IBM 2002 Annual Report Download - page 82

Notes to Consolidated Financial Statements
80 international business machines corporation and Subsidiary Companies
overall
The company’s acquisitions were accounted for as purchase
transactions, and accordingly, the assets and liabilities of the
acquired entities were recorded at their estimated fair value at
the date of acquisition. The effects of these acquisitions on
the company’s Consolidated Financial Statements were not
material. Hence, the company has not provided pro forma
financial information as if the companies had combined at the
beginning of the respective periods presented.
The tangible net assets comprise primarily cash, accounts
receivable, land, buildings and leasehold improvements. The
identifiable intangible assets comprise primarily patents, trade-
marks, customer lists, employee agreements and leasehold
interests. The identifiable intangible assets have been amor-
tized on a straight-line basis, generally not to exceed seven
years. Goodwill from acquisitions that were consummated
prior to July 1, 2001, was amortized over five years. The com-
pany adopted SFAS No. 142 on January 1, 2002, and ceased
amortizing goodwill as of that date. The results of operations
of all acquired businesses were included in the company’s
Consolidated Financial Statements from the respective dates
of acquisition.
Divestitures
2002
On December 31, 2002, the company sold its HDD business to
Hitachi. The total gross proceeds of the sale were $2 billion
(excluding purchase price adjustments), of which $1,414 mil-
lion was received by IBM at closing. According to the terms of
the agreement, the remaining proceeds will be received one
and three years after closing. The remaining proceeds are fixed
and are not dependent or variable based upon the sold business’
earnings or performance. The company transferred approxi-
mately $244 million of cash as part of the HDD business,
resulting in a net cash inflow in 2002 related to the HDD trans-
action of $1,170 million.
IBM has entered into an arms-length five-year supply
agreement with Hitachi, effective January 1, 2003, designed
to provide the company with a majority of its ongoing inter-
nal disk drive requirements for the company’s Server, Storage
and Personal Systems products.
The loss on disposal recorded in 2002 was approximately
$382 million, net of tax, and was recorded in (Loss)/income
from discontinued operations in the Consolidated Statement
of Earnings.
See note a, “Significant Accounting Policies,” on pages
70 to 75 for the “Basis of Presentation” for the discontinued
operations.
In the second and fourth quarters of 2002, the company
announced certain asset and workforce reduction actions, and
excess leased space charges related to its discontinued HDD
business. The company recorded a charge of approximately
$508 million, net of tax, in discontinued operations associated
with these announced actions.
Summarized selected financial information for the discon-
tinued operations is as follows:
(dollars in millions)
for the year ended december 31: 2002*2001 2000
Revenue $««1,946 $«2,799 $«3,307
(Loss)/income before
income taxes $«(2,037) $«««(497) $««««123
Income tax benefit (282) (74) (96)
(Loss)/income from
discontinued operations $«(1,755) $«««(423) $««««219
*At closing, the company incurred a significant U.S. tax charge of approximately
$248 million related to the repatriation of divestiture proceeds from certain countries
with low tax rates. This amount was included in the income tax benefit line item of
discontinued operations.
dFinancial Instruments (excluding derivatives)
Fair Value of Financial Instruments
Cash and cash equivalents, marketable securities, notes and
other accounts receivable and other investments are financial
assets with carrying values that approximate fair value.
Accounts payable, other accrued expenses and liabilities, and
short-term and long-term debt are financial liabilities with
carrying values that approximate fair value.
Marketable Securities*
The following table summarizes the company’s marketable
securities, all of which are considered available for sale, and
alliance investments.
(dollars in millions) fair value
at december 31: 2002 2001
Marketable securities — current:
Time deposits and other obligations $«593 $«««55
Non-U.S. government securities and
other fixed-term obligations —8
Total $«593 $«««63
Marketable securities — non-current:**
Time deposits and other obligations $«172 $«124
Non-U.S. government securities and
other fixed-term obligations 20 —
Total $«192 $«124
Non-equity method alliance
investments** $«249 $«574
*Gross unrealized gains (before taxes) on marketable securities and alliance investments
were $9 million and $27 million at December 31, 2002 and 2001, respectively. Gross
unrealized losses (before taxes) on marketable securities and alliance investments were
$10 million and $4 million at December 31, 2002 and 2001, respectively. See note N,
“Stockholders’ Equity Activity,” on pages 87 and 88 for net change in unrealized
gains and losses on marketable securities.
** Included within Investments and sundry assets in the Consolidated Statement of
Financial Position. See note H, “Investments and Sundry Assets,” on page 81.