IBM 2005 Annual Report Download - page 77
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
76_ NotestoConsolidatedFinancialStatements
AccumulatedGainsand(Losses)NotAffectingRetainedEarnings (netoftax)
(Dollarsinmillions)
NET NET ACCUMULATED
UNREALIZED FOREIGN MINIMUM UNREALIZED GAINS/(LOSSES)
GAINS/(LOSSES) CURRENCY PENSION GAINS ON NOTAFFECTING
ONCASHFLOW TRANSLATION LIABILITY MARKETABLE RETAINED
HEDGEDERIVATIVES ADJUSTMENTS ADJUSTMENTS SECURITIES EARNINGS
December31,2003 $«(454) $«2,006 $«(3,453) $«««5 $«(1,896)
Changeforperiod (199) 1,055 (1,066) 45 (165)
December31,2004 (653) 3,061 (4,519) 50 (2,061)
Changeforperiod 891 (1,153) 290 17 45
December31,2005 $««238 $«1,908 $«(4,229) $«67 $«(2,016)
NetChangeinUnrealized GainsonMarketableSecurities(netoftax)
(Dollarsinmillions)
FORTHEPERIODENDED DECEMBER31: 2005 2004
Netunrealizedgainsarisingduringtheperiod $«64 $«52
Less:Net gains includedinnetincomefortheperiod 47* 7*
Netchangeinunrealizedgainsonmarketablesecurities $«17 $«45
* Includeswritedownsof$0.6 millionand$0.1 millionin2005and2004.
O.ContingenciesandCommitments
Contingencies
Thecompanyisinvolvedinavarietyofclaims,suits,investiga-
tionsandproceedingsthatarisefromtimetotimeintheordinary
course of its business, including actions with respect to con-
tracts, intellectual property (IP), product liability, employment,
benefits, securities, and environmental matters. These actions
may be commenced by a number of different constituents,
including competitors, partners, clients, current or former
employees,governmentandregulatoryagencies,stockholders,
and representativesofthe locations inwhich we dobusiness.
The following is a discussion of some of the more significant
legalmattersinvolvingthecompany.
On July 31, 2003, the U.S. District Court for the Southern
DistrictofIllinois,inCooperetal.v.TheIBMPersonalPension
PlanandIBMCorporation,heldthatthecompany’spensionplan
violated the age discrimination provisions of the Employee
RetirementIncomeSecurityActof1974(ERISA).OnSeptember
29, 2004, the company announced that IBM and plaintiffs
agreedinprincipletoresolvecertainclaimsinthelitigation.That
agreement was finalized by the parties in May 2005, and
received final approval from the District Court on August 16,
2005. Underthetermsoftheagreement,plaintiffswillreceivean
incremental pension benefit in exchange for the settlement of
some claims and a stipulated remedy on remaining claims if
plaintiffs prevail on appeal. This settlement, together with a
previoussettlementofaclaimreferredtoasthepartialplanter-
mination claim resulted in the company taking a one-time
chargeof$320millioninthethirdquarterof2004.
Thisagreementendsthelitigationonallclaimsexceptthe
two claims associated with IBM’s cash balance formula. The
companycontinuestobelievethatitspensionplanformulasare
fairandlegal.Thecompanyhasreachedthisagreementinthe
interestofthebusinessandthecompany’s shareholders,andto
allow for a review of its cash balance formula by the Court of
Appeals. Thecompanycontinuestobelieveitislikelytobesuc-
cessfulonappeal.
The agreement stipulates that if the company is not suc-
cessfulonappealofthetworemainingclaims,theagreedrem-
edywillbeincreasedby up to $1.4billion—$780million for the
claimthatthecompany’scashbalanceformulaisagediscrimi-
natory, and $620million for theclaimthat the methodusedto
establishopeningaccountbalancesduringthe1999conversion
discriminated on the basis of age (referred to as the “always
cashbalance” claim).Themaximumadditionalliabilitythecom-
panycouldfaceinthiscaseifitisnotsuccessfulonappealis
thereforecappedat$1.4billion.
OnAugust30,2005,thecompanyfileditsNoticeofAppeal
oftheliabilityrulingsonthecashbalanceclaimswiththeSeventh
CircuitCourtofAppealsand the matterwassubsequentlyfully
briefed. OnFebruary16, 2006 oralargumentsontheappealwere
heardbytheCourtofAppeals,andthe companyestimatesthat
theappealsprocess shouldconcludein2006.
ThecompanyisadefendantinanactionfiledonMarch6,
2003instatecourtinSalt LakeCity,UtahbyTheSCOGroup.
The company removed the case to Federal Court in Utah.
Plaintiff is an alleged successor in interest to some of AT&T’s
Unix IP rights, and alleges copyright infringement, unfair
competition,interferencewithcontract and breachofcontract
withregardtothecompany’sdistributionofAIXandDynixand
contributionofcodetoLinux. Thecompanyhasassertedcoun-
terclaims,includingbreachofcontract,violationoftheLanham
Act, unfair competition, intentional torts, unfair and deceptive
trade practices, breach of the General Public License that
governs open source distributions, promissory estoppel and
copyrightinfringement. InOctober2005,thecompanywithdrew