Microsoft 2002 Annual Report Download - page 42

MSFT 44 / 2002 FORM 10-K
Part II
Item 8
In millions
June 30, 2002
Cost
Basis
Unrealized
Gains Unrealized
Losses
Recorded
Basis
Debt securities recorded at market, maturing:
Within one year $ 485 $26 $
–
$511
Between 2 and 10 years 893 46 (4) 935
Between 10 and 15 years 541 19 (2) 558
Beyond 15 years 3,036
–
–
3,036
Debt securities recorded at market 4,955 91 (6) 5,040
Common stock and warrants 6,930 1,287 (617) 7,600
Preferred stock 1,382
–
–
1,382
Other investments 169
–
–
169
Equity and other investments $13,436 $1,378 $ (623) $14,191
Debt securities include corporate and government notes and bonds and derivative securities. Debt securities maturing beyond 15 years are composed
entirely of AT&T 5% convertible preferred debt with a contractual maturity of 30 years. The debt is convertible at the Company’s option into AT&T common
stock on or after December 1, 2000, or may be redeemed by AT&T upon satisfaction of certain conditions on or after June 1, 2002. In connection with the
definitive agreement to combine AT&T Broadband with Comcast in a new company to be called AT&T Comcast Corporation, Microsoft has agreed to
exchange its AT&T 5% convertible preferred debt securities for approximately 115 million shares of AT&T Comcast Corporation. It is expected that the
transaction will close by December 31, 2002. While it is possible that Microsoft could incur a loss on this exchange transaction up to the carrying value of the
AT&T debt securities, management believes that the ultimate loss, if any, will be significantly less. As management is unable to predict whether there will be
a gain or loss on the exchange, no loss has been recorded related to this contingent exchange transaction as of June 30, 2002.
Equity securities that are restricted for more than one year or not publicly traded are recorded at cost. At June 30, 2001 the estimated fair value of these
investments in excess of their recorded basis was $161 million. At June 30, 2002 the recorded basis of these investments in excess of their estimated fair
value was $34 million. This excess of cost over estimated fair value was deemed temporary in nature. The estimate of fair value is based on publicly
available market information or other estimates determined by management. Realized gains and (losses) from equity and other investments (excluding
impairments discussed previously) were $1.94 billion and $(10) million in 2000, $3.03 billion and $(23) million in 2001, and $2.24 billion and $(121) million in
2002.
NOTE 8 GOODWILL
During fiscal 2002, goodwill was reduced by $85 million, principally in connection with Microsoft’s exchange of all of its 33.7 million shares and warrants of
Expedia, Inc. to USA Networks, Inc. No goodwill was acquired or impaired during fiscal 2002. As of June 30, 2002, Desktop and Enterprise Software and
Services goodwill was $1.1 billion, Consumer Software, Services, and Devices goodwill was $258 million, and Consumer Commerce Investments goodwill
was $72 million.
NOTE 9 INTANGIBLE ASSETS
During fiscal 2002, changes in intangible assets primarily relates to the Company’s acquisition of $25 million in patents and licenses and $27 million in
existing technology, which will be amortized over approximately 3 years. No significant residual value is estimated for these intangible assets. Intangible
assets amortization expense was $202 million for fiscal 2001 and $194 million for fiscal 2002. The components of intangible assets were as follows:
In millions
June 30
2001 2002
Gross Carrying
A
mount
A
ccumulated
Amortization Gross Carrying
Amount
A
ccumulated
Amortization
Patents and licenses $407 $(177)
$ 421 $(290)
Existing technology 157 (27)
172 (71)
Trademarks, tradenames and other 83 (42)
15 (4)
Intangible assets $647 $(246)
$ 608 $(365)
Amortization expense for the net carrying amount of intangible assets at June 30, 2002 is estimated to be $115 million in fiscal 2003, $90 million in fiscal
2004, $36 million in fiscal 2005, and $2 million in fiscal 2006.