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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_77
its patent counterclaims in an effort to simplify and focus the
issues in the case and to expedite their resolution. Trial is cur-
rentlyscheduledforFebruary2007.
InMay2005,theLouisianaSupremeCourtdeniedthecom-
pany’s motion to review and reverse a Louisiana state court’s
certification of a nationwide class in a case filed against the
companyin1995.Theclassconsistsofcertainformeremploy-
eeswholeftthecompanyin1992,andtheirspouses.Theyclaim
damagesbasedonthecompany’sterminationofaneducation
assistance program. The company has a pending summary
judgmentmotioninthetrialcourt.Nodatehasbeensetfortrial.
OnJune2,2003thecompanyannouncedthatitreceived
noticeofaformal,nonpublicinvestigationbytheSecuritiesand
ExchangeCommission (SEC).TheSEC is seeking information
relatingtorevenuerecognitionin2000and2001 primarilycon-
cerning certain types of client transactions. The company
believesthattheinvestigationarisesfromaseparateinvestiga-
tion by the SEC of Dollar General Corporation, a client of the
company’sRetailStoresSolutionsunit,whichmarketsandsells
point-of-saleproducts.
On January 8, 2004, the company announced that it
receiveda“WellsNotice” fromthestaffoftheSECinconnection
with the staff’s investigation of Dollar General Corporation,
which as noted above, is a client of the company’s Retail
StoresSolutionsunit.Itisthecompany’sunderstandingthatan
employee in the company’s Sales & Distribution unit also
received a Wells Notice from the SEC in connection with this
matter.TheWellsNoticenotifiesthecompanythattheSECstaff
isconsidering recommending thattheSECbringa civil action
againstthecompanyforpossibleviolationsoftheU.S.securities
lawsrelatingtoDollarGeneral’saccountingforaspecifictrans-
action, by participating in and aiding and abetting Dollar
General’s misstatement of its 2000 results. In that transaction,
the company paid Dollar General $11 million for certain used
equipmentaspart ofasale of IBMreplacementequipment in
DollarGeneral’s2000fourthfiscalquarter.UndertheSEC’spro-
cedures, the company responded to the SEC staff regarding
whetheranyactionshouldbebroughtagainstthecompanyby
theSEC.TheseparateSECinvestigationnotedabove,relating
totherecognitionofrevenuebythecompanyin2000and2001
primarilyconcerningcertaintypesofclient transactions,isnot
thesubjectofthisWellsNotice.
On June 27, 2005, the company announced that it had
receivedarequesttovoluntarilycomplywithaninformalinvesti-
gationbythestaffoftheSECconcerningthecompany’sdisclo-
suresrelatingtothecompany’sfirstquarter2005earningsand
expensing of equity compensation. On January 12, 2006, the
companyannouncedthatitreceivednoticeofaformal,nonpublic
investigationbytheSECofthismatter. Thecompanyhasbeen
cooperatingwiththeSEC,andwillcontinuetodoso. TheSEChas
informedthecompanythattheinvestigationshouldnotbecon-
struedasanindicationthatanyviolationsoflawhaveoccurred.
In July 2005, two lawsuits were filed in the United States
DistrictCourtfortheSouthernDistrictofNewYorkrelatedtothe
company’s disclosures concerning first-quarter 2005 earnings
andtheexpensingofequitycompensation. Onelawsuitnamed
asdefendantsIBMandIBM’s SeniorVicePresidentandChief
FinancialOfficer. Theotherlawsuitnamedasdefendants IBM,
IBM’s Senior Vice President and Chief Financial Officer, and
IBM’s Chairman and Chief Executive Officer. Both complaints
allegedthatdefendantsmadecertainmisrepresentationsinvio-
lationofSection10(b)and20(a)oftheSecuritiesExchangeAct
of1934andRule10b-5promulgatedthereunder. OnSeptember
6,2005,counselinoneoftheselawsuitsfiledamotionseeking
to have the lawsuits consolidated, and for the appointment of
leadplaintiffandleadcounsel. Intheirmotion,counselpurport
to be acting on behalf of shareholders who purchased or
acquired the securities of IBM between January19, 2005 and
April 15, 2005. On October 6, 2005, the Court approved an
agreementbetweenplaintiffsandthenameddefendantsinthe
lawsuitspursuanttowhichplaintiffswillservedefendantswitha
ConsolidatedAmendedComplaintwithin 60daysoftheCourt
issuing an Order naming lead plaintiff and lead counsel.
Pursuant to this agreement, defendants will be required to
Answer, file a Motion to Dismiss, or otherwise respond to the
ConsolidatedAmended Complaintwithin60days ofreceiptof
theConsolidatedAmendedComplaint.
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
LGIBM(ajointventurebetweenIBMKoreaandLGElectronics,
whichhas since been dissolved, effectiveJanuary, 2005) and
had also charged employees of some of those entities with,
amongother things, briberyofcertain officials of government-
controlledentitiesinKorea,andbidrigging.IBMKoreaandLG
IBMcooperatedfullywithauthoritiesinthesematters.Anumber
ofindividuals,includingformerIBMKoreaandLGIBMemploy-
ees,weresubsequentlyfoundguiltyandsentenced.IBMKorea
andLGIBMwerealsorequiredtopayfines. Debarmentorders
wereimposed at differenttimes, covering a periodofnomore
thanayearfromthedateofIssuance,whichbarredIBMKorea
fromdoingbusinessdirectlywithcertaingovernmentcontrolled
entitiesinKorea. Alldebarmentordershavesinceexpiredand
whentheywereinforcedidnot prohibitIBMKoreafromselling
productsandservicestobusinesspartnerswhosold togovern-
ment-controlled entities in Korea. In addition, the U.S.
Department of Justice and the SEC have both contacted the
companyinconnectionwiththismatter.
On January 24, 2006, a putative class action lawsuit was
filedagainst IBM infederalcourt inSanFranciscoonbehalfof
technicalsupportworkerswhoseprimaryresponsibilitiesareor
were to install and maintain computer software and hardware.
Thesuit,Rosenburg,et.al.,v.IBM,allegesthecompanyfailedto
pay overtime wages pursuant to the Fair Labor Standards Act
andstatelaw,andassertsviolationsofCaliforniarecordkeeping
and meal-break provisions. The suit also asserts certain viola-
tionsofERISA.Reliefsought includes back wages, correspon-
ding401Kandpensionplancredits,interest,andattorneys’fees.
On June 30, 2005, the company and Microsoft Corp.
reached an agreement to resolve certain antitrust claims. The