Microsoft 2004 Annual Report Download - page 51

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PAGE 51
million shares, 15.2 million shares, and 16.7 million shares at average prices of $25.26, $22.56, and $22.74 per share. At
June 30, 2004, 175.5 million shares were reserved for future issuance.
During the fourth quarter of fiscal 2004, the administrative committee under the plan approved a change to the common
stock purchase discount and approved the elimination of the related look back period and a change to quarterly purchase
periods. As a result, effective beginning in fiscal 2005, shares of our common stock may be purchased by employees at
three months intervals at 90% of the fair market value on the last day of each three month period.
Savings Plan. We have a savings plan in the United States, that qualifies under Section 401(k) of the Internal Revenue
Code, as well as a number of savings plans in international locations. Participating U.S. employees may contribute up to
25% of their pretax salary, but not more than statutory limits. We contribute fifty cents for each dollar a participant
contributes in this plan, with a maximum contribution of 3% of a participant’s earnings. Matching contributions for all plans
were $101 million, $118 million, and $141 million in fiscal 2002, 2003, and 2004. Matching contributions are invested
proportionate to each participant’s voluntary contributions in the investment options provided under the plan. Investment
options in the U.S. plan include Microsoft common stock, but neither participant nor our matching contributions are
required to be invested in Microsoft common stock.
Stock Plans. In fiscal 2004 we implemented changes in employee compensation designed to help us continue to attract
and retain the best employees, and to better align employee interests with those of our shareholders.
In fiscal 2004, we began granting employees stock awards instead of stock options. The stock award program offers
employees the opportunity to earn shares of our stock over time, rather than options that give employees the right to
purchase stock at a set price. We also completed an employee stock option transfer program in the second quarter of
fiscal 2004 whereby employees could elect to transfer all of their vested and unvested stock options with a strike price of
$33 or higher (“eligible options”) to JPMorgan. The unvested eligible options that were transferred to JPMorgan became
vested upon the transfer. The price paid by JPMorgan for the transferred options was determined by reference to the
arithmetic average of the closing prices of Microsoft common stock during the period from November 14, 2003 to
December 8, 2003, which was $25.57.
A total of 18,503 (51%) of the 36,539 eligible employees elected to participate in the stock option transfer program and
344.6 million (55%) of the 621.4 million eligible options were tendered. Under the terms of the program, JPMorgan paid us
$382 million for the transferred options. We made an initial payment of $219 million to participating employees for the
transferred options, with a remaining portion to be paid in one or more payments that are subject to participating
employees’ continued employment over the next two or three years. The options that were transferred to JPMorgan
resulted in stock-based compensation expense of $2.21 billion ($1.48 billion after-tax or $0.14 per diluted share) which is
reflected in the results of fiscal 2004. This expense consists of the unrecognized compensation costs of the options that
were transferred, less the amounts payable applicable to those previously unvested options for which payment is
contingent upon continued employment of participating employees. The contingent payments applicable to unvested
eligible options that are subject to continued employment of participating employees will be recognized as compensation
expense over the vesting period of the contingent payments.
The stock option transfer program also resulted in a decrease to our long-term deferred tax assets due to the excess of
recorded compensation expense for these options over the related tax deduction reported on our tax return. For fiscal
2004, deferred tax assets were reduced by approximately $2.01 billion with an offsetting reduction in paid-in capital,
reflecting the reduction of previously recorded deductions reported on our tax return in excess of stock based
compensation expense. A description of our stock plans follows.
We have stock plans for directors and for officers, employees, consultants and advisors. The plans provide for awards
of stock options and stock awards. At June 30, 2004, an aggregate of 807 million shares were available for future grant
under our stock plans. Our plans under which awards may be issued do not contain separate limitations on the number of
stock awards; all 807 million shares remaining available for grant at June 30, 2004 could be awarded as stock awards. In
addition, awards that expire or are cancelled without delivery of shares generally become available for issuance under the
plans. The options transferred to JPMorgan have been removed from our plans; any options transferred to JPMorgan that
expire without being exercised will not become available for grant under any of our plans.
Stock Awards and Shared Performance Stock Awards. Stock awards are grants that entitle the holder to shares of
common stock as the award vests. During fiscal 2004, 32.6 million stock awards with a weighted-average fair value of
$26.12 per share were granted and generally vest ratably over a five-year period. Approximately 787,000 stock awards
vested and 1.1 million stock awards were cancelled during fiscal 2004.
Shared Performance Stock Awards are a form of stock award in which the number of shares ultimately received
depends on our performance against specified performance targets. The performance period is July 1, 2003 through June