Microsoft 2002 Annual Report Download - page 29

MSFT 31 / 2002 FORM 10-K
Part II
Item 7
Cash flow from operations was $14.51 billion for fiscal 2002, an increase of $1.09 billion from fiscal 2001. The increase reflects strong growth in unearned
revenue. Cash used for financing was $4.57 billion in fiscal 2002, a decrease of $1.01 billion from the prior year. The decrease reflects the repurchase of put
warrants in the prior year. The Company repurchased 122.8 million shares of common stock under its share repurchase program in fiscal 2002, compared to
89.0 million shares repurchased in the prior year. In addition, 5.1 million shares of common stock were acquired in fiscal 2002 under a structured stock
repurchase transaction. The Company entered into the structured stock repurchase transaction in fiscal 2001, giving it the right to acquire 5.1 million of its
shares in exchange for an up-front net payment of $264 million. Cash used for investing was $10.85 billion in fiscal 2002, an increase of $2.11 billion from
fiscal 2001.
Cash flow from operations was $13.42 billion in fiscal 2001, an increase of $2.00 billion from the prior year. The increase was primarily attributable to the
growth in revenue and other changes in working capital, partially offset by the decrease in the stock option income tax benefit, reflecting decreased stock
option exercises by employees. Cash used for financing was $5.59 billion in fiscal 2001, an increase of $3.39 billion from the prior year. The increase
primarily reflects the repurchase of put warrants in fiscal 2001, compared to the sale of put warrants in the prior fiscal year, as well as an increase in common
stock repurchased. All outstanding put warrants were either retired or exercised during fiscal 2001. During fiscal 2001, the Company repurchased 89.0 million
shares. Cash used for investing was $8.73 billion in fiscal 2001, a decrease of $658 million from the prior year. In fiscal 2000, cash flow from operations was
$11.43 billion, a decrease of $720 million from the prior year, reflecting working capital changes partially offset by the increase in the stock option income tax
benefit. Cash used for financing was $2.19 billion in fiscal 2000, an increase of $1.33 billion from the prior year, reflecting an increase in common stock
repurchased versus the prior year. During fiscal 2000, the Company repurchased 55.2 million shares. Cash used for investing was $9.39 billion in fiscal 2000,
a decrease of $808 million from the prior year.
Microsoft has no material long-term debt. Stockholders’ equity at June 30, 2002 was $52.18 billion. Microsoft will continue to invest in sales, marketing,
and product support infrastructure. Additionally, research and development activities will include investments in existing and advanced areas of technology,
including using cash to acquire technology. Additions to property and equipment will continue, including new facilities and computer systems for R&D, sales
and marketing, support, and administrative staff. Commitments for constructing new buildings were $111 million on June 30, 2002. The Company has not
engaged in any transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to affect materially liquidity or the
availability of or requirements for capital resources. Since fiscal 1990, Microsoft has repurchased 982 million common shares while 2.23 billion shares were
issued under the Company’s employee stock option and purchase plans. The Company’s convertible preferred stock matured on December 15, 1999. Each
preferred share was converted into 1.1273 common shares.
Management believes existing cash and short-term investments together with funds generated from operations should be sufficient to meet operating
requirements. The Company’s cash and short-term investments are available for strategic investments, mergers and acquisitions, other potential large-scale
needs and to fund the share repurchase program. Microsoft has not paid cash dividends on its common stock.
SUBSEQUENT EVENT
On July 11, 2002, Microsoft acquired Navision a/s as a result of the successful close of a tender offer. Microsoft purchased Navision’s shares for
approximately $1.45 billion in stock and cash. Navision is a provider of integrated business software solutions for small and medium-sized companies.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Microsoft’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and
expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for Microsoft
include revenue recognition, impairment of investment securities, accounting for research and development costs, accounting for legal contingencies, and
accounting for income taxes.
Microsoft accounts for the licensing of software in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2, Software Revenue Recognition. The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple
elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. End users receive certain elements of the
Company’s products over a period of time. These elements include browser technologies updates and technical support, the fair value of which is recognized
over the product’s estimated life cycle. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of
the respective elements, and changes to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue. Judgment is
also required to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products.
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin
(SAB) 59, Accounting for Noncurrent Marketable Equity Securities, provide guidance on determining when an investment is other-than-temporarily impaired,
which also requires judgment. In making this judgment, Microsoft evaluates, among other factors, the duration and extent to which the fair value of an
investment is less than its cost; the financial health of and business outlook for the investee, including factors such as industry and sector performance,
changes in technology, and operational and financing cash flow; and the Company’s intent and ability to hold the investment.
Microsoft accounts for research and development costs in accordance with several accounting pronouncements, including SFAS 2, Accounting for
Research and Development Costs, and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Other-