on basis of the value of the Participant’s Account in each Investment Fund, as of the date such amounts are debited from his Account, without regard to any portion of his Account that might then be invested under the Mutual Fund Window Program.

 

(f)                                     In the event that the amounts required to be debited from the Participant’s Deferred Account in accordance with subsections (c) and (d) as of any date exceeds the value of the Participant’s Deferred Account invested in the Investment Funds as of such date, then any excess shall be debited from the Participant’s Employer Account and shall be apportioned among the Investment Funds in accordance with subsection (e).  In the event that amounts required to be debited from the Participant’s Deferred Account in accordance with subsections (c) and (d) as of any date exceeds the sum of the value of the Participant’s Deferred Account invested in the Investment Funds and the value of the Participant’s Employer Account invested in the Investment Funds as of such date , then no premium shall be paid and the Participant’s coverage under the Disability Protection Program shall terminate in accordance with Section 5A.07(b).

 

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5A.06                  Benefits Payable under Disability Protection Program

 

(a)                                   In the event that a Participant who is covered under the Disability Protection Program becomes Totally and Permanently Disabled and remains totally and permanently disabled at the conclusion of any elimination period provided for under the Disability Insurance Policy, then monthly benefits shall commence to be paid in accordance with the terms of the Disability Insurance Policy and shall continue to be paid until the earliest of:

 

(i)                                      the date as of which the Participant is determined to have recovered from his Total and Permanent Disability,

 

(ii)                                   the later of

 

(A)                               the Participant’s attainment of age 65 or

 

(B)                                 the fifth anniversary of the commencement of benefit payments;

 

(iii)                                the date as of which a Participant elects

 

(A)                               a withdrawal from his Deferred Cash Account, in accordance with Section 8.01 or 8.02, or

 

(B)                                 a distribution in accordance with Section 10.02 or 10.04,

 

the amount of which withdrawal or distribution exceeds the excess of the balance of his Deferred Cash Account, as of the date of such withdrawal or distribution over the amount previously allocated to his Deferred Cash Account in accordance with subsection (c); or

 

(iv)                               the Participant’s death.

 

(b)                                  The amount of each monthly benefit shall be determined on the basis of the scope of coverage elected by the Participant in accordance with Section 5A.02(a) and shall be

 

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determined in accordance with the terms of the Disability Insurance Policy and the Certificate of Disability Insurance.

 

(c)                                   All monthly benefits payable in accordance with subsection (a) on account of a Participant’s Total and Permanent Disability shall be treated as investment earnings on and shall be allocated to the Participant’s Deferred Account.

 

(d)                                  All monthly benefits payable in accordance with subsection (a) shall be invested in accordance with the Participant’s election under Section 5.02(a) as in effect on the date such benefits are paid.

 

5A.07                  Termination of Coverage under Disability Protection Program

 

A Participant’s coverage under the Disability Protection Program shall terminate on the earliest of the following events:

 

(a)                                   the last day of the month in which the Participant terminates employment with an Employer;

 

(b)                                  the last day of the month preceding the first month for which no premium is paid pursuant to the provisions of Section 5A.05(f);

 

(c)                                   the last day of a calendar year preceding a calendar year for which the Participant has not enrolled in the Disability Protection Program in accordance with Section 5A.03(a) and is not automatically enrolled in the Disability Protection Program in accordance with Section 5A.03(b);

 

(d)                                  the effective date of the cancellation of the Disability Insurance Policy by the Plan or by the Disability Insurer;

 

(e)                                   the effective date of an amendment to the Plan that eliminates the Disability Protection Program;

 

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(f)                                     the effective date of the merger of the Plan with another plan, unless the Plan is deemed the surviving plan of such merger;

 

(g)                                  the effective date of the termination of the Plan.

 

5A.08                  Claims Procedure and Incorporation of Disability Insurance Policy

 

(a)                                   Claims for benefits under the Disability Protection Program shall be made in accordance with the provisions of the Disability Insurance Policy and the Certificate of Disability Insurance.  Claims for benefits shall be adjudicated by the Disability Insurer and the denial of any such claim shall be subject to appeal.  The adjudication of a claim and the appeal of the denial of a claim shall comply with the requirements of ERISA and regulations thereunder, in accordance with the provisions of the Disability Insurance Policy and Certificate of Disability Insurance.

 

(b)                                  The terms of the Disability Protection Program shall be subject to the provisions of the Disability Insurance Policy and the Certificate of Disability Insurance, which are incorporated by reference.

 

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ARTICLE 6 .  VALUATION OF UNITS AND CREDITS TO ACCOUNTS

 

6.01                            Units of Participation

 

A Participant’s interest in each Investment Fund shall be represented by units of participation.  Prior to the first Valuation Date for any Investment Fund in accordance with Section 6.02, each unit in such Investment Fund shall be valued at $1.00 for each dollar allocated to that Fund prior to such first Valuation Date, unless a different initial value is established by the Plan Administrator.

 

6.02                            Valuation of Units

 

(a)                                   The value of a unit in each Fund shall be determined on each Valuation Date by dividing the current market value of the assets in that Fund on that date by the total number of units in that Fund.  For this purpose, the current market value shall reflect any brokerage fees and transfer taxes applicable to purchases and sales for that Fund made since the previous Valuation Date and any other expenses either paid from or accrued to such Fund since the previous Valuation Date and shall exclude, on each Valuation Date after the first, the contributions that are to be credited to Accounts in such Fund as of such Valuation Date.  The valuation of units in each Fund shall be performed by the party so directed by the Plan Administrator and shall be conclusive.

 

(b)                                  In the event that the value of the units in one or more Funds cannot be determined on any Valuation Date, for reasons beyond the control of the Trustee or Plan Administrator, then the Plan Administrator may direct that such valuation be deferred until the next regularly scheduled Valuation Date.

 

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6.03                            Crediting the Accounts

 

(a)                                   The Deferred Account of a Participant in each Investment Fund shall be credited on each Valuation Date with the number of units determined by dividing the Deferred Cash Contributions, if any, made by the Employer to the Deferred Account in that Fund on behalf of the Participant since the previous Valuation Date by the unit value for that Fund as determined on that Valuation Date.

 

(b)                                  The Employer Account of a Participant in each Investment Fund shall be credited on each Valuation Date with the number of units determined by dividing the Employer’s contributions, if any, made on the Participant’s behalf to the Employer Account in that Fund since the previous Valuation Date by the unit value for that Fund as determined on that Valuation Date.

 

(c)                                   The Rollover Account of a Participant in each Investment Fund shall be credited on each Valuation Date with the number of units determined by dividing the Rollover Contributions, if any, made by the Participant to his Rollover Account that Fund since the previous Valuation Date by the unit value for that Fund as determined on that Valuation Date.

 

(d)                                  The Catch-Up Account of a Participant in each Investment Fund shall be credited on each Valuation Date with the number of units determined by dividing the Catch-Up Contributions, if any, made by the Participant to his Catch-Up Account in that Fund since the previous Valuation Date by the unit value for that Fund as determined on that Valuation Date.

 

(e)                                   The After-Tax Account of a Participant in each Investment Fund shall be credited on each Valuation Date with the number of units determined by dividing the After-Tax Contributions, if any, made by the Participant to his After-Tax Account in that Fund since

 

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the previous Valuation Date by the unit value for that Fund as determined on that Valuation Date.

 

6.04                            Statements of Participant Accounts

 

At least once per calendar year, or more frequently, in the discretion of the Plan Administrator, each Participant shall be furnished with a statement setting forth the value of his Accounts.

 

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ARTICLE 7 .  VESTED STATUS OF ACCOUNTS

 

7.01                            Nonforfeitability of Deferred Account, Employer Account, and Rollover Account

 

A Participant shall at all times be 100% vested in, and have a nonforfeitable right to, his entire Account, including his Deferred Account, his After-Tax Account, his Employer Account, and his Rollover Account.

 

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ARTICLE 8 .  IN-SERVICE WITHDRAWALS

 

8.01                            Withdrawal After Age 59½

 

(a)                                   A Participant who is in the employ of an Employer or Affiliate and who shall have attained age 59½ may, subject to the provisions of subsections (b) and (c) and the provisions of Section 8.03, elect to withdraw all or any portion of his Account.

 

(b)                                  A Participant may not make more than 4 withdrawals pursuant to subsection (a) in any Plan Year.

 

(c)                                   The minimum withdrawal under subsection (a) shall be the lesser of (i) $500 or (ii) the total value of the Participant’s Account.

 

8.01A                  Withdrawal from After-Tax Account

 

(a)                                   Effective as of July 1, 2004, a Participant who is in the employ of an Employer may, subject to the provisions of subsections (b) and (c), elect to withdraw all or any portion of his After-Tax Account.

 

(b)                                  A Participant may not make more than 4 withdrawals pursuant to subsection (a) in any Plan Year.

 

(c)                                   The minimum withdrawal under subsection (a) shall be the lesser of (i) $500 or (ii) the total value of the Participant’s After-Tax Account.

 

8.02                            Hardship Withdrawal

 

(a)                                   A Participant may, subject to the provisions Section 8.03, elect to withdraw (i) all or part of the excess of his Deferred Cash Contributions over any amount previously distributed to him on account of Hardship, but not any amount greater than the balance of his

 

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Deferred Account, and (ii) all or part of his Rollover Account, provided that he furnishes proof of Hardship satisfactory to the Plan Administrator in accordance with the provisions of subsections (b) and (c).

 

(b)                                  As a condition for Hardship there must exist with respect to the Participant an immediate and heavy financial need to draw upon his Account.  The Plan Administrator shall presume the existence of such immediate and heavy financial need, if the requested withdrawal is on account of any of the following:

 

(i)                                      expenses for medical care described in Section 213(d) of the Code previously incurred by the Participant, his spouse or any of his dependents, as defined in Section 152 of the Code, or necessary for those persons to obtain such medical care;

 

(ii)                                   costs directly related to the purchase of a principal residence of the Participant, excluding mortgage payments;

 

(iii)                                payment of tuition and related educational fees, and room and board expenses, for the next 12 months of post-secondary education of the Participant, his spouse, children or dependents, as defined in Section 152 of the Code;

 

(iv)                               payment of amounts necessary to prevent eviction of the Participant from his principal residence or to avoid foreclosure on the mortgage of his principal residence; or

 

(v)                                  the inability of the Participant to meet any other expenses, debts or other obligations that may be recognized by the Internal Revenue Service, pursuant to Section 1.401(k)-1(d)(2)(iv)(C) of the Regulations, as giving rise to immediate and heavy financial need for purposes of Section 401(k) of the Code.

 

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(c)                                   As a condition for a Hardship withdrawal, the Participant must demonstrate and the Plan Administrator must determine that the requested withdrawal is necessary to satisfy the financial need described in subsection (b).  The Participant shall request, on such form as the Plan Administrator shall prescribe, that the Plan Administrator make its determination of the necessity for the withdrawal solely on the basis of his application.  The Plan Administrator shall make a determination that the withdrawal is necessary, if and only if all of the following requirements are met::

 

(i)                                      The amount of the withdrawal does not exceed the amount described in subsection (d).

 

(ii)                                   The Participant has obtained all distributions, other than distributions available only on account of hardship, and all nontaxable loans currently available under all plans of the Employer and Affiliates.

 

(iii)                                The Participant is prohibited from making Deferred Cash Contributions to the Plan and from making elective deferrals, within the meaning of Section 402(g)(3) of the Code, or otherwise making employee contributions to or under all other plans of the Employer and Affiliates, under the terms of such plans or by means of an otherwise legally enforceable agreement for the required suspension period.  For Hardship withdrawals made prior to January 1, 2002, the required suspension period shall be a period of 12 months from the date of the distribution; for Hardship withdrawals made subsequent to December 31, 2001, the required suspension period shall be a period of 6 months from the date of the distribution.  For purposes this paragraph, the phrase “all other plans of the Employer and Affiliates” shall include stock option plans, stock purchase plans, including any “employee stock purchase plan” described in Section 423(b) of the

 

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Code, qualified and non-qualified deferred compensation plans, and such other plans as may be designated under Regulations issued under Section 401(k) of the Code, but shall not include health and welfare benefit plans or any mandatory employee contribution portion of a defined benefit plan.

 

(iv)                               For Hardship withdrawals made prior to January 1, 2001, the limitation described in Section 4.01(c) under all plans of the Employer and Affiliates for the calendar year following the year in which the withdrawal is made must be reduced by the Participant’s elective deferrals, within the meaning of Section 402(g)(3) of the Code, made in the calendar year of the distribution for hardship.

 

(d)                                  The amount of a withdrawal on account of Hardship may not be in excess of the amount of the financial need of the Participant, including any amounts necessary to pay any federal, state or local taxes and any amounts necessary to pay any tax penalties reasonably anticipated to result from the Hardship distribution.

 

(e)                                   A Participant may not receive more than one withdrawal on account of Hardship in any period of 6 calendar months.

 

(f)                                     In evaluating the relevant facts and circumstances, the Plan Administrator shall act in a nondiscriminatory fashion and shall treat uniformly those Participants who are similarly situated.  The Participant shall furnish to the Plan Administrator such supporting documents as the Plan Administrator may request in accordance with uniform and nondiscriminatory rules prescribed by the Plan Administrator.

 

8.03                            Procedures and Restrictions

 

(a)                                   To make a withdrawal pursuant to Section 8.01, 8.01A or 8.02, a Participant shall give such advance Notice as the Plan Administrator shall prescribe.  In no event shall the

 

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amount of the withdrawal exceed the portion of the Participant’s Account that is invested in one or more of the Investment Funds.

 

(b)                                  Each withdrawal shall be debited from the Participant’s Account as of the Valuation Date coincident with the payment of the amount so withdrawn to the Participant, or such other Valuation Date as may be determined in accordance with the procedures established by the Plan Administrator, provided, however, that no such payment shall be made as of a Valuation Date with respect to which the Plan Administrator has made a direction pursuant to Section 6.02(b).

 

(c)                                   The amount of any withdrawal shall be allocated among the Investment Funds in proportion to the value of the Participant’s Account in each Investment Fund as of the date determined in accordance with subsection (b).

 

(d)                                  All payments to Participants under this Article shall be made in cash as soon as practicable, after the Participant’s delivery of the Notice required under subsection (a), but shall nonetheless be subject to the provisions of Section 10.15 and a withdrawal pursuant to Section 8.01 shall be subject to the provisions of Section 10.12(c).

 

8.04                            Distributions at Age 70½

 

(a)                                   Notwithstanding any provision of the Plan to the contrary, if a Participant is a Five Percent Owner, distribution of the Participant’s Account shall begin, in accordance with procedures established by the Plan Administrator, no later than the April 1 following the calendar year in which he attains age 70½.  No minimum distributions pursuant to Section 401(a)(9) of the Code will be made on or after January 1, 1997 to a Participant who remains in the employ of an Employer or Affiliate, if he is not a Five Percent Owner.

 

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Such a Participant may elect to receive withdrawals from his Account in accordance with Section 8.01, to the extent that he is eligible therefor.

 

(b)                                  In the event that a distribution is required to be made to a Five Percent Owner pursuant to subsection (a), the schedule for and amount of such distribution shall be determined in accordance with Section 10.06(b).

 

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ARTICLE 9 .  LOANS TO PARTICIPANTS

 

9.01                            Loan Amounts Available and Interest Rate

 

(a)                                   A Participant who is a Regular Employee or, effective as of January 1, 2004, a Long-Term Supplemental Employee, of the Employer or an Affiliate may borrow, on application to the Plan Administrator and on approval by the Plan Administrator under such uniform rules as it shall adopt, an amount which, when added to the outstanding balance of any other loans to the Participant from this Plan or any other qualified plan of any Employer or Affiliate, does not exceed the least of:

 

(i)                                      50% of the present value of the Participant’s nonforfeitable accrued benefit under such plans, or

 

(ii)                                   $50,000 reduced by the excess, if any, of (A) the highest outstanding balance of loans to the Participant from such plans during the one year period ending on the day before the day the loan is made, over (B) the outstanding balance of loans to the Participant from such plans on the date on which the loan is made, or

 

(iii)                                the portion of his Account that is invested in the Investment Funds;

 

provided, however, that in no event shall a Participant be permitted to borrow an amount, which when added to the outstanding balance of any other loan to the Participant from this Plan, will exceed 50% of his Account.

 

(b)                                  The Plan Administrator may establish a minimum loan amount, which amount may be changed from time to time.

 

(c)                                   The interest rate to be charged on loans shall be determined by the Plan Administrator from time to time and shall be commensurate with interest rates charged by persons in

 

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the business of lending money in similar circumstances.  The interest rate so determined for purposes of the Plan shall be fixed for the duration of each loan.

 

(d)                                  The amount of the loan shall be deducted from the Investment Funds in which the Participant’s Accounts are invested, as of the Valuation Date coincident with the payment of the proceeds of the loan to the Participant, or such other Valuation Date as may be determined in accordance with the procedure established by the Plan Administrator, provided, however, that no such payment shall be made as of a Valuation Date with respect to which the Plan Administrator has made a direction pursuant to Section 6.02(b).  Such deduction shall be either in specific amounts from one or more of such Funds or on a proportional basis from all such Funds, as elected by the Participant under rules established by the Plan Administrator, and shall be recorded as a special “Loan Fund” for the Participant under the Plan.  If, pursuant to the Participant’s election, all or any portion of the amount of a loan shall be deducted from the portion of his Account that is allocated to the IBM Stock Fund, then such election shall be deemed to be an election to transfer such amount from the ESOP.  The Loan Fund shall comprise only the amount recorded thereunder and shall be deemed to be invested solely in the loan made to the Participant.  The amount of the Loan Fund shall be pledged as security for the loan.  Payments of principal on the loan will reduce the amount recorded in the Participant’s Loan Fund.  Those payments, together with the attendant interest payment, will be reinvested in the Investment Funds in accordance with the Participant’s investment election as then in effect in accordance with Section 5.02.

 

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9.02                            Terms

 

(a)                                   In addition to such rules and regulations as the Plan Administrator may adopt, all loans from the Plan shall comply with the following terms and conditions:

 

(i)                                      An application for a loan by a Participant shall be by Notice to the Plan Administrator, whose action in approving or disapproving the application shall be final.

 

(ii)                                   Each loan shall be evidenced by a promissory note payable to the Plan or by written instruments that collectively have equivalent effect.

 

(iii)                                The Plan Administrator may assess an administrative fee for the issuance of a loan, the amount of which fee may be changed from time to time.  Any such fee shall be deducted from the proceeds of the loan.

 

(iv)                               The period of repayment for any loan shall be arrived at by mutual agreement between the Plan Administrator and the Participant, but shall not exceed 5 years.  In the event a Participant enters the uniformed services of the United States and retains reemployment rights under law, repayments shall be suspended during the period of such service and the period of repayment shall be extended by the number of months of the period of service in the uniformed services.

 

(v)                                  Payments of principal and interest shall be made by payroll deductions, or in a manner agreed to by the Participant and the Plan Administrator, in substantially level amounts, but in no event less frequently than quarterly, in an amount sufficient to amortize the loan over the repayment period.

 

(vi)                               A loan may be prepaid in full without penalty as of any date after the Participant has made payments for a period of at least 3 months.

 

(vii)                            A Participant may not have more than 2 loans outstanding at any given time.

 

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(b)                                  The Plan Administrator shall establish procedures for the determination of whether a loan has become delinquent or whether there has been a default on a loan, provided, however, that such procedures shall provide that a default has occurred no later than the last day of a calendar quarter following a calendar quarter during which a Participant has failed to make any required repayments, unless all payments required under the terms of the loan to have been made on or before such date have been made.

 

(c)                                   In the event that a Participant’s loan is determined to be in default pursuant to subsection (b), then:

 

(i)                                      the Participant shall be prohibited from making Deferred Cash Contributions for a period of 12 months from the date of such default, if such default occurs prior to January 1, 2002 or for a period of 6 months from the date of such default, if such default occurs subsequent to December 31, 2001, provided, however, that, in any event, such prohibition shall cease to apply if the Participant repays the defaulted loan; and

 

(ii)                                   the Participant shall be prohibited from initiating a new loan until the later of (A) the first anniversary of the date of default or (B) the date that the Participant fully repays the defaulted loan, including accrued interest.

 

A Participant may repay a defaulted loan at any time prior to the Plan’s execution upon its security interest in accordance with subsection (d).

 

(d)                                  If a loan is not repaid in accordance with the terms specified in the instrument thereof and a default occurs, the Plan may execute upon its security interest in the Participant’s Accounts under the Plan to satisfy the debt, provided, however, that the Plan shall not levy against any portion of the Loan Fund attributable to amounts held in the

 

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Participant’s Deferred Account or Employer Account until such time as a distribution of the Deferred Account or Employer Account could otherwise be made under the Plan.

 

(e)                                   The Plan Administrator shall promulgate such additional rules or restrictions as may be necessary to implement and administer the loan program.  Such additional rules are hereby incorporated into the Plan by reference, and the Plan Administrator is hereby authorized to make such revisions to these rules as it deems necessary or appropriate.

 

(f)                                     To the extent required by law and under such rules as the Plan Administrator shall adopt, loans shall also be made available on a reasonably equivalent basis to any Beneficiary or former Employee (i) who maintains an Account under the Plan and (ii) who is with respect to the Plan, a party-in-interest within the meaning of Section 3(14) of ERISA.

 

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ARTICLE 10 .   DISTRIBUTION OF ACCOUNTS UPON TERMINATION OF
EMPLOYMENT, DISABILITY, OR DEATH

 

10.01                      Applicability

 

(a)                                   Upon a Participant’s termination of employment, or incurrence of disability, he shall be eligible to receive a distribution of his Account in accordance with the provisions of this Article.

 

(b)                                  Upon a Participant’s death, his Account shall be distributed to his Beneficiary in accordance with the provisions of this Article.

 

10.02                      Forms of Distribution

 

(a)                                   A Participant who has terminated employment may elect to receive a distribution of his Account in a single lump sum payment.  The provisions of this subsection shall be subject to the provisions of Sections 10.07, 10.12, and 10.15.

 

(b)                                  In addition to the election provided in accordance with subsection (a), a Participant who has terminated employment and who (A) is eligible either to commence receipt of a pension benefit from the IBM Personal Pension Plan, in accordance with the terms thereof as in effect on June 30, 1999, or for disability benefits under the IBM Medical Disability Income Plan or the IBM Long Term Disability Plan, or (B) has attained age 55 may elect to receive a distribution of his Account in either of the following forms:

 

(i)                                      payment in annual installments over a period not less than 2 nor more than 10 years; or

 

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(ii)                                   payment in annual installments over his life expectancy, determined in accordance with Section 10.13 and with applicable regulations, and recalculated annually.

 

The provisions of this subsection shall be subject to the provisions of Sections 10.07, 10.12, and 10.15.

 

(c)                                   In the event that a Participant elects to receive a distribution of his Account in the form of installment payments, in accordance with subsection (b), the amount of each payment shall be determined by dividing the balance of the Participant’s Account on the Valuation Date as of which such payment is to be determined, in accordance with Section 10.12(a), by the number of years remaining in the installment payment period, taking into account the year for which such amount is being determined.

 

(d)                                  A Participant who is eligible to make an election to receive a distribution of his Account in accordance with subsections (a) or (b), but who has not made such an election, shall be permitted to elect withdrawals from his Account, in accordance with Section 10.04.

 

10.03                      Mandatory Distribution of Small Accounts

 

For Plan Years beginning prior to January 1, 2000, and notwithstanding any provision hereof to the contrary, if the balance of the Account of a Participant described in Section 10.02(b) has not exceeded $3,500, then the balance of his Account shall be distributed to him in a lump sum as soon as practicable after his termination of employment and the provisions of Sections 10.02(b) and 10.02(d) shall not be applicable, provided, however, that, effective with respect to terminations of employment occurring after December 31, 1997, $5,000 shall be substituted for $3,500.  For Plan Years beginning after December 31, 1999, if the balance of the Account of a Participant

 

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does not exceed $5,000, then the balance of his Account shall be distributed to him in a lump sum as soon as practicable after his termination of employment and the provisions of Sections 10.02(b) and 10.02(d) shall not be applicable, provided, however, that effective with respect to distributions made on or after March 28, 2005, $1,000 shall be substituted for $5,000.

 

10.04                      Withdrawals From Account After Termination of Employment

 

(a)                                   A Participant who is eligible to elect to receive a distribution of his Account in accordance with Section 10.02(a) or (b) and who has not made such an election may elect to take withdrawals from his Account at any time, provided, however, that:

 

(i)                                      no Participant may take more than 4 withdrawals from his Account in any Plan Year; and

 

(ii)                                   the minimum amount of a withdrawal shall be the lesser of $500 or the balance of the Participant’s Account.

 

In no event shall the amount of the withdrawal elected by the Participant exceed the portion of his Account that is invested in the Investment Funds.  The provisions of this subsection shall be subject to the provisions of Sections 10.07, 10.12, and 10.15.

 

(b)                                  A Participant who has made an election to receive a distribution of his Account in the form of installment payments, in accordance with Section 10.02(b) may elect to take additional withdrawals from his Account at any time.  Such additional withdrawals shall be subject to the provisions of subsection (a).

 

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10.05                      Commencement of Payments

 

(a)                                   Unless a Participant elects otherwise in accordance with the provisions of this Article, distribution of a Participant’s Account shall be made or shall commence as soon as administratively practicable following the later of (i) the Participant’s termination of employment or (ii) the 65th anniversary of the Participant’s date of birth, but in no event more than 60 days after the close of the Plan Year in which the later of (i) or (ii) occurs, provided, however, that distribution of a Participant’s Account shall not be made prior to his provision of Notice of his election to receive such distribution, except for distributions in accordance with Section 10.03 or 10.06.

 

(b)                                  In the case of the death of a Participant before distribution of his Account has been made or commenced, his Account shall be distributed to his Beneficiary in accordance with Section 10.08 as soon as administratively practicable following the Participant’s date of death.

 

10.06                      Required Distributions at Age 70½

 

(a)                                   Notwithstanding any provision hereof to the contrary, a Participant who has terminated employment and has attained age 70½ but has not received, or commenced to receive, a distribution of his Account in accordance with Section 10.02(a)(ii), shall commence to receive a distribution of his Account in annual installments, in accordance with the provisions of subsection (b).

 

(b)                                  The Account of a Participant described in subsection (a) who attains age 70½ prior to January 1, 2001 shall be distributed in 10 annual installment payments, except as provided in subsection (d).  The Account of a Participant who attains age 70½ subsequent to December 31, 2000 shall be distributed in annual installments over the

 

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Participant’s life expectancy, determined in accordance with Section 10.13 and applicable regulations, and recalculated annually.  At the discretion of the Plan Administrator, the first such installment payment shall be made in the year in which the Participant attains age 70½, or in the first quarter of the following year, and shall be attributable to the year in which the Participant attained age 70½, provided, however, that in no event shall payments commence later than April 1 of the calendar year following the year in which the Participant attained age 70½.  The installment payments attributable to each subsequent year shall be made in such subsequent year.  The amount of each installment shall be determined in the manner specified in Section 10.02(c).

 

(c)                                   A Participant who has commenced to receive a distribution of his Account pursuant to subsection (a) may nonetheless make an election described in Section 10.04(b).

 

(d)                                  Effective January 1, 2002, a Participant who has commenced receipt of installment payments in accordance with the first sentence of subsection (b) shall be afforded the opportunity to elect to receive installment payments in accordance with the second sentence of subsection (b).  Such election shall be made by providing Notice to the Plan Administrator at the time and in the manner specified in rules established by the Plan Administrator in accordance with Section 14.05 and shall become effective as of the date specified by the Plan Administrator.

 

10.07                      Effect of Reemployment

 

(a)                                   A Participant who terminates from the employ of an Employer, but remains in employment with any other Employer or any Affiliate of any Employer, shall not be deemed to have terminated employment for purposes of Section 10.01.

 

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(b)                                  A Participant who has terminated employment and is thereafter reemployed by any Employer or any Affiliate of any Employer shall thereupon cease to be eligible to elect to receive a distribution in accordance with Section 10.02 or to take a withdrawal from his Account in accordance with Section 10.04.

 

(c)                                   In the event that a Participant who has terminated employment and elected to receive a distribution of his Account in the form of installments, in accordance with Section 10.02(a)(ii), is thereafter reemployed by any Employer or any Affiliate of any Employer, payment of such installments shall thereupon cease.

 

(d)                                  The provisions of this Section shall have no effect on the right of a Participant to elect to receive a withdrawal in accordance with Section 8.01, provided that he is eligible therefor.

 

(e)                                   The provisions of this Section shall not be applicable to a Participant during any period in which he is a Supplemental Employee, but, effective as of January 1, 2004, not a Long-Term Supplemental Employee, of an Employer or any Affiliate of any Employer.

 

10.08                      Distribution of Account Upon Death

 

In the event of the death of a Participant who has not received a complete distribution of his Account, the entire balance of his Account shall be paid in a lump sum to the Participant’s Beneficiary.

 

10.09                      Designation of Beneficiary

 

(a)                                   A Participant shall designate his Beneficiary by filing such Notice as may be required by the Plan Administrator, but subject to the provisions of subsection (b).  The Participant’s

 

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designation shall become effective upon receipt by the Plan Administrator prior to the death of the Participant.

 

(b)                                  If a Participant is married, a designation of a person other than his spouse as his Beneficiary shall be effective if and only if his spouse has consented to such designation.  The consent of the Participant’s spouse shall be in writing, on a form provided by the Plan Administrator, shall be witnessed by a representative of the Plan or by a Notary Public, and shall acknowledge the effect on the spouse of the Participant’s designation.  A spousal consent form witnessed by a person acting with apparent authority as a Notary Public shall be conclusively deemed to have been witnessed by a Notary Public for all purposes under the Plan.  The requirement of spousal consent may be waived by the Plan Administrator, if it is established to the satisfaction of the Plan Administrator that there is no spouse or that the spouse cannot be located, or under such other circumstances as may permit such waiver under applicable law.

 

(c)                                   A Participant may revoke his designation of a Beneficiary and make a new designation at any time.  However, if the Participant is married, any such new designation shall be subject to the provisions of subsection (b).

 

(d)                                  In the event that a Participant dies without having an effective designation of his Beneficiary then in effect, or if the Participant’s Beneficiary does not survive him, then the person deemed to be the Participant’s Beneficiary shall be determined in the following order:

 

(i)                                      the Participant’s spouse;

 

(ii)                                   if the Participant is not survived by a spouse, the Participant’s surviving children, in equal shares;

 

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(iii)                                if the Participant is not survived by a spouse or a child, then the Participant’s surviving parents, in equal shares;

 

(iv)                               if the Participant is not survived by a spouse, a child, or a parent, then the Participant’s estate.

 

(e)                                   The Plan Administrator shall provide to each Participant a written explanation of (i) the terms, conditions, and effect of a Beneficiary designation under the plan; (ii) the Participant’s right to change such designation, and the effect thereof; (iii) the rights of the Participant’s spouse; and (iv) the Participant’s right to revoke such a designation, and the effect thereof.

 

10.10                      Proof of Death and Right of Beneficiary or Other Person

 

(a)                                   The Plan Administrator may require and rely upon such proof of death and such evidence of the right of any Beneficiary or other person to receive the value of the Account of a deceased Participant as the Plan Administrator may deem proper and its determination of the right of that Beneficiary or other person to receive payment shall be conclusive.

 

(b)                                  Notwithstanding the provisions of Section 10.11, the Plan Administrator may direct that the balance of a deceased Participant’s Account shall be invested in the Investment Fund that is designated by the Committee for purposes of Section 5.02(b), during the period required to make a determination in accordance with subsection (a).

 

10.11                      Status of Accounts Pending Distribution

 

Until completely distributed, the Account of a Participant who is entitled to a distribution shall continue to be invested as part of the funds of the Plan, and the Participant shall

 

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retain the right to reallocate his Account among Investment Funds and under the Mutual Fund Window Program, in accordance with Section 5.04 during any period in which a balance remains in his Account.  However, loans to Participants who are eligible to receive a distribution in accordance with Section 10.02 shall not be permitted, except to the extent required by Section 9.02(d).

 

10.12                      Procedures and Form of Payment

 

(a)                                   All amounts distributed or withdrawn in accordance with this Article shall be debited from the Participant’s or Beneficiary’s Account as of the Valuation Date coincident with the payment of the amount so distributed or withdrawn, or such other date as may be determined in accordance with the procedures established by the Plan Administrator, provided, however, that no such payment shall be made as of a Valuation Date with respect to which the Plan Administrator has made a direction pursuant to Section 6.02(b).

 

(b)                                  In the event that the payment of a distribution or a withdrawal to a Participant does not reduce his Account to zero, then the amount so distributed or withdrawn shall be allocated among the Investment Funds in proportion to the value of the Participant’s Account in each Investment Fund as of the date determined in accordance with subsection (a).

 

(c)                                   All distributions and withdrawals under the Plan shall be paid to the Participant or Beneficiary in cash, except that if any portion of a Participant’s Account is allocated to the IBM Stock Fund, the Participant or Beneficiary may elect to receive shares of IBM stock having a fair market value as of the date of such distribution or withdrawal equal to

 

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the value of the units of the IBM Stock Fund allocated to such Participant’s Account, provided, however, that the value of any fractional share shall be distributed in cash.

 

10.13                      Distribution Limitation

 

Notwithstanding any other provision of this Article 10, all distributions from this Plan shall conform to the Regulations issued under Section 401(a)(9) of the Code, including the incidental death benefit provisions of Section 401(a)(9)(G) of the Code.  Such Regulations shall override any Plan provision that is inconsistent with Section 401(a)(9) of the Code.  With respect to distributions under the Plan made for calendar year 2002, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the Regulations under Section 401(a)(9) of the Code that were proposed on January 17, 2001, notwithstanding any provisions of the Plan to the contrary.  With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2003, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the Final and Temporary Regulations under Section 401(a)(9) of the Code that were issued on April 17, 2002, by Treasury Decision 8987, notwithstanding any provisions of the Plan to the contrary.

 

10.14                      Direct Rollover of Certain Distributions

 

Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid

 

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directly to an eligible retirement plan specified by the distributee in a direct rollover.  For purposes of this Section:

 

(a)                                   The term “eligible rollover distribution” means any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include:

 

(i)                                      any distribution that is one of a series of substantially equal periodic payments, not less frequently than annually, made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated beneficiary, or for a specified period of ten years or more,

 

(ii)                                   any distribution to the extent such distribution is required under Section 401(a)(9) of the Code,

 

(iii)                                any distribution made subsequent to December 31, 1998 on account of the Hardship of the Participant, and

 

(iv)                               the portion of any distribution that is not includible in the gross income of the distributee, determined without regard to the exclusion for net unrealized appreciation with respect to employer securities;

 

(b)                                  The term “eligible retirement plan” means:

 

(i)                                      an individual retirement account described in Section 408(a) of the Code,

 

(ii)                                   an individual retirement annuity described in Section 408(b) of the Code,

 

(iii)                                an annuity plan described in Section 403(a) of the Code,

 

(iv)                               a qualified trust described in Section 401(a) of the Code, that is a defined contribution plan and that accepts the distributee’s eligible rollover distribution,

 

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(v)                                  with respect to eligible rollover distributions made after December 31, 2001, an annuity contract described in Section 403(b) of the Code, or

 

(vi)                               with respect to eligible rollover distributions made after December 31, 2001, an eligible deferred compensation plan described in Section 457(b) of the Code, which is maintained by an eligible employer as described in Section 457(e)(1)(A) of the Code,

 

provided, however, in the case of an eligible rollover distribution to a distributee who is the surviving spouse of a Participant surviving spouse, prior to January 1, 2001, an eligible retirement plan is only an individual retirement account or individual retirement annuity;

 

(c)                                   The term “distributee” means an employee or former employee.  In addition, the employee’s or former employee’s surviving spouse and the employee’s or former employee’s spouse or former spouse who is an alternate payee under a qualified domestic relations order as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse; and

 

(d)                                  The term “direct rollover” means a payment by the Plan to the eligible retirement plan specified by the distributee.

 

10.15                      Waiver of Notice Period

 

(a)                                   Except as provided in subsection (b) or subsection (c), an election by the Participant to receive a distribution shall not be valid unless the written election is made (i) after the Participant has received the notice required under Section 1.411(a)-11(c) of the Regulations and (ii) within a reasonable time before the effective date of the commencement of the distribution, as prescribed by said Regulations.

 

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(b)                                  Notwithstanding the requirements of subsection (a), a distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations is given, provided that: (i) the Plan Administrator clearly informs the Participant that he has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution and, if applicable, a particular distribution option, and  (ii)                                 the Participant, after receiving the notice under Sections 411 and 417 of the Code, affirmatively elects a distribution.

 

(c)                                   For Plan Years beginning prior to January 1, 2000, if the balance of the Account of a Participant described in Section 10.02(b) has not exceeded $3,500, then subsection (a) shall not apply and Section 10.03 shall apply, provided, however, that, effective with respect to terminations of employment occurring after December 31, 1997, $5,000 shall be substituted for $3,500.  For Plan Years beginning after December 31, 1999, if the balance of the Account of a Participant does not exceed $5,000, then subsection (a) shall not apply and Section 10.03 shall apply.

 

10.16                      Distribution of Accounts Upon a Sale of Assets or a Sale of a Subsidiary prior to December 31, 2001

 

(a)                                   Upon the disposition by an Employer of at least 85% of the assets, within the meaning of Section 409(d)(2) of the Code, used by the Employer in a trade or business, or upon the disposition by an Employer of its interest in a subsidiary, within the meaning of Section 409(d)(3) of the Code, prior to December 31, 2001, those Participants who continue in employment with the employer acquiring such assets or with the sold subsidiary shall be deemed to have terminated employment for purposes of Sections 10.01 and 10.03, provided that (i) the Employer continues to maintain the Plan

 

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after the disposition and (ii) the buyer is not an Employer or an Affiliate of any Employer, does not adopt the Plan or otherwise become a participating employer in the Plan, and does not accept any transfer of assets or liabilities from the Plan to a plan it maintains in a transaction subject to Section 414(l)(1) of the Code.

 

(b)                                  A Participant who is deemed to have terminated employment pursuant to subsection (a) shall be permitted to receive a distribution pursuant to Section 10.02 only in a form that constitutes a lump sum distribution within the meaning of Section 401(k)(10)(B)(ii) of the Code.  At the end of the second calendar year following the calendar year in which the sale or disposition described in subsection (a) occurred, such Participant’s entitlement to receive a distribution in accordance with Section 10.02 shall be suspended until he terminates employment with the buyer.

 

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ARTICLE 11 .   ADMINISTRATION OF PLAN

 

11.01                      Named Fiduciaries

 

(a)                                   The following persons and groups of persons shall severally have the authority to control and manage the administration of the Plan and shall each be a named fiduciary with respect to the Plan, within the meaning of Section 402(a) and 403(a)(1) of ERISA:

 

(i)                                      the Board of Directors;

 

(ii)                                   the Committee;

 

(iii)                                the highest ranking IBM officer responsible for Finance and the highest ranking IBM officer responsible for Human Resources; and

 

(iv)                               the Plan Administrator and, if the Plan Administrator is constituted as a committee, pursuant to Section 11.04(a), each member of such committee.

 

(v)                                  any IBM Staff Investment Manager.

 

(b)                                  Each named fiduciary shall be responsible for discharging only those duties assigned to it by the Plan or by the Trust Agreement.

 

(c)                                   The named fiduciaries with respect to the Plan may, in their discretion, (i) designate persons other than named fiduciaries to carry out fiduciary responsibilities under the Plan, other than trustee responsibilities, within the meaning of Section 405(c)(3) of ERISA; (ii) allocate fiduciary responsibilities, other than such trustee responsibilities, among named fiduciaries; and (iii) employ one or more persons to render advice or to provide services with respect to the Plan, provided, however, that fiduciary responsibilities may be delegated only pursuant to a written instrument adopted by the named fiduciary making the delegation and accepted in writing by the person assuming such fiduciary responsibilities.

 

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11.02                      Exclusive Authority of the Board of Directors

 

The Board of Directors, or a committee thereof that the Board may designate from time to time, expressly reserves the following exclusive authority:

 

(i)                                      the power to designate those persons who shall serve as members of the Committee;

 

(ii)                                   the power to terminate the Plan pursuant to Section 13.04;

 

(iii)                                the power to amend the Plan in any manner, except that such power shall not be exclusive, to the extent that it has been delegated to the Committee or the Plan Administrator, in accordance with Section 13.02(b), (c);

 

(iv)                               the right to approve any amendment or new award or other compensation action to be included in Compensation only for IBM corporate officers, or any other action that disproportionately benefits IBM corporate officers;

 

(v)                                  the right to approve any Plan amendment, or any series of amendments adopted within any 12 month period, that affects projected cash flow by more than $100,000,000 in a single year;

 

(vi)                               the power to take any actions materially inconsistent in any material respect with prior actions of the Board or any committee thereof; and

 

(vii)                            the power to revise the procedures to amend the Plan.

 

11.03                      Responsibilities of Committee

 

(a)                                   The Committee shall be responsible for:

 

(i)                                      the appointment, retention, and removal of:

 

(A)                               the Trustee which holds the assets of the Fund, and

 

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(B)                                 the Trustee or Investment Managers which direct or manage the investment, acquisition, and disposition of the assets of the Fund or of any Investment Fund;

 

(ii)                                   the establishment and amendment of investment policies and guidelines for the Plan, including guidelines regarding the diversification of assets, pursuant to Section 404(a)(1)(C) of ERISA, to the extent applicable, provided, however, that the Committee, in its sole discretion, may delegate all or part of such responsibility to the Trustee or Investment Managers, or to employees of IBM, or to Participants;

 

(iii)                                the review, on a basis no less frequent than annually, of the performance of the Plan Administrator, the Trustee, the Investment Managers, and any others appointed by it; and

 

(iv)                               the establishment of such rules as it may deem appropriate for the conduct of its business with respect to the Plan.

 

(b)                                  The Committee may, by duly adopted resolution, delegate to the highest ranking IBM officer responsible for Finance, the highest ranking IBM officer responsible for Human Resources, the IBM Treasurer, the Plan Administrator, or any other officer or employee of IBM, the authority to carry out any decision, resolution, directive, or delegation of the Committee.  The Committee may, by duly adopted resolution, delegate to the Treasurer of IBM the authority granted to the Committee under subsection (a)(i)(B) or Section 5.01(a).

 

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11.04                      Appointment of Plan Administrator

 

(a)                                   The highest ranking IBM officer responsible for Finance and the highest ranking IBM officer responsible for Human Resources shall appoint one or more persons employed by IBM in the capacity of Assistant Controller, Director of Employee Benefits, Director (or Manager) of U.S. Retirement Funds, or such other person or persons holding comparable positions as they deem appropriate in their discretion, to serve as the Plan Administrator or to comprise a committee that shall serve as the Plan Administrator, the members of which committee may be authorized to act jointly or severally.

 

(b)                                  The IBM officers designated in subsection (a) shall appoint and designate such other employees of IBM as may be needed to provide adequate staff support and services to the Committee and the Plan Administrator.

 

11.05                      Responsibilities of Plan Administrator and Effect of Decisions of Plan Administrator

 

(a)                                   The Plan Administrator shall have the full authority and discretion to promulgate and enforce such rules and regulations as it shall deem necessary or appropriate for the administration of the Plan, which rules and regulations shall include a claims procedure in accordance with Section 503 of ERISA and regulations thereunder, provided, however, such claims procedure shall not be applicable to claims arising under the Disability Protection Program, which claims shall be subject only to the provisions of Section 5A.08(b).

 

(b)                                  The Plan Administrator shall have the full authority and discretion to construe and interpret the Plan, and correct any defect, supply any omission, reconcile any inconsistency, or resolve any ambiguities, consistent with the intent hereof, to determine

 

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the amount, timing, and recipients of benefits payable under the Plan, and to determine the date as of which any individual became or ceased to be a Participant.

 

(c)                                   The Plan Administrator shall report to the Committee at least annually on its activities.

 

(d)                                  All determinations of the Plan Administrator as to the interpretation of the Plan or as to any disputed question shall be in accordance with the terms of the Plan and the requirements of ERISA and the Code, and shall be conclusive and binding on all persons, to the extent permitted by applicable law.

 

(e)                                   The Plan Administrator, in its discretion, may delegate the functions assigned to it by the Plan, except for the functions enumerated in subsections (a), (b), and (c) and in Section 13.01(c).

 

11.06                      Retention of Professional Advisors

 

(a)                                   The Committee or the Plan Administrator may engage the services of accountants, attorneys, actuarial and employee benefit consultants, recordkeepers, and such other professional or administrative personnel or organizations as they deem necessary or advisable to assist them in fulfilling their responsibilities under the Plan.

 

(b)                                  The expenses for professional or administrative services engaged pursuant to subsection (a) shall be paid by the Company or, in the discretion of the Committee, which discretion may be delegated, may be paid out of the assets or income of the Trust, in accordance with Article 12.

 

(c)                                   The Committee, the Plan Administrator, all other fiduciaries with respect to the Plan, and their delegates and assistants shall be entitled to act on the basis of any tables, valuations, certificates, opinions, or reports furnished by the professional or administrative personnel engaged in accordance with subsection (a).

 

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11.07                      Prudent Conduct

 

The Committee and the Plan Administrator shall use that degree of care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use in his conduct of a similar situation.

 

11.08                      Service in More Than One Fiduciary Capacity

 

Any individual, entity or group of persons may serve in more than one fiduciary capacity with respect to the Plan and/or the funds of the Plan.

 

11.09                      Compensation and Bonding

 

The members of the Committee and the Plan Administrator shall not receive any compensation from the Plan for their services as such.  Except as may otherwise be required by law, no bond or other security shall be required of any person serving in any capacity with respect to the Plan in any jurisdiction.

 

11.10                      Limitation of Liability

 

The Employer, the Board of Directors, the Committee, the Plan Administrator, and any officer, employee or agent of the Employer shall not incur any liability individually or on behalf of any other individuals or on behalf of the Employer for any act or failure to act, made in good faith in relation to the Plan or the funds of the Plan.  However, this limitation shall not act to relieve any such individual or the Employer from a responsibility or liability for any fiduciary responsibility, obligation or duty under Part 4, Title I of ERISA.

 

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11.11                      Individual Accounts

 

The Plan Administrator shall maintain, or cause to be maintained, records showing the individual balances in each Participant’s Account.  However, maintenance of such records and Accounts shall not require any segregation of the funds of the Plan.

 

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ARTICLE 12 .   MANAGEMENT OF FUNDS

 

12.01                      Trust Agreement

 

All the funds of the Plan shall be held by Trustee appointed from time to time by the Committee under a trust agreement adopted, or as amended, by the Committee for use in providing the benefits of the Plan and paying its expenses not paid directly by the Employer.  The Employer shall have no liability for the payment of benefits under the Plan nor for the administration of the funds paid over to the Trustee.

 

12.02                      Exclusive Benefit Rule

 

Except as otherwise provided in the Plan, no part of the corpus or income of the funds of the Plan shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants and other persons entitled to benefits under the Plan and paying the expenses of the Plan not paid directly by the Employer.  No person shall have any interest in, or right to, any part of the earnings of the funds of the Plan, or any right in, or to, any part of the assets held under the Plan, except as and to the extent expressly provided in the Plan.

 

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ARTICLE 13 .   AMENDMENT, MERGER, TRANSFERS, AND TERMINATION

 

13.01                      Amendment of Plan

 

(a)                                   The Board of Directors reserves the right at any time and from time to time, and retroactively if deemed necessary or appropriate, to amend in whole or in part any or all of the provisions of the Plan.

 

(b)                                  The Committee shall have the authority to amend the Plan at any time and from time to time, and retroactively if deemed necessary or appropriate, provided, however, that the Board of Directors may, in its discretion, limit the authority of the Committee and that any amendment that is subject to the approval of the Board pursuant to Section 11.02 shall not become effective until such approval is granted.

 

(c)                                   The Plan Administrator shall have the authority to adopt amendments to the Plan:

 

(i)                                      that may be required to maintain the qualified status of the Plan under Section 401(a) of the Code and the tax-exempt status of the Trust under Section 501(a) of the Code, or

 

(ii)                                   that relate to the compliance of the Plan with the requirements of the Code and constitute an election permitted by any section of the Code, or Regulations or rulings thereunder, or

 

(iii)                                that have the effect of modifying the optional forms of distribution provided under any special rules adopted pursuant to Section 13.02(d),

 

and shall have such additional authority to amend the Plan as may be delegated to it by the Committee.  Any such amendment shall be effective as specified by the Plan Administrator and may be given retroactive effect to the extent required or permitted by Section 401(b) of the Code and Regulations and rulings thereunder, provided, however,

 

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that any amendment described in paragraph (iii) shall not be effective with respect to a Participant who receives or commences to receive a distribution from the Plan within 90 days after the date on which he is notified of the adoption of such amendment and provided further, however, that any amendment that is subject to the approval of the Board pursuant to Section 11.02 shall not become effective until such approval is granted.

 

(d)                                  No amendment shall make it possible for any part of the funds of the Plan to be used for, or diverted to, purposes other than for the exclusive benefit of persons entitled to benefits under the Plan.

 

(e)                                   No amendment shall be made which has the effect of decreasing the balance of the Account of any Participant or of reducing the nonforfeitable percentage of the balance of the Account of a Participant below the nonforfeitable percentage computed under the Plan as in effect on the date on which the amendment is adopted, or if later, the date on which the amendment becomes effective.

 

13.02                      Merger, Consolidation or Transfer of Assets and Liabilities

 

(a)                                   The Plan may not be merged or consolidated with, and its assets or liabilities may not be transferred to, any other plan unless each person entitled to benefits under the Plan would, if the resulting plan were then terminated, receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated.

 

(b)                                  Subject to the provisions of subsection (a), the Committee shall have the authority (i) to direct the merger of the Plan into or with any other plan that is qualified under

 

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Section 401(a) of the Code, (ii) to cause the Plan to be divided into 2 or more separate plans, each of which shall be qualified under Section 401(a) of the Code, (iii) to instruct the Trustee to transfer any portion of the assets and liabilities of the Plan from the Trust to any other plan that is qualified under Section 401(a) of the Code, or (iv) to instruct the Trustee to accept a transfer to the Trust of any portion of the assets and liabilities of any other plan that is qualified under Section 401(a) of the Code.

 

(c)                                   Subject to the provisions of subsection (a), the Plan Administrator shall have the authority (i) to instruct the Trustee to accept a transfer to the Trust, by another plan that is qualified under Section 401(a) of the Code, of all or any portion of the assets and liabilities of such other plan that are allocated thereunder to the accounts of individuals that have or will become Employees and have or will become eligible to be Participants in the Plan or (ii) to instruct the Trustee to transfer from the Trust to another Plan that is qualified under Section 401(a) of the Code all or any portion of the assets and liabilities of the Trust that are allocated hereunder to the Accounts of Participants who have terminated or will terminate from employment with an Employer as the result of a transaction undertaken by such Employer.  In exercising its authority under clause (ii) of the foregoing sentence, the Plan Administrator may, in its discretion, but shall not be required to, permit each Participant affected by such termination to elect whether or not the assets and liabilities allocated to his Account hereunder shall be included in such transfer and may establish conditions for the inclusion in such transfer of the assets and liabilities allocated to any Account hereunder.

 

(d)                                  In each transaction in which another plan is merged into and with the Plan in accordance with subsection (b)(i) and in each case in which the Plan receives a transfer of assets and liabilities in accordance with subsection (b)(iv) or (c)(i), the Plan

 

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Administrator shall establish rules for the treatment of the Accounts established or increased as a result thereof, which rules may include the establishment of additional sub-accounts.  Such rules, which are hereby incorporated by reference, shall comply with the requirement of Section 411(d)(6) of the Code and Regulations thereunder.

 

(e)                                   Rescission of Special Rules adopted prior to September 30, 2002.

 

(i)                                      Notwithstanding any rule adopted pursuant to Section 13.02(d) prior to September 30, 2002, distributions to a Participant who has terminated employment shall be not be made in any form other than the forms described in Sections 10.02, 10.03, or 10.04, except that distributions to a Participant who has attained age 70½ shall be made in accordance with Section 10.06.  A Participant’s election of any form of distribution described in Sections 10.02, 10.04, or 10.06 shall not be subject to the consent of his or her spouse.

 

(ii)                                   Notwithstanding any rule adopted pursuant to Section 13.02(d) prior to September 30, 2002, distributions to a Participant’s Beneficiary upon the death of a Participant shall be made only in the form described in Section 10.08.

 

(iii)                                Notwithstanding any rule adopted pursuant to Section 13.02(d) prior to September 30, 2002, in no event shall a Participant’s application for a loan in accordance with Section 9.01(a) and 9.02(a) be subject to the consent of his or her spouse.

 

(iv)                               Notwithstanding any special rule adopted pursuant to Section 13.02(d) prior to September 30, 2002, in no event shall a Participant’s application pursuant to Section 8.03 for a withdrawal in accordance with Section 8.01 or 8.02 be subject to the consent of his or her spouse.

 

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(v)                                  This subsection shall be effective as of September 30, 2002, provided, however, that the provisions of this subsection shall not be effective with respect to distributions to a Participant or Beneficiary occurring before the earlier of (i) 90 days after a Summary of Material Modifications describing the provisions of this subsection has been furnished to Participants in accordance with Sec. 2520-104b-3(a) of the regulations of the Department of Labor, or (ii) the date that the Proposed Regulation amending Section 1.411(d)-4, Q&A 2(e) of the Regulations, published on July 8, 2003, becomes final.

 

13.03                      Termination by Participating Employers

 

Any Domestic Subsidiary may terminate its participation in the Plan upon appropriate action by it, including such notice to the Committee as the Committee shall require. In that event, the funds of the Plan held on account of Participants in the employ of that Domestic Subsidiary, and any unpaid balances of the Accounts of all Participants who have separated from the employ of that Domestic Subsidiary and who are not then employed by an Employer other than that Domestic Subsidiary, shall be determined by the recordkeeper appointed by the Plan Administrator.  The Plan Administrator shall direct the Trustee to segregate the amount so determined as a separate trust and such segregation shall be deemed a division of the Plan into 2 plans, in accordance with Section 13.02(b)(ii).  With respect to the separate trust and plan so established, the board of directors of the Domestic Subsidiary that has terminated its participation in the Plan shall succeed to the powers and duties of the Board of Directors and the Committee, including without limitation, the appointment of the Plan Administrator and the authority to terminate such separate plan in accordance with Section 13.04.

 

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13.04                      Termination of Plan

 

(a)                                   The Board of Directors may terminate the Plan at any time.  Subject to Section 11.02, the Committee may completely discontinue contributions under the Plan for any reason at any time.  In case of termination or partial termination of the Plan, or complete discontinuance of Employer contributions to the Plan, the rights of affected Participants to their Accounts under the Plan as of the date of the termination or discontinuance shall be nonforfeitable.  The total amount in each Participant’s Accounts shall be distributed to him or for his benefit, as the Plan Administrator shall direct, subject to the provisions of subsection (b), or continued in trust for his benefit.

 

(b)                                  Upon termination of the Plan, Deferred Cash Contributions and Employer Matching Contributions, with earnings thereon, shall be distributed to Participants only if (i) neither the Employer nor any Affiliate establishes or maintains a successor defined contribution plan, and (ii) payment is made to the Participants in the form of a lump sum distribution, as defined in Section 401(k)(10)(B)(ii) of the Code.  For purposes of this paragraph, a “successor defined contribution plan” is a defined contribution plan within the meaning of Section 414(i) of the Code, other than an employee stock ownership plan as defined in Sections 4975(e)(7) or 409(a) of the Code (“ESOP”) or a simplified employee pension as defined in Section 408(k) of the Code (“SEP”), which exists at the time the Plan is terminated or within the 12 month period beginning on the date all assets are distributed.  However, in no event shall a defined contribution plan be deemed a successor plan if fewer than 2% of the employees who are eligible to participate in the Plan at the time of its termination are or were eligible to participate under such other defined contribution plan of the Employer or an Affiliate, other than an ESOP or a SEP,

 

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at any time during the period beginning 12 months before and ending 12 months after the date of the Plan’s termination.

 

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ARTICLE 14.  GENERAL PROVISIONS

 

14.01                      Nonalienation and Payment Pursuant to Qualified Domestic Relations Orders

 

(a)                                   Except as required by any applicable law, no benefit under the Plan shall in any manner be anticipated, assigned or alienated, and any attempt to do so shall be void.

 

(b)                                  Notwithstanding subsection (a), payment shall be made in accordance with the provisions of any judgment, decree, or order which:

 

(i)                                      creates for, or assigns to, a spouse, former spouse, child or other dependent of a Participant the right to receive all or a portion of the Participant’s benefits under the Plan for the purpose of providing child support, alimony payments or marital property rights to that spouse, child or dependent,

 

(ii)                                   is made pursuant to a State domestic relations law,

 

(iii)                                does not require the Plan to provide any type of benefit, or any option, not otherwise provided under the Plan, and

 

(iv)                               otherwise meets the requirements of Section 206(d) of ERISA, as amended, as a Qualified Domestic Relations Order, as determined by the Plan Administrator in accordance with its established procedures.

 

(c)                                   Notwithstanding anything herein to the contrary, if the amount payable to the alternate payee under a Qualified Domestic Relations Order is less than $3,500, such amount shall be paid in one lump sum as soon as practicable following the qualification of the order.  If such amount exceeds $3,500, it shall be paid in one lump sum as soon as practicable following the qualification of the order, unless the Qualified Domestic

 

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Relations Order provides that such payment may not be made without the consent of the alternate payee.  If a Qualified Domestic Relations Order requires the consent of the alternate payee prior to the payment of the amount awarded thereunder and if such amount exceeds $3,500, then such amount shall be paid in one lump sum as soon as practicable following receipt of the consent of the alternate payee, but in no event later than the date on which the Participant named in such order attains Normal Retirement Age.  Effective January 1, 1998, $5,000 shall be substituted for $3,500 for purposes of this subsection.

 

(d)                                  For the sole purpose of applying the provisions of Sections 5.04 and 10.11 with respect to the portion of an Account that has been made payable to an alternate payee pursuant to a Qualified Domestic Relations Order, such alternate payee shall be deemed to be a Participant.

 

14.02                      Facility of Payment

 

(a)                                   In the event that the Plan Administrator determines that any Participant or Beneficiary receiving or entitled to receive benefits under the Plan is incompetent or unable to care for his 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, sibling, adult child, 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.

 

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(b)                                  In the absence of the appointment of a legal guardian of the property of a minor, any payment due 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.

 

(c)                                   Notwithstanding the provisions of subsection (a) or (b), the Plan Administrator, in its sole discretion, may require that a legal guardian for the property of an incompetent or a minor be appointed, before authorizing any payment hereunder to or for the benefit of such minor or incompetent.

 

(d)                                  Payments made pursuant to this Section shall be a complete discharge of any obligation arising under the Plan with respect to such payments.

 

14.03                      Tax Withholding

 

The Trustee, the Plan Administrator, and the Employer shall withhold applicable taxes from payments made under the Plan, shall pay over the amounts so withheld to the Internal Revenue Service, or state or local tax authority, in accordance with applicable law, and shall report information to government agencies when required to do so by law.

 

14.04                      Prevention of Escheat

 

If the Plan Administrator cannot ascertain the whereabouts of any person to whom a payment is due under the Plan, the Plan Administrator may, prior to January 1, 2004, no earlier than 3 years and, after December 31, 2003, no earlier than 1 year, from the date such payment is due, mail a notice of such due and owing payment to the last known address of such person, as shown on the records of the Plan Administrator or the Employer.  If such person has not made written claim therefor within 3 months of the date of the mailing, the Plan Administrator may, if it so elects and upon receiving advice

 

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from counsel to the Plan, direct that such payment and all remaining payments otherwise due such person be canceled on the records of the Plan and the amount thereof applied to reduce the contributions of the Employer.  Upon such cancellation, the Plan and the Trust shall have no further liability therefor except that, in the event such person or his beneficiary later notifies the Plan Administrator of his whereabouts and requests the payment or payments due to  him under the Plan, the amount so applied shall be paid to him, without interest, in accordance with the provisions of the Plan.

 

14.05                      Elections and Notifications

 

(a)                                   Any elections, notifications or designations made by an Employee, Participant, Beneficiary, or spouse  pursuant to the provisions of the Plan shall be made and filed with the Plan Administrator in a time and manner determined by the Plan Administrator under rules uniformly applicable to all persons similarly situated.  In establishing such rules, the Plan Administrator shall have the authority in its discretion to provide that telephonic or electronic communication may be accepted in lieu of a written instrument, except to the extent otherwise required by law.

 

(b)                                  The Plan Administrator reserves the right to change from time to time the time and manner for making notifications, elections or designations under the Plan, if it determines that such action improves the administration of the Plan.  In the event of a conflict between the provisions for making an election, notification or designation set forth in the Plan and such new administrative procedures, those new administrative procedures shall prevail.

 

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(c)                                   The Plan Administrator shall have the authority to suspend the rights of Participants to make elections under the Plan if the Plan Administrator, in its discretion, deems such suspension to be necessary to preserve the interests of the Plan and its Participants.

 

(d)                                  Any Notice that is not received by the Plan Administrator or its delegate shall be without force or effect and shall not be binding on the Plan, regardless of the circumstances or cause of such nondelivery.  In no event shall the Plan, any Employer, the Committee, or the Plan Administrator by liable to any Employee, Participant, spouse of a Participant, Beneficiary, or any other person for the consequences of the nondelivery of any Notice required to be provided hereunder.

 

14.06                      Information

 

Each Participant, Beneficiary or other person entitled to a benefit, before any benefit shall be payable to him or on his account under the Plan, shall file with the Plan Administrator the information that it shall require to establish his rights and benefits under the Plan.

 

14.07                      Conditions of Employment Not Affected by Plan

 

The establishment of the Plan shall not confer any legal rights upon any Employee or other person for a continuation of employment, nor shall it interfere with the rights of the Employer to discharge any Employee and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant of the Plan.

 

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14.08                      Construction

 

(a)                                   The Plan shall be construed, regulated and administered under ERISA and the laws of the State of New York, except where ERISA controls.

 

(b)                                  For purposes of ERISA and other applicable laws of the United States or any state, the situs of the Plan and the Trust Fund shall be the State of New York.

 

(c)                                   The masculine pronoun shall include the feminine wherever appropriate.

 

(d)                                  The titles and headings of the Articles and Sections in this Plan are for convenience of reference only.  In the case of ambiguity or inconsistency, the text rather than the titles or headings shall control.

 

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APPENDIX A.  SPECIAL PROVISIONS FOR MiCRUS

 

MiCRUS has been a participating Employer in the Plan.  All provisions of the Plan, as set forth in Articles 1 through 14, inclusive, and in Appendix D, apply fully to MiCRUS and employees of MiCRUS, except to the extent that such provisions are modified in this Appendix.  This Appendix shall be applicable only during the period in which MiCRUS is a participating Employer in the Plan and shall cease to be effective as of October 1, 2000.

 

1.04                            Actual Deferral Percentage

 

For the purpose of determining the Actual Deferral Percentage of any group of Employees employed by MiCRUS, any Special Discretionary Contribution made pursuant to Section 4.13 of Appendix A shall be taken into account in the same manner as a Deferred Cash Contribution.

 

1.32                            Hour of Service means, with respect to any applicable computation period,

 

(a)                                   each hour for which the employee is paid or entitled to payment for the performance of duties for the Employer or an Affiliated Employer;

 

(b)                                  each hour for which the employee is paid or entitled to payment by the Employer or an Affiliated Employer on account of a period during which no duties are performed, whether or not the employment relationship has terminated, due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, uniformed service duty, or leave of absence, but not more than 501 hours for any single continuous period; and

 

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(c)                                   each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer or an Affiliated Employer, excluding any hour credited under (a) or (b), which shall be credited to the computation period or periods to which the award, agreement, or payment pertains rather than to the computation period in which the award, agreement, or payment is made.

 

No hours shall be credited on account of any period during which the employee performs no duties and receives payment solely for the purpose of complying with unemployment compensation, workers’ compensation, or disability insurance laws. The Hours of Service credited shall be determined as required by Title 29 of the Code of Federal Regulations, Sections 2530.200b-2(b) and (c).

 

1.50X                   Special Discretionary Contributions ” means amounts contributed pursuant to Section 4.13 of Appendix A.  For purposes of Section 1.401(k)-1(b)(5) of the Regulations, Special Discretionary Contributions made under the Plan shall be deemed “Qualified Nonelective Contributions.”

 

3.01                            Each Employee of MiCRUS shall be eligible to become a Participant at any time during service as a full time Regular Employee.

 

3.02                            Participation

 

(c)                                   An Employee of MiCRUS who has not satisfied the requirements of subsection (a) but who is eligible to receive an allocation of a Special Discretionary Contribution in accordance with Section 4.13 of Appendix A shall become a Participant in the Plan on the date that such allocation is made.

 

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(d)                                  Notwithstanding any provision hereof, no Employee of MiCRUS shall be eligible to make an election described in Section 4.01 for any period during which he is not a full time Regular Employee.

 

4.13                            Special Discretionary Contribution

 

(a)                                   MiCRUS, in its sole discretion, may make a Special Discretionary Contribution to the Plan, out of its Profits, not more than once per Plan Year.

 

(b)                                  If a Special Discretionary Contribution is made for a Plan Year, it shall be paid to the Trustee not later than the time prescribed by law for the filing of the Employer’s Federal income tax return, including extensions thereof, for the taxable year of the Employer that contains the last day of the Plan Year to which the contribution relates.

 

(c)                                   If a Special Discretionary Contribution is made for a Plan Year, it shall be allocated to the Employer Account of each Eligible Employee in the proportion that his Compensation for the Plan Year bears to the Compensation of all Eligible Employees for such Plan Year.

 

(d)                                  For purposes of subsection (c), an Employee of MiCRUS shall be deemed an Eligible Employee if, and only if, (i) he satisfies the requirements of Section 3.01 of Appendix A, (ii) the date on which he first completed an Hour of Service was no later than the first day of the Plan Year to which the Special Discretionary Contribution relates, (iii) he is an Employee in active employment, or is on an authorized leave of absence, on the last day of the Plan Year to which the Special Discretionary Contributions relates, and (iv) he is not eligible to participate in the MiCRUS Retirement Plan.

 

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APPENDIX B.  SPECIAL PROVISIONS FOR
TECHNOLOGY SERVICE SOLUTIONS (“TSS”)

 

Technology Service Solutions (“TSS”) has been a participating employer in the Plan.  All provisions of the Plan, as set forth in Articles 1 through 14, inclusive, and Appendix D apply fully to TSS and employees of TSS, except to the extent that such provisions are modified in this Appendix.  This Appendix shall be applicable only during the period in which TSS is a participating Employer in the Plan shall cease to be effective as of January 1, 1999.

 

4.02                            Employer Matching Contributions

 

(a)                                   TSS shall contribute, out of its Profits, on behalf of each of its Participants who elects to make Deferred Cash Contributions, an amount equal to 100% of the Deferred Cash Contributions made by the Participant during each payroll period; provided, however, that for this purpose, Deferred Cash Contributions in excess of 7% of the Participant’s Compensation for a payroll period shall not be taken into account.  In no event shall the Matching Contributions pursuant to this Section with respect to a Plan Year exceed 7% of the Participant’s Compensation while a Participant during such Plan Year.

 

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APPENDIX C.  SPECIAL RULES APPLICABLE
TO PUERTO RICO EMPLOYEES

 

The Plan includes as participating Employers entities that conduct business operations in Puerto Rico and covers Employees who perform services only in Puerto Rico.  All provisions of the Plan, as set forth in Articles 1 through 14, inclusive, apply fully to Employers conducting business in Puerto Rico and employees performing services in Puerto Rico, except to the extent that such provisions are modified in this Appendix.

 

1.04                            Actual Deferral Percentage

 

For the purpose of determining the Actual Deferral Percentage of a group of Puerto Rico Employees, and at the election of the Plan Administrator, which election may be made or changed each Plan Year, all or any portion of Matching Contributions made pursuant to Section 3.02 with respect to such Plan Year may be taken into account, in accordance with Section 1165(e)(3)(D)(ii)(I) of the Puerto Rico Code.

 

1.31                            Highly Compensated Employee ” means, for purposes of all determinations required to be made in accordance with the Puerto Rico Code, an employee of an Employer who is a Participant or who is eligible to become a Participant and whose compensation for a Plan Year exceeds the compensation of two-thirds of the employees of the Employer who are Participants or eligible to become Participants.

 

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1.45W               Puerto Rico Code ” means the Puerto Rico Internal Revenue Code of 1994, as amended from time to time.  References to specific sections of the Puerto Rico Code shall be deemed to refer to such sections as they may be amended or redesignated.

 

1.45X                   Puerto Rico Employee ” means an Employee of an Employer in Puerto Rico who is subject to income taxation under the laws of Puerto Rico.

 

1.45Y                    Puerto Rico Participant ” means a Puerto Rico Employee who has become Participant in accordance with Section 3.02 and who has not ceased to be a Participant in accordance with Section 3.05.

 

4.01                            Deferred Cash Contributions

 

(a)                                   (i)                                      Notwithstanding the provisions of this subsection, the Compensation reduction elected by a Puerto Rico Participant may not exceed 10% of his Compensation.

 

(f)                                     Notwithstanding any other provision of this Section, in no event shall the Deferred Cash Contributions of a Puerto Rico Participant in any calendar year exceed the lesser of (i) 10% of his Compensation or (ii) the excess, if any, of $7,500 over the amount contributed by the Puerto Rico Participant pursuant to Section 1169 of the Puerto Rico Code, determined without regard to contributions attributable to his spouse, if he resides with his spouse.  Effective January 1, 1998, $8,000 shall be substituted for $7,500 in the foregoing sentence.

 

(g)                                  This subsection shall not apply to Puerto Rico Participants.

 

(h)                                  This subsection shall not apply to Puerto Rico Participants.

 

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4.06                            Actual Deferral Percentage Test

 

(d)                                  For each Plan Year, the Actual Deferral Percentage for Highly Compensated Employees who are Puerto Rico Participants shall be subject to the limitation described in subsection (a), provided, however, that for purposes of this subsection, the Employer shall be deemed to have made the election described in subsection (b).  If the Plan Administrator determines that the limitation under this subsection has been exceeded, then the Plan Administrator shall apply the procedures described in subsection (c), provided, however, that clause (ii) of subsection (c) shall not be applicable and all Excess Contributions shall be distributed to the Highly Compensated Employee with respect to whom such Excess Contributions were determined in accordance with clause (i) of subsection (c).

 

4.07                            Actual Contribution Percentage Test

 

This Section shall not apply to Highly Compensated Employees who are Puerto Rico Participants.

 

4.08                            Aggregate Contribution Limitation

 

This Section shall not be applicable to Highly Compensated Employees who are Puerto Rico Participants.

 

4.09                            Additional Discrimination Testing Provisions

 

(d)                                  The provisions of subsections (a), (b), and (c) shall not be applied to test any Contributions made on behalf of Highly Compensated Employees who are Puerto Rico Participants.  In the event that any Highly Compensated Employee who is a Puerto Rico

 

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Participant participates in more than one plan of an Employer that includes a cash or deferred contribution arrangement under Section 1165(e) of the Puerto Rico Code, or if the plan and any other plan containing a cash or deferred contribution arrangement under Section 1165(e) of the Puerto Rico Code are treated as one plan for purposes of Section 1165(a)(3) or (a)(4) of the Puerto Rico Code, all such cash or deferred contribution arrangements shall be treated as a single arrangement for purposes of Section 4.06(d) of Appendix C.

 

4.12                            Return of Contributions

 

(d)                                  If all or part of an Employer’s deductions for contributions on behalf of Puerto Rico Participants are disallowed by the Secretary of the Treasury of Puerto Rico or his delegate, the portion of contributions to which that disallowance applies shall be returned to the Employer, upon its written request to the Trustee, without interest, but reduced by any investment losses attributable to those contributions, provided one year of the disallowance of the deduction.  For this purpose, all contributions made by each Employer on behalf of Puerto Rico Participants are expressly declared to be conditioned on their deductibility under Section 1023(n) of the Puerto Rico Code.  In the event that Deferred Cash Contributions are returned to an Employer in accordance with this subsection, then the provisions of subsection (c) shall apply to the amount so returned.

 

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APPENDIX D.  TOP-HEAVY PROVISIONS

 

A.                                    The following definitions apply to the terms used in this Appendix:

 

(i)                                      “applicable determination date” means, for any Plan Year, the last day of the preceding Plan Year;

 

(ii)                                   “top-heavy ratio” means the ratio of (A) the value of the aggregate of the Accounts under the Plan for key employees to (B) the value of the aggregate of the Accounts under the Plan for all key employees and non-key employees;

 

(iii)                                “key employee” means an employee who is in a category of employees determined in accordance with the provisions of Sections 416(i)(1) and (5) of the Code and any Regulations thereunder and, where applicable, on the basis of the Employee’s Statutory Compensation from the Employer or an Affiliate;

 

(iv)                               “non-key employee” means any Employee who is not a key employee;

 

(v)                                  “applicable Valuation Date” means the Valuation Date coincident with or immediately preceding the last day of the preceding Plan Year;

 

(vi)                               “required aggregation group” means any other qualified plan(s) of the Employer or an Affiliate in which there are members who are key employees or which enable(s) the Plan to meet the requirements of Section 401(a)(4) or 410(b) of the Code; and

 

(vii)                            “permissive aggregation group” means each plan in the required aggregation group and any other qualified plan(s) of the Employer or an Affiliate in which all members are non-key employees, if the resulting aggregation group continues to meet the requirements of Sections 401(a)(4) and 410(b) of the Code.

 

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B.                                      For purposes of this Appendix, the Plan shall be “top-heavy” with respect to any Plan Year if as of the applicable determination date the top-heavy ratio exceeds 60%.  The top-heavy ratio shall be determined as of the applicable Valuation Date in accordance with Sections 416(g)(3) and (4) of the Code and Article 6 of this Plan, and shall take into account any contributions made after the applicable Valuation Date but before the last day of the Plan Year in which the applicable Valuation Date occurs.  For purposes of determining whether the Plan is top-heavy, the account balances under the Plan will be combined with the account balances or the present value of accrued benefits under each other plan in the required aggregation group, and in the Employer’s discretion, may be combined with the account balances or the present value of accrued benefits under any other qualified plan in the permissive aggregation group.  Distributions made with respect to a Participant under the Plan during the 5-year period ending on the applicable determination date shall be taken into account for purposes of determining the top-heavy ratio; distributions under plans that terminated within such 5-year period shall also be taken into account, if any such plan contained key employees and therefore would have been part of the required aggregation group.

 

C.                                      The following provision shall be applicable to Participants for any Plan Year with respect to which the Plan is top-heavy.  An additional Employer contribution shall be allocated on behalf of each Participant and each Employee eligible to become a Participant who is a non-key employee, and who has not separated from service as of the last day of the Plan Year, to the extent that the contributions made on his behalf under Sections 4.02 for the Plan Year, and not necessary to be taken into account to meet the contribution percentage test set forth in Section 4.07, would otherwise be less than 3% of his remuneration.  However, if the greatest percentage of remuneration contributed on

 

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behalf of a key employee under Sections 4.01 and 4.02 for the Plan Year, disregarding any contributions made under Section 4.11 for the Plan Year, would be less than 3%, that lesser percentage shall be substituted for “3%” in the preceding sentence.  Notwithstanding the foregoing provisions of this paragraph, no minimum contribution shall be made under this Plan with respect to a Participant, or an Employee eligible to become a Participant, if the required minimum benefit under Section 416(c)(1) of the Code is provided to him by any other qualified pension plan of the Employer or an Affiliate.  For the purposes of this paragraph, remuneration has the same meaning as set forth in Section 4.10(c).

 

D.                                     If, during any Plan Year, the Plan is top heavy, the multiplier ‘1.25’ in Sections 415(e)(2)(B)(i) and (3)(B)(i) of the Code shall be reduced to ‘1.0’, and the dollar amount ‘$51,875’ in Section 415(e)(6)(B)(i)(I) of the Code shall be reduced to ‘$41,500’.  This Section shall not apply if:

 

(a)                                   The benefits or allocations provided for such Plan Year to each Participant who is a non-key employee would satisfy the requirements of Section C, if ‘4%” were substituted for ‘3%’ in each place that it appears in such subsection and ‘3%’ were substituted for ‘2%’ in Section 416(c)(1) of the Code; and

 

(b)                                  The top heavy ratio does not exceed 90%.

 

This Section shall not apply to any Plan Year beginning after December 31, 1999.

 

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APPENDIX E.  SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS IN
UNISON, INC. 401(k) SAVINGS AND
INVESTMENT PLAN

 

The provisions of this Appendix E shall be effective for the period commencing on December 10, 1997 and ending on August 15, 2001, and shall be applicable only as specified herein.

 

3.01                            Eligibility

 

Notwithstanding any provision hereof to the contrary, in no event shall an Employee who is then eligible to make elective deferrals, within the meaning of Section 402(g) of the Code, under the Unison Software, Inc. 401(k) Savings and Investment Plan, as amended from time to time, be eligible to become a Participant in the Plan.

 

139



 

APPENDIX F: SPECIAL PROVISIONS APPLICABLE TO FORMER EMPLOYEES OF
PRICEWATERHOUSE
COOPERS, LLP

 

The provisions of this Appendix F shall be applicable only to Participants who became Employees as a result of the acquisition by the Employer of certain assets of Pricewaterhouse Coopers, LLP and shall be effective only for the period commencing on October 1,  2002 and ending on December 31, 2002.

 

1.45Z                    ‘PwCC Participant’ shall mean a Participant who became an Employee as a result of the acquisition by the Employer of certain assets of Pricewaterhouse Coopers, LLP on October 1, 2002.

 

4.01                            Deferred Cash Contributions and Catch-Up Contributions

 

(e)                                   Notwithstanding any other provision of this subsection, if a PwCC Participant made elective deferrals, within the meaning of Section 402(g)(3) of the Code, during 2002, under the Savings Plan for Employees and Partners of Pricewaterhouse Coopers, LLP, or the Savings Plan of BPO (each of which plans is a qualified plan maintained by Pricewaterhouse Coopers, LLP or an affiliate thereof), and also made Deferred Cash Contributions  under the Plan, and the sum of such elective deferrals and Deferred Cash Contributions exceeded the dollar limit specified in Section 4.01(c) for 2002, then the PwCC Participant shall be deemed to have elected to receive a refund of Excess Deferrals from the Plan, in the amount by which the sum of such elective deferrals and Deferred Cash Contributions exceeds such dollar limit.

 

140



 

4.02                            Employer Matching Contributions

 

(c)                                   For the Plan Year ending on December 31, 2002, the Employer shall make a special adjustment to the Matching Contributions made on behalf of PwCC Participants, which adjustment shall be taken into account for all purposes as a Matching Contribution.  The amount of the special adjustment shall be equal to the excess, if any, of (i) the lesser of (A) 50% of the Participant’s Deferred Cash Contributions made during the period beginning on October 1, 2002 and ending on December 31, 2002, or (B) 3% of the Participant’s Compensation for such period, over (ii) the Matching Contributions made on behalf of the Participant for such period in accordance with subsection (a).  Any amount required to be contributed under this subsection shall be contributed by the Employer as soon as practicable following December 31, 2002.

 

141



 

APPENDIX G.  SPECIAL PROVISIONS APPLICABLE TO FORMER EMPLOYEES OF
VF CORPORATION

 

The provisions of this Appendix G shall be applicable only to individuals who had been employed by VF Corporation immediately prior to the effective date of a contract between the Employer and VF Corporation, pursuant to which the Employer agreed to provide certain services to VF Corporation, and who became Employees in accordance with the provisions  of such contract.

 

3.01                            Eligibility

 

(c)                                   Notwithstanding any provision of this subsection, subsection (a) shall be applicable to any individual who was employed by VF Corporation immediately prior to the effective date of  a contract between the Employer and VF Corporation and who becomes an Employee as the result of, and in accordance with the terms of such contract.

 

3.02A                  Participation by 401(k) Pension Program Participants after December 31, 2004

 

(f)                                     The provisions of this Section shall not be applicable to any individual who was employed by VF Corporation immediately prior to the effective date of a contract between the Employer and VF Corporation and who becomes an Employee as the result of, and in accordance with the terms of, such contract.  No individual to whom this subsection applies shall be a 401(k) Pension Program Participant.

 

142


Exhibit 10.2

 

IBM Executive Deferred Compensation Plan

(Amended and Restated Effective January 1, 2000)

(the “Plan”)

 

(reflecting all Plan amendments through January 1, 2005)

 

1.  Elections made by eligible participants under Section 5.02 of the Plan (relating to alternative methods of payment) shall be effective if made at least six months in advance of, and in the calendar year preceding, the participant’s termination of employment. (amendment effective July 31, 2001)

 

2.  All references to “TDSP,” “IBM Tax-Deferred Savings Plan” and “IBM TDSP 401(k) Plan” are replaced with such plan’s current name, “IBM Savings Plan.”  (amendment effective October 1, 2002)

 

3.  Section 3.02 is restated in its entirely to read as follows:

 

3.02   Matching Contributions

 

The amount of Company Matching Contributions credited to a Participant who is not a 401(k) Pension Program Participant (as defined in the IBM Savings Plan) for each payroll period shall be equal to 50% of such Participant’s Deferrals for the payroll period and, effective January 1, 2005, the amount of Company Matching Contributions credited to a Participant who is a 401(k) Pension Program Participant shall be equal to 100% of such Participant’s Deferrals for the payroll period; provided however, that in neither case shall Company Matching Contributions be made for a Participant’s Deferrals in excess of 6% of the Participant’s Compensation for that payroll period.  Company Matching Contributions will be made in units of IBM Stock with no right to transfer such units, except as otherwise provided in this Plan.  No Company Matching Contributions shall be made to a Participant who is a 401(k) Pe nsion Program Participant unless such Participant has, on or before the last day of the payroll period to which such Company Matching Contributions relate, attained his Program Eligibility Date (as defined in the IBM Savings Plan).  (amendment effective January 1, 2005)

 

4.  Section 5.02, Method of Payment, is amended by inserting the following sentence following the end of the last sentence thereof:  “Effective January 1, 2005, payment of Accounts (including in the event of a Participant’s death as described in the preceding sentence) shall be made based on the value of the Account as of the date such payment is processed.” (amendment effective January 1, 2005)

 


Exhibit 10.3

 

IBM 2003 EMPLOYEES STOCK PURCHASE PLAN (the “Plan”)

(as amended through April 1, 2005)

 

[NOTE :  This exhibit reflects various amendments to the Plan.  Section 3 of the Plan was amended to eliminate the requirement that Offering Periods be semi-annual, and that each Offering Period be limited to six months in duration.  Section 5 and Section 7 were amended to reflect administrative payroll deduction matters.  Section 9 was amended to reflect the manner in which shares can be registered under the Plan.  No other changes have been made to the Plan, and the maximum number of shares that may be issued under the Plan, as set forth in the preamble to the Plan, remains unchanged.]

 

The purpose of this Plan is to provide employees an opportunity to purchase IBM stock through offerings to commence on a date no earlier than July 1, 2003, as determined by the Committee.  50,000,000 shares of IBM stock in the aggregate ($0.20 par value) have been approved for this purpose.

 

1. Administration.   The Plan shall be administered by a Committee appointed by the Board of Directors from members of senior management, consisting of at least three members.  The Committee shall have authority to make rules and regulations for the administration of the Plan, including establishing the purchase price in accordance with Section 4 below.  The Committee’s interpretations and decisions with regard thereto shall be final and conclusive.  At any time and from time to time, the Board may delegate to the Committee the Board’s power and authority under the Plan pursuant to such conditions or limitations as the Board may establish.

 

2. Eligibility.   Except as provided below, all employees of the Corporation or its subsidiaries shall be eligible to participate in the Plan in accordance with such rules as may be prescribed by the Committee from time to time, which rules, however, shall neither permit nor deny participation in the Plan contrary to the requirements of the Internal Revenue Code (including, but not limited to, Section 423 (b)(3), (4), (5), and (8)  thereof) and the regulations promulgated thereunder.  Sub-plans established under the Plan outside of the United States need not comply with the Internal Revenue Code and associated regulations.  No employee may be granted an option if such employee, immediately after the option is granted, owns 5% or more of the total combined voting power orvalue of the stock of the Corporation or any subsidiary.  For purposes of the preceding sentence, the rules of Section 424(d) of the Internal Revenue Code shall apply in determiningthe stock ownership of an employee, and stock that the employee may purchase under outstanding options shall be treated as stock owned by the employee.

 

3. Offering Periods.   The Corporation shall make available Offering Periods to employees to purchase IBM stock under this Plan (each, an “Offering Period”). Each Offering Period shall be of a length determined by the Committee, during which (or during such portion thereof as an employee may elect to participate) the amounts received as compensation by an employee shall constitute the measure of such of the employee’s participation in the Offering Period as is based on compensation.

 

4. Purchase of Shares.   Shares shall be purchased each pay period during an Offering Period.  Prior to the commencement of each Offering Period, the Committee shall establish the purchase price for each share purchased during such Offering Period.  The purchase price shall be no lower than the lesser of 85% of the average market price on the first business day of each Offering Period or 85% of the average market price on the last business day of each pay period.  The purchase price established by the Committee may include, without limitation, a purchase price that is no lower than 85% of the average market price on the last business day of each pay period or a purchase price that is no lower than 85% of the average market price on the first business day of each Offering

 



 

Period.  The purchase price established by the Committee may be a fixed price or determined by formula.  Each employee participating in the Plan during any Offering Period shall be granted an option, upon the effective date of such Offering Period, for as many full and fractional shares of IBM stock as the participating employee may elect to purchase with up to 10% of the compensation received during the specified Offering Period, to be paid by payroll deductions during such Offering Period.  Notwithstanding the foregoing, in no event shall the number of shares purchased by an employee in any Offering Period exceed 1,000 shares.  As of the last day of each pay period during any Offering Period, the account of each participating employee shall be totaled, and the employee shall be deemed to have exercised an option to purchase one or more full or fractional shares at the then-applicable price; the employee’s account shall be charged for the amount of the purchase; and the ownership of such share or shares shall be appropriately evidenced on the books of the Corporation.  Additional shares covered by the employee’s option shall be purchased in the same manner, as of the last day of each subsequent pay period during the Offering Period.

 

5. Participation.   An employee eligible for participation on the effective date of any Offering Period may participate in such Offering Period by completing and forwarding a payroll deduction authorization to the employee’s appropriate payroll location in accordance with payroll procedures established by IBM.  The form will authorize a regular payroll deduction from the employee’s compensation, and must specify the date on which such deduction is to commence, which day may not be retroactive.  The form must be received by the Corporation’s payroll department in accordance with payroll procedures established by IBM.

 

6. Deductions.   The Corporation shall maintain payroll deduction accounts for all participating employees.  With respect to any Offering Period under this Plan, an employee may authorize a payroll deduction of a whole percentage (up to a maximum of 10%) of the compensation the employee receives during the Offering Period (or during such portion thereof in which the employee may elect to participate). No employee may be granted an option that permits his or her rights to purchase stock under this Plan, and any other stock purchase plan of the Corporation and its subsidiaries, to accrue at a rate that exceeds $25,000 of the fair market value of such stock (determined at the effective date of the applicable Offering Period) for each calendar year in which the option is outstanding at any time.

 

7. Deduction Changes.   All changes to payroll deductions under the Plan shall be in accordance with payroll procedures established by IBM.  An employee may increase or decrease the employee’s payroll deduction by filing a new payroll deduction authorization at any time during an Offering Period.  The change may not become effective sooner than the next pay period after receipt of the authorization.

 

8. Employee Accounts and Certificates.   Upon purchase of one or more full or fractional shares by a Plan participant pursuant to Section 4 hereof, the Corporation shall establish a book entry account in the name of the employee to reflect the share(s) purchased at that time.  Certificates shall be issued only on request for full shares and also when necessary to comply with transaction requirements outside the United States.  To request certificates, employees may call the Voice Response Service on tieline 771-7000 or outside line (781-575-2727) or send an E-mail to ibm@equiserve.com.  In the event a participant terminates his or her account, any fractional share held in the account will be paid to the participant in cash.

 

9. Registration of Shares.   Shares may be registered only in the name of the employee, or, if the employee so indicates on the employee’s payroll deduction authorization form, in the employee’s name jointly with another joint tenant, with right of survivorship.  An employee who is a resident of a jurisdiction that does not recognize such a joint tenancy may have shares registered in the employee’s name as tenant in common or as community property with another person, without right of survivorship.

 



 

10. Definitions.   The term “Corporation” or “IBM” means International Business Machines Corporation, a New York corporation.  The term “IBM stock” means the commonstock of IBM.  The phrase “average market price” means the average of the high and low composite prices of IBM stock on the New York Stock Exchange on a given day or, if no sales of IBM stock were made on that day, the average of the high and low composite prices of IBM stock on the next preceding day on which sales were made on said Exchange.  The term “subsidiary” means a subsidiary of the Corporation within the meaning of Section 424(f) of the Internal Revenue Code and the regulations promulgated thereunder, provided, however, that this Plan shall not be deemed to cover the employeesof any subsidiary that did not participate in the IBM 2000 Employees Stock Purchase Plan, unless so authorized by the Committee.

 

11. Rights as a Stockholder.   None of the rights or privileges of a stockholder of the Corporation shall exist with respect to shares purchased under this Plan unless and untilsuch shares shall have been appropriately evidenced on the books of the Corporation.

 

12. Rights on Retirement, Death, or Termination of Employment.   In the event of a participating employee’s retirement, death, or termination of employment, the employee shall be ineligible to continue to participate in the Plan, and no payroll deduction shall be taken from any pay due and owing to the employee after the pay period during which the employee became ineligible.

 

13. Rights Not Transferable.   Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee’s lifetime only by the employee.

 

14. Application of Funds and Administrative Fees.   All funds received or held by the Corporation under this Plan may be used for any corporate purpose.  The Committee may impose reasonable administrative fees on participating employees to defray the administrativecosts of the Plan, which shall in no event exceed the actual administrative costs of the Plan.  Initially, the fee shall be $6 per participating employee per Offering Period.

 

15. Adjustments in Case of Changes Affecting IBM Stock.   In the event of a subdivision of outstanding shares, or the payment of a stock dividend, the number of shares approved for this Plan shall be increased proportionately, and such other adjustments shall be made as may be deemed equitable by the Board of Directors.  In the event of any other change affecting IBM stock, such adjustments shall be made as may be deemed equitable by the Board of Directors to give proper effect to such event.

 

16. Disposition Restriction.   If a participating employee disposes of any share purchased under the Plan during an Offering Period before the expiration of that Offering Period, the employee shall not be eligible to continue to participate in the Plan for the remainder of that Offering Period and the following Offering Period.  For purposes of this Section, the term “disposition” shall be defined in accordance with Section 424(c) of the Internal Revenue Code, except that the issuance of a certificate also shall be treated as a disposition, but a transfer by reason of legal process shall not be treated as a disposition for purposes of this Section.

 

17. Amendment of the Plan.  Notwithstanding anything to the contrary contained herein, without the approval of a majority of the shares of stock of the Corporation votedat a meeting duly called, no amendment shall be made (i) increasing the number of shares approved for this Plan (other than as provided in section 15 hereof) or (ii) decreasing the purchase price per share to less than the lesser of (x) 85 percent of the average market price on the first business day of each Offering Period or (y) 85 percent of the average market price on the last business day of each pay period.  Subject to the limitations set forth in the immediately preceding

 



 

sentence, the Board of Directors may at any time, or from time to time, amend this Plan in any respect, including without limitation by (i) increasing or decreasing the purchase price per share, (ii) excluding highly compensated employees (within the meaning of section 414(q) of the Internal Revenue Code) from participation, (iii) decreasing the maximum amount of payroll deduction for purchases and the number of shares that employees may purchase during any offering period, (iv) suspending the Plan and purchases thereunder for a period of time, (v) modifying the offering period in which employees may purchase stock under this Plan (except that an offering period may not exceed twenty-four (24) months), and (vi) establishing sub-plans under the Plan that permit offerings to employees of certain subsidiaries,which sub-plans are not intended to satisfy the requirements of Section 423 of the Internal Revenue Code, in each case in accordance with applicable laws, and in the case of clauses (i) through (v), in accordance with the requirements of the Internal Revenue Code (including, but not limited to, Section 423(b)) and the regulations thereunder.

 

18. Termination of the Plan.   This Plan and all rights of employees under any offering hereunder shall terminate:

 

(a) on the day that participating employees become entitled to purchase a number of shares equal to or greater than the number of shares remaining available for purchase.  If the number of shares so purchasable is greater than the shares remaining available, the available shares shall be allocated by the Committee among such participating employees in such manner as it deems fair, or

 

(b) at any earlier time, including during any periods that the Plan is suspended as the Board of Directors may determine from time to time, at the discretion of the Board.

 

19. Governmental Regulations.   The Corporation’s obligation to sell and deliver IBM stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance, or sale of such stock.

 

20. Plan Shares.   Shares for the Plan may be sourced from shares purchased in the open market, treasury shares, or authorized and unissued shares.

 


EXHIBIT 11

 

COMPUTATION OF BASIC AND DILUTED

EARNINGS PER SHARE

(UNAUDITED)

 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004 *

 

Number of shares on which basic earnings per share is calculated:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares during period

 

1,628,672,602

 

1,691,686,431

 

 

 

 

 

 

 

Add - Incremental shares under stock compensation plans

 

27,872,651

 

30,004,489

 

 

 

 

 

 

 

Add - Incremental shares associated with convertible notes

 

3,900,834

 

4,373,407

 

 

 

 

 

 

 

Add- Incremental shares associated with contingently issuable shares

 

115,716

 

1,327,970

 

 

 

 

 

 

 

Number of shares on which diluted earnings per share is calculated

 

1,660,561,803

 

1,727,392,297

 

 

 

 

 

 

 

Income from continuing operations (millions)

 

$

1,407

 

$

1,364

 

 

 

 

 

 

 

Loss from discontinued operations (millions)

 

5

 

1

 

 

 

 

 

 

 

Net income from total operations on which basic earnings per share is calculated (millions)

 

$

1,402

 

$

1,363

 

 

 

 

 

 

 

Income from continuing operations (millions)

 

$

1,407

 

$

1,364

 

 

 

 

 

 

 

Less - net income applicable to contingently issuable shares (millions)

 

1

 

 

 

 

 

 

 

 

Income from continuing operations on which diluted earnings per share is calculated (millions)

 

1,406

 

1,364

 

 

 

 

 

 

 

Loss from discontinued operations on which basic and diluted earnings per share is calculated (millions)

 

5

 

1

 

 

 

 

 

 

 

Net income from total operations on which diluted earnings per share is calculated (millions)

 

$

1,401

 

$

1,363

 

 


* Restated to include the impact of share-based compensation expense; see Note 3 on page 6 for additional information.

 



 

 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004**

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Assuming dilution

 

 

 

 

 

Continuing operations

 

$

0.85

 

$

0.79

 

Discontinued operations

 

0.00

 

0.00

 

Total

 

$

0.84

*

$

0.79

 

 

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

0.86

 

$

0.81

 

Discontinued operations

 

0.00

 

0.00

 

Total

 

$

0.86

 

$

0.81

 

 


* Does not total due to rounding.

 

** Restated to include the impact of share-based compensation expense; see Note 3 on page 6 for additional information.

 

Stock options to purchase 144,734,490 shares and 125,758,722 shares were outstanding as of March 31, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective periods was greater than the average market price of the common shares and, therefore, the effect would have been antidilutive.

 


EXHIBIT 12

 

COMPUTATION OF RATIO OF INCOME FROM
CONTINUING OPERATIONS TO FIXED CHARGES
FOR THREE MONTHS ENDED  MARCH 31,
(UNAUDITED)

 

(Dollars in millions)

 

2005

 

2004 *

 

 

 

 

 

 

 

Income from continuing operations before income taxes (1)

 

$

2 ,010

 

$

1,950

 

 

 

 

 

 

 

Add: Fixed charges, excluding capitalized interest

 

291

 

260

 

 

 

 

 

 

 

Income as adjusted before income taxes

 

$

2,301

 

$

2,210

 

 

 

 

 

 

 

Fixed charges:

 

 

 

 

 

Interest expense

 

$

176

 

$

143

 

Capitalized interest

 

3

 

 

Portion of rental expense representative of interest

 

115

 

117

 

 

 

 

 

 

 

Total fixed charges

 

$

294

 

$

260

 

 

 

 

 

 

 

Ratio of income from continuing operations to fixed charges

 

7.83

 

8.50

 

 


(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.

 

* Restated to include the impact of share-based compensation expense; see Note 3 on page 6 for additional information.

 



 

SEGMENT INFORMATION - ON CONTINUING OPERATIONS BASIS*

(UNAUDITED)

 

 

 

 

 

Hardware Segments

 

(Dollars in millions)

 

Global
Services

 

Systems and
Technology
Group

 

Personal
Systems
Group

 

Quarter Ended March 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue

 

$

11,696

 

$

3,869

 

$

2,739

 

Internal revenue

 

745

 

235

 

32

 

Total revenue

 

$

12,441

 

$

4,104

 

$

2,771

 

Pre-tax income (loss)

 

$

942

 

$

109

 

$

(17

)

 

 

 

 

 

 

 

 

Revenue year-to-year change

 

5.6

%

2.3

%

(2.7

)%

Pre-tax income year-to-year change

 

(4.9

)%

(35.9

)%

(54. 5

)%

Pre-tax income margin

 

7.6

%

2.7

%

(0.6

)%

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue

 

$

11,024

 

$

3,776

 

$

2,826

 

Internal revenue

 

762

 

236

 

23

 

Total revenue

 

$

11,786

 

$

4,012

 

$

2,849

 

Pre-tax income (loss)

 

$

991

 

$

170

 

$

(11

)

 

 

 

 

 

 

 

 

Pre-tax income margin

 

8.4

%

4.2

%

(0.4

)%

 

 

 

 

 

 

 

 

nm - not meaningful

 

 

 

 

 

 

 

 

Reconciliations to IBM as Reported:

 

(Dollars in millions)

 

Quarter Ended
March 31, 2005

 

Quarter Ended
March 31, 2004

 

Revenue:

 

 

 

 

 

Total reportable segments

 

$

24,650

 

$

23,736

 

Eliminations/other

 

(1,742

)

(1,561

)

Total IBM Consolidated

 

$

22,908

 

$

22,175

 

 

 

 

 

 

 

Pretax income:

 

 

 

 

 

Total reportable segments

 

$

2,291

 

$

2,326

 

Incremental equity compensation expense

 

(246

)

(340

)

Eliminations /other

 

(35

)

(36

)

Total IBM Consolidated

 

$

2,010

 

$

1,950

 

 


* Segment information for the quarters ending March 31, 2005 and March 31, 2004 does not include the impacts of the company’s implementation of SFAS 123(R), “Share-Based Payment” in the first quarter.

 



 

Software

 

Global
Financing

 

Enterprise
Investments

 

Total
Segments

 

 

 

 

 

 

 

 

 

$

3,551

 

$

579

 

$

292

 

$

22,726

 

461

 

449

 

2

 

1,924

 

$

4,012

 

$

1,028

 

$

294

 

$

24,650

 

$

893

 

$

396

 

$

(32

)

$

2,291

 

 

 

 

 

 

 

 

 

3.7

%

8.8

%

6.1

%

3.9

%

4.6

%

5.9

%

38.5

%

(1.5

)%

22.3

%

38.5

%

(10.9

)%

9.3

%

 

 

 

 

 

 

 

 

$

3,466

 

$

665

 

$

275

 

$

22,032

 

401

 

280

 

2

 

1,704

 

$

3,867

 

$

945

 

$

277

 

$

23,736

 

$

854

 

$

374

 

$

(52

)

$

2, 326

 

 

 

 

 

 

 

 

 

22.1

%

39.6

%

(18.8

)%

9.8

%

 


Exhibit 31.1

 

CERTIFICATION 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

 

I, Samuel J. Palmisano, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.                designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.               designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.                evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.               disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 



 

a.                all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.               any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: April 26, 2005

 

 

 

/s/ Samuel J. Palmisano

 

 

 

  Samuel J. Palmisano

 

  Chairman, President and Chief Executive Officer

 


Exhibit 31.2

 

CERTIFICATION 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

 

I, Mark Loughridge, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.                designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.               designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.                evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.               disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 



 

a.                all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.               any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: April 26, 2005

 

 

 

/s/ Mark Loughridge

 

 

 

Mark Loughridge

 

Senior Vice President

 

Chief Financial Officer

 


Exhibit 32.1

 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Samuel J. Palmisano, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)                The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)                The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of  the Company.

 

 

/s/ Samuel J. Palmisano

 

 

 

 

Samuel J. Palmisano

 

Chairman, President and Chief Executive Officer

 

April 26, 2005

 

A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

 


Exhibit 32.2

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Loughridge, Senior Vice President, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)                The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)                The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Mark Loughridge

 

 

 

 

Mark Loughridge

 

Senior Vice President, Chief Financial Officer

 

April 26, 2005

 

A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.