IBM 2003 Annual Report Download - page 104

breach of contract with regard to the company’s contribution
of unspecified code to Linux. The company has asserted
counterclaims, including breach of contract, violation of the
Lanham Act, unfair competition, intentional torts, unfair
and deceptive trade practices, breach of the General Public
License that governs open source distributions, patent
infringement, promissory estoppel and copyright infringe-
ment. Trial is scheduled for April 2005.
On June 2, 2003 the company announced that it received
notice of a formal, nonpublic investigation by the Securities
and Exchange Commission (SEC). The SEC is seeking infor-
mation relating to revenue recognition in 2000 and 2001
primarily concerning certain types of client transactions.
IBM believes that the investigation arises from a separate
investigation by the SEC of Dollar General Corporation, a
client of IBM’s Retail Stores Solutions unit, which markets
and sells point of sale products.
On January 8, 2004, IBM announced that it received a
“Wells Notice” from the staff of the SEC in connection with
the staff’s investigation of Dollar General Corporation, which
as noted above, is a client of IBM’s Retail Stores Solutions unit.
It is IBM’s understanding that an employee in IBM’s Sales &
Distribution unit also received a Wells Notice from the SEC in
connection with this matter. The Wells Notice notifies IBM
that the SEC staff is considering recommending that the SEC
bring a civil action against IBM for possible violations of the
U.S. securities laws relating to Dollar General’s accounting
for a specific transaction, by participating in and aiding and
abetting Dollar General’s misstatement of its 2000 results.
In that transaction, IBM paid Dollar General $11 million for
certain used equipment as part of a sale of IBM replacement
equipment in Dollar General’s 2000 fourth fiscal quarter.
Under the SEC’s procedures, IBM responded to the SEC
staff regarding whether any action should be brought against
IBM by the SEC. The separate SEC investigation noted
above, relating to the recognition of revenue by IBM in 2000
and 2001 primarily concerning certain types of client trans-
actions, is not the subject of this Wells Notice.
In January 2004, the Seoul District Prosecutors Office in
South Korea announced it had brought criminal bid rigging
charges against several companies, including IBM Korea and
LG IBM (a joint venture between IBM Korea and LG Elec-
tronics) and had also charged employees of some of those
entities with, among other things, bribery of certain officials
of government-controlled entities in Korea, and bid rigging.
In addition, the U. S. Department of Justice and the SEC have
both contacted the company in connection with this matter.
In accordance with SFAS No.5, the company records a
provision with respect to a claim, suit, investigation or pro-
ceeding when it is probable that a liability has been incurred
and the amount of the loss can reasonably be estimated. Any
provisions are reviewed at least quarterly and are adjusted to
reflect the impact and status of settlements, rulings, advice
of counsel and other information pertinent to a particular
matter. Any recorded liabilities for the above items, including
any changes to such liabilities during each of the three years
in the period ended December 31, 2003, were not material to
the Consolidated Financial Statements. Based on its experi-
ence, the company believes that the damage amounts
claimed in the matters referred to above are not a meaningful
indicator of the company’s potential liability.
Litigation is inherently uncertain and it is not possible to
predict the ultimate outcome of the matters discussed
above. While the company will continue to defend itself
vigorously in all such matters, it is possible that the company’s
business, financial condition, results of operations or cash
flows, could be affected in any particular period by the resolu-
tion of one or more of these matters. Whether any losses,
damages or remedies finally determined in any such claim,
suit, investigation or proceeding could reasonably have a
material effect on the company’s business, financial condition,
results of operations or cash flows will depend on a number
of variables, including the timing and amount of such losses
or damages, the structure and type of any such remedies, the
significance of the impact any such losses, damages or remedies
may have on IBM’s Consolidated Financial Statements, and
the unique facts and circumstances of the particular matter
which may give rise to additional factors, such as, among
other things, in the Cooper case referred to on page 101, the
amount of any additional obligations that may be imposed
on the pension plan by the remedies finally determined,
whether such additional obligations would require addi-
tional contributions by the company and the size of any such
additional contributions.
COMMITMENTS
The company’s extended lines of credit include unused
amounts of $2,208 million and $3,482 million at December 31,
2003 and 2002, respectively. A portion of these amounts was
available to the company’s business partners to support their
working capital needs. In addition, the company committed
to provide future financing to its clients in connection with
client purchase agreements for approximately $263 million
and $288 million at December 31, 2003 and 2002, respectively.
The company has applied the disclosure provisions of
FIN 45, “Guarantor’s Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,” to its agreements that contain guar-
antee or indemnification clauses. These disclosure provisions
expand those required by SFAS No. 5, by requiring a guarantor
to disclose certain types of guarantees, even if the likelihood of
requiring the guarantor’s performance is remote. The follow-
ing is a description of arrangements in which the company
is the guarantor.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
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