IBM SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF THE PLAN
The following description of the IBM Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan prospectus for a complete description of the Plan’s provisions.
General
The Plan was established by resolution of IBM’s Retirement Plans Committee (the “Committee”) effective July 1, 1983 and Plan assets are held in trust for the benefit of its participants. The Plan offers all eligible active, full-time and part-time regular and long-term supplemental U.S. employees of IBM and certain of its domestic related companies and partnerships an opportunity to defer from one to eighty percent of their eligible compensation for contribution to any of twenty-three investment funds. The investment objectives of the twenty-three funds are described in Note 3, Description of Investment Funds. In addition, participants are able to contribute up to 10% of their eligible compensation on an after-tax basis. (After-tax contributions are not available for employees working in Puerto Rico.) Annual contributions are subject to the legal limits allowed by Internal Revenue Service (“IRS”) regulations.
Effective January 1, 2005, the Plan allows participants to invest their account balances in more than 175 mutual fund investment options through a “mutual fund window”. Participants may direct investments into this mutual fund window in addition to the various primary investment funds offered by the Plan.
Effective January 1, 2005, participants also have the choice to enroll in a “disability protection program” under which a portion of the participant’s account is used to pay premiums to purchase term insurance (underwritten by Metropolitan Life Insurance Company), which will pay the amount of their 401(k) deferral contributions and/or matching contributions into their accounts in the event the participant becomes disabled while insured.
At December 31, 2005 and 2004, the number of participants with an account balance in the Plan was 223,186 and 223,578, respectively.
The Plan qualifies under Section 401(a) of the Internal Revenue Code of 1986, as amended, and is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended.
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Administration
The Plan is administered by the Committee, which appointed certain officials of IBM to assist in administering the Plan. The Committee appointed State Street Bank and Trust Corporation (“SSBT”), as Trustee, to safeguard the assets of the funds and State Street Global Advisors (“SSGA”), the institutional investment management affiliate of State Street Bank and Trust Corporation, The Vanguard Group and other investment managers to direct investments in the various funds. Hewitt Associates (“Hewitt”) is the provider of record keeping, participant services, and operator of the IBM Savings Plan Service Center in Lincolnshire, Illinois. Communications services are provided by Hewitt as well as The Vanguard Group.
Fidelity Investments Institutional Operations Company, Inc. is the provider of administrative services relating to the mutual fund window that became effective January 1, 2005.
Contributions
For eligible employees hired prior to January 1, 2005 (and certain employees hired thereafter in connection with a particular transaction, as noted in the IBM Savings Plan document), IBM contributes to the Plan a “matching contribution” equal to fifty percent of the first six percent of annual eligible compensation the employee defers (such that the maximum match is three percent of eligible compensation).
Effective January 1, 2005, other eligible employees (i.e., generally those hired on and after January 1, 2005) participate in the IBM Savings Plan under certain new Plan provisions referred to as the “IBM Pension Program offered through the IBM Savings Plan.” These employees are automatically enrolled to make 401(k) contributions at three percent of eligible compensation after approximately thirty days of employment with IBM unless they elect otherwise. After completing one year of service, IBM contributes to the Plan a “matching contribution” equal to one hundred percent of the first six percent of annual eligible compensation the employee defers (such that the maximum match is six percent). IBM matching contributions for such employees will be automatically adjusted after year-end to provide the full IBM matching contribution for their aggregate 401(k) deferral contributions for the year.
Starting January 1, 2008, IBM intends to introduce an enhanced plan design that will be called the 401(k) Plus Plan and will provide employer contributions for eligible participants as follows, based upon which, if any, IBM pension formula the employee was eligible for on December 31, 2007:
IBM Pension Plan
Eligibility at 12/31/07 | | 2008 Automatic
Contribution | | 2008 IBM Matching
Contribution |
Pension Credit Formula | | 4% | | 100% on 6% of eligible pay |
Personal Pension Account | | 2% | | 100% on 6% of eligible pay |
401(k) Pension Program | | 1% | | 100% on 5% of eligible pay |
Under the intended 2008 plan design, some participants who were eligible to participate in the Personal Pension Account may also receive transition credits contributed to the IBM Savings Plan, if
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they had been eligible for transition credits under the IBM Personal Pension Account formula. In addition, an additional contribution equal to 5% of eligible compensation (referred to as a “Special Savings Award”) will be added to the accounts of participants who are non-exempt employees and who participated in the Pension Credit Formula as of December 31, 2007.
Eligible compensation under the IBM Savings Plan includes regular salary, commissions, overtime, shift premium and similar additional compensation payments for nonscheduled workdays, recurring payments under any form of employee variable compensation plan, regular IBM Short-Term Disability Income Plan payments, holiday pay, and vacation pay, but excludes payments made under any executive incentive pay plan.
Participants may choose to have their contributions invested entirely in one of, or in any combination of, the following funds in multiples of one percent. These funds and their investment objectives are more fully described in Note 3, Description of Investment Funds.
Life Strategy Funds (4)
Income Plus Life Strategy Fund
Conservative Life Strategy Fund
Moderate Life Strategy Fund
Aggressive Life Strategy Fund
Core Funds (6)
Stable Value Fund
Inflation Protected Bond Fund
Total Bond Market Fund
Total International Stock Market Index Fund
Total Stock Market Index Fund
Real Estate Investment Trust Index Fund
Extended Choice Funds (13)
Money Market Fund
Long-Term Corporate Bond Fund
High Yield and Emerging Markets Bond Fund
Equity Income Fund
European Stock Index Fund
Large Company Index Fund
Large-Cap Value Index Fund
Small-Cap Value Index Fund
Large-Cap Growth Index Fund
Pacific Stock Index Fund
Small/Mid-Cap Stock Index Fund
Small-Cap Growth Index Fund
IBM Stock Fund
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IBM Savings Plan participants also have access to the “ mutual fund window” investments effective January 1, 2005, as previously described.
Participants may change their deferral percentage and investment selection for future contributions at any time. The changes will take effect for the next eligible pay cycle so long as the request is completed before the respective cutoff dates. Also, the participant may transfer part or all of existing account balances among funds in the Plan once daily, subject to the IBM Savings Plan restrictions on trading. The restrictions include:
· Direct transfers from the Stable Value Fund to the Money Market Fund are prohibited. Any funds that are transferred out of the Stable Value Fund cannot be transferred into the Money Market Fund for a period of 90 days.
· 30-Day Trading Block. When money is transferred out of an investment fund other than the Stable Value Fund, the Money Market Fund or the Mutual Fund Window, the participant must wait 30 calendar days before being able to transfer money back into that fund.
A service fee will be assessed for each transfer in excess of eight in a calendar year.
IBM is committed to preserving the integrity of the IBM Savings Plan as a long-term savings vehicle for its employees. Frequent, short-term trading that is intended to attempt to take advantage of pricing lags in mutual funds can harm long-term investors, or increase trading expense in general. Therefore, the IBM Savings Plan reserves the right to take appropriate action to curb short-term round trip transactions (buying/selling) into the same fund within five (5) business days.
Participant Accounts
The Plan record keeper (Hewitt) maintains an account in the name of each participant to which each participant’s contributions and share of the net earnings, losses and expenses, if any, of the various investment funds are recorded. The earnings on the assets held in each of the funds and all proceeds from the sale of such assets are held and reinvested in the respective funds.
Participants may transfer rollover contributions of pre-tax dollars from other qualified savings plans or conduit Individual Retirement Accounts (IRAs that exclusively hold a pre-tax distribution from a qualified plan) into their Plan accounts. Rollovers must be made in cash within the time limits specified by the IRS; stock or in-kind rollovers cannot be accepted. These rollovers are limited to active employees on the payroll of IBM (or affiliated companies) who have existing accounts in the Plan. Retirees are not eligible for such rollovers, except that a retiree or separated employee who has an existing account in the Plan may rollover a lump-sum distribution from an IBM-sponsored qualified retirement plan, including the IBM Personal Pension Plan. After-tax funds may also be rolled over in the Plan. Participant contributions for 2005 of $1,204 million include rollover activity totaling approximately $84 million.
The interest of each participant in each of the funds is represented by units/shares credited to the participant’s account.
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On each valuation date, the unit/share value of each fund is determined by dividing the current investment value of the assets in that fund on that date by the number of units/shares in the fund. The investment value of assets equals the market value of assets for all funds except the Stable Value Fund for which the investment value of assets equals the contract value of assets. In determining the unit/share value, new contributions that are to be allocated as of the valuation date are excluded from the calculation. The number of additional units to be credited to a participant’s account for each fund, due to new contributions, is equal to the amount of the participant’s new contributions to the fund divided by the unit value for the applicable fund as determined on the valuation date.
Contributions made to the Plan as well as interest, dividends or other earnings of the Plan are generally not included in the taxable income of the participant until withdrawal, at which time all earnings and contributions withdrawn generally are taxed as ordinary income to the participant. Additionally, withdrawals by the participant before attaining age 59 1/2 generally are subject to a penalty tax of 10 percent.
Consistent with provisions established by the IRS, the Plan’s 2005 limit on employee salary deferrals was $14,000. (The limit increases to $15,000 for 2006.) Those who were age 50 or older during 2005 could take advantage of a higher pre-tax contribution limit of $18,000 (which increases to $20,000 for 2006). The IRS scheduled increases for the maximum contribution limit will stop in 2006. The 2005 maximum annual deferral amount for employees residing in Puerto Rico was limited by local government regulations to the lesser of $8,000 or ten percent of eligible compensation.
Vesting
Participants in the Plan are at all times fully vested in their account balance, including deferral contributions, employer matching contributions and earnings thereon, if any.
Distributions
Participants who have attained age 59 1/2 may request a distribution of all or part of the value in the account. Up to four distributions are allowed each year and the minimum amount of any such distribution shall be the lesser of the participant’s account balance or $500.
In addition, participants who (1) retire under the prior IBM Retirement Plan provisions of the IBM Personal Pension Plan, or (2) become eligible for benefits under the IBM Long-Term Disability Plan or the IBM Medical Disability Income Plan, or (3) separate and have attained age 55, may also elect to receive the balance of their account either in annual installments over a period not to exceed ten years or over the participant’s life expectancy, recalculated annually, or defer distribution until age 70 1/2.
Withdrawals for financial hardship are permitted provided they are for a severe and immediate financial need, and the distribution is necessary to satisfy that need. Employees are required to fully use the Plan loan program, described below, before requesting a hardship withdrawal. Only an
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employee’s deferral contributions are eligible for hardship withdrawal; earnings and IBM matching contributions are not eligible for withdrawal. Employees must submit evidence of hardship to Hewitt, who will determine whether the situation qualifies for a hardship withdrawal based on direction from IBM. A hardship withdrawal is taxed as ordinary income to the employee and may be subject to the 10 percent additional tax on early distributions.
Upon the death of a participant, the value of the participant’s account will be distributed to the participant’s beneficiary in a lump-sum payment. If the participant is married, the beneficiary must be the participant’s spouse, unless the participant’s spouse has previously given written, notarized consent to designate another person as beneficiary. If the participant marries or remarries, any prior beneficiary designation is canceled and the spouse automatically becomes the beneficiary. If the participant is single, the beneficiary may be anyone previously designated by the participant under the Plan. In the absence of an effective designation under the Plan at the time of death, the proceeds normally will be paid in the following order: the participant’s spouse, the participant’s children in equal shares, or to surviving parents equally. If no spouse, child, or parent is living, payments will be made to the executors or administrators of the participant’s estate.
Participant Loans
Participants may borrow up to one-half of the value of the account balance, not to exceed $50,000 within a twelve month period. Loans will be granted in $50 increments subject to a minimum loan amount of $500. Participants are limited to two simultaneous outstanding Plan loans. Repayment of a loan shall be made through semi-monthly payroll deductions over a term of one to four years. The loan shall bear a fixed rate of interest, set quarterly, for the term of the loan, determined by the plan administrator to be 1.25 percent above the prime rate. The interest shall be credited to the participant’s account as the semi-monthly repayments of principal and interest are made. Interest rates on outstanding loans at December 31, 2005 and 2004 ranged from 5.00 percent to 11.00 percent and 5.00 percent to 11.50 percent, respectively.
Participants may prepay the entire remaining loan principal after payments have been made for three full months. Employees on an approved leave of absence may elect to make scheduled loan payments directly to the Plan. Participants may continue to contribute to the Plan while having an outstanding loan, provided that the loan is not in default.
Participants who retire or separate from IBM and have outstanding Plan loans may make coupon payments to continue monthly loan repayments according to their original amortization schedule.
Termination of Service
If the value of a participant’s account is $1,000 or less, it will be distributed to the participant in a lump-sum payment as soon as practical following the termination of the participant’s employment with IBM. If the account balance is greater than $1,000 at the time of separation, the participant may defer distribution of the account until age 70 ½.
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Termination of the Plan
IBM reserves the right to terminate this Plan at any time by action of the Committee. In that event, each participant or beneficiary receiving or entitled to receive payments under the Plan would receive the balance of the account at such time and in such manner as the Committee shall determine at its discretion.
In the event of a full or partial termination of the Plan, or upon complete discontinuance of contributions under the Plan, the rights of all affected participants in the value of their accounts would be nonforfeitable.
Risks and Uncertainties
The Plan provides for various investment options that include in any combination of mutual funds, commingled funds, life-cycle funds, equities, fixed income securities, synthetic guaranteed investment contracts (“GICs”), and derivative contracts. Investment securities are exposed to various risks, such as interest rates, credit and overall market volatility. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is reasonably possible that changes in risks in the near term could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
The Plan is exposed to credit loss in the event of non-performance by the companies with whom the investment contracts are placed. However, the Committee does not anticipate non-performance by these companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements are prepared under the accrual basis of accounting, except distributions, which are recorded when paid.
Valuation of Investments
The Plan’s investments are stated at fair value, except benefit-responsive investment contracts, which are stated at contract value. Investments in mutual funds and commingled funds are valued at the net asset values per share as quoted by such companies or funds as of the valuation date. IBM common stock is valued daily at the New York Stock Exchange closing price. Other equity securities are valued at the last reported sales price or closing price. Fixed income securities traded in the over-the-counter market are valued at the bid prices. Short-term securities are valued at amortized cost, which includes cost and accrued interest, which approximates fair value. Participant loans are valued at cost plus accrued interest, which approximates fair value.
Investment Contracts
The Plan entered into benefit-responsive investment contracts, such as synthetic investment contracts (GICs), (through the Stable Value Fund) with various third parties. Contract value represents contributions made to investment contracts, plus earnings, less participant withdrawals and administrative expenses.
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A synthetic GIC provides for a fixed return on principal over a specified period of time, e.g., monthly crediting rate, through fully benefit-responsive wrapper contracts issued by a third party, which are backed by underlying assets owned by the Plan. The contract value of the synthetic GIC held by the Stable Value Fund was $5,713 million and $5,191 million at December 31, 2005 and 2004, respectively. The fair value of the synthetic GIC was ($122) million and ($274) million at December 31, 2005 and 2004, respectively, attributable to the amounts by which the contract value of the investment contracts were less than the value of the underlying assets.
The average yield and crediting interest rates of the investment contracts was 5.57 percent and 5.42 percent at December 31, 2005 and 2004, respectively. Fully benefit-responsive investment contracts are reported at contract value, which approximates fair value.
On December 29, 2005, the Financial Accounting Standards Board (FASB) released FASB Staff Position No. AAG INV-1 and SOP94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Audit Guide and Defined-Contribution Health and Welfare and Pension Plans (the "FSP"). The FSP clarifies the definition of fully benefit responsive investment contracts for contracts held by defined contribution plans. The FSP also establishes enhanced financial statement presentation and disclosure requirements for defined contribution plans subject to the FSP effective for financial statements for annual periods ending after December 15, 2006.
Upon adoption of the FSP for the Plan year ending December 31, 2006, the Plan’s statement of net assets available for benefits will present net assets reflecting all investments at fair value and separately, the amount necessary to adjust the portion of net assets attributable to each fully benefit-responsive investment contract from fair value to contract value. The adoption of this FSP is not expected to have any impact on the net assets of the Plan.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and changes therein, and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Security Transactions and Related Investment Income
Security transactions are recorded on a trade-date basis. Dividend income is recorded on the ex-dividend date, and interest income is recorded on the accrual basis.
The Plan presents in the Statement of Changes in Net Assets Available for Benefits the net appreciation in the fair value of its investments, which consists of realized gains and losses and the unrealized appreciation and depreciation on those investments.
Administrative Expenses and Investment Management Fees
All administrative costs of the Plan are deducted from participants’ account balances. These costs include (a) brokerage fees and commissions, which are included in the cost of investments and in determining net proceeds on sales of investments, (b) investment management fees, which are paid from the assets of the respective funds; those fees comprise fixed annual charges and charges based on a percentage of net asset value and are included as part of administrative expenses, and (c) operational expenses required for administration of the Plan including trustee, recordkeeping, participant reports and communications, and service center expenses, which are charged against the fund’s assets on a pro rata basis throughout the year and are included as part of administrative expenses.
NOTE 3 - DESCRIPTION OF INVESTMENT FUNDS
The objectives of the twenty-three investment funds to which employees may contribute monies are described below:
Life Strategy Funds - four blended funds that build a portfolio of diversified investments — U.S. stocks, international stocks, real estate equity stocks and fixed-income investments — from the
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existing core funds noted below. The funds are structured by the IBM Retirement Fund organization and managed by the underlying funds’ managers.
x Income Plus Life Strategy Fund - target allocation 30% stocks, 70% bonds; seeks returns that modestly outpace inflation on a fairly consistent basis.
x Conservative Life Strategy Fund - target allocation 50% stocks, 50% bonds; seeks returns that moderately outpace inflation over the long term.
x Moderate Life Strategy Fund - target allocation 65% stocks, 35% bonds; seeks relatively high returns at a moderate risk level.
x Aggressive Life Strategy Fund - target allocation 85% stocks, 15% bonds; seeks high returns over the long term.
Core Funds - six funds that provide an opportunity to custom-build a portfolio from a selection of broadly diversified U.S. and international stock funds and from funds tracking the fixed-income markets.
x Stable Value Fund - seeks to preserve principal and provide income at a stable rate of interest that is competitive with intermediate-term rates of return. The fund is managed by multiple money managers.
x Inflation Protected Bond Fund - seeks over the long term to provide a rate of return over and above the rate of inflation, thereby preserving the long-term spending power of the money invested. The fund is managed by State Street Global Advisors.
x Total Bond Market Fund - seeks to modestly exceed the return of its benchmark index (Lehman Brothers Aggregate Bond Index), which consists of more than 5,000 U.S. Treasury, federal agency, mortgage-backed, and corporate securities. The fund is managed by State Street Global Advisors.
x Total International Stock Market Index Fund - - seeks long-term capital growth with a market rate of return for a diversified group of non-U.S. equities in such major markets as Europe and Asia plus the emerging markets of the world. It attempts to match the performance of the Morgan Stanley Capital International All Country World Ex-U.S. Free Index. The fund is managed by State Street Global Advisors.
x Total Stock Market Index Fund - seeks long-term growth of capital and income. It attempts to match the performance of the Dow Jones Wilshire 5000 Total Market Index. The fund is managed by The Vanguard Group.
x Real Estate Investment Trust (REIT) Index Fund - seeks a total rate of return approximating the returns of the MSCI U.S. REIT index. Investment consists of U.S. publicly traded real estate equity securities. The fund is managed by Barclays Global Investors.
Extended Choice Funds - thirteen funds that provide an opportunity to build an investment portfolio with funds that are less broadly diversified, focusing instead on discrete sectors of the stock and bond markets.
x Money Market Fund - seeks liquidity and preservation of capital while providing a variable rate of income based on current short-term market interest rates. The fund is managed by State Street Global Advisors.
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x Long-Term Corporate Bond Fund - seeks a high and sustainable level of interest income by investing in a widely diversified group of long-term bonds issued by corporations with strong credit ratings. The fund is managed by State Street Global Advisors.
x Equity Income Fund - seeks both long-term capital appreciation and dividend income by investing in large- and mid-cap U.S. stocks. The fund is managed by State Street Global Advisors.
x European Stock Index Fund - seeks long-term growth of capital that corresponds to an index of European stocks. It attempts to match the investment results of the Morgan Stanley Capital International Europe Index. The fund is managed by The Vanguard Group.
x Large Company Index Fund - seeks long-term growth of capital and income from dividends by holding all the stocks that make up the Standard & Poor’s 500 Index. The fund is managed by The Vanguard Group.
x Large-Cap Value Index Fund - seeks long-term growth of capital and income from dividends. The fund holds all the stocks in the Russell 1000 Value Index in approximately the same proportion as those stocks represented in the index. The fund is managed by The Vanguard Group.
x Small-Cap Value Index Fund - seeks long-term growth of capital by attempting to replicate the performance of the Russell 2000 Value Index. The fund is managed by The Vanguard Group.
x Large-Cap Growth Index Fund - seeks long-term growth of capital by holding all the stocks in the Russell 1000 Growth Index in approximately the same proportion as those stocks represented in the index. The fund is managed by The Vanguard Group.
x Pacific Stock Index Fund - seeks long-term growth of capital by attempting to match the performance of the Morgan Stanley Capital International Pacific Index. The fund is managed by The Vanguard Group.
x Small/Mid-Cap Stock Index Fund - seeks long-term growth of capital with a market rate of return from a diversified group of medium- and small-company stocks. The fund holds stocks in the Russell 3000 index that are not part of the Standard and Poor’s 500 index and attempts to match the performance of the Russell SmallCap Completeness Index. The fund is managed by State Street Global Advisors.
x Small-Cap Growth Index Fund - seeks long-term growth of capital by attempting to match the performance of the Russell 2000 Growth Index. The fund is managed by The Vanguard Group.
x IBM Stock Fund - invests in IBM common stock and holds a small interest-bearing cash balance of approximately 0.25% for liquidity purposes. The fund is managed by State Street Global Advisors.
x High Yield and Emerging Markets Bond Fund - seeks to provide attractive returns, with somewhat less volatility than stocks. The fund invests in “below investment grade” U.S. corporate and emerging market dollar bonds and is managed by Pacific Investment Management Company, LLC (PIMCO).
Securities Lending
Stock loan transactions are permitted with the objective to add investment return to the portfolio. Certain funds may lend securities held in that fund to unaffiliated broker-dealers registered under the Securities Exchange Act of 1934, or banks organized in the United States of America. At all times, the borrower must maintain cash or equivalent collateral equal in value to at least 102 percent of the value of the domestic securities loaned and 105 percent of the value of international securities loaned. The cash collateral is reinvested to generate income that is credited to the portfolio return.
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The primary risk in lending securities is a borrower may default during a sharp rise in the price of the security that was borrowed, resulting in a deficiency in the collateral posted by the borrower. The funds seek to minimize this risk by requiring that the value of the securities that are loaned to be computed each day and that additional collateral is furnished each day, if necessary. The addition of the securities lending provision does not change the investment objectives for the funds. The value of loaned securities in the State Street Bank agency program amounted to $1,852 million and $1,879 million at December 31, 2005 and 2004, respectively. The value of cash collateral obtained and reinvested in short-term investments of $1,909 million and $1,932 million for December 31, 2005 and 2004, respectively, is reflected as a liability in the Plan’s financial statements. Securities lending is also permitted in the Vanguard and SSGA commingled funds.
NOTE 4 - PLAN TRANSFERS
The transfers below represent participant investment account balances attributable to employees transferred to IBM in 2005 primarily as a result of IBM acquisitions:
Significant transfers were:
x Ascential Corporation - net transfer totaling $111,239,156
x Healthlink, Inc. - - net transfer totaling $12,886,149
x Corio, Inc. - - net transfer totaling $9,125,280
In 2005, there were also transfers into the Plan totaling $3,154,996 related to participant account balances from other companies. Total plan transfers were $136,405,581, which includes participant loan balances in addition to the transfers noted above.
NOTE 5 - TAX STATUS
The Trust established under the Plan is qualified under Section 401(a) of the Internal Revenue Code and the Trustee intends to continue it as a qualified trust. The Plan received a favorable determination letter from the IRS on September 10, 2004. The Plan administrator continues to believe the Plan is designed and is being operated in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, a provision for federal income taxes has not been made.
NOTE 6 - RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500 as of:
| | 2005 | | 2004 | |
| | (Dollars in thousands) | |
Net assets available for benefits per the financial statements | | $ | 26,848,963 | | $ | 25,455,163 | |
Benefit obligations currently payable | | 7,116 | | 3,871 | |
Net assets available for benefits per the Form 5500 | | $ | 26,841,847 | | $ | 25,451,292 | |
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The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
| | Year Ended
December 31,
2005 | |
| | (Dollars in thousands) | |
| | | |
Benefits paid to participants per the financial statements | | $ | 1,462,965 | |
Less: | | | |
Amounts payable at December 31, 2004 | | 3,871 | |
Plus: | | | |
Amounts payable at December 31, 2005 | | 7,116 | |
| | | |
Benefits paid to participants per the Form 5500 | | $ | 1,466,210 | |
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NOTE 7 - INVESTMENT VALUATIONS
The following schedules summarize the value of investments, and the related net appreciation in fair value of investments by type of investment:
| | Value Determined By | |
| | Quoted
Market
Prices | | Contract
Value | | Total | |
| | (Dollars in thousands) | |
At December 31, 2005 | | | | | | | |
| | | | | | | |
Investments at Fair Value | | | | | | | |
Commingled Funds | | $ | 14,207,603 | | — | | $ | 14,207,603 | |
Common Stock—non-employer | | 3,141,918 | | — | | 3,141,918 | |
IBM Common Stock | | 2,044,358 | | — | | 2,044,358 | |
Short-Term Investments | | 2,144,121 | | — | | 2,144,121 | |
Mutual Funds | | 1,098,412 | | — | | 1,098,412 | |
Fixed Income Securities | | 71,761 | | — | | 71,761 | |
Total | | $ | 22,708,173 | | — | | $ | 22,708,173 | |
| | | | | | | |
Investments at Contract Value | | | | | | | |
Investment contracts | | — | | $ | 5,713,257 | | 5,713,257 | |
Total | | $ | 22,708,173 | | $ | 5,713,257 | | $ | 28,421,430 | |
| | | | | | | |
At December 31, 2004 | | | | | | | |
| | | | | | | |
Investments at Fair Value | | | | | | | |
Commingled Funds | | $ | 12,016,899 | | — | | $ | 12,016,899 | |
Common Stock—non-employer | | 4,574,368 | | — | | 4,574,368 | |
IBM Common Stock | | 2,590,210 | | — | | 2,590,210 | |
Short-Term Investments | | 2,188,918 | | — | | 2,188,918 | |
Mutual Funds | | 481,377 | | — | | 481,377 | |
Fixed Income Securities | | 3,397 | | — | | 3,397 | |
Total | | $ | 21,855,169 | | — | | $ | 21,855,169 | |
| | | | | | | |
Investments at Contract Value | | | | | | | |
Investment contracts | | — | | $ | 5,190,565 | | 5,190,565 | |
Total | | $ | 21,855,169 | | $ | 5,190,565 | | $ | 27,045,734 | |
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Net Appreciation in Fair Value of Investments (including gains and losses on investments bought and sold, as well as held during the year):
| | 2005 | |
| | (Dollars in thousands) | |
Investments at fair value as determined by quoted market price: | | | |
Commingled Funds | | $ | 558,453 | |
Common Stock—non-employer | | 506,669 | |
IBM Common Stock | | (396,167 | ) |
Fixed Income | | (520 | ) |
Mutual Funds | | 87,652 | |
Total | | $ | 756,087 | |
Investments
The investments that represent 5% or more of the Plan’s net assets available for benefits at December 31, 2005 and 2004 are as follows:
Investments | | | | 2005 | | 2004 | |
| | (Dollars in thousands) | |
Large Company Index Fund (Vanguard) | | $ | 4,562,615 | | $ | 4,883,337 | |
Total Stock Market Index Fund (Vanguard) | | 2,201,948 | | 2,004,369 | |
IBM Common Stock | | 2,044,358 | | 2,590,210 | |
Investment Contract—Royal Bank of Canada, 5.57% (5.42%—2004) | | 1,428,314 | | 1,297,641 | |
Investment Contract —JPMorgan Chase, 5.57% (5.42%—2004) | | 1,428,314 | | 2,335,754 | |
| | | | | | | | | |
NOTE 8 - RELATED-PARTY TRANSACTIONS
At December 31, 2005, a significant portion of the Plan’s assets were invested in State Street Global Advisors funds. State Street Global Advisors’ parent company, State Street Bank and Trust Corporation, also acts as the trustee for the Plan and, therefore, these investments qualify as party-in-interest transactions. The Plan also pays a fee to the trustee and the trustee also is a security lending agent. These transactions qualify as party-in-interest transactions as well.
At December 31, 2005 the Plan held 24,862,508 shares of IBM common stock valued at $2,044,358,384. At December 31, 2004, the Plan held 26,269,305 shares of IBM common stock valued at $2,590,209,713.
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IBM SAVINGS PLAN
Schedule H, line 4i - Schedule of Assets (Held at End of Year)
AT DECEMBER 31, 2005
(a) | | (b) Identity of issue, borrower, lessor, or similar party | | (c) Description of investment including maturity date, rate of interest, collateral, par, or maturity value | | (d) Cost | | (e) Current value |
| | | | | | | | |
| | IBM Stock Fund | | | | | | |
* | | Managed by State Street Global Advisors | | IBM Common Stock*
24,862,508 shares | | | | $2,044,358,384 |
* | | Managed by State Street Global Advisors | | SSBT Short-Term Investments* | | | | 1,848,568 |
| | | | | | | | |
| | Mutual Funds | | | | | | |
| | | | | | | | |
| | Managed by the Vanguard Group | | European Stock Index | | | | 262,513,573 |
| | Managed by the Vanguard Group | | Pacific Stock Index | | | | 487,645,110 |
| | Managed by Fidelity Investments | | Mutual Fund Window | | | | 348,253,390 |
| | | | | | | | |
| | Commingled Trust Funds | | | | | | |
| | | | | | | | |
| | Managed by The Vanguard Group | | Large Company Index | | | | 4,562,615,228 |
| | Managed by The Vanguard Group | | Total Stock Market Index | | | | 2,201,947,903 |
* | | Managed by State Street Global Advisors | | SSBT Inflation Protected Bond* | | | | 1,031,854,355 |
* | | Managed by State Street Global Advisors | | SSBT Money Market* | | | | 916,114,096 |
* | | Managed by State Street Global Advisors | | SSBT Total Bond Market* | | | | 780,025,443 |
* | | Party-In-Interest | | | | | | |
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(a) | | (b) Identity of issue, borrower, lessor, or similar party | | (c) Description of investment including maturity date, rate of interest, collateral, par, or maturity value | | (d) Cost | | (e) Current value |
| | | | | | | | |
| | Commingled Trust Funds - continued | | | | | | |
| | | | | | | | |
| | Managed by Barclays Global Investors | | BGI Real Estate Investment Trust | | | | $691,657,580 |
| | Managed by The Vanguard Group | | Small Cap Value Index | | | | 690,636,074 |
| | Managed by The Vanguard Group | | Large Cap Value Index | | | | 574,529,628 |
| | Managed by The Vanguard Group | | Large Cap Growth Index | | | | 313,461,235 |
* | | Managed by The Vanguard Group
Managed by State Street Global Advisors | | Small Cap Growth Index
SSBT Long-Term Corporate Bond* | | | | 281,933,146 231,162,969 |
| | | | | | | | |
| | Separately-Managed Funds—IBM | | | | | | |
| | | | | | | | |
* | | Managed by State Street Global Advisors | | SSBT Small/Mid Cap Stock Index* (refer to Exhibit A - investments) | | | | 3,025,056,406 |
* | | Managed by State Street Global Advisors | | SSBT Total International Stock Market Index* (refer to Exhibit B - investments) | | | | 1,931,665,572 |
* | | Managed by State Street Global Advisors | | SSBT Equity Income* (refer to Exhibit C - investments) | | | | 117,138,578 |
| | Managed by Pacific Management Investment Company (PIMCO) | | High Yield and Emerging Markets Bond (refer to Exhibit D — investments) | | | | 71,483,473 |
* | | Party-In-Interest | | | | | | |
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(a) | | (b) Identity of issue, borrower, lessor, or similar party | | (c) Description of investment including maturity date, rate of interest, collateral, par, or maturity value | | (d) Cost | | (e) Current value |
| | | | | | | | |
| | Short-Term Investments | | | | | | |
| | Managed by JPMorgan Chase Bank N.A. | | Short-Term Investments purchased with cash collateral from securities lending(refer to Exhibit E - investments) | | | | $1,909,000,935 |
| | | | | | | | |
| | Stable Value Fund—Investment Contracts† | | | | | | |
| | Underlying assets managed by various investment companies | | Synthetic GIC Global Wrapper (the fair value of wrap contracts is ($122) million, Rate of Interest 5.57%, refer to Exhibit F - investments) | | | | 5,713,257,446 |
| | | | | | | | |
| | Short-Term Investments | | | | | | |
* | | Managed by State Street Global Advisors | | SSGA Short-Term Investments* | | | | 233,271,214 |
| | | | | | | | |
* | | Loans to Participants | | Interest rates range: 5.00% - 11.00%, Terms: one to four years | | | | 291,864,892 |
| | | | | | | | | |
* | | Party-In-Interest | | | | | | |
| | | | | | | | |
† | | Royal Bank of Canada, 5.57% | | | | | | $1,428,314,362 |
| | | | | | | | |
† | | JPMorgan Chase, 5.57% | | | | | | 1,428,314,362 |
| | | | | | | | |
† | | UBS, 5.57% | | | | | | 1,142,651,489 |
| | | | | | | | |
† | | Bank of America, 5.57% | | | | | | 1,142,651,489 |
| | | | | | | | |
† | | State Street Bank and Trust, 5.57% | | | | | | 571,325,744 |
| | | | | | | | | |
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