Microsoft 2006 Annual Report Download - page 62

PAGE 61
For the years ended June 30, 2006, 2005, and 2004, 649 million, 854 million, and 1.2 billion shares, respectively, were
attributable to outstanding stock options and 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, 2006, 1.2 million shared performance stock awards, out of
the 36.6 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 $276 million, $299 million, and $331 million, in fiscal years 2006, 2005, and 2004, respectively. Future
minimum rental commitments under noncancellable leases are as follows:
(In millions)
Y
ear Ended June 30
A
mount
2007 $250
2008
193
2009
138
2010
105
2011 and thereafter
199
$885
We have committed $234 million for constructing new buildings.
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, 2006, 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 cannot 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 No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. 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 $10 million as of June 30, 2006. 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 issued a decision in its competition
law investigation of us. 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,
which resulted in a charge in the third quarter of fiscal year 2004 of €497 million ($605 million). We filed an appeal of the