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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 11-K

 

(Mark One)

 

x           ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

OR

 

o    TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission file number 1-2360

 

A.            Full title of the plan and address of the plan, if different from that of the issuer named below:

 

IBM 401(k) Plus Plan

Director of Compensation and Benefits

IBM

North Castle Drive, M/D 147

Armonk, New York 10504

 

B.            Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

New Orchard Road

Armonk, New York 10504

 

 

 



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IBM 401(k) PLUS PLAN

 

Table of Contents

 

 

Page

 

 

Financial Statements and Schedules:

 

 

 

Report of Independent Registered Public Accounting Firm

4

 

 

Financial Statements:

 

 

 

Statements of Net Assets Available for Benefits at December 31, 2013 and 2012

5

 

 

Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 2013

6

 

 

Notes to Financial Statements

7

 

 

Supplemental Schedules*:

 

 

 

Schedule G, Part I - Schedule of Loans or Fixed Income Obligations in Default or Classified as Uncollectible at December 31, 2013

37

 

 

Schedule H, Line 4i - Schedule of Assets (Held at End of Year) at December 31, 2013

38

 

 

Schedule H, Line 4i - Schedule of Assets (Acquired and Disposed of Within Year) for the Year Ended December 31, 2013

41

 

Exhibit:

 

Exhibit 23 - Consent of Independent Registered Public Accounting Firm

 


*   Other schedules required by Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosures under the Employee Retirement Income Security Act of 1974 are omitted because they are not applicable.

 

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SIGNATURE

 

The Plan.  Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

IBM 401(k) Plus Plan

 

 

 

 

 

 

 

 

Date:

June 24, 2014

 

By:

/s/ James J. Kavanaugh

 

 

 

James J. Kavanaugh

 

 

 

Vice President and Controller

 

 

 

(Principal Accounting Officer)

 

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Report of Independent Registered Public Accounting Firm

 

To the Participants and Plan Administrator of the IBM 401(k) Plus Plan:

 

In our opinion, the accompanying statements of net assets available for benefits and the related statement of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the IBM 401(k) Plus Plan (the “Plan”) at December 31, 2013 and 2012, and the changes in net assets available for benefits for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Plan’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.  The supplemental schedules of loans or fixed income obligations in default or classified as uncollectible, of assets (held at end of year) and of assets (acquired and disposed of within year) are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974.  These supplemental schedules are the responsibility of the Plan’s management.  The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 

/s/ PricewaterhouseCoopers LLP

 

PricewaterhouseCoopers LLP

New York, NY

June 24, 2014

 

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IBM 401(k) PLUS PLAN

STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS

AT DECEMBER 31,

 

 

 

2013

 

2012

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

Investments, at fair value (Note 3)

 

$

46,791,660

 

$

41,986,768

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Employer contributions

 

 

 

35,662

 

Participant contributions

 

 

 

24,053

 

Notes receivable from participants

 

315,264

 

323,820

 

Income, sales proceeds and other receivables

 

1,044,073

 

1,292,054

 

Total receivables

 

1,359,337

 

1,675,589

 

 

 

 

 

 

 

Total assets

 

48,150,997

 

43,662,357

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Payable for collateral deposits

 

8,643

 

14,335

 

Accrued expenses and other liabilities

 

1,563,603

 

2,044,352

 

Total liabilities

 

1,572,246

 

2,058,687

 

 

 

 

 

 

 

Net assets at fair value

 

46,578,751

 

41,603,670

 

 

 

 

 

 

 

Adjustment from fair value to contract value for fully benefit-responsive investment contracts

 

(293,477

)

(708,476

)

 

 

 

 

 

 

Net assets available for benefits

 

$

46,285,274

 

$

40,895,194

 

 

The accompanying notes are an integral part of these financial statements.

 

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IBM 401(k) PLUS PLAN

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS

FOR THE YEAR ENDED DECEMBER 31,

 

 

 

2013

 

 

 

(Dollars in thousands)

 

Additions to net assets attributed to:

 

 

 

 

 

 

 

Investment income:

 

 

 

Net appreciation in fair value of investments (Note 3)

 

$

5,067,415

 

Interest income from investments

 

643,283

 

Dividends

 

255,282

 

 

 

5,965,980

 

 

 

 

 

Interest income on notes receivable from participants

 

13,242

 

 

 

 

 

Contributions:

 

 

 

Participants

 

1,197,051

 

Employer

 

791,927

 

 

 

1,988,978

 

 

 

 

 

Transfers from other benefit plans

 

94,928

 

 

 

 

 

Total additions

 

8,063,128

 

 

 

 

 

Deductions from net assets attributed to:

 

 

 

 

 

 

 

Distributions to participants

 

2,620,019

 

 

 

 

 

Administrative expenses, net

 

53,029

 

 

 

 

 

Total deductions

 

2,673,048

 

 

 

 

 

Net increase in net assets during the year

 

5,390,080

 

 

 

 

 

Net assets available for benefits:

 

 

 

 

 

 

 

Beginning of year

 

40,895,194

 

 

 

 

 

End of year

 

$

46,285,274

 

 

The accompanying notes are an integral part of these financial statements.

 

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IBM 401(k) PLUS PLAN

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF THE PLAN

 

The following description of the IBM 401(k) Plus Plan (the “Plan”) provides only general information.  Participants should refer to the Plan prospectus (Summary Plan Description) for a complete description of the Plan’s provisions.

 

General

 

The Plan was established by resolution of International Business Machines Corporation’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 United States (U.S.) employees of International Business Machines Corporation (“IBM”) and certain of its domestic related companies and partnerships an opportunity to defer from one to eighty percent of their eligible compensation for before-tax 401(k) and/or Roth 401(k) contributions to any of thirty-three primary investment funds and about 165 mutual funds in a “mutual fund window.”  The investment objectives of the primary funds are described in Note 6, Description of Investment Funds.  In addition, participants are able to contribute up to ten percent of their eligible compensation on an after-tax basis.  Roth 401(k) and after-tax contributions are not available for employees working in Puerto Rico.  Annual contributions are subject to the legal limits permitted by Internal Revenue Service (“IRS”) regulations.

 

Participants are provided 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 before-tax 401(k) contributions, matching contributions, automatic contributions and/or Special Savings Awards into their accounts in the event the participant becomes disabled while insured.

 

At December 31, 2013 and 2012, the number of participants with an account balance in the Plan was 196,397 and197,713, respectively.

 

The Plan is dual qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, and Section 1081.01(a) of the Internal Revenue Code for a New Puerto Rico, as amended (the “PRIRC”).  It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended.

 

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 Company (“SSBT”), as Trustee, to safeguard the assets of the funds and State Street Global Advisors (“SSGA”), the institutional investment management affiliate of SSBT, The Vanguard Group and other investment managers to direct investments in the various funds.

 

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Fidelity Investments Institutional Operations Company, Inc. (“Fidelity”) is the provider of record keeping and participant services, operator of the IBM Employee Services Center for the Plan in Raleigh, North Carolina as well as the provider of administrative services related to the mutual fund window.  Communication services were provided by Fidelity as well as The Vanguard Group.

 

Contributions

 

Under the Plan, IBM provides employer contributions for eligible participants as shown in the table below:

 

IBM Pension Plan
Eligibility at 12/31/2007

 

IBM Automatic
Contribution

 

IBM Matching
Contribution

 

Pension Credit Formula

 

4

%

100% on 6% of eligible compensation

 

Personal Pension Account

 

2

%

100% on 6% of eligible compensation

 

New Hires on or after 1/1/2005

 

1

%

100% on 5% of eligible compensation

 

GBS Application Development Specialist Job Family Hires on or after 4/15/2013

 

1

%

100% on 2% of eligible compensation

 

 

IBM employer contributions are based upon the IBM pension formula for which the employee was eligible on December 31, 2007, or on hire date on or after January 1, 2005.  Any employees who terminate employment and are rehired on or after January 1, 2005 will be eligible to participate in the “New Hires on or after 1/1/2005” contribution rates or the “Global Business Services (“GBS”) Application Development Specialist Job Family Hires” on or after 4/15/2013 as applicable.

 

A contribution equal to five percent of eligible compensation (referred to as a “Special Savings Award”) will be added to the accounts of participants who are non-exempt employees at each year-end  (effective January 1, 2013, the determination will be made on  December 15 and the Special Savings Award will be contributed to eligible participants on the last business day of the year) and who participated in the Pension Credit Formula as of December 31, 2007 and have been continuously employed by IBM since that date.

 

Newly hired employees are automatically enrolled at five percent of eligible salary and performance pay after approximately thirty days of employment with IBM, unless they elect otherwise.  After completing one year of service with IBM, they are eligible for the IBM automatic contribution and the IBM matching contribution.  “GBS Application Development Specialist Job Family Hires” are eligible for a matching contribution equal to two percent and automatic contributions equal to one percent, if they complete two years of service.

 

Effective January 1, 2013, matching and automatic contributions are made once annually at the end of the year.  In order to receive such IBM employer contributions each year, a participant must be employed on December 15 of the plan year.  However, if a participant separates from service prior to December 15, and has completed certain service and/or age requirements, then the participant will be eligible to receive such matching and automatic contributions following separation from service.

 

Eligible compensation under the Plan includes regular salary, commissions, overtime, shift premium and similar additional compensation payments for nonscheduled workdays, recurring payments under an employee variable compensation plan, regular IBM Short-Term Disability Income Plan payments, holiday pay and vacation pay, and payments made under any executive incentive compensation plan.  Non-recurring compensation, such as awards, deal team payments and significant signing bonuses are not eligible compensation and cannot be deferred under the Plan.

 

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Participants are able to choose to have their contributions invested entirely in one of, or in any combination of, the following funds or in the mutual fund window funds, in multiples of one percent. If participants do not make an investment election, then contributions will be invested in the default Target Date fund that most closely corresponds to the year in which they will reach age 60.

 

These funds and their investment objectives are more fully described in Note 6, Description of Investment Funds.

 

Life Cycle Funds (14)

 

Target Date 2005 Fund

Target Date 2010 Fund

Target Date 2015 Fund

Target Date 2020 Fund

Target Date 2025 Fund

Target Date 2030 Fund

Target Date 2035 Fund

Target Date 2040 Fund

Target Date 2045 Fund

Target Date 2050 Fund

Income Plus Life Strategy Fund

Conservative Life Strategy Fund

Moderate Life Strategy Fund

Aggressive Life Strategy Fund

 

Core Funds (8)

 

Interest Income Fund
Inflation Protected Bond Fund

Total Bond Market Fund

High Yield and Emerging Markets Bond Fund

Total Stock Market Index Fund

Total International Stock Market Index Fund

Real Estate Investment Trust (REIT) Index Fund

International Real Estate Index Fund

 

Expanded Choice Funds (11)

 

Long-Term Corporate Bond Fund

Large Company Index Fund

Large-Cap Value Index Fund

Large-Cap Growth Index Fund

Small/Mid-Cap Stock Index Fund

Small-Cap Value Index Fund

Small-Cap Growth Index Fund

European Stock Index Fund

Pacific Stock Index Fund

Emerging Markets Stock Index Fund

IBM Stock Fund

 

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The Plan participants also have access to the “mutual fund window” investment options.

 

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 if the request is completed before the applicable cutoff date.  Also, participants may transfer part or all of existing account balances among funds in the Plan once daily, subject to the Plan restrictions on trading.

 

The Committee is committed to preserving the integrity of the Plan as a long-term savings vehicle for its employees.  Frequent, short-term trading that is intended to take advantage of pricing lags in funds can harm long-term investors, or increase trading expenses in general.  Therefore, the Plan has implemented frequent trading transaction restrictions and reserves the right to take other appropriate action to curb short-term transactions (buying/selling).

 

Participant Accounts

 

The Plan record keeper 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 before-tax and Roth 401(k) amounts from other qualified savings plans or Individual Retirement Accounts into their Plan account.  Rollovers must be made in cash within the time limits specified by the IRS; stock or in-kind rollovers are not 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 roll over a lump-sum distribution from an IBM-sponsored qualified retirement plan, including the IBM Personal Pension Plan.  After-tax amounts may also be directly rolled over into the Plan from another qualified savings plan.

 

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 participant’s investment value of assets equals the market value of assets for all funds except the Interest Income Fund for which the participant’s 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.  On the next day, the cash related to new contributions is transferred into the fund and 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 prior night’s unit value.

 

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Contributions (with the exception of after-tax contributions and Roth 401(k) 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.  After-tax contributions made to the Plan are not tax deferred, but are taxable income prior to the participant making the contribution.  Any interest, dividends or other earnings on the after-tax contributions are generally not included in the taxable income of the participant until withdrawal, at which time all earnings withdrawn are generally taxed as ordinary income to the participant.  Any distribution of earnings on after-tax contributions that are withdrawn by the participant before attaining age 59 1/2 generally are subject to a penalty tax of 10 percent.  Roth 401(k) contributions are not tax deferred, but are taxable income prior to the participant making the contribution.  Interest, dividends or other earnings on Roth 401(k) contributions may not be taxable at withdrawal provided the participant has met the applicable rules.

 

Consistent with provisions established by the IRS, the Plan’s 2013 limit on employee salary and performance pay deferrals was $17,500.  (The limit for 2014 is $17,500.)  Participants who were age 50 or older during 2013 could take advantage of a higher 401(k) contribution limit of $23,000.  (The limit for 2014 is $23,000.)  The 2013 maximum annual deferral amount for employees residing in Puerto Rico was limited by local government regulations to $17,500.  (The Puerto Rico limit for 2014 is $17,500.)  Puerto Rico participants who were age 50 or older in 2013 could take advantage of a higher contribution limit of $19,000.  (The limit for 2014 is $19,000.)

 

Vesting

 

Participants in the Plan are at all times fully vested in their account balance, including employee contributions, employer 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 their account.  A maximum of four ad-hoc 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. Effective January 1, 2014 participants who have attained age 59 ½ may request ad-hoc withdrawals ($500 minimum), as needed from their account.

 

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 from IBM and have attained age 55, may also elect to receive the balance of their account in annual installments over a period not to exceed twenty years.  Effective January 1, 2014, in addition to the existing annual installment option, monthly and quarterly and specific dollar amount installments may be requested, and there will be no limit on the time period over which installments may be taken, subject to required minimum distribution requirements for participants who have reached age 70 ½.

 

Withdrawals for financial hardship are permitted provided they are for an immediate and significant 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 employee’s contributions are eligible for hardship withdrawal; earnings on before-tax 401(k) and Roth 401(k), and IBM contributions (match, automatic, transition credits and Special Savings Award) are not

 

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eligible for withdrawal.  Employees must submit evidence of hardship to the record keeper who will determine whether the situation qualifies for a hardship withdrawal based on guidance from the Plan administrator.   A hardship withdrawal is taxed as ordinary income to the employee and may be subject to the 10 percent additional tax on early distributions.

 

If the participant dies and is married at the time of death, the participant’s spouse must be the beneficiary of the participant’s Plan account, 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.

 

After the death of a participant, an account will be established for the participant’s beneficiary.  If the beneficiary is a spouse or domestic partner, the beneficiary’s account may be maintained in the Plan, subject to IRS required minimum distributions.  If the beneficiary is neither a spouse nor a domestic partner, the account will be paid to the beneficiary in a lump sum.  Beneficiaries may roll over distributions from the Plan.

 

Participant Loans

 

Participants may borrow up to one-half of the value of their account balance, not to exceed $50,000, within a twelve month period.  Loans will be granted in $1 increments subject to a minimum loan amount of $500.  Participants are limited to two simultaneous outstanding Plan loans.  Repayment of a loan is made through semi-monthly payroll deductions.  Loans originated under the Plan have a repayment term of one to four years for a general purpose loan or one to ten years for a primary residence loan.  There are a limited number of outstanding loans originated under acquired company plans that were merged into the Plan having repayment terms greater than 10 years and up to a maximum term of 30 years.  The loans originated under the Plan bear a fixed rate of interest, set quarterly, for the term of the loan, determined by the plan administrator to be 1.25 points above the prime rate.  The interest is 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, 2013 and 2012 ranged from 3.25 percent to 11.00 percent.

 

Participants may prepay the entire remaining loan principal at any time.  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.  A loan default is a taxable event to the participant and will be reported as such in the year of the loan default.

 

Participants who retire or separate from IBM and have outstanding Plan loans may make loan repayments via coupon payments or  ACH deductions to continue monthly loan repayments according to their original amortization schedule.

 

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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 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.

 

Termination of the Plan

 

IBM reserves the right to terminate this Plan at any time by action of the Board of Directors of IBM.  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 accordance with applicable law and regulations.  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 non-forfeitable.

 

Risks and Uncertainties

 

The Plan provides for various investment options in the form of mutual funds, commingled funds or separately-managed funds. These funds invest in equities, fixed income securities, synthetic guaranteed investment contracts (“synthetic GICs”), a separate account investment contract (“separate account GIC”) and derivative contracts.  Investment securities are exposed to various risks, such as interest rate movements, credit quality changes 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 potentially exposed to credit loss in the event of non-performance by the companies with whom the Plan entered into the synthetic GICs and a separate account GIC.  However, the Committee does not anticipate non-performance by these companies at this time.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying financial statements are prepared under the accrual basis of accounting, except distributions, which are recorded when paid.  Notes receivable from participants are measured at their unpaid principal balance plus any accrued interest.  Within the financial tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes.

 

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Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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.

 

Investment Contracts

 

Investment contracts held by a defined contribution plan are reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan.  Contract value represents contributions made to investment contracts plus interest at the contract rates less withdrawals and administrative expenses.  The statements of net assets available for benefits present the fair value of the investments in the Interest Income Fund as well as the adjustment from fair value to contract value for the fully benefit responsive investment contracts within the Interest Income Fund.  The statement of changes in net assets available for benefits presents these investments on a contract value basis.

 

Valuation of Investments

 

The Plan’s investments are stated at fair value.  Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Under this guidance, the Plan is required to classify certain assets and liabilities based on the following fair value hierarchy:

 

· Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

 

· Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

 

· Level 3 —Unobservable inputs for the asset or liability.

 

The guidance requires the use of observable market data if such data is available without undue cost and effort.

 

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Assets are classified within the fair value hierarchy according to the lowest level input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs.  A security that is categorized as Level 3 is valued using the last available market price or a price from an alternate pricing source.  The valuation methodology is applied consistently from period to period.

 

Investments in mutual funds and commingled funds are valued at the net asset values per share using available inputs to measure fair value by such companies or funds as of the valuation date. Generally, mutual funds have a quoted market price in an active market and are classified as Level 1 and commingled funds which may include 103-12 investments, common collective trusts and pooled separate accounts are classified as Level 2 based upon observable data.

 

Common stocks and financial derivative instruments, such as futures contracts or options contracts that are traded on a national securities exchange are stated at the last reported sale or settlement price on the day of valuation.  Valuation adjustments may be applied to certain securities that are solely traded on a foreign exchange to account for the market movement between the close of the foreign market and the close of the New York Stock Exchange. These securities are valued using pricing service providers that consider the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments.

 

Fixed income investments are valued on the basis of valuations furnished by Trustee-approved independent pricing services. These services determine valuations for normal institutional-size trading units of such securities using models or matrix pricing, which incorporates yield and/or price with respect to bonds that are considered comparable in characteristics such as rating, interest rate and maturity date and quotations from bond dealers to determine current value. If these valuations are deemed to be either not reliable or not readily available, the fair value will be determined in good faith by the Trustee.

 

Over-the-counter derivatives are typically valued using proprietary pricing models that use as their basis readily observable market parameters — that is, parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, simulation models or a combination of various models, which are consistently applied. Where derivative products have been established for some time, the Plan uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Further, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps, option contracts and credit default swaps.

 

Interest bearing cash securities are valued at amortized cost, which includes cost and accrued interest and approximates fair value.

 

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

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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 change 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

 

Participants pay for administrative expenses of the Plan which are included in each fund’s expense ratio.  These costs include (a) investment management, custody and benefit responsive investment contract fees which are charged to the applicable funds and (b) operational expenses required for administration of the Plan including trustee and recordkeeping which are charged against the funds’ assets on a pro rata basis throughout the year.  Operational expenses related to balances in the Mutual Fund Window are deducted from participant account balances. Brokerage fees, and commissions are included in the cost of investments and in determining net proceeds on sales of investments.  Investment management, custody and administrative fees for commingled trusts and mutual funds are charged based on a percentage of net asset value and are paid from the assets of the respective funds.

 

Standards Implemented

 

In December 2011 and January 2013, the Financial Accounting Standards Board (FASB) issued additional disclosure requirements and amended guidance for offsetting and related arrangements.  These additional requirements became effective for the year ended December 31, 2013 and did not have a material impact on the Plan’s Financial Statements.

 

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Table of Contents

 

NOTE 3 — INVESTMENTS

 

The following schedules summarize the fair value of investments within the fair value hierarchy, Level 3 gains and losses, fair value of investments that calculate net asset value, investments that represent 5 percent or more of the Plan’s net assets and the related net change in the fair value of investments by type of investment.

 

The following tables set forth by level, within the fair value hierarchy, the Plan’s investments at fair value at December 31, 2013 and 2012.

 

Investments at Fair Value as of December 31, 2013

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

Equity commingled*/mutual funds

 

$

3,494,914

 

$

13,884,615

 

$

 

 

$

17,379,529

 

IBM Corporation common stock

 

2,209,214

 

 

 

 

 

2,209,214

 

International equity securities

 

366,811

 

3,168,796

 

24

 

3,535,632

 

US large-cap equity securities

 

886,340

 

 

 

 

 

886,340

 

US mid-cap equity securities

 

2,901,805

 

 

 

 

 

2,901,805

 

US small-cap equity securities

 

1,244,469

 

 

 

12

 

1,244,481

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

Government securities rated A or higher

 

 

 

8,676,257

 

 

 

8,676,257

 

Government securities rated below A

 

 

 

305,417

 

1,314

 

306,731

 

Corporate bonds rated A or higher

 

 

 

1,157,594

 

 

 

1,157,594

 

Corporate bonds rated below A

 

 

 

2,093,707

 

590

 

2,094,296

 

Mortgage and asset-backed securities

 

 

 

743,435

 

499

 

743,935

 

Fixed income commingled*/mutual funds

 

1,175,897

 

569,130

 

 

 

1,745,027

 

Investment contracts

 

 

 

633,210

 

 

 

633,210

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

37,847

 

1,502,634

 

 

 

1,540,481

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

5,872

 

9,027

 

 

 

14,898

 

 

 

 

 

 

 

 

 

 

 

Other commingled*/mutual funds

 

604,047

 

1,118,184

 

 

 

1,722,231

 

Total investments at fair value

 

12,927,216

 

33,862,005

 

2,440

 

46,791,660

 

 


*Commingled funds may include 103-12 investments, common collective trusts, and pooled separate accounts.

 

There were no transfers between Levels 1 and 2.

 

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Table of Contents

 

Investments at Fair Value as of December 31, 2012

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

Equity commingled*/mutual funds

 

$

2,588,283

 

$

11,228,774

 

$

 

 

$

13,817,058

 

IBM Corporation common stock

 

2,504,527

 

 

 

 

 

2,504,527

 

International equity securities

 

386,482

 

2,921,483

 

 

 

3,307,965

 

US large-cap equity securities

 

729,182

 

 

 

 

 

729,182

 

US mid-cap equity securities

 

2,040,336

 

 

 

 

 

2,040,336

 

US small-cap equity securities

 

1,206,692

 

 

 

 

 

1,206,692

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

Government securities rated A or higher

 

 

 

10,156,571

 

528

 

10,157,099

 

Government securities rated below A

 

 

 

360,651

 

 

 

360,651

 

Corporate bonds rated A or higher

 

 

 

1,093,707

 

 

 

1,093,707

 

Corporate bonds rated below A

 

 

 

2,063,104

 

577

 

2,063,471

 

Mortgage and asset-backed securities

 

 

 

795,282

 

6,564

 

801,846

 

Fixed income commingled*/mutual funds

 

1,526,599

 

575,287

 

 

 

2,101,887

 

Investment contracts

 

 

 

16,899

 

 

 

16,899

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

35,592

 

976,599

 

 

 

1,012,401

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

4,597

 

(5,493

)

 

 

(896

)

 

 

 

 

 

 

 

 

 

 

Other commingled*/mutual funds

 

458,880

 

315,064

 

 

 

773,944

 

Total investments at fair value

 

$

11,481,171

 

$

30,497,927

 

$

7,670

 

$

41,986,768

 

 


*Commingled funds may include 103-12 investments, common collective trusts, and pooled separate accounts

 

There were no transfers between Levels 1 and 2.

 

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Table of Contents

 

Level 3 Gains and Losses

 

The following table presents the changes in the fair value of the plan’s Level 3 investments for the year ended December 31, 2013:

 

 

 

 

 

 

 

Government

 

Government

 

 

 

 

 

 

 

 

 

 

 

US, Small,

 

Securities

 

Securities

 

Corporate

 

Mortgage and

 

 

 

 

 

International

 

Mid Cap

 

Rated A or

 

Rated

 

Bonds Rated

 

Asset-Backed

 

 

 

(Dollars in Thousands)

 

Companies

 

Companies

 

Higher

 

Below A

 

Below A

 

Securities

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

$

 

 

$

 

 

$

528

 

$

 

 

$

577

 

$

6,564

 

$

7,670

 

Unrealized gains/(losses) on assets held at end of year*

 

24

 

12

 

 

 

3

 

12

 

387

 

438

 

Realized gains/(losses)*

 

 

 

 

 

22

 

 

 

 

 

(384

)

(363

)

Purchases

 

 

 

 

 

 

 

1,311

 

 

 

 

 

1,311

 

Sales

 

 

 

 

 

(550

)

 

 

 

 

(982

)

(1,532

)

Transfers into Level 3 **

 

0

 

 

 

 

 

 

 

 

 

64

 

64

 

Transfers out of Level 3 ***

 

 

 

 

 

 

 

 

 

 

 

(5,149

)

(5,149

)

Balance at December 31, 2013

 

$

24

 

$

12

 

$

0

 

$

1,314

 

$

590

 

$

499

 

$

2,440

 

 


*Reported in the net change in fair value of investments in the Statement of Changes in Net Assets Available for Benefits.

**Transferred from Level 2 to Level 3 because observable market data was not available for the securities.

***Transferred from Level 3 to Level 2 because observable market data became available for the securities.

 

The Plan’s policy is to recognize transfers in and transfers out at the beginning of the period.

 

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Table of Contents

 

Fair Value of Investments that Calculate Net Asset Value

 

The following table summarizes investments measured at fair value based on net asset value per share at December 31, 2013 and 2012, respectively:

 

Investments at fair value:

 

2013

 

2012

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Equity funds (a)

 

$

13,884,615

 

$

11,228,774

 

Fixed income funds (b)

 

569,130

 

575,287

 

Other funds (c)

 

1,118,184

 

315,064

 

 


(a)         The equity funds are invested to gain exposure to broad public indices, including U.S. and international market securities.

(b)         The fixed income funds are part of the underlying holdings within the Interest Income Fund and include investments in public and private bonds.

(c)          The other funds consist of a balanced exposure fund (new in 2013) and a commodities fund that are only available to participants as part of the Life Cycle funds.  The balanced exposure fund invests in stocks, bonds and commodities with the objective of balancing risk across different economic environments or risk factors.

 

Generally, under ordinary market conditions, investments in the funds included in the table above provide daily market liquidity to Plan participants and the Plan, facilitating daily participant transactions (issuances and redemptions).  Investment in some of these funds may be subject to redemption restrictions at the fund’s discretion in limited situations including, but not limited to, a major market event, closure of a market on which any significant portion of the assets of the fund are invested, a situation deemed to be an emergency by the fund, and a situation in which price or value of the assets cannot be promptly and accurately ascertained.  At December 31, 2013 and 2012, no funds were subject to redemption restrictions.

 

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Table of Contents

 

Investments — Five Percent or More of Plan’s Net Assets

 

The investments that represent 5 percent or more of the Plan’s net assets available for benefits at December 31, 2013 and/or 2012 are as follows:

 

Investments

 

2013

 

2012

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Large Company Index Fund (Vanguard Employee Benefit Index Fund)

 

$

5,305,752

 

$

4,195,821

 

Total Stock Market Index Fund (Vanguard Total Stock Market Index Trust)

 

4,402,837

 

4,011,363

 

IBM Common Stock

 

2,209,214

 

2,504,527

 

 

Net Change in Fair Value of Investments

 

The following table represents the Net Change in Fair Value of Investments (including gains and losses on investments bought and sold, as well as held during the year):

 

 

 

2013

 

 

 

(Dollars in thousands)

 

Investments at fair value:

 

 

 

Commingled / Mutual Funds

 

$

3,997,053

 

Equity Securities

 

1,383,989

 

Fixed Income Securities

 

(313,627

)

Total

 

$

5,067,415

 

 

NOTE 4 — DERIVATIVES

 

In accordance with the investment strategy of the separately-managed funds and the Interest Income Fund, investment managers execute transactions in various derivative instruments.  These derivative instruments include swaps, options, bond and equity futures and forward contracts.  The use of derivatives is permitted principally to gain or reduce exposure or execute an investment strategy more efficiently.  The investment managers use these derivative instruments to manage duration and interest rate volatility and exposure to credit, currency, equity, and cash.

 

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Table of Contents

 

Within the fixed income funds, the investment managers either sell or purchase credit protection through credit default swaps.  The investment managers also enter into interest rate swap transactions where a series of fixed versus floating rate amounts are exchanged.

 

Derivatives may be executed on exchange traded investment instruments or via over the counter (OTC) transactions.  When an OTC contract is executed, there is exposure to credit loss in the event of non-performance by the counterparties to these transactions. IBM manages this exposure through the credit criteria included in the investment guidelines and monitors and reports market and counterparty credit risks associated with these instruments. The Plan’s investment managers negotiate and enter into collateral and netting agreements with counterparties on the Plan’s behalf.  In the event of a counterparty default, these agreements reduce the potential loss to the Plan.   These arrangements define the nature of the collateral (cash or U.S. Treasury securities) and the established thresholds for when additional collateral is required by either party. For OTC transactions, the Plan has posted collateral of $11 million and $23 million and received collateral of $8 million and $11 million at December 31, 2013 and 2012, respectively.   In addition, for exchange traded transactions, the Plan has posted $3 million and $9 million of collateral as of December 31, 2013 and 2012, respectively and received no collateral at December 31, 2013 and 2012.  Derivative collateral received is recorded in Investments, at fair value and Payable for collateral deposits in the Statements of Net Assets Available For Benefits.  Derivative collateral posted is recorded in Investments, at fair value in the Statements of Net Assets Available For Benefits.  In the Statements of Net Assets Available For Benefits, the Plan does not offset derivative assets against liabilities where the Plan has a legal right of setoff under a master netting agreement nor does it offset Investments, at fair value or Payable for collateral deposits recognized upon payment or receipt of cash collateral against the fair value of the related derivative instruments.  Derivative liabilities are recorded in Investments, at fair value in the Statements of Net Assets Available For Benefits.

 

Market risk arises from the potential for changes in value of financial instruments resulting from fluctuations in interest and foreign exchange rates and in prices of debt and equity securities.  The notional (or contractual) amounts used to express the volume of these transactions do not necessarily represent the amounts potentially subject to market risk.

 

Derivative financial instruments are carried at fair value.  The net fair value of derivative financial instruments was an asset of $15 million and a liability of $1 million as of December 31, 2013 and 2012, respectively.

 

The Plan has authorized Investment Managers to use specific derivative instruments in the implementation of their investment strategy for financial instruments that are managed by the Plan.  The following section discloses how these derivatives may be used, their fair value and financial position at year-end, and the risks associated with each.  Exchange traded derivatives, including futures and options, are regulated by the exchange and approved broker dealers.  OTC derivatives include foreign currency forward contracts, options, and swaps. These transactions will be contracted between two counterparties and governed by separate agreements.  A description of these instruments and the risks are below.

 

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Table of Contents

 

Futures Contracts

 

Futures contracts are standardized agreements to buy or sell a specific amount of a financial instrument on a future date for a specified price.  Futures are valued based upon their quoted daily price.  The primary risks associated with futures are the accuracy of the correlation between the value of bonds or equities and the price of the futures contracts. Futures contracts may be used to equitize cash and manage exposure to changes in interest rates. Upon entering into a futures contract, the investment manager is required to deposit collateral or initial margin and subsequent margin payments are moved daily depending on the value of the contract. Futures contracts may be subject to risk of loss in excess of the daily variation margin.  They are classified as either interest rate or equity contracts on the derivative instrument tables that follow.

 

Options Contracts

 

Options include equity options, index options, options on swaps (swaptions), and options on futures. Options are contracts that give the owner the right, but not the obligation, to buy or sell an asset at a specified price (strike price) on a future date. Options may be purchased or written to help manage exposure to the securities markets. Investment managers may write (sell) call and put options and the premiums received from writing options which expire are treated as realized gains.  Premiums received from a position which is exercised/closed are offset against the amount paid for the underlying security to calculate the gain or loss. An option writer (seller) has no control over whether the underlying instrument may be sold (call) or purchased (put) and bears the market risk of an unfavorable change in the price of the underlying instrument.  Investment managers may also purchase put and call options. Purchasing call options is intended to increase exposure to the underlying instrument, while purchasing put options would tend to decrease exposure to the underlying issue. Premiums paid for purchasing options which expire are realized losses. The risk associated with purchasing put and call options is limited to the premium paid.  Options may be traded on an exchange or OTC.  For OTC options, the Plan could be exposed to risk if the counterparties are unable to meet the terms of the contracts. This risk is mitigated by the posting of collateral by the counterparty and monitored against the contract terms.  Options are classified as interest rate or foreign exchange contracts on the derivative instruments tables that follow.

 

Foreign Currency Forwards

 

A foreign currency forward is a contract between two parties to exchange money denominated in one currency into another currency at a set price on a specified future date. Foreign currency forwards are used to hedge the currency exposure, as a part of an investment strategy, or in connection with settling transactions.  Foreign currency contracts may involve market risk in excess of the unrealized gain or loss. Forward transactions are typically not collateralized. The Plan could be exposed to risk if the counterparties are unable to meet the terms of the contracts.

 

Swap Agreements

 

Swap agreements are privately negotiated contracts to exchange investment cash flows at a future date based on the underlying value of the assets.  Swap agreements involve elements of credit, market, and documentation risk. The Plan could be exposed to risk if the counterparties are unable to meet the terms of the contracts. This risk is mitigated by the posting of collateral by the counterparty and monitored against the contract terms.  Swap agreements may be centrally cleared or traded OTC.  For OTC swap agreements, the Plan could be exposed to risk if the counterparties are unable to meet the terms of the contracts. This risk is mitigated by the posting of collateral by the counterparty and monitored against the contract terms.  Swap agreements are classified as interest rate or credit contracts on the derivative instruments tables that follow.

 

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Table of Contents

 

Interest Rate Swaps

 

An Interest rate swap is an agreement in which two parties exchange cash flows based upon a notional principal amount and pay or receive fixed or floating rate amounts of interest. One party exchanges a stream of fixed interest payments for another party’s stream of floating interest payments.  Investment managers may enter into interest rate swap agreements to help hedge against interest rate risk and to maintain its ability to generate income at prevailing market rates. Interest rate swaps expose users to interest rate risk and credit risk.  The notional value of an interest rate swap is not at risk.

 

Credit Default Swaps

 

Credit default swaps are agreements where one party (the buyer of protection) makes payments to another party (seller of protection) in exchange for the right to receive a specified return in the event of a default or other credit event.  Investment managers may use credit default swaps to provide a measure of protection against defaults of the issuers or to gain or reduce exposure to a particular credit exposure.  The typical term of an agreement is five years.  If an investment manager is a buyer of protection and a credit event occurs, the portfolio will either receive from the seller of protection an amount equal to the notional amount of the swap or receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation.  If an investment manager is a seller of protection and a credit event occurs, the portfolio will either pay to the buyer of protection an amount equal to the notional amount of the swap or pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation.  The maximum potential amount of future payments that the Plan as a seller could be required to make is $113 million.  Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller upon the occurrence of a defined credit event.

 

Total Return Swaps

 

A Total Return Swap allows one party to derive the economic benefit of owning an asset without putting that asset on its balance sheet, and allows the other party, which does retain the asset on its balance sheet, to buy protection against loss in value.  Investment managers may enter into Total Return Swaps to gain/reduce exposure on the Referenced Asset.

 

The following tables provide a quantitative summary of the derivative activity as of December 31, 2013 and 2012 and for the year ended December 31, 2013.

 

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Table of Contents

 

Fair Values of Derivative Instruments on Statements of Net Assets Available for Benefits

 

(Dollars in Thousands)

 

 

 

Notional/

 

 

 

 

 

 

 

contractual

 

 

 

 

 

At December 31, 2013:

 

amount

 

Assets *

 

Liabilities *

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

2,197,844

 

$

21,339

 

$

14,533

 

Foreign exchange contracts

 

432,486

 

3,184

 

3,094

 

Credit contracts

 

272,820

 

8,053

 

5,269

 

Equity contracts

 

128,311

 

5,218

 

 

 

Carrying value of derivatives on the statement of net assets available for benefits

 

 

 

$

37,794

 

$

22,896

 

 

 

 

Notional/

 

 

 

 

 

 

 

contractual

 

 

 

 

 

At December 31, 2012: **

 

amount

 

Assets *

 

Liabilities *

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

1,781,750

 

$

16,455

 

$

22,168

 

Foreign exchange contracts

 

517,838

 

3,961

 

5,275

 

Credit contracts

 

221,455

 

6,210

 

2,531

 

Equity contracts

 

135,061

 

2,496

 

44

 

Carrying value of derivatives on the statement of net assets available for benefits

 

 

 

$

29,121

 

$

30,017

 

 


* Reported in Investments, at fair value

** The classification of amounts related to the Assets and Liabilities at December 31, 2012 have been revised to conform with the requirements of relevant accounting guidance for such disclosures and the 2013 presentation.  As a result of the revision, both Assets and Liabilities in the table above have been reduced by approximately $780M.  There is no impact to either the Statement of Net Assets Available For Benefits or to the Statement of Changes in Net Assets Available For Benefits for the periods presented as such revision relates only to the above disclosures. The impact on prior disclosures was not considered material.

 

The Effect of Derivative Instruments on the Statement of Changes in Net Assets Available for Benefits

 

(Dollars in Thousands)

 

For the year ended December 31, 2013 *

 

 

 

 

 

Interest rate contracts

 

$

20,668

 

Foreign exchange contracts

 

(789

)

Credit contracts

 

(1,950

)

Equity contracts

 

25,273

 

Total net gain

 

$

43,202

 

 


* Reported in Net change in fair value of investments

 

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Table of Contents

 

The following table provides a quantitative summary of derivatives that are subject to a master netting agreement less the amounts subject to counter party netting, cash and securities collateral and the net amount.

 

 

 

 

 

Counter-party

 

 

 

 

 

 

 

(Dollars in thousands)

 

Gross amount*

 

netting

 

Cash collateral

 

Securities collateral

 

Net amount

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

$

16,035

 

$

8,083

 

$

4,594

 

$

1,463

 

$

1,894

 

Liability derivatives

 

13,821

 

8,083

 

365

 

2,820

 

2,553

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

$

21,147

 

$

10,644

 

$

6,624

 

$

1,501

 

$

2,378

 

Liability derivatives

 

26,719

 

10,644

 

3,489

 

10,805

 

1,781

 

 


*Reported in Investments, at fair value on the Statements of Net Assets Available for Benefits

 

For futures and centrally cleared derivative assets of $22M and $8M and derivative liabilities of $9M and $3M at December 31, 2013 and 2012, respectively, the Plan does not have a legal right of setoff under a master netting agreement.

 

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Table of Contents

 

NOTE 5 — INVESTMENT CONTRACTS

 

The Plan entered into benefit-responsive synthetic investment contracts (“synthetic GICs”) and a separate account investment contract (“separate account GIC” and together with the synthetic GICs, “Investment Contracts”), through the Interest Income Fund (“the Fund”), with various third parties, i.e., insurance companies and banks.  The fair value of the Investment Contracts was determined using a discounted cash flow model which considers recent rebids as determined by recognized dealers, a discount rate and the duration of the underlying portfolio.

 

A synthetic GIC provides for a fixed return on principal over a specified period of time, e.g., a quarterly crediting rate.  These investment contracts, which are backed by underlying assets owned by the Plan, are issued by third parties.  A separate account GIC also provides for a fixed return on principal and these investment contracts are funded by contributions which are held in a separate account at the third party established for the sole benefit of the Fund participants.  Both types of Investment Contracts are meant to be fully benefit-responsive.  Participants transact at contract value, which represents contributions plus interest earned based on a formula called the “crediting rate.”  The crediting rate formula smooths and decreases differences over time between the market value of the covered assets and the contract value.  The crediting rate is most impacted by the change in the annual effective yield to maturity of the underlying securities, but is also affected by changes in general level of interest rates, administrative expenses and cash flows into or out of the contract.  The difference between the contract value and the market value of the covered assets is amortized over the Investment Contract’s actual or benchmark duration, in accordance with the contract. A change in duration of the covered assets from reset period to reset period can affect the speed with which any difference is amortized.  Crediting rates are reset quarterly or more often if deemed appropriate.  Investment Contracts provide a guarantee that the crediting rate will not fall below zero percent.

 

An Investment Contract crediting rate, and hence the Fund’s return, may be affected by many factors, including purchases and redemptions by participants.  The precise impact on the Investment Contract depends on whether the market value of the covered assets is higher or lower than the contract value of those assets.  If the market value of the covered assets is higher than the contract value, the crediting rate will ordinarily be higher than the yield of the covered assets.  Under these circumstances, cash from new investors will tend to lower the crediting rate and the Fund’s return, and redemptions by existing participants will tend to increase the crediting rate and the Fund’s return.  If the market value of the covered assets is less than the contract value, the crediting rate will ordinarily be lower than the yield of the covered assets.  Under these circumstances, cash from new investors will tend to increase the crediting rate and the Fund’s return, and redemptions by existing participants will tend to decrease the crediting rate and the Fund’s return. If the Investment Contract experiences significant redemptions when the market value is below the contract value, the Investment Contract’s crediting rate may be reduced significantly, to a level that may not be competitive with other investment options. If redemptions continued, the crediting rate could be reduced to zero.  If the Investment Contract has insufficient covered assets to meet redemption requests, the Fund would require payments from the investment contract issuer to pay further participant redemptions.

 

27



Table of Contents

 

The Fund and the Investment Contracts purchased by the Fund are designed to pay all participant-initiated transactions at contract value.  Participant-initiated transactions are those transactions allowed by the provisions of the Plan (typically this would include withdrawals for benefits, loans, or transfers to non-competing funds within the Plan).  However, the Investment Contracts may limit the ability of the Fund to transact at contract value upon the occurrence of certain events.  At this time, the occurrence of any of these events is not probable.  These events include:

 

·                  The Plan’s failure to qualify under Section 401(a) or Section 401(k) of the Internal Revenue Code.

 

·                  The establishment of a defined contribution plan that competes with the Plan for employee contributions.

 

·                  Any substantive modification of the Plan or the administration of the Plan that is not consented to by the investment contract issuer.

 

·                  Complete or partial termination of the Plan.

 

·                  Any change in law, regulation or administrative ruling applicable to the Plan that could have a material adverse effect on the Fund’s cash flow.

 

·                  Merger or consolidation of the Plan with another plan, the transfer of plan assets to another plan, or the sale, spin-off or merger of a subsidiary or division of the plan sponsor.

 

·                  Any communication given to participants by the Plan sponsor or any other plan fiduciary that is designed to induce or influence participants not to invest in the Fund or to transfer assets out of the Fund.

 

·                  Exclusion of a group of previously eligible employees from eligibility in the Plan.

 

·                  Any significant retirement program, group termination, group layoff, facility closing or similar program.

 

·                  Any transfer of assets from the Fund directly to a competing option, if such transfers are prohibited.

 

·                  Bankruptcy of the plan sponsor or other plan sponsor events which cause a significant withdrawal from the Plan.

 

An investment contract issuer may terminate a contract at any time.  In the event that the market value of the covered assets is below the contract value at the time of such termination, the Plan may elect to keep a contract in place to allow for the convergence of the market value and the contract value.  An investment contract issuer may also terminate a contract if certain terms of the Investment Contract fail to be met.

 

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Table of Contents

 

Investment Contracts generally impose conditions on both the Plan and the issuer.  If an event of default occurs and is not cured, the non-defaulting party may terminate the contract.  The following may cause the Plan to be in default: a breach of material obligation under the contract; a material misrepresentation; or a material amendment to the Plan agreement.  The issuer may be in default if it breaches a material obligation under the investment contract; makes a material misrepresentation; is acquired or reorganized.  If, in the event of default of an issuer, the Fund were unable to obtain a replacement investment contract, the Fund may experience losses if the market value of the Plan’s assets no longer covered by the contract is below contract value.  The Fund may seek to add additional issuers over time to diversify the Fund’s exposure to such risk, but there is no assurance the Fund will be able to do so.  The combination of the default of an issuer and an inability to obtain a replacement agreement could render the Fund unable to achieve its objective of maintaining contract value.  The terms of an Investment Contract generally provide for settlement of payments only upon termination of the contract or total liquidation of the covered investments.  Generally, payments will be made pro-rata, based on the percentage of investments covered by each issuer.  Contract termination occurs whenever the contract value or market value of the covered investments reaches zero or upon certain events of default.  If the contract terminates when the market value equals zero, the issuer will pay the excess of contract value over market value to the Plan to the extent necessary for the Plan to satisfy outstanding contract value withdrawal requests.  Contract termination also may occur by either party upon election and notice as agreed to under the terms of the contract.

 

The following table provides the fair value and contract value for the Investment Contracts and the fair value of the underlying assets net of all receivables and payables.

 

Investment Contracts at December 31,

 

2013

 

2012

 

 

 

(Dollars in thousands)

 

Fair value:

 

 

 

 

 

Investment Contracts

 

$

633,210

 

$

16,826

 

Underlying assets net of payables/receivables

 

8,864,949

 

9,993,644

 

Fair value of Investment Contracts and underlying assets

 

$

9,498,159

 

$

10,010,470

 

Adjustment from fair value to contract value

 

(293,477

)

(708,476

)

Contract value of Investment Contracts

 

$

9,204,682

 

$

9,301,994

 

 

The Investment Contracts owned by the Interest Income Fund produced the following returns:

 

 

 

Year Ended
December 31,

 

 

 

2013

 

2012

 

Earned by the Plan

 

-1.33

%

4.82

%

Credited to participants

 

3.04

%

3.50

%

 

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Table of Contents

 

NOTE 6 - DESCRIPTION OF INVESTMENT FUNDS

 

The objectives of the thirty-three primary investment funds in which participants could invest in 2013 are described below:

 

Life Cycle Funds —

 

The fourteen Life Cycle funds reflect a portfolio of diversified investments — U.S. stocks, international stocks, real estate equity stocks, and fixed-income investments — from the existing core funds noted below, plus a balanced exposure fund and a commodities fund (not available to participants as standalone offerings).  These funds offer a convenient low-cost way to achieve diversification, professional investment management and periodic rebalancing.  The funds are structured by the IBM Retirement Fund organization and managed by the underlying funds’ managers.

 

Four Life Cycle Funds are Life Strategy Funds that have a preset mix of stock and fixed income investments in order to provide broad diversification at four given levels of exposure to equities.  The preset mix of each Life Strategy Fund is not expected to change over time.

 

·

 

Income Plus Life Strategy Fund - target allocation: 25% stocks*, 75% bonds; seeks returns that modestly outpace inflation on a fairly consistent basis.

 

 

 

·

 

Conservative Life Strategy Fund - target allocation: 50% stocks*, 50% bonds; seeks returns that moderately outpace inflation over the long term.

 

 

 

·

 

Moderate Life Strategy Fund - target allocation: 65% stocks*, 35% bonds; seeks relatively high returns at a moderate risk level.

 

 

 

·

 

Aggressive Life Strategy Fund - target allocation: 90% stocks*, 10% bonds; seeks high returns over the long term.

 


* Exposure to the balanced exposure and commodities funds is considered part of the allocation to stocks.

 

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Table of Contents

 

Ten Life Cycle Funds are Target Date Funds that offer portfolios with asset allocations designed for varying retirement dates or the year in which one expects to start drawing on their retirement assets. The portfolios are offered in five year increments from 2005 to 2050, with the 2030 through 2050 funds providing a significantly higher allocation to stocks. As a fund draws closer to its associated target date, the fund will automatically shift toward a more conservative risk level by reducing its allocation to stocks. Each fund’s reduction to stocks continues through its “target date” for another 10 years, until the fund’s allocation and risk profile matches that of the Income Plus Fund. Target Date funds assume a retirement age of 60.

 

·

 

Target Date 2005 Fund - designed for investors who have retired or started to draw on their retirement assets on or around the year 2005; seeks returns that moderately outpace inflation over the long term. Target asset allocation between stocks and bonds is 29% stocks*, 71% bonds.

 

 

 

·

 

Target Date 2010 Fund - seeks relatively high returns at a moderate risk level. Target asset allocation between stocks and bonds is 41% stocks*, 59% bonds.

 

 

 

·

 

Target Date 2015 Fund - seeks relatively high returns at a moderate risk level. Target asset allocation between stocks and bonds is 54% stocks*, 46% bonds.

 

 

 

·

 

Target Date 2020 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 65% stocks*, 35% bonds.

 

 

 

·

 

Target Date 2025 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 77% stocks*, 23% bonds.

 

 

 

·

 

Target Date 2030 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 87% stocks*, 13% bonds.

 

 

 

·

 

Target Date 2035 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 90% stocks*, 10% bonds.

 

 

 

·

 

Target Date 2040 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 90% stocks*, 10% bonds.

 

 

 

·

 

Target Date 2045 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 90% stocks*, 10% bonds.

 

 

 

·

 

Target Date 2050 Fund - seeks high returns over the long term. Target asset allocation between stocks and bonds is 90% stocks*, 10% bonds.

 


* Exposure to the balanced exposure and commodities funds is considered part of the allocation to stocks.

 

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Table of Contents

 

Core Funds - eight funds that provide an opportunity to build a portfolio from a selection of broadly diversified U.S. and international stock funds and from funds that track the fixed-income markets.

 

·

 

Interest Income Fund - seeks to provide income similar to an intermediate bond fund with low volatility and to preserve principal.  The fund is managed by multiple investment managers.

 

 

 

·

 

Inflation Protected Bond Fund - seeks over the long term to provide a rate of return similar to the Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index.  The fund is managed by State Street Global Advisors.

 

 

 

·

 

Total Bond Market Fund - seeks to provide a rate of return similar to its benchmark index (Barclays 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 Neuberger Berman.

 

 

 

·

 

High Yield and Emerging Markets Bond Fund - seeks to modestly exceed the returns of a customized composite benchmark of 40% U.S. high yield, 40% emerging market bonds issued in local currencies and 20% emerging market bonds issued in U.S. dollars. The fund invests in “below investment grade” U.S. corporate and emerging market bonds. The fund is managed by multiple investment managers.

 

 

 

·

 

Total Stock Market Index Fund - seeks long-term growth of capital and income with a market rate of return for a diversified group of U.S. equities.  It attempts to match the performance of the Dow Jones U.S. Total Stock Market Index. The fund is managed by The Vanguard Group.

 

 

 

·

 

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 MSCI All Country World Ex-USA Investable Market Index.  The fund is managed by State Street Global Advisors.

 

 

 

·

 

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 BlackRock Institutional Trust Company.

 

 

 

·

 

International Real Estate Index Fund. - seeks to replicate the returns of the FTSE EPRA/NAREIT Developed ex US Rental Index. Investment consists of the international market for securities of companies principally engaged in the real estate industry that derive greater than or equal to 70% of their total revenue from rental revenue of investment properties. The fund is managed by BlackRock Institutional Trust Company.

 

Expanded Choice Funds —eleven 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.

 

·

 

Long-Term Corporate Bond Fund - seeks to modestly outperform the return of the Barclays U.S. Long Credit Index. The fund invests in a diversified group of investment grade corporate and local U.S. and non-U.S. government fixed-rate debt issues with maturities of ten years or more.  The fund is managed by Neuberger Berman.

 

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Table of Contents

 

·

 

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.

 

 

 

·

 

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.

 

 

 

·

 

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.

 

 

 

·

 

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.

 

 

 

·

 

Small-Cap Value Index Fund - seeks long-term growth of capital by attempting to match the performance of the Russell 2000 Value Index.  The fund is managed by The Vanguard Group.

 

 

 

·

 

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.

 

 

 

·

 

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 MSCI Europe Index.  The fund is managed by The Vanguard Group.

 

 

 

·

 

Pacific Stock Index Fund - seeks long-term growth of capital by attempting to match the performance of the MSCI Pacific Index.  The fund is managed by The Vanguard Group.

 

 

 

·

 

Emerging Markets Stock Index Fund - seeks long-term growth of capital by attempting to match the investment results of the MSCI Emerging Markets Index.  The fund is managed by The Vanguard Group.

 

 

 

·

 

IBM Stock Fund - invests in IBM common stock and holds a small interest-bearing cash balance of approximately 0.35% for liquidity purposes.  The fund is managed by State Street Bank and Trust Company.

 

IBM 401(k) participants also have access to the “mutual fund window” investments — which expands the Plan’s investment options to include about 165 mutual funds, most of which are actively managed.  This feature gives more options to participants who are interested in investing in brand-name funds, or in simply having a broader range of investment options from which to choose.

 

In the second quarter of 2013, the target asset allocation in the fourteen Life Cycle funds changed, and the Target Date Funds’ glide path was changed so that each fund will reach its final target allocation of 25% stocks and 75% bonds ten years after the target date. The High Yield & Emerging Markets Bond Fund was added to the Core Funds as was a new Balanced Exposure Fund (available only as an investment in the Life Cycle Funds).  Over time, allocations to the Total Bond Market Fund will replace any Interest Income Fund allocation in the Life Cycle Funds.  Additional information on the Plan’s Investment Funds is available at: netbenefits.com/IBM.

 

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Table of Contents

 

Securities Lending

 

The Plan does not currently engage in securities lending for the separate accounts.  Securities lending may be permitted in certain commingled funds and in funds within the IBM Mutual Fund Window.  The prospectus for each fund will disclose if lending is permitted and the risks involved.

 

Repurchase Agreements

 

Certain investment managers of separately managed accounts may enter into repurchase agreements with the objective of managing cash in the portfolio.  The repurchase agreements are short-term and managers are limited in the percent of assets which may be invested in them.  Counterparties must meet credit rating requirements and permitted collateral is restricted to cash and/or government securities.  The Plan received $23 million of securities at December 31, 2013 and $0.3 million of cash collateral and $102 million of securities at December 31, 2012.  Repurchase agreement cash collateral received is recorded in Investments, at fair value and Payable for collateral deposits in the Statements of Net Assets Available For Benefits. The prospectus of commingled funds or funds within the Mutual Fund Window will disclose if repurchase agreements are permitted.

 

The following table provides a quantitative summary of repurchase agreements that are subject to master netting agreements less cash and securities collateral and the net amount.

 

(Dollars in thousands)

 

Gross amount*

 

Cash collateral

 

Securities collateral

 

Net amount

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

22,600

 

$

 

 

$

22,600

 

$

 

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

100,000

 

$

330

 

$

99,670

 

$

 

 

 


*Reported in Investments, at fair value on the Statements of Net Assets Available for Benefits

 

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Table of Contents

 

NOTE 7 - TAX STATUS

 

The Trust established under the Plan is qualified under Section 401(a) of the Internal Revenue Code of 1986 and Section 1081.01 of the Internal Revenue Code for a New Puerto Rico (2011), and the Trustee intends for the Trust to remain dual-qualified in this manner.  The Plan received a favorable determination letter from the IRS on September 10, 2004, and received a favorable determination letter from the Hacienda (Puerto Rico) on April 29, 1993.  Subsequent to these determination letters by the IRS and the Hacienda, the Plan was amended.  The Plan administrator and Counsel continue to believe the Plan is designed and is being operated in compliance with the applicable requirements of the Internal Revenue Code and the Internal Revenue Code for a New Puerto Rico (2011).  The Plan submitted a request for a new determination letter to the IRS on January 21, 2011 and a request for a new determination letter to the Hacienda on April 15, 2014.

 

Accounting principles generally accepted in the United States of America require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2013, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

 

NOTE 8 - 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:

 

 

 

12/31
2013

 

12/31
2012

 

 

 

(Dollars in thousands)

 

Net assets available for benefits per the financial statements

 

$

46,285,274

 

$

40,895,194

 

Plus:

 

 

 

 

 

Adjustment from contract value to fair value for fully benefit-responsive investment contracts held by the Interest Income Fund

 

293,477

 

708,476

 

Net assets available for benefits per the Form 5500

 

$

46,578,751

 

$

41,603,670

 

 

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Table of Contents

 

The following is a reconciliation of investment income per the financial statements to the Form 5500:

 

 

 

Year Ended
December 31,
2013

 

 

 

(Dollars in thousands)

 

Total investment income and interest income on notes receivable from participants per the financial statements

 

$

5,979,221

 

Less:

 

 

 

Adjustment from fair value to contract value for fully benefit-responsive investment contracts at December 31, 2012

 

708,476

 

Plus:

 

 

 

Adjustment from fair value to contract value for fully benefit-responsive investment contracts at December 31, 2013

 

293,477

 

Total investment income per the Form 5500

 

$

5,564,222

 

 

NOTE 9 - RELATED-PARTY TRANSACTIONS

 

At December 31, 2013, a significant portion of the Plan’s assets were managed by State Street Global Advisors.  State Street Global Advisors’ affiliate, State Street Bank and Trust Company, also acts as the trustee for the Plan and, therefore, these investments in addition to participant loans qualify as party-in-interest transactions.  The Plan also pays a fee to the trustee.  These transactions qualify as party-in-interest transactions as well.

 

In addition, Fidelity Investments Institutional Operations Company, Inc. is the provider of administrative services related to the mutual fund window as well as the investment manager of Fidelity funds within the mutual fund window.  Fidelity is also the provider of record keeping and participant services, and the operator of the IBM Employee Services Center for the IBM 401(k) Plus Plan.

 

At December 31, 2013 and 2012, the Plan held 11,778,076 and 13,075,056 shares of IBM common stock valued at $2,209,213,715 and $2,504,526,977, respectively.  During the year ended December 31, 2013, purchases of IBM common stock by the Plan totaled $172,097,229 and sales of IBM common stock by the Plan totaled $435,540,178.

 

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Table of Contents

 

IBM 401(k) PLUS PLAN AT DECEMBER 31, 2013

Schedule G, Part I - Schedule of Loans or Fixed Income Obligations in Default or Classified as Uncollectible

 

 

 

 

 

(c) Detailed description of loan including dates of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

making and maturity, interest rate, the type and value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of collateral, any renegotiation of the loan and the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

terms of the renegotiation, and other material items

 

 

 

Amount received during

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

(d) Original

 

reporting year

 

(g) Unpaid balance

 

Amount Overdue

 

(a)*

 

(b) Identity and address of Obligor

 

Security ID

 

Issue Date

 

Maturity Date

 

Rate

 

amount of loan

 

(e) Principal

 

(f) Interest

 

at end of year

 

(h) Principal

 

(i) Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American Airlines INC, 4333 Amon Carter Blvd., Fort Worth, TX 76155

 

023771R83

 

3/9/2011

 

3/15/2016

 

7.5

 

$

500,000

 

 

 

 

 

$

75,000

 

 

 

$

75,000

 

 

 

Glitnir Bank HF, Islandsbanki, Kirkjusandi 2-155 Reykjavik, Iceland

 

379308AA7

 

6/15/2006

 

6/15/2016

 

6.693

 

2,100,000

 

 

 

 

 

773,042

 

 

 

773,042

 

 

 

Glitnir Bank HF, Islandsbanki, Kirkjusandi 2-155 Reykjavik, Iceland

 

379308AB5

 

9/14/2006

 

9/14/2049

 

7.451

 

200,000

 

 

 

 

 

74,510

 

 

 

74,510

 

 

 

Kaupthing Bank hf., Borgartun 26 IS-105 Reykjavik, Iceland

 

48632HAA5

 

5/19/2006

 

5/19/2016

 

7.125

 

700,000

 

 

 

 

 

249,375

 

 

 

249,375

 

 

 

Lehman Brothers Holdings Inc., 745 Seventh Avenue, New York, NY 10019

 

524ESC7M6

 

12/21/2007

 

12/28/2017

 

6.75

 

9,850,000

 

 

 

 

 

3,324,375

 

 

 

3,324,375

 

 

 

Lehman Brothers Holdings Inc., 745 Seventh Avenue, New York, NY 10019

 

524ESCXA3

 

5/17/2007

 

11/30/2056

 

5.857

 

1,730,000

 

 

 

 

 

1,854,097

 

 

 

1,854,097

 

 

 

Sigma Finance Corp., M&C Corp. Services LTD,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Box 309GT, Ugland House, South Church St., George Town, Grand Cayman, Grand Cayman Islands

 

8265Q0XQ0

 

6/4/2007

 

6/4/2009

 

variable

 

10,000,000

 

 

 

 

 

9,554,482

 

9,494,970

 

59,512

 

 


* Party-in-interest

 

Schedule G, Part I - Overdue Loan Explanation

 

Investment managers have responsibility for these securities as well as other securities in their portfolio and they have or will take appropriate actions taking into consideration the circumstances surrounding each security and the overall portfolio that they manage.

 

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Table of Contents

 

IBM 401(k) PLUS PLAN

Schedule H, line 4i - Schedule of Assets (Held at End of Year)

 

AT DECEMBER 31, 2013

 

(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) Fair value

 

 

 

 

 

 

 

(n/a)

 

 

 

 

 

IBM Stock Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

International Business Machines Corporation

 

IBM Common Stock 11,778,076 shares

 

 

 

$

2,209,213,715

 

 

 

Managed by State Street Global Advisors

 

State Street Bank and Trust Company Government Short-Term Investment Fund

 

 

 

1,893,760

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual Funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administered by Fidelity Investments

 

Mutual Fund Window (refer to Exhibit K — investments)

 

 

 

5,238,579,883

 

 

 

Vanguard Emerging Markets Stock Index Fund

 

Vanguard Emerging Markets Stock Index Fund Institutional Plus Shares 396,236 shares

 

 

 

34,040,673

 

 

 

 

 

 

 

 

 

 

 

 

 

Commingled Funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vanguard Employee Benefit Index Fund

 

Large Company Index

 

 

 

5,305,752,365

 

 

 

Vanguard Total Stock Market Index Trust

 

Total Stock Market Index

 

 

 

4,402,836,677

 

 

 

Vanguard Russell 1000 Value Index Trust

 

Large Cap Value Index

 

 

 

928,327,214

 

 

 

Vanguard Russell 1000 Growth Index Trust

 

Large Cap Growth Index

 

 

 

818,292,103

 

 

 

Vanguard Russell 2000 Value Index Trust

 

Small Cap Value Index

 

 

 

804,448,279

 

 

 

Vanguard Russell 2000 Growth Index Trust

 

Small Cap Growth Index

 

 

 

759,682,088

 

 

 

Vanguard European Stock Index Trust

 

European Stock Index

 

 

 

494,977,224

 

 

 

Vanguard Pacific Stock Index Trust

 

Pacific Stock Index

 

 

 

370,298,945

 

 

 

PIMCO Commodities Plus Trust II

 

Commodity

 

 

 

283,472,031

 

 

 

AQR Global Risk Parity Enhanced Liquidity Fund

 

Balanced Fund

 

 

 

207,232,862

 

 

 

Bridgewater All Weather Portfolio III, LTD.

 

Balanced Fund

 

 

 

627,478,761

 

 


*   Party-In-Interest

 

38



Table of Contents

 

(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) Fair value

 

 

 

 

 

 

 

(n/a)

 

 

 

 

 

Separately-Managed Funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed by State Street Global Advisors

 

Total International Stock Market Index (refer to Exhibit A - investments)

 

 

 

$

3,335,108,010

 

 

 

Managed by State Street Global Advisors

 

Small/Mid Cap Stock Index (refer to Exhibit B - investments)

 

 

 

3,972,818,587

 

 

 

Managed by State Street Global Advisors

 

Inflation Protected Bond (refer to Exhibit C - investments)

 

 

 

1,718,306,024

 

 

 

Managed by Neuberger Berman

 

Total Bond Market (refer to Exhibit D - investments)

 

 

 

1,644,184,863

 

 

 

Managed by BlackRock Institutional Trust Company

 

Real Estate Investment Trust (refer to Exhibit E - investments)

 

 

 

1,095,808,727

 

 

 

Managed by Neuberger Berman

 

Long-Term Corporate Bond (refer to Exhibit F - investments)

 

 

 

312,949,814

 

 

 

Managed by Pacific Investment Management Company (PIMCO)

 

High Yield and Emerging Markets Bond (refer to Exhibit G - investments)

 

 

 

247,506,075

 

 

 

Managed by BlackRock Institutional Trust Company

 

International Real Estate Index (refer to Exhibit H -investments)

 

 

 

275,125,710

 

 

 

Managed by Lazard

 

Emerging Markets Debt (Refer to Exhibit L - investments)

 

 

 

143,746,040

 

 

 

Managed by JP Morgan

 

High Yield Debt (Refer to Exhibit M - investments)

 

 

 

102,236,809

 

 

 

Collateral

 

(refer to Exhibit I - investments)

 

 

 

8,643,027

 

 


*   Party-In-Interest

 

39



Table of Contents

 

(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) Fair value

 

 

 

 

 

 

 

(n/a)

 

 

 

 

 

Separately-Managed Funds (continued)

 

 

 

 

 

 

 

 

 

Underlying assets managed by various investment companies

 

Interest Income Fund (refer to Exhibit J - investments)

 

 

 

10,642,899,786

 

 

 

Bank of America, N.A.

 

Synthetic GIC Wrapper Contract, Rate of Interest 2. 93%

 

 

 

2,431,819

 

*

 

JPMorgan Chase Bank, N.A.

 

Synthetic GIC Wrapper Contract, Rate of Interest 2.93%

 

 

 

5,427,814

 

 

 

Royal Bank of Canada

 

Synthetic GIC Wrapper Contract, Rate of Interest 2. 93%

 

 

 

2,007,745

 

*

 

State Street Bank and Trust Company

 

Synthetic GIC Wrapper Contract, Rate of Interest 2.93%

 

 

 

 

 

*

 

The Prudential Insurance Company of America

 

Synthetic GIC Wrapper Contract, Rate of Interest 2.51%

 

 

 

 

 

*

 

New York Life Insurance Company

 

Synthetic GIC Wrapper Contract, Rate of Interest 2.64%

 

 

 

 

 

*

 

Metropolitan Life Insurance Company

 

Separate Account GIC Contract, Rate of Interest 2.47%

 

 

 

 

 

*

 

Notes receivable from participants

 

Interest rates range: 3.25% - 11.00% Terms: one to thirty years

 

 

 

 

315,263,823

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed by State Street Global Advisors

 

State Street Bank and Trust Company Government Short-Term Investment Fund

 

 

 

795,932,867

 

 


*   Party-In-Interest

 

40



Table of Contents

 

IBM 401(K) PLUS PLAN AT DECEMBER 31, 2013

Schedule H, line 4i-Schedule of Assets (Acquired and Disposed of Within Year)

 

FOR THE YEAR ENDED DECEMBER 31, 2013

 

 

 

(b) Identity of issue, borrower,

 

(c) Description of investment including maturity date,

 

 

 

(e) Fair

 

(a)

 

lessor, or similar party

 

rate of interest, collateral, par, or maturity value

 

(d) Cost

 

value

 

 

 

 

 

 

 

 

 

(n/a)

 

 

 

 

 

 

 

 

 

Shares/

 

 

 

 

 

 

 

 

 

 

 

Par Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BOA FUTURES COC

 

INTEREST-BEARING CASH

 

145,000

 

 

 

$

145,000

 

 

 

BROOKFIELD PROPERTY PARTNERS

 

PARTN./JOINT VENTURE INTEREST

 

5,616

 

 

 

119,521

 

 

 

CCMSCZUS2 CCPC COC EQUITY

 

INTEREST-BEARING CASH

 

36,000

 

 

 

36,000

 

 

 

CITIBANK CASH COLL CCP

 

INTEREST-BEARING CASH

 

648,000

 

 

 

69,000

 

 

 

CREDIT SUISSE SEC (USD) LLC

 

INTEREST-BEARING CASH

 

4,070,000

 

 

 

4,070,000

 

 

 

GOLDMAN SACH AND CO

 

INTEREST-BEARING CASH

 

187,000

 

 

 

187,000

 

 

 

GOLDMAN SACHS BANK USA COC

 

INTEREST-BEARING CASH

 

400,000

 

 

 

400,000

 

 

 

GREENWICH CAPITAL MKTS

 

INTEREST-BEARING CASH

 

560,000

 

 

 

560,000

 

 

 

JP MORGAN SEC INC

 

INTEREST-BEARING CASH

 

610,000

 

 

 

610,000

 

 

 

LIN MEDIA LLC

 

COMMON STOCK

 

32,600

 

 

 

488,320

 

 

 

ROYAL BANK OF CANADA

 

INTEREST-BEARING CASH

 

207,000

 

 

 

207,000

 

 

 

SWAP BARCLAYS COC

 

INTEREST-BEARING CASH

 

673,000

 

 

 

1,343,000

 

 

 

SWAP BNP PARIBAS BOC

 

INTEREST-BEARING CASH

 

550,000

 

 

 

550,000

 

 

 

SWAP BNP PARIBAS BOC

 

INTEREST-BEARING CASH

 

1,720,000

 

 

 

1,720,000

 

 

 

SWAP BNP PARIBAS COC

 

INTEREST-BEARING CASH

 

260,000

 

 

 

260,000

 

 

 

SWAP CITIBANK BOC

 

INTEREST-BEARING CASH

 

2,220,000

 

 

 

2,250,000

 

 

 

SWAP CSFB BOC

 

INTEREST-BEARING CASH

 

880,000

 

 

 

630,000

 

 

 

SWAP CSFB BOC

 

INTEREST-BEARING CASH

 

1,000,000

 

 

 

1,000,000

 

 

 

SWAP CSFB COC

 

INTEREST-BEARING CASH

 

372,000

 

 

 

372,000

 

 

 

SWAP DEUTSCHE BOC

 

INTEREST-BEARING CASH

 

740,000

 

 

 

740,000

 

 

 

SWAP DEUTSCHE COC

 

INTEREST-BEARING CASH

 

591,000

 

 

 

591,000

 

 

 

SWAP JPM CHASE BOC

 

INTEREST-BEARING CASH

 

3,250,000

 

 

 

2,630,000

 

 

 

SWAP JPM CHASE COC

 

INTEREST-BEARING CASH

 

800,000

 

 

 

800,000

 

 

 

SWAP UBS BOC

 

INTEREST-BEARING CASH

 

1,180,000

 

 

 

1,180,000

 

 

 

SWAP UBS COC

 

INTEREST-BEARING CASH

 

251,000

 

 

 

251,000

 

 

 

WESTPAC CASH COLL BOC

 

INTEREST-BEARING CASH

 

900,000

 

 

 

900,000

 

 

 

WESTPAC SWAP COC USD

 

INTEREST-BEARING CASH

 

1,160,000

 

 

 

1,160,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

23,268,841

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

* Party-In-Interest

 

 

 

 

 

 

 

 

 

 

41



Table of Contents

 

EXHIBIT A - Total International Stock Market Index Fund

(Managed by State Street Global Advisors)

 

IBM 401(K) PLUS PLAN AT DECEMBER 31, 2013

 

Schedule H, line 4i-Schedule of Assets (Held At End of Year)

 

(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) Fair
value

 

 

 

 

 

 

 

 

 

 

 

(n/a)

 

 

 

 

 

 

 

 

 

 

 

Shares/
Par Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARGENTINE PESO

 

FOREIGN CURRENCY

 

ARGENTINA

 

1,151

 

 

 

$

177

 

 

 

CRESUD S.A.C.I.F.Y A.

 

COMMON STOCK

 

ARGENTINA

 

4

 

 

 

5

 

 

 

GRUPO FINANCIERO GALICIA B

 

COMMON STOCK

 

ARGENTINA

 

8

 

 

 

12

 

 

 

PETROBRAS ARGENTINA SA B

 

COMMON STOCK

 

ARGENTINA

 

6

 

 

 

5

 

 

 

TELECOM ARGENTINA S.A. B

 

COMMON STOCK

 

ARGENTINA

 

6

 

 

 

29

 

 

 

TRANSPORTADORA DE GAS SUR B

 

COMMON STOCK

 

ARGENTINA

 

3

 

 

 

2

 

 

 

ABACUS PROPERTY GROUP

 

REIT NPV

 

AUSTRALIA

 

153,554

 

 

 

318,763

 

 

 

ADELAIDE BRIGHTON LTD

 

COMMON STOCK

 

AUSTRALIA

 

86,157

 

 

 

283,738

 

 

 

AET AND D HLDGS NO 1 PTY LTD

 

COMMON STOCK

 

AUSTRALIA

 

36,515

 

 

 

0

 

 

 

AGL ENERGY LTD

 

COMMON STOCK

 

AUSTRALIA

 

89,738

 

 

 

1,207,054

 

 

 

ALS LTD

 

COMMON STOCK

 

AUSTRALIA

 

69,628

 

 

 

549,056

 

 

 

ALUMINA LTD

 

COMMON STOCK

 

AUSTRALIA

 

425,103

 

 

 

424,145

 

 

 

AMCOR LIMITED

 

COMMON STOCK

 

AUSTRALIA

 

196,993

 

 

 

1,866,523