Microsoft 2004 Annual Report Download - page 55

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PAGE 55
NOTE 16 COMMITMENTS AND GUARANTEES
We have operating leases for most U.S. and international sales and support offices and certain equipment. Rental
expense for operating leases was $318 million, $290 million, and $331 million in fiscal 2002, 2003, and 2004, respectively.
Future minimum rental commitments under noncancellable leases, in millions of dollars, are as follows:
(In millions)
Y
ear Ended June 30
A
mount
2005 $148
2006 124
2007 81
2008 62
2009 and thereafter 120
$535
We have committed $129 million for constructing new buildings.
We have unconditionally guaranteed the repayment of certain Japanese yen denominated bank loans and related
interest and fees of Jupiter Telecommunication, Ltd., a Japanese cable company (Jupiter). These guarantees arose on
February 1, 2003 in conjunction with the expiration of prior financing arrangements, including previous guarantees by us.
The financing arrangements were entered into by Jupiter as part of financing its operations. As part of Jupiter’s new
financing agreement, we agreed to guarantee repayment by Jupiter of the loans of approximately $51 million. The
estimated fair value and the carrying value of the guarantees was $11 million which was added to the carrying value of the
related investment. The guarantees are in effect until the earlier of repayment of the loans, including accrued interest and
fees, or February 1, 2009. The maximum amount of the guarantees is limited to the sum of the total due and unpaid
principal amounts, accrued and unpaid interest, and any other related expenses. Additionally, the maximum amount of the
guarantees, denominated in Japanese yen, will vary based on fluctuations in foreign exchange rates. If we were required
to make payments under the guarantees, we may recover all or a portion of those payments upon liquidation of the
Jupiter’s assets. The proceeds from such liquidation cannot be accurately estimated due to the multitude of factors that
would affect the valuation and realization of the proceeds in the event of liquidation.
In connection with various operating leases, we issued residual value guarantees, which provide that if we do not
purchase the leased property from the lessor at the end of the lease term, then we are liable to the lessor for an amount
equal to the shortage (if any) between the proceeds from the sale of the property and an agreed value. As of June 30,
2004, the maximum amount of the residual value guarantees was approximately $271 million. We believe that proceeds
from the sale of properties under operating leases would exceed the payment obligation and therefore no liability to us
currently exists.
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property
infringement made by third parties arising from the use of our products. In addition, we also provide indemnification
against credit risk in several geographical locations to our volume license resellers in case the resellers fail to collect from
the end user. Due to the nature of the indemnification provided to our resellers, we can not estimate the fair value, nor
determine the total nominal amount of the indemnification. We evaluate estimated losses for such indemnifications under
SFAS 5, Accounting for Contingencies, as interpreted by FIN 45. We consider such factors as the degree of probability of
an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not
encountered material costs as a result of such obligations and have not accrued any liabilities related to such
indemnifications in our financial statements.
Our product warranty accrual reflects management’s best estimate of our probable liability under its product warranties
(primarily relating to the Xbox console). We determine the warranty accrual based on known product failures (if any),
historical experience, and other currently available evidence. Our warranty accrual totals $19 million. There has been no
significant activity impacting the results of operations for any period presented.
NOTE 17 CONTINGENCIES
Government antitrust cases. We are the defendant in U.S. v. Microsoft and New York v. Microsoft, companion
lawsuits filed by the Antitrust Division of the U.S. Department of Justice (DOJ) and a group of eighteen state Attorneys
General alleging violations of the Sherman Act and various state antitrust laws. After the trial, the District Court entered
Findings of Fact and Conclusions of Law stating that we had violated Sections 1 and 2 of the Sherman Act and various