Creating opportunities through innovation

In February 2003, outstanding shares of our common stock were split two-for-one. All prior share and per share amounts have been restated to reflect the stock split.

Effective July 1, 2000, we adopted SFAS 133 which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of SFAS 133 on July 1, 2000, resulted in a cumulative pre-tax reduction to income of $560 million ($375 million after-tax) and a cumulative pre-tax

Effective July 1, 2001, we adopted SFAS 141, Business Combinations, and SFAS 142. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142.

Net income and earnings per share for fiscal 2001 adjusted to exclude amortization expense (net of taxes) is as follows:

(In millions, except earnings per share)
Year Ended June 30	2001
Net income:
Reported net income	$7,346
Goodwill amortization	252
Equity method goodwill amortization	26
Adjusted net income	$7,624
Basic earnings per share:
Reported basic earnings per share	$  0.69
Goodwill amortization	0.02
Equity method goodwill amortization	–
Adjusted basic earnings per share	$  0.71
Diluted earnings per share:
Reported diluted earnings per share	$  0.66
Goodwill amortization	0.02
Equity method goodwill amortization	–
Adjusted diluted earnings per share	$  0.68

 

Note 4—Unearned Revenue

Unearned revenue from volume licensing programs represents customer billings, 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. For certain other licensing arrangements revenue attributable to undelivered elements, including free post-delivery telephone support and the right to receive unspecified upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis, 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. The percentage of revenue recorded as unearned due to undelivered elements ranges from approximately 15% to 25% of the sales price for Windows XP Home, approximately 5% to 15% of the sales price for Windows XP Professional, and approximately 5% to 15% of the sales price for desktop applications, depending on the terms and conditions of the license and prices of the elements. Product life cycles are currently estimated at three and a half years for Windows operating systems and two years for desktop applications. Unearned revenue also includes payments for online advertising for which the advertisement has yet to be displayed and payments for post-delivery support services to be performed in the future.

 

(In millions)
June 30	2002		2003
Volume licensing programs	$ 4,158		$ 5,472
Undelivered elements	2,830		2,847
Other	755		696
Unearned revenue	$ 7,743		$ 9,015

 

Unearned revenue by segment was as follows:

 

(In millions)
June 30	2002		2003
Client	$ 3,023		$ 3,165
Server and Tools	1,595		2,185
Information Worker	2,757		3,305
Other segments	368		360
Unearned revenue	$ 7,743		$ 9,015

 
Of the $9.02 billion of unearned revenue at June 30, 2003, $2.65 billion is expected to be recognized in the first quarter of fiscal 2004, $2.05 billion in the second quarter of fiscal 2004, $1.53 billion in the third quarter of fiscal 2004, $1.00 billion in the fourth quarter of fiscal 2004, and $1.79 billion thereafter.

 

Note 5—Cash and Short-Term Investments