Microsoft 2005 Annual Report Download - page 58

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For the years ended June 30, 2003, 2004, and 2005, 1.09 billion, 1.2 billion and 854 million shares attributable to
outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the
stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have
been anti-dilutive. For the year ended June 30, 2005, 25.24 million shared performance stock awards, out of the 35.3 million
targeted amount outstanding, have been excluded from the calculation of diluted earnings per share because the number of
shares ultimately issued is contingent on our performance against metrics established for the performance period, as discussed
in Note 14 – Employee Stock and Savings Plans.
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 $290 million, $331 million, and $299 million in fiscal years 2003, 2004, and 2005, respectively. Future
minimum rental commitments under noncancellable leases are as follows:
(In millions)
Y
ear Ended June 30 Amount
2006 $ 230
2007 204
2008 167
2009 122
2010 and thereafter 310
$1,033
We have committed $152 million for constructing new buildings.
As of June 30, 2004, we had guaranteed the repayment of certain Japanese yen denominated bank loans and related
interest and fees of Jupiter Telecommunication, Ltd., a Japanese cable company. The total amount of these guarantees was
approximately $51 million. Effective December 21, 2004, the unconditional guarantees were terminated.
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, 2005, 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 No. 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 $14 million as of June 30, 2005. There has been
no significant activity impacting the results of operations for any period presented.
NOTE 17 CONTINGENCIES
Government competition law matters. On March 25, 2004, the European Commission announced a decision in its competition
law investigation of Microsoft. The Commission concluded that we infringed European competition law by refusing to provide our
competitors with licenses to certain protocol technology in the Windows server operating systems and by including streaming
media playback functionality in Windows desktop operating systems. The Commission ordered us to make the relevant licenses
to our technology available to our competitors and to develop and make available a version of the Windows desktop operating
system that does not include specified software relating to media playback. The decision also imposed a fine of €497 million,