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<SEC-DOCUMENT>0000912057-02-009402.txt : 20020415
<SEC-HEADER>0000912057-02-009402.hdr.sgml : 20020415
ACCESSION NUMBER: 0000912057-02-009402
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020311
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: INTERNATIONAL BUSINESS MACHINES CORP
CENTRAL INDEX KEY: 0000051143
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570]
IRS NUMBER: 130871985
STATE OF INCORPORATION: NY
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-02360
FILM NUMBER: 02572393
BUSINESS ADDRESS:
STREET 1: 1 NEW ORCHARD ROAD
CITY: ARMONK
STATE: NY
ZIP: 10504-
BUSINESS PHONE: 9144991900
MAIL ADDRESS:
STREET 1: ONE NEW ORCHARD RD
CITY: ARMONK
STATE: NY
ZIP: 10504
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>a2071411z10-k405.txt
<DESCRIPTION>10-K405
<TEXT>
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2001
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
<S> <C>
NEW YORK 13-0871985
(State of Incorporation) (IRS Employer Identification Number)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
</Table>
914-499-1900
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<Table>
<Caption>
VOTING SHARES OUTSTANDING NAME OF EACH EXCHANGE
TITLE OF EACH CLASS AT MARCH 1, 2002 ON WHICH REGISTERED
- ------------------- ------------------------- -----------------------
<S> <C> <C>
Capital stock, par value $.20 per share 1,716,941,848 New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
7.25% Notes due 2002 New York Stock Exchange
6.45% Notes due 2007 New York Stock Exchange
5.375% Notes due 2009 New York Stock Exchange
7.50% Debentures due 2013 New York Stock Exchange
8.375% Debentures due 2019 New York Stock Exchange
7.00% Debentures due 2025 New York Stock Exchange
6.22% Debentures due 2027 New York Stock Exchange
6.50% Debentures due 2028 New York Stock Exchange
7.00% Debentures due 2045 New York Stock Exchange
7.125% Debentures due 2096 New York Stock Exchange
</Table>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 2002 was $176.9 billion.
Documents incorporated by reference:
Portions of IBM's Annual Report to Stockholders for the year ended
December 31, 2001 into Parts I, II and IV of Form 10-K.
Portions of IBM's definitive Proxy Statement dated March 11, 2002 into
Part III of Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART I
ITEM 1. BUSINESS:
International Business Machines Corporation (IBM) was incorporated in the
State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co.
(C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating
Machine Co., and The International Time Recording Co. of New York. In 1924,
C-T-R adopted the name International Business Machines Corporation.
IBM uses advanced information technology to provide customer solutions. The
company operates primarily in a single industry using several segments that
create value by offering a variety of solutions that include, either singularly
or in some combination, technologies, systems, products, services, software and
financing.
Organizationally, the company's major operations comprise a Global Services
segment; three hardware product segments--Enterprise Systems, Personal and
Printing Systems and Technology; a Software segment; a Global Financing segment
and an Enterprise Investments segment. The segments are determined based on
several factors, including customer base, homogeneity of products, technology
and delivery channels.
IBM offers its products through its global sales and distribution
organizations. The sales and distribution organizations have both a geographic
focus (in the Americas, Europe/Middle East/Africa, and Asia Pacific) and a
specialized and global industry focus. In addition, these organizations include
a global sales and distribution effort devoted exclusively to small and medium
businesses. IBM also offers its products through a variety of third party
distributors and resellers, as well as through its on-line channels.
While the company's various proprietary intellectual property rights are
important to its success, IBM believes its business as a whole is not materially
dependent on any particular patent or license, or any particular group of
patents or licenses. IBM owns or is licensed under a number of patents, which
vary in duration, relating to its products. Licenses under patents owned by IBM
have been and are being granted to others under reasonable terms and conditions.
These protections may not prevent competitors from independently developing
products and services similar to or duplicative of the company's nor can there
be any assurance that these protections will adequately deter misappropriation
or improper use of the company's technology. Also, there can be no assurances
that IBM will be able to obtain from third parties the licenses it needs in the
future.
IBM's businesses employ a wide variety of components, supplies and raw
materials from a substantial number of suppliers around the world. Certain of
the company's businesses rely on a single or limited number of suppliers,
although the company makes every effort to assure that alternative sources are
available if the need arises. The failure of the company's suppliers to deliver
components, supplies and raw materials in sufficient quantities and in a timely
manner could adversely affect the company's business.
IBM's revenues are affected by such factors as the introduction of new
products, the length of the sales cycles and the seasonality of technology
purchases. As a result, the company's results are difficult to predict. These
factors historically have resulted in lower revenue in the first quarter than in
the immediately preceding fourth quarter.
The value of unfilled orders is not a meaningful indicator of future
revenues from the company's product offerings due to the significant proportion
of revenue from services, the volume of products delivered from shelf
inventories, and the shortening of product delivery schedules. With respect to
the company's Global Services segment, in 2001 the company signed contracts
totaling $51 billion, which contributed to a services backlog at December 31,
2001 of $102 billion, compared with $85 billion at the end of 2000.
The company operates in businesses that are subject to intense competitive
pressures. The company's businesses face a significant number of competitors,
ranging from Fortune 50 companies to
1
<Page>
an increasing number of relatively small, rapidly growing and highly specialized
organizations. The company believes that its combination of technology,
performance, quality, reliability, price and the breadth of products and service
offerings are important competitive factors.
Intense competitive pressures could affect prices or demand for the
company's products and services, resulting in reduced profit margins and /or
loss of market opportunity. Unlike many of its competitors, the company has a
portfolio of businesses and must allocate resources across these businesses
while competing with companies that specialize in one or more of these product
lines. As a result, the company may not fund or invest in certain of its
businesses to the same degree that its competitors do and these competitors may
have greater financial, technical and marketing resources available to them than
the businesses against which they compete.
The company operates in more than 150 countries worldwide and derives more
than half of its revenues from sales outside the United States. Changes in the
laws or policies of the countries in which the company operates could affect the
company's business in that country and the company's results of operations. The
company's results of operations also could be affected by economic and political
changes in those countries and by macroeconomic changes, including recessions
and inflation.
The following information is included in IBM's 2001 Annual Report to
Stockholders and is incorporated herein by reference:
Segment information and revenue by classes of similar products or
services--Pages 100 through 105.
Financial information by geographic areas--Page 105.
Amount spent during each of the last three years on research and development
activities--Page 91.
Financial information regarding environmental activities--Page 88.
The number of persons employed by the registrant--Page 69.
The management discussion overview--Pages 55 and 56.
Forward-looking and Cautionary Statements: Certain statements contained in
this Annual Report may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act").
The company may also make forward-looking statements in other reports filed with
the Securities and Exchange Commission, in materials delivered to stockholders
and in press releases. In addition, the company's representatives may from time
to time make oral forward-looking statements. Forward-looking statements provide
current expectations of future events based on certain assumptions and include
any statement that does not directly relate to any historical or current fact.
Words such as "anticipates," "believes," "expects," "estimates," "intends,"
"plans," "projects," and similar expressions, may identify such forward-looking
statements. The company assumes no obligation to update or revise any
forward-looking statements. In accordance with the Reform Act, set forth below
are cautionary statements that accompany those forward-looking statements.
Readers should carefully review these cautionary statements as they identify
certain important factors that could cause actual results to differ materially
from those in the forward-looking statements and from historical trends. The
following cautionary statements are not exclusive and are in addition to other
factors discussed elsewhere in this Annual Report, in the company's filings with
the Securities and Exchange Commission or in materials incorporated therein by
reference.
New Products and the Pace of Technological Change: The company's results of
operations depend on the continued successful development and marketing of new
and innovative products and services. The development of new products and
services requires significant capital investments by the company's various
businesses and the success of these products and services depends on their
acceptance by customers and business partners. Further, the company's businesses
are characterized by rapid technological changes and corresponding shifts in
customer demand, resulting in unpredictable product transitions and shortened
life cycles and increasing emphasis on being first to market with new products
and services.
2
<Page>
There can be no assurance that the company will successfully introduce new
products and services, that these products and services will be accepted by
customers, or that the company's businesses will recoup or realize a return on
their capital investments. In addition, from time to time the company may
experience difficulties or delays in the development, production or marketing of
new products and services.
Volatility of Stock Prices: The company's stock price is affected by a
number of factors, including quarterly variations in results, the competitive
landscape, general economic and market conditions and estimates and projections
by the investment community. As a result, like other technology companies, the
company's stock price is subject to significant volatility.
Dependence on and Compensation of Key Personnel: Much of the future success
of the company depends on the continued service and availability of skilled
personnel, including technical, marketing and staff positions. Experienced
personnel in the information technology industry are in high demand and
competition for their talents is intense. There can be no assurance that the
company will be able to successfully retain and attract the key personnel it
needs. Many of the company's key personnel receive a total compensation package
that includes stock options and other equity awards. New regulations, volatility
in the stock market and other factors could diminish the value of the company's
equity awards, putting the company at a competitive disadvantage or forcing the
company to use more cash compensation.
Currency and Customer Financing Risks: The company derives a significant
percentage of its non-U.S. revenues from its affiliates operating in local
currency environments and its results are affected by changes in the relative
values of non-U.S. currencies and the U.S. dollar. Further, inherent in the
company's customer financing business are risks related to the concentration of
credit risk and the creditworthiness of the customer, interest rate and currency
fluctuations on the associated debt and liabilities and the determination of
residual values. The company employs a number of strategies to manage these
risks, including the use of derivative financial instruments. Derivatives
involve the risk of non-performance by the counterparty. In addition, there can
be no assurance that the company's efforts to manage these risks will be
successful.
Distribution Channels: The company offers its products directly and through
a variety of third party distributors and resellers. Changes in the financial or
business condition of these distributors and resellers could subject the company
to losses and affect its ability to bring its products to market.
Acquisitions and Alliances: The company has made and expects to continue to
make acquisitions or enter into alliances from time to time. Acquisitions and
alliances present significant challenges and risks relating to the integration
of the business into the company, and there can be no assurances that the
company will manage acquisitions and alliances successfully.
ITEM 2. PROPERTIES:
At December 31, 2001, IBM's manufacturing and development facilities in the
United States had aggregate floor space of 40.8 million square feet, of which
31.5 million was owned and 9.3 million was leased. Of these amounts,
2.4 million square feet was vacant and 1.9 million square feet was being leased
to non-IBM businesses. Similar facilities in 15 other countries totaled
15.2 million square feet, of which 10.7 million was owned and 4.5 million was
leased. Of these amounts, 0.6 million square feet was vacant and 0.9 million
square feet was being leased to non-IBM businesses.
Although improved production techniques, productivity gains and
infrastructure reduction actions have resulted in reduced manufacturing floor
space, continuous upgrading of facilities is essential to maintain technological
leadership, improve productivity, and meet customer demand. For additional
information on expenditures for plant, rental machines and other property, refer
to "Investments" on pages 65 and 66 of IBM's 2001 Annual Report to Stockholders
which is incorporated herein by reference.
3
<Page>
EXECUTIVE OFFICERS OF THE REGISTRANT (AT MARCH 11, 2002):
<Table>
<Caption>
OFFICER
AGE SINCE
-------- --------
<S> <C> <C>
Chairman of the Board
Louis V. Gerstner, Jr.(1)................................... 60 1993
President and Chief Executive Officer
Samuel J. Palmisano(1)...................................... 50 1997
Vice Chairman of the Board
John M. Thompson(1)......................................... 59 1989
Senior Vice Presidents:
Nicholas M. Donofrio, Group Executive....................... 56 1995
Douglas T. Elix, Group Executive............................ 53 1999
J. Bruce Harreld, Strategy.................................. 51 1995
Paul M. Horn, Research...................................... 55 1996
Jon C. Iwata, Communications................................ 39 2002
John R. Joyce, Chief Financial Officer...................... 48 1999
John E. Kelly III, Group Executive.......................... 48 2000
Abby F. Kohnstamm, Marketing................................ 48 1998
Joseph C. Lane, Group Executive............................. 48 2001
J. Michael Lawrie, Group Executive.......................... 48 2001
Edward M. Lineen, General Counsel........................... 61 2002
J. Randall MacDonald, Human Resources....................... 53 2000
Steven A. Mills, Group Executive............................ 50 2000
Robert W. Moffat, Jr., Group Executive...................... 45 2002
Lawrence R. Ricciardi, General Counsel...................... 61 1995
Linda S. Sanford, Group Executive........................... 49 2000
William M. Zeitler, Group Executive......................... 54 2000
Vice Presidents:
Mark Loughridge, Controller................................. 48 1998
Daniel E. O'Donnell, Secretary.............................. 54 1998
Robert F. Woods, Treasurer.................................. 46 2000
</Table>
- ------------------------
(1) Member of the Board of Directors.
All executive officers are elected by the Board of Directors and serve until
the next election of officers in conjunction with the annual meeting of the
stockholders as provided in the By-laws. Each executive officer named above,
with the exception of Joseph C. Lane and J. Randall MacDonald have been an
executive of IBM or its subsidiaries during the past five years.
Mr. Lane was with GATX Capital, a subsidiary of GATX Corporation, a holding
company which provides railcar leasing and management, financial services,
terminals and pipelines, and shipping and warehousing services, as president and
CEO for four years prior to joining IBM in 1998. In previous assignments at GATX
Capital, Mr. Lane led operations including five offices in Europe, two in
Canada, four in Asia and two in Australia; was responsible for the newly created
Technology Services Group, Corporate Finance Group, the Rail Group and GATX Air;
was responsible for development of joint ventures and strategic alliances; and
was responsible for sales, marketing and syndications.
Mr. MacDonald was with GTE (now Verizon Communications), a
telecommunications company, as executive vice president of human resources and
administration until joining IBM in 2000. He was with GTE for 17 years holding
positions of increasing responsibility. Before joining GTE, Mr. MacDonald held
human resources positions at Ingersoll-Rand Corporation and Sterling Drug, Inc.
4
<Page>
ITEM 3. LEGAL PROCEEDINGS:
Refer to note n "Contingencies and Commitments" on page 89 of IBM's 2001
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:
Refer to pages 106 and 107 of IBM's 2001 Annual Report to Stockholders which
are incorporated herein by reference solely as they relate to this item.
IBM common stock is listed on the New York Stock Exchange, Chicago Stock
Exchange and Pacific Stock Exchange. There were 677,418 common stockholders of
record at March 1, 2002.
ITEM 6. SELECTED FINANCIAL DATA:
Refer to page 106 of IBM's 2001 Annual Report to Stockholders which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Refer to pages 55 through 69 of IBM's 2001 Annual Report to Stockholders
which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Refer to the section titled "Market Risk" on pages 68 and 69 of IBM'S 2001
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Refer to page 54 and 70 through 105 of IBM's 2001 Annual Report to
Stockholders which are incorporated herein by reference. Also refer to the
Financial Statement Schedule on page S-1 of this Form.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Refer to pages 5 through 8 of IBM's definitive Proxy Statement dated
March 11 2002, which are incorporated herein by reference. Also refer to Item 2
entitled "Executive Officers of the Registrant" in Part I of this Form.
ITEM 11. EXECUTIVE COMPENSATION:
Refer to pages 13 through 21 of IBM's definitive Proxy Statement dated
March 11, 2002, which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners:
Not applicable.
5
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(b) Security Ownership of Management:
Refer to the section entitled "Ownership of Securities--Common Stock and
Total Stock-Based Holdings" appearing on pages 11 and 12 of IBM's
definitive Proxy Statement dated March 11, 2002, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Refer to the section entitled "Other Relationships" appearing on page 10 of
IBM's definitive Proxy Statement dated March 11, 2002, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this report:
1. Financial statements from IBM's 2001 Annual Report to Stockholders
which are incorporated herein by reference:
Report of Independent Accountants (page 54).
Consolidated Statement of Earnings for the years ended December 31,
2001, 2000 and 1999 (page 70).
Consolidated Statement of Financial Position at December 31, 2001 and
2000 (page 71).
Consolidated Statement of Stockholders' Equity at December 31, 2001,
2000 and 1999 (pages 72 and 73).
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 (page 74).
Notes to Consolidated Financial Statements (pages 75 through 105).
2. Financial statement schedules required to be filed by Item 8 of this
Form:
<Table>
<Caption>
SCHEDULE
PAGE NUMBER
- ---- -----------
<C> <C> <S>
10 Report of Independent Accountants on Financial
Statement Schedules.
S-1 II Valuation and Qualifying Accounts and Reserves.
</Table>
All other schedules are omitted as the required matter is not present, the
amounts are not significant or the information is shown in the consolidated
financial statements or the notes thereto.
3. Exhibits:
Included in this Form 10-K:
<Table>
<S> <C> <C> <C>
I -- Computation of Ratio of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
II -- Parents and Subsidiaries.
III -- Consent of Independent Accountants.
IV -- Additional Exhibits (a) Quarterly Consolidated Statement of Earnings--
Restated 2001
(b) Quarterly Consolidated Statement of Earnings--
Restated 2000
V -- IBM's 2001 Annual Report to Stockholders, certain sections of
which have been incorporated herein by reference.
VI -- Powers of Attorney.
</Table>
6
<Page>
Not included in this Form 10-K:
<Table>
<S> <C> <C>
-- The Certificate of Incorporation of IBM is
Exhibit (3)(i) to Form 8-K filed April 28, 1999, and is
hereby incorporated by reference.
-- The By-laws of IBM as amended through January 1, 2001, is
Attachment III to Form 8-K dated January 17, 2001, and is
hereby incorporated by reference.
-- The IBM 1999 Long-Term Performance Plan, a compensatory
plan, is contained in Registration Statement No. 333-30424
on Form S-8, filed on February 15, 2000, and is hereby
incorporated by reference.
-- The IBM 1997 Long-Term Performance Plan, a compensatory
plan, is contained in Registration Statement No. 333-31305
on Form S-8, filed on July 15, 1997, and is hereby
incorporated by reference.
-- Board of Directors compensatory plans, as described under
"Directors' Compensation" on pages 10 and 11 of IBM's
definitive Proxy Statement dated March 11, 2002, and is
hereby incorporated by reference.
-- IBM Board of Directors Deferred Compensation and Equity
Award Plan is Exhibit X to Form 10-K for the year ended
December 31, 1996, and is hereby incorporated by reference.
-- The IBM Non-Employee Directors Stock Option Plan is
Appendix B to IBM's definitive Proxy Statement dated
March 14, 1995, and is hereby incorporated by reference.
-- The IBM Executive Deferred Compensation Plan is contained in
Registration Statement No. 333-33692 as Exhibit 4 on
Form S-8, filed March 31, 2000, and is hereby incorporated
by reference.
-- The IBM Supplemental Executive Retention Plan is
Exhibit VII to Form 10-K for the year ended December 31,
1999, and is hereby incorporated by reference.
-- The IBM Extended Tax Deferred Savings Plan is Exhibit X to
Form 10-K for the year ended December 31, 1994, and is
hereby incorporated by reference.
-- The Employment Agreement for L. V. Gerstner, Jr. Is
Exhibit 19 to Form 10-Q dated March 31, 1993, and is hereby
incorporated by reference.
-- Amendment to Employment Agreement for L. V. Gerstner, Jr.
dated as of January 1, 1996, is Exhibit XI to Form 10-K for
the year ended December 31, 1995, and is hereby
incorporated by reference.
-- Second Amendment to Employment Agreement for L. V. Gerstner,
Jr. dated as of November 17, 1997, is Exhibit VI to
Form 10-K for the year ended December 31, 1997, and is
hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
7.25% Notes due 2002 are Exhibits 4(a) through 4(l) to
Registration Statement No. 33-33590 on Form S-3, filed on
February 22, 1990, and are hereby incorporated by reference.
</Table>
7
<Page>
<Table>
<S> <C> <C>
-- The instruments defining the rights of the holders of the
7.50% Debentures due 2013 are Exhibits 4(a) through 4(l) to
Registration Statement No. 33-49475(1) on Form S-3, filed
May 24, 1993, and are hereby incorporated by reference.
-- The instruments defining the rights of holders of the 8.375%
Debentures due 2019 are Exhibits 4(a)(b)(c) and (d) to
Registration Statement 33-31732 on Form S-3, filed on
October 24, 1989, and are hereby incorporated by reference.
-- The instruments defining the rights of holders of the 7.00%
Debentures due 2025 and the 7.00% Debentures due 2045 are
Exhibit 2 and 3 to Form 8-K, filed on October 30, 1995, and
are hereby incorporated by reference.
-- The instrument defining the rights of holders of the 7.125%
Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on
December 6, 1996, and is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
6.45% Notes due 2007 and the 6.22% Debentures due 2027 are
Exhibits 2 and 3 to Form 8-K, filed on August 1, 1997, and
is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on
January 8, 1998, and is hereby incorporated by reference.
-- The instruments defining the rights of the holders of the
5.375% Notes due 2009 is Exhibit 2 to Form 8-K, filed on
January 29, 1999, and is hereby incorporated by reference.
-- IBM's definitive Proxy Statement dated March 11, 2002,
certain sections of which have been incorporated herein by
reference.
</Table>
(b) Reports on Form 8-K:
The company filed Form 8-K on October 16, 2001, with respect to the
company's financial results for the periods ended September 30, 2001, and
included unaudited Consolidated Statement of Earnings, Consolidated
Statement of Financial Position and Segment Data for the periods ended
September 30, 2001. In addition, IBM's Chief Financial Officer John R.
Joyce's third quarter earnings presentation to securities analysts on
Tuesday, October 16, 2001, was filed as Attachment II of the Form 8-K.
8
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant)
By: __________/s/ SAMUEL J. PALMISANO_________
(Samuel J. Palmisano)
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: March 11, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN R. JOYCE Senior Vice President, Chief
(John R. Joyce) Financial Officer March 11, 2002
/s/ MARK LOUGHRIDGE
(Mark Loughridge) Vice President and Controller March 11, 2002
</Table>
<Table>
<S> <C> <C>
CATHLEEN BLACK Director
KENNETH I. CHENAULT Director
JUERGEN DORMANN Director
LOUIS V. GERSTNER, JR. Chairman of the Board
NANNERL O. KEOHANE Director
CHARLES F. KNIGHT Director
MINORU MAKIHARA Director By: /s/ DANIEL E. O'DONNELL
LUCIO A. NOTO Director (Daniel E. O'Donnell)
JOHN B. SLAUGHTER Director ATTORNEY-IN-FACT
SIDNEY TAUREL Director
JOHN M. THOMPSON Vice Chairman of the Board March 11, 2002
ALEX TROTMAN Director
LODEWIJK C. VAN WACHEM Director
CHARLES M. VEST Director
</Table>
9
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of
International Business Machines Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 17, 2002, appearing on page 54 of the 2001 Annual Report to
Stockholders of International Business Machines Corporation, (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial
Statement Schedule present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
January 17, 2002
10
<Page>
SCHEDULE II
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31:
(DOLLARS IN MILLIONS)
<Table>
<Caption>
ADDITIONS
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS END
DESCRIPTION OF PERIOD AND EXPENSES WRITE-OFFS OTHER (A) OF PERIOD
- ------------------------------------------------ ---------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2001
--Current................................... $860 $418 $269 $(25) $984
==== ==== ==== ==== ====
--Noncurrent................................ $ 87 $ 73 $ 49 $(14) $ 97
==== ==== ==== ==== ====
2000
--Current................................... $854 $286 $247 $(33) $860
==== ==== ==== ==== ====
--Noncurrent................................ $158 $(15) $ 45 $(11) $ 87
==== ==== ==== ==== ====
1999
--Current................................... $794 $285 $202 $(23) $854
==== ==== ==== ==== ====
--Noncurrent................................ $195 $ 34 $ 28 $(43) $158
==== ==== ==== ==== ====
ALLOWANCE FOR INVENTORY LOSSES
2001.......................................... $695 $590 $582 $ 23 $726
==== ==== ==== ==== ====
2000.......................................... $869 $527 $643 $(58) $695
==== ==== ==== ==== ====
1999.......................................... $723 $644 $514 $ 16 $869
==== ==== ==== ==== ====
</Table>
- ------------------------
(A) Primarily comprises currency translation adjustments.
S-1
<Page>
EXHIBIT INDEX
<Table>
<Caption>
REFERENCE
NUMBER PER
ITEM 601 OF EXHIBIT NUMBER
REGULATION SK DESCRIPTION OF EXHIBITS IN THIS FORM 10-K
- --------------- ---------------------------------------------------------- -----------------
<C> <S> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession................................. Not applicable
(3) Certificate of Incorporation and By-laws..................
The Certificate of Incorporation of IBM is Exhibit (3)(i)
to Form 8-K filed April 28, 1999, and is hereby
incorporated by reference.................................
The By-laws of IBM as amended through January 1, 2001, is
Attachment III to Form 8-K dated January 17, 2001, and is
hereby incorporated by reference..........................
(4) Instruments defining the rights of security holders.......
The instruments defining the rights of the holders of the
7.25% Notes due 2002 are Exhibits 4(a) through 4(l) to
Registration Statement No. 33-33590 on Form S-3, filed
February 22, 1990, and are hereby incorporated by
reference.................................................
The instruments defining the rights of the holders of the
7.50% Debentures due 2013 are Exhibits 4(a) through 4(l)
to Registration Statement No. 33-49475(1) on Form S-3,
filed May 24, 1993, and are hereby incorporated by
reference.................................................
The instruments defining the rights of the holders of the
8.375% Debentures due 2019 are Exhibits 4(a)(b)(c) and (d)
to Registration Statement No. 33-31732 on Form S-3, filed
on October 24, 1989, and are hereby incorporated by
reference.................................................
The instruments defining the rights of the holders of the
7.00% Debentures due 2025 and the 7.00% Debentures due
2045 are Exhibits 2 and 3 to Form 8-K, filed on
October 30, 1995, and are hereby incorporated by
reference.................................................
The instrument defining the rights of the holders of the
7.125% Debentures due 2096 is Exhibit 2 to Form 8-K/A,
filed on December 6, 1996, and is hereby incorporated by
reference.................................................
The instruments defining the rights of the holders of the
6.45% Notes due 2007 and the 6.22% Debentures due 2027 are
Exhibit 2 and 3 to Form 8-K, filed on August 1, 1997, and
is hereby incorporated by reference.......................
The instrument defining the rights of the holders of the
6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed
on January 8, 1998, and is hereby incorporated by
reference.................................................
The instrument defining the rights of the holders of the
5.375% Notes due 2009 is Exhibit 2 to Form 8-K, filed on
January 29, 1999, and is hereby incorporated by
reference.................................................
(9) Voting trust agreement.................................... Not applicable
</Table>
<Page>
<Table>
<Caption>
REFERENCE
NUMBER PER
ITEM 601 OF EXHIBIT NUMBER
REGULATION SK DESCRIPTION OF EXHIBITS IN THIS FORM 10-K
- --------------- ---------------------------------------------------------- -----------------
<C> <S> <C>
(10) Material contracts........................................
The IBM 1999 Long-Term Performance Plan, a compensatory
plan, is contained in Registration Statement No. 333-30424
on Form S-8, filed on February 15, 2000, and is hereby
incorporated by reference.................................
The IBM 1997 Long-Term Performance Plan, a compensatory
plan, is contained in Registration Statement No. 33-331305
on Form S-8, filed on July 15, 1997, and is hereby
incorporated by reference.................................
Board of Directors compensatory arrangements as described
under "Directors' Compensation" on pages 10 and 11 of
IBM's definitive Proxy Statement dated March 11, 2002, and
is hereby incorporated by reference.......................
The IBM Supplemental Executive Retention Plan is Exhibit
VII to Form 10-K for the year ended December 31, 1999, and
is hereby incorporated by reference.......................
The IBM Executive Deferred Compensation Plan is contained
in Registration Statement No. 333-33692 as Exhibit 4 on
Form S-8, filed March 31, 2000, and is hereby incorporated
by reference..............................................
The IBM Board of Directors Deferred Compensation and
Equity Award Plan is Exhibit X to Form 10-K for the year
ended December 31, 1996, and is hereby incorporated by
reference.................................................
The IBM Non-Employee Directors Stock Option Plan is
Appendix B to IBM's definitive Proxy Statement dated
March 14, 1995, and is hereby incorporated by
reference.................................................
The IBM Extended Tax Deferred Savings Plan is Exhibit X to
Form 10-K for the year ended December 31, 1994, and is
hereby incorporated by reference..........................
The Employment Agreement for L. V. Gerstner, Jr. is
Exhibit 19 to Form 10-Q dated March 31, 1993, and is
hereby incorporated by reference..........................
Amendment to Employment Agreement for L. V. Gerstner, Jr.
dated as of January 1, 1996, is Exhibit XI to Form 10-K
for the year ended December 31, 1995, and is hereby
incorporated by reference.................................
Second Amendment to Employment Agreement for
L. V. Gerstner, Jr. dated as of November 17, 1997, is
Exhibit VI to Form 10-K for the year ended December 31,
1997, and is hereby incorporated by reference.............
(11) Statement re computation of per share earnings............
The statement re computation of per share earnings is
note r, "Earnings Per Share of Common Stock" on page 93
of IBM's 2001 Annual Report to Stockholders, and is hereby
incorporated by reference.................................
</Table>
<Page>
<Table>
<Caption>
REFERENCE
NUMBER PER
ITEM 601 OF EXHIBIT NUMBER
REGULATION SK DESCRIPTION OF EXHIBITS IN THIS FORM 10-K
- --------------- ---------------------------------------------------------- -----------------
<C> <S> <C>
(12) Statement re computation of ratios........................ I
(13) Annual report to security holders......................... V
(18) Letter re change in accounting principles................. Not applicable
(19) Previously unfiled documents.............................. Not applicable
(21) Subsidiaries of the registrant............................ II
(22) Published report regarding matters submitted to vote of
security holders.......................................... Not applicable
(23) Consents of experts and counsel........................... III
(24) Powers of attorney........................................ VI
(28) Information from reports furnished to state insurance
regulatory authorities.................................... Not applicable
(99) Additional exhibits....................................... IV
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<FILENAME>a2071411zex-12.txt
<DESCRIPTION>EXHIBIT 12
<TEXT>
<Page>
EXHIBIT I
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)
<Table>
<Caption>
YEARS ENDED DECEMBER 31:
----------------------------------------------------
2001 2000 1999 1998 1997
(DOLLARS IN MILLIONS) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before income taxes (1)................. $10,991 $11,501 $11,665 $ 8,997 $ 9,054
Add:
Fixed charges, excluding capitalized
interest................................... 1,652 1,885 1,921 2,036 2,000
------- ------- ------- ------- -------
Income as adjusted before income taxes....... $12,643 $13,386 $13,586 $11,033 $11,054
======= ======= ======= ======= =======
Fixed charges:
Interest expense............................. $ 1,202 $ 1,430 $ 1,455 $ 1,559 $ 1,573
Capitalized interest......................... 33 20 23 28 32
Portion of rental expense representative of
interest................................... 450 455 466 477 427
------- ------- ------- ------- -------
Total fixed charges............................ $ 1,685 $ 1,905 $ 1,944 $ 2,064 $ 2,032
Preferred stock dividend (2)................... 14 29 30 29 29
------- ------- ------- ------- -------
Combined fixed charges and preferred stock
dividends.................................... $ 1,699 $ 1,934 $ 1,974 $ 2,093 $ 2,061
======= ======= ======= ======= =======
Ratio of net income to fixed charges........... 7.5 7.0 7.0 5.3 5.4
Ratio of net income to combined fixed charges
and preferred stock dividend................. 7.4 6.9 6.9 5.3 5.4
</Table>
- ------------------------
(1) Income before income taxes excludes (a) amortization of capitalized interest
and (b) the company's share in the income and losses of less-than-fifty
percent owned affiliates.
(2) Included in the ratio calculation are preferred stock dividends of
$10 million for 2001, $20 million for 2000, 1999, 1998 and 1997,
respectively, or $14 million for 2001, $29 million in 2000, $30 million in
1999, $29 million in 1998 and 1997 representing the pre-tax income that
would be required to cover such dividend requirements based on the company's
effective tax rate for 2001, 2000, 1999, 1998 and 1997, respectively.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>a2071411zex-13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<Page>
Exhibit 13
Financial Report
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Report of Management 54
Report of Independent Accountants 54
Management Discussion 55
Consolidated Financial Statements
Earnings 70
Financial Position 71
Stockholders' Equity 72
Cash Flows 74
Notes to Consolidated Financial Statements
a Significant Accounting Policies 75
b Accounting Changes 79
c Acquisitions/Divestitures 81
d Financial Instruments (excluding derivatives) 83
e Inventories 83
f Financing Receivables 83
g Plant, Rental Machines and Other Property 83
h Investments and Sundry Assets 84
i Sale and Securitization of Receivables 84
j Borrowings 84
k Derivatives and Hedging Transactions 85
l Other Liabilities 87
m Stockholders' Equity Activity 88
n Contingencies and Commitments 89
o Taxes 90
p Expense and Other Income 91
q 1999 Actions 91
r Earnings Per Share of Common Stock 93
s Rental Expense and Lease Commitments 94
t Stock-Based Compensation Plans 94
u Retirement-Related Benefits 96
v Segment Information 100
Five-Year Comparison of Selected Financial Data 106
Selected Quarterly Data 106
Stockholder Information 107
Board of Directors and Senior Management 108
53
<Page>
Report of Management
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report rests with IBM management. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in
part, of organizational arrangements with clearly defined lines of
responsibility and delegation of authority, and comprehensive systems and
control procedures. We believe this structure provides reasonable assurance that
transactions are executed in accordance with management authorization, and that
they are appropriately recorded in order to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
adequately safeguard, verify and maintain accountability of assets. An important
element of the control environment is an ongoing internal audit program.
To assure the effective administration of internal control, we carefully
select and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels, and foster an
environment conducive to the effective functioning of controls. We believe that
it is essential for the company to conduct its business affairs in accordance
with the highest ethical standards, as set forth in the IBM Business Conduct
Guidelines. These guidelines, translated into numerous languages, are
distributed to employees throughout the world, and reemphasized through internal
programs to assure that they are understood and followed.
PricewaterhouseCoopers LLP, independent accountants, is retained to
examine IBM's financial statements. Its accompanying report is based on an
examination conducted in accordance with generally accepted auditing standards,
including a review of the internal control structure and tests of accounting
procedures and records.
The Audit Committee of the Board of Directors is composed solely of
outside directors, and is responsible for recommending to the Board the
independent accounting firm to be retained for the coming year, subject to
stockholder approval. The Audit Committee meets periodically and privately with
the independent accountants, with the company's internal auditors, as well as
with IBM management, to review accounting, auditing, internal control structure
and financial reporting matters.
/s/ Samuel J. Palmisano /s/ John R. Joyce
SAMUEL J.PALMISANO JOHN R. JOYCE
PRESIDENT AND SENIOR VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
----------
Report of Independent Accountants
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF INTERNATIONAL BUSINESS MACHINES
CORPORATION:
In our opinion, the accompanying consolidated financial statements, appearing on
pages 70 through 105, present fairly, in all material respects, the financial
position of International Business Machines Corporation and subsidiary companies
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the company'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 auditing standards generally accepted in the United States of
America, which 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.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
NEW YORK, NEW YORK
JANUARY 17, 2002
54
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Road Map
The financial section of the IBM 2001 Annual Report consisting of this
Management Discussion, the Consolidated Financial Statements that follow and the
related notes thereto comprises 52 pages of information. The length and detail
required by the various applicable reporting and disclosure rules can leave a
reader somewhat overwhelmed. Therefore, this Road Map is designed to provide you
with some perspective regarding the information contained in the financial
section and a few helpful hints for reading the next 51 pages.
IBM'S BUSINESS MODEL
The company's business model is relatively straightforward. IBM sells services,
hardware and software. These offerings are bolstered by IBM's research and
development capabilities. If a customer requires financing, IBM can provide that
too. The fundamental strength of this business model is IBM's ability to
assemble the optimal mix of these offerings to design tailored solutions for
customers and to continue to win in the marketplace.
FINANCIAL REPORTING
IBM follows generally accepted accounting principles. It is important for
investors to understand the quality of a company's earnings, and as you read
this financial section, you will learn about both recurring and nonrecurring
events and trends that result in items that contribute to or reduce earnings.
Some of these items and trends occur in an unpredictable fashion. Among these,
the following are examples of items disclosed in this financial section:
<Table>
<Caption>
Page
- --------------------------------------------------------------------------------
<S> <C>
Write-downs of certain equity investments 62
Higher bad debt expense 61 and 91
Lower income from transfer of
intellectual property 62 and 91
Lower goodwill amortization 61
Lower interest income 62 and 91
Higher workforce accruals 61 and 91
Increase in income from retirement-
related benefits 62 and 96
Lower gains from certain real estate activity 62 and 91
Higher foreign currency transaction gains 62 and 91
</Table>
It is, however, just as or more important to maintain a longer-term perspective
and to consider net income in the context of revenues and cash flows. A
fundamentally sound and strong company should have strength in all three of
these measures. Since 1994, IBM's business model has produced $633 billion of
revenue, $85 billion of cash flows from operations, and $49 billion of net
income.
IBM does not use so-called "pro forma" earnings for its quarterly
earnings press releases or analysts conference calls. One of the reasons that
the company does not use pro forma earnings is that many items adding to or
reducing earnings are part of the company's operating business model. An
example of such item is transfers of intellectual property. Although
individual transactions may be large or small, the company realizes income
from such transactions every quarter. See pages 62, 76 and 91 for additional
information.
HELPFUL HINTS
ORGANIZATION OF INFORMATION
o This Management Discussion section is designed to provide the reader of the
financial statements with a narrative on the company's financial results. It
discusses the results of operations for each segment of the business and is
followed by a description of the company's financial position generally divided
between the Global Financing business and the rest. Certain employee data is
located at the end of this section. It is useful to read the Management
Discussion in conjunction with note v, "Segment Information," on pages 100
through 105.
o Pages 70 through 74 include the Consolidated Financial Statements. These
statements include an overview of the company's income and cash flow performance
and its financial position.
o The notes follow the financial statements. Among other things, the notes
contain the company's accounting policies (pages 75 through 79), detailed
information on balances within the financial statements, certain contingencies
and commitments (page 89), and the results of each IBM segment (pages 100
through 105).
RETIREMENT BENEFITS INCLUDING PENSIONS
Pages 62 and 63 include a discussion of the impact that retirement benefits have
on the company's Consolidated Financial Statements. On pages 76 and 77, you will
find the required accounting policies for these benefits. The detailed
information about each plan including financial analysis of the larger plans is
provided on pages 96 through 100.
CAPITAL STRUCTURE
The use of debt by the company's Global Financing business and the importance of
cash flows from operations to the rest of the company are discussed on page 66.
Page 67 continues the discussion with an overview of the company's total
interest expense and its relation to the Global Financing unit's financial
results. Pages 84 and 85 include detailed information regarding the company's
debt.
55
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
FINANCING OBLIGATIONS
All of the company's financing obligations are disclosed within this financial
section.
DERIVATIVES
The company does not use derivatives for speculative purposes. Instead,
derivatives are used to mitigate certain currency and interest rate risks. The
company's accounting policy for derivatives is located on pages 77 and 78. A
discussion of the company's implementation of the new derivatives accounting
rules is located on page 80. Details regarding the company's risk management
programs and the derivatives used in these programs are located on pages 85
through 87.
We hope that this information facilitates your review of this document as
you continue to evaluate IBM.
FINANCIAL OVERVIEW OF 2001
IBM achieved strong profitability in spite of a volatile and uncertain global
business environment in 2001. In addition, the company gained market share in
the key business segments of services, software, storage and servers. Notably,
the Global Services segment finished the year with a record backlog of services
contracts, despite a tough business climate. The zSeries mainframe servers, led
by the z900, recorded its first full year of growth in more than a decade, and
the company's new "Regatta" UNIX servers, which began shipping in December, were
sold out in the fourth quarter. The company's personal computer and original
equipment manufacturer (OEM) businesses slowed dramatically, principally due to
pricing pressures and an ongoing economic downturn affecting the worldwide
semiconductor and OEM markets.
The company's financial results for 2001 declined in comparison to 2000 in
a number of key areas, but were strong relative to its competitors in the
technology sector. The company's strong performance in services, software,
zSeries servers and high-end storage helped its gross profit margin to move
higher. Some of IBM's businesses were impacted by industry weakness; the
microelectronics unit grew at a slower pace. Declines in personal computers and
hard disk drives (HDD) contributed significantly to a decline in IBM revenue,
however, since the personal computer and HDD markets have lower margins than
other markets where IBM competes, the company's net income was affected to a
lesser extent.
During the year, the company continued to make progress in its ongoing
drive to reduce cost and expense. These savings helped to fund increased
investment in key areas in which the company can leverage its leadership, such
as research and development and sales initiatives relative to the company's high
priority segments within the services, software, servers and storage businesses.
The company's cash flow continued to be very strong in 2001. IBM's strong
cash flow, even in a difficult economic environment, gave the company the
flexibility to make necessary and appropriate investments for the future of the
business and for share repurchases.
Cash and cash equivalents and Marketable securities on the balance sheet
stand at $6.4 billion, $2.7 billion above last year's level. Total debt
decreased $1.4 billion. Both inventories and accounts receivable were lower
versus the prior year. The company's balance sheet remains strong.
Focus Items in 2002
Business conditions remain challenging as the company enters the new year. The
company will continue to benefit from its business model with a mix of
annuity-like businesses and transaction-based businesses as well as its healthy
balance sheet. There are three areas in which the company is placing particular
emphasis in 2002:
o Continue to grow market share in key market segments, including services
offerings, software, servers, and storage subsystems.
o Improve performance in the personal computer, HDD and microelectronics
businesses.
o Continue to execute on the company's productivity initiatives.
Forward-Looking and Cautionary Statements
Certain statements contained in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to be materially
different, as discussed more fully elsewhere in this Annual Report and in the
company's filings with the Securities and Exchange Commission, including the
company's 2001 Form 10-K to be filed on or about March 11, 2002.
56
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Results of Operations
<Table>
<Caption>
(dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: 2001 2000* 1999*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $85,866 $88,396 $87,548
Cost 54,084 56,342 55,994
- --------------------------------------------------------------------------------
Gross profit 31,782 32,054 31,554
Gross profit margin 37.0% 36.3% 36.0%
Total expense and
other income 20,829 20,520 19,797
- --------------------------------------------------------------------------------
Income before
income taxes 10,953 11,534 11,757
- --------------------------------------------------------------------------------
Net income $ 7,723 $ 8,093 $ 7,712
================================================================================
Earnings per share of common stock:
Assuming dilution $ 4.35 $ 4.44 $ 4.12
Basic $ 4.45 $ 4.58 $ 4.25
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
The average number of common shares outstanding assuming dilution was lower by
40.9 million shares in 2001 versus 2000 and 59.0 million shares in 2000 versus
1999, primarily as a result of the company's common share repurchase program.
The average number of common shares outstanding assuming dilution was 1,771.2
million, 1,812.1 million and 1,871.1 million, respectively, at December 31,
2001, 2000 and 1999.
Revenue in 2001 totaled $85.9 billion, a decline of 2.9 percent (up 1
percent at constant currency) compared with revenue of $88.4 billion in the
year-earlier period. Global Services and Software revenue grew year over year,
but was more than offset by lower Hardware, Global Financing and Enterprise
Investments/Other revenue.
The Global Services segment became the largest segment in terms of revenue
in 2001. The following table identifies the company's percentage of revenue:
<Table>
<Caption>
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Services 40.7% 37.5% 36.7%
Hardware 38.9 42.7 43.3
Software 15.1 14.3 14.5
Global Financing 4.0 3.9 3.6
Enterprise Investments/Other 1.3 1.6 1.9
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
================================================================================
</Table>
The overall gross profit margin of 37.0 percent increased 0.7 points from 2000,
following a 0.3 point increase in 2000 versus 1999. The increase in 2001 gross
profit margin was primarily driven by improvement in Global Services, Software
and Global Financing margins, partially offset by a lower Hardware gross profit
margin. The increase in the 2000 gross profit margin was primarily driven by
improvement in the Hardware margin, partially offset by a lower Global Services
margin. The reference to constant currency, the best measure of comparative
business growth, is made so that a segment can be viewed without the impacts of
changing foreign currency exchange rates. The U.S. dollar generally strengthened
against other currencies, so growth at constant currency exchange rates is
higher than growth at actual currency exchange rates.
In the Americas, full-year 2001 revenue was $37.4 billion, down 3.4
percent (2 percent at constant currency) from the 2000 period. Revenue from
Europe/Middle East/Africa was $24.0 billion, a decrease of 0.9 percent (up 3
percent at constant currency). Asia Pacific revenue declined 2.5 percent (up 8
percent at constant currency) to $17.2 billion. OEM revenue decreased 7.2
percent (6 percent at constant currency) to $7.2 billion.
Information about the company's operating segments can be found in note v,
"Segment Information," on pages 100 through 105. Note v provides additional
information, including a description of the products and services of each
segment, as well as financial data pertaining to each segment.
The following discussion is based on the Consolidated Financial Statements
on pages 70 through 74, which reflect, in all material respects, the company's
segment results on an external basis.
GLOBAL SERVICES
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $34,956 $33,152 $32,172
Cost 25,355 24,309 23,304
- --------------------------------------------------------------------------------
Gross profit $ 9,601 $ 8,843 $ 8,868
================================================================================
Gross profit margin 27.5% 26.7% 27.6%
</Table>
Global Services revenue increased 5.4 percent (10 percent at constant currency)
in 2001 over 2000 and 3.0 percent (6 percent at constant currency) in 2000 over
1999. Global Services revenue, excluding maintenance, increased 6.8 percent (11
percent at constant currency) in 2001 versus 2000 and 3.7 percent (7 percent at
constant currency) in 2000 versus 1999. Maintenance revenue declined 2.2 percent
(up 2 percent at constant currency) in 2001 versus 2000 and was essentially flat
(up 4 percent at constant currency) in 2000 when compared to 1999.
Global Services experienced a slowdown in contract signings in the
middle of the year, particularly in short-term engagements, which affected
the growth of Global Services revenue in 2001. Strategic Outsourcing Services
and Integrated Technology Services contributed significantly to the revenue
growth in 2001 and 2000. Strategic Outsourcing Services continued to
demonstrate solid revenue growth,
57
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
particularly in Asia Pacific, and in its Web hosting offerings. Web hosting
is an e-sourcing service that became a $1 billion business in 2001.
Integrated Technology Services grew its revenue in support of server
consolidations, business continuity services, and its OEM alliances. Global
Services revenue growth in support of non-IBM hardware deployment continues
to moderate due to the slowdown in personal computer, telecommunications and
networking equipment providers. Business Innovation Services (BIS) revenue
grew but it was affected the most by the current economic environment. This
business includes consulting and systems integration. Despite a slowdown in
the BIS market, especially in the U.S., customers continued to deploy
e-business applications such as customer relationship management and supply
chain management and to perform e-business integration of their business
processes and multiple applications.
Revenue comparisons in 2000 were adversely affected by two events: the
sale of the Global Network to AT&T in 1999 and the decline in Y2K services
activity year over year. After adjusting for those two factors, Global
Services revenue (excluding maintenance) increased 9 percent in 2000 versus
1999. (See "Divestitures," on page 82 for additional information about the
Global Network sale.) In 2000, Integrated Technology Services revenue was
affected by the loss of revenue due to the sale of the Global Network and BIS
was affected primarily by the decline in Y2K activity. BIS recovered in the
second half of 2000 as customers shifted from mature offerings such as custom
systems integration and Y2K remediation to the company's e-business
offerings. BIS revenue, exclusive of Y2K and custom systems integration,
experienced strong growth in 2000.
In 2001, the company signed contracts totaling $51 billion, including 39
contracts in excess of $100 million, six of which exceeded $1 billion. These
transactions contributed to a services backlog at December 31, 2001, of $102
billion compared with $85 billion at December 31, 2000. The company experienced
an acceleration in contract signings in the fourth quarter of 2001 and a strong
pipeline of contracts at December 31, 2001, that should have a positive effect
on Global Services revenue growth in 2002. Also, in 2002, the annuity-like
portions of Global Services, particularly outsourcing and maintenance, should
mitigate the downturn in other businesses until the economy recovers. To extend
the benefits of outsourcing, the company is in the forefront of e-sourcing--the
delivery of infrastructure, applications and business processes over the
Internet as a service. The company intends to provide the infrastructure
technologies that all of these service providers will require, as well as to
provide many of the services themselves.
Global Services gross profit dollars increased 8.6 percent in 2001
compared to 2000 and were essentially flat in 2000 versus 1999. The gross profit
margin increased 0.8 points in 2001 versus 2000 and declined 0.9 points in 2000
versus 1999. The increases in both gross profit dollars and gross profit margin
in 2001 were a result of reduced labor and parts costs across all geographies
for maintenance offerings and cost reductions across all services offerings. The
decline in gross profit margin in 2000 was primarily driven by lower utilization
rates in BIS and Integrated Technology Services due to rapid hiring and
retraining associated with rebalancing skills toward e-business services. Also
contributing to the decline was a revenue shift to OEM alliances, which have a
lower gross profit margin. These declines were partially offset by an
improvement in the maintenance gross profit margin.
HARDWARE
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $33,392 $37,777 $37,888
Cost 24,137 27,038 27,591
- --------------------------------------------------------------------------------
Gross profit $ 9,255 $10,739 $10,297
================================================================================
Gross profit margin 27.7% 28.4% 27.2%
</Table>
Hardware revenue declined 11.6 percent (8 percent at constant currency) in 2001
versus 2000 and was essentially flat (up 2 percent at constant currency) in 2000
compared with 1999.
Effective in the first quarter 2001, the company made changes in the
organization of its Hardware segment. These changes include the transfer of the
xSeries (Intel-based) servers from the Personal Systems segment to the
Enterprise Systems segment, and the transfer of the Printing Systems Division
from the Technology segment to the newly formed Personal and Printing Systems
segment, consisting of the realigned Personal Computer Division, Retail Store
Solutions Division and the Printing Systems Division. All amounts disclosed
herein for all years presented have been reclassified to conform with these
changes.
In 2001, Enterprise Systems revenue declined 3.2 percent from 2000,
following an increase of 2.6 percent in 2000 versus 1999. zSeries revenue
grew in 2001, the first full year of revenue growth since 1989, a clear
recognition of the unique advantages mainframes offer to the company's
customers. Total deliveries of zSeries computing power increased more than 30
percent as measured in MIPS (millions of instructions per second) versus
2000. In addition, revenue growth in storage products was driven by high-end
products ("Shark"). pSeries revenue decreased in 2001 as the market for UNIX-
based servers declined substantially, but the new high-end
58
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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
"Regatta" servers began shipping in December 2001, and were sold out in the
fourth quarter. Entry and mid-range pSeries revenue declined in 2001, but the
company will strengthen these products by bringing Regatta's Power-4
technology to the products later in 2002. Revenue from iSeries declined in
2001; however, it benefited from server consolidations and Linux late in the
year. Although the pSeries and iSeries servers had declining revenue, these
products gained market share in 2001 against their competitors. xSeries
revenue also declined, reflecting the extremely competitive environment in
the Intel-based server market.
The company is investing in an initiative (project eLiza) that will
deliver self-managing systems technology across the company's entire e-server
product portfolio within the next five years. Project eLiza involves developing
systems that can configure, optimize, fix and protect themselves. This project
will give businesses the ability to manage systems and technology that are
significantly more complex than those in existence today.
In 2000, revenue increased for both xSeries servers and pSeries UNIX
servers, with particular strength in the mid-range and high-end pSeries Web
servers. In addition, revenue from the company's storage products, which include
"Shark," increased in 2000. These increases were partially offset by revenue
declines for the mid-range iSeries servers and the zSeries servers in 2000 as
compared to 1999.
Personal and Printing Systems revenue declined 20.6 percent in 2001 from
2000, following a decrease of 3.2 percent in 2000 versus 1999 with personal
computers, retail store solutions and printing systems all showing declines. The
personal computer revenue decline reflects demand weakness and price erosion
across all product lines. The company continues to focus on reducing cost and
expense in the personal computer business as well as achieving maximum
utilization through the company's direct fulfillment channel via the Internet.
In the fourth quarter of 2001, 44 percent of the personal computer division
revenue was through the direct fulfillment channel via the Internet versus 34
percent in 2000. In February 2002, the company completed the sale of its U.S.
and European desktop personal computer manufacturing to Sanmina-SCI. Pursuant to
the transaction agreement, the company will outsource its NetVista desktop
manufacturing operations to Sanmina-SCI. This transaction will allow the company
to eventually further lower its cost, while it continues to develop and sell a
full line of personal computer products and services as part of its end-to-end
solutions to help customers build their computer infrastructure.
The change in 2000 revenue was driven by decreased revenue in desktop
personal computer and retail store solutions revenue, partially offset by
increased mobile products revenue. The decline in desktop revenue was driven by
consumer products, as the company decided in 1999 to exit retail channels in the
U.S. and Europe.
Technology revenue in 2001 decreased 6.4 percent when compared with 2000,
following an increase of 6.1 percent in 2000 versus 1999. The decline in the
Technology segment revenue was driven by the semiconductor industry's severe
downturn which began affecting the company in the second quarter of 2001. In
addition, HDD revenue declined as the company's ability to sell HDDs is highly
dependent on the personal computer industry. The uncertainty in this industry is
affecting both the company's HDD and personal computer results. The company
continues to evaluate various alternatives to mitigate the impact of HDDs on the
results of the company. These alternatives include, among other actions,
rebalancing sources of supply and re-examining manufacturing efficiencies. The
increase in 2000 revenue was driven by strong growth in custom logic, networking
and pervasive computing products, partially offset by lower HDD revenue.
The company took actions in 1999 in the microelectronics and HDD areas
that were aimed at strengthening the Technology segment over the long-term.
Those actions were intended to shift the focus of the Technology segment to
higher margin businesses and more efficient operations.
Hardware gross profit dollars decreased 13.8 percent in 2001 from 2000,
following a 4.3 percent increase in 2000 versus 1999. The Hardware gross profit
margin declined 0.7 points in 2001 following an increase of 1.2 points in 2000
versus 1999. The decline in gross profit dollars and gross profit margin was
primarily due to lower volumes in the company's Technology segment and pricing
pressures in personal computers and HDDs.
The increase in 2000 gross profit margin was primarily driven by improved
margins in microelectronics and personal computers.
SOFTWARE
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $12,939 $12,598 $12,662
Cost 2,265 2,283 2,240
- --------------------------------------------------------------------------------
Gross profit $10,674 $10,315 $10,422
================================================================================
Gross profit margin 82.5% 81.9% 82.3%
</Table>
59
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Software revenue increased 2.7 percent (7 percent at constant currency) in
2001, following a decline of 0.5 percent (up 4 percent at constant currency) in
2000 from 1999. The company's middleware products grew revenue 5 percent (9
percent at constant currency) in 2001 and 3 percent (8 percent at constant
currency) in 2000. Middleware comprises data management, transaction processing,
Tivoli systems management and Lotus Notes messaging and collaboration for both
IBM and non-IBM platforms. Middleware revenue increases in 2001 and 2000 were
driven by strong growth in WebSphere (Web application server software), DB2
(data management) and MQSeries (business integration software) offerings.
Revenue from the acquisition of the Informix database business in July 2001
contributed about 62 percent of the middleware software growth in 2001. These
increases were partially offset by revenue declines in Tivoli and Lotus
products. Although revenue was down in both 2001 and 2000 in Tivoli and Lotus
businesses, both units grew revenue sequentially from quarter to quarter within
2001. The company continues to focus on helping customers use IBM's software to
transform businesses to e-businesses across all platforms. To achieve this, the
company uses its services offerings, 74 strategic alliances, 56,000 business
partners and a 10,000-person dedicated software sales force. These provide the
company with strong momentum in its Software business as it enters 2002.
Operating systems software revenue declined 3 percent (up 1 percent at
constant currency) in 2001 and 9 percent (5 percent at constant currency) in
2000 compared with the prior year. The decline in 2001 resulted from lower
revenue associated with iSeries and pSeries server products. The decline in 2000
was driven by lower revenue associated with e-server products and legacy (S/390,
AS/400 and RS/6000) products.
Software gross profit dollars increased 3.5 percent in 2001 from 2000,
following a decrease of 1.0 percent in 2000 from 1999. The Software gross profit
margin improved 0.6 points in 2001 following a decline of 0.4 points in 2000
compared to 1999. The increase in gross profit dollars and gross profit margin
was primarily due to higher Software revenue, lower service costs and purchased
vendor software, partially offset by higher amortization costs and vendor
royalty payments in 2001 versus 2000. The decline in gross profit dollars and
gross profit margin in 2000 was primarily due to lower revenue, higher costs for
purchased vendor software and higher vendor royalty payments, partially offset
by lower amortization and services costs.
GLOBAL FINANCING
<Table>
<Caption>
(dollars in millions) 2001 2000* 1999*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 3,426 $ 3,465 $ 3,137
Cost 1,693 1,965 1,821
- --------------------------------------------------------------------------------
Gross profit $ 1,733 $ 1,500 $ 1,316
================================================================================
Gross profit margin 50.6% 43.3% 41.9%
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
Global Financing revenue declined 1.1 percent (up 1 percent at constant
currency) in 2001 from 2000, following an increase of 10.4 percent (13 percent
at constant currency) in 2000 versus 1999. The decline in 2001 was primarily a
result of a lower earnings-generating asset base and lower used equipment sales.
The revenue increase in 2000 over 1999 was due to higher used equipment sales
and commercial financing activity.
Global Financing gross profit dollars increased 15.5 percent in 2001
versus 2000, following an increase of 14.0 percent in 2000 versus 1999. The
Global Financing gross profit margin improved 7.3 points in 2001 following an
increase of 1.4 points in 2000 as compared to 1999. The increases in 2001 gross
profit dollars and gross profit margin were primarily driven by lower borrowing
costs related to the current interest rate environment and increased margin in
used equipment sales. The increase in 2000 was primarily driven by higher sales
of used equipment and an improving gross profit margin on these sales. See
Management Discussion on page 62 for additional information regarding Cost of
Global Financing reclassification effective in 2001. All amounts displayed
herein for all years presented have been reclassified to conform with these
changes. (Also see the "Debt and Equity" section of Management Discussion on
pages 66 and 67 for additional discussion of Global Financing debt.)
ENTERPRISE INVESTMENTS/OTHER
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,153 $ 1,404 $ 1,689
Cost 634 747 1,038
- --------------------------------------------------------------------------------
Gross profit $ 519 $ 657 $ 651
================================================================================
Gross profit margin 45.0% 46.8% 38.5%
</Table>
As expected, Enterprise Investments/Other revenue decreased 17.9 percent (14
percent at constant currency) from 2000, following a decrease of 16.9 percent
(13 percent at constant currency) in 2000 from 1999. The decreases in revenue
were a result of the company's strategy to shift development and distribution
of custom-made products to third-party
60
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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
companies. In addition, computer-aided three-dimensional interactive
application (CATIA) related products revenue decreased in 2001 versus 2000,
and their revenue grew slightly in 2000 versus 1999.
The gross profit dollars from Enterprise Investments/Other declined 21.0
percent in 2001 versus 2000 and increased 0.9 percent in 2000 versus 1999. The
Enterprise Investments/Other gross profit margin declined 1.8 points in 2001
following an increase of 8.3 points in 2000 versus 1999. The decline in 2001
gross profit dollars and margin was primarily a result of lower revenue in 2001
as compared to 2000. The increase in 2000 gross profit dollars and margin was
primarily due to a shift in the mix of revenue to products that have a higher
gross profit margin than the product lines the company discontinued in 1999.
EXPENSE AND OTHER INCOME
Amounts within the Expense and Other Income section of the Consolidated
Statement of Earnings have been reclassified to provide additional details. See
"Reclassifications," on page 79.
<Table>
<Caption>
(dollars in millions) 2001 2000* 1999*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Selling, general and
administrative $17,197 $17,535 $16,294
Percentage of revenue 20.0% 19.8% 18.6%
Research, development
and engineering 5,290 5,374 5,505
Percentage of revenue 6.2% 6.1% 6.3%
Intellectual property
and custom
development income (1,535) (1,728) (1,506)
Other (income) and expense (361) (1,008) (848)
Interest expense 238 347 352
- --------------------------------------------------------------------------------
Total expense and
other income $20,829 $20,520 $19,797
================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
Selling, general and administrative (SG&A) expense declined 1.9 percent in 2001
versus 2000, following an increase of 7.6 percent in 2000 compared with 1999.
See "Expense and Other Income," on page 76 for a description of the
expenses.
The company continued to reduce its SG&A expense by using technology to
improve its efficiency. The increased use of e-procurement, ibm.com, e-Care for
customer support and other actions related to the company's ongoing e-business
transformation resulted in substantial productivity improvements in 2001. In
addition, the company continued to reduce discretionary spending such as travel
and consulting in 2001 and benefited from lower goodwill amortization expense
during the year as goodwill relating to several older acquisitions became fully
amortized. The decreases were partially offset by higher charges taken for
workforce rebalancing actions and bad debt expense in 2001 versus 2000. Future
levels of SG&A expense arising from bad debt expense will depend upon the
prevailing economic conditions, estimated value of collateral, and the overall
health of and any concentrations in the company's receivables portfolio.
The increase in 2000 SG&A expense was primarily driven by the 1999 net
pre-tax benefit of $2,107 million associated with the sale of the Global
Network, actions taken by the company in 1999 to improve its competitiveness and
to strengthen the company's overall business portfolio, and implementation of a
change in personal computers' depreciable lives. (See "Divestitures," on page
82, and note q, "1999 Actions," on pages 91 through 93 for further
information.) Excluding the 1999 actions and sale of the Global Network, 2000
SG&A expense would have declined 4.7 percent versus 1999. In addition, the
percentage of revenue would have been 21.0 percent for 1999.
As described in "New Standards to be Implemented," on pages 80 and 81, the
company adopted new accounting rules that eliminate the amortization of goodwill
on January 1, 2002. The new rules also provide for no goodwill amortization on
any acquisitions that occurred after June 30, 2001. The amount of goodwill
amortization, net of tax, that was recorded in 2001, 2000 and 1999 was $262
million, $436 million, and $420 million, respectively. The amount of goodwill
amortization, net of tax, that would have been recorded in 2002 if the new rules
were not adopted on January 1, 2002, (excluding the Informix acquisition that
occurred after June 30, 2001, and any other post-2001 acquisition) would have
been $244 million.
Research, development and engineering (RD&E) expense declined 1.6
percent in 2001 from 2000, following a decrease of 2.4 percent in 2000 from
1999. The decline in 2001 was a result of actions taken to reduce overhead.
In addition, the company reprioritized its spending to increase its
investment in high-growth opportunities such as e-business, initiatives to
support Linux and middleware software products. In addition, as discussed on
page 59, the company is also investing in project eLiza that will deliver
self managing systems technology across its entire e-server product
portfolio, within the next five years. The decline in 2000 is primarily due
to a $111 million pre-tax charge taken in 1999 for acquired in-process
research and development (IPR&D) associated with the acquisition of Sequent
Computer Systems, Inc., Mylex Corporation and DASCOM, Inc. See note c,
"Acquisitions/Divestitures," on page 82 for further detail about the IPR&D
charge.
61
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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
As a result of its ongoing research and development efforts, the company
was awarded the most U.S. patents in 2001 for the ninth consecutive year, with a
record 3,411 issued by the U.S. Patent and Trademark Office. This represents
nearly a 20 percent increase over its previous record of 2,886 set in 2000, and
the company becomes the first patent holder in history to be granted more than
3,000 U.S. patents in a single year.
More than one-third of the technologies the company patented last year are
already being applied to its product and service offerings. For example,
magnetic recording media with antiferromagnetically coupled (AFC) ferromagnetic
films as the recording layer is the company's "pixie dust" patent. Pixie dust is
a new type of magnetic coating that is eventually expected to quadruple the data
density of current hard disk drive products. In 2001, the company shipped more
than 5.3 million disk drives manufactured with AFC.
Intellectual property and custom development income include both sales and
other transfers as well as license/royalty bearing fee transfers. The sales and
other transfers in 2001, which included $280 million of pre-tax income from the
transfer of the company's optical transceiver intellectual property, declined
from 2000 due to lower activity. These amounts can vary from year to year. The
amount of income from intellectual property licensing/royalty-based fee
transactions has declined in recent years and may continue this trend in 2002.
See "Intellectual Property and Custom Development Income," on page 91 for
additional information.
Other income and expense declined 64.2 percent in 2001 versus 2000 and
increased 18.9 percent in 2000 versus 1999. The decline in 2001 was primarily
due to write-downs ($405 million) of certain equity investments for
other-than-temporary market declines. In addition, the company realized lower
gains from sales of securities and other investments, lower interest income
(other than from the company's Global Financing business transactions) and lower
net realized gains from certain real estate activities in 2001 versus 2000. The
increase in 2000 versus 1999 was primarily a result of higher net realized gains
from certain real estate activity and an increase in foreign currency
transaction gains, partially offset by lower interest income and lower gains
from sales of securities and other investments.
Effective January 1, 2001, interest expense is presented in Cost of Global
Financing in the Consolidated Statement of Earnings if the related external
borrowings to support the Global Financing business were issued by either the
company or its Global Financing unit (see pages 66 and 67 for a discussion of
Global Financing debt and interest expense). In prior periods, the caption only
included interest related to direct external borrowings of Global Financing.
Prior period results have been reclassified to conform with the current period
presentation.
Interest expense, excluding amounts recorded in Cost of Global Financing,
declined 31.4 percent in 2001 from 2000 and 1.4 percent in 2000 versus 1999. The
declines were primarily due to lower average interest rates and a decline in
average debt outstanding in the periods.
The following table provides the total pre-tax (income)/cost for
retirement-related plans for 2001, 2000 and 1999. (Income)/cost amounts are
included as a reduction from/addition to, respectively, the company's cost and
expense amounts on the Consolidated Statement of Earnings.
RETIREMENT-RELATED BENEFITS
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total retirement-
related plans $ (437) $ (327) $ 83
================================================================================
Comprise:
Defined benefit
and contribution
pension plans (841) (728) (288)
Nonpension post-
retirement benefits 404 401 371
</Table>
The additional income contributed by the defined benefit plans of the company in
2001 was principally due to the long-term investment returns generated by the
pension trust assets. As discussed in "Retirement-Related Benefits," on pages
76 and 77, there will almost always be a difference in any given year between
the company's expected return on plan assets and the actual return. These
differences are spread over time in accordance with Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions."
Although actual returns in 2001 were less than expected returns in the U.S.
pension plan, the cumulative excess of actual returns over expected returns
was $5.3 billion since 1986 (the year in which the company was required to
adopt SFAS No. 87). Each year's difference is recognized over a number of
years following the year that each difference arises. Therefore, the 2001
shortfall between actual and expected returns in the U.S. will be recognized
in the net periodic pension calculation over the next five years along with
the excess actual versus expected returns in recent years and any other
differences arising in future years.
Although the income from defined benefit pension plans represents a
contribution to the company's reported Income before income taxes, these
amounts are partially offset by the costs of the company's nonpension
postretirement medical benefits. Moreover, these amounts have positive
implications for the company's employees, retirees and shareholders. The
returns that the fund has experienced over time resulted in these benefits.
As a result, despite the recent downturn in the equity and financial markets,
the trust funds have continued
62
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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
to provide the capacity to meet their obligations to current and future
retirees.
The largest retirement-related benefit plan is the U.S. Personal Pension
Plan (PPP). See page 96 for the impact that the PPP had on the company's Income
before income taxes. The following is a discussion of the impacts of recent
changes relating to the PPP on the company's financial results. Refer to page 98
for a table containing the actuarial assumption changes.
The following is the historical actual average rates of return on plan
assets in the PPP:
<Table>
<Caption>
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Actual annualized rates of return:
15-year average 10.3% 11.9% 13.5% 12.8% 13.0%
10-year average 10.0% 12.5% 12.3% 12.7% 12.4%
Expected rate
of return
assumptions 10.0% 10.0% 9.5% 9.5% 9.5%
</Table>
The company uses long-term historical actual return experience, the expected
investment mix of the plans' assets, and future estimates of long-term
investment returns to develop its expected rate of return assumption used in the
net periodic pension calculation. This assumption is reviewed and set annually
at the beginning of each year. Accordingly, the change for 2000 and the decision
to leave the rate unchanged in 2001 was made at the beginning of each respective
year. At the beginning of 2002, using the process described above, the company
reduced its expected long-term return on the U.S. plan asset assumption from
10.0 percent to 9.5 percent. This change and the impact of 2002 changes in the
expected long-term rate of return on plan assets for certain non-U.S. plans is
expected to reduce 2002 net retirement plan income by approximately $350
million. The change in expected long-term return on U.S. plan assets in 2000
resulted in an additional $195 million of net retirement plan income for the
year ended December 31, 2000.
The company annually sets its discount rate assumption for
retirement-related benefits accounting to reflect the rates available on
high-quality, fixed-income debt instruments. Using this process, the company
changed its discount rate assumption for the PPP from 7.25 percent to 7.0
percent, effective December 31, 2001. This change is not expected to have a
material effect on the company's 2002 results of operations. The change in the
discount rate from 7.75 percent to 7.25 percent, effective December 31, 2000,
did not have a significant impact on the company's results of operations for the
year ended December 31, 2001. Effective January 1, 2001, the company increased
pension benefits to certain recipients who retired before January 1, 1997. The
increases ranged from 2.5 percent to 25 percent, and are based on the year of
retirement and the pension benefit currently being received. This improvement
resulted in an additional cost to the company of approximately $100 million in
2001.
The change in discount rate assumption for the 2000 U.S. plan year did not
have a significant impact on the company's results of operations for the year
ended December 31, 2000.
Future effects of pension plans, including the changes noted above, on the
operating results of the company depend on economic conditions, employee
demographics, mortality rates and investment performance.
See note v, "Segment Information," on pages 100 through 105 for additional
information about the pre-tax income of each segment, as well as the
methodologies employed by the company to allocate shared expenses to the
segments.
PROVISION FOR INCOME TAXES
The provision for income taxes resulted in an effective tax rate of 29.5 percent
for 2001, compared with the 2000 effective tax rate of 29.8 percent and a 1999
effective tax rate of 34.4 percent. The 4.6 point decrease in the 2000 rate from
the 1999 rate was primarily the result of the company's 1999 sale of its Global
Network business and various other actions implemented during 1999. Had it not
been for these 1999 actions, the company's 1999 effective tax rate would have
been 30 percent (essentially flat from 1998 through 2001).
As reflected in the reconciliation of the company's effective tax rate in
note o, "Taxes," on page 90, the increased benefit on the company's tax rate
of the foreign tax differential in 2000 was principally due to the U.S. tax
benefit from the repatriation of profits previously subject to foreign taxes,
partially offset by a less favorable mix of profits arising in markets with
lower effective tax rates.
Fourth Quarter
In the quarter ended December 31, 2001, the company had diluted earnings per
common share of $1.33, a 10.1 percent decrease compared with diluted earnings
per common share of $1.48 in the fourth quarter of 2000. Fourth-quarter 2001 net
income was $2.3 billion, a 12.7 percent decrease from $2.7 billion in the
year-earlier period. The company's fourth quarter 2001 revenue totaled $22.8
billion, down 10.9 percent (8 percent at constant currency) compared with fourth
quarter of 2000.
In the Americas, fourth-quarter revenue was $9.8 billion, a decrease of
9.1 percent (8 percent at constant currency) from the 2000 period. Revenue
from Europe/Middle East/Africa was $6.9 billion, down 6.3 percent (6 percent
at constant currency). Asia Pacific revenue declined 9.8 percent (1 percent
at constant currency) to $4.5 billion. OEM revenue
63
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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
decreased 34.4 percent (33 percent at constant currency) to $1.6 billion
compared with the fourth quarter of 2000.
Revenue from Global Services, including maintenance, declined 1.4 percent
(up 1 percent at constant currency) in the fourth quarter to $9.1 billion.
Global Services revenue, excluding maintenance, declined 1.6 percent (up 1
percent at constant currency). The company's annuity-like outsourcing and
maintenance businesses continued to perform well, but the company felt the
economic pressure in Consulting Services and BIS during the quarter. In
addition, a slowdown in contract signings in the middle of the year,
particularly in short-term engagements, affected the company's fourth quarter
revenue. New contract signings for Global Services in the fourth quarter were
approximately $15 billion.
Hardware revenue decreased 24.0 percent (21 percent at constant currency)
to $8.7 billion from the 2000 fourth quarter. Mainframe computing capacity,
however, grew 12 percent in the fourth quarter, as measured in MIPS. Revenue
from the company's UNIX-based pSeries declined, in large part because of
transition to the company's new "Regatta" family of UNIX servers, which began
shipping on December 14, 2001. Personal computer and microelectronics revenue
decreased substantially over the prior year's quarter, principally due to price
pressures in personal computers and an ongoing downturn affecting the worldwide
semiconductor and OEM markets. Revenue from the company's high-end storage
product "Shark" grew in a declining market.
Software revenue increased 6.0 percent (8 percent at constant currency) to
$3.8 billion compared to the prior year's fourth quarter. Overall, the company's
middleware software revenue grew 9 percent (10 percent at constant currency).
The company's data management and WebSphere products had strong growth versus
the fourth quarter of 2000. Although fourth-quarter revenue declined year to
year in the company's Tivoli and Lotus businesses, both units had strong revenue
growth sequentially. Tivoli and Lotus are benefiting from operational
efficiencies gained as a result of integrating their business processes into the
company's Software business, which has improved profitability in both units.
Operating system revenue declined 4 percent (2 percent at constant currency).
Global Financing revenue decreased 4.6 percent (4 percent at constant
currency) in the fourth quarter to $927 million primarily due to a lower
earnings-generating asset base and lower sales of used equipment. As expected,
revenue from the Enterprise Investments/Other area, which includes custom-made
products to third-party companies, declined 20.0 percent (18 percent at constant
currency) compared to the fourth quarter of 2000 to $340 million. The company
has been consistently shifting development and distribution of products in this
segment to third-party companies.
The company's total gross profit margin improved to 38.3 percent in the
2001 fourth quarter from 37.3 percent in the 2000 fourth quarter. Gross margins
improved in each revenue segment except for Hardware, which declined by 4.1
points, due to low volumes in the Technology segment and pricing pressures in
personal computers and HDDs.
Despite absorbing workforce-balancing actions and write-downs of certain
equity investments, the company's Total Expense and Other Income improved 5.6
percent to $5.4 billion. The improvement came from each of the company's two
main expense categories: SG&A expense as well as research and development
expense. The company continued to reduce its expense and improve operating
efficiencies through the use of electronic procurement, sales, education and
customer support systems. These systems, known as e-procurement, ibm.com,
e-learning and e-Care, have resulted in substantial productivity improvements.
The company's fourth quarter 2001 Intellectual property and custom development
income, which includes the transfer of the company's optical transceiver
intellectual property, was essentially flat compared to such income in 2000.
The company's tax rate in the fourth quarter was 29.3 percent compared
with 29.5 percent in the fourth quarter of 2000.
The company spent approximately $1.0 billion on common share repurchases
in the fourth quarter. The average number of common shares outstanding assuming
dilution was lower by 32.6 million shares in fourth quarter of 2001 versus the
fourth quarter of 2000, primarily as a result of the ongoing common share
repurchase program. The average number of shares assuming dilution was 1,758.0
million in fourth quarter 2001 versus 1,790.6 million in fourth quarter 2000.
Financial Condition
During 2001, the company continued to demonstrate strong financial
performance, enabling it to make appropriate investments to support future
growth and increase shareholder value. The company spent $5,844 million for
research, development and engineering, including software development that
was capitalized on the Consolidated Statement of Financial Position, $4,483
million for plant and other property, including machines used in strategic
outsourcing contracts; $1,177 million for machines on operating leases with
customers; and $5,293 million for the repurchase of the company's common
shares. In addition, the company paid cash totaling approximately $916
million of the aggregate $1,082 million purchase price of the company's two
acquisitions in 2001. The company had $6,393 million in Cash and cash
equivalents and current Marketable securities at December 31, 2001. The
company's debt levels declined $1,425 million in 2001 primarily due to a
decline in Global Financing debt, offset by an increase in non-global
financing debt. The decline in Global
64
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Financing debt was the result of the decrease in Global Financing assets.
Effective May 31, 2001, the company arranged global credit facilities
totaling $12.0 billion in committed credit lines, including an $8.0 billion
five-year facility and a $4.0 billion 364-day facility, replacing the company's
$10 billion credit facility which was due to expire in February 2002. Amounts
unused and available under these facilities were $11,383 million and $9,103
million at December 31, 2001 and 2000, respectively. In addition, at December
31, 2001 and 2000, the company had in place other lines of credit, most of which
were uncommitted, of $6,860 million and $7,646 million, respectively. The
amounts unused and available under these primarily uncommitted facilities at
December 31, 2001 and 2000, were $4,738 million and $5,111 million,
respectively.
At December 31, 2001 and 2000, the company had a total balance of state
and local government loans receivable securitized of $213 million and $136
million, respectively. For additional information, see note i, "Sale and
Securitization of Receivables," on page 84.
The changes in the company's U.S. pension plan during 2001, including the
increased benefits for retirees and the 1999 amendment to the plan, are not
expected to have a material effect on the company's financial condition.
The major rating agencies' ratings of the company's debt securities at
December 31, 2001, appear in the table below:
<Table>
<Caption>
Standard Moody's
and Investors
Poor's Service Fitch, Inc.
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Senior long-term debt A+ A1 AA-
Commercial paper A-1 Prime-1 F-1+
</Table>
CASH FLOWS
The company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows on page 74, are summarized
in the following table:
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided from/(used in):
Operating activities $14,265 $ 9,274 $10,111
Investing activities (6,106) (4,248) (1,669)
Financing activities (5,309) (6,359) (8,625)
Effect of exchange rate
changes on cash and
cash equivalents (83) (147) (149)
- --------------------------------------------------------------------------------
Net change in cash and
cash equivalents $ 2,767 $(1,480) $ (332)
================================================================================
</Table>
WORKING CAPITAL
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets $42,461 $43,880
Current liabilities 35,119 36,406
- --------------------------------------------------------------------------------
Working capital $ 7,342 $ 7,474
================================================================================
Current ratio 1.21:1 1.21:1
================================================================================
</Table>
Current assets decreased $1,419 million due primarily to decreases in accounts
receivable of $3,708 million, Inventories of $461 million and Deferred taxes of
$299 million, offset by net increases of $2,671 million in Cash and cash
equivalents and current Marketable securities, and $378 million in Prepaid
expenses and other current assets. The decline in accounts receivable was
primarily attributable to lower fourth quarter 2001 revenue volumes as compared
to the fourth quarter of 2000. The net increase in Cash and cash equivalents and
current Marketable securities was due primarily to an increase in cash from
operations and a reduction in common stock transactions, mainly from lower stock
repurchases, partially offset by an increase in investment and acquisition
activities.
The company ended 2001 with Inventories of $4,304 million, the lowest
level since 1983, primarily as a result of lower inventory levels within the
Personal and Printing Systems segment. The company's inventory turnover ratio
declined to 5.8 in 2001 from 6.3 in 2000.
Current liabilities declined $1,287 million from year-end 2000, primarily
due to decreases of $1,145 million in Accounts payable, $644 million in Other
accrued expenses and liabilities and $293 million in Deferred income, offset by
an increase of $983 million in Short-term debt.
INVESTMENTS
The company's investments for Plant, rental machines and other property were
$5,660 million for 2001, remaining essentially flat.
In addition to software development expenses included in RD&E expense, the
company capitalized $655 million of software costs during 2001, an increase of
$90 million from the 2000 period. The increase resulted from increases in
capitalized costs for both internal-use software and licensed programs.
Investments and sundry assets were $17,102 million at the end of 2001,
an increase of $2,655 million from 2000, primarily the result of increases in
Prepaid pension assets and Informix goodwill, offset by declines in Alliance
investments and Deferred taxes. See note h, "Investments and Sundry Assets,"
on page 84 for additional information.
65
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The company continues to invest in its Global Services, Software, Global
Financing and selected hardware businesses. The company continues its plans to
invest approximately $5 billion in its microelectronics business. These
investments include building an advanced 300mm chip-making facility in East
Fishkill, New York and expanding its chip-making and chip-packaging operations
worldwide. In 2001, approximately $1.2 billion has been spent on these
investments. The remaining amount is to be invested over the next three years.
The company has remaining authorization at December 31, 2001, to purchase
$4.6 billion of IBM common shares in the open market from time to time, based on
market conditions.
The company expects to fund all of these investments primarily with cash
from ongoing operations.
DEBT AND EQUITY
The company's debt level of $27 billion is almost entirely (more than 94
percent) the result of the company's Global Financing business. The Global
Financing business provides financing primarily to the company's customers and
business partners. Using the typical financing business model, Global Financing
funds its operations primarily through borrowings. It uses a debt to equity
ratio of approximately 7 to 1. Global Financing generates income by charging its
customers a higher interest rate than the interest expense on Global Financing
borrowings.
GLOBAL FINANCING ASSETS AND DEBT
<Table>
<Caption>
Global Global
Financing Financing
Assets Debt
--------- ----------
<S> <C> <C>
2001 36,670 25,545
2000 40,822 27,514
1999 39,686 26,799
1998 40,109 27,754
1997 35,444 23,824
1996 31,793 20,627
1995 28,846 19,722
1994 28,670 19,164
1993 30,448 21,131
1992 32,371 22,397
</Table>
The company's operations are essentially self-funding except for the
company's Global Financing business which leverages debt.
As a result, the $5.3 billion of share repurchases, $5.7 billion of
capital additions, and $5.8 billion of RD&E spending, including software
development that was capitalized on the Consolidated Statement of Financial
Position, were made possible from cash generated by operations, not external
company borrowings.
The company's funding requirements are continually monitored and
strategies are executed to manage the company's overall asset and liability
profile. Additionally, the company maintains sufficient flexibility to access
global funding sources as needed. During 2001, the company issued debt
denominated in U.S. dollars, Japanese yen, British pounds and Canadian dollars
to meet existing financing needs.
The company's total debt decreased $1,425 million to $27,151 million.
Based upon the company's two different capital structures as previously
discussed in this section, the analysis of this change and certain ratios are
discussed below on both a Global Financing and a non-global financing basis.
GLOBAL FINANCING
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets* $36,670 $40,822
Debt** 25,545 27,514
Equity 3,756 4,142
- --------------------------------------------------------------------------------
Debt/Equity 6.8x 6.6x
</Table>
* GLOBAL FINANCING ASSETS INCLUDE CASH, FINANCING RECEIVABLES (SEE NOTE F,
"FINANCING RECEIVABLES," ON PAGE 83), INTERCOMPANY AMOUNTS, RENTAL MACHINE
FIXED ASSETS AND OTHER ASSETS.
** THE TOTAL INTEREST EXPENSE RELATED TO GLOBAL FINANCING DEBT ABOVE IS
PRESENTED IN THE GLOBAL FINANCING COLUMN ON PAGE 67.
As discussed above, the Global Financing segment is a financial services
business and is, therefore, more debt dependent than the company's other
businesses. At December 31, 2001, more than 94 percent of the company's total
debt was used to fund this business, and supported almost 42 percent of the
company's total assets. In 2001, Global Financing debt to equity ratio
increased to 6.8x, which is within management's acceptable target range.
The company's Global Financing business provides funding predominantly
for the company's external customers but also provides financing for the
company including the funding to support the Global Services business'
long-term customer services contracts. All of these financing arrangements
are at arm's-length rates based upon market conditions. The company manages
and measures the Global Financing business as if it approximates a
stand-alone business that includes both the external financing and related
company financing described above. Accordingly, the Global Financing debt
discussed above and Cost of Global Financing discussed below support both of
these Global Financing activities.
All intercompany transactions are eliminated in the Consolidated
Statement of Earnings and therefore, the financing revenue associated with
the financing provided by Global Financing to the company is eliminated in
consolidation. Accordingly, the interest expense from the company's external
66
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
borrowings that supports such financing revenue is classified in the Interest
expense caption of the Consolidated Statement of Earnings as opposed to the
Cost of Global Financing caption.
The reconciliation of the segment amounts to the Consolidated Statement of
Earnings amounts for the years 2001, 2000 and 1999 is as follows:
<Table>
<Caption>
Global Non-Global Consolidated Consolidated
(dollars in millions) Financing Financing Eliminations Results
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2001
COST OF GLOBAL
FINANCING $1,140 $ -- $(176) $ 964
INTEREST EXPENSE -- 62 176 238
2000*
Cost of Global
Financing $1,319 $ -- $(237) $1,082
Interest expense -- 110 237 347
1999*
Cost of Global
Financing $1,232 $ -- $(132) $1,100
Interest expense -- 220 132 352
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
NON-GLOBAL FINANCING
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Debt* $1,606 $1,062
Debt/Capitalization 7.5% 6.1%
</Table>
* NON-GLOBAL FINANCING DEBT IS THE COMPANY'S TOTAL EXTERNAL DEBT LESS THE GLOBAL
FINANCING DEBT DESCRIBED IN THE GLOBAL FINANCING TABLE ON PAGE 66.
The company's non-global financing businesses generate significant cash from
ongoing operations and therefore generally do not require a significant amount
of debt. Cash flows from operations are these businesses' primary source of
funds for future investments.
The increase in the non-global financing debt is consistent with the
company's cash and debt arrangement strategies and should be considered in
conjunction with the increase in cash in the same period.
A review of the company's debt and equity should also consider other
contractual obligations and commitments, which are disclosed elsewhere in the
financial section. These amounts are summarized in one table below to facilitate
a reader's review.
CONTRACTUAL OBLIGATIONS
<Table>
<Caption>
Payments Due In
BALANCE AS OF -------------------------------------------
(dollars in millions) DEC. 31, 2001 2002 2003-04 2005-06 After 2006
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt $20,429 $5,186 $4,607 $4,165 $6,471
Lease commitments 5,734 1,378 1,927 1,062 1,367
</Table>
COMMITMENTS
<Table>
<Caption>
Amounts Expiring In
BALANCE AS OF -------------------------------------------
(dollars in millions) DEC. 31, 2001 2002 2003-04 2005-06 After 2006
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unused lines of credit $4,088 $3,127 $395 $259 $307
Other commitments 269 140 129 -- --
Financial guarantees 218 87 37 8 86
</Table>
Unused lines of credit represent amounts available to the company's dealers to
support their working capital needs and available lines of credit relating to
the company's syndicated loan activities. Other commitments primarily include
the company's commitments to provide financing to customers for their future
purchases of the company's products. Financial guarantees represent guarantees
for certain loans and financial commitments the company had made as of December
31, 2001.
STOCKHOLDERS' EQUITY
The company's total consolidated Stockholders' equity increased $2,990 million
to $23,614 million at December 31, 2001, primarily due to the increase in
Retained earnings, partially offset by the company's ongoing stock repurchase
program and Accumulated gains and losses not affecting retained earnings. (See
note m, "Stockholders' Equity Activity," on pages 88 and 89).
67
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CURRENCY RATE FLUCTUATIONS
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect
the company's results. At December 31, 2001, currency changes resulted in assets
and liabilities denominated in local currencies being translated into fewer
dollars than at year-end 2000. The currency rate changes had an unfavorable
effect on revenue growth of approximately 4 percentage points in 2001,
approximately 3 percentage points in 2000 and minimal effect in 1999.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or
whose economic environment is highly inflationary, translation adjustments are
reflected in results of operations, as required by SFAS No. 52, "Foreign
Currency Translation." Generally, the company manages currency risk in these
entities by linking prices and contracts to U.S. dollars and entering into
foreign currency hedge contracts.
The company uses a variety of financial hedging instruments to limit
specific currency risks related to financing transactions and other foreign
currency-based transactions. Further discussion of currency and hedging appears
in note k, "Derivatives and Hedging Transactions," on pages 85 through 87.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." See "Standards Implemented,"
on pages 79 and 80 for additional information regarding SFAS No. 133.
MARKET RISK
In the normal course of business, the financial position of the company
routinely is subjected to a variety of risks. In addition to the market risk
associated with interest rate and currency movements on outstanding debt and
non-U.S. dollar denominated assets and liabilities, other examples of risk
include collectibility of accounts receivable and recoverability of residual
values on leased assets.
The company regularly assesses these risks and has established policies
and business practices to protect against the adverse effects of these and other
potential exposures. As a result, the company does not anticipate any material
losses from these risks.
The company's debt in support of the Global Financing business and the
geographic breadth of the company's operations contain an element of market risk
from changes in interest and currency rates. The company manages this risk, in
part, through the use of a variety of financial instruments including
derivatives, as explained in note k, "Derivatives and Hedging Transactions," on
pages 85 through 87.
To meet disclosure requirements, the company performs sensitivity analysis
to determine the effects that market risk exposures may have on the fair values
of the company's debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis
comprise all of the company's cash and cash equivalents, marketable securities,
long-term non-lease receivables, investments, long-term and short-term debt and
all derivative financial instruments. The company's portfolio of derivative
financial instruments includes interest rate swaps, interest rate options,
foreign exchange swaps, forward contracts and option contracts.
To perform the sensitivity analysis, the company assesses the risk of loss
in fair values from the effect of hypothetical changes in interest rates and
foreign currency exchange rates on market-sensitive instruments. The market
values for interest and foreign currency exchange risk are computed based on the
present value of future cash flows as affected by the changes in rates that are
attributable to the market risk being measured. The discount rates used for the
present value computations were selected based on market interest and foreign
currency exchange rates in effect at December 31, 2001 and 2000, respectively.
The differences in this comparison are the hypothetical gains or losses
associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily
represent the actual changes in fair value that the company would incur under
normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor are held constant. In addition,
the results of the model are constrained by the fact that certain items are
specifically excluded from the analysis, while the financial instruments
relating to the financing or hedging of those items are included by
definition. Excluded items include leased assets, forecasted foreign currency
cash flows, and the company's net investment in foreign operations. As a
consequence, reported changes in the values of some of the financial
instruments affecting the results of the sensitivity analysis are not matched
with the offsetting changes in the values of the items that those instruments
are designed to finance or hedge.
The results of the sensitivity analysis at December 31, 2001, and December
31, 2000, are as follows:
INTEREST RATE RISK
At December 31, 2001, a 10 percent decrease in the levels of interest rates with
all other variables held constant would result in a decrease in the fair market
value of the company's financial instruments of $177 million as compared with a
decrease of $99 million at December 31, 2000. A 10 percent increase in the
levels of interest rates with all other variables held constant would result in
an increase in the fair value of the company's financial instruments of $151
million as compared to $83 million at December 31, 2000. Changes in the relative
sensitivity of the fair value of the company's financial
68
<Page>
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
instrument portfolio for these theoretical changes in the level of interest
rates are primarily driven by changes in the company's debt maturity,
interest rate profile and amount. In 2001 versus 2000, the reported increase
in interest rate sensitivity is primarily due to reductions in the company's
"receive fixed/pay floating" interest rate swap portfolio that had been
utilized in 2000 to more closely match the maturity profile of the company's
fixed-rate debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
At December 31, 2001, a 10 percent weaker U.S. dollar against foreign currencies
with all other variables held constant would result in a decrease in the fair
value of the company's financial instruments of $1,401 million as compared with
a decrease of $1,352 million at December 31, 2000. Conversely, a 10 percent
stronger U.S. dollar against foreign currencies with all other variables held
constant would result in an increase in the fair value of the company's
financial instruments of $1,440 million compared to $1,435 million at December
31, 2000.
FINANCING RISKS
Financing is an integral part of the company's total worldwide offerings.
Inherent in financing are certain risks, including credit, interest rate,
currency and residual value. The company manages credit risk through
comprehensive credit evaluations and pricing practices. To manage the risks
associated with an uncertain interest rate environment, the company pursues a
funding strategy of substantially matching the interest rate profile of its debt
with the interest rate profile of its assets. Currency risks are managed by
denominating liabilities in the same currency as the assets.
Residual value risk is managed by developing projections of future
equipment values at lease inception, reevaluating these projections quarterly,
and effectively deploying remarketing capabilities to recover residual values
and potentially earn a profit. The following table presents the recorded amount
of unguaranteed residual values for sales-type and operating leases at December
31, 1999, 2000 and 2001. In addition, the table below presents the run-out of
the unguaranteed residual value over the remaining lives of these leases at
December 31, 2001.
<Table>
<Caption>
Total Run-Out of 2001 Balance
----------------------------- ---------------------------------------
2005 and
(dollars in millions) 1999* 2000* 2001 2002 2003 2004 beyond
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales-type leases $ 771 $ 785 $ 791 $236 $273 $220 $62
Operating leases 609 396 334 172 95 44 23
- --------------------------------------------------------------------------------------------------------------
Total residual value $1,380 $1,181 $1,125 $408 $368 $264 $85
==============================================================================================================
</Table>
* RESTATED TO INCLUDE RESIDUAL VALUE ASSOCIATED WITH NON-INFORMATION
TECHNOLOGY (I/T) EQUIPMENT. (AMOUNTS WERE INCLUDED IN THE NARRATIVE IN
PRIOR YEARS.)
Accounting Estimates
Accounting under generally accepted accounting principles requires the use of
estimates. The company's note a, "Significant Accounting Policies," starting on
page 75 describes the important estimates used by the company.
Employees and Related Workforce
<Table>
<Caption>
Percentage Changes
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001-00 2000-99
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IBM/wholly owned subsidiaries 319,876 316,303 307,401 1.1 2.9
Less-than-wholly owned subsidiaries 25,403 21,886 17,176 16.1 27.4
Complementary 21,300 25,500 29,800 (16.5) (14.4)
</Table>
Employees at IBM and its wholly owned subsidiaries in 2001 increased 3,573 from
last year. Although the rate of growth of the company's workforce slowed in
2001, primarily due to workforce rebalancing initiatives, the company continued
to hire at a strong pace. Global Services, for example, hired nearly 14,000
people in 2001. Acquisitions, particularly the Informix database business, added
to the 2001 workforce as well.
In less than wholly owned subsidiaries, the number of employees increased
from last year, particularly in Europe and China. This growth reflects a new
subsidiary in Europe related to a major services venture with Fiat SpA, and
growth in China to support a rapidly expanding I/T infrastructure.
The company's complementary workforce is an approximation of equivalent
full-time employees hired under temporary, part-time and limited-term employment
arrangements to meet specific business needs in a flexible and cost-effective
manner.
69
<Page>
Consolidated Statement of Earnings
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
(dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: Notes 2001 2000* 1999*
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Global Services $ 34,956 $ 33,152 $ 32,172
Hardware 33,392 37,777 37,888
Software 12,939 12,598 12,662
Global Financing 3,426 3,465 3,137
Enterprise Investments/Other 1,153 1,404 1,689
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 85,866 88,396 87,548
- ---------------------------------------------------------------------------------------------------------------
COST:
Global Services 25,355 24,309 23,304
Hardware 24,137 27,038 27,591
Software 2,265 2,283 2,240
Global Financing j 1,693 1,965 1,821
Enterprise Investments/Other 634 747 1,038
- ---------------------------------------------------------------------------------------------------------------
TOTAL COST 54,084 56,342 55,994
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT 31,782 32,054 31,554
- ---------------------------------------------------------------------------------------------------------------
EXPENSE AND OTHER INCOME:
Selling, general and administrative p 17,197 17,535 16,294
Research, development and engineering p 5,290 5,374 5,505
Intellectual property and custom development income p (1,535) (1,728) (1,506)
Other (income) and expense p (361) (1,008) (848)
Interest expense j & k 238 347 352
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSE AND OTHER INCOME 20,829 20,520 19,797
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 10,953 11,534 11,757
Provision for income taxes o 3,230 3,441 4,045
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 7,723 8,093 7,712
Preferred stock dividends 10 20 20
- ---------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 7,713 $ 8,073 $ 7,692
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK:
ASSUMING DILUTION r $ 4.35 $ 4.44 $ 4.12
BASIC r $ 4.45 $ 4.58 $ 4.25
===============================================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
ASSUMING DILUTION: 2001--1,771,230,599; 2000--1,812,118,422; 1999--1,871,073,912
BASIC: 2001--1,733,348,422; 2000--1,763,037,049; 1999--1,808,538,346
===============================================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
THE ACCOMPANYING NOTES ON PAGES 75 THROUGH 105 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
70
<Page>
Consolidated Statement of Financial Position
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
(dollars in millions except per share amounts)
AT DECEMBER 31: Notes 2001 2000
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,330 $ 3,563
Marketable securities d 63 159
Notes and accounts receivable--trade, net of allowances 9,101 10,447
Short-term financing receivables f 16,656 18,705
Other accounts receivable 1,261 1,574
Inventories e 4,304 4,765
Deferred taxes o 2,402 2,701
Prepaid expenses and other current assets 2,344 1,966
- ---------------------------------------------------------------------------------------------------------------
Total current assets 42,461 43,880
- ---------------------------------------------------------------------------------------------------------------
Plant, rental machines and other property g 38,375 38,455
Less: Accumulated depreciation 21,871 21,741
- ---------------------------------------------------------------------------------------------------------------
Plant, rental machines and other property--net 16,504 16,714
- ---------------------------------------------------------------------------------------------------------------
Long-term financing receivables f 12,246 13,308
Investments and sundry assets h 17,102 14,447
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 88,313 $ 88,349
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Taxes o $ 4,644 $ 4,827
Short-term debt j & k 11,188 10,205
Accounts payable 7,047 8,192
Compensation and benefits 3,796 3,801
Deferred income 4,223 4,516
Other accrued expenses and liabilities 4,221 4,865
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 35,119 36,406
- ---------------------------------------------------------------------------------------------------------------
Long-term debt j & k 15,963 18,371
Other liabilities l 13,617 12,948
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 64,699 67,725
- ---------------------------------------------------------------------------------------------------------------
Contingencies n
Stockholders' equity: m
Preferred stock, par value $.01 per share -- 247
Shares authorized: 150,000,000
Shares issued and outstanding (2000--2,546,011)
Common stock, par value $.20 per share 14,248 12,400
Shares authorized: 4,687,500,000
Shares issued (2001--1,913,513,218; 2000--1,893,940,595)
Retained earnings 30,142 23,784
Treasury stock, at cost (shares: 2001--190,319,489; 2000--131,041,411) (20,114) (13,800)
Employee benefits trust (shares: 2000--20,000,000) -- (1,712)
Accumulated gains and losses not affecting retained earnings (662) (295)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 23,614 20,624
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,313 $ 88,349
===============================================================================================================
</Table>
THE ACCOMPANYING NOTES ON PAGES 75 THROUGH 105 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
71
<Page>
Consolidated Statement of Stockholders' Equity
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
Accumulated
Gains and
(Losses) Not
Employee Affecting
Preferred Common Retained Treasury Benefits Retained
(dollars in millions) Stock Stock Earnings Stock Trust Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999*
Stockholders' equity, January 1, 1999 $ 247 $ 10,121 $ 10,141 $ (133) $(1,854) $ 911 $19,433
Net income plus gains and losses not
affecting retained earnings:
Net income 7,712 $ 7,712
-------
Gains and losses not affecting retained
earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $180) (549) (549)
Minimum pension liability adjustment 3 3
Net unrealized gains on marketable
securities (net of tax expense of $456) 796 796
-------
Total gains and losses not affecting
retained earnings 250
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 7,962
=======
Cash dividends declared--common stock (859) (859)
Cash dividends declared--preferred stock (20) (20)
Common stock issued under employee
plans (22,927,141 shares) 741 (1) 740
Purchases (6,418,975 shares) and sales
(6,606,223 shares) of treasury stock
under employee plans--net (95) (50) (145)
Other treasury shares purchased, not retired
(70,711,971 shares) (7,192) (7,192)
Fair value adjustment of employee benefits trust 318 (308) 10
Increase due to shares issued by subsidiary 37 37
Tax effect--stock transactions 545 545
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 1999 $ 247 $ 11,762 $ 16,878 $(7,375) $(2,162) $ 1,161 $20,511
- ------------------------------------------------------------------------------------------------------------------------------------
2000*
Net income plus gains and losses not affecting
retained earnings:
Net income 8,093 $ 8,093
-------
Gains and losses not affecting retained
earnings (net of tax):
Foreign currency translation adjustments
(net of tax expense of $289) (538) (538)
Minimum pension liability adjustment 7 7
Net unrealized losses on marketable
securities (net of tax benefit of $506) (925) (925)
-------
Total gains and losses not affecting
retained earnings (1,456)
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 6,637
=======
Cash dividends declared--common stock (909) (909)
Cash dividends declared--preferred stock (20) (20)
Common stock issued under employee
plans (17,275,350 shares) 615 1 616
Purchases (8,799,382 shares) and sales
(9,074,212 shares) of treasury stock
under employee plans--net (259) 6 (253)
Other treasury shares purchased, not retired
(58,867,226 shares) (6,431) (6,431)
Fair value adjustment of employee benefits trust (439) 450 11
Increase due to shares remaining to be issued
in acquisition 40 40
Tax effect--stock transactions 422 422
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, December 31, 2000 $ 247 $ 12,400 $ 23,784 $(13,800) $(1,712) $ (295) $20,624
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
72
<Page>
Consolidated Statement of Stockholders' Equity
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
Accumulated
Gains and
(Losses) Not
Employee Affecting
Preferred Common Retained Treasury Benefits Retained
(dollars in millions) Stock Stock Earnings Stock Trust Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2001
Stockholders' equity, December 31, 2000 $ 247 $ 12,400 $ 23,784 $(13,800) $(1,712) $ (295) $20,624
Net income plus gains and losses not
affecting retained earnings:
Net income 7,723 $ 7,723
-------
Gains and losses not affecting retained
earnings (net of tax):
Cumulative effect of adoption of SFAS No
133 on Jan. 1 (net of tax expense of $120) 219 219
Net unrealized gains on SFAS No. 133
cash flow hedge derivatives during 2001
(net of tax expense of $44) 77 77
Foreign currency translation adjustments
(net of tax expense of $323) (539) (539)
Minimum pension liability adjustment (216) (216)
Net unrealized gains on marketable
securities (net of tax expense of $58) 92 92
-------
Total gains and losses not affecting
retained earnings (367)
-------
Subtotal: Net income plus gains and
losses not affecting retained earnings $ 7,356
=======
Cash dividends declared--common stock (956) (956)
Cash dividends declared--preferred stock (10) (10)
Preferred stock purchased and
retired (10,184,043 shares) (247) (7) (254)
Common stock issued under employee
plans (19,572,623 shares) 774 (1) 773
Purchases (2,237,935 shares) and sales
(11,801,053 shares) of treasury stock
under employee plans--net 32 (391) 1,032 673
Other treasury shares purchased, not retired
(48,841,196 shares) (5,091) (5,091)
Dissolution of employee benefits trust
(20,000,000 shares) 546 (2,255) 1,712 3
Decrease in shares remaining to be issued
in acquisition (6) (6)
Tax effect--stock transactions 502 502
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY, DECEMBER 31, 2001 $ -- $ 14,248 $ 30,142 $(20,114) $ -- $ (662) $23,614
====================================================================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
THE ACCOMPANYING NOTES ON PAGES 75 THROUGH 105 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
73
<Page>
Consolidated Statement of Cash Flows
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
(dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2001 2000* 1999*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 7,723 $ 8,093 $ 7,712
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation 4,195 4,513 6,159
Amortization of software 625 482 426
Deferred income taxes 658 29 (713)
Gain on asset sales (317) (792) (4,791)
Write-down of impaired investment assets 405 -- --
Other changes that provided/(used) cash:
Receivables 3,284 (4,720) (1,677)
Inventories 337 (55) 301
Other assets (545) (643) (130)
Accounts payable (969) 2,245 (3)
Other liabilities (1,131) 122 2,827
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 14,265 9,274 10,111
- -----------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Payments for plant, rental machines and other property (5,660) (5,616) (5,959)
Proceeds from disposition of plant, rental machines
and other property 1,165 1,619 1,207
Investment in software (655) (565) (464)
Purchases of marketable securities and other investments (778) (750) (2,628)
Proceeds from marketable securities and other investments 738 1,393 2,616
Proceeds from sale of the Global Network -- -- 4,880
Acquisitions (916) (329) (1,321)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (6,106) (4,248) (1,669)
- -----------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from new debt 4,535 9,604 6,133
Short-term borrowings/(repayments) less than 90 days--net 2,926 (1,400) 276
Payments to settle debt (7,898) (7,561) (7,510)
Preferred stock transactions--net (254) -- --
Common stock transactions--net (3,652) (6,073) (6,645)
Cash dividends paid (966) (929) (879)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,309) (6,359) (8,625)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (83) (147) (149)
- -----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,767 (1,480) (332)
Cash and cash equivalents at January 1 3,563 5,043 5,375
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 6,330 $ 3,563 $ 5,043
===============================================================================================
SUPPLEMENTAL DATA:
Cash paid during the year for:
Income taxes $ 2,279 $ 2,697 $ 1,904
Interest $ 1,247 $ 1,447 $ 1,574
===============================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
THE ACCOMPANYING NOTES ON PAGES 75 THROUGH 105 ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
74
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
a Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of International
Business Machines Corporation and its controlled subsidiary companies, which in
general are majority owned. Investments in business entities in which the
company does not have control, but has the ability to exercise significant
influence over operating and financial policies (generally 20-50 percent
ownership), are accounted for by the equity method. Other investments are
accounted for by the cost method. The accounting policy for other investments in
securities is described on page 78 within "Marketable Securities."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts that are reported in the consolidated financial statements
and accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that the company may undertake in
the future, actual results may be different from the estimates.
REVENUE
The company recognizes revenue when it is realized or realizable and earned. The
company considers revenue realized or realizable and earned when it has
persuasive evidence of an arrangement, the product has been shipped or the
services have been provided to the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. The company reduces
revenue for estimated customer returns and other allowances. In addition to the
aforementioned general policy, the following are the specific revenue
recognition policies for each major category of revenue and for multiple element
arrangements.
SERVICES
The terms of service contracts generally range from less than one year up to ten
years. Revenue from time and material service contracts is recognized as the
services are provided. Revenue from Strategic Outsourcing Service contracts
reflects the extent of actual services delivered in the period in accordance
with the terms of the contract. Revenue from Business Innovation Services (BIS)
contracts requiring the delivery of unique products and/or services is
recognized using the percentage-of-completion (POC) method of accounting. In
using the POC method, the company records revenue by reference to the costs
incurred to date and the estimated costs remaining to fulfill the contracts.
Provisions for losses are recognized during the period in which the loss first
becomes apparent. Revenue from maintenance is recognized over the contractual
period or as the services are performed.
In some of the company's services contracts, the company bills the
customer prior to performing the service. This situation gives rise to deferred
income of $2.4 billion and $2.5 billion at December 31, 2001 and 2000,
respectively, included in Deferred income on the Consolidated Statement of
Financial Position. In other services contracts, the company performs the
service prior to billing the customer. This situation gives rise to unbilled
accounts receivable of $1.3 billion and $1.2 billion at December 31, 2001 and
2000, respectively, included in Notes and accounts receivable--trade on the
Consolidated Statement of Financial Position. In these circumstances, billings
usually occur shortly after the company performs the services and can range up
to six months later. Unbilled receivables are expected to be billed and
collected within nine months.
HARDWARE
Revenue from hardware sales or sales-type leases is recognized when the product
is shipped to the customer and there are no unfulfilled company obligations that
affect the customer's final acceptance of the arrangement. Any cost of these
obligations is accrued when the corresponding revenue is recognized. Revenue
from rentals and operating leases is recognized monthly as the fees accrue.
SOFTWARE
Revenue from one-time charge licensed software is recognized at the inception of
the license term. Revenue from monthly software licenses is recognized ratably
over the license term. Revenue from maintenance, unspecified upgrades and
technical support is recognized over the period such items are delivered. See
"Multiple Element Arrangements" below for further information.
FINANCING
Revenue from financing is recognized at level rates of return over the term of
the lease or receivable.
MULTIPLE ELEMENT ARRANGEMENTS
The company enters into transactions that include multiple element arrangements,
which may include any combination of hardware, services or software. These
arrangements and stand-alone software arrangements may also involve any
combination of software maintenance, software technical support or unspecified
software upgrades. When some elements are
75
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
delivered prior to others in an arrangement, revenue is deferred until the
delivery of the last element unless there is all of the following:
o Vendor-specific objective evidence of fair value (VSOE) of the undelivered
elements.
o The functionality of the delivered elements is not dependent on the
undelivered elements.
o Delivery of the delivered element represents the culmination of the earnings
process.
VSOE is the price charged by the company to an external customer for the same
element when such element is sold separately.
EXPENSE AND OTHER INCOME
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expense is charged to income as
incurred. Expenses of promoting and selling products are classified as selling
expense and include such items as advertising, sales commissions and travel.
General and administrative expense includes such items as officers' salaries,
office supplies, non income taxes, insurance and office rental. In addition,
general and administrative expense includes other operating items such as
provision for doubtful accounts, workforce accruals for contractually obligated
payments to employees terminated in the ongoing course of business, amortization
of intangible assets and environmental remediation costs. The cost of internal
environmental protection programs that are preventive in nature are expensed as
incurred. The company accrues for all known environmental liabilities when it
becomes probable that the company will incur cleanup costs and those costs can
be reasonably estimated. In addition, estimated environmental costs that are
associated with post-closure activities (for example, the removal and
restoration of chemical storage facilities and monitoring) are accrued when the
decision is made to close a facility.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering costs are expensed as incurred.
INTELLECTUAL PROPERTY AND CUSTOM DEVELOPMENT INCOME
As part of the company's ongoing business model, the company licenses and sells
the rights to certain of its intellectual property including internally
developed patents, trade secrets and technological know-how. Certain transfers
of intellectual property to third parties are licensing/royalty fee based and
other transfers are transaction-based sales and other transfers.
Licensing/royalty-based fees involve transfers in which the company earns the
income over time or the amount of income is not fixed and determinable until the
licensee sells future related products (e.g., variable royalty based upon
licensee's revenue). Sales and other transfers typically include transfers of
intellectual property whereby the company has fulfilled its obligations and the
fee received is fixed and determinable. The company also earns income from
certain custom development projects for specific customers. The company records
the income from these projects when the fee is earned, is not refundable, and is
not dependent upon the success of the project.
OTHER INCOME AND EXPENSE
Other income and expense includes interest income (other than from the company's
Global Financing business transactions), gains and losses from securities and
other investments, realized gains and losses from real estate activity, and
foreign currency transaction gains and losses.
DEPRECIATION AND AMORTIZATION
Plant, rental machines and other property are carried at cost and depreciated
over their estimated useful lives using the straight-line method.
The estimated useful lives of depreciable properties generally are as
follows: buildings, 50 years; building equipment, 20 years; land improvements,
20 years; plant, laboratory and office equipment, 2 to 15 years; and computer
equipment, 1.5 to 5 years.
Capitalized software costs incurred or acquired after technological
feasibility are amortized over periods up to 3 years. See "Software Costs"
section on page 79 for additional information. Other intangible assets are
amortized for periods up to 5 years. See "New Standards to Be Implemented" on
pages 80 and 81 for additional information on goodwill.
RETIREMENT-RELATED BENEFITS
The company accounts for its defined benefit pension plans and its nonpension
postretirement benefit plans using actuarial models required by Statement of
Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," respectively. These models use an attribution approach
that generally spreads individual events over the service lives of the employees
in the plan. Examples of "events" are plan amendments and changes in actuarial
assumptions such as discount rate, rate of compensation increases and mortality.
See the next paragraph for information on the expected long-term rate of return
on plan assets. The principle underlying the required attribution approach is
that employees render service over their service lives on a relatively smooth
basis and therefore, the income statement effects of pensions or nonpension
postretirement benefit plans are earned in, and should follow, the same pattern.
76
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
One of the principal components of the net periodic pension calculation is
the expected long-term rate of return on plan assets. The required use of
expected long-term rate of return on plan assets may result in recognized
pension income that is greater or less than the actual returns of those plan
assets in any given year. Over time, however, the expected long-term returns are
designed to approximate the actual long-term returns and therefore result in a
pattern of income and expense recognition that more closely matches the pattern
of the services provided by the employees. Differences between actual and
expected returns are recognized in the net periodic pension calculation over
five years.
The company uses long-term historical actual return information, the mix
of investments that comprise plan assets, and future estimates of long-term
investment returns by reference to external sources to develop its expected
return on plan assets.
The discount rate assumptions used for pension and nonpension
postretirement benefit plan accounting reflects the rates available on
high-quality fixed-income debt instruments on December 31 of each year. The rate
of compensation increase is another significant assumption used in the actuarial
model for pension accounting and is determined by the company based upon its
long-term plans for such increases. For retiree medical plan accounting, the
company reviews external data and its own historical trends for health care
costs to determine the health care cost trend rates.
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between asset and
liability amounts that are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These deferred taxes are
measured by applying currently enacted tax laws. Valuation allowances are
recognized to reduce the deferred tax assets to an amount that is more likely
than not to be realized. In assessing the likelihood of realization, management
considers estimates of future taxable income.
TRANSLATION OF NON-U.S. CURRENCY AMOUNTS
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at weighted-average rates of exchange
prevailing during the year. Translation adjustments are recorded in Accumulated
gains and losses not affecting retained earnings within Stockholders' equity.
Inventories, Plant, rental machines and other property--net, and other
non-monetary assets and liabilities of non-U.S. subsidiaries and branches that
operate in U.S. dollars, or whose economic environment is highly inflationary,
are translated at approximate exchange rates prevailing when the company
acquired the assets or liabilities. All other assets and liabilities are
translated at year-end exchange rates. Cost of sales and depreciation are
translated at historical exchange rates. All other income and expense items are
translated at the weighted-average rates of exchange prevailing during the year.
Gains and losses that result from translation are included in net income.
DERIVATIVES
In the normal course of business, the company uses a variety of derivative
financial instruments to manage currency exchange rate and interest rate risk.
The company does not use derivatives for trading or speculative purposes, nor is
it a party to leveraged derivatives.
All derivatives are recognized on the balance sheet at fair value and are
reported in Prepaid expenses and other current assets, Investments and sundry
assets, Other accrued expenses and liabilities or Other liabilities in the
Consolidated Statement of Financial Position. Classification of each derivative
as current or non current is based upon whether the maturity of each instrument
is less than or greater than 12 months. To qualify for hedge accounting in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," the company requires that the instruments are effective in reducing
the risk exposure that they are designated to hedge. For instruments that are
associated with the hedge of an anticipated transaction, hedge effectiveness
criteria also require that it be probable that the underlying transaction will
occur. Instruments that meet established accounting criteria are formally
designated as hedges at the inception of the contract. These criteria
demonstrate that the derivative is expected to be highly effective at offsetting
changes in fair value of the underlying exposure both at inception of the
hedging relationship and on an ongoing basis. The assessment for effectiveness
is formally documented at hedge inception and reviewed at least quarterly
throughout the designated hedge period.
The company applies hedge accounting in accordance with SFAS No. 133,
whereby the company designates each derivative as a hedge of (1) the fair value
of a recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge); (2) the variability of anticipated cash flows of a forecasted
transaction or the cash flows to be received or paid related to a recognized
asset or liability ("cash flow" hedge); or (3) a hedge of a long-term investment
("net investment" hedge) in a foreign operation. From time to time, however, the
company may enter into derivatives that economically hedge certain of its risks,
even though hedge
77
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
accounting does not apply under SFAS No. 133 or is not applied by the company.
In these cases, there generally exists a natural hedging relationship in which
changes in fair value of the derivative, which are recognized currently in net
income, act as an economic offset to changes in the fair value of the underlying
hedged item(s).
Changes in the value of a derivative that is designated as a fair value
hedge, along with offsetting changes in fair value of the underlying hedged
exposure, are recorded in earnings each period. For hedges of interest rate
risk, the fair value adjustments are recorded as adjustments to Interest expense
and Cost of Financing in the Consolidated Statement of Earnings. For hedges of
currency risk associated with recorded assets or liabilities, derivative fair
value adjustments generally are recognized in Other income and expense in the
Consolidated Statement of Earnings. Changes in the value of a derivative that is
designated as a cash flow hedge are recorded in the Accumulated gains and losses
not affecting retained earnings, a component of Stockholders' equity. When net
income is affected by the variability of the underlying cash flow, the
applicable amount of the gain or loss from the derivative that is deferred in
Stockholders' equity is released to net income and reported in Interest expense,
Cost, SG&A expense or Other income and expense in the Consolidated Statement of
Earnings based on the nature of the underlying cash flow hedged. Effectiveness
for net investment hedging derivatives is measured on a spot to spot basis. The
effective portion of changes in the fair value of derivatives and other non
derivative risk management instruments designated as net investment hedges are
recorded as foreign currency translation adjustments in the Accumulated gains
and losses not affecting retained earnings section of Stockholders' equity.
Changes in the fair value of the portion of a net investment hedging derivative
excluded from the effectiveness assessment are recorded in Interest expense.
When the underlying hedged item ceases to exist, all changes in the fair
value of the instrument are included in net income each period until the
instrument matures. When the underlying transaction ceases to exist, a hedged
asset or liability is no longer adjusted for changes in its fair value.
Derivatives that are not designated as hedges, as well as changes in the value
of derivatives that do not offset the underlying hedged item throughout the
designated hedge period (collectively, "ineffectiveness"), are recorded in net
income each period and generally are reported in Other income and expense. Refer
to note k, "Derivatives and Hedging Transactions," on pages 85 through 87 for a
description of the major risk management programs and classes of financial
instruments used by the company.
FINANCIAL INSTRUMENTS
In determining fair value of its financial instruments, the company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option
pricing models, replacement cost and termination cost are used to determine fair
value. Dealer quotes are used for the remaining financial instruments. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at date of
purchase are carried at fair value and considered to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities included in Current assets represent securities with a
maturity of less than one year. The company also has Marketable securities,
including non equity method alliance investments, with a maturity of more than
one year. These non current investments are included in Investments and sundry
assets. The company's Marketable securities, including certain non equity method
alliance investments, are considered available for sale and are reported at fair
value with changes in unrealized gains and losses, net of applicable taxes,
recorded in Accumulated gains and losses not affecting retained earnings within
Stockholders' equity. Realized gains and losses are calculated based on the
specific identification method. Other than temporary declines in market value
from original cost are charged to Other income and expense in the period in
which the loss occurs. In determining whether an other than temporary decline in
the market value has occurred, the company considers the duration that and
extent to which market value is below original cost. Realized gains and losses
and other than temporary declines in market value from original cost are
included in Other income and expense in the Consolidated Statement of Earnings.
All other investment securities not described above or in the "Principles of
Consolidation" on page 75, primarily non-publicly traded equity securities, are
accounted for using the cost method.
INVENTORIES
Raw materials, work in process and finished goods are stated at the lower of
average cost or net realizable value.
78
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CUSTOMER LOANS RECEIVABLE
Global Financing is one of many sources of funding from which customers can
choose. Customer loans receivable, net of allowances, comprise almost entirely
loans made by the company's Global Financing segment, primarily to finance the
purchase of the company's services and software. Separate contractual
relationships on these financing agreements are generally for terms ranging from
one to three years requiring straight-line payments over the term. These
agreements do not represent extended payment terms. Each financing contract is
priced independently at competitive market rates. An allowance for loan losses
is established with a corresponding charge to SG&A expense based upon
management's historical collection experience, prevailing economic conditions,
the present value of estimated future cash flows, the estimated value of
underlying collateral, and specific situations that may affect a customer's
ability to repay.
ESTIMATED RESIDUAL VALUES OF LEASE ASSETS
The recorded residual values of the company's lease assets are estimated at the
inception of the lease to be the expected fair market value of the assets at the
end of the lease term. On a quarterly basis, the company reassesses the
realizable value of its lease residual values. In accordance with generally
accepted accounting principles, anticipated increases in specific future
residual values are not recognized before realization. Anticipated decreases in
specific future residual values that are considered to be other than temporary
are recognized immediately.
SOFTWARE COSTS
Costs that are related to the conceptual formulation and design of licensed
programs are expensed as research and development. Also, for licensed programs,
the company capitalizes costs that are incurred to produce the finished product
after technological feasibility is established. The annual amortization of the
capitalized amounts is performed using the straight-line method, and is applied
over periods ranging up to three years. The company performs periodic reviews to
ensure that unamortized program costs remain recoverable from future revenue.
Costs to support or service licensed programs are expensed as the costs are
incurred.
The company capitalizes certain costs that are incurred to purchase or to
create and implement internal-use computer software, which include software
coding, installation, testing and data conversion. Capitalized costs are
amortized on a straight-line basis over two years.
COMMON STOCK
Common stock refers to the $.20 par value capital stock as designated in the
company's Certificate of Incorporation. Treasury stock is accounted for using
the cost method. When treasury stock is reissued, the value is computed and
recorded using a weighted-average basis.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock--basic is computed by dividing Net income
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period. Earnings per share of common stock--assuming
dilution reflects the maximum potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock and would then share in the net income of the company. See note r,
"Earnings Per Share of Common Stock," on page 93 for additional information.
RECLASSIFICATIONS
Effective January 1, 2001, interest expense is presented in Cost of Global
Financing in the Consolidated Statement of Earnings if the related external
borrowings to support the Global Financing business were issued by either the
company or its Global Financing units. In prior years, the Cost of Global
Financing caption only included interest related to direct external borrowings
of the Global Financing units. Prior periods were reclassified to conform with
the current year presentation. This change was described and disclosed in the
company's 2001 first quarter report on Form 10-Q.
The company also removed the impact of intellectual property income, gains
and losses on sales and other than temporary declines in market value of certain
investments, realized gains and losses on certain real estate activity and
foreign currency transaction gains and losses from the SG&A caption on the
Consolidated Statement of Earnings. Custom development income was also removed
from the Research, development and engineering caption on the Consolidated
Statement of Earnings. Intellectual property and custom development income are
now recorded in a separate caption in the Consolidated Statement of Earnings.
The other items listed above are now recorded as part of Other income and
expense. Prior periods were reclassified to conform with the current year
presentation.
b Accounting Changes
STANDARDS IMPLEMENTED
The company implemented new accounting standards in 2001, 2000 and 1999. These
standards did not have a material effect on the financial position or results of
operations of the company.
79
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the Statement of
Financial Position and to measure those instruments at fair value. Additionally,
the fair value adjustments will affect either stockholders' equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity. As of
January 1, 2001, the adoption of the new standard resulted in a cumulative
effect net-of-tax increase of $219 million to Accumulated gains and losses not
affecting retained earnings in the Stockholders' equity section of the
Consolidated Statement of Financial Position and a cumulative effect net-of-tax
charge of $6 million included in Other income and expense in the Consolidated
Statement of Earnings.
Effective January 1, 2001, the company adopted SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a replacement of SFAS No. 125." This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and revises the accounting standards for
securitizations and transfers of financial assets and collateral. The adoption
did not have a material effect on the company's results of operations and
financial position. The standard also requires new disclosures which were not
applicable to the company.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 102, "Selected Loan Loss Allowance Methodology and
Documentation Issues," the company has reviewed its policies related to
methodologies for the determination of, and documentation in support of its
allowance for loan losses and the provision for loan losses in its Global
Financing segment. The company's methodology and documentation policies are
consistent with the views expressed within SAB 102. See "Customer Loans
Receivable," on page 79 for a description of the company's policies for
customer loans receivable.
In 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of Accounting Principles Board Opinion No.
25." The requirements of FIN No. 44 are either not applicable to the company or
are already consistent with the company's existing accounting policies.
Effective July 1, 2000, the company adopted Emerging Issues Task Force
(EITF) Issue No. 00-2, "Accounting for Web Site Development Costs." As a result,
the company changed its accounting policies to capitalize certain phases of Web
site development costs that were previously expensed as incurred. The company
amortizes these amounts on a straight-line basis over two years.
Pursuant to the Securities and Exchange Commission's SAB No. 101, "Revenue
Recognition in Financial Statements," the company has reviewed its accounting
policies for the recognition of revenue. SAB No. 101 was required to be
implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying
generally accepted accounting principles to revenue recognition in financial
statements. The company's policies for revenue recognition are consistent with
the views expressed within SAB No. 101. See "Revenue," on page 75 for a
description of the company's policies for revenue recognition.
Effective January 1, 1999, the company adopted American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires a company to capitalize certain costs that are
incurred to purchase or to create and implement internal-use computer software.
See "Software Costs" on page 79 for a description of the company's policies for
internal-use software.
NEW STANDARDS TO BE IMPLEMENTED
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires the use of the
purchase method of accounting for business combinations and prohibits the use of
the pooling of interests method. Under the previous rules, the company used the
purchase method of accounting. SFAS No. 141 also refines the definition of
intangible assets acquired in a purchase business combination. As a result, the
purchase price allocation of future business combinations may be different than
the allocation that would have resulted under the old rules. Business
combinations must be accounted for using SFAS No. 141 beginning on July 1, 2001.
SFAS No. 142 eliminates the amortization of goodwill, requires annual
impairment testing of goodwill and introduces the concept of indefinite life
intangible assets. It was adopted on January 1, 2002. The new rules also
prohibit the amortization of goodwill associated with business combinations that
close after June 30, 2001.
These new requirements will impact future period net income by an
amount equal to the discontinued goodwill amortization offset by goodwill
impairment charges, if any, and adjusted for any differences between the old
and new rules for defining intangible assets on future business combinations.
80
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
An initial impairment test must be performed in 2002 as of January 1, 2002.
The company completed this initial transition impairment test and determined
that its goodwill is not impaired.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 provides accounting and reporting guidance
for legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction or normal operation of a long-lived
asset. The standard is effective January 1, 2003. The company is reviewing the
provisions of this standard. Its adoption is not expected to have a material
effect on the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting model, based on the framework established in
SFAS No. 121 for long-lived assets to be disposed of by sale, whether such
assets are or are not deemed to be a business. SFAS No. 144 also modifies the
accounting and disclosure rules for discontinued operations. The standard was
adopted on January 1, 2002, and is not expected to have a material effect on the
financial statements except that any future discontinued operations may be
presented in the financial statements differently under the new rules as
compared to the old rules.
In November 2001, the FASB issued EITF Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out of Pocket' Expenses
Incurred." This guidance requires companies to recognize the recovery of
reimbursable expenses such as travel costs on services contracts as revenue.
These costs are not to be netted as a reduction of cost. This guidance was
effective January 1, 2002. The company does not expect this guidance to have a
material effect on the financial statements due to the company's billing
practices. For instance, outside the U.S., almost all of the company's contracts
involve fixed billings that are designed to recover all costs, including
out-of-pocket costs. Therefore, the "reimbursement" of these costs are already
recorded in revenue.
c Acquisitions/Divestitures
ACQUISITIONS
2001
In 2001, the company completed two acquisitions at a cost of approximately
$1,082 million.
The larger was the acquisition of Informix Corporation's database software
business. In July, the company agreed to pay $1 billion in cash for the net
assets of the business. Under the terms of the purchase, the company has paid
$889 million of the purchase price and will pay the remaining amount in 2002.
The Informix acquisition provides the company with a database software system
for data warehousing, business intelligence and transaction-handling systems
that are used by more than 100,000 customers. In addition, the acquisition
significantly increased the size of the company's Unix database business. The
transaction was completed in the third quarter of 2001 from which time the
results of this acquisition were included in the company's consolidated
financial statements.
The allocation of the purchase price for the 2001 acquisitions is
presented in the following table in the required SFAS No. 141 format.
<Table>
<Caption>
Amortization
(dollars in millions) Life (in years) Informix* Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 156 $ 57
Fixed/long-term assets 41 21
Intangible assets:
Customer lists 5 220 --
Completed technology 3 140 --
Trademarks 2 10 --
Goodwill 591 25
- --------------------------------------------------------------------------------
Total assets acquired $ 1,158 $ 103
- --------------------------------------------------------------------------------
Deferred revenue (101) (2)
Payables/accrued expenses (55) (21)
- --------------------------------------------------------------------------------
Total liabilities assumed $ (156) $ (23)
- --------------------------------------------------------------------------------
Net assets acquired $ 1,002 $ 80
================================================================================
</Table>
* DURING THE FOURTH QUARTER, THE COMPANY REVISED THE ESTIMATES ORIGINALLY
DISCLOSED IN THE THIRD QUARTER. THESE ADJUSTMENTS RESULTED IN AN
ADDITIONAL $40 MILLION OF GOODWILL AND A CORRESPONDING DECREASE IN
TANGIBLE NET ASSETS ACQUIRED. THERE WAS NO ADJUSTMENT IN THE PURCHASE
PRICE OR IN THE COMPANY'S EARNINGS.
The overall weighted-average life of intangible assets purchased from Informix
is 4.2 years. Goodwill of $591 million has been assigned to the Software
segment. Almost all of the goodwill is deductible for tax purposes. The primary
items that generated this goodwill are the value of the acquired assembled
workforce and the synergies between the acquired business and IBM. This
transaction occurred after June 30, 2001, and therefore, the acquired goodwill
is not subject to amortization.
2000
In 2000, the company completed nine acquisitions at a cost of approximately $511
million.
The largest acquisition was LGS Group Inc. (LGS). The company acquired all
the outstanding stock of LGS in April for $190 million. LGS offers services
ranging from application development to information technology (I/T) consulting.
81
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The following table presents the allocation of the purchase price of the
2000 acquisitions.
<Table>
<Caption>
(dollars in millions) LGS Other
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchase price $190 $ 321
================================================================================
Tangible net assets 31 68
Identifiable intangible assets -- 36
Goodwill 159 220
In-process research
and development -- 9
Deferred tax liabilities
related to identifiable
intangible assets -- (12)
</Table>
1999
In 1999, the company completed 17 acquisitions at a cost of approximately $1,551
million. Three of the major acquisitions for the year are detailed in the
following discussion.
On September 24, 1999, the company acquired all of the outstanding capital
stock of Sequent Computer Systems, Inc., an acknowledged leader in systems based
on NUMA (non-uniform memory access) architecture, for approximately $837
million.
On September 29, 1999, the company acquired all of the outstanding stock
of Mylex Corporation, a leading developer of technology for moving, storing,
protecting and managing data in desktop and networked environments, for
approximately $259 million.
On September 27, 1999, the company acquired all of the outstanding stock
of DASCOM, Inc., an industry leader in Web-based and enterprise-security
technology, for approximately $115 million.
The following table presents the allocation of the purchase price of the
1999 acquisitions.
<Table>
<Caption>
(dollars in millions) Sequent Mylex DASCOM Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchase price $ 837* $ 259 $ 115 $340
================================================================================
Tangible net assets/
(liabilities) 382 67 (17) 45
Identifiable intangible
assets 187 35 13 --
Current technology 87 26 19 9
Goodwill 192* 145 92 286
In-process research
and development 85 7 19 --
Deferred tax liabilities
related to identifiable
intangible assets (96) (21) (11) --
</Table>
* IN 2000, THE TOTAL PURCHASE PRICE AND GOODWILL NUMBERS WERE ADJUSTED
PRIMARILY FOR INCREASED STOCK OPTIONS BEING EXERCISED VERSUS BEING
CONVERTED TO IBM OPTIONS AND AT A HIGHER GAIN PER OPTION THAN ORIGINALLY
ASSUMED.
The company's acquisitions were accounted for as purchase transactions,
and accordingly, the assets and liabilities of the acquired entities were
recorded at their estimated fair value at the date of acquisition. The effects
of these acquisitions on the company's consolidated financial statements were
not material. Hence, the company has not provided pro forma financial
information as if the companies had combined at the beginning of the current
period or at the immediately preceding period.
The tangible net assets comprise primarily cash, accounts receivable,
land, buildings and leasehold improvements. The identifiable intangible assets
comprise primarily patents, trademarks, customer lists, assembled workforce,
employee agreements and leasehold interests. The identifiable intangible assets
have been amortized on a straight-line basis, generally not to exceed five
years. Except for Informix, goodwill has been amortized over five years.
Effective January 1, 2002, any unamortized assembled workforce intangible asset
will be reclassified to goodwill and all goodwill will no longer be amortized.
See "New Standards to Be Implemented" on pages 80 and 81 for a description of
the new accounting rules that eliminate the amortization of goodwill.
In connection with these acquisitions, the company recorded pre-tax
charges of $9 million and $111 million for acquired in-process research and
development (IPR&D) for 2000 and 1999, respectively. At the date of the
acquisitions, the IPR&D projects had not yet reached technological feasibility
and had no alternative future uses. The value of the IPR&D reflects the relative
value and contribution of the acquired research and development to the company's
existing research or product lines.
DIVESTITURES
During 1999, the company completed the sale of its Global Network business to
AT&T for $4,991 million. More than 5,300 IBM employees joined AT&T as a result
of these sales of operations in 71 countries.
During 1999, the company recognized a pre-tax gain of $4,057 million
($2,495 million after tax, or $1.33 per diluted common share). The net gain
reflects dispositions of plant, rental machines and other property of $410
million, other assets of $182 million and contractual obligations of $342
million. The gain was recorded as a reduction of SG&A expense in the
Consolidated Statement of Earnings.
82
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
d Financial Instruments (Excluding Derivatives)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, marketable securities, notes and other accounts
receivable and other investments are financial assets with carrying values that
approximate fair value. Accounts payable, other accrued expenses and
liabilities, and short-term and long-term debt are financial liabilities with
carrying values that approximate fair value.
MARKETABLE SECURITIES*
The following table summarizes the company's marketable securities, all of which
are considered available for sale, and alliance investments.
<Table>
<Caption>
Fair Value
(dollars in millions) ------------------
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Current marketable securities:
Time deposits and other obligations $ 55 $153
Non-U.S. government securities and
other fixed-term obligations 8 6
- --------------------------------------------------------------------------------
Total $ 63 $159
================================================================================
Marketable securities--non current:**
Time deposits and other obligations $124 $163
Non-U.S. government securities and
other fixed-term obligations -- 8
- --------------------------------------------------------------------------------
Total $124 $171
================================================================================
Non equity method alliance
investments** $574 $909
================================================================================
</Table>
* GROSS UNREALIZED GAINS (BEFORE TAXES) ON MARKETABLE SECURITIES AND
ALLIANCE INVESTMENTS WERE $27 MILLION AND $47 MILLION AT DECEMBER 31, 2001
AND 2000, RESPECTIVELY. GROSS UNREALIZED LOSSES (BEFORE TAXES) ON
MARKETABLE SECURITIES AND ALLIANCE INVESTMENTS WERE $4 MILLION AND $175
MILLION AT DECEMBER 31, 2001 AND 2000, RESPECTIVELY. SEE NOTE M,
"STOCKHOLDERS' EQUITY ACTIVITY," ON PAGES 88 AND 89 FOR ACCUMULATED AND
NET CHANGE IN UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES.
** INCLUDED WITHIN INVESTMENTS AND SUNDRY ASSETS IN THE CONSOLIDATED
STATEMENT OF FINANCIAL POSITION. (SEE NOTE H, "INVESTMENTS AND SUNDRY
ASSETS," ON PAGE 84.)
e Inventories
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $1,259 $1,446
Work in process and raw materials 3,045 3,319
- --------------------------------------------------------------------------------
Total $4,304 $4,765
================================================================================
</Table>
f Financing Receivables
The following table includes receivables resulting from leasing activities,
installment loans to customers, and commercial financing activities (primarily
dealers and syndicated loan activities), arising from the Global Financing
business. See note v, "Segment Information," on page 104 for information on the
total assets of the Global Financing segment, which include cash, rental machine
fixed assets, intercompany amounts and other assets.
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-term:
Commercial financing receivables $ 5,452 $ 6,851
Customer loans receivable 4,297 4,065
Installment payment receivables 871 1,221
Net investment in sales-type leases 6,036 6,568
- --------------------------------------------------------------------------------
Total short-term financing
receivables $16,656 $18,705
================================================================================
Long-term:
Commercial financing receivables $ 1,009 $ 779
Customer loans receivable 4,041 4,359
Installment payment receivables 353 574
Net investment in sales-type leases 6,843 7,596
- --------------------------------------------------------------------------------
Total long-term financing receivables $12,246 $13,308
================================================================================
</Table>
Net investment in sales-type leases is for leases that relate principally to IBM
equipment and is generally for terms ranging from two to five years. Net
investment in sales-type leases includes unguaranteed residual values of
approximately $791 million and $785 million at December 31, 2001 and 2000,
respectively, and is reflected net of unearned income at those dates of
approximately $1,428 million and $1,481 million, respectively. Scheduled
maturities of minimum lease payments outstanding at December 31, 2001, expressed
as a percentage of the total, are approximately as follows: 2002, 50 percent;
2003, 31 percent; 2004, 14 percent; 2005, 4 percent; and 2006 and beyond, 1
percent.
g Plant, Rental Machines and Other Property
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 859 $ 896
Buildings and building improvements 10,073 9,904
Plant, laboratory and office equipment 22,369 22,354
- --------------------------------------------------------------------------------
33,301 33,154
Less: Accumulated depreciation 18,982 18,857
- --------------------------------------------------------------------------------
14,319 14,297
Rental machines 5,074 5,301
Less: Accumulated depreciation 2,889 2,884
- --------------------------------------------------------------------------------
2,185 2,417
- --------------------------------------------------------------------------------
Total $16,504 $16,714
================================================================================
</Table>
83
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
h Investments and Sundry Assets
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred taxes $ 2,395 $ 2,968
Prepaid pension assets 9,407 6,806
Alliance investments:
Equity method 544 629
Other 574 909
Goodwill (less accum. amortization) 1,278 848
Marketable securities--non current 124 171
Software 963 782
Other assets 1,817 1,334
- --------------------------------------------------------------------------------
Total $17,102 $14,447
================================================================================
</Table>
i Sale and Securitization of Receivables
The company periodically sells receivables through the securitization of loans,
leases and trade receivables. The company retains servicing rights in the
securitized receivables for which it receives a servicing fee. Any gain or loss
incurred as a result of such sales is recognized in the period in which the sale
occurs.
During 2001, the company entered into an uncommitted trade receivables
securitization facility that allows for the ongoing sale of up to $500 million
of trade receivables. This facility was put in place primarily to provide backup
liquidity and can be accessed on three days' notice. The company sold $179
million in trade receivables through this facility in 2001. In addition, the
company sold $278 million of loans receivable due from state and local
government customers through a securitization program established in 1990. No
receivables were sold in 2000 under this program. Net gains and losses on these
sales were insignificant.
Total cash proceeds of $460 million were received in 2001 from the sale
and securitization of receivables.
At December 31, 2001, the total balance of assets securitized and under
the company's management was $213 million, all of which related to loans
receivable. Servicing assets net of servicing liabilities were insignificant.
The investors in the loans receivable securitizations have recourse to the
company via a limited guarantee. At year-end 2001, delinquent amounts from the
receivables sold and net credit losses were insignificant.
j Borrowings
SHORT-TERM DEBT
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 4,809 $ 3,521
Short-term loans 1,564 3,975
Long-term debt: Current maturities 4,815 2,709
- --------------------------------------------------------------------------------
Total $11,188 $10,205
================================================================================
</Table>
The weighted-average interest rates for commercial paper at December 31, 2001
and 2000, were 1.9 percent and 6.7 percent, respectively. The weighted-average
interest rates for short-term loans at December 31, 2001 and 2000, were 4.0
percent and 2.9 percent, respectively.
LONG-TERM DEBT
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: Maturities 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. dollars:
Debentures:
6.22% 2027 $ 500 $ 500
6.5% 2028 700 700
7.0% 2025 600 600
7.0% 2045 150 150
7.125% 2096 850 850
7.5% 2013 550 550
8.375% 2019 750 750
Notes: 6.3% average 2002-2014 2,772 2,933
Medium-term note
program: 5.4% average 2002-2014 3,620 4,305
Other: 4.5% average 2002-2009 828 1,092
- --------------------------------------------------------------------------------
11,320 12,430
Other currencies (average
interest rate at
December 31, 2001,
in parentheses):
Euros (4.4%) 2002-2009 3,042 3,042
Japanese yen (1.1%) 2002-2014 4,749 4,845
Canadian dollars (5.8%) 2002-2011 441 302
Swiss francs (4.0%) 2002-2003 151 231
Other (6.1%) 2002-2014 726 275
- --------------------------------------------------------------------------------
20,429 21,125
Less: Net unamortized
discount 47 45
Add: SFAS No. 133 fair
value adjustment* 396 --
- --------------------------------------------------------------------------------
20,778 21,080
Less: Current maturities 4,815 2,709
- --------------------------------------------------------------------------------
Total $15,963 $18,371
================================================================================
</Table>
* IN ACCORDANCE WITH THE REQUIREMENTS OF SFAS NO. 133, THE PORTION OF THE
COMPANY'S FIXED-RATE DEBT OBLIGATIONS THAT IS HEDGED IS REFLECTED IN THE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AN AMOUNT EQUAL TO THE SUM
OF THE DEBT'S CARRYING VALUE PLUS A SFAS NO. 133 FAIR VALUE ADJUSTMENT
REPRESENTING CHANGES RECORDED IN THE FAIR VALUE OF THE HEDGED DEBT
OBLIGATIONS ATTRIBUTABLE TO MOVEMENTS IN MARKET INTEREST RATES.
84
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Annual maturities on long-term debt outstanding at December 31, 2001, are
as follows:
<Table>
<Caption>
(dollars in millions)
- --------------------------------------------------------------------------------
<S> <C>
2002 $5,186
2003 3,106
2004 1,501
2005 1,904
2006 2,261
2007 and beyond 6,471
</Table>
INTEREST ON DEBT
<Table>
<Caption>
(dollars in millions) 2001 2000* 1999*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of Global Financing $ 964 $ 1,082 $ 1,100
Interest expense 238 347 352
Interest capitalized 33 20 23
- --------------------------------------------------------------------------------
Total interest paid
and accrued $ 1,235 $ 1,449 $ 1,475
================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
Refer to the table and related discussion on page 104 in note v, "Segment
Information," for the total interest expense of the Global Financing segment.
See note k, "Derivatives and Hedging Transactions," on pages 85 through 87 for a
discussion of the use of currency and interest rate swaps in the company's debt
risk management program.
LINES OF CREDIT
Effective May 31, 2001, the company replaced its $10 billion committed global
credit facility, which was due to expire in February 2002, with two global
credit facilities totaling $12.0 billion in committed credit lines, including an
$8.0 billion five-year facility and a $4.0 billion 364-day facility. The
company's other lines of credit, most of which were uncommitted, totaled $6,860
million and $7,646 million, respectively, at December 31, 2001 and 2000.
Interest rates and other terms of borrowing under these lines of credit vary
from country to country, depending on local market conditions.
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Unused lines
From the committed global
credit facility $11,383 $ 9,103
From other committed
and uncommitted lines 4,738 5,111
- --------------------------------------------------------------------------------
Total unused lines of credit $16,121 $14,214
================================================================================
</Table>
k Derivatives and Hedging Transactions
DERIVATIVES AND HEDGING
The company operates in approximately 35 functional currencies and is a
significant lender and a borrower in the global markets. In the normal course of
business, the company is exposed to the impact of interest rate changes and
foreign currency fluctuations. The company limits these risks by following
established risk management policies and procedures including use of derivatives
and, where cost-effective, financing with debt in the currencies in which assets
are denominated. For interest rate exposures, derivatives are used to align rate
movements between the interest rates associated with the company's lease and
other financial assets and the interest rates associated with its financing
debt. Derivatives are also used to manage the related cost of debt. For currency
exposures, derivatives are used to limit the effects of foreign exchange rate
fluctuations on financial results.
The company does not use derivatives for trading or speculative purposes,
nor is it a party to leveraged derivatives. Further, the company has a policy of
only entering into contracts with carefully selected major financial
institutions based upon their credit ratings and other factors and maintains
strict dollar and term limits that correspond to the institution's credit
rating. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designed to hedge, the company has not sustained a
material loss from these instruments.
In its hedging programs, the company employs the use of forward contracts,
interest rate and currency swaps, options, caps, floors or a combination thereof
depending upon the underlying exposure.
A brief description of the major hedging programs follows:
DEBT RISK MANAGEMENT
The company issues debt on the global capital markets, principally to fund its
financing lease and loan portfolio. Access to cost-effective financing can
result in interest rate and/or currency mismatches with the underlying assets.
To manage these mismatches and to reduce overall interest cost, the company
primarily uses interest-rate and currency instruments, principally swaps, to
convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair
value hedges) and to convert specific variable-rate debt and anticipated
85
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
commercial paper issuances to fixed rates (i.e., cash flow hedges). The
resulting cost of funds is lower than that which would have been available if
debt with matching characteristics was issued directly. The weighted-average
remaining maturity of all swaps in the debt risk management program is
approximately four years.
LONG-TERM INVESTMENTS IN FOREIGN SUBSIDIARIES
("NET INVESTMENTS")
A significant portion of the company's foreign currency denominated debt
portfolio is designated as a hedge to reduce the volatility in stockholders'
equity caused by changes in foreign currency exchange rates in the functional
currency of major foreign subsidiaries with respect to the U.S. dollar. The
company also uses currency swaps and foreign exchange forward contracts for this
risk management purpose. The currency effects of these hedges (approximately
$506 million for the current period, net of tax) are reflected as a credit in
the Accumulated gains and losses not affecting retained earnings section of the
Consolidated Statement of Stockholders' Equity, thereby offsetting a portion of
the translation of the applicable foreign subsidiaries' net assets.
ANTICIPATED ROYALTIES AND COST TRANSACTIONS
The company's operations generate significant non functional currency third
party vendor payments and intercompany payments for royalties and goods and
services among the company's non-U.S. subsidiaries and with the parent company.
In anticipation of these foreign currency cash flows and in view of the
volatility of the currency markets, the company selectively employs foreign
exchange forward and option contracts to manage its currency risk. At December
31, 2001, the maximum remaining maturity of these derivative instruments was
less than 24 months, commensurate with the underlying hedged anticipated cash
flows. The effective portion of the gain or loss of these contracts is reported
in net income when the underlying transactions occur. Classification of
derivative gains and losses in the Consolidated Statement of Earnings is
consistent with the recognition of the specific underlying transactions hedged.
SUBSIDIARY CASH AND FOREIGN CURRENCY
ASSET/LIABILITY MANAGEMENT
The company uses its Global Treasury Centers to manage the cash of its
subsidiaries. These centers principally use currency swaps to convert cash flows
in a cost-effective manner. In addition, the company uses foreign exchange
forward contracts to hedge, on a net basis, the foreign currency exposure of a
portion of the company's non functional currency assets and liabilities. The
terms of these forward and swap contracts are generally less than one year. The
changes in fair value from these contracts and from the underlying hedged
exposures are generally offsetting and are recorded in Other income and expense
in the Consolidated Statement of Earnings.
EQUITY RISK MANAGEMENT
The company is exposed to certain equity price changes related to certain
obligations to employees. These equity exposures are primarily related to market
value movements in certain broad equity market indices and in the company's own
stock. Changes in the overall value of this employee compensation obligation are
recorded in SG&A expense in the Consolidated Statement of Earnings. Although not
designated as accounting hedges, the company utilizes equity derivatives,
including equity swaps and futures to economically hedge the equity exposures
relating to this employee compensation obligation. To match the exposures
relating to this employee compensation obligation, these derivatives are linked
to the total return of certain broad equity market indices and/or the total
return of the company's common stock. These derivatives are recorded at fair
value with gains or losses also reported in SG&A expense in the Consolidated
Statement of Earnings.
OTHER DERIVATIVES
The company holds warrants in connection with certain investments that, although
not designated as hedging instruments, are deemed derivatives since they contain
net share settlement clauses. During the year, the company recorded the change
in the fair value of these warrants in net income.
The following table summarizes the net fair value of the company's
derivative and other risk management instruments at December 31, 2001, included
in the Consolidated Statement of Financial Position.
86
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
RISK MANAGEMENT PROGRAM
<Table>
<Caption>
Hedge Designation
-------------------------------------
Net Non-Hedge/
(dollars in millions) Fair Value Cash Flow Investment Other
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Derivatives:
Debt risk management $ 301 $ (26) $ -- $(13)
Long-term investments in foreign subsidiaries ("net investments") 92
Anticipated royalties and cost transactions 375
Subsidiary cash and foreign currency asset/liability management 16
Equity risk management 22
All other 3
- ------------------------------------------------------------------------------------------------------------------------
Total derivatives $ 301(1) $ 349(2) $ 92(3) $ 28(4)
Debt:
Long-term investments in foreign subsidiaries ("net investments") -- -- (5,519)* --
- ------------------------------------------------------------------------------------------------------------------------
Total $ 301 $ 349 $(5,427) $ 28
========================================================================================================================
</Table>
* REPRESENTS FAIR VALUE OF FOREIGN DENOMINATED DEBT ISSUANCES FORMALLY
DESIGNATED AS A HEDGE OF NET INVESTMENTS.
(1) COMPRISES ASSETS OF $301 MILLION.
(2) COMPRISES ASSETS OF $383 MILLION AND LIABILITIES OF $34 MILLION.
(3) COMPRISES ASSETS OF $92 MILLION.
(4) COMPRISES ASSETS OF $60 MILLION AND LIABILITIES OF $32 MILLION.
ACCUMULATED DERIVATIVE GAINS OR LOSSES
As illustrated, the company makes extensive use of cash flow hedges, principally
in the anticipated royalties and cost transactions risk management program. In
connection with the company's cash flow hedges, it has recorded approximately
$296 million of net gains in Accumulated gains and losses not affecting retained
earnings as of December 31, 2001, net of tax, of which approximately $276
million is expected to be reclassified to net income within the next year to
provide an economic offset to the impact of the underlying anticipated cash
flows hedged.
The following table summarizes activity in the Accumulated gains and losses
not affecting retained earnings section of the Consolidated Statement of
Stockholders' Equity related to all derivatives classified as cash flow hedges
held by the company during the period January 1, 2001 (the date of the company's
adoption of SFAS No. 133) through December 31, 2001:
<Table>
<Caption>
Debit/
(dollars in millions, net of tax) (Credit)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative effect of adoption
of SFAS No. 133 as of January 1, 2001 $(219)
Net gains reclassified into earnings
from equity 379
Changes in fair value of derivatives (456)
- --------------------------------------------------------------------------------
Accumulated derivative gain included in
Accumulated gains and losses not affecting
retained earnings as of December 31, 2001 $(296)
================================================================================
</Table>
As of December 31, 2001, there were no significant gains or losses on derivative
transactions or portions thereof that were either ineffective as hedges,
excluded from the assessment of hedge effectiveness, or associated with an
underlying exposure that did not occur; nor are there any anticipated in the
normal course of business.
l Other Liabilities
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirement and nonpension
postretirement benefits--
U.S. and non-U.S. employees $ 8,044 $ 7,128
Deferred income taxes 1,593 1,623
Deferred income 1,145 1,266
Executive compensation accruals 868 769
Restructuring actions 589 854
Postemployment/
preretirement liability 493 585
Environmental accruals 215 226
Other 670 497
- --------------------------------------------------------------------------------
Total $13,617 $12,948
================================================================================
</Table>
The company has taken actions, including workforce rebalancing actions, each
year to improve productivity and competitive position. Contractually obligated
future payments associated with these ongoing activities are recorded in
postemployment/preretirement liabilities. Prior to 1994 and in 1999, the company
took significant actions including
87
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
significant workforce reductions. The non current liabilities relating to these
actions are included in restructuring actions in the table on page 87. See note
q, "1999 Actions," on pages 91 through 93 for more information regarding the
1999 actions. The reconciliation of the December 31, 2000 to 2001, balances of
the current and non current liabilities for restructuring actions are presented
below. The current liabilities presented in the table are included in Other
accrued expenses and liabilities in the Consolidated State ment of Financial
Position.
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
2000 Other 2001
(dollars in millions) Balance Payments Adjustments Balance
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Workforce $ 148 $ 128 $ 67 $ 87
Space 91 86 60 65
- -----------------------------------------------------------------------------------------
Total $ 239 $ 214 $ 127 $ 152
==========================================================================================
Non current:
Workforce $ 470 $ -- $ (85) $ 385
Space 384 -- (180) 204
- -----------------------------------------------------------------------------------------
Total $ 854 $ -- $(265) $ 589
==========================================================================================
</TABLE>
The workforce accruals relate to terminated employees who are no longer working
for the company, but who were granted annual payments to supplement their state
pensions in certain countries. These contractually required payments will
continue until the former employee dies.
The space accruals are for ongoing obligations to pay rent for vacant
space that could not be sublet or space that was sublet at rates lower than the
committed lease arrangement. The length of these obligations varies by lease
with the longest extending through 2012.
The Other Adjustments column in the table above includes the
reclassification of non current to current and translation adjustments. In
addition, the company adjusted its vacant space accrual by $110 million. This
adjustment is recorded as part of the real estate activity included in Other
income and expense and is offset by a decline in real estate gains in 2001.
Refer to "Other Income and Expense," on page 91 for additional information on
the company's net gains from real estate activity. The adjustment was made as a
result of the company's periodic reassessment of the remaining accrual.
The company employs extensive internal environmental protection programs
that primarily are preventive in nature. The company also participates in
environmental assessments and cleanups at a number of locations, including
operating facilities, previously owned facilities and Superfund sites.
The total amounts accrued for environmental liabilities, including amounts
classified as current in the Consolidated Statement of Financial Position, that
do not reflect actual or anticipated insurance recoveries, were $238 million and
$248 million at December 31, 2001 and 2000, respectively.
Estimated environmental costs are not expected to materially affect the
financial position or results of the company's operations in future periods.
However, estimates of future costs are subject to change due to protracted
cleanup periods and changing environmental remediation regulations.
m Stockholders' Equity Activity
STOCK REPURCHASES
From time to time, the Board of Directors authorizes the company to repurchase
IBM common stock. The company repurchased 50,764,698 common shares at a cost of
$5.3 billion and 61,041,820 common shares at a cost of $6.7 billion in 2001 and
2000, respectively. In 2001 and 2000, the company issued 1,923,502 and 2,174,594
treasury shares, respectively, as a result of exercises of stock options by
employees of certain recently acquired businesses and by non-U.S. employees. At
December 31, 2001, approximately $4.6 billion of Board authorized repurchases
remained. The company plans to purchase shares on the open market from time to
time, depending on market conditions. The company also repurchased 314,433
common shares at a cost of $31 million and 249,288 common shares at a cost of
$27 million in 2001 and 2000, respectively, as part of other stock compensation
plans.
In 1995, the Board of Directors authorized the company to repurchase all
of its outstanding Series A 7-1/2 percent callable preferred stock. On May 18,
2001, the company announced it would redeem all outstanding shares of its Series
A 7-1/2 percent callable preferred stock, represented by the outstanding
depositary shares (10,184,043 shares). The depositary shares represent ownership
of one-fourth of a share of preferred stock. Depositary shares were redeemed as
of July 3, 2001, the redemption date, for cash at a redemption price of $25 plus
accrued and unpaid dividends to the redemption date for each depositary share.
Dividends on preferred stock, represented by the depositary shares, ceased to
accrue on the redemption date. The company did not repurchase any shares in
2000.
Employee Benefits Trust
In 1997, the company created an employee benefits trust to which the company
contributed 10 million shares of treasury stock. The company was authorized
to instruct the trustee to sell such shares from time to time and to use the
proceeds from such sales, and any dividends paid or earnings received on such
stock, toward the partial payment of the company's obligations under certain
of its compensation and benefit plans. The shares held in trust were not
considered outstanding for earnings per share purposes until they were
committed to be released. The company did not commit any
88
<PAGE>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
shares for release from the trust during its existence nor were any shares
sold from the trust. The trust would have expired in 2007. Due to the fact
that the company has not used the trust, nor is it expected to need the trust
prior to its expiration, the company dissolved the trust, effective May 31,
2001, and all of the shares (20 million on a split-adjusted basis) were
returned to the company as treasury shares. Dissolution of the trust will not
affect the company's obligations related to any of its compensation and
employee benefit plans or its ability to settle the obligations. In addition,
the dissolution is not expected to have any impact on net income. At this
time, the company plans to fully meet its obligations for the compensation
and benefit plans in the same manner as it does today, using cash from
operations.
ACCUMULATED GAINS AND LOSSES NOT AFFECTING RETAINED EARNINGS*+
<Table>
<Caption>
Net Net Accumulated
Unrealized Foreign Minimum Unrealized Gains/(losses)
Gains On Currency Pension Gains/(losses) Not Affecting
Cash Flow Translation Liability On Marketable Retained
(Dollars in Millions) Hedge Derivatives Adjustments Adjustments Securities Earnings
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 1, 1999 $ -- $ 1,014 $ (154) $ 51 $ 911
Change for period -- (549) 3 796 250
- -------------------------------------------------------------------------------------------------------------------
December 31, 1999 -- 465 (151) 847 1,161
Change for period -- (538) 7 (925) (1,456)
- -------------------------------------------------------------------------------------------------------------------
December 31, 2000 -- (73) (144) (78) (295)
Cumulative effect on January 1, 2001 219 -- -- -- 219
Change for period 77 (539) (216) 92 (586)
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ 296 $ (612) $ (360) $ 14 $ (662)
===================================================================================================================
</Table>
* NET OF TAX.
+ RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
NET CHANGE IN UNREALIZED GAINS/(LOSSES) ON MARKETABLE SECURITIES (NET OF TAX)
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized losses arising
during the period $(154) $(810)
Less net (losses)/gains included
in net income for the period (246)* 115
- --------------------------------------------------------------------------------
Net change in unrealized gains/
(losses) on marketable securities $ 92 $(925)
================================================================================
</Table>
* INCLUDES WRITE-DOWNS OF $287 MILLION.
Unrealized losses arising in 2000 relate primarily to previous unrealized gains
from original cost occurring in prior years.
n Contingencies and Commitments
CONTINGENCIES
The company is subject to a variety of claims and suits that arise from time to
time in the ordinary course of its business, including actions with respect to
contracts, intellectual property, product liability, employment and
environmental matters. The company is a defendant and/or third-party defendant
in a number of cases in which claims have been filed by current and former
employees, independent contractors, estate representatives, offspring and
relatives of employees seeking damages for wrongful death and personal injuries
allegedly caused by exposure to chemicals in various of the company's facilities
from 1964 to the present. The company believes that plaintiffs' claims are
without merit and will defend itself vigorously.
While it is not possible to predict the ultimate outcome of the matters
discussed above, the company believes that any losses associated with any of
such matters will not have a material effect on the company's business,
financial condition or results of operations.
COMMITMENTS
The company has guaranteed certain loans and financial commitments. The
approximate amount of these financial guarantees was $218 million and $388
million at December 31, 2001 and 2000, respectively.
The company extended lines of credit, of which the unused amounts were
$4,088 million and $4,235 million at December 31, 2001 and 2000,
respectively. A portion of these amounts was available to the company's
dealers to support their working capital needs. In addition, the company
committed to provide future financing to its customers in connection with
customer purchase agreements for approximately $269 million and $129 million
at December 31, 2001 and 2000, respectively.
89
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
o TAXES
<Table>
<Caption>
(dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
U.S. operations $ 5,386 $ 5,871 $ 5,892
Non-U.S. operations 5,567 5,663 5,865
- --------------------------------------------------------------------------------
$10,953 $11,534 $11,757
================================================================================
</Table>
The provision for income taxes by geographic operations is as follows:
<Table>
<S> <C> <C> <C>
U.S. operations $ 1,455 $ 1,692 $ 2,005
Non-U.S. operations 1,775 1,749 2,040
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 3,230 $ 3,441 $ 4,045
================================================================================
</Table>
The components of the provision for income taxes by taxing jurisdiction are as
follows:
<Table>
<Caption>
(dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal:
Current $ 348 $ 613 $ 1,759
Deferred 341 286 (427)
- --------------------------------------------------------------------------------
689 899 1,332
U.S. state and local:
Current 62 192 272
Deferred 155 47 7
- --------------------------------------------------------------------------------
217 239 279
Non-U.S.:
Current 2,162 2,607 2,727
Deferred 162 (304) (293)
- --------------------------------------------------------------------------------
2,324 2,303 2,434
- --------------------------------------------------------------------------------
Total provision for income taxes 3,230 3,441 4,045
Provision for social security,
real estate, personal
property and other taxes 2,761 2,766 2,831
- --------------------------------------------------------------------------------
Total provision for taxes $ 5,991 $ 6,207 $ 6,876
================================================================================
</Table>
The effect of tax law changes on deferred tax assets and liabilities did not
have a significant effect on the company's effective tax rate.
The significant components of activities that gave rise to deferred tax
assets and liabilities that are recorded on the Consolidated Statement of
Financial Position were as follows:
DEFERRED TAX ASSETS
<Table>
<Caption>
(dollars in millions)
AT DECEMBER 31: 2001 2000
- -------------------------------------------------------------------------
<S> <C> <C>
Employee benefits $ 3,612 $ 3,673
Alternative minimum tax credits 1,282 1,424
Bad debt, inventory and
warranty reserves 907 953
Capitalized research and development 747 848
General business credits 700 655
Deferred income 656 837
Infrastructure reduction charges 466 617
Depreciation 386 376
Foreign tax loss carryforwards 325 489
Equity alliances 290 437
State and local tax loss carryforwards 238 246
Intracompany sales and services 127 149
Other 2,974 2,809
- -------------------------------------------------------------------------
Gross deferred tax assets 12,710 13,513
Less: Valuation allowance 581 572
- -------------------------------------------------------------------------
Net deferred tax assets $12,129 $ 12,941
=========================================================================
DEFERRED TAX LIABILITIES
(dollars in millions)
AT DECEMBER 31: 2001 2000
- -------------------------------------------------------------------------
Retirement benefits $ 3,977 $ 3,447
Sales-type leases 2,159 2,450
Depreciation 971 1,179
Software costs deferred 318 306
Other 1,744 1,836
- -------------------------------------------------------------------------
Gross deferred tax liabilities $ 9,169 $ 9,218
=========================================================================
</Table>
The valuation allowance at December 31, 2001, principally applies to certain
state and local, and foreign tax loss carryforwards that, in the opinion of
management, are more likely than not to expire before the company can use them.
A reconciliation of the company's effective tax rate to the statutory U.S.
federal tax rate is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31: 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Foreign tax differential (5) (6) (2)
State and local 1 1 1
Valuation allowance
related items -- (1) --
Other (1) 1 --
- --------------------------------------------------------------------------------
Effective rate 30% 30% 34%
================================================================================
</Table>
90
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The company's effective rate will change year to year based on
nonrecurring events (such as the sale of the Global Network business and various
other actions in 1999) as well as recurring factors including the geographical
mix of income before taxes, the timing and amount of foreign dividends, state
and local taxes, and the interaction of various global tax strategies. In the
normal course of business, the company expects that its effective rate will
approximate 30 percent.
For tax return purposes, the company has available tax credit
carryforwards of approximately $2,092 million, of which $1,282 million have an
indefinite carryforward period and the remainder begin to expire in 2004. The
company also has state and local, and foreign tax loss carryforwards, the tax
effect of which is $563 million. Most of these carryforwards are available for 5
years or have an indefinite carryforward period.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings were $16,851 million at December 31, 2001, $15,472 million at
December 31, 2000, and $14,900 million at December 31, 1999. These earnings,
which reflect full provision for non-U.S. income taxes, are indefinitely
reinvested in non-U.S. operations or will be remitted substantially free of
additional tax.
p Expense and Other Income
SELLING, GENERAL AND ADMINISTRATIVE
Included in SG&A expense is advertising expense, which includes media, agency
and promotional expenses, of $1,615 million, $1,746 million and $1,758 million
in 2001, 2000 and 1999, respectively. Workforce accruals for contractually
obligated payments to employees terminated in the ongoing course of business
were $293 million, $169 million and $486 million in 2001, 2000 and 1999,
respectively. The provision for bad debt expense in 2001, 2000 and 1999 was $491
million, $271 million and $319 million, respectively.
In 1999, the $4,057 million gain from the sale of the Global Network (see
"Divestitures," on page 82 for additional information) was recorded as a
reduction of SG&A expense and the cost of $1,546 million for the 1999 actions
described in note q, "1999 Actions," was included in SG&A expense.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expense was $5,290 million in 2001, $5,374
million in 2000 and $5,505 million in 1999.
The company had expenses of $4,620 million in 2001, $4,568 million in 2000 and
$4,806 million in 1999 for basic scientific research and the application of
scientific advances to the development of new and improved products and their
uses. Of these amounts, software-related expenses were $1,926 million, $1,956
million and $2,051 million in 2001, 2000 and 1999, respectively. Included in the
expense for 2000 and 1999 are charges for acquired in-process research and
development of $9 million and $111 million, respectively. See note c,
"Acquisitions/Divestitures," on page 82 for further information about that
expense.
Expenses for product-related engineering were $670 million, $806 million
and $699 million in 2001, 2000 and 1999, respectively.
INTELLECTUAL PROPERTY AND CUSTOM DEVELOPMENT
INCOME
The company earned the following intellectual property-related income:
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and other transfers of
intellectual property $ 736 $ 915 $ 628
Licensing/royalty-based fees 515 590 646
Custom development income 284 223 232
- --------------------------------------------------------------------------------
Total $ 1,535 $ 1,728 $ 1,506
================================================================================
</Table>
OTHER INCOME AND EXPENSE
The company recorded interest income (other than from the company's Global
Financing business) of $178 million, $310 million and $416 million in 2001, 2000
and 1999, respectively. Net realized gains/(losses) from sales and other than
temporary declines in market value of securities and other investments were
$(169) million, $265 million and $366 million in 2001, 2000 and 1999,
respectively. Net realized gains from certain real estate activity were $133
million, $222 million and $100 million in 2001, 2000 and 1999, respectively.
Foreign currency transaction gains/(losses) amounted to $198 million, $140
million and $(125) million in 2001, 2000 and 1999, respectively.
q 1999 Actions
TECHNOLOGY GROUP ACTIONS
During 1999, the company implemented actions that were designed to better align
the operations and cost structure of IBM's Technology Group with that group's
strategic direction in view of the competitive environment, overcapacity in the
industry and resulting pricing pressures. The actions affected the
Microelectronics Division (MD), the Storage Technology Division
(STD)--previously known as the Storage Systems Division--and the Networking
Hardware Division (NHD) of the company's Technology Group. The company completed
these actions during the first half of 2000.
In total, the Technology Group actions resulted in a charge of $1,690
million ($1,366 million after tax, or $.73 per diluted common share) as
described below and in the table on page 92.
The actions within MD addressed a prolonged, industry-wide downturn in
memory chip prices that affected the
91
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
results of the company's semiconductor business. They were intended to enable
the company to (1) reconfigure the assets and capabilities of the division to
allow more focus on the faster-growth, higher-margin custom logic portion of
the MD business and (2) enhance its ability to more cost-effectively manage a
partnership agreement that was formed to produce complementary metal oxide
semiconductor (CMOS) based logic components.
The company reduced its internal dynamic random access memory (DRAM)
capacity by converting its manufacturing facility in Essonnes, France, from DRAM
to custom logic. The company effected that conversion through a joint venture
with Infineon Technologies, which at the time was a subsidiary of Siemens AG.
Also related to DRAM, the company executed contracts with various banks and
other financing institutions to sell and lease back test equipment.
The company also participated in a 50/50 joint venture (Dominion
Semiconductor Company) with Toshiba Corporation to produce DRAM memory
components. The company entered into an agreement whereby Toshiba assumed the
company's interest in Dominion effective December 1, 2000. The company
participated in the capacity output of Dominion at a significantly reduced rate
in the interim period.
The company held a majority interest in a joint venture (MiCRUS) with
Cirrus Logic Inc. (the partner) to produce CMOS-based logic components for IBM
and its partner based on contractual capacity agreements. The partner indicated
that it would not require the output capacity that was provided for in the
partnership agreement. The company determined that the most cost-effective
manner in which to address the partner's desire to exit the partnership
agreement was to acquire the minority interest held by that partner and to cut
back production. In the second quarter of 1999, the company accrued related
costs associated with the MiCRUS operations. The liability created was primarily
for lease termination charges for equipment under the MiCRUS operation. Since
June 1999, related activities were under way and were completed in June 2000.
The liabilities accrued in the second quarter of 1999 were utilized during the
second quarter of 2000. In June 2000, the company sold its MiCRUS semiconductor
operations to Philips Semiconductors, an affiliate of Royal Philips
Electronics.
The company also announced aggressive steps intended to improve its
competitive position in the markets that STD serves by merging server hard disk
drive (HDD) product lines and realigning operations. The company integrated all
server HDDs into a single low-cost design platform that uses common development
and manufacturing processes. The company transferred manufacturing assembly and
test operations to Hungary and Mexico and completed these actions by mid-2000.
The actions within NHD relate to a global alliance with Cisco Systems,
Inc. As a result of the announcement of the alliance, demand for the router and
switch products by both existing and new customers deteriorated.
The following table identifies the significant components of the pre-tax
charge related to the 1999 actions and the liability as of December 31, 2001 and
2000:
<Table>
<Caption>
Investments Liability
Total and Other Liability as of
Pre-Tax Asset Write- Created Other Dec. 31,
(dollars in millions) Charges* Downs in 1999 Payments Adjustments** 1999 Payments
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Technology Group
MD Actions:
DRAM
Equipment(1) $ 662 $ 662 $ -- $ -- $ -- $ -- $ --
Employee terminations:(2)(8)
Current 30 -- 30 15 18 33 44
Non current 137 -- 137 -- (21) 116 --
Dominion investment(3) 171 171 -- -- -- -- --
MiCRUS investment(4) 152 -- 152 -- -- 152 152
STD Actions:
Equipment(5) 337 337 -- -- -- -- --
Employee terminations(6) 23 -- 23 16 -- 7 7
NHD Action:
Inventory write-downs and
contract cancellations(7) 178 178 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total 1999 actions $ 1,690 $1,348 $ 342 $ 31 $ (3) $ 308 $ 203
==================================================================================================================
<Caption>
Liability
as of
Other Dec. 31,
(dollars in millions) Adjustments** 2000
- ---------------------------------------------------------
<S> <C> <C>
Technology Group
MD Actions:
DRAM
Equipment(1) $ -- $ --
Employee terminations:(2)(8)
Current 26 15
Non current (30) 86
Dominion investment(3) -- --
MiCRUS investment(4) -- --
STD Actions:
Equipment(5) -- --
Employee terminations(6) -- --
NHD Action:
Inventory write-downs and
contract cancellations(7) -- --
- ---------------------------------------------------------
Total 1999 actions $ (4) $ 101
=========================================================
</Table>
92
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
<Table>
<Caption>
Liability as of Other Liability as of
(dollars in millions) Dec. 31, 2000 Payments Adjustments** Dec. 31, 2001
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DRAM
Employee terminations:(2)(8)
Current $ 15 $ 14 $ 12 $ 13
Non current 86 -- (12) 74
- -----------------------------------------------------------------------------------------------------
Total 1999 actions $ 101 $ 14 $ -- $ 87
=====================================================================================================
</Table>
* WITH THE EXCEPTION OF NHD INVENTORY WRITE-DOWNS, ALL CHARGES WERE RECORDED
IN SG&A EXPENSE. NHD INVENTORY WRITE-DOWNS WERE RECORDED IN HARDWARE COST.
** PRINCIPALLY REPRESENTS RECLASSIFICATION OF NON CURRENT TO CURRENT AND
TRANSLATION ADJUSTMENTS.
(1) REPRESENTS (A) THE DIFFERENCE BETWEEN NET BOOK VALUE AND FAIR VALUE OF
ASSETS THAT WERE CONTRIBUTED TO A JOINT VENTURE, (B) THE BOOK VALUE OF
ASSETS THAT WERE REMOVED FROM SERVICE AS A RESULT OF THE MD ACTIONS AND
WERE SCRAPPED DURING THE SECOND QUARTER OF 1999 AND (C) THE DIFFERENCE
BETWEEN THE NET BOOK VALUE AND THE APPRAISED FAIR VALUE OF TEST EQUIPMENT
THAT IS SUBJECT TO SALE-LEASEBACK AGREEMENTS AND THAT IS BEING USED AND
APPROPRIATELY EXPENSED.
(2) WORKFORCE REDUCTIONS THAT AFFECTED APPROXIMATELY 790 EMPLOYEES (455 DIRECT
MANUFACTURING AND 335 INDIRECT MANUFACTURING) IN FRANCE. THE WORKFORCE
REDUCTIONS WERE COMPLETED BY THE END OF THE FIRST QUARTER OF 2000.
(3) WRITE-OFF OF INVESTMENT IN JOINT VENTURE AT THE SIGNING OF THE AGREEMENT
WITH TOSHIBA CORPORATION.
(4) ACQUISITION OF MINORITY INTEREST IN MICRUS AND CHARGES FOR EQUIPMENT
LEASEHOLD CANCELLATION LIABILITIES AND LEASE RENTAL PAYMENTS FOR IDLE
EQUIPMENT. THE MICRUS SEMICONDUCTOR OPERATION WAS SOLD TO PHILIPS
SEMICONDUCTORS DURING JUNE 2000.
(5) REPRESENTS (A) THE BOOK VALUE OF ASSETS THAT WERE REMOVED FROM SERVICE AS
A RESULT OF THE STD ACTIONS AND WERE SCRAPPED DURING THE SECOND AND THIRD
QUARTERS OF 1999, (B) WRITE-DOWNS TO FAIR VALUE OF EQUIPMENT UNDER
CONTRACT FOR SALE AND DELIVERY BY DECEMBER 1, 1999 ($29 MILLION), AND
MARCH 31, 2000 ($5 MILLION), AND (C) THE DIFFERENCE BETWEEN THE NET BOOK
VALUE AND THE APPRAISED FAIR VALUE OF EQUIPMENT THAT IS SUBJECT TO
SALE-LEASEBACK AGREEMENTS AND THAT IS BEING USED AND APPROPRIATELY
EXPENSED.
(6) WORKFORCE REDUCTIONS THAT AFFECTED APPROXIMATELY 900 EMPLOYEES (780 DIRECT
MANUFACTURING AND 120 INDIRECT MANUFACTURING) IN THE U.S. THE WORKFORCE
REDUCTIONS WERE COMPLETED BY THE END OF THE FIRST QUARTER OF 2000.
(7) WRITE-DOWN TO NET REALIZABLE VALUE OF INVENTORY OF ROUTER AND SWITCH
PRODUCTS ($144 MILLION) AND CONTRACT CANCELLATION FEES ($34 MILLION)
RELATED TO DETERIORATION IN DEMAND FOR ROUTER AND SWITCH PRODUCTS.
(8) THE 2001 YEAR-END AND 2000 AMOUNTS ARE ALSO DISCLOSED IN NOTE l, "OTHER
LIABILITIES," ON PAGES 87 AND 88.
CHANGE IN ESTIMATE
As a result of a change in the estimated useful life of personal computers from
five years to three years, the company recognized a charge in the second quarter
of 1999 of $404 million ($241 million after tax, $.13 per diluted common share).
In the second quarter of 1999, the company wrote off the net book value of
personal computers that were three years old or older and, therefore, had no
remaining useful life. The remaining book value of the assets will be
depreciated over the remaining new useful life. The net effect on future
operations is expected to be minimal as the increased depreciation due to the
shorter life will be offset by the lower depreciable base attributable to the
write-off of personal computers older than three years.
r Earnings Per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings per
share of common stock.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31: 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average number of shares on which earnings per share
calculations are based:
(dollars in millions except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic 1,733,348,422 1,763,037,049 1,808,538,346
Add--incremental shares under stock compensation plans 36,595,476 46,750,030 59,344,849
Add--incremental shares associated with contingently issuable shares 1,277,222 2,331,343 3,190,717
Add--incremental shares associated with put options* 9,479 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Assuming dilution 1,771,230,599 1,812,118,422 1,871,073,912
=================================================================================================================================
</Table>
<Table>
<S> <C> <C> <C>
Net income applicable to common stockholders (millions) $ 7,713 $ 8,073 $ 7,692
Less--net income applicable to contingently issuable shares (millions) 4 21 (11)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income on which diluted earnings per share is calculated (millions) $ 7,709 $ 8,052 $ 7,703
=================================================================================================================================
Earnings per share of common stock:
Assuming dilution $ 4.35 $ 4.44 $ 4.12
Basic $ 4.45 $ 4.58 $ 4.25
</Table>
* REPRESENTS SHORT-TERM PUT OPTION CONTRACTS SOLD BY THE COMPANY ON A
LIMITED BASIS THROUGH PRIVATE PLACEMENTS WITH INDEPENDENT THIRD PARTIES TO
REDUCE THE COST OF THE SHARE BUY-BACK PROGRAM. THE PUT OPTION CONTRACTS
THAT WERE EXECUTED PERMITTED NET SHARE SETTLEMENT AT THE COMPANY'S OPTION
AND DID NOT RESULT IN A PUT OPTION LIABILITY ON THE CONSOLIDATED STATEMENT
OF FINANCIAL POSITION. AT DECEMBER 31, 2001, THE COMPANY DID NOT HAVE ANY
PUT OPTION OBLIGATIONS OUTSTANDING.
93
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Stock options to purchase 67,596,737 common shares in 2001, 34,633,343
common shares in 2000 and 27,355,056 common shares in 1999 were outstanding, but
were not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of the
common shares and, therefore, the effect would have been antidilutive. Net
income applicable to common stockholders excludes preferred stock dividends of
$10 million in 2001 and $20 million in both 2000 and 1999.
s Rental Expense and Lease Commitments
Rental expense, including amounts charged to inventories and fixed assets and
excluding amounts previously reserved, was $1,349 million in 2001, $1,366
million in 2000 and $1,397 million in 1999. The table below depicts gross
minimum rental commitments under noncancelable leases, amounts related to vacant
space associated with infrastructure reduction and restructuring actions taken
through 1993 (previously reserved), and sublease income commitments. These
amounts reflect activities primarily related to office space as well as to
manufacturing equipment.
<Table>
<Caption>
Beyond
(dollars in millions) 2002 2003 2004 2005 2006 2006
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross rental commitments $1,378 $1,129 $798 $625 $437 $1,367
Vacant space $ 121 $ 75 $ 47 $ 42 $ 25 $ 90
Sublease income commitments $ 58 $ 32 $ 25 $ 19 $ 13 $ 36
</Table>
t Stock-based Compensation Plans
The company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock-based compensation plans. A description of the terms of
the company's stock-based compensation plans follows:
LONG-TERM PERFORMANCE PLANS
Incentive awards are provided to employees under the terms of the company's
Long-Term Performance Plans ("the Plans"). The Plans are administered by the
Executive Compensation and Management Resources Committee of the Board of
Directors. The committee determines the type and terms of the awards to be
granted, including vesting provisions.
Awards may include stock options, stock appreciation rights, restricted
stock, cash or stock awards, or any combination thereof. The number of shares
that may be issued under the Plans is 231.6 million. There were 193.4 million
and 121.9 million unused shares available to be granted under the Plans at
December 31, 2001 and 2000, respectively. Awards under the Plans resulted in
compensation expense of $169.8 million, $134.0 million and $267.3 million in
2001, 2000 and 1999, respectively.
STOCK OPTION GRANTS
Stock options are granted to employees at an exercise price equal to the fair
market value of the company's stock at the date of grant. Generally, options
vest 25 percent per year, are fully vested four years from the grant date and
have a term of ten years. The following tables summarize option activity under
the Plans during 2001, 2000 and 1999:
<Table>
<Caption>
2001 2000 1999
------------------------ ------------------------ -------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise No. of Shares Exercise No. of Shares Exercise No. of Shares
Price Under Option Price Under Option Price Under Option
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 73 160,557,003 $ 60 146,136,523 $ 36 131,443,850
Options granted 110 43,410,364 102 42,601,014 115 42,786,845
Options exercised 37 (20,354,701) 35 (18,243,347) 28 (23,160,228)
Options canceled/expired 100 (5,656,176) 87 (9,937,187) 61 (4,933,944)
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 85 177,956,490 $ 73 160,557,003 $ 60 146,136,523
================================================================================================================
Exercisable at December 31 $ 62 80,773,980 $ 45 66,599,878 $ 29 51,599,735
================================================================================================================
</Table>
94
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The shares under option at December 31, 2001, were in the following exercise
price ranges:
<Table>
<Caption>
Options Outstanding Options Currently Exercisable
------------------------------------------------- -------------------------------
Wtd. Avg.
Remaining
Wtd. Avg. Contractual Wtd. Avg.
Exercise Price Range Exercise Price No. of Options Life (in years) Exercise Price No. of Options
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 12--50 $ 28 35,220,555 4 $ 28 34,918,554
$ 51--90 63 38,048,214 6 60 24,215,708
$ 91--110 104 53,168,401 9 105 9,934,212
$ 111 and over 122 51,519,320 9 131 11,705,506
- --------------------------------------------------------------------------------------------------------------------
$ 85 177,956,490 7 $ 62 80,773,980
====================================================================================================================
</Table>
IBM EMPLOYEES STOCK PURCHASE PLAN
The IBM Employees Stock Purchase Plan (ESPP) enables substantially all regular
employees to purchase full or fractional shares of IBM common stock through
payroll deductions of up to 10 percent of eligible compensation. Effective July
1, 2000, ESPP was amended whereby the share price paid by an employee changed
from 85 percent of the average market price on the last business day of each pay
period, to the lesser of 85 percent of the average market price on the first
business day of each offering period or 85 percent of the average market price
on the last business day of each pay period. The current plan provides
semi-annual offerings over the five-year period commencing July 1, 2000. ESPP
participants are restricted from purchasing more than $25,000 of common stock in
one calendar year or 1,000 shares in an offering period. This change is not
expected to have a significant effect on the company's financial condition.
Approximately 16.5 million, 26.3 million and 57.3 million reserved unissued
shares were available for purchase under ESPP at Decem ber 31, 2001, 2000 and
1999, respectively.
PRO FORMA DISCLOSURE
In accordance with APB Opinion No. 25, the company does not recognize expense
for stock options granted under the Plans or for employee stock purchases
under the ESPP. SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires a company to determine the fair market value of all awards of
stock-based compensation at the grant date and to disclose pro forma net
income and earnings per share as if the resulting stock-based compensation
amounts were recorded in the Consolidated Statement of Earnings. The table
below presents these pro forma disclosures:
<Table>
<Caption>
2001 2000 1999
------------------------- ------------------------- -------------------------
(dollars in millions except per share amounts) As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable to common
stockholders $ 7,713 $ 6,474 $ 8,073 $ 7,183 $ 7,692 $ 7,044
Earnings per share of common stock:
Assuming dilution $ 4.35 $ 3.69 $ 4.44 $ 3.99 $ 4.12 $ 3.78
Basic $ 4.45 $ 3.74 $ 4.58 $ 4.07 $ 4.25 $ 3.89
</Table>
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that was earned for the years
ended December 31, 2001, 2000 and 1999.
The fair market value of stock option grants is estimated using the
Black-Scholes option-pricing model with the following assumptions:
<Table>
<Caption>
2001 2000 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Term (years)* 4/5 4/5 5/6
Volatility** 37.7% 32.0% 27.3%
Risk-free interest rate (zero coupon U.S. treasury note) 4.4% 5.1% 6.6%
Dividend yield 0.5% 0.5% 0.4%
Weighted-average fair value per option $ 42 $ 36 $ 46
</Table>
* Option term is 4 years for tax incentive options and 5 years for non-tax
incentive options for the years ended December 31, 2001 and 2000. Option
term is 5 years for tax incentive options and 6 years for non-tax
incentive options for the year ended December 31, 1999.
** To determine volatility, the company measured the daily price changes of
the stock over the respective term for tax incentive options and non-tax
incentive options.
95
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
u Retirement-related Benefits
IBM offers defined benefit pension plans, defined contribution pension plans and
nonpension postretirement plans, primarily consisting of retiree medical
benefits. These benefits form an important part of the company's total
compensation and benefits program that is designed to attract and retain highly
skilled and talented employees. The following table provides the total
retirement-related benefit plans impact on income before income taxes.
<Table>
<Caption>
U.S. Non-U.S. Total
--------------------------- ------------------------- ---------------------------
(dollars in millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total retirement-related
plans--(income)/cost $(256) $(156) $ 47 $(181) $(171) $36 $(437) $(327) $ 83
============================================================================================================================
Comprises:
Defined benefit and
contribution pension plans $(632) $(530) $(295) $(209) $(198) $ 7 $(841) $(728) $(288)
Nonpension postretirement
benefits 376 374 342 28 27 29 404 401 371
</Table>
See Management Discussion on pages 62 and 63 for additional discussion
regarding the company's retirement-related benefits. Also see note a,
"Significant Accounting Policies," pages 76 and 77 for the company's
accounting policy regarding retirement-related benefits.
DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS
The company and its subsidiaries have defined benefit and defined contribution
pension plans that cover substantially all regular employees, and supplemental
retirement plans that cover certain executives.
U.S. PLANS
IBM provides U.S. regular, full-time and part-time employees with a
noncontributory plan that is funded by company contributions to an irrevocable
trust fund, which is held for the sole benefit of participants.
Effective January 1, 2001, the company increased pension benefits to
certain recipients who retired before January 1, 1997. The increases range from
2.5 percent to 25 percent, and are based on the year of retirement and the
pension benefit currently being received. This improvement resulted in an
additional cost to the company of approximately $100 million in 2001.
Effective July 1, 1999, the company amended the IBM Retirement Plan to
establish the IBM Personal Pension Plan (PPP). The new plan establishes a new
formula for determining pension benefits for many of the company's employees.
Under the amended PPP, a new formula was created whereby retirement benefits are
credited to each employee's cash balance account monthly based on a percentage
of the employee's pensionable compensation. Employees who were retirement
eligible or within five years of retirement eligibility with at least one year
of service, or who were at least forty years of age with at least ten years of
service as of June 30, 1999, could elect to participate under the new formula or
to have their service and earnings credit accrue under the preexisting benefit
formula. Benefits become vested on the completion of five years of service under
either formula.
The number of individuals receiving benefits from the PPP at December 31,
2001 and 2000, was 131,071 and 129,290, respectively. Net periodic pension
income for this plan for the years ended December 31, 2001, 2000 and 1999, was
$1,025 million, $896 million and $638 million, respectively. Although these
pension income amounts represent a contribution to the company's income before
income taxes, these amounts are partially offset by the costs of the company's
other retirement-related plans (see table above). Moreover, these amounts have
positive implications for the company's employees, retirees and shareholders.
The returns that the fund has experienced over time have resulted in these
benefits. Therefore, despite the recent downturn in the equity and financial
markets, the trust funds continued to provide the capacity to meet their
obligations to current and future retirees.
U.S. regular, full-time and part-time employees are eligible to
participate in the Tax Deferred Savings Plan 401(k) (TDSP), which is a qualified
voluntary defined contribution plan. The company matches 50 percent of the
employee's contribution up to the first 6 percent of the employee's
compensation. All contributions, including the company match, are made in cash
in accordance with the participants' investment elections. There are no minimum
amounts that must be invested in
96
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
company stock. The total cost of all of the company's U.S. defined
contribution plans was $313 million, $294 million and $275 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
NON-U.S. PLANS
Most subsidiaries and branches outside the U.S. have defined benefit and/or
defined contribution retirement plans that cover substantially all regular
employees, under which the company deposits funds under various fiduciary-type
arrangements, purchases annuities under group contracts or provides reserves.
Benefits under the defined benefit plans are typically based on years of service
and the employee's compensation, generally during a fixed number of years
immediately before retirement. The ranges of assumptions that are used for the
non-U.S. defined benefit plans reflect the different economic environments
within various countries. The total non-U.S. retirement plan (income)/cost of
these plans for the years ended December 31, 2001, 2000 and 1999, was $(209)
million, $(198) million and $7 million, respectively.
U.S. SUPPLEMENTAL EXECUTIVE RETENTION PLAN
The company also has a non qualified U.S. Supplemental Executive Retention
Plan (SERP). The SERP, which is unfunded, provides defined pension benefits
outside the IBM Retirement Plan to eligible executives, based on average
earnings, years of service and age at retirement. Effective July 1, 1999, the
company adopted the Supplemental Executive Retention Plan (which replaced the
previous Supplemental Executive Retirement Plan). Some participants of the
pre-existing SERP will still be eligible for benefits under that plan, but
will not be eligible for the new plan. The total cost of this plan for the
years ended December 31, 2001, 2000 and 1999, was $23 million, $24 million
and $30 million, respectively. These amounts are reflected in Cost of other
defined benefit plans below. At December 31, 2001 and 2000, the projected
benefit obligation was $166 million and $163 million, respectively, and the
amounts included in Other liabilities in the Consolidated Statement of
Financial Position were pension liabilities of $151 million and $131 million,
respectively.
(INCOME)/COST OF PENSION PLANS:
<Table>
<Caption>
U.S. Plans Non-U.S. Plans
--------------------------------- ---------------------------------
(dollars in millions) 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 613 $ 563 $ 566 $ 429 $ 445 $ 475
Interest cost 2,624 2,553 2,404 1,214 1,234 1,282
Expected return on plan assets (4,202) (3,902) (3,463) (2,062) (2,042) (1,937)
Amortization of transition assets (140) (141) (140) (10) (10) (11)
Amortization of prior service cost 80 31 (21) 28 24 25
Recognized actuarial losses/(gains) -- -- 16 (12) 4 28
Settlement gains -- -- -- (12) (25) (23)
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension income--U.S. Plan
and material non-U.S. Plans $(1,025) $ (896) $ (638) $ (425) $ (370) $ (161)
Cost of other defined benefit plans 80 72 68 54 23 37
- ---------------------------------------------------------------------------------------------------------------------------
Total net periodic pension income for
all defined benefit plans $ (945) $ (824) $ (570) $ (371) $ (347) $ (124)
- ---------------------------------------------------------------------------------------------------------------------------
Cost of defined contribution plans $ 313 $ 294 $ 275 $ 162 $ 149 $ 131
- ---------------------------------------------------------------------------------------------------------------------------
Total retirement plan (income) cost recognized
in the Consolidated Statement of Earnings $ (632) $ (530) $ (295) $ (209) $ (198) $ 7
===========================================================================================================================
</Table>
See beginning of note u, "Retirement-Related Benefits," on page 96 for the
company's total retirement-related benefits (income)/cost.
97
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The changes in the benefit obligations and plan assets of the U.S. and
significant non-U.S. defined benefit plans for 2001 and 2000 were as follows:
<Table>
<Caption>
U.S. Plan Non-U.S. Plans
----------------------- ----------------------
(dollars in millions) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 37,539 $ 34,434 $ 21,150 $ 21,770
Service cost 613 563 429 445
Interest cost 2,624 2,553 1,214 1,234
Plan participants' contributions -- -- 27 28
Acquisitions/divestitures, net (29) 36 22 (65)
Amendments -- 645 8 63
Actuarial losses 457 1,729 1,101 243
Benefits paid from trust (2,595) (2,421) (748) (728)
Direct benefit payments -- -- (198) (218)
Foreign exchange impact -- -- (1,184) (1,626)
Plan curtailments/settlements/termination benefits -- -- (20) 4
- --------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 38,609 37,539 21,801 21,150
- --------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 44,594 45,584 24,833 27,843
Actual return on plan assets (2,405) 1,395 (1,559) (196)
Employer contribution -- -- 417 66
Acquisitions/divestitures, net (29) 36 -- (50)
Plan participants' contributions -- -- 27 28
Benefits paid from trust (2,595) (2,421) (748) (728)
Foreign exchange impact -- -- (1,376) (2,015)
Settlements -- -- (63) (115)
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 39,565 44,594 21,531 24,833
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets in excess of benefit
obligation 956 7,055 (270) 3,683
Unrecognized net actuarial losses/(gains) 4,297 (2,768) 2,871 (1,860)
Unrecognized prior service costs 803 883 140 168
Unrecognized net transition asset (351) (491) (42) (56)
Adjustment to recognize non-U.S. minimum liability -- -- (462) (90)
- --------------------------------------------------------------------------------------------------------------
Net prepaid pension asset recognized in the
Consolidated Statement of Financial Position $ 5,705 $ 4,679 $ 2,237 $ 1,845
==============================================================================================================
</Table>
Actuarial assumptions used to determine costs and benefit obligations for
principal pension plans follow:
<Table>
<Caption>
U.S. Plan Non-U.S. Plans
WEIGHTED-AVERAGE ACTUARIAL ---------------------------- -----------------------------------
ASSUMPTIONS AS OF DECEMBER 31: 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.0% 7.25% 7.75% 4.5-7.1% 4.5-7.1% 4.5-7.3%
Expected return on plan assets 10.0% 10.0% 9.5% 5.0-10.0% 5.0-11.0% 6.0-10.5%
Rate of compensation increase 6.0% 6.0% 6.0% 2.0-6.1% 2.6-6.1% 2.6-6.1%
</Table>
98
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The company evaluates its actuarial assumptions on an annual basis and
considers changes in these long-term factors based upon market conditions and
the requirements of SFAS No. 87, "Employers' Accounting for Pensions."
The change in the discount rate for the 2001 U.S. plan year had an effect
of an additional $9 million of net retirement plan cost for the year ended
December 31, 2001. The change in expected return on plan assets and the discount
rate for the 2000 U.S. plan year had an effect of an additional $195 million and
$26 million of net retirement plan income, respectively, for the year ended
December 31, 2000. This compares with an additional $46 million and $65 million
of net retirement plan cost for the year ended December 31, 1999, as a result of
plan year 1999 changes in the rate of compensation increase and the discount
rate, respectively.
FUNDING POLICY
It is the company's practice to fund amounts for pensions sufficient to meet the
minimum requirements set forth in applicable employee benefits laws and local
tax laws. From time to time, the company contributes additional amounts as it
deems appropriate. Liabilities for amounts in excess of these funding levels are
accrued and reported in the company's Consolidated Statement of Financial
Position. The assets of the various plans include corporate equities, government
securities, corporate debt securities and real estate.
OTHER
As described earlier in this note, the company provides defined benefit pension
plans in a number of countries. Page 98 includes an aggregation of the
significant non-U.S. plans. SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," requires that companies disclose the
aggregate benefit obligation (BO) and plan assets of all plans in which the BO
exceeds plan assets. Similar disclosure is required for all plans in which the
accumulated benefit obligation (ABO) exceeds plan assets. BO reflects the
present value of the pension obligation assuming salary increases and is
included in the table on the top of page 98. The ABO reflects this obligation
based upon current salary levels (i.e., no salary increases). Accordingly, the
ABO is a subset of the BO and the plans listed under the Plans with an ABO in
excess of plan assets are also included in the amounts for Plans with a BO in
excess of plan assets. The aggregate BO and plan assets are also disclosed for
plans in which the plan assets exceed the BO.
<Table>
<Caption>
2001 2000
----------------------------- -----------------------------
BENEFIT PLAN Benefit Plan
(dollars in millions) OBLIGATION ASSETS Obligation Assets
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plans with BO in excess
of plan assets $ 12,358 $ 10,929 $ 4,209 $ 3,919
Plans with ABO
in excess of plan
assets $ 3,041 $ 2,636 $ 530 $ 400
Plans with assets
in excess of BO $ 9,443 $ 10,602 $ 16,941 $ 20,915
</Table>
NONPENSION POSTRETIREMENT BENEFITS
The total cost of the company's nonpension post retirement benefits for the
years ended December 31, 2001, 2000 and 1999, were $404 million, $401 million
and $371 million, respectively. The company has a defined benefit
postretirement plan that provides medical, dental and life insurance for U.S.
retirees and eligible dependents. The total cost of this plan for the years
ended December 31, 2001, 2000 and 1999, was $376 million, $374 million and
$342 million, respectively. Effective July 1, 1999, the company established a
"Future Health Account (FHA) Plan" for employees who were more than five
years away from retirement eligibility. Employees who were within five years
of retirement eligibility are covered under the company's prior retiree
health benefits plan. Under either the FHA or the preexisting plan, there is
a maximum cost to the company for retiree health care. For employees who
retired before January 1, 1992, that maximum became effective in 2001. For
all other employees, the maximum is effective upon retirement.
Certain of the company's non-U.S. subsidiaries have similar plans for
retirees. However, most of the retirees outside the U.S. are covered by
government-sponsored and administered programs. The total cost of these plans
for the years ended December 31, 2001, 2000 and 1999, was $28 million, $27
million and $29 million, respectively. At December 31, 2001 and 2000, Other
liabilities in the Consolidated Statement of Financial Position include non-U.S.
postretirement benefit liabilities of $200 million and $208 million,
respectively.
99
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
The net periodic postretirement benefit cost for the U.S. plan for the
years ended December 31 include the following components:
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 65 $ 50 $ 48
Interest cost 437 449 424
Expected return on
plan assets -- (2) (6)
Amortization of
prior service costs (148) (147) (143)
Recognized actuarial losses 22 24 19
- --------------------------------------------------------------------------------
Net periodic post-
retirement benefit cost $ 376 $ 374 $ 342
================================================================================
</Table>
The changes in the benefit obligation and plan assets of the U.S. plan for 2001
and 2000 are as follows:
<Table>
<Caption>
(dollars in millions) 2001 2000*
- --------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,443 $ 6,178
Service cost 65 50
Interest cost 437 449
Actuarial (gains)/losses (183) 363
Participant contributions 71 23
Benefits paid from trust (68) (110)
Direct benefit payments (617) (510)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 6,148 6,443
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 4 105
Actual return on plan assets 1 (14)
Participant contributions 71 23
Benefits paid (68) (110)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 8 4
- --------------------------------------------------------------------------------
Benefit obligation in excess
of plan assets (6,140) (6,439)
Unrecognized net actuarial losses 781 986
Unrecognized prior service costs (653) (801)
- --------------------------------------------------------------------------------
Accrued postretirement benefit
liability recognized in the
Consolidated Statement
of Financial Position $(6,012) $ (6,254)
================================================================================
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
The plan assets primarily comprise short-term fixed-income investments.
The benefit obligation was determined by applying the terms of medical,
dental and life insurance plans, including the effects of established maximums
on covered costs, together with relevant actuarial assumptions. These actuarial
assumptions include a projected health care cost trend rate of 6 percent. The
projected health care cost trend rate assumption is projected to increase to 10
percent in 2002, and is assumed to decrease gradually to 5 percent by 2007 and
remain constant thereafter.
<Table>
<Caption>
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
FOR NON-PENSION POSTRETIREMENT
BENEFIT PLANS AS OF DECEMBER 31: 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.00% 7.25% 7.75%
Expected return on
plan assets 5.0% 5.0% 5.0%
</Table>
The company evaluates its actuarial assumptions on an annual basis and considers
changes in these long-term factors based upon market conditions and the
requirements of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The discount rate changes did not have a material effect
on net postretirement benefit cost for the years ended December 31, 2001, 2000
and 1999.
The health care cost trend rate has an insignificant effect on plan costs
and obligations. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects at December 31, 2001:
<Table>
<Caption>
One-Percentage- One-Percentage-
(dollars in millions) Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and
interest cost $ 6 $ (6)
Effect on postretirement
benefit obligation $ 24 $(29)
</Table>
v Segment Information
IBM uses advanced I/T to provide customer solutions. The company operates
primarily in a single industry using several segments that create value by
offering a variety of solutions that include, either singularly or in some
combination, technologies, systems, products, services, software and financing.
Organizationally, the company's major operations comprise a Global
Services segment; three hardware product segments--Enterprise Systems,
Personal and Printing Systems, and Technology; a Software segment; a Global
Financing segment; and an Enterprise Investments segment. The segments are
determined based on several factors, including customer base, homogeneity of
products, technology and delivery channels.
The Global Services segment is the world's largest I/T services provider,
supporting computer hardware and software products and providing professional
services to help customers of all sizes realize the full value of I/T. The
segment provides value through three primary lines of business: Strategic
Outsourcing Services, BIS and Integrated Technology Services. Strategic
Outsourcing Services creates business value through long-term strategic
partnerships with
100
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
customers by taking on responsibility for their processes and systems. BIS
provides business/industry consulting and end-to-end e-business
implementation of such offerings as Supply Chain Management, Customer
Relationship Management, Enterprise Resource Planning and Business
Intelligence. Integrated Technology Services offers customers a single I/T
partner to manage multivendor I/T systems' complexity in today's e-business
environment including such traditional offerings as Product Support, Business
Recovery Services, Site and Connectivity Services, and Systems Management and
Networking Services. Learning Services supports the three primary lines of
business and helps customers design, develop and deploy curricula to educate
their employees. The Global Services segment is uniquely suited to integrate
the full range of the company's and key industry participants' capabilities,
including hardware, software, services and research.
The Enterprise Systems segment produces powerful multipurpose computer
servers that operate many open-network-based applications simultaneously for
multiple users. They perform high-volume transaction processing and serve data
to personal systems and other end-user devices. The servers are the engines
behind the bulk of electronic business transactions, including e-commerce.
Brands include the zSeries mainframe servers, the heart of the e-business
infrastructure for mission-critical data and transaction processing, the pSeries
servers, the most powerful technologically advanced UNIX servers, the iSeries
mid-range servers, integrated mid-range business servers that run sophisticated
business applications and the Intel-based xSeries servers. The segment also
includes system-level product businesses such as the company's disk storage
products, including the Enterprise Storage Server known as "Shark," tape
subsystems and the company's storage area networking products.
In the first quarter of 2001, the company reorganized the Personal Systems
segment and renamed it the Personal and Printing Systems segment. In accordance
with the organizational change, the company transferred the Printing Systems
Division from the Technology segment to the Personal and Printing Systems
segment. In addition, the xSeries (Intel-based) servers were transferred to the
Enterprise Systems segment from the Personal Systems segment. The Personal and
Printing Systems segment produces general-purpose computer systems, advanced
function printers, and point-of-sale solutions. Major business units include
Personal Computers, Retail Store Solutions, and Printing Systems. Major brands
include ThinkPad mobile systems and NetVista.
The Technology segment provides components such as semiconductors and HDDs
for use in the company's products and for sale to original equipment
manufacturers (OEM). Major business units include Microelectronics and Storage
Technology.
The Software segment delivers operating systems for the company's servers
and e-business enabling software (middleware) for IBM and non-IBM platforms. The
segment's business offerings align with key customer opportunity
areas--transformation and integration, leveraging information, organizational
effectiveness and managing technology. In addition to its own development,
product and marketing effort, the segment supports 56,000 business partners to
ensure that the company's software and hardware offerings are included in their
solutions.
The Global Financing segment is the world's largest provider of financing
services for I/T. The segment provides lease and loan financing that enables the
company's customers to acquire complete I/T and e-business solutions--hardware,
software and services--provided by the company and its business partners. Global
Financing, as a reliable source of capital for the distribution channel, also
provides the company's business partners with customized commercial financing
for inventory, accounts receivable and term loans, helping them manage their
cash flow, invest in infrastructure and grow their business. Global Financing
also selectively participates in syndicated loan activities.
The Enterprise Investments segment provides industry- specific I/T
solutions, supporting the Hardware, Software and Global Services segments of
the company. The segment develops unique products designed to meet specific
marketplace requirements and to complement the company's overall portfolio of
products. Enterprise Investments revenue is primarily derived from the sale
of software products.
Segment revenue and pre-tax income include transactions between the
segments that are intended to reflect an arm's-length transfer price.
Specifically, semiconductors and HDDs are sourced internally from the Technology
segment for use in the manufacture of the Enterprise Systems segment and
Personal and Printing Systems segment products. In addition, technology,
hardware and software that are used by the Global Services segment in
outsourcing engagements are mostly sourced internally from the Enterprise
Systems, Personal and Printing Systems and Software segments. For the internal
use of I/T services, the Global Services segment recovers cost, as well as a
reasonable fee reflecting the arm's-length value of providing the services. The
Global Services segment enters into arm's-length leases at prices equivalent to
market rates with the Global Financing segment to facilitate the acquisition of
equipment used in outsourcing engagements. Generally, all internal transaction
prices are reviewed and reset annually if appropriate.
The company uses shared-resources concepts to realize economies of scale
and efficient use of resources. Thus, a
101
<PAGE>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
considerable amount of expense is shared by all of the company's segments.
This expense represents sales coverage, marketing and support functions such
as Accounting, Treasury, Procure ment, Legal, Human Resources, and Billing
and Collections. Where practical, shared expenses are allocated based on
measurable drivers of expense, e.g., headcount. When a clear and measurable
driver cannot be identified, shared expenses are allocated on a financial
basis that is consistent with the company's management system; e.g., image
advertising is allocated based on the gross profit of the segments. The
unallocated corporate amounts arising from certain acquisitions, indirect
infrastructure reductions and certain intellectual property income are
recorded in net income but are not allocated to the segments.
The following tables reflect the results of the segments consistent with
the company's management system. These results are not necessarily a depiction
that is in conformity with generally accepted accounting principles; e.g.,
employee retirement plan costs are developed using actuarial assumptions on a
country-by-country basis and allocated to the segments on headcount. Different
amounts could result if actuarial assumptions that are unique to the segment
were used. Perform a nce measurement is based on income before income taxes
(pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments. The results for 2000 and 1999 have been reclassified to reflect the
organizational changes and product transfers made in 2001.
MANAGEMENT SYSTEM SEGMENT VIEW
<Table>
<Caption>
Hardware
-----------------------------------
Personal
Global Enterprise and Printing Global Enterprise Total
(dollars in millions) Services Systems Systems Technology Software Financing Investments Segments
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2001:
- -----------------------------------------------------------------------------------------------------------------------------
External revenue $34,956 $ 13,743 $ 11,982 $ 7,970 $ 12,939 $ 3,407 $ 1,118 $ 86,115
Internal revenue 2,647 710 73 2,325 981 836 4 7,576
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue $37,603 $ 14,453 $ 12,055 $ 10,295 $ 13,920 $ 4,243 $ 1,122 $ 93,691
=============================================================================================================================
Pre-tax income (loss) $ 5,161 $ 1,830 $ (153) $ (374) $ 3,168 $ 1,143 $ (317) $ 10,458
=============================================================================================================================
Revenue year-to-year change 5.7% (2.6)% (20.5)% (10.7)% 3.7% (4.5)% (18.2)% (2.8)%
Pre-tax income year-
to-year change 14.3% (4.8)% (251.5)% (155.1)% 13.4% (2.8)% (6.7)% (4.0)%
Pre-tax income margin 13.7% 12.7% (1.3)% (3.6)% 22.8% 26.9% (28.3)% 11.2%
2000*:
- -----------------------------------------------------------------------------------------------------------------------------
External revenue $33,152 $ 14,194 $ 15,098 $ 8,519 $ 12,598 $ 3,500 $ 1,369 $ 88,430
Internal revenue 2,439 649 70 3,007 828 944 3 7,940
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue $35,591 $ 14,843 $ 15,168 $ 11,526 $ 13,426 $ 4,444 $ 1,372 $ 96,370
=============================================================================================================================
Pre-tax income (loss) $ 4,517 $ 1,922 $ 101 $ 679 $ 2,793 $ 1,176 $ (297) $ 10,891
=============================================================================================================================
Revenue year-to-year change 2.2% 3.1% (3.0)% (2.3)% 0.0% 9.6% (17.8)% 0.6%
Pre-tax income year-
to-year change 1.2% 21.3% 304.0% 51.2% (9.9)% 12.3% 57.4% 9.2%
Pre-tax income margin 12.7% 12.9% 0.7% 5.9% 20.8% 26.5% (21.6)% 11.3%
1999*:
- -----------------------------------------------------------------------------------------------------------------------------
External revenue $32,172 $ 13,834 $ 15,593 $ 8,026 $ 12,662 $ 3,219 $ 1,651 $ 87,157
Internal revenue 2,636 568 45 3,774 767 835 19 8,644
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue $34,808 $ 14,402 $ 15,638 $ 11,800 $ 13,429 $ 4,054 $ 1,670 $ 95,801
=============================================================================================================================
Pre-tax income (loss) $ 4,464 $ 1,584 $ 25 $ 449 $ 3,099 $ 1,047 $ (697) $ 9,971
=============================================================================================================================
Pre-tax income margin 12.8% 11.0% 0.2% 3.8% 23.1% 25.8% (41.7)% 10.4%
</Table>
* Reclassified to conform with 2001 presentation.
102
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
RECONCILIATIONS TO IBM AS REPORTED
<Table>
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Total reportable segments $ 93,691 $ 96,370 $ 95,801
Other revenue and
adjustments (249) (34) 391
Elimination of internal
revenue (7,576) (7,940) (8,644)
- --------------------------------------------------------------------------------
Total IBM consolidated $ 85,866 $ 88,396 $ 87,548
================================================================================
<Caption>
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax income:
Total reportable segments $ 10,458 $ 10,891 $ 9,971
Elimination of internal
transactions 108 62 (47)
Sale of Global Network -- -- 4,057
1999 actions -- -- (2,205)
Unallocated corporate
amounts 387 581 (19)
- --------------------------------------------------------------------------------
Total IBM consolidated $ 10,953 $ 11,534 $ 11,757
================================================================================
</Table>
IMMATERIAL ITEMS
INVESTMENT IN EQUITY ALLIANCES AND EQUITY ALLIANCES GAINS/LOSSES
The investments in equity alliances and the resulting gains and losses from
these investments that are attributable to the segments do not have a
significant effect on the financial position or the financial results of the
segments.
SEGMENT ASSETS AND OTHER ITEMS
The Global Services assets primarily are accounts receivable, maintenance
inventory, and plant, property and equipment including those associated with the
segment's outsourcing business. The assets of the Hardware segments primarily
are inventory and plant, property and equipment. The Software segment assets
mainly are plant, property and equipment, and investment in capitalized
software.
To accomplish the efficient use of the company's space and equipment, it
usually is necessary for several segments to share plant, property and equipment
assets. Where assets are shared, landlord ownership of the assets is assigned to
one segment and is not allocated to each user segment. This is consistent with
the company's management system and is reflected accordingly in the schedule on
page 104. In those cases, there will not be a precise correlation between
segment pre-tax income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on
the assigned landlord ownership and may not be consistent with the amounts that
are included in the segments' pre-tax income. The amounts that are included in
pre-tax income reflect occupancy charges from the landlord segment and are not
specifically identified by the management reporting system.
Capital expenditures that are reported by each segment also are in line
with the landlord ownership basis of asset assignment.
The Global Financing segment amounts on page 104 for Interest income
and Cost of Global Financing interest expense reflect the interest income and
interest expense associated with the Global Financing business, as well as
the income from the investment in cash and marketable securities. The
reconciliation and explanation of the difference between Cost of Global
Financing and Interest expense for segment presentation versus presentation
on the Statement of Consolidated Earnings are included on pages 66 and 67 of
the Management Discussion.
The segment information for 2000 and 1999 has been reclassified to reflect
the organizational changes and product transfers
between the segments in 2001.
103
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
MANAGEMENT SYSTEM SEGMENT VIEW
<Table>
<Caption>
Hardware
-------------------------------------
Personal
Global Enterprise and Printing Global Enterprise Total
(dollars in millions) Services Systems Systems Technology Software Financing Investments Segments
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2001:
- --------------------------------------------------------------------------------------------------------------------------
Assets $10,340 $3,208 $1,904 $9,136 $3,356 $36,670 $106 $64,720
Depreciation/amortization 1,219 308 131 1,105 782 2,476 8 6,029
Capital expenditures/
investment in software 1,519 390 128 1,855 839 3,143 7 7,881
Interest income -- -- -- -- -- 2,941 -- 2,941
Cost of Global Financing
interest expense -- -- -- -- -- 1,140 -- 1,140
2000*:
- --------------------------------------------------------------------------------------------------------------------------
Assets $10,492 $3,451 $2,448 $9,316 $2,488 $40,822 $246 $69,263
Depreciation/amortization 1,243 425 154 1,060 665 2,696 12 6,255
Capital expenditures/
investment in software 1,311 325 180 1,744 770 2,898 9 7,237
Interest income -- -- -- -- -- 3,051 -- 3,051
Cost of Global Financing
interest expense -- -- -- -- -- 1,319 -- 1,319
1999*:
- --------------------------------------------------------------------------------------------------------------------------
Assets $ 9,312 $3,788 $1,691 $9,187 $2,527 $39,686 $369 $66,560
Depreciation/amortization 1,259 234 149 2,077 576 2,976 15 7,286
Capital expenditures/
investment in software 1,292 363 163 1,792 656 3,217 12 7,495
Interest income -- -- -- -- -- 2,961 -- 2,961
Cost of Global Financing
interest expense -- -- -- -- -- 1,232 -- 1,232
</Table>
* Reclassified to conform with 2001 presentation
<Table>
<Caption>
RECONCILIATIONS TO IBM AS REPORTED
(dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Total reportable segments $ 64,720 $ 69,263 $ 66,560
Elimination of internal transactions (4,884) (5,300) (5,776)
Unallocated amounts:
Cash and marketable securities 5,313 2,268 4,563
Notes and accounts receivable 2,810 3,145 2,658
Deferred tax assets 4,624 5,498 5,428
Plant, other property
and equipment 3,260 3,798 4,161
Pension assets 9,408 6,809 5,636
Other 3,062 2,868 4,265
- ------------------------------------------------------------------------
Total IBM consolidated $ 88,313 $ 88,349 $ 87,495
========================================================================
</Table>
104
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
Revenue by Classes of Similar Products or Services
For the Personal and Printing Systems, Software and Global Financing segments,
the segment data on page 102 represents the revenue contributions from the
products that are contained in the segments and that are basically similar in
nature. The following table provides external revenue for similar classes of
products within the Technology, Enterprise Systems and Global Services segments.
The Technology segment's OEM hardware comprises revenue primarily from the sale
of HDD storage files, semiconductors and display devices. Other technology is
primarily design services for OEM customers. The Enterprise Systems segment's
storage comprises revenue from the Enterprise Storage Server ("Shark"), other
disk storage products and tape subsystems.
<Table>
<Caption>
Consolidated
(dollars in millions) 2001 2000* 1999*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology:
OEM $ 7,624 $ 8,229 $ 7,740
Other technology 346 290 286
Enterprise Systems:
Servers $10,947 $11,497 $11,024
Storage 2,755 2,539 2,381
Networking products 41 158 429
Global Services:
Services $29,953 $28,036 $27,035
Maintenance 5,003 5,116 5,137
- --------------------------------------------------------------------------------
</Table>
* RECLASSIFIED TO CONFORM WITH 2001 PRESENTATION.
MAJOR CUSTOMERS
No single customer represents 10 percent or more of the company's total revenue.
<Table>
<Caption>
GEOGRAPHIC INFORMATION
Revenue* Long-lived Assets**
--------------------------- ---------------------------
(dollars in millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $35,215 $37,216 $37,171 $23,028 $21,449 $19,309
Japan 11,514 12,128 10,411 4,034 4,319 4,710
Other countries 39,137 39,052 39,966 9,572 10,029 10,259
- --------------------------------------------------------------------------------
Total $85,866 $88,396 $87,548 $36,634 $35,797 $34,278
================================================================================
</Table>
* REVENUE IS ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF CUSTOMER.
**INCLUDES ALL NON CURRENT ASSETS EXCEPT NON CURRENT FINANCIAL INSTRUMENTS AND
DEFERRED TAX ASSETS.
105
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
<Table>
<Caption>
(dollars in millions except per share amounts)
FOR THE YEAR: 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 85,866 $ 88,396 $ 87,548 $ 81,667 $ 78,508
Net income 7,723 8,093 7,712 6,328 6,093
Per share of common stock:
Assuming dilution 4.35 4.44 4.12 3.29 3.00
Basic 4.45 4.58 4.25 3.38 3.09
Cash dividends paid on common stock 956 909 859 814 763
Per share of common stock .55 .51 .47 .43 .3875
Investment in plant, rental machines
and other property 5,660 5,616 5,959 6,520 6,793
Return on stockholders' equity 35.1% 39.7% 39.0% 32.6% 29.7%
AT END OF YEAR:
- --------------------------------------------------------------------------------------------------------------
Total assets $ 88,313 $ 88,349 $ 87,495 $ 86,100 $ 81,499
Net investment in plant, rental machines
and other property 16,504 16,714 17,590 19,631 18,347
Working capital 7,342 7,474 3,577 5,533 6,911
Total debt 27,151 28,576 28,354 29,413 26,926
Stockholders' equity 23,614 20,624 20,511 19,433 19,816
</Table>
SELECTED QUARTERLY DATA
(dollars in millions except per share amounts and stock prices)
<Table>
<Caption>
Per Share of Common Stock
-----------------------------
Earnings
------------------- Stock Prices+
Gross Net Assuming ----------------
Revenue Profit Income Dilution Basic Dividends High Low
- --------------------------------------------------------------------------------------------------------------
2001
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter $ 21,044 $ 7,608 $ 1,750 $ .98 $ 1.00 $ .13 $ 118.64 $ 83.75
Second quarter 21,568 8,038 2,045 1.15 1.17 .14 119.90 90.05
Third quarter 20,428 7,391 1,595 0.90 0.92 .14 115.40 87.49
Fourth quarter 22,826 8,745 2,333 1.33 1.35 .14 124.70 91.34
- --------------------------------------------------------------------------------------------------------------
Total $ 85,866 $ 31,782 $ 7,723 $ 4.35** $ 4.45** $ .55
==========================================================================================
2000*
First quarter $ 19,348 $ 6,934 $ 1,519 $ .83 $ .85 $ .12 $ 128.25 $ 99.50
Second quarter 21,651 7,863 1,941 1.06 1.10 .13 126.94 101.25
Third quarter 21,781 7,704 1,963 1.08 1.11 .13 134.94 100.00
Fourth quarter 25,616 9,553 2,670 1.48 1.52 .13 119.63 80.06
- --------------------------------------------------------------------------------------------------------------
Total $ 88,396 $ 32,054 $ 8,093 $ 4.44** $ 4.58 $ .51
==========================================================================================
</Table>
* Reclassified to conform with 2001 presentation.
** Earnings Per Share (EPS) in each quarter is computed using the
weighted-average number of shares outstanding during that quarter while
EPS for the full year is computed using the weighted-average number of
shares outstanding during the year. Thus, the sum of the four quarters'
EPS does not equal the full-year EPS.
+ The stock prices reflect the high and low prices for IBM's common stock on
the New York Stock Exchange composite tape for the last two years.
106
<Page>
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
IBM STOCKHOLDER SERVICES
STOCKHOLDERS WITH QUESTIONS ABOUT THEIR ACCOUNTS SHOULD CONTACT: EQUISERVE TRUST
COMPANY, N.A.
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey 07303-2530
(888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0218.
Stockholders can also reach EquiServe Trust Company, N.A.
via e-mail at: ibm@equiserve.com
Hearing-impaired stockholders with access to a telecommunications device (TDD)
can communicate directly with EquiServe Trust Company, N.A., by calling (800)
490-1493. Stockholders residing outside the United States, Canada and Puerto
Rico should call (201) 222-4489.
IBM ON THE INTERNET
Topics featured in this Annual Report can be found via the IBM home page on the
Internet (http://www.ibm.com). Financial results, news on IBM products, services
and other activities can also be found via that address. Stockholders of record
can receive online account information and answers to frequently asked questions
regarding stockholder accounts via the internet (http://www.ibm.com/investor).
Stockholders of record can also consent to receive future IBM Annual Reports and
Proxy Statements online through the Internet at this site.
IBM INVESTOR SERVICES PROGRAM
The Investor Services Program brochure outlines a number
of services provided for IBM stockholders and potential IBM investors, including
the reinvestment of dividends, direct purchase and the deposit of IBM stock
certificates for safe keeping. Call (888) 421-8860 for a copy of the brochure.
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0218.
INVESTORS WITH OTHER REQUESTS MAY WRITE TO:
IBM Corporation
Stockholder Relations
New Orchard Road
Armonk, New York 10504
IBM STOCK
IBM common stock is listed on the New York Stock Exchange, on other exchanges in
the United States and around the world.
ANNUAL MEETING
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 30, 2002,
at 10 a.m. at the Kentucky International Convention Center, 221 Fourth Street,
Louisville, Kentucky.
Stockholder Communications
Stockholders in the United States and Canada can get
quarterly financial results, listen to a summary of the Annual Meeting remarks
and hear voting results from the meeting by calling (800) IBM-7800. Callers can
also request printed copies of the information via mail or fax. Stockholders
residing outside the United States, Canada and Puerto Rico should call (402)
573-9861.
LITERATURE FOR IBM STOCKHOLDERs
THE FOLLOWING LITERATURE ON IBM IS AVAILABLE WITHOUT CHARGE FROM:
EquiServe Trust Company, N.A.
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey 07303-2530
(888) IBM-6700
Investors residing outside the United States, Canada and Puerto Rico should call
(201) 324-0218.
The Form 10-K Annual Report and Form 10-Q Quarterly Reports to the SEC provide
additional information on IBM's business. The 10-K report is released in March;
10-Q reports are released in May, August and November.
An audio cassette recording of the 2001 Annual Report will be available for
sight-impaired stockholders in June.
"IBM Environment and Well-Being: Progress Report " reports on IBM's health and
safety, environmental and energy programs.
"Valuing Diversity: An Ongoing Commitment" communicates to the company's entire
community of employees, customers, stockholders, vendors, suppliers, business
partners and employment applicants the importance IBM places on the diversity of
the company's workplace and marketplace.
GENERAL INFORMATION
For answers to general questions about IBM from within the continental United
States, call (800) IBM-4YOU. From outside the United States, call (404)
238-1234.
CORPORATE OFFICES
International Business Machines Corporation
New Orchard Road
Armonk, New York 10504
(914) 499-1900
The IBM Annual Report is printed on recycled paper and is recyclable.
AS/400, DB2, eLiza, IBM, MiCRUS, MQSeries, NetVista, RS/6000, S/390, Shark,
ThinkPad, WebSphere and zSeries are trademarks of International Business
Machines Corporation or its wholly owned subsidiaries. CATIA is a trademark of
Dassault Systemes SA. Intel is a trademark of Intel Corporation. Linux is a
trademark of Linus Torvalds. Lotus and Lotus Notes are trademarks of Lotus
Development Corporation. Tivoli is a trademark of Tivoli Systems, Inc. Microsoft
is a trademark of Microsoft Corporation. UNIX is a trademark in the United
States and other countries licensed exclusively through The Open Group. iPaq is
a trademark of Compaq Computer Corporation. Inspiron is a trademark of Dell
Computer Corporation. MXP and Treo are trademarks of e.Digital Corporation.
NexII is a trademark of Frontier Labs Ltd. ECOSYS is a registered trademark of
Kyocera Corporation. GameCube is a trademark of Nintendo Co., Ltd. Other company
product and service names may be trademarks or service marks of others.
Printed in U.S. G507-0501-07
107
<Page>
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
BOARD OF DIRECTORS
Cathleen Black
PRESIDENT
HEARST MAGAZINES
Kenneth I. Chenault
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
AMERICAN EXPRESS COMPANY
Juergen Dormann
CHAIRMAN OF THE
BOARD OF MANAGEMENT
AVENTIS S.A.
Louis V. Gerstner, Jr.
CHAIRMAN OF THE BOARD, IBM
Nannerl O. Keohane
PRESIDENT
DUKE UNIVERSITY
Charles F. Knight
CHAIRMAN OF THE BOARD
EMERSON ELECTRIC CO.
Minoru Makihara
CHAIRMAN OF THE BOARD
MITSUBISHI CORPORATION
Lucio A. Noto
MANAGING PARTNER
MIDSTREAM PARTNERS LLC
Samuel J. Palmisano
PRESIDENT AND
CHIEF EXECUTIVE OFFICER, IBM
John B. Slaughter
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
NATIONAL ACTION COUNCIL FOR
MINORITIES IN ENGINEERING, INC.
Sidney Taurel
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
ELI LILLY AND COMPANY
John M. Thompson
VICE CHAIRMAN OF THE BOARD, IBM
Alex Trotman
CHAIRMAN
IMPERIAL CHEMICAL INDUSTRIES PLC
Lodewijk C. van Wachem
CHAIRMAN OF THE
SUPERVISORY BOARD
ROYAL DUTCH PETROLEUM COMPANY
Charles M. Vest
PRESIDENT
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
------------------------------------------------
SENIOR MANAGEMENT
Louis V. Gerstner, Jr.
CHAIRMAN OF THE BOARD
Samuel J. Palmisano
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
John M. Thompson
VICE CHAIRMAN OF THE BOARD
CORPORATE HEADQUARTERS
J. Bruce Harreld
SENIOR VICE PRESIDENT
STRATEGY
Philip S. Thompson
VICE PRESIDENT
BUSINESS TRANSFORMATION AND
CHIEF INFORMATION OFFICER
Jon C. Iwata
SENIOR VICE PRESIDENT
COMMUNICATIONS
John R. Joyce
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Joseph C. Lane
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
IBM GLOBAL FINANCING
Mark Loughridge
VICE PRESIDENT AND CONTROLLER
Robert F. Woods
VICE PRESIDENT AND TREASURER
Abby F. Kohnstamm
SENIOR VICE PRESIDENT
MARKETING
Edward M. Lineen
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
Daniel E. O'Donnell
VICE PRESIDENT
ASSISTANT GENERAL COUNSEL
AND SECRETARY
J. Randall MacDonald
SENIOR VICE PRESIDENT
HUMAN RESOURCES
Lawrence R. Ricciardi
SENIOR VICE PRESIDENT
TECHNOLOGY AND
MANUFACTURING
Nicholas M. Donofrio
SENIOR VICE PRESIDENT
Paul M. Horn
SENIOR VICE PRESIDENT
RESEARCH
Robert W. Moffat, Jr.
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
PERSONAL SYSTEMS AND
INTEGRATED SUPPLY CHAIN
IBM GLOBAL SERVICES
Douglas T. Elix
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
Frank Kern
GENERAL MANAGER
IBM GLOBAL SERVICES
EUROPE/MIDDLE EAST/AFRICA
Virginia M. Rometty
GENERAL MANAGER
IBM GLOBAL SERVICES
AMERICAS
Frank J. Roney
GENERAL MANAGER
BUSINESS INNOVATION SERVICES
Ralph F. Martino
GENERAL MANAGER
STRATEGY AND MARKETING
TECHNOLOGY GROUP
John E. Kelly, III
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
Michel Mayer
GENERAL MANAGER
MICROELECTRONICS DIVISION
SALES AND DISTRIBUTION
J. Michael Lawrie
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
Colleen F. Arnold
GENERAL MANAGER
GLOBAL COMMUNICATIONS SECTOR
Jerry Cole
GENERAL MANAGER
GLOBAL FINANCIAL SERVICES SECTOR
Michael E. Daniels
GENERAL MANAGER
IBM AMERICAS
Mark W. Elliott
GENERAL MANAGER
IBM EUROPE/MIDDLE EAST/AFRICA
Larry Hirst
GENERAL MANAGER
IBM UK AND IRELAND
Kakutaro Kitashiro
GENERAL MANAGER
IBM ASIA PACIFIC
Henry W. K. Chow
GENERAL MANAGER
IBM GREATER CHINA GROUP
Takuma Otoshi
GENERAL MANAGER
IBM JAPAN
Marc Lautenbach
GENERAL MANAGER
GLOBAL SMALL AND
MEDIUM BUSINESS
Hans-Ulrich Maerki
CHAIRMAN
IBM EUROPE/MIDDLE EAST/AFRICA
Douglas L. Maine
GENERAL MANAGER
IBM.COM
Christian Nivoix
GENERAL MANAGER
GLOBAL DISTRIBUTION SECTOR
Peter T. Rowley
GENERAL MANAGER
GLOBAL BUSINESS PARTNERS
Curtis H. Tearte
GENERAL MANAGER
GLOBAL PUBLIC SECTOR
Stephen M. Ward, Jr.
General Manager
GLOBAL INDUSTRIAL SECTOR
SOFTWARE GROUP
Steven A. Mills
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
Rodney C. Adkins
GENERAL MANAGER
PERVASIVE COMPUTING
Louis J. D'Ambrosio
GENERAL MANAGER
WORLDWIDE SALES AND MARKETING
Robert J. LeBlanc
GENERAL MANAGER
TIVOLI SYSTEMS
Janet Perna
GENERAL MANAGER
DATABASE MANAGEMENT
SOLUTIONS
John A. Swainson
GENERAL MANAGER
APPLICATION AND
INTEGRATION MIDDLEWARE
Al W. Zollar
GENERAL MANAGER
LOTUS
STORAGE SYSTEMS GROUP
Linda S. Sanford
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
SERVER GROUP
William M. Zeitler
SENIOR VICE PRESIDENT AND
GROUP EXECUTIVE
Daniel R. Colby
GENERAL MANAGER
ENTERPRISE SERVERS
Val Rahmani
GENERAL MANAGER
WEB SERVERS
Susan M. Whitney
GENERAL MANAGER
XSERIES
Irving Wladawsky-Berger
VICE PRESIDENT
TECHNOLOGY AND STRATEGY
108
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>a2071411zex-21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<Page>
EXHIBIT II
PARENTS AND SUBSIDIARIES
AS OF DECEMBER 31, 2001
<Table>
<Caption>
STATE OR COUNTRY PERCENTAGE OF
OF INCORPORATION VOTING SECURITIES OWNED
OR ORGANIZATION BY ITS IMMEDIATE PARENT
------------------------------ -----------------------
<S> <C> <C>
Registrant:
International Business Machines Corporation................ New York
Subsidiaries:
IBM Credit Corporation..................................... Delaware 100
Lotus Development Corporation.............................. Delaware 100
Tivoli Systems Inc......................................... Delaware 100
IBM World Trade Corporation................................ Delaware 100
IBM Asia Pacific Service Corporation..................... Japan 100
IBM Central and Eastern Europe/ Middle East/ Africa,
Inc.................................................... Delaware 100
IBM Plans Management Corporation......................... New York 88(A)
IBM World Trade Asia Corporation......................... Delaware 100
IBM World Trade Holding LLC.............................. Delaware 100
WTC Insurance Corporation, Ltd........................... Bermuda 100
IBM Argentina, S.A....................................... Argentina 100(A)
IBM Australia Ltd........................................ Australia 100
IBM Bahamas Ltd.......................................... Bahamas 100
IBM de Bolivia, S.A...................................... Bolivia 100
IBM Brasil Industria, Maquinas e Servicos Ltda........... Brazil 100(A)
IBM Foreign Sales Corporation............................ Barbados 100
General Business Machines Corp........................... British V.I. 10
IBM Canada Credit Services Company....................... Canada 100
IBM Canada Limited--IBM Canada Limitee................... Canada 100
IBM China Company Limited................................ China 100
IBM China/Hong Kong Limited.............................. Hong Kong 100
IBM de Chile, S.A.C...................................... Chile 100(A)
IBM de Colombia, S.A..................................... Colombia 90(A)
IBM Middle East FZE...................................... United Arab Emirates 100
IBM del Ecuador, S.A..................................... Ecuador 100
IBM Global Services India Pvt. Ltd....................... India 90(B)
</Table>
<Page>
<Table>
<Caption>
STATE OR COUNTRY PERCENTAGE OF
OF INCORPORATION VOTING SECURITIES OWNED
OR ORGANIZATION BY ITS IMMEDIATE PARENT
------------------------------ -----------------------
<S> <C> <C>
IBM India Ltd.............................................. India 99
IBM Japan, Ltd............................................. Japan 100
IBM Korea, Inc............................................. Korea (South) 100
PT IBM Indonesia........................................... Indonesia 100
IBM Malaysia Sdn. Bhd...................................... Malaysia 100
Mesiniaga Berhad........................................... Malaysia 6
Financiera de Tecnologia e Informatica S.A. de C.A.,
Sociedad Financiera del Objecto Limitado Filial.......... Mexico 100(A)
Grupo IBM Mexico, S.A. de C.V.............................. Mexico 100(C)
IBM de Mexico, S.A....................................... Mexico 100(C)
IBM New Zealand Ltd........................................ New Zealand 100
IBM del Peru, S.A.......................................... Peru 100
IBM Philippines, Incorporated.............................. Philippines 100(C)
IBM Romania Srl............................................ Romania 100
IBM Taiwan Corporation..................................... Taiwan 100(A)
Thai Systems Corporation Ltd............................... Thailand 100
IBM Thailand Company Ltd................................... Thailand 100(C)
IBM del Uruguay, S.A....................................... Uruguay 100
IBM de Venezuela, S.A...................................... Venezuela 100
IBM Vietnam Company........................................ Vietnam 100
International Business Machines of Belgium S.A............. Belgium 100(A)
IBM Botswana (PTY) Limited................................. Botswana 100
IBM Bulgaria Ltd........................................... Bulgaria 100
IBM Croatia Ltd./ IBM Hrvatska d.o.o....................... Croatia 100
IBM Global Services Delivery Center Czech Republic
s.r.o.................................................... Czech Republic 100
IBM Eesti Osauhing (IBM Estonia Ou)........................ Estonia 100
Compagnie IBM France, S.A.................................. France 100(C)
IBM Eurocoordination..................................... France 96(A)
Tunisian Business Machines (TBM)......................... Tunisia 70
IBM Europe Middle East Africa.............................. France 100(A)
IBM Central Holding GmbH................................... Germany 100
IBM Beteiligungs GmbH.................................... Germany 100
IBM Ceska Republika spol. s.r.o.......................... Czech Republic 100
</Table>
<Page>
<Table>
<Caption>
STATE OR COUNTRY PERCENTAGE OF
OF INCORPORATION VOTING SECURITIES OWNED
OR ORGANIZATION BY ITS IMMEDIATE PARENT
------------------------------ -----------------------
<S> <C> <C>
IBM Deutschland GmbH..................................... Germany 72(A)
IBM Oesterreich Internationale Bueromaschinen
Gesellschaft m.b.H................................... Austria 100
IBM (Schweiz)--IBM (Suisse)--IBM (Svizzera)--IBM
(Switzerland)........................................ Switzerland 100
International Business Machines Corporation
Magyarorszagi Kft.................................... Hungary 100(A)
IBM Polska Sp. z.o.o................................... Poland 100
IBM East Europe/Asia................................... Russia 100
IBM International Treasury Services Company................ Ireland --(D)
IBM Italia S.p.A........................................... Italy 100
IBM Hellas Information Handling Systems S.A.............. Greece 100(A)
IBM Israel Ltd........................................... Israel 100(A)
Companhia IBM Portuguesa, S.A............................ Portugal 100
IBM (International Business Machines) Turk Ltd.
Sirketi................................................ Turkey 98(A)
IBM South Africa (Pty) Group Ltd......................... South Africa 100
IBM East Africa Limited.................................... Kenya 67(A)
Sabiedriba ar irobezotu IBM Latvija........................ Latvia 100
IBM Lietuva................................................ Lithuania 100
IBM Global Holdings B.V.................................... Netherlands 100
IBM International Holdings B.V........................... Netherlands 100
IBM Ireland Limited.................................... Ireland 100
IBM Singapore Pte. Ltd................................. Singapore 100
IBM Storage Products Kft............................... Hungary 100
Shenzhen IBM Technology Products Co., Ltd.............. China 100
IBM International Centre for Asset Management N.V.......... Netherlands 100
IBM West Africa Limited.................................... Nigeria 83(C)
International Business Machines A/S........................ Norway 60(A)
IBM West Africa Limited.................................... Nigeria 100
IBM Slovensko spol.s.r.o................................... Slovak Republic 100
IBM Slovenija d.o.o........................................ Slovenia 100
International Business Machines, S.A....................... Spain 100(A)
IBM Nordic Aktiebolag...................................... Sweden 100
IBM Danmark A/S.......................................... Denmark 100
</Table>
<Page>
<Table>
<Caption>
STATE OR COUNTRY PERCENTAGE OF
OF INCORPORATION VOTING SECURITIES OWNED
OR ORGANIZATION BY ITS IMMEDIATE PARENT
------------------------------ -----------------------
<S> <C> <C>
Oy International Business Machines AB.................... Finland 100
IBM Svenska Aktiebolag................................... Sweden 100
IBM North Region Holdings.................................. United Kingdom 100
IBM Nederland N.V........................................ Netherlands 100
IBM United Kingdom Holdings Ltd.......................... United Kingdom 100
IBM United Kingdom Ltd................................. United Kingdom 100
</Table>
- ------------------------
(A) Remaining percentage owned by other wholly owned IBM company(s).
(B) Minor percentage held by other IBM shareholder(s).
(C) Minor percentage held by other IBM shareholders, subject to repurchase
option.
(D) IBM Germany owns 33.7%, IBM France owns 13.5%, IBM Finland owns 10.1%, IBM
Denmark owns 18.0% and IBM Switzerland owns 24.7% of IBM International
Treasury Services Company.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>a2071411zex-23.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<Page>
EXHIBIT III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777,
33-60225, 33-60227, 33-60237, 33-60815, 33-01411, 333-09055, 333-23315,
333-31305, 333-41813, 333-44981, 333-48435, 333-81157, 333-87757, 333-87856,
333-87925, 333-30424, 333-33692 and 333-36510) and the Prospectuses constituting
part of the Registration Statements on Form S-3 (Nos. 33-50537, 33-65119,
33-65119(1), 333-03763, 333-21073, 333-27669, 333-40669, 333-70521, 333-32690
and 333-37034) of International Business Machines Corporation of our report
dated January 17, 2002 appearing on page 54 of the 2001 Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated January 17, 2002
on the Financial Statement Schedule, which appears on page 10 of this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 11, 2002
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>7
<FILENAME>a2071411zex-24.txt
<DESCRIPTION>EXHIBIT 24
<TEXT>
<Page>
Exhibit 24
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Cathleen P. Black
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Kenneth I. Chenault
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Juergen Dormann
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Louis V. Gerstner, Jr.
----------------------------------------
Louis V. Gerstner, Jr.
Chairman of the Board
and Chief Executive Officer
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Nannerl O. Keohane
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Charles F. Knight
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Minoru Makihara
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Lucio A. Noto
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Samuel J. Palmisano
----------------------------------------
Samuel J. Palmisano
President and
Chief Operating Officer
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ John B. Slaughter
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Sidney Taurel
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ John M. Thompson
----------------------------------------
John M. Thompson
Vice Chairman of the Board
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Alex Trotman
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Lodewijk C. van Wachem
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Charles M. Vest
----------------------------------------
Director
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ John R. Joyce
----------------------------------------
John R. Joyce
Senior Vice President and
Chief Financial Officer
<Page>
POWER OF ATTORNEY OF IBM DIRECTOR
---------------------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
International Business Machines Corporation, a New York corporation, which
will file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Law, an Annual Report for 2001 on
Form 10-K, hereby constitutes and appoints Louis V. Gerstner, Jr., John M.
Thompson, Samuel J. Palmisano, John R. Joyce, Edward M. Lineen, Robert F.
Woods, Mark Loughridge, Daniel E. O'Donnell and Andrew Bonzani his true and
lawful attorneys-in-fact and agents, and each of them with full power to act
without the others, for him or her in his or her name, place and stead, in
any and all capacities, to sign said 10-K Annual Report and any and all
amendments thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform any and all acts and things requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has excuted this Power of
Attorney this 26 day of February 2002.
/s/ Mark Loughridge
----------------------------------------
Mark Loughridge
Vice President and Controller
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>8
<FILENAME>a2071411zex-99.txt
<DESCRIPTION>EXHIBIT 99
<TEXT>
<Page>
EXHIBIT IV
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
ADDITIONAL EXHIBITS
In 2001, the company has removed the impact of intellectual property income,
gains and losses on sales and other than temporary declines in market value of
certain investments, realized gains and losses on certain real estate activity
and foreign currency transaction gains and losses from the SG&A caption on the
Consolidated Statement of Earnings. Custom development income was also removed
from the Research, development and engineering caption on the Consolidated
Statement of Earnings. Intellectual property and custom development income are
now recorded in a separate caption in the Consolidated Statement of Earnings.
The other items listed above are recorded as part of Other income and expense.
The 2001 and 2000 quarterly Consolidated Statement of Earnings are restated in
Exhibit IVa and IVb for these changes.
<Page>
EXHIBIT IVA
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
2001
<Table>
<Caption>
1ST QTR.* 2ND QTR.* 3RD QTR.* 4TH QTR.* FULL YEAR
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Global Services................................. $8,471 $8,742 $8,682 $9,061 $34,956
Hardware........................................ 8,547 8,652 7,479 8,714 33,392
Software........................................ 2,918 3,036 3,201 3,784 12,939
Global Financing................................ 832 845 822 927 3,426
Enterprise Investments/Other.................... 276 293 244 340 1,153
------ ------ ------ ------ -------
Total revenue................................... 21,044 21,568 20,428 22,826 85,866
Cost:
Global Services................................. 6,311 6,329 6,214 6,501 25,355
Hardware........................................ 5,969 6,061 5,685 6,422 24,137
Software........................................ 579 535 591 560 2,265
Global Financing................................ 438 438 403 414 1,693
Enterprise Investments/Other.................... 139 167 144 184 634
------ ------ ------ ------ -------
Total cost...................................... 13,436 13,530 13,037 14,081 54,084
------ ------ ------ ------ -------
Gross profit.................................... 7,608 8,038 7,391 8,745 31,782
Expense and other income:
Selling, general and administrative............. 4,119 4,210 4,115 4,753 17,197
Research, development and engineering........... 1,281 1,360 1,328 1,321 5,290
Intellectual property and custom development
income........................................ (277) (366) (405) (487) (1,535)
Other (income) and expense...................... (76) (126) 37 (196) (361)
Interest expense................................ 72 58 54 54 238
------ ------ ------ ------ -------
Total expense................................... 5,119 5,136 5,129 5,445 20,829
Income before income taxes...................... 2,489 2,902 2,262 3,300 10,953
Income tax provision............................ 739 857 667 967 3,230
------ ------ ------ ------ -------
Net income...................................... 1,750 2,045 1,595 2,333 7,723
Preferred stock dividends....................... 5 5 -- -- 10
------ ------ ------ ------ -------
Net income applicable to common shareholders.... $1,745 $2,040 $1,595 $2,333 $ 7,713
====== ====== ====== ====== =======
</Table>
- ------------------------
* unaudited
<Page>
EXHIBIT IVB
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
2000
<Table>
<Caption>
1ST QTR.* 2ND QTR.* 3RD QTR.* 4TH QTR.* FULL YEAR
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Global Services................................ $ 7,552 $ 8,184 $ 8,230 $ 9,186 $33,152
Hardware....................................... 7,712 9,151 9,451 11,463 37,777
Software....................................... 2,927 3,182 2,918 3,571 12,598
Global Financing............................... 816 819 859 971 3,465
Enterprise Investments/Other................... 341 315 323 425 1,404
------- ------- ------- ------- -------
Total revenue.................................. 19,348 21,651 21,781 25,616 88,396
Cost:
Global Services................................ 5,597 5,964 6,042 6,706 24,309
Hardware....................................... 5,593 6,654 6,815 7,976 27,038
Software....................................... 584 557 549 593 2,283
Global Financing............................... 461 449 501 554 1,965
Enterprise Investments/Other................... 179 164 170 234 747
------- ------- ------- ------- -------
Total cost..................................... 12,414 13,788 14,077 16,063 56,342
------- ------- ------- ------- -------
Gross profit................................... 6,934 7,863 7,704 9,553 32,054
Expense and other income:
Selling, general and administrative............ 4,154 4,346 4,180 4,855 17,535
Research, development and engineering.......... 1,231 1,315 1,322 1,506 5,374
Intellectual property and custom development
income....................................... (411) (424) (402) (491) (1,728)
Other (income) and expense..................... (285) (231) (286) (206) (1,008)
Interest expense............................... 75 84 86 102 347
------- ------- ------- ------- -------
Total expense.................................. 4,764 5,090 4,900 5,766 20,520
Income before income taxes..................... 2,170 2,773 2,804 3,787 11,534
Income tax provision........................... 651 832 841 1,117 3,441
------- ------- ------- ------- -------
Net income..................................... 1,519 1,941 1,963 2,670 8,093
Preferred stock dividends...................... 5 5 5 5 20
------- ------- ------- ------- -------
Net income applicable to common shareholders... $ 1,514 $ 1,936 $ 1,958 $ 2,665 $ 8,073
======= ======= ======= ======= =======
</Table>
- ------------------------
* unaudited
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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