Microsoft 2009 Annual Report Download - page 30

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
While we own certain mortgage- and asset-backed fixed-income securities, our portfolio as of June 30, 2009 does
not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime
collateral. The majority of the mortgage-backed securities are collateralized by prime residential mortgages and
carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, and Government National Mortgage Association.
Debt
Short-term Debt
In September 2008, our Board of Directors authorized debt financings of up to $6.0 billion. Pursuant to the
authorization, we established a commercial paper program providing for the issuance and sale of up to $2.0 billion in
short-term commercial paper. As of June 30, 2009, $2.0 billion of the commercial paper was issued and outstanding
with a weighted average interest rate, including issuance costs, of 0.20% and maturities of 22 to 119 days.
In September 2008, we also entered into a $2.0 billion six-month senior unsecured credit facility, principally to
support the commercial paper program. In November 2008, we replaced the six-month credit facility with a $2.0
billion 364-day credit facility. This credit facility expires on November 6, 2009. In March 2009, we entered into an
additional credit facility. This $1.0 billion 364-day credit facility expires on March 12, 2010. As of June 30, 2009, we
were in compliance with the only financial covenant in both credit agreements, which requires us to maintain a
coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest
expense. No amounts were drawn against these credit facilities during the year ended June 30, 2009.
Long-term Debt
In November 2008, we filed a shelf registration statement with the U.S. Securities and Exchange Commission that
allows us to issue debt securities from time to time pursuant to the September 2008 authorization for debt financings
of up to $6.0 billion. In May 2009, we issued $3.75 billion of debt securities under that registration statement as
follows: $2.0 billion aggregate principal amount of 2.95% notes due 2014, $1.0 billion aggregate principal amount of
4.20% notes due 2019, and $750 million aggregate principal amount of 5.20% notes due 2039 (collectively “the
Notes”). Interest on the Notes will be payable semi-annually on June 1 and December 1 of each year, commencing
on December 1, 2009, to holders of record on the preceding May 15 and November 15. The Notes are senior
unsecured obligations and will rank equally with our other unsecured and unsubordinated debt outstanding.
We intend to use the net proceeds from sales of the debt securities for general corporate purposes, which may
include funding for working capital, capital expenditures, repurchases of our capital stock, and acquisitions.
Unearned Revenue
Unearned revenue is comprised of the following items:
Volume Licensing Programs
Represents customer billings for multi-year licensing arrangements, paid either upfront or annually at the beginning
of each billing coverage period, which are accounted for as subscriptions with revenue recognized ratably over the
billing coverage period.
Undelivered Elements
Represents the right to receive unspecified upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-
available basis and free post-delivery telephone support. This revenue deferral is applicable for Windows XP and
prior versions shipped as retail packaged products, products licensed to OEMs, and perpetual licenses for current
products under our Open and Select volume licensing programs. The amount recorded as unearned is based on the
sales price of those elements when sold separately and is recognized ratably on a straight-line basis over the related
product’s life cycle. Product life cycles are currently estimated at three and one-half years for Windows operating
systems. Undelivered elements include $276 million of deferred revenue related to the Windows 7 Upgrade Option
program. The program, which started June 26, 2009, allows customers who purchase PCs from participating
computer makers or retailers with certain versions of Windows Vista to receive an upgrade to the corresponding
version of Windows 7 at minimal or no cost. In addition, purchasers of retail packaged Windows Vista may also
qualify for a free or discounted upgrade to the equivalent Windows 7 product with participating retailers in
participating markets when the product becomes generally available.