<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002
1-2360
------
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
-------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-0871985
-------- ----------
(State of incorporation) (IRS employer identification number)
ARMONK, NEW YORK 10504
---------------- -----
(Address of principal executive offices) (Zip Code)
914-499-1900
------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
1934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The registrant has 1,711,889,435 shares of common stock outstanding at
March 31, 2002.
<Page>
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Earnings for the three months
ended March 31, 2002 and 2001 ................................. 1
Consolidated Statement of Financial Position at
March 31, 2002 and December 31, 2001........................... 3
Consolidated Statement of Cash Flows for the three months
ended March 31, 2002 and 2001 ................................. 5
Notes to Consolidated Financial Statements ......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION .............. 11
PART II - OTHER INFORMATION .............................................. 25
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<Table>
<Caption>
(Dollars in millions except Three Months Ended
per share amounts) March 31,
-----------------------
2002 2001*
-------- --------
REVENUE:
Global Services $ 8,229 $ 8,471
Hardware 6,405 8,547
Software 2,897 2,918
Global Financing 783 832
Enterprise Investments/Other 237 276
-------- --------
TOTAL REVENUE 18,551 21,044
COST:
Global Services 6,093 6,311
Hardware 5,029 5,969
Software 549 579
Global Financing 340 438
Enterprise Investments/Other 104 139
-------- --------
TOTAL COST 12,115 13,436
-------- --------
GROSS PROFIT 6,436 7,608
EXPENSE AND OTHER INCOME:
Selling, general and administrative 4,053 4,119
Research, development and
engineering 1,200 1,281
Intellectual property and custom
development income (333) (277)
Other (income) and expense (205) (76)
Interest expense 30 72
-------- --------
TOTAL EXPENSE AND OTHER INCOME 4,745 5,119
INCOME BEFORE INCOME TAXES 1,691 2,489
Provision for income taxes 499 739
-------- --------
NET INCOME 1,192 1,750
Preferred stock dividends - 5
-------- --------
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 1,192 $ 1,745
======== ========
</Table>
* Reclassified to conform with 2002 presentation.
(The accompanying notes are an integral part of the financial statements.)
-1-
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS - (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
MARCH 31,
----------------------------
2002 2001
EARNINGS PER SHARE OF COMMON
STOCK:
Assuming dilution $ 0.68 $ 0.98
Basic $ 0.69 $ 1.00
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (MILLIONS)
Assuming dilution 1,753.0 1,781.2
Basic 1,718.4 1,740.9
CASH DIVIDENDS PER COMMON SHARE $ 0.14 $ 0.13
</Table>
(The accompanying notes are an integral part of the financial statements.)
-2-
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS
<Table>
<Caption>
(Dollars in millions) At March 31,
2002 At December 31,
(UNAUDITED) 2001*
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 3,833 $ 6,330
Marketable securities -- at fair value,
which approximates market value 134 63
Notes and accounts receivable -- trade, net of
allowances 8,325 9,101
Short-term financing receivables 14,555 16,656
Other accounts receivable 1,238 1,261
Inventories, at lower of average cost or net
realizable value
Finished goods 1,270 1,259
Work in process and raw materials 3,137 3,045
------- -------
Total inventories 4,407 4,304
Deferred taxes
2,332 2,402
Intangible assets 94 122
Prepaid expenses and other current assets 2,467 2,222
------- -------
Total current assets 37,385 42,461
Plant, rental machines and other property 39,375 38,375
Less: Accumulated depreciation 22,746 21,871
------- -------
Plant, rental machines and other property -- net 16,629 16,504
Long-term financing receivables 11,745 12,246
Intangible assets 350 356
Goodwill 1,436 1,278
Investments and sundry assets 15,511 15,468
------- -------
TOTAL ASSETS $83,056 $88,313
======= =======
</Table>
* Reclassified to conform with 2002 presentation
(The accompanying notes are an integral part of the financial statements.)
-3-
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - (C0NTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
At March 31,
(Dollars in millions except 2002 At December 31,
per share amounts) (UNAUDITED) 2001
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Taxes $ 4,235 $ 4,644
Short-term debt 8,243 11,188
Accounts payable and accruals 17,606 19,287
-------- --------
Total current liabilities 30,084 35,119
Long-term debt 16,665 15,963
Other liabilities 13,256 13,617
-------- --------
TOTAL LIABILITIES 60,005 64,699
STOCKHOLDERS' EQUITY:
Common stock - par value $.20 per share 14,444 14,248
Shares authorized: 4,687,500,000
Shares issued: 2002 - 1,916,363,067
2001 - 1,913,513,218
Retained earnings 31,037 30,142
Treasury stock - at cost (21,549) (20,114)
Shares: 2002 - 204,473,632
2001 - 190,319,489
Accumulated gains and losses not
affecting retained earnings (881) (662)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 23,051 23,614
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,056 $ 88,313
======== ========
</Table>
(The accompanying notes are an integral part of the financial statements.)
-4-
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<Table>
<Caption>
(Dollars in millions) 2002 2001
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,192 $ 1,750
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 992 1,084
Amortization of software 175 149
(Gain)/loss on disposition of fixed and other assets (128) 55
Changes in operating assets and liabilities 424 (1,103)
------- -------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 2,655 1,935
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Payments for plant, rental machines
and other property, net of proceeds (1,111) (1,276)
Investment in software (140) (134)
Purchases of marketable securities and other
investments (273) (74)
Proceeds from marketable securities and other
investments 67 102
------- -------
NET CASH USED IN INVESTING ACTIVITIES
(1,457) (1,382)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from new debt 978 578
Payments to settle debt (369) (1,052)
Short-term (repayments)/borrowings less than 90
days--net (2,611) 1,364
Common stock transactions -- net (1,435) (926)
Cash dividends paid (241) (234)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,678) (270)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (17) (53)
------- -------
Net change in cash and cash equivalents (2,497) 230
Cash and cash equivalents at January 1 6,330 3,563
------- -------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 3,833 $ 3,793
======= =======
</Table>
(The accompanying notes are an integral part of the financial statements.)
-5-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the management of International Business Machines
Corporation (the company), all adjustments, which are of a normal recurring
nature, necessary to a fair statement of the results for the unaudited
three-month periods have been made.
2. The following table summarizes Net income plus gains and losses not affecting
retained earnings.
<Table>
<Caption>
(Dollars in millions) Three Months Ended
MARCH 31,
-----------------------
2002 2001*
------- -------
Net Income $ 1,192 $ 1,750
------- -------
Gains and losses not affecting
retained earnings (net of tax):
Foreign currency translation
adjustments (180) (370)
Minimum pension liability
adjustments 22 (4)
Net unrealized (losses)/gains on
marketable securities (8) (1)
Net unrealized gains/(losses) on
cash flow hedge derivatives (53) 507
------- -------
Total gains and (losses) not affecting
retained earnings (219) 132
------- -------
Net income plus gains and losses
not affecting retained earnings $ 973 $ 1,882
======= =======
</Table>
* Reclassified to conform with 2002 presentation.
3. On January 1, 2002, the company adopted Statement of Financial Accounting
Standards (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 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 adoption of this standard did
not have a material effect on the financial statements.
On January 1, 2002, the company adopted Emerging Issues Task Force 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.
The adoption of this guidance did not have a material effect on the Consolidated
Statement of Earnings.
-6-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
provides accounting and reporting guidance for obligations associated with the
retirement of long-lived assets that result from the acquisition, construction
or normal operations 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.
4. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This standard eliminates the amortization of goodwill,
requires annual impairment testing of goodwill and introduces the concept of
indefinite life intangible assets. The new rules also prohibit the
amortization of goodwill associated with business combinations that close
after June 30, 2001. An initial impairment test of goodwill 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.
The changes in the carrying amount of goodwill, by external reporting
segment, for the quarter ended March 31, 2002, are as follows:
<Table>
<Caption>
Foreign
Assembled Purchase Currency
Balance Workforce Goodwill Price Translation Balance
Segment 1/1/02 Reclass(*) Additions Adjustments Adjustments 3/31/02
------- ------ ------ ------ ------ ------ ------
Global Services $ 325 $ - $ 11 $ - $ (4) $ 332
Enterprise Systems 111 26 - - - 137
Personal and Printing
Systems 13 - - - - 13
Technology 102 5 - - - 107
Software 727 2 130 (8) (4) 847
Global Financing - - - - - -
Enterprise Investments - - - - - -
------ ------ ------ ------ ------ ------
Total $1,278 $ 33 $ 141 $ (8) $ (8) $1,436
</Table>
(*) In accordance with SFAS No. 141, "Business Combinations," the unamortized
balance for acquired assembled workforce, which had been recognized as an
intangible asset separate from goodwill, has been reclassified to goodwill
effective January 1, 2002.
There were no goodwill impairment losses recorded during the quarter and
there was no goodwill written off as a result of divestitures during the
quarter.
The following table presents the prior period's reported net income
adjusted to exclude goodwill amortization, which is no longer recorded under
SFAS No. 142.
-7-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
(Dollars in millions except Three Months Ended
per share amounts) March 31, 2001
-------------------
Reported net income $ 1,750
Add: Goodwill amortization,
net of tax effects 75
---------
Adjusted net income $ 1,825
BASIC EARNINGS PER SHARE:
Reported net income $ 1.00
Goodwill amortization 0.04
---------
Adjusted basic earnings per share $ 1.04
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.98
Goodwill amortization 0.04
---------
Adjusted diluted earnings per share $ 1.02
</Table>
SFAS No. 141 specifies certain criteria for identifying, valuing and
recording intangible assets separate from goodwill. SFAS No. 142 prescribes
the disclosure requirements for intangible assets that meet these criteria.
The following schedule details the company's intangible asset balances by
major asset class:
<Table>
<Caption>
(Dollars in millions) Gross Carrying Accumulated Net Carrying
Intangible Asset Class Amount Amortization Amount At 3/31/02
- ---------------------- ------ ------------ -----------------
Customer-related $ 310 $ (76) $ 234
Completed technology 212 (65) 147
Patents/Trademarks 111 (63) 48
Other(a) 43 (28) 15
----- ----- -----
Total $ 676 $(232) $ 444
</Table>
(a) Other intangibles are primarily contract-related assets such as employee
agreements and leasehold interests.
The net carrying amount of intangible assets decreased $34 million
during the first quarter of 2002 due to the amortization of existing intangible
asset balances and the reclassification of acquired assembled workforce to
goodwill effective January 1, 2002, offset by identified intangible assets
recorded as a result of the CrossWorlds acquisition.
The aggregate amortization expense was $40 million and $100 million for
the quarter ended March 31, 2002 and for year ended December 31, 2001,
respectively.
-8-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The amortization expense related to intangible assets currently recorded
on the company's books for each of the five succeeding years is estimated to be
the following at December 31,:
<Table>
2002 $ 160 million includes 1Q02 amortization
2003 $ 148 million
2004 $ 108 million
2005 $ 45 million
2006 $ 23 million
</Table>
5. On January 11, 2002, the company acquired all of the outstanding stock of
CrossWorlds Software, Inc., for $138 million. CrossWorlds is a leading provider
of software that enables companies to automate business processes that integrate
multiple applications, such as those for managing customer relationships and
supply chains, as well as to integrate business processes unique to individual
industries such as telecommunications, financial services, and industrial
sectors. The acquisition better enables the company to participate in the
emerging Business Process Management (BPM) opportunity. The transaction was
completed in the first quarter of 2002 from which time the results of this
acquisition were included in the company's consolidated financial statements.
The allocation of the purchase price for this acquisition is presented in
the following table:
<Table>
<Caption> Amortization
(dollars in millions) Life (yrs.) Amount
- ---------------------------------------------------------
Current assets $ 27
Fixed assets 7
Intangible assets:
Completed technology 3 33
Customer lists 5 5
Other intangibles 5 1
Goodwill 130
In-process research &
development 2
- ---------------------------------------------------------
Total assets acquired 205
- ---------------------------------------------------------
Payables/accrued
Expenses (54)
Deferred tax liability (13)
- ---------------------------------------------------------
Total liabilities assumed (67)
- ---------------------------------------------------------
Net assets acquired $ 138
- ---------------------------------------------------------
</Table>
The overall weighted-average life of the identified intangible assets
acquired in the purchase of CrossWorlds is 3.3 years. With the exception of
goodwill, these identified intangible assets will be amortized on a
straight-line basis over their useful lives. Goodwill of 130 million has been
assigned to the Software segment. None 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 CrossWorlds and IBM.
The acquisition was accounted for as a purchase transaction, and accordingly,
the assets and liabilities of the acquired entities were
-9-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
recorded at their estimated fair values at the date of the acquisition. The
company recorded a pretax charge of $2 million for in-process research and
development. This amount, which reflects the relative value and contribution of
the acquired research and development to the company's existing research or
product lines, was charged to research, development, and engineering expense on
the company's Consolidated Statement of Earnings.
6. The tables on pages 29 and 30 of this Form 10-Q reflect the results of the
company's segments consistent with its management system used by the company's
chief operating decision maker. These results are not necessarily a depiction
that is in conformity with generally accepted accounting principles (GAAP),
e.g., employee retirement plan costs are developed using actuarial assumptions
on a country-by-country basis and allocated to the segments on headcount. A
different result could occur for any segment if actuarial assumptions unique to
each segment were used. Performance measurement is based on income before income
taxes (pre-tax income). These results are used, in part, by management, both in
evaluating the performance of, and in allocating resources to, each of the
segments.
7. The following table provides the liability balances for restructuring actions
that the company took through 1993 and special actions in 1999:
<Table>
<Caption>
Liability Liability
as of as of
12/31/2001 Payments Other Adj.(c) 3/31/2002
---------- -------- ------------- ----------
Current:
Workforce (a) $ 87 $ 26 $ 13 $ 74
Space (b) 65 17 15 63
----- ----- ----- -----
Total $ 152 $ 43 $ 28 $ 137
Non-current:
Workforce (a) $ 385 $ - $ (20) $ 365
Space (b) 204 - (19) 185
----- ----- ----- -----
Total $ 589 $ - $ (39) $ 550
</Table>
(a) 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.
(b) 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.
(c) Principally represents reclassification of non-current to current and
currency translation adjustments.
8. Subsequent Events: On April 16, 2002, Hitachi, Ltd. and IBM announced plans
to create a new, standalone company that will integrate various hard disk drive
(HDD) operations from research and development through sales and marketing. An
additional initiative contemplates the companies working together on a common
architecture for future storage subsystems to improve interoperability and lower
customer costs. Negotiations are underway on the terms of an agreement.
-10-
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 30, 2002, the company announced that the Board of Directors
approved an increase in the quarterly dividend of 7 percent from $.14 to $.15
per common share. The dividend is payable June 10, 2002, to shareholders of
record on May 10, 2002.
On April 30, 2002, the Board of Directors authorized the company to
repurchase up to an additional $3.5 billion of IBM common shares. The company
plans to repurchase the shares in the open market from time to time, based on
market conditions.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2002
The first quarter financial results, while disappointing, were largely
the result of the continued weak global business environment. Customers
deferred technology purchases in the first quarter, and such deferrals
impacted the company across many of its major business segments.
Even within this tough climate, the company generated $1.7 billion in
pre-tax income, had strong services signings of more than $15 billion, and
believes it gained or held share in most of its high-priority businesses. The
company is pleased that, despite the difficult business conditions, it continued
to maintain its leadership.
While no one can predict the timing of a recovery, the company remains
optimistic that business conditions will improve later this year. The company's
customers believe that information technology remains critical to the success of
their businesses, and that they will continue to embrace the company's
e-business strategies, its products and its services. The company remains
confident about the fundamental strength of its business and its prospects for
the future.
RESULTS OF OPERATIONS
<Table>
<Caption>
(Dollars in millions except per share amounts) Three Months Ended
March 31,
----------------------
2002 2001
------ ------
Revenue $18,551 $21,044
Cost 12,115 13,436
------- -------
Gross profit $ 6,436 $ 7,608
Gross profit margin 34.7% 36.1%
Net income $ 1,192 $ 1,750
Earnings per share of
common stock:
Assuming dilution $ 0.68 $ 0.98
Basic $ 0.69 $ 1.00
</Table>
-11-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
The average number of common shares outstanding assuming dilution was
lower by 28.2 million than the first quarter of 2001, primarily as a result of
the company's share repurchase program. The average number of shares assuming
dilution was 1,753.0 million in the first quarter of 2002 and 1,781.2 million
for the first quarter of 2001. There were 1,711.9 million shares outstanding at
March 31, 2002.
Revenue for the three months ended March 31, 2002 decreased 11.8 percent
from the same period last year (9 percent at constant currency). Global Services
revenue, including maintenance, declined 2.9 percent (up 1 percent at constant
currency) in the first quarter to $8.2 billion. The company signed more than $15
billion in services contracts in the first quarter.
Hardware revenue decreased 25.1 percent (23 percent at constant currency)
to $6.4 billion compared with the first quarter of 2001. Revenue from Enterprise
Systems declined due to customers deferring purchases and price pressures.
Personal computer revenue declined in the first quarter, reflecting continued
weak industry demand. Technology revenue, which includes hard disk drives (HDD)
and microelectronics, decreased substantially from the prior year's quarter,
reflecting ongoing weakness in both product areas.
Software revenue decreased 0.7 percent (up 3 percent at constant
currency) to $2.9 billion. Middleware revenue, which comprises 80 percent of the
company's software revenue, grew 2 percent (6 percent at constant currency) and
operating systems software declined 10 percent (7 percent at constant currency)
year over year.
Global Financing revenue decreased 5.9 percent (3 percent at constant
currency) in the first quarter to $783 million. Revenue from the Enterprise
Investments/Other area, which includes industry-specific IT solutions, declined
14.3 percent (10 percent at constant currency) to $237 million compared with the
first quarter of 2001.
In the Americas, first-quarter revenue was $8.1 billion, a decrease of
9.2 percent (8 percent at constant currency) from the same period last year.
Revenue from Europe/Middle East/Africa was $5.1 billion, down 8.5 percent (4
percent at constant currency). Asia-Pacific revenue declined 9.4 percent (3
percent at constant currency) to $3.9 billion. OEM revenue across all
geographies was $1.3 billion, a 37.1 percent decrease (37 percent at constant
currency) compared with the first quarter of 2001.
The company's total gross profit margin was 34.7 percent in the first
quarter of 2002 compared with 36.1 percent in the first quarter of 2001. A
nearly nine-point reduction in the hardware margin offset increases in all other
revenue categories.
In the first quarter, total expense and other income improved 7.3 percent
to $4.7 billion. Selling, general and administrative (SG&A) expense declined 1.6
percent and research, development and engineering expense declined 6.3 percent,
both reflecting the continued reduction in discretionary spending. SG&A expense
results also included the absorption of higher expenses for workforce-balancing
initiatives and provisions for bad debt expense. In addition, the company's
results benefited from lower write downs of equity investments, the elimination
of the amortization of goodwill and the sale of the personal computer desktop
manufacturing operations to Sanmina-SCI, higher intellectual property income and
lower interest expense.
-12-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
The company's tax rate in the first quarter was 29.5 percent compared
with 29.7 percent in the first quarter of last year.
GLOBAL SERVICES
- ---------------
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
---------------------
2002 2001
----- -----
Total revenue $8,229 $8,471
Total cost 6,093 6,311
----- -----
Gross profit $2,136 $2,160
Gross profit margin 26.0% 25.5%
</Table>
Global Services revenue, including maintenance, decreased 2.9 percent (up
1 percent at constant currency) in the first quarter of 2002 compared with the
same period last year. Global Services revenue, excluding maintenance, declined
3.2 percent (up 1 percent at constant currency). Maintenance revenue declined
1.0 percent (up 3 percent at constant currency) in the first quarter of 2002
versus the same period in 2001.
Strategic Outsourcing Services revenue increased as demand remained
strong. Strategic Outsourcing Services is attractive to customers in both good
and bad economies as customers focus on cost reductions. Integrated Technology
Services, excluding maintenance, declined slightly as revenue in support of
non-IBM hardware deployment continues to moderate due to the slowdown in the
personal computer and telecommunications industries and networking equipment
providers. Revenue for management services, such as business recovery, technical
support and infrastructure and systems management continued to grow. Business
Innovation Services (BIS) revenue declined as it was affected the most by the
slowdown in the economy. Despite the slowdown in the BIS market, especially in
the Americas, customers continue to deploy e-business applications such as
e-business integration and enterprise resource planning (ERP). The company
signed more than $15 billion in services contracts in the first quarter of 2002,
the largest first quarter signings in the company's history. These signings
included ten deals over $100 million each including two deals over $1 billion.
The services backlog at March 31, 2002, stands at approximately $108 billion.
Global Services gross profit dollars decreased 1.1 percent in the first
quarter of 2002, compared with the year-ago period. The gross profit margin
improved 0.5 points in the first quarter of 2002 versus last year. The increase
in gross profit margin was primarily driven by lower labor and parts costs for
maintenance offerings.
-13-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
HARDWARE
- --------
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
---------------------
2002 2001
------ ------
Total revenue $6,405 $8,547
Total cost 5,029 5,969
------ ------
Gross profit $1,376 $2,578
Gross profit margin 21.5% 30.2%
</Table>
Revenue from hardware for the first quarter of 2002 decreased 25.1
percent (23 percent at constant currency) when compared with the same period in
2001.
Enterprise Systems revenue decreased as eServer revenue and storage
businesses declined due to a longer customer decision process and aggressive
pricing by competitors in the first quarter of 2002 versus 2001. Revenue from
zSeries mainframes declined as a result of deferred purchase decisions. Total
deliveries of zSeries computing power as measured in MIPS (millions of
instructions per second) decreased 4 percent in the first quarter of 2002
compared to the first quarter of 2001. Revenue from the pSeries UNIX servers
declined due to lower volumes and significant price pressures and iSeries
servers declined as customers deferred buying decisions pending the introduction
of the Power4 architecture. The xSeries revenue declined driven by steep price
erosion the company has been experiencing over the past year. In storage, both
total disk storage and tape storage revenue declined as a result of increasing
price pressure and a longer customer decision process, resulting in some
deferrals at the end of the quarter.
Personal and Printing Systems revenue decreased as a result of lower
revenue from personal computers, retail store solutions and printing systems
products. The personal computer revenue decline continues to reflect demand
weakness and price erosion across all product lines. The percentage of business
through the direct channel did not meet the company's expectation for the first
quarter of 2002. The company continues to execute on its strategies for its
personal computer business as the company's inventory was down, channel
inventory was reduced and expense declined versus the first quarter of 2001. The
company also continues to bring new functionality to its desktop personal
computers and ThinkPads, such as the latest wireless and security offerings.
Technology revenue declined substantially in the first quarter of 2002
versus the comparable period of 2001. The decline in Technology revenue was
driven by the semiconductor industry's severe downturn. In addition, HDD (hard
disk drive) revenue decreased year-over-year reflecting the continued pricing
and demand pressures in the components market. See note 8 on page 10 of this
Form 10-Q for additional information regarding the company's HDD business. The
company also continues to evaluate various alternatives to mitigate the impact
of the semiconductor industry's downturn on the results of the company. These
alternatives include among other actions, rebalancing sources of supply and
reexamining manufacturing efficiencies.
-14-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
Hardware gross profit dollars for the first quarter of 2002 decreased
46.6 percent and the gross profit margin decreased 8.7 points, from the
comparable period in 2001. These decreases were primarily driven by
significantly lower gross profit margins associated with microelectronic
products, due to the continued weakness in demand for the company's OEM
products. However, for end-user hardware, gross profit margins for most
individual products were fairly stable as price reductions were offset with cost
reductions.
SOFTWARE
- --------
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
---------------------
2002 2001
------ ------
Total revenue $2,897 $2,918
Total cost 549 579
------ ------
Gross profit $2,348 $2,339
Gross profit margin 81.1% 80.2%
</Table>
Revenue from software for the first quarter of 2002 declined 0.7 percent
(up 3 percent at constant currency) versus the first quarter of 2001. The
company's middleware products (which comprise data management, transaction
processing, Tivoli systems management, and Lotus Notes messaging and
collaboration across both IBM and non-IBM platforms) had revenue growth of 2
percent (6 percent at constant currency) over the first three months of 2001.
The Informix acquisition contributed to all of the middleware revenue growth at
constant currency. Additional middleware revenue growth was driven by strong
growth in WebSpere, continued growth in DB2 database products, growth in Tivoli
security and systems management offerings and the impact of currency. DB2, the
company's leading database management software, grew revenue in double digits at
constant currency. This additional revenue growth was partially offset by a
decline in Lotus software products. Operating-systems software revenue declined
10 percent (7 percent at constant currency) in the first quarter of 2002 when
compared with the year-ago period. The decline in the first quarter revenue was
primarily driven by lower revenue from pSeries and iSeries software products.
Software gross profit dollars were essentially flat and the gross profit
margin improved 0.9 points versus the first quarter of 2001. The improvement in
the gross profit percentage was primarly driven by lower external royalty
payments and lower service costs in 2002 versus 2001.
GLOBAL FINANCING
- ----------------
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
-----------------
2002 2001
---- ----
Total revenue $783 $832
Total cost 340 438
---- ----
Gross profit $443 $394
Gross profit margin 56.6% 47.3%
</Table>
-15-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
First quarter 2002 Global Financing revenue decreased 5.9 percent (3
percent at constant currency) compared with the same period of 2001. The decline
was primarily driven by lower commercial financing activity in 2002 versus 2001.
Global Financing gross profit dollars increased 12.6 percent for the first
quarter of 2002 versus the same period in 2001. The gross profit margin
increased 9.3 points in 2002 as compared to 2001. These increases were primarily
driven by lower borrowing costs related to the current interest rate
environment, partially offset by a decline in the used equipment sales gross
profit margin.
ENTERPRISE INVESTMENTS / OTHER
- ------------------------------
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
-----------------
2002 2001
---- ----
Total revenue $237 $276
Total cost 104 139
---- ----
Gross profit $133 $137
Gross profit margin 56.2% 49.5%
</Table>
Revenue from Enterprise Investments/Other decreased 14.3 percent (10
percent at constant currency) in the first three months of 2002 versus the
comparable period in 2001. The decrease was primarily driven by lower hardware
revenue associated with document processors versus last year.
The Enterprise Investments/Other gross profit dollars decreased 2.7
percent and the gross profit margin increased 6.7 points in the first quarter of
2002, versus the same periods of 2001, primarily as a result of the mix of
revenue shifting to higher margin products such as CATIA.
EXPENSE AND OTHER INCOME
- ------------------------
The company reclassified 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
reclassified 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.
-16-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
Selling, general and administrative $ 4,053 $ 4,119
Percentage of revenue 21.8% 19.6%
Research, development and engineering $ 1,200 $ 1,281
Percentage of revenue 6.5% 6.1%
Intellectual property and custom
development (income) $ (333) $ (277)
Other (income) and expense $ (205) $ (76)
Interest expense $ 30 $ 72
------- -------
Total expense and other income $ 4,745 $ 5,119
</Table>
Selling, general and administrative (SG&A) expense decreased 1.6 percent
(up 1 percent at constant currency) in the first three months of 2002 compared
with the same period in 2001. The company continues to make progress in its
operating expense management driven by its continued focus on productivity. SG&A
expense decreased in 2002 as a result of lower discretionary spending on items
such as travel and consulting services. Contributing to the overall decrease was
the benefit from the elimination of goodwill amortization of $76 million
(pre-tax) and a favorable impact from currency translation. This overall
decrease (comprised of lower discretionary spending, the elimination of goodwill
amortization and currency translation) was partially offset by a first-quarter
2002 increase of $61 million in charges taken for bad debt expense to a total of
$154 million and a first-quarter 2002 increase of $108 million in charges taken
for workforce reductions to a total of $138 million. The company continues to
evaluate its headcount and skills needs, and may continue to take related
actions from time to time.
As described in note 4 on pages 7 through 9, of this Form 10-Q, 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 would have been recorded in the first quarter of
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
acquisitions) was $65 million. The amount of goodwill amortization recorded in
the first quarter of 2001 was $75 million, net of tax.
Research, development and engineering (RD&E) expense decreased 6.3
percent for the first three months of 2002 compared with the same period of
2001. The decline in RD&E expense was driven by the focus on discretionary
spending and savings associated with the integration of Lotus and Tivoli into
the company's Software business.
Intellectual property and custom development income increased 20.0
percent for the first three months of 2002 versus the first quarter of 2001.
-17-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
---------------------
2002 2001
---- ----
Sales and other transfers of
intellectual property $170 $ 60
Licensing/royalty-based fees 95 139
Custom development income 68 78
---- ----
Total $333 $277
</Table>
Sales and other transfers of intellectual property can vary period to
period. These transactions often require an extended period of negotiations and
contract/license drafting and administration prior to finalization and
recognition in the financial statements. The increase in first quarter 2002
versus first quarter 2001 was primarily due to the transfer of technology know
how for building a complementary metal oxide semiconductor (CMOS) device in a
silicon-on- insulator (SOI) substrate to Sony and Toshiba. The amount of income
from licensing/royalty-based fee transactions has been declining and this trend
may continue.
Other (income) and expense improved 171 percent in the first quarter of
2002 versus the first quarter of 2001. The improvement was primarily the result
of lower write-downs of certain equity investments for other-than-temporary
market declines of $88 million and a $91 million gain in the first quarter of
2002 associated with the sale of the U.S. and European desktop personal computer
manufacturing to Sanmina SCI. These items were partially offset by lower
interest income of $20 million in the first quarter of 2002 versus 2001.
Interest expense excluding interest classified as Cost of Financing in
the Consolidated Statement of Earnings declined 57.9 percent in the first
quarter of 2002 compared with the first quarter of 2001. The decline was a
result of reduced levels of debt and lower interest rates.
Interest on total borrowings of the company and its subsidiaries, which
includes interest expense and Global Financing interest classified as Cost of
Financing in the Consolidated Statement of Earnings was $217 million for the
first quarter of 2002, of which the company capitalized $9 million.
-18-
<Page>
RESULTS OF OPERATIONS - (CONTINUED)
The following table provides the total pre-tax (income)/cost for
retirement-related plans at March 31, 2002 and 2001. (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>
March 31, March 31,
(dollars in millions) 2002 2001
---- ----
Total retirement-related plans--
(income)/cost $ (25) $ (84)
===== =====
Comprise:
Defined benefit and contribution
pension plans (113) (187)
Nonpension postretirement
retirement benefits 88 103
</Table>
Included in the amounts above, the company realized income of
approximately $266 million due to the funded status of its defined benefits
pension plans for the quarter ended March 31, 2002. The comparable amount for
the first quarter of 2001 was approximately $339 million. The decline in the
income was primarily a result of the change in the expected long-term rate of
return on plan assets from 10 percent to 9.5 percent for the U.S. plan and
similar changes made for certain non-U.S. plans.
At the beginning of 2002, the company reduced its expected long-term
return on the U.S. Plan assets 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 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 7.00
percent, effective December 31, 2001. This change is not expected to have a
material effect on the company's 2002 results of operations.
Future effects of retirement-related plans on the operating results of
the company depend on economic conditions, employee demographics, mortality
rates and investment performance.
PROVISION FOR INCOME TAXES
The effective tax rate for the first three months of 2002 was 29.5
percent versus 29.7 percent in the first quarter of 2001. The company's
effective tax rate will change period to period based on nonrecurring events 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 tax rate will approximate 30 percent.
-19-
<Page>
FINANCIAL CONDITION
During the first quarter of 2002, the company's financial performance
enabled it to make significant investments to fund its future growth and
increase shareholder value. These investments included expenditures of $1,339
million for Research, development and engineering, $1,373 million for Plant,
rental machines and other property and $1,782 million for the repurchase of the
company's common shares. The company had $3,967 million in Cash and cash
equivalents and Marketable securities at March 31, 2002.
CASH FLOW
<Table>
<Caption>
(Dollars in millions) Three Months Ended
March 31,
------------------------
2002 2001
---- ----
Net cash provided from/(used in):
Operating activities $ 2,655 $ 1,935
Investing activities (1,457) (1,382)
Financing activities (3,678) (270)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (17) (53)
------- -------
Net change in cash and cash equivalents $(2,497) $ 230
</Table>
Cash flows from operating activities in the first three months of 2002
increased $720 million from the comparable 2001 period. This primarily resulted
from working capital improvements.
Cash flows used in investing activities increased by $75 million from the
comparable 2001 period. The increase primarily resulted from the acquisition of
CrossWorlds. Proceeds from marketable securities and other investments declined
from the 2001 period.
Cash flows used in financing activities in the first three months of 2002
increased $3,408 million from the comparable 2001 period due primarily to a
decrease in debt financing and an increase in stock repurchases.
WORKING CAPITAL
<Table>
<Caption>
(Dollars in millions) At March 31, At December 31,
2002 2001
------------ ---------------
Current assets $37,385 $42,461
Current liabilities 30,084 35,119
------- -------
Working capital $ 7,301 $ 7,342
Current ratio 1.24:1 1.21:1
</Table>
Current assets decreased $5,076 million from year-end 2001 primarily due
to decreases of $2,900 million in Accounts receivable ($2,101 million in
Short-term financing receivables,
-20-
<Page>
FINANCIAL CONDITION - (CONTINUED)
$776 million in Notes and accounts receivable and $23 in Other accounts
receivable), $2,426 million in Cash and cash equivalents and Marketable
securities and $70 million in deferred taxes, partially offset by increases of
$245 million in Prepaid expenses and other current assets and $103 million in
Inventories. The decline in accounts receivable was attributable to the lower
first quarter revenue volumes and collection of typically higher yearend
accounts receivable balances. The net decrease in Cash and cash equivalents and
Marketable securities was primarily due to a decrease in cash flow from
Investing and Financing activities partially offset by an increase in cash flow
from Operating activities compared to year-end 2001.
Current liabilities decreased $5,035 million from year-end 2001 with
declines of $2,945 million in short-term debt, $1,681 million in Accounts
payable and other accruals, and $409 million in Taxes payable (resulting
primarily from declines in these balances from typically higher year-end
levels).
INVESTMENTS
During the first quarter of 2002, the company invested $1,373 million in
Plant, rental machines and other property, a decrease of $60 million from the
comparable 2001 period. The company invested in its services business, primarily
in the management of customers' information technology, as well as in
manufacturing capacity for the 300 mm copper chip-making facilities in
microelectronics.
In addition to software development expense included in RD&E expense,
during the first three months of 2002, the company invested in software costs of
$140 million that were capitalized on the Consolidated Statement of Financial
Position, an increase of $6 million from the comparable period in 2001.
Amortization of capitalized software costs was $175 million during the first
quarter of 2002, an increase of $26 million from the comparable 2001 period.
Investments and sundry assets were $15,511 million at March 31, 2002,
an increase of $43 million from year-end 2001, primarily due to higher
pre-paid pension assets.
The company has remaining authorization as of March 31, 2002, to purchase
$2,794 million of IBM common shares in the open market. On April 30, 2002, the
Board of Directors authorized the company to repurchase up to an additional $3.5
billion of IBM common shares. The company plans to repurchase the shares in the
open market from time to time, based on market conditions.
DEBT AND EQUITY
The company's debt level of $24,908 million is almost entirely (98
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.
-21-
<Page>
FINANCIAL CONDITION - (CONTINUED)
Global Financing Assets and Debt
(dollars in billions)
GLOBAL FINANCING
-----------------------
ASSETS DEBT
1993 30,448 21,131
1994 28,670 19,164
1995 28,846 19,722
1996 31,793 20,627
1997 35,444 23,824
1998 40,199 27,754
1999 39,686 26,799
2000 40,822 27,514
2001 36,670 25,545
2002 33,723 24,377
The company's operations are essentially self-funding except for the
company's Global Financing business which leverages assets.
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. The company's total debt decreased $2,243
million to $24,908 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 March 31, At December 31,
2002 2001
------------ ---------------
Assets* $33,723 $36,670
Debt ** 24,377 25,545
Equity 3,715 3,756
Debt/Equity 6.6x 6.8x
</Table>
* Global Financing assets include cash, financing receivables, intercompany
amounts, rental machine fixed assets and other assets.
** Global Financing debt includes debt of the company and of Global Financing
units that support the Global Financing business.
-22-
<Page>
FINANCIAL CONDITION - (CONTINUED)
The Global Financing segment is a financial services business and is,
therefore, more debt dependent than the company's other businesses. In the first
quarter of 2002, the Global Financing debt to equity ratio decreased to 6.6x,
which is within management's acceptable target range.
NON-GLOBAL FINANCING
<Table>
<Caption>
(Dollars in millions) At March 31, At December 31,
2002 2001
--------------- ---------------
Debt* $ 531 $ 1,606
Debt/Capitalization 2.7% 7.5%
</Table>
* Non-global financing debt is the company's total external debt less the Global
Financing debt described in the Global Financing table above.
The decrease in non-global financing debt in the first quarter of 2002
was due to stronger cash flows and decreased requirements for cash in the first
quarter period.
Global Financing provides financing predominately 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 arms-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 company financing described above. Accordingly, the
Global Financing debt above and Global Financing Cost of financing 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
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 financing caption. The reconciliation of these amounts is as follows:
<Table>
<Caption>
(Dollars in millions)
Global Non-Global Consolidated
Financing Financing Eliminations Results
--------- --------- ------------ -------
Cost of financing $ 208 -- $ (30) $ 178
Interest expense -- $ 0 30 30
</Table>
Stockholders' equity decreased $563 million from December 31, 2001,
primarily due to the company's ongoing stock repurchase program partially offset
by an increase in the company's retained earnings. A review of the company's
debt and equity should also consider other contractual obligations and
commitments. These amounts are summarized in one table below to facilitate a
reader's review.
-23-
<Page>
FINANCIAL CONDITION - (CONTINUED)
CONTRACTUAL OBLIGATIONS
<Table>
<Caption>
Payments Due In
Balance as -----------------------------------------------------------
(Dollars in millions) of 3/31/02 2002 2003-04 2005-06 After 2006
---------- ---- ------- ------- ----------
Long-term debt $ 20,203 $ 3,824 $ 5,041 $ 4,620 $ 6,718
Lease commitments 5,319 988 1,889 1,028 1,414
COMMITMENTS
Amounts Expiring In
Balance as -----------------------------------------------------------
(Dollars in millions) of 3/31/02 2002 2003-04 2005-06 After 2006
---------- ---- ------- ------- ----------
Unused lines of credit $ 3,762 $ 2,906 $ 412 $ 208 $ 236
Other commitments 229 96 130 3 -
Financial guarantees 217 79 40 9 89
</Table>
LIQUIDITY
The company maintains a global credit facility totaling $12.0 billion in
committed credit lines, including an $8.0 billion five-year facility (which has
four years remaining) and a $4.0 billion 364-day facility, as part of its
ongoing efforts to ensure appropriate levels of liquidity. As of March 31, 2002,
amounts unused and available under these facilities were $11,537 million. In
addition, at March 31, 2002, the company had in place other lines of credit,
most of which were uncommitted, of $7,294 million. The amount of unused and
available under these primarily uncommitted facilities at March 31, 2002, was
$5,162 million.
The major rating agencies' ratings of the company's debt securities at
March 31, 2002, appear in the table below:
<Table>
<Caption>
Standard Moody's
And Investors
Poor's Service Fitch, Inc.
--------------------------------------------------
Senior long-term debt A+ A1 AA-
Commercial paper A-1 Prime-1 F-1+
</Table>
CURRENCY RATE FLUCTUATIONS
Changes in the relative values of non-U.S. currencies to the U.S. dollar
affect the company's results. At March 31, 2002, currency changes resulted in
assets and liabilities denominated in local currencies being translated into
fewer dollars than at year-end 2001. The currency rate changes had an
unfavorable effect on revenue growth of approximately 3 and 5 percentage points
in the first quarter of 2002 and 2001, respectively.
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
-24-
<Page>
FINANCIAL CONDITION - (CONTINUED)
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 of the
2001 Annual Report.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain or protect intellectual property rights; quarterly
fluctuations in revenues and volatility of stock prices; the company's ability
to attract and retain key personnel; currency fluctuations and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition of the company's distributors or resellers; the company's
ability to successfully manage acquisitions and alliances; legal, political and
economic changes and other risks, uncertainties and factors discussed elsewhere
in this Form 10-Q, in the company's other filings with the Securities and
Exchange Commission or in materials incorporated therein by reference.
PART II - OTHER INFORMATION
ITEM 6 (a). EXHIBITS
<Table>
<Caption>
EXHIBIT NUMBER
- --------------
3 The By-laws of IBM as amended through April 30, 2002.
10 Third Amendment to Employment Agreement for L.V. Gerstner, Jr.
dated as of January 29, 2002.
11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios.
</Table>
-25-
<Page>
ITEM 6 (b). REPORTS ON FORM 8-K
The company filed Form 8-K on January 17, 2002, with respect to the
company's financial results for the periods ended December 31, 2001, and
included the unaudited Consolidated Statement of Earnings, Consolidated
Statement of Financial Position and Segment Data for the periods ended December
31, 2001. In addition, IBM's Chief Financial Officer, John R. Joyce's
fourth-quarter earnings presentation to security analysts on Thursday, January
17, 2002 was filed as Attachment II of the Form 8-K.
The company filed Form 8-K on January 29, 2002, announcing that Samuel J.
Palmisano had been elected CEO of IBM effective March 1, 2002 and that Louis V.
Gerstner, Jr. will remain IBM chairman through the end of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
International Business Machines Corporation
-------------------------------------------
(Registrant)
Date: May 15, 2002
- ------------------
By: /s/ Robert F. Woods
----------------------------------
Robert F. Woods
Vice President and Controller
-26-