NCR Annual Report 2001 | Quarterlytics

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FY2001 Annual Report · NCR

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REVENUE

RESULTS OF OPERATIONS1
year ended december 31

dollars in millions,
except per share amounts

TABLE OF CONTENTS

data warehousing

fﬁnancial self service

retail store automation

systemedia

payment and imaging

other

1999

2000

2001

Lars Nyberg

C.K. Prahalad

NCR BOARD OF DIRECTORS

revenue

cost of revenue

selling, general and administrative expenses

research and development expenses

operating income

other expense (income), net

net income

1999

2000

2001

$ 6,196

$ 5,959

$ 5,917

4,298

1,354

341

203

(59)

162

4,054

1,327

308

270

(70)

229

4,117

1,273

293

234

142

earnings per diluted share

1.61

$ 2.34

$ 1.43

1For comparability purposes, this ﬁnancial information excludes: the provision for loans and receivables
related to Credit Card Center (CCC); a charge for an environmental matter; acquisition-related in-process
research and development and integration charges; the cumulative effect of an accounting change; the
beneﬁt from a favorable resolution of international tax issues; restructuring and other related charges;
signiﬁcant gains from asset sales; and, a favorable impact from a tax valuation allowance release
(see Notes 1, 2, 5, 8 and 9 of Notes to Consolidated Financial Statements). Including these items, net
income per diluted share would have been $3.35, $1.82 and $2.18, in 1999, 2000 and 2001, respectively
(see Consolidated Statements of Income).

overview

at-a-glance

letter to shareholders

management’s discussion and analysis

report of management

report of independent accountants

consolidated statements of income

consolidated balance sheets

consolidated statements of cash flows

consolidated statements of changes in stockholders’ equity

notes to consolidated financial statements

selected financial data

stockholder information

executive officers

board of directors

inside back cover

C.K. Prahalad has been the Chairman of PRAJA, Inc., a software
company located in San Diego, California, since May 2000.
Mr. Prahalad is on a two-year leave of absence from the University
of Michigan, where he is the Harvey Freuhauf Professor of Business
Administration. Mr. Prahalad is a specialist in corporate strategy
and the role of top management in large, diversiﬁed, multi-national
companies. Since completing his D.B.A. at Harvard University,
he has been a visiting research fellow at Harvard, a professor at
the Indian Institute of Management, and a visiting professor at the
European Institute of Business Administration.

James Robbins

Since 1994, James Robbins has served as President and Chief
Executive Officer of Cox Communications, Inc. He was President
of the Cable Division of Cox Enterprises, Inc. from 1985 to 1994.
Prior to joining Cox in 1983, he worked for Continental Cablevision
and Viacom Communications, Inc.

William Stavropoulos

William Stavropoulos is Chairman of the Board of Directors
and Chairman of the Executive Committee of The Dow Chemical
Company. From 1995 until November 2000, he also was the
President and Chief Executive Officer of Dow Chemical. He joined
Dow Chemical in 1967 and assumed his current duties in 1995.

Chairman of the Board and Chief Executive Officer Lars Nyberg
joined NCR in 1995. Prior to coming to NCR, he held a number of
positions with Philips Electronics NV, including Chairman and CEO
of its Communications Division and the head of its Computer
Division, where he led a turnaround of Philips' computer business.

David Holmes

David Holmes was Chairman of The Reynolds and Reynolds
Company from 1990 to January 1, 2002. Mr. Holmes also served as
its Chief Executive Officer from 1989 until November 2000, and its
President from 1989 to 1999. He joined Reynolds and Reynolds
in 1984 as Senior Vice President of its Computer Systems Division.

Linda Fayne Levinson

Linda Fayne Levinson has been a partner with GRP Partners, a private
equity investment fund, since 1997. From 1994 to 1999, she also was
President of Fayne Levinson Associates, an independent consulting
ﬁrm. Prior to 1994, Ms. Levinson held executive and management
positions with a number of companies.

James Long

On December 31, 1999, James Long retired as Executive Vice President
of Nortel Networks Corporation and President of its Enterprise
Networks business, positions he had held since 1996 and 1998,
respectively. Prior to 1998, he served as President of Nortel World
Trade, Group Executive for Asia and Corporate Vice President of
Quality. Before joining Nortel, he spent 25 years with IBM Corporation
in a variety of sales, marketing and management capacities.

Ronald Mitsch

Ronald Mitsch was the Vice Chairman of the Board for Minnesota
Mining and Manufacturing Company (3M) from 1995 until November
1998, and its Executive Vice President, Industrial and Consumer
Markets and Corporate Services, from 1991 to 1998. Dr. Mitsch
joined 3M in 1960 and held a variety of technical, research and
management positions.

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OVERVIEW

To be successful in today’s networked economy, businesses
must embrace a fundamental change from technology intended
for information collection to technology aimed at developing
relationships. NCR is a global leader in providing technologies
designed to enhance interaction among customers, suppliers,
partners and employees – not just process data.

NCR is uniquely positioned to deliver complete solutions –
hardware, software applications, global services and consulting,
and consumables – that address critical strategic and operational
issues for both the management and development of business
relationships in the networked economy. We help customers
turn their data into actionable information to make better, faster
decisions at a lower cost. NCR is the technology leader in enterprise
data warehousing. We are the best at integrating strategic, tactical
and event-driven decision making into a single, centralized
view of the business through all customer contact channels. Our
automated-teller machines, web-enabled kiosks, self-checkout
technology and point-of-sale workstations embrace the relationship
continuum. Supported by global maintenance and consulting
services, these solutions provide our customers the competitive
edge required to be successful today and in the future.

Our customers include the world’s top 10 retailers, 7 of the world’s
top 10 telecommunication companies, 6 of the world’s top airlines,
and the world’s top technology companies and leading banks. We
have offices and distribution facilities in more than 100 countries
to support this large and geographically diverse customer base.

Our businesses are structured into two operating divisions, each led
by a Chief Operating Officer reporting to Chairman and Chief Executive
Officer Lars Nyberg. Mark Hurd leads the Teradata Division, while
Howard Lance leads the Retail and Financial Group, which includes
Financial Self Service, Retail Store Automation, Worldwide Customer
Services, Systemedia, and Payment and Imaging. Recognizing the
operational differences of the two groups, we implemented this
dual structure to leverage management focus, ensuring that each
division can reach its full potential. Lars Nyberg, Mark Hurd and
Howard Lance, along with Senior Vice President and Chief Financial
Officer Earl Shanks, form NCR’s Executive Committee, which
oversees the strategic direction of the company.

NCR understands that the ability to form

relationships, and to nurture and grow those

relationships, is the ultimate competitive

advantage; perhaps the only sustainable

competitive advantage. This is Relationship

Technology ™, and NCR is the Relationship

Technology company.

NCR 2001

AT-A-GLANCE

teradata data warehousing

NCR’s Teradata Division is the industry’s leading provider of enterprise
data warehousing solutions. Companies count on the powerful analytical
capabilities of Teradata® solutions to proactively manage and proﬁtably
grow their businesses. Our unique ability to provide a single, inte-
grated view of a company’s operations and business relationships
allows companies to identify profitable revenue opportunities and
ways to streamline costs. Furthermore, Teradata’s data warehousing
solutions are designed to give employees throughout an organization
the actionable information they need to make better decisions faster
and closer to the customer. With an increased ability to proactively
manage customer satisfaction comes increased loyalty and business
opportunity. Businesses worldwide choose Teradata Data Warehousing
for its proven expertise, commitment to excellence and innovation, and
best-in-class technology.

Teradata analytical solutions can include some or all of the following:
our database and data warehouse solutions; analytical applications
for customer relationship management, operations and ﬁnancial
management, business performance management and e-business;
services; and hardware. We partner with leading software and
analytical/decisioning tool providers as well as key enterprise
application providers to create complete, integrated solutions which
address the diverse needs of our customers.

To further our leadership in enterprise data warehousing, we will
continue to advance our active data warehousing technologies, build
analytical applications that leverage our data warehousing solutions,
optimize our service capabilities, and partner with global consulting
companies to extend our reach.

ﬁnancial self service

NCR is the world’s leading provider of automated-teller machines
(ATMs) and ﬁnancial self-service solutions, making people’s lives easier
by conveniently fulﬁlling secure, reliable ﬁnancial transactions. The
company focuses on delivering solutions faster to its customers, helping
them maintain a competitive edge, and offering best value solutions
through cost-efficient design, manufacturing, delivery and services.

NCR’s comprehensive Aptra™ software suite provides an open operating

platform and modern software tools which enable easy development of
new business opportunities across channels and multi-vendor networks.

By adding new services such as cash and check deposit automation,
bill payment and check cashing, NCR can help its customers reduce
costs by migrating transactions to the self-service channel. New revenue
streams can be generated and customer loyalty encouraged through
applications such as ticketing, advertising and personalizing the
automated customer interface.

NCR has worked with strategic partners beyond banking to expand
the role of ﬁnancial self service, developing a family of products for
the convenience sector just as a range of products is available to the
ﬁnancial sector. By concentrating on its customers’ bottom line, NCR is
able to attract and retain customers from banking institutions, retailers,
independent sales organizations, convenience stores and e-banks.

retail store automation

For generations, retailers have relied on NCR to help them operate
more efficiently and enhance the consumer’s shopping experience.
Already a global market leader in point-of-sale (POS) terminals and
bar code scanners, NCR’s Retail Store Automation business today is
reshaping the way retailers interact with their customers – combining
our assisted POS expertise with innovative self-checkout, interactive
kiosk and electronic shelf label (ESL) solutions.

NCR’s intuitive and reliable self-checkout technology and web-enabled
kiosks provide consumers with improved levels of satisfaction as they
are no longer frustrated by long checkout lines or store personnel
unavailability. Additionally, self-checkout terminals and kiosks allow
retailers to beneﬁt from decreased labor costs. ESLs, which provide
pricing and other information for each item on a retailer’s shelf, allow
consumers to be conﬁdent that the price on the shelf is the same as
the price at the cash register. Retailers appreciate the ability to change
prices from one central location in a fraction of the time and cost
required to replace paper price tags on the shelf.

NCR is working to accelerate the market adoption rate for these newer
solutions. This strategic focus is designed to seize a signiﬁcant share
of proﬁtable, high-growth market opportunities. At the same time,
initiatives focused on operational excellence and cost leadership
are aimed at driving competitive advantage and proﬁtable growth
for NCR’s Retail Store Automation products, software and services.

worldwide customer services

payment and imaging

Payment and Imaging solutions enable item-based transactions to be
digitally captured at a bank via an ATM, at a processing center, or
wherever a payment is received. These image-based transactions are
then processed and retained within a ﬂexible and scalable archive where
they can be easily retrieved and delivered via the Internet, an intranet,
or CD-ROM, among other channels, to both retail and commercial
clients, as well as other banks. NCR provides a single-source, image-
item processing system to ﬁnancial institutions, enabling them to reduce
operating costs, improve customer service and generate revenue
through value-added product offerings to their customers.

Services are an essential component of NCR’s complete solution
offerings, and NCR’s Worldwide Customer Services (WCS) business is
a global leader in information technology (IT) services delivery. WCS
supports NCR’s solutions with world-class maintenance and industry-
leading metrics in critical areas such as fix rate, on-time service
delivery and customer service satisfaction. The strength of WCS lies
with its ability to provision and manage global IT infrastructures.
From consulting to site design, to staging and implementation, to
complete systems management, WCS has proven its capabilities by
successfully supporting NCR’s base of Teradata Data Warehousing,
Financial Self Service and Retail Store Automation customers.

As a result of supporting NCR solutions around the world, WCS
has established an impressive service delivery capability, and has
leveraged this global presence and experience to develop and deliver
a comprehensive portfolio of IT infrastructure services to businesses
in additional industries. These high availability network services focus
on the vital systems, networks, software and security that comprise
the IT infrastructure of today’s businesses, and include operations
management, consulting, deployment and maintenance. WCS provides
these services directly to global businesses as well as through
strategic partnerships with leading technology, network and systems
suppliers, including Cisco Systems, Nortel Networks, Dell Computer,
Sun Microsystems and others.

systemedia

Systemedia develops and markets a complete line of business
consumables for NCR’s Financial Self Service and Retail Store
Automation solutions. Additionally, Systemedia provides world
class products and consumables for third-party solutions around
the globe which include ink jet and laser printer supplies, thermal
transfer ribbons, labels, paper rolls, ink ribbons, laser documents,
business forms and specialty media. Systemedia certiﬁed products
ensure system compatibility, trouble-free operation and maximum
equipment performance. Systemedia’s extensive use of Six Sigma®
and e-commerce tools enhance its ability to meet customer
requirements. Its extensive product line, global reach, multi-channel
presence and use of technology have positioned Systemedia
well for long term growth and proﬁtability.

NCR 2001

AT-A-GLANCE

teradata data warehousing

ﬁnancial self service

NCR’s comprehensive Aptra™ software suite provides an open operating

platform and modern software tools which enable easy development of
new business opportunities across channels and multi-vendor networks.

retail store automation

worldwide customer services

payment and imaging

systemedia

NCR 2001

DEAR FELLOW SHAREHOLDER:

We began 2001 with the objective of continued success in executing
our strategy. Our primary goals across each of our core solutions
were to drive top-line revenue growth, and to improve profitability
by achieving operational excellence.

Given the challenging economic conditions that developed throughout
the year, we did not achieve the growth we had anticipated. Still, we
believe that we performed well relative to our competitors. We began
taking steps early in the year to mitigate the effects of an economic
downturn on our businesses. We lowered product and service costs,
and we reduced expenses. As a result, each of our businesses is now
better positioned for improved proﬁtability when the economy recovers.

We are encouraged by the progress made within our core solutions –
Teradata Data Warehousing, Financial Self Service, and Retail Store
Automation, each of which is supported by our Worldwide Customer
Services organization. We believe that each business moved forward
in addressing both opportunities and challenges throughout 2001.

Teradata Data Warehousing continued to gain market share even as
capital spending declined. It lowered its breakeven point, improving its
ﬁnancial model and delivering its ﬁrst meaningful operating proﬁt
in the fourth quarter.

Financial Self Service achieved tremendous success penetrating the
automated-teller machine (ATM) market in the Asia/Paciﬁc region and
maintained its global market leadership. It drove down product costs,
streamlined its expense structure, and delivered two percentage points
of year-over-year operating margin improvement, excluding special
items discussed elsewhere in this Annual Report.

Retail Store Automation benefited from the market acceptance of
self-checkout technology and significantly outshipped its competitors
in 2001. This business continued its initiatives aimed at cost and
expense reduction, and improved proﬁtability year-over-year.

Our Worldwide Customer Services organization reduced service costs
and is making progress on improving utilization rates. Additionally,
it realized year-over-year maintenance revenue growth in both Data
Warehousing and Financial Self Service.

Each of our businesses made progress in driving toward operational
excellence. We view operational excellence as the ability to consistently
provide high-quality solutions to our customers in the most efficient
and proﬁtable manner possible. To help us achieve operational
excellence, we are utilizing Six Sigma methodology to examine and

improve every process affecting our customers and their perception
of NCR as a world-class solutions provider.

To improve proﬁtability, we are concentrating our efforts on lowering
product costs and reducing infrastructure expenses across all of
our solutions. We continue to move toward using industry-standard
components to reduce product and service costs, and to better
leverage our research and development investment. We have
strengthened our commitment to sourcing lower-cost components,
to designing our products and services for efficiency and low
cost, and to evaluating less expensive and diverse manufacturing
alternatives. Additionally, we have implemented a global procure-
ment process, which resulted in significant savings in 2001 and
will continue to provide cost reductions going forward.

To support our Financial Self Service growth in the Asia/Pacific
region, we have an ATM manufacturing facility in Beijing, China.
This facility provides more efficient and timely manufacturing capa-
bilities and lower-cost delivery. We are also moving manufacturing
and component sourcing for our Retail Store Automation business to
lower-cost countries. Reducing our product costs in this business
will help provide a more attractive value proposition to our customers.

With the economic slow down in 2001, we re-sized our infrastructure,
resulting in more than $50 million in expense reductions compared
to 2000 levels. For example, we largely completed the move of our
back-office ﬁnancial and accounting operations into a shared services
model, allowing more efficient and consistent operation at a lower
overall cost. Our efforts to reduce our expense structure continue.
We are deploying a global model in Worldwide Customer Services
to help drive margin improvement, improve consistency and increase
infrastructure utilization. We also are consolidating call centers and
increasing the use of remote resolution to further improve productivity.

Now I would like to review the progress of each of NCR’s businesses.

teradata data warehousing

The competitive position of our Teradata Data Warehousing solution
has never been stronger. We continue to gain market share quarter
after quarter, as evidenced by our ability to generate 2001 revenue con-
sistent with prior year despite the overall market decline.

We increased the number of new customer wins year-over-year in 2001.

New customers included Publix, GE Capital Corporation, Neiman
Marcus, Tricon Global Restaurants, Inc., Telstra, Albertson’s, and
Goodyear Tire & Rubber Company, among others. This is an important
measure because new customers will typically upgrade their data
warehouses as their business and data-related needs grow. Many of
our larger customers, such as Safeway, British Airways, J.C. Penney
Corporation, RBC Financial Group, BellSouth Corporation, and Sears,
Roebuck and Company, upgraded their data warehouses in 2001,
despite the difficult economic environment. Demonstrating our success
in penetrating the ﬁnancial industry, Bank of America upgraded the
size and scope of its warehouse, selecting Teradata as its strategic data
warehouse engine for business intelligence and decision support.

Even though the economic slowdown affected capital spending, it
highlighted the value – and necessity – of an enterprise-wide data
warehouse. To make better, faster decisions at a lower cost, companies
need one integrated view of the business. This requires having all the
available data from all the operational systems and customer touch-
points in one enterprise-wide data warehouse.

Many companies have come to the realization that having multiple,
independent data marts not only limits analytical capabilities, but
also is more expensive. As a result, companies have begun to
consolidate the data in these data marts into enterprise-wide data
warehouses. As the enterprise-wide approach provides both a
compelling return on investment and a strategic competitive advantage,
the pace of data mart consolidation is accelerating. This is a major
opportunity for our Teradata Division.

In 2001, the Teradata Division made signiﬁcant progress in reducing
costs and expenses, further lowering its breakeven point and enhancing
its financial model. We closed our Columbia, South Carolina,
manufacturing facility as part of our continued move toward higher
utilization of industry-standard components. We eliminated
duplicative research and development expenses which resulted from
a previous acquisition. Additionally, we removed organizational expense
through streamlining administrative and sales support.

Entering 2002, our Teradata Data Warehousing solution is well
positioned to deliver proﬁtable growth. It clearly has the potential
to become NCR’s most proﬁtable business.

ﬁnancial self service

Despite the challenging economic environment, our ATM business
achieved meaningful revenue growth and maintained its global market
leadership. We are particularly pleased with our increased penetration
of the emerging Asia/Paciﬁc region.

Our broad array of offerings has enabled us to increase our competitive
differentiation, both in terms of cost and functionality. One of our
newer Financial Self Service offerings is the Aptra software platform.
This middleware is open-system software that can run on any ATM
and allows web-enablement of ATM networks.

In the more mature United States and European markets, we have seen
banks begin to move to web-enabled networks. We are encouraged

by this trend, because their use makes adding functionality – such as
automated check cashing and deposit, bill payment, purchasing
money orders and ticket disbursement – simple and cost efficient.

7-Eleven’s Vcom project with NCR is a working example of this
technology. 7-Eleven has partnered with industry leaders to provide
full-function ATMs that not only accept and dispense cash, but also
recognize and count multiple currency denominations, cash checks,
sell money orders and perform other advanced functions.

retail store automation

The economy-driven erosion in consumer conﬁdence signiﬁcantly
affected most retailers in 2001. As the year progressed, retailers
continued to defer the purchase of traditional point-of-sale equipment.

We view operational excellence as the ability

to consistently provide high-quality solutions

to our customers in the most efficient and

profitable manner possible.

However, they continued to show interest in our newer products,
such as self-checkout terminals, web-enabled kiosks and electronic
shelf labels (ESLs). These products provide an attractive return on
investment by improving a retailer’s efficiency and margins, as well as
enhancing customer service. As competition among retailers intensiﬁes,
these products will become increasingly attractive and important.

In 2001, we saw the market acceptance of self-checkout technology.
We successfully completed a 1,300-store rollout and added several
pilots at major retailers, including general merchandisers, grocers and
drug stores. With market acceptance conﬁrmed, the questions now are
how fast will the major retailers install self-checkout, and who will
supply these installations. Among other retailers, Wal-Mart placed
sizeable orders for our web-enabled kiosks, and several regional
chains in North America and Europe deployed our ESL product.
We believe that 2002 will be the year ESL begins to achieve more
widespread market support as our newest release allows its beneﬁts
to be achieved at a lower price per label.

worldwide customer services

With the resources to reach over 200 countries, NCR is one of only
three global IT support service providers. This offering is an extremely
important component of the complete, end-to-end solutions we provide
to our customers. However, to improve our service margins we must
move from a country-centric business model to standardized offers,
metrics and systems worldwide. Effectively executing this transition
in 2002 is very important for NCR.

We were encouraged to see customer service maintenance revenue
growth for 2001 in both Data Warehousing and Financial Self Service.
The increase in Data Warehousing maintenance revenue was fueled
by our increasing number of customers. Financial Self Service

NCR 2001

DEAR FELLOW SHAREHOLDER:

improve every process affecting our customers and their perception
of NCR as a world-class solutions provider.

Now I would like to review the progress of each of NCR’s businesses.

teradata data warehousing

We increased the number of new customer wins year-over-year in 2001.

Entering 2002, our Teradata Data Warehousing solution is well
positioned to deliver proﬁtable growth. It clearly has the potential
to become NCR’s most proﬁtable business.

ﬁnancial self service

In the more mature United States and European markets, we have seen
banks begin to move to web-enabled networks. We are encouraged

retail store automation

We view operational excellence as the ability

to consistently provide high-quality solutions

to our customers in the most efficient and

profitable manner possible.

worldwide customer services

NCR 2001

NCR’s fundamentals are strong and I believe that we are better
positioned, both in terms of proﬁtability and geography, than we were
at the beginning of 2001. Each member of NCR’s management team
shares my commitment to our strategy and its successful execution.
I am conﬁdent that we have taken the proper actions to position NCR
for long-term success and enhanced shareholder value.

Lars Nyberg
Chairman of the Board and Chief Executive Officer

maintenance revenue grew due to an increased capture rate,
regaining several contracts from competitors, and extended service
offerings such as help desk and incident management.

We are leveraging our worldwide presence and experience to provide
further value-added products and services. These include outsourcing
and managed services, as well as incremental revenue from high-
availability network services for companies such as Cisco Systems,
Nortel Networks, Dell Computer, Sun Microsystems and others.

systemedia

In 2001, our consumables business developed TeleWeb, a telephone-
and Internet-based sales model, to drive sales growth and reduce
expense. Systemedia also utilized Six Sigma programs to integrate
products and services into the Financial Self Service and Retail Store
Automation offerings at lower product costs, and to increase NCR’s
overall wallet share of ATM customers. We will leverage this success in
a new TeleWeb initiative throughout NCR’s other business units in 2002.

payment and imaging

Our technology solution that facilitates the automation of check and
item processing for banks provides stable margins and cash ﬂow.
Even as the use of cash alternatives such as debit cards and electronic
payments increases, the paper check will remain popular for some
time. However, check processing is changing, with traditional paper
check processing giving way to electronic exchange. The information
will be stored electronically in one central location so it can be accessed
instantly, and checks could ultimately be cleared electronically in
minutes rather than days, without depending on an expensive and time-
consuming physical transport system. Banks will be able to reduce
payment-processing costs while increasing access to information and
improving customer service, risk management and fraud reduction.
Combining our Payment and Imaging solutions with our Financial
Self Service offerings, positions NCR to be the only end-to-end
provider that can capture and process check images.

looking forward

NCR EXECUTIVE COMMITTEE

(from left to right)

Howard Lance

Lars Nyberg

Earl Shanks

Mark Hurd

President, and Chief Operating Officer,
Retail and Financial Group

Chairman of the Board and
Chief Executive Officer

Senior Vice President and
Chief Financial Officer

President, and Chief Operating Officer,
Teradata Division

Our intense focus on operational excellence and expense reduction
remains a top strategic priority. We expect to see greater beneﬁt from
these efforts as we move through 2002.

We have strengthened our management team by adding individuals
with proven track records and experience in achieving operational
excellence. We have improved our product cost leadership, making
our products and solutions even more attractive and more proﬁtable.
We are a geographically diverse company, not solely reliant on
the economy of one country or region.

We are the market and technology leader in enterprise-wide data
warehousing. The competitive position of our Teradata Data
Warehousing solution has never been stronger. We will continue
our global leadership in ATMs. We see increased market acceptance
of self-checkout technology, and increasing interest in electronic
shelf labels, full-function ATMs and ATM network outsourcing.

NCR 2001

NCR Corporation 2001 Annual Report Financials

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

overview

As the Relationship Technology company, we provide the technology and services that help businesses interact, connect and relate
with their customers. Through our presence at customer interaction points, such as point-of-sale workstations, automated-teller
machines (ATMs) and web-enabled kiosks, our Retail Store Automation and Financial Self Service solutions enable companies to
capture and process transaction-based information. Our powerful Data Warehousing solutions transform transaction-based information
into knowledge, permitting businesses to respond with programs designed to improve customer acquisition, retention and proﬁtability.

We offer speciﬁc solutions for the retail and ﬁnancial industries and also provide solutions for industries including telecommunications,
transportation, insurance, utilities and electronic commerce, as well as consumer goods manufacturers and government entities. Our
solutions are built on a foundation of long-established industry knowledge and consulting expertise, a range of hardware technology,
value-adding software, global customer support services, and a complete line of consumable and media products.

We deliver our solutions to customers on a global basis, and categorize our results in four regions: the Americas, Europe/Middle
East/Africa (EMEA), Japan and Asia/Paciﬁc excluding Japan (Asia/Paciﬁc).

revenue and operating margin by solution

Our key solutions are categorized as Data Warehousing, Financial Self Service and Retail Store Automation. In addition,
Systemedia and our Payment and Imaging solutions are reportable segments. A sixth category, Other, accumulates individually
insignificant and dissimilar businesses, such as exited businesses, networking hardware and services, and managed services,
which are not attributable to the formally identified reportable segments. Each segment is comprised of hardware, software,
professional consulting services and customer support services.

For the years ended December 31, the effects of the provision for loans and receivables with Credit Card Center (CCC), acquisition-
related integration and in-process research and development charges, and restructuring and other related charges have been excluded
from the gross margin, operating expense and operating income amounts presented and discussed below (see Notes 1, 2 and 8 of
Notes to Consolidated Financial Statements).

In millions

Consolidated revenue
Consolidated gross margin excluding special items1
Consolidated operating expenses excluding special items:

Selling, general and administrative expenses2
Research and development expenses 3

Consolidated income from operations excluding special items
Special items (as discussed in the footnotes below)

Total consolidated income from operations

2001

2000

1999

$ 5,917
1,800

$ 5,959
1,905

$ 6,196
1,898

1,273
293

234
(48)

1,327
308

270
(65)

1,354
341

203
(125)

186

205

1 In 2001 and 2000, consolidated gross margin excludes the impact of $6 million and $1 million, respectively, for integration charges related to acquisitions
(see Note 2 of Notes to Consolidated Financial Statements). Also excluded from gross margin are $37 million and $8 million for restructuring and other
related charges in 2000 and 1999, respectively (see Note 1 of Notes to Consolidated Financial Statements).

2 In 2001, selling, general and administrative expenses exclude the impact of a $39 million provision for loans and receivables with CCC (see Note 8 of Notes to

Consolidated Financial Statements). In 2001 and 2000, selling, general and administrative expenses exclude integration costs related to acquisitions of $3 million
and $1 million, respectively (see Note 2 of Notes to Consolidated Financial Statements). Also excluded from selling, general and administrative expenses are
$1 million and $117 million for restructuring and other related charges in 2000 and 1999, respectively (see Note 1 of Notes to Consolidated Financial Statements).

3 In 2000, research and development expenses exclude the impact of $25 million for in-process research and development charges related to acquisitions

(see Note 2 of Notes to Consolidated Financial Statements).

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001

Total revenue decreased 1% in 2001 versus the prior year, but increased 2% on a constant currency basis. Revenues reﬂect declines
from exited businesses and the impact of the slowing United States (U.S.) economy on capital spending, offset by the strength of our
Financial Self Service solutions in the EMEA and Asia/Paciﬁc regions. Total revenue declines in 2001 of 4% in the Americas region
and 12% in Japan were partially offset by growth in the EMEA and Asia/Paciﬁc regions of 6% and 9%, respectively. On a constant
currency basis, 2001 revenues increased 9% in the EMEA region and 16% in the Asia/Paciﬁc region, contrasted to a 1% decline in
Japan. Operating income excluding special items declined 13% in 2001 compared to 2000. The decrease is attributable to a lower
mix of higher margin product revenue versus service revenue and lower customer services margin as a percentage of revenue, partially
offset by our efforts to reduce operating expenses.

In 2000, total revenue decreased 4% compared to 1999. On a constant currency basis, total revenue decreased 1% in 2000 versus
the prior-year period. The decline in 2000 revenue primarily reﬂected the impact of exited businesses, but was also impacted by the
termination of services associated with equipment retired as a result of Year 2000 replacement and economic slowing in the U.S.
retail industry. The decline in 2000 revenue was partially offset by growth in our Data Warehousing solutions. By geographic region,
revenues in 2000 decreased from the prior year 2% in the Americas region, 6% in Japan and 13% in the EMEA region, in contrast
to a 24% increase in the Asia/Paciﬁc region. The 33% increase in income from operations in 2000 reﬂected continued improvement
in gross margin as a percentage of revenue, particularly in our Data Warehousing solutions, and reductions in operating expenses.

Data Warehousing Solutions

Data Warehousing solutions, built on our advanced Teradata data warehouse and data mining software and complemented by customer
relationship management applications, help businesses synthesize large volumes of information about customers, suppliers and
partners, allowing more accurate business decisions. Combining hardware, software, professional consulting services, customer
support services and products from leading technology firms, our Data Warehousing solutions are designed to enable businesses,
across a multitude of industries, to quickly leverage detailed data into actionable opportunities.

The following table presents Data Warehousing solutions (including customer services maintenance) revenue and total operating loss
for the years ended December 31 (excluding the impact of special items previously described):

In millions

Data Warehousing revenue
Data Warehousing operating loss

2001

2000

1999

$ 1,149
(32)

$ 1,134
(34)

900
(142)

Data Warehousing revenues increased 1% in 2001 compared to 2000 despite the challenging economic environment. During 2001,
the adverse impact of the economy on capital spending resulted in a decline in product upgrade revenues offset by growth in
professional consulting services as customers sought to leverage more from their existing data warehouses. In addition, customer
services maintenance revenue increased as a result of growth in our installed customer base. Data Warehousing solutions experienced
revenue growth in all regions except Japan. The operating loss in 2001 versus 2000 decreased slightly due to a lower expense
structure offset partially by a lower mix of higher margin hardware and software products, versus lower margin professional services.
In 2000, revenue increased 26% compared to 1999 due primarily to existing customer upgrades and new customer sales growth.
The decreased operating loss in 2000 from 1999 was the result of higher volume and significant improvement in gross margin
as a percentage of revenue.

We expect revenue growth as the economy improves, which when combined with our continued focus on operational efficiency and
expense management, should position Data Warehousing solutions to deliver operating proﬁtability in 2002.

NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Self Service Solutions

Providing a complete line of ATMs, and related software and services, Financial Self Service solutions are designed to quickly and
reliably process high volumes of consumer transactions. Incorporating advanced features such as web enablement, automated check
cashing and deposit, bill payment and the sale of non-cash items, Financial Self Service solutions enable businesses to reduce costs,
generate new revenue streams and build customer loyalty.

The following table presents Financial Self Service solutions (including customer services maintenance) revenue and total operating
income for the years ended December 31 (excluding the impact of special items previously described):

In millions

Financial Self Service revenue
Financial Self Service operating income

2001

2000

1999

$ 1,615
249

$ 1,511
201

$ 1,565
224

Financial Self Service solutions revenues increased 7% in 2001 compared to 2000. Revenue growth versus the prior year was driven
by growth in the Asia/Paciﬁc region, particularly in the emerging markets of India and China, and growth in Europe, aided by sales
of euro conversion kits, partially offset by slight declines in the Americas region. Revenue growth in 2001 was also attributable to
increased customer services maintenance revenues resulting from selling extended services and realizing a higher capture rate for new
installations. Operating income in 2001 increased 24% versus the prior year due primarily to higher volume and lower expenses. In
2000, revenues decreased 3% compared to 1999. The decline was due to the impact of currency ﬂuctuations, as well as a decrease
in customer services maintenance revenue driven by the retirement of equipment as a result of Year 2000 replacement. The operating
income decline in 2000 was due to lower revenue and gross margin as a percentage of revenue.

By continuing to leverage our worldwide service and manufacturing presence, and our focus on expense management, we are
positioned to deliver efficient, timely and lower-cost Financial Self Service solutions to our customers. Accordingly, we expect to
deliver consistent operating margins while maintaining or modestly growing revenue in 2002.

Retail Store Automation Solutions

Combining our retail industry expertise, software and hardware technologies, and implementation, consulting and maintenance
services, Retail Store Automation solutions deliver traditional retail solutions such as point-of-sale workstations and scanners, as well as
advanced solutions in the emerging areas of self-checkout technologies, web-enabled kiosks and electronic shelf labels. Our Retail Store
Automation solutions are designed to improve selling productivity and checkout processes, and increase service levels for retailers.

The following table presents Retail Store Automation solutions (including customer services maintenance) revenue and total operating
income (loss) for the years ended December 31 (excluding the impact of special items previously described):

In millions

Retail Store Automation revenue
Retail Store Automation operating income (loss)

2001

2000

1999

$ 1,272
4

$ 1,359
(17)

$ 1,435
20

Retail Store Automation revenues decreased 6% in 2001 compared to 2000. The overall revenue decline was primarily the result
of decreased revenues in the Americas region as U.S. economic conditions continued to impact the capital spending of retailers on
traditional Retail Store Automation solutions. Partially offsetting this effect, we experienced signiﬁcant growth in revenues from our
advanced self-checkout solution as retailers focused limited capital spending on projects with attractive returns on investment. The
improvement in operating income in 2001 was primarily the result of expense reductions offset partially by lower sales. In 2000, revenues
decreased 5% compared to 1999 due primarily to softness in the U.S. retail industry, and declines in Japan and the EMEA region,
offset partially by growth in the Asia/Pacific region. The operating income decline in 2000 was primarily the result of lower sales.

We expect the weak U.S. economy to have a continued impact on the results of our Retail Store Automation solutions. Revenue
declines in our traditional solutions are expected to outpace growth in our advanced solutions. The continued shift in revenue mix
from traditional solutions to higher margin advanced solutions, combined with ongoing expense management, will better position
Retail Store Automation solutions for improved proﬁtability when the U.S. economy improves.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001

Systemedia

Systemedia develops, produces and markets a complete line of business consumables. These products include paper rolls for ATMs
and point-of-sale workstations, labels, paper products, and imaging supplies for ink jet, laser, impact and thermal-transfer printers.
Systemedia products are designed to reduce paper-related failures and enable businesses to improve transaction accuracy while
reducing overall costs.

The following table presents Systemedia revenue and total operating income for the years ended December 31 (excluding the impact
of special items previously described):

In millions

Systemedia revenue
Systemedia operating income

2001

2000

1999

503
9

502
15

506
30

Systemedia revenues remained relatively flat in 2001 compared to 2000. On a constant currency basis, Systemedia revenues
increased 3%. Growth in the Americas region was offset by declines in Japan, and the EMEA and Asia/Paciﬁc regions. Operating
income declined in 2001 primarily due to continued competitive pricing pressures impacting gross margin yield, offset partially
by lower operating expenses. In 2000, revenues decreased 1% compared to 1999 due primarily to currency ﬂuctuations and weakness
in the U.S. retail industry. Operating income declined in 2000 due to competitive pricing pressures impacting gross margin yield
and increasing paper prices.

Payment and Imaging Solutions

Consisting of hardware, software, and consulting and support services, our comprehensive Payment and Imaging solutions enable
check and item-based transactions to be digitally captured, processed and retained within a ﬂexible, scalable environment. Payment
and Imaging solutions utilize advanced image recognition and workﬂow technologies to automate item processing, helping ﬁnancial
industry businesses increase efficiency and reduce operating costs.

The following table presents Payment and Imaging solutions (including customer services maintenance) revenue and total operating
income for the years ended December 31 (excluding the impact of special items previously described):

In millions

Payment and Imaging revenue
Payment and Imaging operating income

2001

2000

1999

301
44

304
42

324
17

Payment and Imaging revenues declined 1% in 2001 compared to 2000. Revenues declined in the Asia/Paciﬁc and Americas regions,
in contrast to revenue growth in the EMEA region and Japan. The decline in the Americas region was primarily due to the fourth-
quarter sale of our item processing outsourcing business (see Note 2 of Notes to Consolidated Financial Statements). The operating
income increase of 5% in 2001 was primarily driven by lower operating expenses. In 2000, revenues decreased 6% compared to
1999 due to our decision to focus efforts in more profitable geographic areas. The operating income improvement in 2000 was
driven by gross margin improvement and reductions in operating expenses.

gross margin

Gross margin as a percentage of revenue (excluding the impact of special items previously described) decreased 1.6 percentage points
in 2001 versus the prior year. Product gross margin declined 1.0 percentage point and service gross margin decreased 1.7 percentage
points in 2001. Product gross margin declined due primarily to a lower mix of Data Warehousing hardware revenues versus Retail Store
Automation and Financial Self Service hardware revenues. The decline in service gross margin was primarily due to underutilization
of our customer services resource infrastructure resulting from the slower economy and its effect on the retail and telecommunication
industries. Gross margin as a percentage of revenue increased 1.4 percentage points in 2000 compared to 1999. The gross margin
increase in 2000 consisted of a 0.8 percentage point increase in product gross margin and a 1.9 percentage point increase in service
gross margin. The improvement in product gross margin in 2000 was primarily due to increased sales within our higher-margin
solutions, such as Data Warehousing, and decreased sales of lower-margin products within our exited businesses. Service gross
margin in 2000 increased due to improved professional consulting and transactional support services margins within our key solutions.

10 NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

operating expenses

Selling, general and administrative expenses (excluding the impact of special items previously described) decreased $54 million
or 4% in 2001 compared to 2000. The decrease in 2001 was primarily due to cost infrastructure improvements and curtailment of
discretionary spending, offset partially by increases in general and administrative expenses relating to incremental amortization
of goodwill from acquisitions. In 2000, selling, general and administrative expenses declined $27 million or 2% versus 1999. The
decrease in 2000 was primarily due to lower selling expenses and employee reductions related to the 1999 restructuring plan, offset
partially by increased goodwill amortization related to acquisitions and marketing expenses. As a percentage of revenue, selling,
general and administrative expenses were 21.5%, 22.3% and 21.9% in 2001, 2000 and 1999, respectively.

Total goodwill amortization recorded in operating expenses was $67 million, $33 million and $20 million in 2001, 2000 and 1999,
respectively. Excluding goodwill amortization, selling, general and administrative expenses decreased $88 million or 7% in 2001
versus 2000, and $40 million or 3% in 2000 versus 1999. In accordance with Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangibles,” NCR will no longer amortize goodwill beginning January 1, 2002 (see Note 1 of Notes to
Consolidated Financial Statements).

Research and development expenses decreased $15 million or 5% in 2001 compared to the prior year. The decline in 2001 related to
the rationalization of our spending and the elimination of duplicative expenses in our customer relationship management software, which
primarily resulted from the ﬁnalization of integrating our 2000 acquisition of Ceres Integrated Solutions, LLC. Research and development
expenses decreased $33 million or 10% in 2000 versus 1999, representing spending reductions in non-key or exited businesses.
As a percentage of revenue, research and development expenses were 5.0%, 5.2% and 5.5% in 2001, 2000 and 1999, respectively.

income before income tax

Operating income (excluding the impact of special items previously described) was $234 million in 2001 versus operating income
of $270 million and $203 million in 2000 and 1999, respectively. The 13% decline in operating income in 2001 reﬂected a lower mix
of higher margin product revenue versus service revenue and lower customer services margin as a percentage of revenue, partially
offset by our efforts to reduce operating expenses. The net beneﬁt to operating results from the combined pension, postretirement and
postemployment benefit plans and associated investments was $19 million less favorable in 2001 versus 2000. The net benefit
from the combined pension, postretirement and postemployment benefit plans and associated investments was $26 million more
favorable in 2000 versus 1999.

Interest expense was $18 million in 2001, $13 million in 2000 and $12 million in 1999. Other expense, net, was $44 million in 2001,
and consisted primarily of a $40 million charge related to an environmental matter, $7 million of goodwill amortization expense,
and $16 million of investment basis write-downs for losses that were considered to be other than temporary. These expenses were
partially offset by $10 million of interest income and $20 million of other income representing both a gain from the sale of our
account and item processing outsourcing businesses and a gain related to the demutualization of one of our health insurance
providers. Other income, net, was $83 million and $169 million in 2000 and 1999, respectively. In 2000, other income, net, consisted
primarily of $48 million in gains from facility sales, $31 million of interest income and $6 million in goodwill amortization expense.
In 1999, other income, net, included $118 million in gains from facility sales (of which $98 million represented signiﬁcant gains on
the sale of two facilities), $26 million of interest income and $3 million in goodwill amortization expense, among other things.

income tax

Income tax benefit was $97 million in 2001 compared to income tax expense of $97 million in 2000 and income tax benefit of
$102 million in 1999. The income tax benefit in 2001 included a $138 million benefit due primarily to a favorable resolution
of international income tax issues. The 1999 income tax benefit was the result of a $232 million reduction in our U.S. deferred
tax valuation allowance resulting from sustained profitability of our U.S. operations. Our effective tax rate was approximately 33%
for 2001 excluding the impact of the provision for loans and receivables related to CCC, acquisition-related integration costs, a charge
related to an environmental matter, the cumulative effect of adopting Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (SFAS 133), and the beneﬁt from the favorable resolution of international income
tax issues. Our effective tax rate was approximately 33% and 38% for 2000 and 1999, respectively, excluding restructuring and other
related charges, acquisition-related integration and in-process research and development charges, the tax valuation release, and
signiﬁcant gains from dispositions of assets. We expect our effective tax rate for 2002 to be approximately 30%.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001 11

ﬁnancial condition, liquidity and capital resources

Our cash, cash equivalents and short-term investments totaled $336 million at December 31, 2001, compared to $357 million
and $763 million at December 31, 2000 and 1999, respectively. The signiﬁcant decrease in 2000 was primarily due to business
acquisitions and investments totaling $319 million.

We generated cash from operations of $146 million, $171 million and $607 million in 2001, 2000 and 1999, respectively. The cash
generated from operations in 2001 was driven primarily by operating results and improved asset management, partially offset by
disbursements for employee severance and pension. Receivable balances decreased $212 million in 2001 compared to an $80 million
increase in 2000 and a $358 million decrease in 1999. The decrease in receivables in 2001 versus the prior year was primarily
attributable to lower fourth-quarter revenues, incremental factoring of approximately $18 million and a continued focus on collections.
Inventory balances decreased $8 million, $28 million and $85 million in 2001, 2000 and 1999, respectively. The cash generated from
operations in 2000 was driven primarily by operating results, partially offset by disbursements for employee severance and pension.
In 1999, the cash generated from operations was primarily due to improved operating results and dramatic asset management
improvements, partially offset by disbursements for employee severance and pension.

Net cash used in investing activities was $233 million, $367 million and $326 million in 2001, 2000 and 1999, respectively. The net use
of cash in investing activities in 2001 primarily represented net expenditures for property, plant and equipment, and reworkable service
parts. In 2001, we reduced net short-term investments by $9 million compared to a reduction of $182 million in 2000 and an increase
of $165 million in 1999. In 2000, we reduced our short-term investment position to fund acquisition activities. Capital expenditures
excluding expenditures for reworkable service parts were $141 million, $216 million and $187 million for the years ended 2001, 2000
and 1999, respectively. Proceeds from sales of property, plant and equipment are primarily driven by initiatives to reduce our excess
real estate.

In 2001, net cash generated from ﬁnancing activities was $87 million compared to uses of $7 million and $194 million in 2000 and
1999, respectively. In 2001, the purchase of NCR common stock used $60 million versus $110 million in 2000 and $269 million in
1999. Short- and long-term debt provided $41 million in aggregate in 2001 compared to a $14 million use in 2000 and a $6 million
use in 1999.

In the normal course of business, we enter into various contractual and other commercial commitments that impact or can impact
the liquidity of our operations. The following table outlines our commitments at December 31, 2001:

Total
Amounts

Less than
1 Year

1-3
Years

4-5
Years

Over 5
Years

In millions

Long-term debt
Capital lease obligations
Operating leases (non-cancelable)
Short-term borrowings

Total contractual

Unused lines of credit1
Standby letters of credit and surety bonds
Corporate guarantees
Other commitments

Total commercial

8
2
334
138

–
–
59
138

$ 482

$ 197

$ 667
118
55
4

$ 266
45
7
–

2
1
92
–

1
–
6
4

–
–
55
–

6
1
128
–

$ 135

$ 400
73
–
–

–
–
42
–

$ 844

$ 318

$ 473

1 Includes unused bank overdraft and other uncommitted funds of $56 million.

In 1996, we entered into a $600 million ﬁve-year, unsecured revolving credit facility with a syndicate of ﬁnancial institutions which
was scheduled to mature in November 2001. In October 2001, we terminated the $600 million credit facility and entered into a
$200 million 364-day unsecured revolving credit facility with a one year term-out option and a $400 million five-year unsecured
revolving credit facility, both with a syndicate of financial institutions. The credit facilities contain certain representations and
warranties; conditions; affirmative, negative and ﬁnancial covenants; and events of default customary for such facilities. Interest rates
charged on borrowings outstanding under the credit facilities are based on prevailing market rates. No amounts were outstanding
under the facilities at December 31, 2001, 2000 or 1999.

12 NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We believe that cash ﬂows from operations, the credit facilities (existing or future arrangements) and other short- and long-term debt
ﬁnancings, if any, will be sufficient to satisfy our future working capital, research and development, capital expenditures and other
ﬁnancing requirements for the foreseeable future. Our ability to generate positive cash ﬂows from operations is dependent on general
economic conditions, competitive pressures, and other business and risk factors described below in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. If we are unable to generate sufficient cash ﬂows from operations, or
otherwise comply with the terms of our credit facilities, we may be required to reﬁnance all or a portion of our existing debt or seek
additional ﬁnancing alternatives.

factors that may affect future results

This annual report, including the Chairman’s letter, and other documents that we ﬁle with the Securities and Exchange Commission
(SEC), as well as other oral or written statements we may make from time to time, contain information based on management’s beliefs
and include forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve a
number of known and unknown risks, uncertainties and assumptions. These forward-looking statements are not guarantees of future
performance, and there are a number of factors including, but not limited to, those listed below, which could cause actual outcomes
and results to differ materially from the results contemplated by such forward-looking statements. We do not undertake any obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Competition

Our ability to compete effectively within the technology industry is critical to our future success.

We operate in the intensely competitive information technology industry. This industry is characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions, price and cost reductions, and increasingly greater commoditization
of products, making differentiation difficult. In addition, this intense competition increases pressure on gross margins that could
impact our business and operating results. Our competitors include other large, successful companies in the technology industry
such as: International Business Machines Corporation (IBM), Oracle Corporation, Unisys Corporation, Diebold, Inc. and Wincor
Nixdorf Gmbh & Co., some of which have widespread penetration of their platforms and service offerings. In addition, we compete
with companies in niche markets such as advanced retail solutions and entry-level ATMs. If we are unable to compete successfully,
the demand for our solutions, including products and services would decrease. Any reduction in demand could lead to fewer customer
orders, a decrease in the prices of our products and services, reduced revenues, reduced margins, operating inefficiencies, reduced
levels of proﬁtability and loss of market share.

Our future competitive performance depends on a number of factors, including our ability to: rapidly and continually design, develop
and market, or otherwise maintain and introduce solutions and related products and services for our customers that are competitive in
the marketplace; offer a wide range of solutions from web-enabled kiosks to enterprise data warehouses; offer solutions to customers
that operate effectively within a computing environment which includes the integration of hardware and software from multiple vendors;
offer products that are reliable and that ensure the security of data and information; offer high quality, high availability network services;
market and sell all of our solutions effectively; and produce and deliver solutions at competitive operating margins.

Introduction of New Solutions

The solutions we sell are very complex, and we need to rapidly and successfully develop and introduce new solutions.

We operate in a very competitive, rapidly changing environment, and our future success depends on our ability to develop and
introduce new solutions that our customers choose to buy. If we are unable to develop new solutions, our business and operating
results would be impacted. This includes our efforts to rapidly develop and introduce data warehousing software applications. The
development process for our complex solutions, including our software application development programs, requires high levels of
innovation from both our developers and our suppliers of the components embedded in our solutions. In addition, the development
process can be lengthy and costly. It requires us to commit a signiﬁcant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers’ needs and technological trends accurately, or are otherwise unable to complete
development efficiently, we would be unable to introduce new solutions into the market on a timely basis, if at all, and our business
and operating results would be impacted. In addition, if we are unable to successfully market and sell both existing and newly developed
solutions, such as our self-checkout technologies, electronic shelf labels, full-function ATMs and outsourcing solutions, our
operating results would be impacted.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001 13

Our solutions, which contain both hardware and software products, may contain known as well as undetected errors which may be
found after the products’ introduction and shipment. While we attempt to remedy errors that we believe would be considered critical
by our customers prior to shipment, we may not be able to detect or remedy all such errors, and this could result in lost revenues,
delays in customer acceptance and incremental costs, which would all impact our operating results.

Reliance on Third Parties

Third party suppliers provide important elements to our solutions.

We rely on many suppliers for necessary parts and components to complete our solutions. In most cases, there are a number of
vendors producing the parts and components that we utilize. However, there are some components that are purchased from single
sources due to price, quality, technology or other reasons. For example, we depend on chips and microprocessors from Intel Corporation
and operating systems from UNIX ® and Microsoft Windows NT ®. Certain parts and components used in the manufacture of our
ATMs and the delivery of some of our Retail Store Automation solutions are also supplied by single sources. If we were unable
to purchase the necessary parts and components from a particular vendor and we had to ﬁnd an alternative supplier for such parts
and components, our new and existing product shipments and solutions deliveries could be delayed, impacting our business
and operating results.

We have, from time to time, formed alliances with third parties that have complementary products, services and skills. Many different
relationships are formed by these alliances such as outsourcing arrangements to manufacture hardware and subcontract agreements
with third parties to perform services and provide products to our customers in connection with our solutions. These alliances
introduce risks that we cannot control such as non-performance by third parties and difficulties with or delays in integrating elements
provided by third parties into our solutions. The failure of third parties to provide high quality products or services that conform to
the required speciﬁcations or contractual arrangements could impair the delivery of our solutions on a timely basis and impact our
business and operating results.

Acquisitions and Alliances

Our ability to successfully integrate acquisitions or effectively manage alliance activities will help drive future growth.

As part of our overall solutions strategy, we intend to continue to make investments in companies, products, services and technologies,
either through acquisitions, joint ventures or strategic alliances. Acquisitions and alliance activities inherently involve risks. The
risks we may encounter include those associated with assimilating and integrating different business operations, corporate cultures,
personnel, infrastructures and technologies or products acquired or licensed, retaining key employees and the potential for unknown
liabilities within the acquired or combined business. The investment or alliance may also disrupt our ongoing business, or we may
not be able to successfully incorporate acquired products, services or technologies into our solutions and maintain quality. Further,
we may not achieve the projected synergies once we have integrated the business into our operations.

It is our policy not to discuss or comment upon negotiations regarding such business combinations or divestitures until a deﬁnitive
agreement is signed or circumstances indicate a high degree of probability that a material transaction will be consummated, unless
the law requires otherwise.

Operating Result Fluctuations

Our revenues and operating results could ﬂuctuate for a number of reasons.

Future operating results could continue to be subject to ﬂuctuations based on a variety of factors, including:

Seasonality. Our sales are historically seasonal, with revenue higher in the fourth quarter of each year. During the three quarters ending
in March, June and September, we have historically experienced less favorable results than in the quarter ending in December. Such
seasonality also causes our working capital cash ﬂow requirements to vary from quarter to quarter depending on the variability in the
volume, timing and mix of product sales. In addition, revenue in the third month of each quarter is typically higher than in the ﬁrst
and second months. These factors, among other things, make forecasting more difficult and may adversely affect our ability to predict
ﬁnancial results accurately.

14 NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Acquisitions and Alliances. As part of our solutions strategy, we intend to continue to acquire technologies, products and businesses
as well as form strategic alliances and joint ventures. As these activities take place and we begin to include the ﬁnancial results related
to these investments, our operating results will ﬂuctuate.

Cost/Expense Reductions. We are actively working to manage our costs and expenses to continue to improve operating proﬁtability
without jeopardizing the quality of our products. We are also striving to become the leading, low-cost provider of certain Financial
Self Service and Retail Store Automation solutions. Our success in achieving targeted cost and expense reductions depends on a number
of factors, including our ability to achieve infrastructure rationalizations, implement Six Sigma practices, improve accounts receivable
collections, and reduce inventory overhead, among other things. If we do not successfully complete our cost reduction initiatives,
our results of operation or ﬁnancial condition could be adversely affected.

Multinational Operations

Continuing to generate substantial revenues from our multinational operations helps to balance our risks and meet our strategic goals.

Currently, approximately 57% of our revenues come from our international operations. We believe that our geographic diversity
may help to mitigate some risks associated with geographic concentrations of operations (e.g., adverse changes in foreign currency
exchange rates or business disruptions due to economic or political uncertainties). However, our ability to sell our solutions domestically
in the United States and internationally is subject to the following risks, among others: general economic and political conditions in
each country which could adversely affect demand for our solutions in these markets, as evidenced by the recent economic slowing in
the U.S. retail and global telecommunications industries; currency exchange rate ﬂuctuations which could result in lower demand for
our products as well as generate currency translation losses; changes to and compliance with a variety of local laws and regulations
which may increase our cost of doing business in these markets or otherwise prevent us from effectively competing in these markets;
and the impact of terrorist activity on the economy or markets in general, or on our ability or that of our suppliers, to meet
commitments, or on the timing of purchases by our customers.

Employees

Hiring and retaining highly qualiﬁed employees helps us to achieve our business objectives.

Our employees are vital to our success, and our ability to attract and retain highly skilled technical, sales, consulting and other key
personnel is critical, as these key employees are difficult to replace. If we are not able to attract or retain highly qualiﬁed employees
in the future, our business and operating results could be impacted.

Intellectual Property

As a technology company, our intellectual property portfolio is key to our future success.

Our intellectual property portfolio is a key component of our ability to be a leading technology and services solutions provider. To
that end, we aggressively protect and work to enhance our proprietary rights in our intellectual property through patent, copyright,
trademark and trade secret laws, and if our efforts fail, our business could be impacted. In addition, many of our offerings rely on
technologies developed by others, and if we are not able to continue to obtain licenses for such technologies, our business would
be impacted. Moreover, from time to time, we receive notices from third parties regarding patent and other intellectual property claims.
Whether such claims are with or without merit, they may require significant resources to defend and, if an infringement claim is
successful, in the event we are unable to license the infringed technology or to substitute similar non-infringing technology, our
business could be adversely affected.

Environmental

Our historical and ongoing manufacturing activities subject us to environmental exposures.

We have been identiﬁed as a potentially responsible party in connection with the Fox River matter as further described in “Environmental
Matters” under Note 9 of Notes to Consolidated Financial Statements, and we incorporate such discussion in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations by reference and make it a part of this risk factor.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001 15

Contingencies

Like other technology companies, we face uncertainties with regard to regulations, lawsuits and other related matters.

We are subject to regulations, proceedings, lawsuits, claims and other matters, including those that relate to the environment, health
and safety, and intellectual property. Such matters are subject to the resolution of many uncertainties; thus, outcomes are not
predictable with assurance. While we believe that amounts provided in our ﬁnancial statements are currently adequate in light of the
probable and estimable liabilities, there can be no assurances that the amounts required to discharge alleged liabilities from lawsuits,
claims and other legal proceedings and environmental matters, and to comply with applicable environmental laws, will not impact
future operating results.

market risk

We are exposed to market risk, including changes in foreign currency exchange rates and interest rates. We use a variety of measures
to monitor and manage these risks, including derivative ﬁnancial instruments. Since a substantial portion of our operations and
revenue occur outside the United States, and in currencies other than the U.S. dollar, our results can be signiﬁcantly impacted by
changes in foreign currency exchange rates. To manage our exposures to changes in currency exchange rates, we enter into various
derivative ﬁnancial instruments such as forward contracts and options. These instruments generally mature within 12 months. At
inception, select derivative instruments are designated as cash-ﬂow hedges of inventory purchases and sales, and of certain ﬁnancing
transactions that are ﬁrmly committed or forecasted. Gains and losses on qualifying cash-ﬂow hedge transactions are deferred and
recognized in the determination of income when the underlying transactions are realized, canceled or otherwise terminated. When
hedging certain foreign currency transactions of a long-term investment nature, gains and losses are recorded in the currency
translation adjustment component of stockholders’ equity. Gains and losses on other foreign exchange contracts are recognized
in other income or expense as exchange rates change.

For purposes of potential risk analysis, we use sensitivity analysis to quantify potential impacts that market rate changes may have
on the fair values of our hedge portfolio related to ﬁrmly committed or forecasted transactions. The sensitivity analysis represents
the hypothetical changes in value of the hedge position and does not reﬂect the related gain or loss on the forecasted underlying
transaction. Due to the adoption of SFAS 133 on January 1, 2001, the 2000 sensitivity data has been restated to conform to the 2001
presentation. As of December 31, 2001 and 2000, a 10% appreciation in the value of the U.S. dollar against foreign currencies from
the prevailing market rates would result in a $41 million increase or a $25 million increase in the fair value of the hedge portfolio,
respectively. Conversely, a 10% depreciation of the U.S. dollar against foreign currencies from the prevailing market rates would result in
a $9 million decrease or an $8 million decrease in the fair value of the hedge portfolio as of December 31, 2001 and 2000, respectively.

The interest rate risk associated with our borrowing and investing activities at December 31, 2001 was not material in relation to our
consolidated ﬁnancial position, results of operations or cash ﬂows. We generally do not use derivative ﬁnancial instruments to alter
the interest rate characteristics of our investment holdings or debt instruments.

The only ﬁnancial instruments that we utilize that are not exchange traded are foreign exchange forward contracts and options that we
purchase exclusively from large ﬁnancial institutions. We record these contracts on our balance sheet at fair market value based upon
market-price quotations from the ﬁnancial institutions. Accordingly, we do not enter into non-exchange traded contracts that require
the use of fair value estimation techniques, and that would have a material impact on our ﬁnancial results.

We are potentially subject to concentrations of credit risk on accounts receivable and ﬁnancial instruments such as hedging instruments,
short-term investments, and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum
potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals,
credit limits, selecting major international ﬁnancial institutions (as counterparties to hedging transactions) and monitoring procedures.
Our business often involves large transactions with customers, and if one or more of those customers were to default in its obligations
under applicable contractual arrangements, we could be exposed to potentially signiﬁcant losses. Moreover, the recent downturn in
the U.S. economy could have an adverse impact on the ability of our customers to pay their obligations on a timely basis. However,
we believe that the reserves for potential losses are adequate. At December 31, 2001 and 2000, we did not have any major
concentration of credit risk related to ﬁnancial instruments.

16 NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

key accounting policies

Revenue Recognition

We are a solutions company that provides our customers with hardware, software, professional consulting services and customer
support services. Consistent with other companies that provide similar solution offerings, revenue recognition is often complex and
subject to multiple accounting pronouncements including Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (SAB 101), Statement of Position No. 97-2, “Software Revenue Recognition” (SoP 97-2) and related interpretations. We
have described below our policy for revenue recognition which we believe is consistent with accounting principles generally accepted
in the United States of America.

In general, we consider revenue realized, or realizable, and earned when persuasive evidence of an arrangement exists, the products
or services have been provided to the customer, the sales price is ﬁxed or determinable and collectability is reasonably assured.

For our solutions, hardware and software revenue is recognized upon shipment, delivery, installation or customer acceptance of
the product, as defined in the customer contract. Revenue is not recognized until the customer has use of the products, including
both the hardware and software components. Other than a few small software businesses we operate, which generate approximately
1% of our annual revenue, we do not sell our software products without the related hardware as our software products are embedded
in the hardware we sell. Our typical solution requires no signiﬁcant production, modiﬁcation or customization of the software or hard-
ware that is essential to the functionality of the products other than installation for our more complex solutions. For these complex
solutions, revenue is deferred until the installation is complete.

As a solutions provider, our sales arrangements often include services in addition to hardware and software. These services could
include hardware maintenance, upgrade rights, customer support and professional consulting services. For sales arrangements that
include bundled hardware, software and services, we account for any undelivered service offering as a separate element of a multiple-
element arrangement. These services are typically not essential to the functionality of the hardware and software. Revenue amounts
deferred for services are determined based upon vendor-speciﬁc objective evidence of the fair value of the elements as prescribed
in SoP 97-2. For these services, revenue is typically recognized ratably over the period beneﬁted or when the services are complete.
If the services are essential to the functionality of the hardware and software, revenue from the hardware and software components
is deferred until the essential services are complete.

Use of Estimates

As a result of our complex business, global scope and size, we are required to make signiﬁcant estimates in preparing our ﬁnancial
statements. As described in Note 1 of Notes to Consolidated Financial Statements, actual results could differ from the amounts
estimated and recorded in such statements. A description of each of our more signiﬁcant estimates follows:

Provisions for Doubtful Accounts. We establish provisions for doubtful accounts using percentages of our accounts receivable balance
as an overall proxy to reﬂect historical average credit losses and speciﬁcally provision for known issues. Given our experience, we
believe that the reserves for potential losses are adequate, but if one or more of our larger customers were to default in its obligations
under applicable contractual arrangements, we could be exposed to potentially signiﬁcant losses in excess of the provisions established.

Inventory Reserves. We maintain inventory at the lower of average cost or net realizable value. Excess and obsolete reserves are
established based on forecasted usage, orders, technological obsolescence and inventory aging. If our estimates related to forecasted
usage are inaccurate, if orders are canceled or if changes in technology impact demand for our products in an unforeseen manner,
we could be exposed to potentially signiﬁcant losses in excess of the reserves established.

Warranty Reserves. We accrue warranty reserves using percentages of revenue as an overall proxy to reﬂect our historical average
warranty claims. Given our experience, we believe that the reserves for potential warranty claims are adequate, but if one or more
of our larger customers were to make unexpected warranty claims, we could be exposed to potential losses in excess of the
provisions established.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

NCR 2001 17

Investments in Marketable Securities. We classify our marketable securities as available-for-sale and account for them at fair value
with net unrealized gains or losses reported, net of tax, within stockholders’ equity. If a decline in the fair value of a marketable
security is deemed by us to be other than temporary, the cost basis of the investment is written down to estimated fair value, and
the amount of the write-down is included in the determination of income. If our estimates of fair value are inaccurate, we could be
exposed to potentially signiﬁcant losses up to the cost basis of the marketable equity securities.

Long-Lived Assets. Long-lived assets such as property, plant and equipment, goodwill, software and investments are reviewed for
impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An
impairment loss would be recognized when estimated future undiscounted cash ﬂows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount. If our estimates about future undiscounted cash ﬂows or useful lives
were to change, we could be exposed to potentially signiﬁcant losses.

Pension, Postemployment and Postretirement. We estimate the expected return on plan assets, discount rate, involuntary turnover
rate, rate of compensation increase and future health care costs, among other things, and rely on actuarial estimates, to assess
the future potential liability and funding requirements of our pension, postemployment and postretirement plans. These estimates,
if incorrect, could have a signiﬁcant impact on our consolidated ﬁnancial position, results of operations or cash ﬂows.

Environmental and Legal Contingencies. We accrue legal and environmental provisions when it is probable that a liability has been
incurred and the amount or range of the liability is reasonably estimable. If we are able to determine that the amount of the liability
is likely to fall into a range and no amount within that range can be determined to be the better estimate, we accrue at the minimum
amount of the range. Our ultimate liability could be signiﬁcantly greater than the amounts currently reserved for in the consolidated
ﬁnancial statements.

Income Taxes. We estimate our tax liabilities based on current tax laws in the statutory jurisdictions in which we operate. Our estimates
include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes, as well as judgments regarding the realization of
deferred tax assets. If our provisions for current or deferred taxes are not adequate, if we are unable to realize certain deferred tax
assets or if the tax laws change unfavorably, we could experience potentially signiﬁcant losses in excess of the established provisions.
Likewise, if our provisions for current and deferred taxes are in excess of those eventually needed, if we are able to realize additional
deferred tax assets or if tax laws change favorably, we could experience potentially significant gains (see Note 5 of Notes to
Consolidated Financial Statements).

Basis of Consolidation

The consolidated financial statements include the accounts of NCR and our majority-owned subsidiaries. Long-term investments
in affiliated companies in which we own between 20% and 50%, and therefore exercise signiﬁcant inﬂuence, but which we do not
control, are accounted for using the equity method. Investments in which we do not exercise signiﬁcant inﬂuence (generally, when
we have an investment of less than 20% and no representation on the company’s Board of Directors) are accounted for using the
cost method. We eliminate all signiﬁcant intercompany transactions and accounts. We do not have any special purpose entities whose
ﬁnancial results are not included in the consolidated ﬁnancial statements.

During the year, we did not participate in any material transactions with a related party, including members of the Board of Directors,
executive officers, key employees, or former employees.

recently issued accounting pronouncements

A discussion of recently issued accounting pronouncements is described in Note 1 of Notes to Consolidated Financial Statements
and we incorporate such discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations
by reference and make it a part hereof.

18 NCR 2001

Management’s Discussion and Analysis of Financial Condition and Results of Operations

REPORT OF MANAGEMENT

We are responsible for the preparation, integrity and objectivity of our consolidated ﬁnancial statements and other ﬁnancial information
presented in our Annual Report. The accompanying consolidated ﬁnancial statements were prepared in accordance with accounting
principles generally accepted in the United States of America and include certain amounts based on currently available information
and our judgment of current conditions and circumstances.

We maintain an internal control structure designed to provide reasonable assurance, at reasonable cost, that our assets are safeguarded,
and that transactions are properly authorized, executed, recorded and reported. This structure is supported by the selection and training
of qualiﬁed personnel, by the proper delegation of authority and division of responsibility, and through dissemination of written policies
and procedures. An ongoing program of internal audits and operational reviews assists us in monitoring the effectiveness of these
controls, policies and procedures. The accounting systems and related other controls are modiﬁed and improved in response to changes
in business conditions and operations, and recommendations made by our independent accountants and internal auditors.

PricewaterhouseCoopers LLP, independent accountants, are engaged to perform audits of our consolidated financial statements.
These audits are performed in accordance with auditing standards generally accepted in the United States of America, which include
the consideration of our internal control structure.

The Audit and Finance Committee of the Board of Directors, consisting entirely of independent directors who are not employees of
NCR, monitors our accounting, reporting and internal control structure. Our independent accountants, internal auditors and manage-
ment have complete and free access to the Audit and Finance Committee, which periodically meets directly with each group to ensure
that their respective duties are being properly discharged.

Lars Nyberg
Chairman of the Board and
Chief Executive Officer

Earl Shanks
Senior Vice President and
Chief Financial Officer

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of NCR Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in
stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of NCR Corporation and its
subsidiaries 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 NCR Corporation’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.

As addressed in Note 1 of the Notes to Consolidated Financial Statements, on January 1, 2001, NCR Corporation adopted Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement
of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an
Amendment of FASB Statement No. 133,” the effect of which is reﬂected as a cumulative effect of change in accounting for the year
ended December 31, 2001.

Dayton, Ohio
January 19, 2002

Report of Management and Report of Independent Accountants

NCR 2001 19

CONSOLIDATED STATEMENTS OF INCOME

For the year ended December 31

In millions, except per share amounts

Revenue
Product revenue
Service revenue

Total revenue

Operating expenses
Cost of products
Cost of services
Selling, general and administrative expenses
Research and development expenses

Total operating expenses

Income from operations
Interest expense
Other expense (income), net

Income before income taxes and cumulative effect of accounting change

Income tax (beneﬁt) expense

Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax

Net income

Net income per common share
Basic before cumulative effect of accounting change
Cumulative effect of accounting change

Basic

Diluted before cumulative effect of accounting change
Cumulative effect of accounting change

Diluted

Weighted average common shares outstanding
Basic
Diluted

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

2001

2000

1999

$ 3,048
2,869

$ 3,178
2,781

$ 3,290
2,906

5,917

5,959

6,196

1,947
2,176
1,315
293

5,731

186
18
44

124

(97)

221
(4)

217

2,000
2,092
1,329
333

5,754

205
13
(83)

275

178
–

178

2,099
2,207
1,471
341

6,118

78
12
(169)

235

(102)

337
–

337

$ 2.29
(0.04)

$ 1.87
–

$ 3.45
–

$ 2.25

$ 1.87

$ 3.45

$ 2.22
(0.04)

$ 1.82
–

$ 3.35
–

$ 2.18

$ 1.82

$ 3.35

96.7
99.6

95.1
98.0

97.6
100.6

20 NCR 2001

Consolidated Statements of Income

CONSOLIDATED BALANCE SHEETS

At December 31

In millions, except per share amounts

Assets
Current assets

Cash, cash equivalents and short-term investments
Accounts receivable, net
Inventories, net
Other current assets

Total current assets

Reworkable service parts and rental equipment, net
Property, plant and equipment, net
Other assets

Total assets

Liabilities and stockholders’ equity
Current liabilities

Short-term borrowings
Accounts payable
Payroll and beneﬁts liabilities
Customer deposits and deferred service revenue
Other current liabilities

Total current liabilities

Long-term debt
Pension and indemnity liabilities
Postretirement and postemployment beneﬁts liabilities
Other liabilities
Minority interests

Total liabilities

Commitments and contingencies (Note 9)

Stockholders’ equity

Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued

and outstanding at December 31, 2001 and 2000, respectively

Common stock: par value $0.01 per share, 500.0 shares authorized, 97.4 and 95.2 shares

issued and outstanding at December 31, 2001 and 2000, respectively

Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

2001

2000

336
1,126
280
221

1,963

224
629
2,039

357
1,338
288
251

2,234

218
742
1,912

$ 4,855

$ 5,106

138
362
217
319
482

96
521
260
344
615

1,518

1,836

10
319
359
600
22

11
332
466
676
27

2,828

3,348

–

1
1,235
861
(70)

2,027

1
1,156
644
(43)

1,758

$ 4,855

$ 5,106

Consolidated Balance Sheets

NCR 2001 21

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended December 31

In millions

Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

2001

2000

1999

$ 217

178

337

Depreciation and amortization
Deferred income taxes
Income tax adjustment
Other gain on assets, net
Changes in assets and liabilities:

Receivables
Inventories
Current payables
Customer deposits and deferred service revenue
Disbursements for employee severance and pension
Other assets and liabilities

Net cash provided by operating activities

Investing activities
Purchases of short-term investments
Proceeds from sales and maturities of short-term investments
Net expenditures and proceeds for reworkable service parts
Expenditures for property, plant and equipment
Proceeds from sales of property, plant and equipment
Business acquisitions and investments
Proceeds from sale of business
Additions to capitalized software
Other investing activities, net

Net cash used in investing activities

Financing activities
Purchases of Company common stock
Short-term borrowings, additions
Short-term borrowings, repayments
Long-term debt, additions
Long-term debt, repayments
Proceeds from employee stock plans
Other ﬁnancing activities, net

Net cash provided by (used in) ﬁnancing activities

Effect of exchange rate changes on cash and cash equivalents

(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental data
Cash (received) paid during the year for:

Income taxes
Interest

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

423
11
(138)
(23)

212
8
(146)
(25)
(263)
(130)

146

(23)
32
(117)
(141)
40
(6)
44
(67)
5

(233)

(60)
213
(171)
1
(2)
101
5

(12)

(12)
347

361
32
–
(8)

(80)
28
80
(42)
(248)
(130)

171

(26)
208
(108)
(216)
173
(319)
–
(67)
(12)

(367)

(110)
10
(21)
–
(3)
122
(5)

(7)

(21)

(224)
571

$ 335

347

358
(187)
–
(107)

358
85
(41)
13
(148)
(61)

607

(354)
189
(104)
(187)
240
(32)
–
(78)
–

(326)

(269)
20
(33)
8
(1)
83
(2)

(194)

(4)

83
488

571

(8)
18

68
14

61
16

22 NCR 2001

Consolidated Statements of Cash Flows

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Common Stock
Amount

Paid-in
Capital

Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings

In millions

December 31, 1998
Employee stock purchase and stock compensation plans
Proceeds from sale of put options
Reclassiﬁcation of put option obligation
Purchase of Company common stock

Subtotal

Net income
Other comprehensive income (loss), net of tax:

Currency translation adjustments
Unrealized gains on securities:

99
3
–
–
(8)

–

Unrealized holding gains arising during the period –
Less: reclassiﬁcation adjustment for gains

included in net income

Additional minimum pension liability

Comprehensive income

December 31, 1999
Employee stock purchase and stock compensation plans
Purchase acquisitions
Proceeds from sale of put options
Expiration of put option obligation
Purchase of Company common stock

Subtotal

Net income
Other comprehensive income (loss), net of tax:

Currency translation adjustments
Unrealized (losses) gains on securities:

–
–

–

94
3
1
–
–
(3)

–

Unrealized holding (losses) arising during the period –
Less: reclassiﬁcation adjustment for gains

included in net income

Additional minimum pension liability

Comprehensive income (loss)

December 31, 2000
Employee stock purchase and stock compensation plans
Proceeds from sale of put options
Purchase of Company common stock

Subtotal

Net income
Other comprehensive income (loss), net of tax:

Currency translation adjustments
Unrealized losses on securities:

–
–

–

95
3
–
(1)

–

Unrealized holding (losses) arising during the period –
Less: reclassiﬁcation adjustment for losses

included in net income

Additional minimum pension liability
Unrealized gains on derivatives

Comprehensive income (loss)

December 31, 2001

–
–
–

–

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

$ 1,295
80
1
(13)
(282)

1,081

–

–
–

–

1,081
117
64
5
13
(124)

1,156

–

–
–

–

1,156
124
1
(46)

1,235

–

–
–
–

–

129
–
–
–
–

129

337

–

–
–

337

466
–
–
–
–
–

466

178

–

–
–

178

644
–
–
–

644

217

–

–
–
–

217

1
–
–
–
–

–

–
–

–

1
–
–
–
–
–

–

–
–

–

1
–
–
–

–

–
–
–

–

Total

$ 1,447
80
1
(13)
(282)

1,233

337

(13)

(14)
(1)

363

1,596
117
64
5
13
(124)

1,671

178

(42)

(35)

(3)
(11)

1,758
124
1
(46)

1,837

22
–
–
–
–

–

(13)

(14)
(1)

48
–
–
–
–
–

–

(42)

(35)

(3)
(11)

(91)

(43)
–
–
–

(43)

–

217

(42)

(3)

5
6
7

(3)

5
6
7

(27)

(70)

190

$ 2,027

$ 1,235

$ 861

Consolidated Statements of Changes in Stockholders’ Equity

NCR 2001 23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

note 1 description of business and signiﬁcant accounting policies

Description of Business

NCR Corporation and its subsidiaries (NCR or the Company) provide solutions worldwide that are designed speciﬁcally to enable
businesses to build, expand and enhance their relationships with their customers by facilitating transactions and transforming data
from transactions into useful business information.

NCR offers specific solutions for the retail and financial industries and also provides solutions for industries including
telecommunications, transportation, insurance, utilities and electronic commerce, as well as consumer goods manufacturers
and government entities. These solutions are built on a foundation of long-established industry knowledge and consulting
expertise, a range of hardware technology, value-adding software, global customer support services, and a complete line of
business consumables.

Business Restructuring

During the fourth quarter of 1999, NCR established a restructuring plan aligned around three key solutions: Data Warehousing,
Financial Self Service and Retail Store Automation. In connection with the restructuring plan, NCR recorded a pre-tax charge of
$125 million in 1999 ($8 million in cost of revenue and $117 million in selling, general and administrative expenses), and incurred
approximately $38 million of period costs during 2000 ($37 million in cost of revenue and $1 million in selling, general and
administrative expenses). Cash payments under the plan totaled $36 million and $10 million in 2000 and 1999, respectively. The
restructuring plan was substantially complete at December 31, 2000.

Basis of Consolidation

The consolidated ﬁnancial statements include the accounts of NCR and its majority-owned subsidiaries. Long-term investments in
affiliated companies in which NCR owns between 20% and 50%, and therefore exercises signiﬁcant inﬂuence, but which it does not
control, are accounted for using the equity method. Investments in which NCR does not exercise signiﬁcant inﬂuence (generally,
when NCR has an investment of less than 20% and no representation on the company’s Board of Directors) are accounted for using
the cost method. All significant intercompany transactions and accounts have been eliminated. The Company does not have any
special purpose entities whose ﬁnancial results are not included in the consolidated ﬁnancial statements.

Use of Estimates

The preparation of ﬁnancial statements in conformity with generally accepted accounting principles (GAAP) requires management to make
estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the ﬁnancial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates.

Foreign Currency

For many NCR international operations, the local currency is designated as the functional currency. Accordingly, assets and liabilities
are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average exchange rates
prevailing during the year. Currency translation adjustments resulting from fluctuations in exchange rates are recorded in other
comprehensive income.

In the normal course of business, NCR enters into various ﬁnancial instruments, including derivative ﬁnancial instruments. NCR uses
foreign exchange forward contracts and options to reduce the Company’s exposure to changes in currency exchange rates, primarily
as it relates to inventory purchases by marketing units and inventory sales by manufacturing units. Derivatives used as a part of NCR’s
risk management strategy, which are designated at inception as cash-ﬂow hedges, are measured for effectiveness both at inception
and on an ongoing basis. For foreign exchange contracts designated as cash-ﬂow hedges, the gains or losses are deferred in other
comprehensive income and recognized in the determination of income as adjustments of carrying amounts when the underlying
hedged transaction is realized, canceled or otherwise terminated. For the year ended December 31, 2001, NCR reclassiﬁed net gains
of $1 million to other income as a result of discontinuance of cash-flow hedges. The net gain related to the ineffectiveness of all

24 NCR 2001

Notes to Consolidated Financial Statements

cash-ﬂow hedges was not material during 2001. At December 31, 2001, before-tax deferred net gains recorded in other comprehensive
income related to cash-ﬂow hedges were $10 million, and are expected to be reclassiﬁed to earnings during the next twelve months.

When hedging certain foreign currency transactions of a long-term investment nature, gains and losses are recorded in the currency
translation adjustment component of stockholders’ equity. Gains and losses on foreign exchange contracts that are not used to hedge
currency transactions of a long-term investment nature, or that are not designated as cash-flow hedges, are recognized in other
income or expense as exchange rates change. The impact of these hedging activities were not material to the Company’s consolidated
financial position, results of operations or cash ﬂows.

Settlement payments are primarily based on net gains and losses related to foreign exchange derivatives and are included in cash
ﬂows from operating activities in the consolidated statements of cash ﬂows.

Revenue Recognition

NCR’s revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 101, “Revenue Recognition in
Financial Statements” (SAB 101), Statement of Position No. 97-2, “Software Revenue Recognition” (SoP 97-2) and other applicable
revenue recognition guidance and interpretations. In general, the Company records revenue when it is realized, or realizable, and
earned. The Company considers these requirements met when persuasive evidence of an arrangement exists, the products or services
have been provided to the customer, the sales price is ﬁxed or determinable and collectability is reasonably assured.

For the Company’s solutions, hardware and software revenue is recognized upon shipment, delivery, installation or customer acceptance
of the product, as deﬁned in the customer contract. Revenue is not recognized until the customer has use of the products, including
both the hardware and software components. Other than a few small software businesses NCR operates, which generate approximately
1% of the Company’s annual revenue, NCR does not sell its software products without the related hardware as the software products
are embedded in the hardware. The Company’s typical solution requires no significant production, modification or customization of
the software or hardware that is essential to the functionality of the products other than installation for its more complex solutions. For
these complex solutions, revenue is deferred until the installation is complete.

As a solutions provider, the Company’s sales arrangements often include services in addition to hardware and software. These services
could include hardware maintenance, upgrade rights, customer support and professional consulting services. For sales arrangements
that include bundled hardware, software and services, NCR accounts for any undelivered service offering as a separate element of a
multiple-element arrangement. These services are typically not essential to the functionality of the hardware and software. Amounts
deferred for services are determined based upon vendor-speciﬁc objective evidence of the fair value of the elements as prescribed
in SoP 97-2. For these services, revenue is typically recognized ratably over the period beneﬁted or when the services are complete.
If the services are essential to the functionality of the hardware and software, revenue from the hardware and software components
is deferred until the essential services are complete.

Warranty, Post Sales Support and Sales Returns

Provisions for product warranties, post sales support, and sales returns and allowances are recorded in the period in which the related
revenue is recognized. The Company accrues warranty reserves and sales returns and allowances using percentages of revenue as an
overall proxy to reﬂect the Company’s historical average warranty and sales return claims.

Income Taxes

Income tax expense is provided based on income before income taxes. Deferred income taxes reﬂect the impact of temporary differences
between assets and liabilities recognized for ﬁnancial reporting purposes and such amounts recognized for tax purposes. These
deferred taxes are measured by applying currently enacted tax laws. NCR records valuation allowances related to its deferred income
tax assets when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets
will not be realized.

Net Income Per Common Share

Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the
reported period. The calculation of diluted earnings per share is similar to basic, except that the weighted average number of shares
outstanding includes the additional dilution from potential common stock, such as stock options and restricted stock awards.

Notes to Consolidated Financial Statements

NCR 2001 25

Cash, Cash Equivalents and Short-Term Investments

All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.
Short-term investments include certiﬁcates of deposit, commercial paper and other investments having maturities less than one year.
Such investments are stated at cost, which approximates fair value at December 31, 2001 and 2000.

Transfer of Financial Assets

NCR offers its customers the option to acquire its products and services through payment plans, ﬁnancing or leasing contracts.
From time to time, the Company factors certain receivables, or transfers future payments under these contracts, to ﬁnancing institutions
on a non-recourse basis. NCR may act as servicing agent for the purchaser and retain collection and administrative responsibilities.
These transfers are recorded as sales of the related accounts receivable when NCR is considered to have surrendered control of such
receivables. The Company had factored receivables of approximately $76 million and $58 million at December 31, 2001 and 2000,
respectively. The related cost of the factoring was immaterial to the Company’s consolidated ﬁnancial results.

Inventories

Inventories are stated at the lower of average cost or net realizable value. Excess and obsolete reserves are established based on
forecasted usage, orders, technological obsolescence and inventory aging.

Investments in Marketable Securities

All marketable securities, which are included in other assets, are deemed by management to be available-for-sale and are reported
at fair value with net unrealized gains or losses reported, net of tax, within stockholders’ equity. If a decline in the fair value of a
marketable security is deemed by management to be other than temporary, the cost basis of the investment is written down to fair
value, and the amount of the write-down is included in the determination of income. Realized gains and losses are recorded based
on the speciﬁc identiﬁcation method and average cost method, as appropriate, based upon the investment type. The fair value of
the Company’s investments in marketable securities in aggregate was $73 million and $72 million at December 31, 2001 and 2000,
respectively. The cost basis of the Company’s investments in marketable securities was $69 million and $70 million at December 31,
2001 and 2000, respectively.

Long-Lived Assets

Capitalized Software. Certain direct development costs associated with internal-use software are capitalized within other assets and
are amortized over the estimated useful lives of the resulting software. NCR typically amortizes capitalized internal-use software over
three years beginning when the asset is substantially ready for use.

Research and development costs incurred for the development of computer software that will be sold, leased or otherwise marketed
are capitalized when technological feasibility has been established. These costs are included within other assets and are amortized
over the estimated useful lives of the resulting software. The Company typically amortizes capitalized software over three years
beginning when the product is available for general release. Costs capitalized include direct labor and related overhead costs. Costs
incurred prior to technological feasibility and after general release are expensed as incurred.

Amortization of capitalized software development costs was $70 million in 2001, $68 million in 2000 and $63 million in 1999.
Gross capitalized software development costs were $252 million and $242 million at December 31, 2001 and 2000, respectively,
and accumulated amortization for capitalized software development costs was $144 million and $131 million at December 31, 2001
and 2000, respectively.

Goodwill. Goodwill is included in other assets and is carried at cost less accumulated amortization. Goodwill amortization was
computed on a straight-line basis over estimated useful lives ranging from three to 20 years. Goodwill amortization expense recorded
in operating expense was $67 million, $33 million and $20 million, in 2001, 2000 and 1999, respectively. Goodwill amortization
expense recorded in other expense was $7 million, $6 million and $3 million in 2001, 2000 and 1999, respectively. Accumulated
amortization was $127 million and $58 million at December 31, 2001 and 2000, respectively.

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (SFAS 142), NCR will no
longer amortize goodwill beginning January 1, 2002. Furthermore, NCR will conduct goodwill impairment analyses at least annually
using one or more of the asset impairment tests described in the statement.

26 NCR 2001

Notes to Consolidated Financial Statements

Property, Plant and Equipment. Property, plant and equipment, reworkable service parts, and rental equipment are stated at cost less
accumulated depreciation. Reworkable service parts are those parts that can be reconditioned and used in installation and ongoing
maintenance services and integrated service solutions for NCR’s customers. Depreciation is computed over the estimated useful lives
of the related assets primarily on the straight-line basis. Buildings are depreciated over 25 to 45 years, machinery and other equipment
over three to 10 years and reworkable service parts over three to six years.

Valuation of Long-Lived Assets. Long-lived assets such as property, plant and equipment, goodwill, software and investments are
reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss would be recognized when estimated future undiscounted cash ﬂows expected to result from the
use of the asset and its eventual disposition are less than its carrying amount.

Reclassiﬁcations

Certain prior year amounts have been reclassiﬁed to conform to the 2001 presentation.

Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards No. 133 and No. 138. NCR adopted Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended by Statement of Financial Accounting Standards
No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FASB Statement No. 133”
(SFAS 138), on January 1, 2001. SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction, and if it is, the type of hedge transaction. For fair value
hedge transactions in which the Company is hedging changes in the fair value of an asset, liability or ﬁrm commitment, changes in the
fair value of the derivative instrument will be offset in the income statement by changes in the hedged item’s fair value. For cash ﬂow
hedge transactions in which the Company is hedging the variability of cash ﬂows related to a variable rate asset, liability or a forecasted
transaction, changes in the fair value of the derivative instrument will generally be reported in other comprehensive income. The gains
and losses on the derivative instrument that are reported in other comprehensive income will be reclassiﬁed to earnings in the periods in
which earnings are impacted by the variability of the cash ﬂows of the underlying hedged item. To the extent that a qualifying hedge is
terminated or ceases to be effective as a hedge, any deferred gains and losses recorded in other comprehensive income to that point
continue to be deferred and are included in the basis of the underlying transaction. To the extent anticipated transactions are no longer
likely to occur, the related hedges are closed with gains or losses recognized in earnings in the current period.

On January 1, 2001, NCR recorded net-of-tax, cumulative-effect-type losses of $6 million and $4 million, in accumulated other
comprehensive income and net income, respectively, to recognize at fair value all derivative instruments that were designated as
hedging instruments.

Statement of Financial Accounting Standards No. 141. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). SFAS 141, which supersedes Accounting
Principles Board Opinion No. 16, “Business Combinations” and Statement of Financial Accounting Standards No. 38, “Accounting for
Preacquisition Contingencies of Purchased Enterprises,” requires that all business combinations entered into after the effective date of
July 1, 2001, be accounted for by the purchase method. SFAS 141 further deﬁnes criteria for recognition of intangible assets apart from
goodwill and disclosure requirements for business combinations. NCR does not expect this standard to have any material impact on the
Company’s consolidated ﬁnancial position, results of operations or cash ﬂows.

Statement of Financial Accounting Standards No. 142. In July 2001, the FASB issued SFAS 142. SFAS 142, which supersedes
Accounting Principles Board Opinion No. 17, “Intangible Assets,” deﬁnes new accounting treatment for goodwill and other intangible
assets. This standard eliminates the amortization of goodwill and other intangible assets that have indeﬁnite lives. It establishes a
requirement that goodwill and other intangible assets with indeﬁnite lives be tested at least annually for impairment, provides speciﬁc
guidance on such testing, and requires disclosures of information about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS 142 is effective for ﬁscal years beginning after December 15, 2001; however, consistent with the
requirements of the standard, goodwill and other intangible assets acquired after June 30, 2001 will be immediately subject to the
new provisions. In 2002, the Company expects to recognize annual amortization expense savings of approximately $70 million, of
which less than $5 million would have been recognized in other expense. The Company is currently evaluating the goodwill asset
under the SFAS 142 transitional impairment test and has not yet determined whether there will be an impairment loss. Any transitional
impairment loss will be recognized as a change in accounting principle.

Notes to Consolidated Financial Statements

NCR 2001 27

Statement of Financial Accounting Standards No. 143. In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143, which amends Statement of Financial Accounting
Standards No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,” establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The objective of SFAS 143
is to provide guidance for legal obligations associated with the retirement of tangible long-lived assets. The retirement obligations
included within the scope of this project are those that an entity cannot avoid as a result of either acquisition, construction or normal
operation of a long-lived asset. This statement is effective for ﬁnancial statements issued for ﬁscal years beginning after June 15,
2002. NCR does not expect this standard to have any material impact on the Company’s consolidated ﬁnancial position, results of
operations or cash ﬂows.

Statement of Financial Accounting Standards No. 144. In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supersedes Statement of Financial
Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”
(SFAS 121) and amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations – Reporting the Effects
of Disposal of a Segment of a Business.” This statement develops one accounting model (based on the model in SFAS 121) for
long-lived assets to be disposed of, expands the scope of discontinued operations and modiﬁes the accounting for discontinued
operations. This statement is effective for fiscal years beginning after December 15, 2001. NCR does not expect this standard to
have any material impact on the Company’s consolidated ﬁnancial position, results of operations or cash ﬂows.

note 2 business combinations, divestitures and equity investments

During 2001, 2000 and 1999, NCR completed a number of acquisitions accounted for as purchase business combinations. The earnings
from the acquired entities were included in NCR’s consolidated ﬁnancial results from the dates of acquisition. Purchase price and
related acquisition costs were allocated to the acquired tangible and intangible assets and liabilities based on fair market values, with
residual amounts recorded as goodwill. Also, in 2001, 2000 and 1999, NCR completed other investments and sold assets related to
portions of its businesses to third parties.

During 2001, NCR acquired two companies that were not individually, or in the aggregate, signiﬁcant to its ﬁnancial position, results
of operations or cash ﬂows. In 2001, the Company recorded approximately $9 million of integration costs related to acquisitions, which
were expensed as incurred ($6 million in cost of revenue and $3 million in selling, general and administrative expenses).
Also during 2001, NCR sold its account and item processing outsourcing businesses for approximately $44 million. Unaudited
pro forma ﬁnancial information has not been presented because the effects of the acquisitions and divestitures were not material
on either an individual or aggregate basis.

During 2000, NCR completed several acquisitions including 4Front Technologies, Inc. (4Front). The acquisitions resulted in total
goodwill of $431 million that was being amortized over various periods of ﬁve to ten years, and in-process research and development
charges of $25 million. The total amount of stock issued as part of the acquisitions was $64 million. NCR recorded approximately
$2 million of integration costs related to acquisitions in 2000, which were expensed as incurred ($1 million in cost of revenue and
$1 million in selling, general and administrative expenses). All purchase accounting adjustments for acquisitions completed in
2000 were ﬁnalized and included in the 2001 results.

Assuming the acquisition of 4Front had occurred at the beginning of 2000, the unaudited pro forma revenue, net income and net
income per common share for the period ended December 31, 2000 would have been:

In millions, except per share amounts

Revenue
Net income
Net income per common share

Basic
Diluted

Pro Forma

2000
Reported

$ 6,138
147

$ 5,959
178

$ 1.55
1.50

$ 1.87
1.82

Unaudited pro forma ﬁnancial information for other acquisitions and divestitures completed in 2000 has not been presented because
the effects of the acquisitions and divestitures were not material on either an individual or aggregate basis.

28 NCR 2001

Notes to Consolidated Financial Statements

note 3 supplemental ﬁnancial information

For the year ended December 31

In millions

Other expense (income)
Interest income
Other gain on assets, net
Fox River provision (see Note 9)
Other, net

Other expense (income), net

At December 31

In millions

Cash, cash equivalents and short-term investments
Cash and cash equivalents
Short-term investments

Total cash, cash equivalents and short-term investments

Accounts receivable
Trade
Other

Accounts receivable, gross
Less: allowance for doubtful accounts

Total accounts receivable, net

Inventories
Finished goods, net
Work in process and raw materials, net

Total inventories, net

Other current assets
Current deferred tax assets
Other

Total other current assets

Reworkable service parts and rental equipment
Reworkable service parts and rental equipment, gross
Less: accumulated depreciation

Total reworkable service parts and rental equipment, net

Property, plant and equipment
Land and improvements
Buildings and improvements
Machinery and other equipment

Property, plant and equipment, gross
Less: accumulated depreciation

Total property, plant and equipment, net

2001

2000

1999

(10)
(23)
40
37

(31)
(33)
2
(21)

(83)

(26)
(107)
2
(38)

$ (169)

2001

2000

$ 335
1

$ 336

347
10

357

$ 1,093
87

$ 1,255
107

1,180
54

1,362
24

$ 1,126

$ 1,338

$ 198
82

$ 280

$ 113
108

$ 221

$ 462
238

$ 224

88
556
1,058

1,702
1,073

219
69

288

123
128

251

494
276

218

103
641
1,107

1,851
1,109

$ 629

742

Notes to Consolidated Financial Statements

NCR 2001 29

note 3 supplemental ﬁnancial information (continued)

At December 31

In millions

Other assets
Prepaid pension cost
Goodwill, net
Other

Total other assets

Other liabilities
Income taxes
Other

Total other liabilities

Accumulated other comprehensive loss
Currency translation adjustments
Unrealized gain on securities
Unrealized gain on derivatives
Additional minimum pension liability and other

Total accumulated other comprehensive loss

note 4 debt obligations

2001

2000

$ 1,104
457
478

932
532
448

$ 2,039

$ 1,912

440
160

600

(54)
3
7
(26)

(70)

525
151

676

(12)
1
–
(32)

(43)

NCR had debt with scheduled maturities of less than one year of $138 million and $96 million at December 31, 2001 and 2000,
respectively. The weighted average interest rate for such debt was 3.5% at December 31, 2001 and 7.2% at December 31, 2000. The
decrease in the weighted average interest rate reﬂects the general decline in interest rates and a higher proportion of debt in Japan
(which has lower interest rates) in 2001 versus the prior year. NCR had long-term debt and notes totaling $10 million and $11 million
at December 31, 2001 and 2000, respectively. These obligations had U.S. dollar equivalent interest rates ranging from 7.3% to 14.0%
with scheduled maturity dates from 2004 to 2020. The scheduled maturities of the outstanding long-term debt and notes during the
next five years are $3 million in 2004 and the remainder after 2007.

In 1996, NCR entered into a $600 million ﬁve-year, unsecured revolving credit facility with a syndicate of ﬁnancial institutions which
was scheduled to mature in November 2001. In October 2001, NCR terminated the $600 million credit facility and entered into a $200
million 364-day unsecured revolving credit facility with a one year term-out option and a $400 million ﬁve-year unsecured revolving
credit facility, both with a syndicate of financial institutions. The credit facilities contain certain representations and warranties;
conditions; affirmative, negative and ﬁnancial covenants; and events of default customary for such facilities. Interest rates charged
on borrowings outstanding under the credit facilities are based on prevailing market rates. No amounts were outstanding under the
facilities as of December 31, 2001, 2000 or 1999.

note 5 income taxes

For the years ended December 31, income before income taxes consisted of the following:

In millions

Income (loss) before income taxes and cumulative effect of accounting change
United States
Foreign

Total income before income taxes and cumulative effect of accounting change

$ 289
(165)

$ 124

319
(44)

275

264
(29)

235

2001

2000

1999

30 NCR 2001

Notes to Consolidated Financial Statements

For the years ended December 31, income tax (beneﬁt) expense consisted of the following:

In millions

Income tax (beneﬁt) expense
Current

Federal
State and local
Foreign

Deferred

Federal
State and local
Foreign

Total income tax (beneﬁt) expense

2001

2000

1999

9
2
(119)

7
(4)
8

(97)

32
2
31

35
3
(6)

24
2
59

(218)
(14)
45

$ (102)

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory
income tax rate for the years ended December 31:

In millions

Income tax expense at the U.S. federal tax rate of 35%
Foreign income tax differential
U.S. permanent book/tax differences (principally goodwill)
U.S. tax losses and valuation allowance
Other, net

Total income tax (beneﬁt) expense

2001

2000

1999

43
(147)
9
–
(2)

(97)

96
(8)
6
–
3

82
74
–
(260)
2

$ (102)

NCR’s tax provisions include a provision for income taxes in those tax jurisdictions where its subsidiaries are proﬁtable, but reﬂect
only a portion of the tax beneﬁts related to certain foreign subsidiaries’ tax losses due to the uncertainty of the ultimate realization
of future beneﬁts from these losses. In 2001, the foreign income tax differential included a $138 million income tax beneﬁt realized
from the favorable resolution of international income tax issues. In 1999, U.S. tax losses and valuation allowance included the
recognition of $232 million of the Company’s federal and a portion of its state deferred income tax assets that were previously subject
to a valuation allowance.

Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:

In millions

Deferred income tax assets
Employee pensions and other beneﬁts
Other balance sheet reserves and allowances
Tax loss and credit carryforwards
Capitalized research and development
Property, plant and equipment
Other

Total deferred income tax assets
Valuation allowance

Net deferred income tax assets

Deferred income tax liabilities
Property, plant and equipment
Employee pensions and other beneﬁts
Taxes on undistributed earnings of foreign subsidiaries
Other

Total deferred income tax liabilities

Total net deferred income tax assets

2001

2000

37
150
343
120
46
94

790
(281)

509

32
245
–
41

318

$ 191

110
170
445
–
29
90

844
(304)

540

72
164
58
63

357

183

Notes to Consolidated Financial Statements

NCR 2001 31

NCR recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization
of future beneﬁts from those assets. The valuation allowance covers deferred tax assets, primarily tax loss carryforwards, in tax
jurisdictions where there is uncertainty as to the ultimate realization of a beneﬁt from those tax losses. As of December 31, 2001,
NCR had U.S. federal and foreign tax loss carryforwards of approximately $411 million. The tax loss carryforwards subject to
expiration will expire in the years 2002 through 2020.

NCR did not provide for U.S. federal income taxes or foreign withholding taxes on approximately $565 million and $568 million
of undistributed earnings of its foreign subsidiaries as of December 31, 2001 and 2000, respectively, because such earnings are
intended to be reinvested indeﬁnitely.

The income tax (beneﬁt) expense related to other comprehensive income for 2001, 2000 and 1999 was $(15) million, $(48) million
and $5 million, respectively.

note 6 stock compensation plans, purchases of company common stock and put options

Stock Compensation Plans

The NCR Management Stock Plan provides for the grant of several different forms of stock-based beneﬁts, including stock options,
stock appreciation rights, restricted stock awards, performance awards, other stock unit awards and other rights, and interests or
options relating to shares of NCR common stock to employees and non-employee directors. Stock options are generally granted at
the fair market value of the common stock at the date of grant, generally have a ten-year term and vest within three years of the grant
date. Grants that were issued before 1998 generally had a four-year vesting period. Options to purchase common stock may be
granted under the authority of the Board of Directors. Option terms as determined by the Compensation Committee of the Board of
Directors will not exceed ten years, as consistent with the Internal Revenue Code. The plan was adopted by the Board of Directors,
with stockholder approval, effective January 1, 1997. The plan contains an evergreen provision that initially authorized and made
available for grant 5.6% of the outstanding shares as of January 1, 1997, as well as sufficient shares to replace all outstanding
awards held by active NCR employees for shares of AT&T Corp. (AT&T) stock. Thereafter, the number of shares authorized under the
plan increases each calendar year by 4% of the outstanding shares on the ﬁrst day of the year for the 10-year term of the plan without
the need for additional Board approval. The number of shares of common stock authorized and available for grant under this plan
were approximately 21 million and 6 million, respectively, at December 31, 2001.

NCR adopted the WorldShares Plan effective as of December 31, 1996, the date AT&T distributed to its stockholders all of its interest
in NCR on the basis of one share of NCR common stock for each 16 shares of AT&T common stock (the Distribution). The plan
provided for the grant of nonstatutory stock options to substantially all NCR employees at the time of the Distribution. NCR provided
each participant with an option to purchase shares of NCR common stock with an aggregate market value of $3,000 as of the
Distribution date. Such options had an exercise price of $33.44, equal to the market value of NCR common stock on January 2, 1997,
and had a ﬁve-year expiration period. Subject to certain conditions, participants became fully vested and able to exercise their options
January 2, 1998. The WorldShares Plan terminated on January 2, 2002, and all unexercised options expired.

A summary of stock option activity under the NCR Management Stock Plan and the WorldShares Plan follows (shares in thousands):

Outstanding at beginning of year
Granted
Exercised
Canceled
Expired

Outstanding at end of year

2001
Weighted
Average
Exercise
Price
$ 36.52
43.89
32.73
38.41
34.10

Shares
Under
Option
15,915
3,598
(2,481)
(864)
(649)

2000
Weighted
Average
Exercise
Price
$ 35.22
38.50
32.07
37.44
34.26

1999
Weighted
Average
Exercise
Price
$ 33.13
40.64
31.36
36.47
33.27

Shares
Under
Option
12,906
3,967
(1,631)
(504)
(161)

Shares
Under
Option
14,577
4,491
(2,327)
(593)
(233)

15,519

$ 38.87

15,915

$ 36.52

14,577

$ 35.22

32 NCR 2001

Notes to Consolidated Financial Statements

The following table summarizes information about stock options outstanding at December 31, 2001 (shares in thousands):

Range of Exercise Price
$5.92 to $14.51
$15.28 to $29.72
$30.31 to $51.63

Total

Stock Options Outstanding

Stock Options Exercisable

Weighted
Average
Remaining
Contractual
Life
2 0.16 years
248 4.83 years
15,269 6.90 years

15,519

Weighted
Average
Exercise
Price
$ 9.68
26.39
39.07

$ 38.87

Weighted
Average
Exercise
Price
$ 9.68
26.15
36.94

Shares
2
223
8,065

8,290

$ 36.64

There were approximately 8.4 million stock options with a weighted average exercise price of $34.67 exercisable at December 31, 2000.
At December 31, 1999, there were approximately 8.2 million stock options exercisable with a weighted average exercise price of $33.31.

NCR accounts for its stock-based compensation plans using the intrinsic value-based method, which requires compensation expense
for options to be recognized when the market price of the underlying stock exceeds the exercise price on the date of grant. Compensation
cost charged against income for NCR’s stock-based plans was not material in 2001, 2000 and 1999. If NCR recognized stock-based
compensation expense based on the fair value of granted options at the grant date, net income and net income per diluted share for
the years ended December 31 would have been as follows:

In millions, except per share amounts

Net income
As reported
Pro forma

Net income per diluted share
As reported
Pro forma

2001

2000

1999

$ 217
177

178
140

337
309

$ 2.18
1.78

$ 1.82
1.43

$ 3.35
3.07

The pro forma amounts calculated are not necessarily indicative of the effects on net income and net income per diluted share in
future years. The pro forma net income and net income per diluted share for all periods presented were computed using the fair value
of options as calculated using the Black-Scholes option-pricing method. The following weighted average assumptions were used for
the years ended December 31:

Dividend yield
Risk-free interest rate
Expected volatility
Expected holding period (years)

2001
–
4.86%

1999
2000
–
–
4.97%
6.41%
40.00% 40.00% 40.00%
5.0

4.9

5.0

The weighted average fair value of NCR stock options calculated using the Black-Scholes option-pricing model for options granted
during the years ended December 31, 2001, 2000 and 1999 was $18.53, $17.42 and $17.39 per share, respectively.

The NCR Employee Stock Purchase Plan enables eligible employees to purchase NCR’s common stock at 85% of the average
market price at the end of the last trading day of each month. Employees may authorize payroll deductions of up to 10% of eligible
compensation for common stock purchases. During 2001, 2000 and 1999, employees purchased approximately 700 thousand,
800 thousand and 900 thousand shares, respectively, of NCR common stock for approximately $25 million, $27 million and
$30 million, respectively. The number of shares authorized and available for grant under this plan at December 31, 2001 were
approximately 8 million and 4 million, respectively.

Purchase of Company Common Stock

On December 8, 2000, NCR’s Board of Directors approved a share repurchase program authorizing the systematic repurchase of
shares of Company common stock to offset the dilutive effect of the employee stock plans. The systematic repurchase program is
funded by the proceeds from the purchase of shares under the Company’s Employee Stock Purchase Plan and the exercise of options.
Stock will be repurchased periodically on an ongoing basis in the open market or through privately negotiated transactions at
management’s discretion. The repurchased shares are added to NCR’s authorized, but unissued shares. During 2001, NCR committed

Notes to Consolidated Financial Statements

NCR 2001 33

approximately $46 million to the repurchase of approximately 1.2 million shares under this program at an average price per share of
$38.12. In 2000, NCR committed approximately $88 million to the repurchase of approximately 1.8 million shares under this program
at an average price per share of $48.75. This program is expected to continue in 2002.

Under a separate share repurchase program, the Board of Directors on April 15, 1999 and October 21, 1999 authorized $500 million
for share repurchases. As of December 31, 2001, the Company had purchased approximately $319 million of the total $500 million
authorized. No shares were repurchased under this program in 2001. During 2000, approximately 1.1 million shares were
repurchased under this program at an average cost of $34.04 per share.

Put Options

From time to time, the Company sells put options that entitle the holder of each option to sell to the Company, by physical delivery,
shares of common stock at a speciﬁed price. In a single private placement during the third quarter of 2001, the Company sold put
options for 400 thousand shares of common stock. These put options were designated as part of the repurchase program approved
by NCR’s Board of Directors on December 8, 2000. Of these 400 thousand options, 250 thousand were retired prior to the exercise
date. The remaining 150 thousand were eventually exercised at an average price of $37.00. There were no put options outstanding at
December 31, 2001. During 2000, in a series of private placements, the Company sold put options for 2.0 million shares of common
stock. Of these 2.0 million options, 1.6 million expired unexercised during 2000 and 400 thousand were exercised during the third
quarter of 2000 at an average price of $37.00 per share. In a single private placement during the fourth quarter of 1999, the Company
sold put options for 400 thousand shares of common stock. These put options expired unexercised in the ﬁrst quarter of 2000. The
put option obligations had no signiﬁcant effect on diluted earnings per share for the periods presented. NCR received net premiums
related to Company put options of approximately $1 million and $5 million in 2001 and 2000, respectively.

The put option activity is summarized as follows:

In millions

December 31, 1999

Sales
Exercises/Retirements
Expirations

December 31, 2000

Sales
Exercises/Retirements

December 31, 2001

Put Options Outstanding
Potential
Obligation

Number of
Options

0.4

$ 13.1

2.0
(0.4)
(2.0)

73.0
(14.8)
(71.3)

–

0.4
(0.4)

14.8
(14.8)

–

At December 31, 1999, the amount related to the Company’s potential repurchase obligation of approximately $13 million was
reclassiﬁed from stockholders’ equity to put options.

note 7 employee beneﬁt plans

Pension and Postretirement Plans

NCR sponsors deﬁned beneﬁt plans for substantially all U.S. employees and the majority of international employees. For salaried
employees, the deﬁned beneﬁt plans are based primarily upon compensation and years of service. For certain hourly employees in
the United States, the beneﬁts are based on a ﬁxed dollar amount per year of service. NCR’s funding policy is to contribute annually
not less than the minimum required by applicable laws and regulations. Assets of NCR’s deﬁned beneﬁt plans are primarily invested
in publicly traded common stocks, corporate and government debt securities, real estate investments and cash or cash equivalents.

Prior to September 1998, substantially all U.S. employees who reached retirement age while working for NCR were eligible to participate
in a postretirement beneﬁt plan. The plan provides medical care and life insurance beneﬁts to retirees and their eligible dependents. In
September 1998, the plan was amended whereby U.S. participants who had not reached a certain age and years of service with NCR were no
longer eligible for such beneﬁts. Non-U.S. employees are typically covered under government sponsored programs, and NCR generally does
not provide postretirement beneﬁts other than pensions to non-U.S. retirees. NCR generally funds these beneﬁts on a pay-as-you-go basis.

34 NCR 2001

Notes to Consolidated Financial Statements

Reconciliation of the beginning and ending balances of the beneﬁt obligations for NCR’s pension and postretirement beneﬁt plans were:

In millions

Change in beneﬁt obligation
Beneﬁt obligation at January 1
Gross service cost
Interest cost
Amendments
Actuarial loss
Beneﬁts paid
Currency translation adjustments
Other

Beneﬁt obligation at December 31

Pension Beneﬁts
2000

2001

Postretirement Beneﬁts
2000
2001

$ 3,593
78
234
3
12
(240)
(57)
(2)

$ 3,462
81
234
52
99
(245)
(93)
3

332
1
25
–
31
(42)
–
–

326
1
24
(2)
21
(38)
–
–

$ 3,621

$ 3,593

347

332

A reconciliation of the beginning and ending balances of the fair value of the plan assets of NCR’s pension plan follows:

In millions

Change in plan assets
Fair value of plan assets at January 1
Actual return on plan assets
Company contributions
Beneﬁts paid
Currency translation adjustments
Other

Fair value of plan assets at December 31

Pension Beneﬁts
2000

2001

$ 4,540
(528)
59
(240)
(51)
(5)

$ 4,707
120
62
(245)
(108)
4

$ 3,775

$ 4,540

Accrued pension and postretirement beneﬁt assets (liabilities) included in NCR’s consolidated balance sheets at December 31 were:

In millions

Reconciliation to balance sheet
Funded status
Unrecognized net loss (gain)
Unrecognized prior service cost (beneﬁt)
Unrecognized transition asset

Net amount recognized

Total recognized amounts consist of:
Prepaid beneﬁt cost
Accrued beneﬁt liability
Intangible asset
Accumulated other comprehensive income

Net amount recognized

Pension Beneﬁts
2000

2001

Postretirement Beneﬁts
2000
2001

$ 154
600
45
(5)

947
(380)
66
(25)

$ (347)
40
(26)
–

$ (332)
6
(36)
–

$ 794

608

$ (333)

$ (362)

$ 1,104
(343)
3
30

932
(366)
4
38

–
(333)
–
–

–
(362)
–
–

$ 794

608

$ (333)

$ (362)

The weighted average rates and assumptions utilized in accounting for these plans for the years ended December 31 were:

In millions

Discount rate
Expected return on plan assets
Rate of compensation increase

2001

6.9%
9.8%
4.2%

Pension Beneﬁts
1999

2000

7.0%
10.0%
4.2%

7.0%
10.0%
4.1%

2001

7.3%
–
4.3%

Postretirement Beneﬁts
1999

2000

7.5%
–
4.3%

Notes to Consolidated Financial Statements

NCR 2001 35

For postretirement beneﬁt measurement purposes, NCR assumed growth in the per capita cost of covered health care beneﬁts
(the health care cost trend rate) would gradually decline from 8.0% and 6.0%, pre-65 and post-65, respectively, in 2001 to 5.0%
by the year 2006. In addition, a one percentage point change in assumed health care cost trend rates would have the following
effect on the postretirement beneﬁt costs and obligation:

In millions

2001 service cost and interest cost
Postretirement beneﬁt obligation at December 31, 2001

The net periodic beneﬁt (income) cost for the plans for the years ended December 31 follows:

1% Increase

1% Decrease

2
20

(2)
(19)

In millions

Net service cost
Interest cost
Expected return on plan assets
Settlement charge (credit)
Amortization of:

Transition asset
Prior service cost
Actuarial (gain) loss

2001

77
234
(431)
15

(20)
22
(21)

78
234
(414)
(8)

(21)
23
(16)

Pension Beneﬁts
1999

2000

2001

1
25
–
–

–
(13)
–

Postretirement Beneﬁts
1999

2000

1
24
–
–

–
(12)
–

1
23
–
–

–
(12)
–

78
225
(360)
–

(22)
16
3

(60)

Net beneﬁt (income) cost

$ (124)

For pension plans with accumulated beneﬁt obligations in excess of plan assets, the projected beneﬁt obligation, accumulated beneﬁt
obligation and fair value were $439 million, $378 million and $39 million, respectively, at December 31, 2001, and $483 million,
$408 million and $46 million, respectively, at December 31, 2000.

In 1996, NCR entered into an agreement with the Pension Beneﬁt Guaranty Corporation (PBGC) concerning the provision by NCR
of additional support for its domestic deﬁned beneﬁt pension plans. Under this agreement, among other terms and conditions, NCR
agreed to provide security interests in support of such plans as collateral with an aggregate value (calculated by applying speciﬁed
discounts to market value) of $84 million. This collateral is comprised of certain domestic real estate. NCR does not believe that its
agreement with the PBGC will have a material effect on its ﬁnancial condition, results of operations or cash ﬂows.

Savings Plans

All U.S. employees and many international employees participate in deﬁned contribution savings plans. These plans generally
provide either a speciﬁed percent of pay or a matching contribution on participating employees’ voluntary elections. NCR’s matching
contributions typically are subject to a maximum percentage or level of compensation. Employee contributions can be made pre-tax,
after-tax or a combination thereof. The expense under these plans was approximately $28 million in each of 2001, 2000 and 1999.