-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N26b8JZ+D9itB1VV26jhdjYCn7ihAfr9TPt7zghrp+hZRKVoz6sJ97WA+oXpaXv/ 51ADKl9FzvxHYuzhlXeing== 0001104659-08-065416.txt : 20081023 0001104659-08-065416.hdr.sgml : 20081023 20081023143937 ACCESSION NUMBER: 0001104659-08-065416 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20081023 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20081023 DATE AS OF CHANGE: 20081023 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL BUSINESS MACHINES CORP CENTRAL INDEX KEY: 0000051143 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 130871985 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02360 FILM NUMBER: 081137140 BUSINESS ADDRESS: STREET 1: 1 NEW ORCHARD ROAD CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9144991900 MAIL ADDRESS: STREET 1: 1 NEW ORCHARD RD CITY: ARMONK STATE: NY ZIP: 10504 8-K 1 a08-26644_18k.htm 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of Report:  October 23, 2008

(Date of earliest event reported)

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

 

New York

 

1-2360

 

13-0871985

(State of Incorporation)

 

(Commission File Number)

 

(IRS employer Identification No.)

 

ARMONK, NEW YORK

 

10504

(Address of principal executive offices)

 

(Zip Code)

 

914-499-1900

(Registrant’s telephone number)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


 

Item 8.01.  Other Events

 

International Business Machines Corporation (the “Company”) is submitting its financial statements and financial statement footnotes for the quarter ended June 30, 2008 as part of the Securities and Exchange Commission’s (the “SEC”) eXtensible Business Reporting Language (“XBRL”) Voluntary Filing Program. XBRL is an emerging XML-based standard to define and exchange business reports and financial statements. The XBRL-tagged data submitted is on an unaudited basis for the purpose of testing the related format and technology.

 

Attached as Exhibit 100 to this Current Report on Form 8-K are the  following from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed with the SEC on July 29, 2008 formatted in XBRL: (i) the Consolidated Statement of Earnings for the three month and six month periods ended June 30, 2008 and 2007, (ii) the Consolidated Statement of Financial Position at June 30, 2008 and December 31, 2007, (iii) the Consolidated Statement of Cash Flows for the six months ended June 30, 2008 and 2007 and (iv) the notes to the consolidated financial statements, tagged as blocks of text. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the financial and other information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Company.  The purpose of submitting these XBRL-formatted documents is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished documents and not rely on the information in this Current Report on Form 8-K, including Exhibit 100, in making investment decisions.

 

In accordance with Rule 402 of Regulation S-T, the information in this Current Report on Form 8-K, including Exhibit 100, shall not be deemed to be “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

Item 9.01. Financial Statements and Exhibits

 

(d) Exhibits

 

Exhibit Number

 

Description

 

 

 

100

 

The following from International Business Machines Corporation Quarterly Report on Form 10-Q for the period ended June 30, 2008, filed on July 29, 2008 formatted in XBRL: (i) the Consolidated Statement of Earnings for the three month and six month periods ended June 30, 2008 and 2007, (ii) the Consolidated Statement of Financial Position at June 30, 2008 and December 31, 2007, (iii) the Consolidated Statement of Cash Flows for the six months ended June 30, 2008 and 2007 and (iv) the notes to the consolidated financial statements, tagged as blocks of text.

 

2


 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

Date: October 23, 2008

 

 

 

 

 

 

 

 

 

By:

/s/ James J. Kavanaugh

 

 

      James J. Kavanaugh

 

 

      Vice President and Controller

 

3


 

EXHIBIT INDEX

 

Exhibit Number

 

Description

 

 

 

Exhibit 100.INS

 

XBRL Instance Document

 

 

(File name: ibm-20080729.xml)

 

 

 

Exhibit 100.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

(File name: ibm-20080729.xsd)

 

 

 

Exhibit 100.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

(File name: ibm-20080729_cal.xml)

 

 

 

Exhibit 100.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

(File name: ibm-20080729_def.xml)

 

 

 

Exhibit 100.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

(File name: ibm-20080729_lab.xml)

 

 

 

Exhibit 100.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

(File name: ibm-20080729_pre.xml)

 

4

 EX-100.INS 2 ibm-20080729.xml EX-100.INS 0000051143 2007-10-01 2007-12-31 0000051143 2007-06-30 0000051143 2006-12-31 0000051143 2008-06-30 0000051143 2007-12-31 0000051143 2008-01-01 2008-06-30 0000051143 2007-01-01 2007-06-30 0000051143 2007-04-01 2007-06-30 0000051143 2008-04-01 2008-06-30 iso4217:USD iso4217:USD shares 1354840130 International Business Machines Corporation 0000051143 --12-31 Yes No Yes Large Accelerated Filer 10-Q Transition Report false 2008-06-30 15203000000 10976000000 642000000 26820000000 10709000000 4225000000 286000000 15221000000 11599000000 13072000000 10097000000 602000000 23772000000 9450000000 4059000000 325000000 13834000000 9938000000 29777000000 20263000000 1282000000 51322000000 21057000000 7899000000 600000000 29556000000 21766000000 25495000000 19083000000 1223000000 45801000000 18501000000 7867000000 629000000 26997000000 18804000000 2765000000 2260000000 5084000000 4105000000 1.98 1.55 3.63 2.75 2.02 1.57 3.7 2.8 6289000000 1660000000 -285000000 -24000000 145000000 7786000000 3814000000 1049000000 2765000000 0 1.98 0 2.02 0 1395795201 1366274013 0.5 5631000000 1534000000 -246000000 -253000000 130000000 6796000000 3142000000 881000000 2261000000 -1000000 1.55 0 1.57 0 1460833527 1437151920 0.4 11909000000 3229000000 -559000000 -149000000 323000000 14754000000 7012000000 1928000000 5084000000 0 3.63 0 3.7 0 1400058867 1374641282 0.9 10720000000 3044000000 -451000000 -432000000 203000000 13083000000 5721000000 1616000000 4105000000 0 2.75 0 2.8 0 1491805503 1468339365 0.7 35188000000 37882000000 0.2 0.2 672373283 731322546 14991000000 1155000000 11428000000 241000000 16289000000 296000000 1072000000 13000000 9626000000 221000000 10952000000 254000000 15242000000 323000000 1034000000 15000000 668000000 1996000000 2664000000 1687000000 3891000000 53177000000 667000000 2248000000 2916000000 1949000000 4371000000 46312000000 38584000000 23503000000 15081000000 11603000000 58000000 17417000000 2107000000 14285000000 6761000000 120431000000 40320000000 24934000000 15386000000 11473000000 65000000 19027000000 3277000000 19624000000 5829000000 120928000000 3673000000 12235000000 8054000000 4645000000 9802000000 5901000000 44310000000 2831000000 12710000000 7531000000 4288000000 10815000000 6508000000 44683000000 23039000000 13582000000 3060000000 7970000000 91962000000 21522000000 14243000000 3171000000 9044000000 92663000000 4687500000 2057607421 4687500000 2086162676 60640000000 63945000000 64456000000 71068000000 -3414000000 28470000000 120431000000 -3006000000 28264000000 120928000000 75000000 257000000 353000000 -274000000 8453000000 6459000000 -6909000000 -2569000000 8022000000 7010000000 2096000000 654000000 340000000 1999000000 381000000 5891000000 29000000 8284000000 9617000000 6813000000 5924000000 -2273000000 7164000000 2704000000 1239000000 -7083000000 175000000 0 -5365000000 14066000000 1962000000 171000000 18205000000 1967000000 1044000000 -5008000000 112000000 -6000000 -1012000000 1803000000 439000000 241000000 310000000 16998000000 16602000000 1943000000 581000000 361000000 1. Basis of Presentation: The accompanying consolidated financial statements and footnotes thereto are unaudited. In the opinion of the management of the International Business Machines Corporation (the company), these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the company's results of operations, financial position and cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and gains and losses not affecting retained earnings that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results may be different. See the company's 2007 Annual Report for a discussion of the company's critical accounting estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the company's 2007 Annual Report. Within the financial tables in this Form 10-Q, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. 2. Accounting Changes: In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," which will become effective in 2009 via retrospective application. Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Restricted Stock Units (RSUs) granted to employees prior to December 31, 2007 are considered participating securiti es as they receive non-forfeitable dividend equivalents at the same rate as common stock. RSUs granted after December 31, 2007 do not receive dividend equivalents and are not considered participating securities. The company will adopt the FSP in fiscal year 2009. Upon implementation, the company does not expect a material impact on diluted and basic EPS. The implementation of the FSP is expected to decrease diluted EPS by $0.01 for the first and second quarters of 2008, by $0.02 for the six months ended June 30, 2008, and by $0.03 for the year ended December 31, 2007. Basic EPS is expected to decrease by $0.01 in each of the first and second quarters of 2008, by $0.02 for the six months ended June 30, 2008 and by $0.05 for the year ended December 31, 2007. In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133." SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity's financial position, performance and cash flow. Pursuant to the transition provisions of the Statement, the company will adopt SFAS No. 161 in fiscal year 2009 and will present the required disclosures in the prescribed format on a prospective basis. This Statement will not impact the consolidated financial results as it is disclosure-only in nature. In February 2008, the FASB issued FSP Financial Accounting Standard (FAS) 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13," and FSP FAS 157-2, "Effective Date of FASB Statement No. 157." FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, "Fair Value Measurements." FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). See SFAS No. 157 discussion on page 9. In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which will become effective in 2009 via prospective application to business combinations. This Statement requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). The company will adopt this Statement in fiscal year 2009 and its effects on future periods will depend on the nature and significance of business combinations subject to this statement. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51." This Statement requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. Pursuant to the transition provisions of SFAS No. 160, the company will adopt the Statement in fiscal year 2009 via retrospective application of the presentation and disclosure requirements. The company does not expect the adoption of this Statement to have a material effect on the Consolidated Financial Statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115," which became effective January 1, 2008. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The company adopted this Statement as of January 1, 2008 and the adoption of this Statement did not have a material effect on the Consolidated Financial Statements. In September 2006, the FASB finalized SFAS No. 157 which became effective January 1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as previously described. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 were applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. The adoption of this Statement did not have a material effect on the Consolidated Financial Statements for fair value measurements made during the six months ended June 30, 2008. While the company does not expect the adoption of this Statement to have a material impact on its Consolidated Financial Statements i n subsequent reporting periods, the company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets, such as private market pension plan assets, and nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the financial statements on at least an annual basis. See Note 6 on pages 12 to 14 for additional information regarding the adoption of this Statement. 3. Stockholders' Equity: The following table summarizes Net income plus gains and (losses) not affecting retained earnings (net of tax), a component of Stockholders' equity in the Consolidated Statement of Financial Position: Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2008 2007 2008 2007 Net income $ 2,765 $ 2,260 $ 5,084 $ 4,105 Gains and (losses) not affecting retained earnings (net of tax): Foreign currency translation adjustments (2 ) 259 457 349 Prior service costs, net gains/(losses) and transition assets/(obligations) 151 262 277 470 Net unrealized (losses)/gains on marketable securities (1) (19 ) 65 (176 ) 47 Net unrealized gains/(losses) on cash flow hedge derivatives 147 23 (149 ) 38 Total net gains and (losses) not affecting retained earnings 276 609 408 904 Net income plus gains and (losses) not affecting retained earnings $ 3,041 $ 2,869 $ 5,492 $ 5,009 (1) Sale of Lenovo stock and mark-to-market adjustments of remaining Lenovo stock accounted for a $18 million loss and a $89 million gain for second quarter of 2008 and 2007, and a loss of $169 million and a gain of $52 million in the first six months of 2008 and 2007, respectively. 4. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings: Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2008 2007 2008 2007 Cost $ 30 $ 45 $ 59 $ 91 Selling, general and administrative 125 123 252 235 Research, development and engineering 15 17 29 37 Other (income) and expense -- (1 ) -- (1 ) Pre-tax stock-based compensation cost 170 184 340 361 Income tax benefits (63 ) (76 ) (110 ) (143 ) Total stock-based compensation cost $ 106 $ 107 $ 230 $ 219 The reduction in pre-tax stock-based compensation cost for the three months ended June 30, 2008, as compared to the corresponding period in the prior year, was principally the result of a reduction in the level of stock option grants ($55 million), partially offset by an increase related to restricted and performance-based stock units ($36 million). The reduction in pre-tax stock-based compensation cost for the six months ended June 30, 2008, as compared to the corresponding period in the prior year, was principally the result of a reduction in the level of stock option grants ($119 million), partially offset by an increase related to restricted and performance-based stock units ($93 million). The effects on pre-tax stock-based compensation cost related to the formation of a joint venture based on the company's Printing Systems Division are included in Other (income) and expense above and in the Consolidated Statement of Earnings for the three and six-month periods ended June 30, 2007. As of June 30, 2008, the total unrecognized compensation cost of $1,342 million related to non-vested awards is expected to be recognized over a weighted-average period of approximately three years. There were no significant capitalized stock-based compensation costs at June 30, 2008 and 2007. For Restricted Stock Units (RSUs) awarded after December 31, 2007, dividend equivalents will not be paid. The fair value of such RSUs is determined and fixed on the grant date based on the company's stock price adjusted for the exclusion of dividend equivalents. 5. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the total retirement-related benefit plans' impact on income from continuing operations before income taxes. For the three months ended June 30: 2008 2007 Yr. to Yr. Percent Change (Dollars in millions) Retirement-related plans cost: Defined benefit and contribution pension plans cost $ 290 $ 534 (45.8) % Nonpension postretirement plans cost 91 94 (3.6) Total $ 381 $ 628 (39.4) % For the six months ended June 30: 2008 2007 Yr. to Yr. Percent Change (Dollars in millions) Retirement-related plans cost: Defined benefit and contribution pension plans cost $ 651 $ 1,074 (39.4) % Nonpension postretirement plans cost 185 197 (6.1) Total $ 836 $ 1,271 (34.2) % The following tables provide the components of the cost/(income) for the company's pension plans. Cost/(Income) of Pension Plans U.S. Plans Non-U.S. Plans For the three months ended June 30: 2008 2007 2008 2007 (Dollars in millions) Service cost $ -- $ 185 $ 138 $ 145 Interest cost 666 647 518 433 Expected return on plan assets (994 ) (926 ) (705 ) (613 ) Amortization of transition assets -- -- -- -- Amortization of prior service cost -- 15 (34 ) (31 ) Recognized actuarial losses 63 171 156 222 Net periodic pension (income)/cost--U.S. Plan and material non-U.S. Plans (265 )* 92 * 73 ** 156 ** Cost of other defined benefit plans 27 32 59 42 Total net periodic pension (income)/cost for all defined benefit plans (238 ) 124 132 198 Cost of defined contribution plans 252 97 143 115 Total retirement plan cost recognized in the Consolidated Statement of Earnings $ 15 $ 221 $ 275 $ 313 * Represents the qualified portion of the IBM Personal Pension Plan. ** Represents the qualified and non-qualified portion of material non-U.S. Plans. U.S. Plans Non-U.S. Plans For the six months ended June 30: 2008 2007 2008 2007+ (Dollars in millions) Service cost $ -- $ 373 $ 276 $ 291 Interest cost 1,337 1,293 1,024 857 Expected return on plan assets (1,989 ) (1,852 ) (1,395 ) (1,217 ) Amortization of transition assets -- -- -- (1 ) Amortization of prior service cost -- 30 (68 ) (62 ) Recognized actuarial losses 133 340 310 442 Net periodic pension (income)/cost--U.S. Plan and material non-U.S. Plans (519 )* 184 * 147 ** 310 ** Cost of other defined benefit plans 50 62 116 79 Total net periodic pension (income)/cost for all defined benefit plans (469 ) 246 263 389 Cost of defined contribution plans 573 213 283 226 Total retirement plan cost recognized in the Consolidated Statement of Earnings $ 105 $ 459 $ 546 $ 615 + Reclassified to conform with 2008 presentation. * Represents the qualified portion of the IBM Personal Pension Plan. ** Represents the qualified and non-qualified portion of material non-U.S. Plans. In 2008, the company expects to contribute to its non-U.S. defined benefit plans approximately $660 million, which is the legally mandated minimum contribution for its non-U.S. plans. Total contributions to the non-U.S. plans in the first half of 2008 were $295 `million. On April 29, 2008, the IBM Board of Directors approved a pension adjustment for certain U.S. retirees and beneficiaries. Effective September 1, 2008, this adjustment provides a pension increase to approximately 42,000 IBM retirees who retired before January 1, 1997. The impact of this adjustment will be included in the IBM Personal Pension Plan remeasurement at December 31, 2008, therefore, there will be no impact to 2008 net periodic pension cost. The following table provides the components of the cost for the company's nonpension postretirement plans. Cost of Nonpension Postretirement Plans Three Months Ended June 30, Six Months Ended June 30, 2008 2007 2008 2007 (Dollars in millions) Service cost $ 13 $ 17 $ 28 $ 34 Interest cost 77 76 156 155 Amortization of prior service cost (15 ) (15 ) (31 ) (30 ) Expected return on plan assets -- -- (4 ) -- Recognized actuarial losses 2 4 5 12 Net periodic post retirement plan cost -- U.S. Plan 77 82 153 171 Cost of non-U.S. Plans 14 12 32 26 Total nonpension postretirement plan cost recognized in the Consolidated Statement of Earnings $ 91 $ 94 $ 185 $ 197 The company received a $17.1 million subsidy in the second quarter and $20.2 million for the first half of 2008 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this amount is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants. For further information related to the Medicare Prescription Drug Act, see page 115 in the company's 2007 Annual Report. 6. Fair Value: As highlighted in Note 2 on page 8, the company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on January 1, 2008. Pursuant to the provisions of FSP FAS 157-2, the company will not apply the provisions of SFAS No. 157 until January 1, 2009 for the following major categories of nonfinancial assets and liabilities from the Consolidated Statement of Financial Position: Plant, rental machines and other property-net; Goodwill; Intangible assets-net; and, the Asset retirement obligation liabilities within Other accrued expenses and liabilities and Other liabilities. The company recorded no change to its opening balance of Retained earnings as of January 1, 2008 as it did not have any financial instruments requiring retrospective application per the provisions of SFAS No. 157. Fair Value Hierarchy SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company's own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy: Level 1 -- Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 -- Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; Level 3 -- Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort. Measurement of Fair Value The company measures fair value as an exit price using the procedures described below for all assets and liabilities measured at fair value. When available, the company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and marketable debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In the event of an other-than-temporary impairment of a nonpublic equity method investment, the company uses the net asset value of its investment in the investee adjusted using discounted cash flows for the company's estimate of the price that it would receive to sell the investment to a market participant that would consider all factors that would impact the investment's fair value. In determining the fair value of financial instruments, the company considers "base valuations' calculated using the methodologies described below for several parameters that market participants would consider in determining fair value. - - Counterparty credit risk adjustments are applied to financial instruments, where the base valuation uses market parameters based on an AA (or equivalent) credit rating. Due to the fact that not all counterparties have a AA (or equivalent) credit rating, it is necessary to take into account the actual credit rating of a counterparty to determine the true fair value of such an instrument. - - Credit risk adjustments are applied to reflect the company's own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company's own credit risk as observed in the credit default swap market. Items Measured at Fair Value on a Recurring Basis The following table presents the company's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2008 consistent with the fair value hierarchy provisions of SFAS No. 157. (Dollars in millions) Level 1 Level 2 Level 3 Netting (1) Total Assets: Cash and cash equivalents $2,919 $4,044 $ -- $ -- $6,964 Marketable securities -- 120 -- -- 120 Derivative assets (2) 31 1,009 -- (541 ) 499 Investments and sundry assets 437 1 -- -- 438 Total Assets $3,387 $5,175 $ -- $(541 ) $8,021 Liabilities: Derivative liabilities (3) $ -- $1,782 $ -- $(541 ) $1,241 Total Liabilities $ -- $1,782 $ -- $(541 ) $1,241 (1) Represents netting of derivative exposures covered by a qualifying master netting agreement in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Relating to Certain Contracts," and credit risk adjustments, if material. (2) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at June 30, 2008 are $793 million and $247 million, respectively. (3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at June 30, 2008 are $1,300 million and $481 million, respectively. At June 30, 2008, the company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Items Measured at Fair Value on a Nonrecurring Basis Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the table above. These assets include equity method investments that are recognized at fair value at the end of the period to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis and are included in the table above can also be subject to nonrecurring fair value measurements. These assets include public cost method investments that are deemed to be other-than-temporarily impaired. The company did not record any other-than-temporary impairment charges for these assets during the first six months of 2008. 7. Accelerated Share Repurchase: In May 2007, IBM International Group (IIG), a wholly-owned foreign subsidiary of the company repurchased 118.8 million shares of common stock for $12.5 billion under accelerated share repurchase (ASR) agreements with three banks. Pursuant to the ASR agreements, executed on May 25, 2007, IIG paid an initial purchase price of $105.18 per share for the repurchase. The initial purchase price was subject to adjustment based on the volume weighted average price of IBM common stock over a settlement period of three months for each of the banks. The adjustment also reflected certain other amounts including the banks' carrying costs, compensation for ordinary dividends declared by the company during the settlement period and interest benefits for receiving the $12.5 billion payment in advance of the anticipated purchases by each bank of shares in the open market during its settlement period. The adjustment amount could be settled in cash, registered shares or unregistered shares at IIG's option. Under the ASR, IIG had a separate settlement with each of the three banks. The first settlement occurred on September 6, 2007, resulting in a settlement payment to the bank of $151.8 million. The second settlement occurred on December 5, 2007, resulting in a settlement payment to the bank of $253.1 million. The third settlement occurred on March 4, 2008, resulting in a settlement payment to the company of $54.2 million. The settlement amounts were paid in cash at the election of IIG in accordance with the provisions of the ASR and were recorded as adjustments to Stockholders' equity in the Consolidated Statement of Financial Position on the settlement dates. The adjusted average price paid per share during the ASR period was $108.13, resulting in a total purchase price of $12,851 million versus the original $12,500 million. The $351 million difference was settled in cash. 8. Acquisitions: During the six months ended June 30, 2008, the company completed 13 acquisitions at an aggregate cost of $6,447 million. The Cognos, Inc. and Telelogic AB acquisitions are shown separately given their significant purchase prices. Cognos, Inc. (Cognos) - On January 31, 2008, the company acquired 100 percent of the outstanding common shares of Cognos for consideration of $5,021 million consisting of $4,998 million of cash and $24 million of equity instruments. Through this acquisition, IBM and Cognos will become a leading provider of technology and services for business intelligence and performance management, delivering the industry's most complete, open standards-based platform with the broadest range of expertise to help companies expand the value of their information, optimize their business processes and maximize performance across their enterprises. The company acquired Cognos to accelerate its Information on Demand strategy, a cross-company initiative that combines the company's strength in information integration, content and data management and business consulting services to unlock the business value of information. Cognos was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table on page 15 has been entirely assigned to the Software segment. It is expected that 20-30 percent of the goodwill will be deductible for tax purposes. The overall weighted average useful life of the intangible assets acquired, excluding goodwill, is 6.5 years. Telelogic, AB (Telelogic) - On April 3, 2008, IBM acquired 100 percent of the outstanding common shares of Telelogic for cash consideration of $885 million. Telelogic is a leading global provider of solutions for automating and supporting best practices across the enterprise from powerful modeling of business processes and enterprise architectures to requirements-driven development of advanced systems and software. Telelogic's solutions enable organizations to align product, systems and software development lifecycles with business objectives and customer needs to dramatically improve quality and predictability, while significantly reducing time-to-market and overall costs. Clients will benefit from the combined technologies and services of both companies, providing them a wider range of software and system development capabilities used to build complex systems. Telelogic was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table on page 15 has been entire ly assigned to the Software segment. None of the goodwill will be deductible for tax purposes. The overall weighted average useful life of the intangible assets acquired, excluding goodwill, is 7.0 years. Other Acquisitions - The company acquired 11 additional companies at an aggregate cost of $541 million that are presented in the table below as "Other Acquisitions." The Software segment completed seven other acquisitions, all privately held companies: in the first quarter; AptSoft Corporation, Solid Information Technology, Net Integration Technologies Inc., and Encentuate, Inc; in the second quarter; Infodyne, Beijing Super Info and FilesX. Global Technology Services (GTS) completed one acquisition in the first quarter: Arsenal Digital Solutions, a privately held company. Arsenal provides global clients with security rich information protection services designed to handle increasing data retention requirements. Global Business Services (GBS) completed one acquisition in the first quarter: u9consult, a privately held company. u9consult complements the company's existing capabilities in value chain consulting. Systems and Technology completed two acquisitions in the second quarter: Diligent Technologies Corporation and Platform Solutions, Inc (PSI), both privately held companies. Diligent will be an important component of IBM's New Enterprise Data Center model, which helps clients improve IT efficiency and facilitates the rapid deployment of new IT services for future business growth. PSI's technologies and skills, along with its intellectual capital, will be integrated into the company's mainframe product engineering cycles and future product plans. In the second quarter, $24 million of the purchase price of PSI was attributed to the settlement of a preexisting lawsuit between IBM and PSI and recorded in SG&A expense. See note 14 on page 18 for additional information regarding this litigation. Also, the company recorded a $24 million In-Process Research and Development (IPR&D) charge related to this acquisition in the second quarter. Purchase price consideration for the "Other Acquisitions" was paid all in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents. The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2008. (Dollars in millions) Amortization Life (yrs.) Cognos* Telelogic Other Acquisitions Current assets $ 507 $ 238 $ 26 26 Fixed assets/non current 126 7 17 Intangible assets: Goodwill N/A 4,177 658 433 Completed technology 3 -- 7 534 108 47 Client relationships 3 -- 7 47 127 11 IPR&D N/A -- -- 24 Other 3 -- 7 543 15 18 Total assets acquired 5,934 1,153 575 Current liabilities (784 ) (213 ) (47 ) Non current liabilities (128 ) (54 ) (12 ) Total liabilities assumed (912 ) (267 ) (59 ) Settlement of preexisting litigation -- - -- 24 Total purchase price $ 5,021 $ 885 $ 541 * Purchase price allocation at June 30, 2008 reflects immaterial adjustments from the March 31, 2008 balances. The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. For the "Other Acquisitions," the overall weighted-average life of the identified amortizable intangible assets acquired is 5.0 years. With the exception of goodwill, these identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $433 million has been assigned to the Software ($119 million), Global Technology Services ($84 million) and Systems and Technology ($231 million) segments. Substantially, all of the goodwill related to "Other Acquisitions" is not deductible for tax purposes. 9. Printing Systems Divestiture: In January 2007, the company announced an agreement with Ricoh Company Limited (Ricoh), a publicly traded company, to form a joint venture company based on IBM's Printing System Division (a division of the Systems and Technology segment). The company initially created a wholly-owned subsidiary, InfoPrint Solutions Company, LLC (InfoPrint), by contributing specific assets and liabilities from its printer business. The Printing System Division generated approximately $1 billion of revenue in 2006. The InfoPrint portfolio includes solutions for production printing for enterprises and commercial printers as well as solutions for office workgroup environments and industrial segments. On June 1, 2007 (closing date), the company divested 51 percent of its interest in InfoPrint to Ricoh. The company will divest its remaining ownership to Ricoh quarterly over a three year period from the closing date. At June 30, 2008, the company's ownership in InfoPrint was 32.6 percent. See IBM's 2007 Annual Report, Note C, "Acquisitions/Divestitures", for additional information. 11. Financing Receivables: The following table presents financing receivables, net of allowances for doubtful accounts, including residual values. At June 30, At December 31, (Dollars in millions) 2008 2007 Current: Net investment in sales-type leases $ 4,469 $ 4,746 Commercial financing receivables 5,232 6,263 Client loans receivables 4,877 4,652 Installment payment receivables 665 629 Total $ 15,242 $ 16,289 Noncurrent: Net investment in sales-type leases $ 6,192 $ 6,085 Commercial financing receivables 125 113 Client loans receivables 4,719 4,931 Installment payment receivables 438 474 Total $ 11,473 $ 11,603 Net investment in sales-type leases is for leases that relate principally to the company's equipment and are for terms ranging from two to seven years. Net investment in sales-type leases includes unguaranteed residual values of $947 million and $915 million at June 30, 2008 and December 31, 2007, respectively, and is reflected net of unearned income of $1,069 million and $1,016 million and of allowance for uncollectible accounts of $141 million and $127 million at those dates, respectively. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loans receivables relate to loans that are provided by Global Financing primarily to the company's clients to finance the purchase of the company's software and services. Separate contractual relationships on these financing arrangements are for terms ranging from two to seven years. Each financing contract is priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements. The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $341 million and $258 million at June 30, 2008 and December 31, 2007, respectively. The company did not have any financing receivables held for sale as of June 30, 2008 and December 31, 2007. 10. Intangible Assets Including Goodwill: The following schedule details the company's intangible asset balances by major asset class: At June 30, 2008 (Dollars in millions) Gross Carrying Accumulated Net Carrying Intangible asset class Amount Amortization Amount Capitalized software $ 1,920 $ (841 ) $ 1,079 Client-related 1,664 (573 ) 1,091 Completed technology 1,161 (239 ) 922 Patents/Trademarks 195 (55 ) 140 Other(1) 176 (129 ) 46 Total $ 5,115 $ (1,837 ) $ 3,277 At December 31, 2007 (Dollars in millions) Gross Carrying Accumulated Net Carrying Intangible asset class Amount Amortization Amount Capitalized software $ 1,926 $ (826 ) $ 1,100 Client-related 1,054 (495 ) 559 Completed technology 536 (194 ) 342 Strategic alliances 103 (103 ) -- Patents/Trademarks 128 (61 ) 67 Other(1) 154 (115 ) 39 Total $ 3,901 $ (1,794 ) $ 2,107 (1) Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems and impacts from currency translation. The net carrying amount of intangible assets increased $1,170 million during the first half of 2008, primarily due to acquired intangible assets and capitalized software additions, partially offset by amortization. The aggregate intangible amortization expense was $337 million and $654 million for the second quarter and first six months of 2008, respectively, versus $289 million and $580 million for the second quarter and first six months ended June 30, 2007, respectively. In addition, in the first half of 2008, the company retired $619 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at June 30, 2008: Capitalized Acquired (Dollars in millions) Software Intangibles Total 2008 (for Q3-Q4) $ 373 $ 316 $ 689 2009 497 498 994 2010 186 402 588 2011 22 353 375 2012 -- 271 271 The changes in the goodwill balances by reportable segment, for the six months ended June 30, 2008, are as follows: Foreign Currency Purchase Translation (Dollars in millions) Balance Goodwill Price And Other Balance Segment 12/31/07 Additions Adjustments Divestitures Adjustments 6/30/08 Global Business Services $ 4,041 $ -- $ (1 ) $ -- $ 29 $ 4,069 Global Technology Services 2,914 84 (2 ) -- 166 3,161 Systems and Technology 484 231 20 -- 1 735 Software 6,846 4,954 (61 ) -- (80 ) 11,658 Global Financing -- -- -- -- -- -- Total $ 14,285 $ 5,268 $ (44 ) $ -- $ 116 $ 19,624 There were no goodwill impairment losses recorded during the first six months of 2008. 12. Segments: The tables below reflect the results of the company's reportable segments consistent with the management system used by the company's chief operating decision maker. These results are not necessarily a depiction that is in conformity with GAAP. For example, employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount. Different results could occur if actuarial assumptions that are unique to each segment were used. Segment performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments. SEGMENT INFORMATION - ON CONTINUING OPERATIONS BASIS (UNAUDITED) Global Services Global Global Technology Business Systems and Global Total (Dollars in millions) Services Services Technology Software Financing Segments Three Months Ended June 30, 2008: External revenue $ 10,100 $ 5,107 $ 5,212 $ 5,574 $ 634 $ 26,626 Internal revenue 390 259 215 719 525 2,108 Total revenue $ 10,489 $ 5,366 $ 5,427 $ 6,293 $ 1,159 $ 28,734 Pre-tax income $ 994 $ 637 $ 400 $ 1,492 $ 428 $ 3,951 Revenue year-to-year change 14.5 % 15.0 % 1.3 % 18.2 % 23.5 % 12.9 % Pre-tax income year-to-year change 26.2 % 31.2 % 20.7 % 19.4 % 28.7 % 24.0 % Pre-tax income margin 9.5 % 11.9 % 7.4 % 23.7 % 36.9 % 13.8 % Three Months Ended June 30, 2007: External revenue $ 8,756 $ 4,338 $ 5,102 $ 4,777 $ 597 $ 23,571 Internal revenue 409 329 255 549 341 1,883 Total revenue $ 9,165 $ 4,667 $ 5,357 $ 5,326 $ 938 $ 25,453 Pre-tax income $ 788 $ 486 $ 332 $ 1,250 $ 332 $ 3,187 Pre-tax income margin 8.6 % 10.4 % 6.2 % 23.5 % 35.4 % 12.5 % Reconciliations to IBM as Reported: Three Months Ended Three Months Ended (Dollars in millions) June 30, 2008 June 30, 2007 Revenue: Total reportable segments $ 28,734 $ 25,453 Eliminations/other (1,915 ) (1,681 ) Total IBM Consolidated $ 26,820 $ 23,772 Pre-tax income: Total reportable segments $ 3,951 $ 3,187 Eliminations/other (138 )* (46 )* Total IBM Consolidated $ 3,814 $ 3,142 * Includes the gain from the divestiture of the company's printing business and the interest expense associated with the debt to support the company's accelerated share repurchase. SEGMENT INFORMATION - ON CONTINUING OPERATIONS BASIS (UNAUDITED) Global Services Global Global Technology Business Systems and Global Total (Dollars in millions) Services Services Technology Software Financing Segments Six Months Ended June 30, 2008: External revenue $ 19,777 $ 10,018 $ 9,431 $ 10,421 $ 1,266 $ 50,913 Internal revenue 778 517 410 1,386 911 4,002 Total revenue $ 20,555 $ 10,535 $ 9,841 $ 11,807 $ 2,177 $ 54,915 Pre-tax income $ 1,982 $ 1,216 $ 546 $ 2,759 $ 816 $ 7,319 Revenue year-to-year change 15.2 % 15.1 % (3.0 )% 16.2 % 14.5 % 11.6 % Pre-tax income year-to-year change 34.9 % 27.3 % 27.5 % 20.7 % 15.6 % 25.2 % Pre-tax income margin 9.6 % 11.5 % 5.5 % 23.4 % 37.5 % 13.3 % Six Months Ended June 30, 2007: External revenue $ 17,013 $ 8,521 $ 9,622 $ 9,028 $ 1,211 $ 45,397 Internal revenue 834 630 523 1,134 689 3,810 Total revenue $ 17,848 $ 9,152 $ 10,145 $ 10,162 $ 1,901 $ 49,207 Pre-tax income $ 1,469 $ 955 $ 428 $ 2,286 $ 706 $ 5,844 Pre-tax income margin 8.2 % 10.4 % 4.2 % 22.5 % 37.1 % 11.9 % Reconciliations to IBM as Reported: Six Months Ended Six Months Ended (Dollars in millions) June 30, 2008 June 30, 2007 Revenue: Total reportable segments $ 54,915 $ 49,207 Eliminations/other (3,593 ) (3,406 ) Total IBM Consolidated $ 51,322 $ 45,801 Pre-tax income: Total reportable segments $ 7,319 $ 5,844 Eliminations/other (307 )* (124 )* Total IBM Consolidated $ 7,012 $ 5,721 * Includes the gain from the divestiture of the company's printing business and the interest expense associated with the debt to support the company's accelerated share repurchase. 13. Restructuring-Related Liabilities: The following table provides a rollforward of the current and noncurrent liability balances for actions taken in the following periods: (1) the second-quarter of 2005; (2) the fourth-quarter 2002 actions associated with the acquisition of the PricewaterhouseCoopers consulting business; (3) the second-quarter of 2002 actions associated with the Microelectronics Division and the rebalancing of both the company's workforce and leased space resources; (4) the 2002 actions associated with the hard disk drive (HDD) business for reductions in workforce, manufacturing capacity and space; (5) actions taken in 1999; and (6) actions that took place prior to 1994. See the company's 2007 Annual Report, Note Q on pages 99 and 100 for additional information on the actions taken in 2005. Liability as of 12/31/2007 Payments Other adjustments* Liability as of 6/30/2008 (Dollars in millions) Current: Workforce $ 130 $ (69 ) $ 46 $ 107 Space 30 (17 ) 18 31 Other 7 -- 1 8 Total Current $ 167 $ (86 ) $ 65 $ 146 Noncurrent: Workforce $ 557 $ -- $ 18 $ 575 Space 74 -- (14 ) 60 Total Noncurrent $ 631 $ -- $ 4 $ 635 * The other adjustments column in the table above principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion. 14. Contingencies: The company is involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property (IP), product liability, employment, benefits, securities, foreign operations and environmental matters. These actions may be commenced by a number of different parties, including competitors, partners, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. The following is a summary of some of the more significant legal matters involving the company. The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by The SCO Group (SCO v. IBM). 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, interference with contract and breach of contract with regard to the company's distribution of AIX and Dynix and contribution of 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, promissory estoppel and copyright infringement. In October 2005, the company withdrew its patent counterclaims in an effort to simplify and focus the issues in the case and to expedite their resolution. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On August 10, 2007, the court in another suit, The SCO Group, Inc. v. Novell, Inc., issued a decision and order determining, among other things, that Novell is the owner of UNIX and UnixWare copyrights, and obligating SCO to recognize Novell's waiver of SCO's claims against IBM and Sequent for breach of UNIX license agreements. At the request of the court in SCO v. IBM, on August 31, 2007, each of the parties filed a status report with the court concerning the effect of the August 10th Novell ruling on the SCO v. IBM case, including the pending motions. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. On November 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York. IBM filed its amended complaint on August 17, 2007 and asserted claims for patent infringement, trade secret misappropriation, copyright infringement, tortious interference and breach of contract in connection with PSI's development and marketing of a computer system that PSI says is compatible with IBM's S/390 and System z architectures. IBM also sought a declaratory judgment that its refusal to license its patents to PSI and certain of its software for use on PSI systems does not violate the antitrust laws. IBM seeks damages and injunctive relief. On September 21, 2007, PSI answered the amended complaint and asserted counterclaims against IBM for alleged monopolization and attempted monopolization, tying, violations of New York and California statutes proscribing unfair competition, tortious interference with the acquisition of PSI by a third party and promissory estoppel. PSI also sought declaratory judgments of noninfringement of IBM's patents and patent invalidity. In October 2007, PSI filed a complaint with the European Commission claiming that the company's alleged refusal to do business with PSI violated European competition law. The company responded to this complaint in December. On January 11, 2008, the court in the New York lawsuit permitted T3 Technologies, a reseller of PSI computer systems, to intervene as a counterclaim-plaintiff, and the court also permitted the company to file a second amended complaint adding patent infringement claims against T3. On June 30, 2008, IBM acquired PSI. As a result of this transaction, IBM and PSI dismissed all claims against each other. Litigation between the company and T3 continues. In October 2003, a purported collective action lawsuit was filed against IBM in the United States District Court for the Northern District of California by 10 former IBM employees alleging, on behalf of themselves and allegedly similarly situated former employees, that the company engaged in a pattern and practice of discriminating against employees on the basis of age when it terminated employees, both in connection with reductions in force and individualized determinations (Syverson v. IBM). Initially, the District Court dismissed the lawsuit on the basis of release agreements signed by all the plaintiffs. On appeal, the Ninth Circuit reversed the trial court's finding that the release barred these claims, and in January 2007, after denial of IBM's petition for rehearing, the matter was returned to the trial court for further proceedings. On October 3, 2007, the court dismissed with prejudice plaintiffs' claim for relief under the Older Workers Benefit Protection Act, and dismissed wi th leave to amend plaintiffs' claim asserting disparate impact age discrimination with respect to individualized terminations. On November 6, 2007, plaintiffs filed a Third Amended Complaint, amending the disparate impact claim. IBM filed its answer on November 26, 2007, and discovery is proceeding. In July 2005, two lawsuits were filed in the United States District Court for the Southern District of New York related to the company's disclosures concerning first-quarter 2005 earnings and the expensing of equity compensation. Pursuant to an Order from the Court dated March 28, 2006, the two lawsuits were consolidated into a single action captioned "In re International Business Machines Corp. Securities Litigation." Plaintiffs filed a corrected consolidated amended complaint dated May 19, 2006, in which they named the company and IBM's Senior Vice President and Chief Financial Officer as defendants and alleged that defendants made certain misrepresentations and omissions in violation of Section 10(b), and Rule 10b-5 thereunder, and Section 20(a) of the Securities Exchange Act of 1934. On September 20, 2006, the Court denied a Motion to Dismiss that was filed by IBM. On March 12, 2007, the plaintiffs' class was certified; class notifications were mailed on or about May 30, 2 007. On May 30, 2008, the Court granted preliminary approval of a settlement of this action and set September 8, 2008 as the date for a fairness hearing. 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 Electronics, which has since been dissolved, effective January, 2005) 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. IBM Korea and LG IBM cooperated fully with authorities in these matters. A number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. Debarment orders were imposed at different times, covering a period of no more than a year from the date of issuance, which barred IBM Korea from doing business directly with certain government-controlled entities in Korea. All debarment orders have since expired and when they were in force did not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter. In March 2008, the company received a request from the SEC for additional information. On March 27, 2008, the company was temporarily suspended from participating in new business with U.S. Federal government agencies. The notice of temporary suspension was issued by the Environmental Protection Agency (EPA) and related to an investigation by the EPA of possible violations of the Procurement Integrity provisions of the Office of Federal Procurement Policy Act regarding a specific bid for business with the EPA originally submitted in March 2006. In addition, the U.S. Attorney's Office for the Eastern District of Virginia served the company and certain employees with grand jury subpoenas related to the bid, requesting testimony and documents regarding interactions between employees of the EPA and certain company employees. On April 4, 2008, the company announced an agreement with the EPA that terminated the temporary suspension order. The company is cooperating with the EPA and with the U.S. Attorney's Office for the Eastern District of Virginia. The company is a defendant in a civil lawsuit brought in Tokyo District Court by Tokyo Leasing Co., Ltd., which seeks to recover losses that it allegedly suffered after IXI Co., Ltd. initiated civil rehabilitation (bankruptcy) proceedings in Japan and apparently failed to pay Tokyo Leasing amounts for which Tokyo Leasing now seeks to hold IBM and others liable. The claims in this suit include tort and breach of contract. The company is a defendant in numerous actions filed after January 1, 2008 in Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and different causes of action, including for negligence and recklessness, private nuisance and trespass. Plaintiffs in these cases seek medical monitoring and claim damages in unspecified amounts for a variety of personal injuries and property damages allegedly arising out of the presence of groundwater contamination and vapor intrusion of groundwater contaminants into certain structures in which plaintiffs reside or resided, or conducted business, allegedly resulting from the release of chemicals into the environment by the company at its former manufacturing and development facility in Endicott. These complaints also seek punitive damages in an unspecified amount. The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as "Superfund," or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites. The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters principally relate to claims for taxes on the importation of computer software. The total amounts related to these matters are approximately $2.6 billion, including amounts currently in litigation and other amounts. In addition, the company has received an income tax assessment from Mexican authorities relating to the deductibility of certain warranty payments. In response, the company has filed an appeal in the Mexican Federal Fiscal court. The total potential amount related to this matter for all applicable years is approximately $550 million. The company believes it will prevail on these matters and that these amounts are not meaningful indicators of liability. In accordance with SFAS No. 5, "Accounting for Contingencies," (SFAS No. 5), the company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and proceedings are reviewed at least quarterly and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities including any changes to such liabilities for the quarter ended June 30, 2008, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters previously referred to are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. 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 resolution 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 the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter which may give rise to additional factors. 15. Commitments: The company's extended lines of credit to third-party entities include unused amounts of $4,944 million and $3,702 million at June 30, 2008 and December 31, 2007, respectively. A portion of these amounts was available to the company's business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $4,288 million and $3,654 million at June 30, 2008 and December 31, 2007, respectively. The company has applied the disclosure provisions of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to its agreements that contain guarantee 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 following is a description of arrangements in which the company is the guarantor. The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of non-financial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other party's claims. Further, the company's obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the company may have recourse against third parties for certain payments made by the company. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company's business, financial condition or results of operations. In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $24 million and $23 million at June 30, 2008 and December 31, 2007, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material. The company offers warranties for its hardware products that range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. Revenue from extended warranty contracts, for which the company is obligated to perform, is recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period. Changes in the company's deferred income for extended warranty contracts and warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities on the Consolidated Statement of Financial Position, are presented in the following tables: Standard Warranty Liability (Dollars in millions) 2008 2007 Balance at January 1 $ 412 $ 582 Current period accruals 199 228 Accrual adjustments to reflect actual experience 18 (25 ) Charges incurred (253 ) (327 ) Balance at June 30 $ 376 $ 458 The decrease in the balance was primarily driven by a reduction in estimated future cost as a result of the divestiture of the Personal Computing business to Lenovo Group Limited (Lenovo) in April 2005. Extended Warranty Liability (Dollars in millions) 2008 2007 Aggregate deferred revenue at January 1 $ 409 $ 131 Revenue deferred for new extended warranty contracts 157 120 Amortization of deferred revenue (50 ) (29 ) Other (a) 8 1 Aggregate deferred revenue at June 30 $ 523 $ 223 Current $ 199 $ 102 Non current 325 121 Aggregate deferred revenue at June 30 $ 523 $ 223 (a) Other primarily consists of foreign currency translation adjustments. 16. Subsequent Events: On July 29, 2008, the company announced that the Board of Directors approved a quarterly dividend of $0.50 per common share. The dividend is payable September 10, 2008 to stockholders of record on August 8, 2008. On July 28, 2008, the company issued $1.0 billion of 3-year floating rate notes. On July 28, 2008, the company announced an agreement to acquire ILOG, a publicly held compny, for approximately $340 million. The closing of this acquisition is conditioned upon satisfactory completion of all regulatory reviews. Certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. 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