Microsoft 2011 Annual Report Download - page 64

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64
Each $1,000 principal amount of notes is convertible into 29.94 shares of Microsoft common stock at a conversion
price of $33.40 per share. As of June 30, 2011, the net carrying amount of our convertible debt was $1.2 billion
and the unamortized discount was $38 million.
Prior to March 15, 2013, the notes will be convertible, only in certain circumstances, into cash and, if applicable,
cash, shares of Microsoft’s common stock, or a combination thereof, at our election. On or after March 15, 2013,
the notes will be convertible at any time. Upon conversion, we will pay cash up to the aggregate principal amount
of the notes and pay or deliver cash, shares of our common stock, or a combination of cash and shares of our
common stock, at our election.
Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for
the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate
when interest costs are recognized in subsequent periods. The net proceeds of $1.24 billion were allocated
between debt for $1.18 billion and stockholders’ equity for $58 million with the portion in stockholders’ equity
representing the fair value of the option to convert the debt.
In connection with the issuance of the notes, we entered into capped call transactions with certain option
counterparties who are initial purchasers of the notes or their affiliates. The capped call transactions are expected
to reduce potential dilution of earnings per share upon conversion of the notes. Under the capped call
transactions, we purchased from the option counterparties capped call options that in the aggregate relate to the
total number of shares of our common stock underlying the notes, with a strike price equal to the conversion price
of the notes and with a cap price equal to $37.16. The purchased capped calls were valued at $40 million and
recorded to stockholders’ equity.
NOTE 13 — INCOME TAXES
The components of the provision for income taxes were as follows:
(In millions)
Y
ear Ended June 30, 2011 2010 2009
Current Taxes
U.S. federal $ 3,108 $ 4,415 $ 3,159
U.S. state and local 209
357 192
International 1,602
1,701 1,139
Current taxes 4,919
6,473 4,490
Deferred Taxes
Deferred taxes 2
(220) 762
Provision for income taxes $ 4,921
$ 6,253 $ 5,252
U.S. and international components of income before income taxes were as follows:
(In millions)
Y
ear Ended June 30, 2011 2010 2009
U.S. $ 8,862
$ 9,575 $ 5,529
International 19,209
15,438 14,292
Income before income taxes $ 28,071 $ 25,013 $ 19,821