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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-14278
MICROSOFT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1144442
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 882-8080
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the common stock held by non-affiliates of
the registrant as of September 8, 1995 was $34,330,611,220.
The number of shares outstanding of the registrant's common stock as of
September 8, 1995 was 589,952,132.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated September 25, 1995 to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held October 27, 1995 are incorporated by reference into Part III.
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MICROSOFT CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
INDEX
PAGE
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 10
Item 3. Legal Proceedings............................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......................... 11
Item E.O. Executive Officers of the Registrant......................................... 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......... 13
Item 6. Selected Financial Data...................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 14
Item 8. Financial Statements and Supplementary Data.................................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 30
Item 11. Executive Compensation....................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 30
Item 13. Certain Relationships and Related Transactions............................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 31
Signatures............................................................................... 33
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PART I
ITEM 1. BUSINESS
GENERAL
Microsoft Corporation (the "Company" or "Microsoft") was founded as a
partnership in 1975 and incorporated in 1981. Microsoft develops, manufactures,
licenses, sells, and supports a wide range of software products, including
operating systems for personal computers (PCs), workstations, and servers;
business and consumer programs for productivity, reference, education, and
entertainment; and development tools. Microsoft also markets personal computer
books and input devices and is engaged in the research and development of online
and advanced technology software products. Microsoft(R) products are available
for most PCs, including Intel-type microprocessor-based computers and Apple
computers.
Microsoft's business strategy emphasizes the development of a broad line of
microcomputer software products for business and personal use, marketed through
multiple channels of distribution. The Company is divided into four main groups:
the Platforms Product Group; the Applications and Content Product Group; the
Sales and Support Group; and the Operations Group.
The Platforms Product Group is comprised of four divisions, each
responsible for a particular area of platforms software development and
marketing. The Personal Systems Division designs and develops operating systems
and technologies (such as multimedia, user interface, and online browsers) for
general and home PC users. The Business Systems Division is responsible for
computing solutions for corporate and enterprise use, including client-server
operating systems, networking products, and server and workgroup applications.
The Developer Division creates database products, as well as programming
language products and software development tools. The Consumer Systems Division
is developing software products and technologies for use on the emerging public
networks, including future interactive television networks, and for creating
advanced multimedia applications, such as 3D titles.
The Applications and Content Product Group has two divisions that create
and market productivity programs for PCs and multimedia content titles. The
group also includes online systems and research. The Desktop Applications
Division creates productivity applications. The Consumer Division develops
products designed for the home, school, and small business market, including
multimedia consumer products and PC input devices. The MSN Division is
responsible for an online and Internet service. Microsoft Research is a research
lab dedicated to creating new technology in support of the Company's vision for
the evolution of personal computing.
The Sales and Support Group is responsible for building long-term business
relationships with customers. This group is organized to serve three customer
types: OEMs (original equipment manufacturers), end users, and organizations.
The Sales and Support Group manages the channels that serve those customers.
These include the OEM channel and the following geographic channels: U.S. and
Canada, Europe, and Other International. The group also provides support for the
Company's products through Product Support Services, Consulting Services, and
Solutions Providers.
The Operations Group is responsible for managing business operations and
overall business planning. This includes the process of manufacturing and
delivering finished goods, licenses, subscriptions, and fulfillment orders; the
publishing efforts of Microsoft Press; and other corporate functions.
PRODUCTS
PERSONAL SYSTEMS
The Personal Systems Division develops desktop operating systems software,
which performs operations such as allocating computer memory, scheduling the
execution of applications software, and managing the flow of information and
communication among the various components of the PC. The division's primary
desktop operating systems for PCs are: Microsoft Windows(R) 95, Microsoft
MS-DOS(R), Microsoft Windows 3.1, and Microsoft Windows for Workgroups. (Windows
3.1 and Windows for Workgroups 3.11 are hereafter referred to collectively as
"Windows 3.x.")
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Windows 95: Microsoft's new personal operating system, designed to be the
successor to MS-DOS and Windows 3.x, was released commercially on August 24,
1995. Windows 95 is a fully integrated, multitasking 32-bit operating system,
compatible with mainstream PCs and most Windows 3.x and MS-DOS software
applications. Windows 95 was also designed for the next generation of
applications, games, PCs, and peripherals.
MS-DOS: Microsoft MS-DOS is a single-user, single-tasking operating system
designed for PCs that utilize Intel microprocessor chips. Since the introduction
of MS-DOS in 1981, the Company has enhanced MS-DOS as new technologies have
developed and new user needs have arisen. MS-DOS has been preinstalled by OEMs
on most PCs.
Windows 3.1: Microsoft Windows 3.1 is a graphical operating system for
MS-DOS-based PCs. Microsoft Windows 3.1 supports high-performance Windows-based
applications, and offers ease of use and aesthetic appeal, scalable TrueType(R)
fonts, built-in multimedia functionality, and straightforward integration into
corporate computing environments.
Windows for Workgroups 3.11: Windows for Workgroups 3.11 integrates network
and workgroup functionality directly into the Windows operating system. With
Windows for Workgroups, users can share files, data, and printers, with ease of
access and security.
BUSINESS SYSTEMS
The Business Systems Division is focused on delivering a broad range of
business computing solutions for organizations. The division develops and
markets an integrated product line of software for creating business solutions,
including foundation operating systems for servers and workstations, as well as
applications for business servers. Server applications development is divided
into the areas of databases, connectivity, systems management, and workgroup
applications. Server software products are marketed separately or as a part of
an integrated family of products, the Microsoft BackOffice(TM). The BackOffice
family includes the following key products.
Windows NT Workstation and Server: Microsoft Windows NT(TM) Workstation is
a powerful desktop operating system designed for demanding business needs. It is
a 32-bit, multithreaded operating system for mission critical computing which
provides the same feature and applications programming interface (API) set
across four hardware platforms: Intel, Alpha AXP, MIPS, and Power PC. The
operating system provides integrated mail and networking with remote access,
pre-emptive multitasking, and support for background communication sessions. The
Windows NT Server is designed to be the network foundation for a new generation
of business applications. It provides extensive network management features,
administration tools, security, and fault tolerance. It is a platform for
business critical applications and database, connectivity, system management,
and mail servers.
SQL Server: Microsoft SQL Server is a high-performance relational database
management system designed specifically for distributed computing. SQL Server
supports the Structured Query Language, which is a commonly used language
through which application programs communicate with relational databases. The
Company provides SQL Server for Windows NT systems. This product is developed in
the Developer Division and marketed as part of BackOffice by the Business
Systems Division.
SNA Server: Microsoft SNA Server is a robust, highly fault-tolerant, and
easy-to-maintain gateway product that connects PC local area networks (LANs)
with IBM host systems using SNA protocols.
Systems Management Server: Microsoft Systems Management Server is a
software tool that helps information technology departments centrally manage
distributed-computing environments. With Systems Management Server, system
administrators can distribute and install software to PCs throughout an
enterprise, meter software licenses, conduct remote diagnostics, and perform a
detailed inventory of hardware and software resources.
Mail Server: Microsoft Mail Server for PC networks is a system for
distributing messages and information. It provides administrative utilities for
managing message files, addresses, and mail system
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capabilities. Microsoft Mail Server supports users of popular desktop platforms,
including Windows 95, Windows 3.x, MS-DOS, Macintosh, and OS/2.
Mail: Microsoft Mail for PC networks includes client-access software for
Windows 95, Windows 3.x, MS-DOS, Macintosh, and OS/2 platforms. In addition,
this workgroup application offers large corporate users support for multiple
network environments. A companion product, Microsoft Mail for AppleTalk
networks, is used by companies with Macintosh servers. Microsoft Mail Remote for
Windows offers software for remote clients used by travelers or those working at
home to stay in touch with the office mail system.
Schedule+: Microsoft Schedule+ is a calendar and scheduling program that
helps individuals and groups manage their time and resources. The program can
search other workgroup members' schedules to determine meeting availability
times, provide invitees the means to accept, decline, or tentatively accept
invitations to meetings, and automatically notify attendees if a meeting is
canceled or rescheduled.
DEVELOPER PRODUCTS
The Developer Division provides software development tools, database
products, and technical information to Windows developers worldwide. These
products and services help independent software developers, corporate
developers, solutions developers, and hobbyists create a wide variety of
applications, primarily for Windows 95, Windows 3.x, and Windows NT.
Database Products: Database products control the maintenance and
utilization of structured data organized into a set of records or files. The
Company offers database products which span the needs of a wide variety of
users, from individuals to large corporations. These products include Microsoft
Access, Microsoft FoxPro(R), Microsoft SQL Server, and a variety of database
connectivity technologies. Microsoft Access is a relational database management
application, also offered in conjunction with Microsoft Office, which provides
access to structured business data. Microsoft FoxPro is a desktop database
development tool which is compatible with the industry standard xBase
development language. FoxPro supports xBase applications on MS-DOS, Windows 3.x,
Windows 95, Windows NT, Macintosh, and UNIX. The Open Database Connectivity
(ODBC) product provides access and connectivity to read and write to various
databases from other computer industry vendors from within Microsoft Windows
applications.
Software Development Tools and Computer Languages: Software development
tools and computer languages allow software developers to write programs in a
particular computer language and translate programs into a binary
machine-readable set of commands that activate and instruct the hardware. The
Company develops and markets a number of software development environments,
language compilers, and software testing tools. Microsoft Visual C++(TM) is the
Company's development system for 16- and 32-bit application development on
Windows 3.x, Windows 95, and Windows NT. The Microsoft Visual Basic(TM)
programming system for Windows 95, Windows 3.x, and Windows NT operating systems
provides easy access to a wide variety of data sources by integrating the
Microsoft Access database engine and the ability to leverage investments in
commercial applications through OLE 2.0. Additionally, the Company offers
professional, highly-integrated development environments in the FORTRAN language
for MS-DOS, Windows 3.x, and Windows NT.
Developer Information Products: The Company provides third party software
developers with a wide range of technical and support information that assists
them in developing software products intended to run on Windows 3.x, Windows 95,
and Windows NT. Developers subscribe to the Microsoft Developer Network (MSDN)
information service and receive periodic updates via CD-ROMs, magazines, and
several on-line information services.
CONSUMER SYSTEMS
The Consumer Systems Division is developing advanced system software. Core
technologies under development include broadband networking and multimedia
operating system architecture, advanced video and graphics, and new authoring
system technologies for interactive television. The group is also responsible
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for the development and marketing activities of the Company's SoftImage
products, which include authoring and editing systems for film and video.
DESKTOP APPLICATIONS SOFTWARE
The Desktop Applications Division develops applications software, which
provides the PC with instructions for the performance of end user tasks. The
Company's desktop applications software is designed for use by a broad class of
end users, regardless of business, industry, or market segment. Primary examples
of desktop applications software are word processing, spreadsheet, and
presentation graphics programs. The Company's desktop applications programs are
developed principally for Windows 95, Windows 3.x, and Macintosh operating
systems.
Microsoft Office: Microsoft Office(R) is a suite of software programs
featuring seamless integration of the most commonly used desktop applications.
Microsoft Office is based upon a document-centric concept, with common commands
and extensive use of object linking and embedding (OLE) cross-application
capabilities. Microsoft Office is available in two editions, Standard and
Professional. The Standard Edition includes Microsoft Word, Microsoft Excel, and
the Microsoft PowerPoint(R) presentation graphics program. The Microsoft Office
for Windows 95 version also includes Schedule+, while earlier versions of the
Standard Edition included a client-access license for Microsoft Mail. The
Standard Edition is available for Windows 95, Windows 3.x, and Macintosh
operating systems. The Microsoft Office Professional Edition for Windows adds
the Microsoft Access(R) database.
Microsoft Word: The Company's principal word processing program is
Microsoft Word. Versions of Microsoft Word for Windows 95 and for Windows 3.x
provide all the features that users of word processing products expect in the
Windows graphical environment, plus the ability to handle graphics, tables,
spreadsheet data, charts, and images imported from other Windows-based software
programs. The Company also has Windows NT and Macintosh versions of Microsoft
Word.
Microsoft Excel: The Company's spreadsheet program is Microsoft Excel,
which is available for Windows 95, Windows 3.x, Windows NT, and Macintosh
operating systems. It is an integrated spreadsheet with pivot table, database,
and business graphics capabilities. Microsoft Excel allows full linking and
embedding of objects that permits users to view and edit graphics or charts from
other Windows-based programs from the worksheet in which the object is stored.
Microsoft Excel graphics capabilities can be linked to its spreadsheets to allow
simultaneous changes to charts as changes are made to the spreadsheets.
Microsoft PowerPoint: Microsoft PowerPoint is a presentation graphics
program for producing slides, overheads, transparencies, and prints. The Company
markets versions of PowerPoint for Windows 95, Windows 3.x, and the Macintosh.
Microsoft Project: Microsoft Project is a critical path project scheduling
and resource allocation program that runs on Windows 95, Windows 3.x, and
Macintosh operating systems. The product can perform as a budgeting, monitoring,
and cost estimating tool for large business projects and as a critical path and
schedule planning tool.
ONLINE SERVICES
The MSN Division manages MSN, The Microsoft Network, a new, interactive
online service. MSN provides easy and inexpensive access for users to a wide
range of graphically-rich online content, a compelling business model and
platform for independent content providers (ICPs), and rich and powerful
development tools.
The Microsoft Network: Client-access software for MSN is included as a
feature of Windows 95, which was released commercially on August 24, 1995. The
online service provides access to the Internet, electronic mail, bulletin
boards, and myriad additional services offered by Microsoft and by independent
content providers. The Microsoft Internet Explorer, an Internet browser, takes
advantage of various technical advances in Windows 95 and includes real-time
audio capabilities. Content and service providers aligned with MSN
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have flexibility in creating products and pricing their services, such as
subscriptions, online transactions, and ticket events. Services may be supported
by advertising and commerce.
MSN is owned by The Microsoft Network, LLC (formerly the Microsoft Online
Services Partnership). Microsoft owns 80% of the entity and a wholly owned
subsidiary of Tele-Communications, Inc. (TCI) owns the remaining 20%.
CONSUMER PRODUCTS
The Microsoft Consumer Division develops and markets useful, enjoyable, and
fundamental software and services for small businesses, schools, and homes. The
division is developing and managing a synergistic product line focusing on the
following categories of consumer usage: Information, Productivity, Kids,
Personal Finance, Entertainment, and PC Input Devices. Many of the titles are
available on CD-ROM.
Information: Reference titles include Microsoft Encarta(TM) and Microsoft
Bookshelf(R), which are both available for Windows 3.x and Macintosh operating
systems. The Encarta multimedia encyclopedia database blends text in articles
with a wealth of innovative, interactive information presented through
animations, videos, maps, charts, sounds, and pictures. Bookshelf is a
multimedia reference library that integrates seven well-respected and
authoritative works on one compact disc, including a dictionary, world atlas,
world almanac, thesaurus, concise encyclopedia, and two books of quotations.
Personal interest titles include Microsoft Cinemania(TM), an interactive
guide to the movies with entries for 19,000 films, Microsoft Dinosaurs, and many
musical titles.
Geography and travel products include Automap Road Atlas, a comprehensive
route-planning program with detailed maps and road information for routes in
North America.
Productivity: The Company's leading consumer productivity products are
Microsoft Works and Microsoft Publisher. The Company markets versions of
Microsoft Works that run on Windows 95, Windows 3.x, MS-DOS, and Macintosh
operating systems. Microsoft Works is an integrated software program that
contains basic word processing, spreadsheet, and database capabilities that
allows the easy exchange of information from one tool to another. Microsoft
Publisher is an easy-to-use, entry-level desktop publishing tool for Windows 95
and Windows 3.x operating systems. Publisher features an interactive tool that
automates the design process of 12 custom publications, including newsletters,
calendars, greeting cards, and invitations.
Kids: Titles for children include Microsoft Creative Writer and Microsoft
Fine Artist. Creative Writer is a full-featured creative writing and publishing
program; Fine Artist is a comprehensive art program. Both products take
advantage of the computer's ability to integrate text, high-quality graphics,
sound, and animation to produce an enriching creative experience for children.
The Company also has a series of products based on the popular children's books
and television series, The Magic School Bus.
Personal Finance: Microsoft Money is a financial organization product that
allows users to computerize their household finances. Microsoft Money is
available for systems running Windows 95 and became available August 24, 1995.
It is visually appealing, easy to use, and focuses on the financial tasks that
people do most often. Microsoft Money provides enhanced online home-banking
services with 17 different banks in the U.S. Users who are customers of
participating banks will be able to pay bills online, access up-to-date
statements and balances, transfer funds, and send email messages and inquiries
to their banks.
Entertainment: The Company also has a line of entertainment products.
Microsoft Flight Simulator, which was developed by Bruce Artwick Organization
Ltd., is a popular airplane-flying game available for MS-DOS and Macintosh
operating systems. Microsoft Golf, licensed from Access Software, Inc., is a
realistic simulation of the sport of golf for Windows 95 and Windows 3.x
operating systems.
PC Input Devices: The Company's major input device is the Microsoft Mouse,
a hand-held pointing device that facilitates use of a PC. It can be used with
MS-DOS, Windows 95, and Windows 3.x operating systems and works with many
applications products from Microsoft and other companies. The Microsoft
BallPoint(R) Mouse is designed especially for use with laptop and notebook
computers. The BallPoint Mouse is shipped with a universal clamp that fits on
the keyboards of most laptop computers and a positioner that allows
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the user to adjust the angle of the mouse to the keyboard. The Company also
designed and markets the Microsoft Natural Keyboard(TM), an
ergonomically-designed keyboard.
MICROSOFT PRESS
Microsoft Press publishes books about software products from Microsoft and
other software developers and about current developments in the industry. Books
published by Microsoft Press typically are written and copyrighted by
independent authors who submit their manuscripts to the Company for publication
and who receive royalties based on net revenues generated by the book.
Microsoft Press contracts with an independent commercial printer for the
manufacturing of its books. Publisher's Resources, Inc. acts as the Company's
main fulfillment house in the United States, maintaining the majority of the
inventory of Microsoft Press books. Books are marketed by independent sales
representatives and by Microsoft Press sales personnel. Internationally,
Microsoft Press has numerous international agreements with publishers for the
worldwide distribution of its books. Microsoft Press has granted a publisher in
England the right to distribute English language versions of its books in all
countries except the United States, Canada, Central and South America, and
certain Asian countries. In most cases, Microsoft Press provides each publisher
with a book's manuscript, and the publisher arranges for its translation and the
printing, marketing, and distribution of the translated version.
PRODUCT DEVELOPMENT
The PC software industry is characterized by extremely rapid technological
change, which requires a continuous and high level of expenditures for enhancing
existing products and developing new products. The Company is committed to
continued high expenditures for research and product development.
Most of the Company's software products are developed internally. The
Company also purchases technology, licenses intellectual property rights, and
oversees third party development for certain products. Product documentation is
also created internally. Internal development enables Microsoft to maintain
closer technical control over the products and gives the Company the freedom to
designate which modifications and enhancements are most important and when they
should be implemented. The Company has created a substantial body of proprietary
development tools and has evolved a development methodology for creating and
enhancing its products. These tools and methodology are also designed to
simplify a product's portability among different operating systems or computers.
The Company believes that a crucial factor in the success of a new product
is getting it to market quickly to respond to new user needs or advances in
hardware design, without compromising product quality. The Company strives to
become as informed as possible at the earliest possible time about changing
usage patterns and hardware advances that may affect software design.
During fiscal years 1993, 1994, and 1995, the Company spent $470 million,
$610 million, and $860 million, respectively, on product research and
development activities. Those amounts represented 12.5%, 13.1%, and 14.5%,
respectively, of net revenues in each of those years.
LOCALIZATION
In order to best serve the needs of users in foreign countries, Microsoft
"localizes" many of its products to reflect local languages and conventions. In
France, for example, all user messages and documentation are in French and all
monetary references are in French francs, and in the United Kingdom, monetary
references are in British pounds and user messages and documentation reflect
certain British conventions. Various Microsoft products have been localized into
more than 30 languages.
MANUFACTURING
The Company has manufacturing facilities located in the United States,
Puerto Rico, and Ireland. The Company's manufacturing operations involve disk
replication, assembly of purchased parts, and final packaging. Quality control
tests are performed on purchased parts, finished disks, and other products. The
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chief materials and components used in Microsoft products include disks or
CD-ROMs, books, and multicolor printed materials. The Company is often able to
acquire component parts and materials on a volume discount basis. The Company
has multiple sources for raw materials, supplies, and components.
The Company contracts a substantial portion of its manufacturing activity
to third parties. Outside manufacturers produce various software products,
documentation, and hardware such as mouse pointing devices and keyboards. There
are other custom manufacturers in the event that outsourced manufacturing
becomes unavailable from current sources.
MARKETING AND DISTRIBUTION
Microsoft aligns its sales and marketing people with three customer types:
end users, organizations, and OEMs. The Company's sales and marketing staff
seeks to build long-term relationships with these customers of Microsoft
products. Microsoft has four major channels of distribution which deliver
product to end users: finished goods in the U.S. and Canada, Europe, and Other
International; and OEM.
The end user customer unit has responsibility for activities that target
end users who make individual buying decisions for the PCs they use at work or
home. All sales and marketing activities aimed at end user customers are
performed by this unit, including developing and administering distributor and
reseller relationships; reseller sales terms and conditions; channel marketing
and promotions; end user marketing programs; support policies; and seminars,
events, and sales training for resellers. The key products licensed and sold are
the Company's personal operating systems and consumer and desktop applications.
The organization customer unit has responsibility for activities that
target groups of users in organizations of all sizes. The unit works with
Solutions Providers, the Microsoft Consulting Services division, and directly
with organizations to create enterprise-wide solutions to business computing
problems. The unit's sales and marketing activities include providing technical
training of Solutions Providers and channel resellers; developing support
policies; and supporting and providing seminars, events, and sales training for
resellers and Solutions Providers. Key products are the Company's business
systems, developer software, and software sold via volume licensing programs. In
the U.S., the organization customer unit is further segregated into an
enterprise customer unit, which services only large organization customers, and
a more specialized unit which services small and medium customers.
The OEM customer unit includes the sales force which works with original
equipment manufacturers that include Microsoft software on their PCs.
FINISHED GOODS CHANNELS
Distributors and Resellers: The Company markets its products in the
finished goods channels primarily through independent non-exclusive distributors
and resellers. Distributors include Computer 2000, Ingram Micro, and Merisel.
Resellers include Egghead Software, Softbank, Software Spectrum, and Stream
International (formerly Corporate Software). Microsoft has a network of field
sales representatives and field support personnel who solicit orders from
distributors and resellers and provide product training and sales support.
Large Accounts: The Company has a program designed to make it easier for
large organizations to acquire and maintain Microsoft products. The program,
Microsoft Select, offers flexible software acquisition, licensing, and
maintenance options specially designed to meet the needs of large multinational
organizations. Targeted audiences include technology specialists and influential
end users in large enterprises. Marketing efforts and fulfillment are generally
coordinated with the Microsoft network of large account resellers.
Solutions Providers: Microsoft's Solutions Providers program is a
comprehensive support relationship with independent organizations that provide
network and system integration, custom development, training, and technical
support for business computing solutions. The program supports value-added
resellers (VARs), system integrators, consultants, and developers, as well as
technical support and training organizations. Under this business partnership
strategy, the Company provides sales and product information, development
services, early access to Microsoft products, and customer support tools
including priority telephone support, education,
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and business development support. To ensure high-quality technical services for
the Company's products, Microsoft Solutions Providers are required to have
Microsoft-certified professionals on staff.
Consulting Services: The Company's Consulting Services Division assists
customers in using the Company's computer operating systems, applications, and
communications products. The group works with Solutions Providers and helps
create enterprise-wide computing solutions for large corporate accounts.
Direct Marketing: Microsoft promotes some of its products through direct
marketing techniques directed toward existing and potential users of the
Company's products. Promotional materials are typically delivered through the
mail, utilizing lists of targeted individuals. Fulfillment of product to the end
user is accomplished by either direct shipment or through resellers.
International Sales Sites: The Company has established marketing, support,
and/or distribution subsidiaries in Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, Colombia, Costa Rica, the Czech Republic, Denmark,
Ecuador, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland,
Israel, Italy, Japan, Malaysia, Mexico, Morocco, the Netherlands, New Zealand,
Norway, the People's Republic of China, Peru, the Philippines, Poland, Portugal,
Puerto Rico, Russia, Singapore, Slovakia, Slovenia, South Africa, South Korea,
Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, the
United Kingdom, and Venezuela.
The Company's international operations, both OEM and finished goods, are
subject to certain risks common to foreign operations in general, such as
governmental regulations, import restrictions, and foreign exchange rate
fluctuations. Microsoft hedges a portion of its foreign exchange risk.
OEM CHANNEL
The Company's operating systems are licensed primarily to OEMs under
agreements that grant the OEMs the right to distribute copies of Microsoft's
products with their computers. The Company also markets certain language and
applications programs to OEMs under similar arrangements. In addition, the
Company markets the Microsoft Mouse, BallPoint Mouse, and Natural Keyboard to
OEMs for distribution to buyers of their computers. In almost all cases, the
products are distributed under Microsoft trademarks. The Company has OEM
agreements covering one or more of its products with virtually all of the major
microcomputer OEMs, including AST Research, Acer, Digital Equipment Corporation,
Dell, Compaq, Gateway 2000, Hewlett-Packard, IBM, NEC, Olivetti, Packard Bell,
and Toshiba.
ADVERTISING
The Company works closely with large advertising and direct marketing
firms. Advertising, direct marketing, worldwide packaging, and marketing
materials are targeted to various end-user segments. The Company utilizes broad
consumer media (television, radio, and business publications) and trade
publications. Microsoft has programs under which qualifying resellers and OEMs
are reimbursed for certain advertising expenditures. Microsoft also invests
heavily in direct marketing and customer satisfaction areas. In 1996, the
Company plans to spend more than $150 million on a broad campaign emphasizing
the Microsoft brand identity.
CUSTOMERS
As described above, Microsoft has three customer types: end users,
organizations, and OEMs. Most end users of Microsoft products are individuals in
businesses, government agencies, educational institutions, and at home. These
end users obtain Microsoft products primarily through distributors, resellers,
and OEMs, which include certain Microsoft products with their hardware. Notes to
Financial Statements describe customers that represent more than 10% of the
Company's revenues. The Company's practice is to ship its products promptly upon
receipt of purchase orders from its customers and, consequently, backlog is not
significant.
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PRODUCT SUPPORT SERVICES
The Company's Product Support Services group, with locations in the U.S.
and in various Microsoft subsidiaries, provides product support coverage options
to meet the needs of users of Microsoft products. The Company hires individuals
with proven product expertise and provides them with productivity tools,
continuous product education and training, and consistent processes to deliver
quality support for Microsoft products. Certain telephone support is also
supplied by qualified third-party support organizations. Coverage options range
from standard no-charge toll telephone support to fee-based offerings providing
unlimited 800 number telephone and electronic technical support across all
Microsoft products 24 hours per day, 7 days per week.
Users have access to Microsoft KnowledgeBase, a library of thousands of
technical articles that is updated regularly with useful information regarding
Microsoft products. Microsoft provides access to KnowledgeBase via MSN, America
Online, CompuServe(R), GEnie(TM), Prodigy, and the Internet. Additionally, the
Company offers two information subscription services: Microsoft TechNet and
Microsoft Developer Network.
As a supplement or alternative to direct support, the Company enhances the
third party support channel by providing Microsoft Solutions Providers with
education, training, tools, and support. Microsoft Solutions Providers include
Authorized Training Centers, which offer advanced product education and
certification on Microsoft products; and Authorized Support Centers, which
provide a wide spectrum of multinational support, multivendor support, and
integration services.
COMPETITION
The microcomputer software business is intensely competitive and subject to
extremely rapid technological change. Microsoft faces formidable competition in
all areas of its business activity, including competition from many companies
whose revenues and resources are much larger than Microsoft's.
Operating systems. Microsoft's operating systems products face substantial
competition from a number of sources. Major competitors such as IBM, Apple
Computer, Digital Equipment Corporation, and others, which are vertically
integrated in both software development and hardware manufacture, have developed
operating systems that they preinstall on computers of their own manufacture.
Many of these operating system software products are also licensed to third
party OEMs for preinstallation on their machines. Microsoft's operating systems
products compete with UNIX-based operating systems from a wide range of
companies including IBM, AT&T, Hewlett Packard, Sun Microsystems, Novell, The
Santa Cruz Operation, and others. Variants of UNIX run on a wide variety of
computer platforms and are gaining increasing acceptance as desktop operating
systems. As microcomputer technology increasingly moves toward connectivity and
communications, Microsoft's operating systems products will face increased
competition from network server operating systems, such as Novell NetWare, and
"middleware" products such as Lotus Notes from IBM. Microsoft's operating
systems products also face constant competition from software pirates who
unlawfully copy and distribute Microsoft's copyrighted software products.
Business systems. The Company is a fairly recent entrant into
enterprise-wide computing solutions. As such, competitors enjoy larger market
shares and installed bases. Software developers that provide competing server
applications include Oracle, Sybase, and Informix. There are also several
software vendors who offer connectivity servers. Additionally, Lotus Development
(now owned by IBM) has a large installed base of Lotus Notes and cc:Mail, which
compete with the Company's workgroup products.
Desktop applications. The Company's competitors include many software
application vendors, such as Lotus, Oracle, Claris, and Novell. Some of the
competitors in this arena do not offer products in every major desktop
application category (e.g., spreadsheet, word processors, databases, etc.) and
as a result may be able to more effectively focus their efforts on enhancing
particular product offerings.
Online services. An enormous range of companies, including media
conglomerates, telephone companies, cable companies, retailers, hardware
manufacturers, and software developers, are competing to make online services
widely available to computer users. Microsoft's new online services network,
MSN, faces
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formidable competition from both established online networks, such as CompuServe
(owned by H&R Block), Prodigy (owned by IBM and Sears), America Online, and
others, and impending entrants, such as a number of new online networks that
will be offered by AT&T. MSN and other online networks also face competition
from online services that are offered to users directly via the Internet,
including, in particular, the World Wide Web portion of the Internet.
Additionally, Netscape, Adobe, Sun Microsystems, and many other companies offer
software for Internet servers and for user navigation of the Internet.
Developer. The Company's developer products compete against offerings from
Sybase, Borland, and many other companies.
Consumer. Microsoft's Consumer division faces many smaller but focused
competitors, particularly in the areas of entertainment and education. Examples
include Intuit, Broderbund, Electronic Arts, Softkey, The Learning Company,
Davidson Associates, Voyager, Comptons, Edmark, Sierra On-Line, and Dorling
Kindersley. Still other competitors own branded content, such as Walt Disney and
Lucas Arts. Additionally, as platforms become more powerful, PC-based games will
compete head-to-head with games created for proprietary systems such as Nintendo
and Sega. The Consumer Division's input devices face substantial competition
from computer manufactures, since computers are typically sold with a keyboard
and mouse, and other manufacturers of these devices.
The Company believes that the principal competitive factors in marketing PC
software are the product's reputation, features and functions, ease of use,
reliability, price relative to performance, timeliness of delivery, and
availability and quality of support services. There is no assurance that the
Company's competitive position will not be adversely affected by one or more of
these factors in the future, particularly in view of the fast pace of
technological change in the software industry.
EMPLOYEES
As of June 30, 1995, the Company employed 17,801 people, 12,193
domestically and 5,608 internationally. Of the total, 5,397 were in product
research and development, 9,166 in sales, marketing, and support, 1,639 in
manufacturing and distribution, and 1,599 in finance and administration.
Microsoft's success is highly dependent on its ability to attract and retain
qualified employees. Competition for employees is intense in the software
industry. To date, the Company believes it has been successful in its efforts to
recruit qualified employees, but there is no assurance that it will continue to
be as successful in the future. None of the Company's employees are subject to
collective bargaining agreements. The Company believes that relations with its
employees are excellent.
ITEM 2. PROPERTIES
The Company's corporate offices consist of approximately 2.2 million square
feet of office building space located in Redmond, Washington. There are two
sites that total approximately 300 acres of land. The Company is constructing a
225,000 square foot office building, which is expected to be completed in the
spring of 1996. Additionally, construction is continuing on another series of
office buildings with approximately 685,000 square feet of space. Occupancy on
this site will be phased starting in the fall of 1995 and completed by spring of
1996. The Company owns all of its corporate campus.
The Company's domestic manufacturing and distribution operation consists of
a 265,000 square foot facility situated on 23 acres in nearby Snohomish County,
Washington, and a 45,000 square foot disk duplication facility in Humacao,
Puerto Rico. The Puerto Rican facility, which began operation in April 1990, is
leased under a 10-year lease, with an option to renew for an additional 10
years. The Company's European manufacturing operation consists of a 155,000
square foot facility situated on 12 acres in Dublin, Ireland. The Ireland site
also includes a 25,000 square foot office building for international
localization. An additional 80,000 of square feet of office space for
localization is being constructed in Ireland.
The Company owns a 65,000 square foot office building on seven acres of
land plus another 33 acres near London, England. In Les Ulis, France, the
Company owns a 110,000 square foot office building on four acres of land.
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In addition, the Company leases office space in numerous locations in the
United States and many other countries.
ITEM 3. LEGAL PROCEEDINGS
See Notes to Financial Statements -- Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1995.
ITEM E.O. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Microsoft as of September 8, 1995 were as
follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
William H. Gates 39 Chairman of the Board; Chief Executive Officer
Steven A. Ballmer 39 Executive Vice President, Worldwide Sales and Support
Robert J. Herbold 53 Executive Vice President; Chief Operating Officer
Frank M. (Pete) Higgins 37 Group Vice President, Applications and Content Group
Paul A. Maritz 40 Group Vice President, Platforms Group
Nathan P. Myhrvold 36 Group Vice President, Applications and Content Group
James E. Allchin 43 Senior Vice President, Business Systems Division
Roger J. Heinen, Jr. 44 Senior Vice President, Developer Division
Joachim Kempin 53 Senior Vice President, Worldwide OEM Sales
Craig J. Mundie 46 Senior Vice President, Consumer Systems Division
William H. Neukom 53 Senior Vice President, Law and Corporate Affairs;
Secretary
Jeffrey S. Raikes 37 Senior Vice President, North America
Brad A. Silverberg 41 Senior Vice President, Personal Systems Division
Patricia Q. Stonesifer 39 Senior Vice President, Consumer Division
Bernard P. Vergnes 50 Senior Vice President, Microsoft; President, Microsoft
Europe
Michael W. Brown 49 Vice President, Finance; Chief Financial Officer
Mr. Gates co-founded Microsoft in 1975 and has been its Chief Executive
Officer and Chairman of the Board since the original partnership was
incorporated in 1981.
Mr. Ballmer was named Executive Vice President, Worldwide Sales and Support
in February 1992. He had been Senior Vice President, Systems Software since
1989. From 1984 until 1989, Mr. Ballmer served as Vice President, Systems
Software. He joined Microsoft in 1980.
Mr. Herbold joined Microsoft as Executive Vice President and Chief
Operating Officer in November 1994. Herbold had been with The Procter & Gamble
Company since 1968, with experience in information services, advertising and
market research. Most recently, he was P&G's Senior Vice President, Information
Services and Advertising.
Mr. Higgins was named Group Vice President, Applications and Content Group
in May 1995. He was named Senior Vice President, Desktop Applications Division
in March 1993. He had been Vice President, Desktop Applications Division since
1992 and previously, Vice President, Analysis Business Unit since 1991. Mr.
Higgins joined Microsoft in 1983.
Mr. Maritz was named Group Vice President, Platforms Group in May 1995. He
was named Senior Vice President, Product and Technology Strategy in November
1994 and had been Senior Vice President, Systems
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Division since February 1992. He had been Vice President, Advanced Operating
Systems since 1989. Mr. Maritz joined Microsoft in 1986.
Mr. Myhrvold was named Group Vice President, Applications and Content Group
in May 1995. He was named Senior Vice President, Advanced Technology in July
1993. He had been Vice President, Advanced Technology and Business Development
since 1989. Mr. Myhrvold joined Microsoft in 1986.
Mr. Allchin was named Senior Vice President, Business Systems Division in
November 1994. He had been Vice President, Business Systems Division, since July
1991. Prior to joining Microsoft in 1991, Mr. Allchin spent seven years at
Banyan Systems, Inc., where he held numerous positions, most recently Senior
Vice President and Chief Technology Officer.
Mr. Heinen joined Microsoft as Senior Vice President, Developer Division in
January 1993. He had been Senior Vice President and General Manager of the
Macintosh Software Division at Apple Computer, Inc. from 1990 to 1993. Prior to
1990, Heinen was a corporate consulting engineer for software at Digital
Equipment Corporation.
Mr. Kempin was named Senior Vice President, Worldwide OEM Sales in August
1993. He had been Vice President, OEM Sales since 1987. Mr. Kempin had served as
General Manager of Microsoft's German subsidiary since its inception in 1983.
Mr. Mundie was named Senior Vice President, Consumer Systems Division in
May 1995. He had been Vice President, Advanced Consumer Technology since July
1993. He joined Microsoft as General Manager, Advanced Consumer Technology Group
in December 1992. Previously, Mr. Mundie had been CEO of Alliant Computer
Systems Corporation, which declared bankruptcy on May 25, 1992 and was
liquidated.
Mr. Neukom was named Senior Vice President, Law and Corporate Affairs in
February 1994. He joined Microsoft in 1985 as Vice President. Mr. Neukom
formerly was a member of the Seattle law firm of Shidler McBroom Gates & Lucas
(now Preston Gates & Ellis), Microsoft's primary outside law firm.
Mr. Raikes was named Senior Vice President, Microsoft North America in
January 1992. He had been Vice President, Office Systems since 1990. Mr. Raikes
came to Microsoft in 1981.
Mr. Silverberg was named Senior Vice President, Personal Systems Division
in November 1994. He joined Microsoft in August 1990 as Vice President, Personal
Operating Systems Division. From 1987 until joining Microsoft, Mr. Silverberg
served as Vice President, Engineering for Borland International, Inc.
Ms. Stonesifer was named Senior Vice President, Consumer Division in
November 1994, after having been Vice President, Consumer Division since June
1993. She had been Vice President, Support since 1992 and General Manager of
Product Support Services since 1991. Previously, she was General Manager of
Microsoft Canada and before that, General Manager for Microsoft Press. Prior to
joining Microsoft in 1988, Ms. Stonesifer was with Que Corporation, a publisher
of books for computer users.
Mr. Vergnes is a Senior Vice President of Microsoft and was named
President, Microsoft Europe in April 1992. He had been Vice President, Europe
since 1989. Mr. Vergnes served as General Manager of Microsoft's French
subsidiary since its inception in 1983.
Mr. Brown was named Chief Financial Officer in August 1994 and Vice
President, Finance in April 1993. He had been Treasurer since February 1990,
after joining Microsoft in January 1990. Previously, Mr. Brown was a partner in
the accounting firm Deloitte & Touche, Microsoft's independent auditors.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol MSFT. On September 8, 1995, there were 35,643 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
QUARTERLY FINANCIAL AND STOCK PRICE INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
QUARTER ENDED
---------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 YEAR
------------- ------------ --------- -------- ------
1993
Net revenues........................ $ 818 $ 938 $ 958 $1,039 $3,753
Operating income.................... 289 326 338 373 1,326
Net income.......................... 209 236 243 265 953
Earnings per share.................. 0.35 0.39 0.40 0.43 1.57
Common stock price per share:
High.............................. 41 47 1/2 47 1/8 49 49
Low............................... 32 3/4 37 7/8 38 3/8 39 7/8 32 3/4
1994
Net revenues........................ $ 983 $1,129 $ 1,244 $1,293 $4,649
Operating income.................... 343 415 480 488 1,726
Net income.......................... 239 289 256 362 1,146
Earnings per share.................. 0.39 0.48 0.42 0.59 1.88
Common stock price per share:
High.............................. 44 1/4 43 1/4 44 5/8 54 5/8 54 5/8
Low............................... 35 1/8 38 39 41 35 1/8
1995
Net revenues........................ $ 1,247 $1,482 $ 1,587 $1,621 $5,937
Operating income.................... 437 520 549 532 2,038
Net income.......................... 316 373 396 368 1,453
Earnings per share.................. 0.51 0.60 0.63 0.58 2.32
Common stock price per share:
High.............................. 59 1/4 65 1/8 74 1/8 92 3/8 92 3/8
Low............................... 46 7/8 53 7/8 58 1/4 68 3/4 46 7/8
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
YEAR ENDED JUNE 30
--------------------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
Net revenues.................................. $1,843 $2,759 $3,753 $4,649 $5,937
Net income.................................... 463 708 953 1,146 1,453
Earnings per share............................ 0.82 1.20 1.57 1.88 2.32
Return on net revenues........................ 25.1% 25.7% 25.4% 24.7% 24.5%
Cash and short-term investments............... $ 686 $1,345 $2,290 $3,614 $4,750
Total assets.................................. 1,644 2,640 3,805 5,363 7,210
Stockholders' equity.......................... 1,351 2,193 3,242 4,450 5,333
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR 1993, 1994, AND 1995
Microsoft develops, manufactures, licenses, sells, and supports a wide
range of software products, including operating system platforms for personal
computers (PCs), workstations, and servers; business and consumer applications
for productivity, reference, education, and entertainment; and development
tools. Microsoft also sells personal computer books and input devices, and is
engaged in the research and development of online and advanced technology
software products.
NET REVENUES
Microsoft's net revenues grew 24% in the fiscal year ended June 30, 1994
and 28% in fiscal year 1995. Software license volume (as opposed to price)
increases have been the principal factor in Microsoft revenue growth. The
average selling price per license has decreased, primarily because of general
shifts in the sales mix from retail packaged products to licensing programs,
from new products to product upgrades, and from stand-alone desktop applications
to integrated product suites. Average revenue per license from original
equipment manufacturer (OEM) licenses and corporate license programs, such as
Microsoft Select, is lower than average revenue per license from retail
versions. Likewise, product upgrades have lower prices than new products. Also,
prices of integrated suites, e.g., Microsoft Office, are less than the sum of
the prices for the individual programs included in these products when such
programs are licensed separately.
Product groups. Microsoft has a platforms product group and an applications
and content product group.
Platforms product group revenues were $1.52 billion, $1.83 billion, and
$2.36 billion in 1993, 1994, and 1995.
Principal personal systems products have been the MS-DOS and Microsoft
Windows operating systems. MS-DOS is preinstalled on PCs by most OEMs, and
revenues from such licenses increased steadily in both 1994 and 1995. Revenues
from retail upgrade versions of MS-DOS decreased in both 1994 and 1995 after a
strong increase in 1993 when the MS-DOS 6 Upgrade was released. There were no
major upgrades of MS-DOS in 1994 or 1995. The Microsoft Windows operating system
was an increasingly strong contributor to revenues as the number of new PCs
preinstalled with Windows increased rapidly during the three-year period.
Windows units licensed to new users were 15 million, 30 million, and 40 million
in 1993, 1994, and 1995.
Business systems products offer an enterprise-wide distributed
client/server environment based on the Microsoft Windows NT operating system and
the server applications in the Microsoft BackOffice family of products. Revenues
from these products increased strongly in 1994 and 1995.
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Revenues from developer products increased steadily in all three years, as
more independent software vendors, corporate developers, and solutions
developers licensed tools to develop software for Windows and Windows NT.
Applications and content product group revenues were $2.24 billion, $2.82
billion, and $3.58 billion in 1993, 1994, and 1995.
Increases in desktop applications revenues were led by strong sales of
Microsoft Office. The Microsoft Office Standard product includes the Microsoft
Excel spreadsheet, the Microsoft Word word processor, the Microsoft PowerPoint
presentation graphics program, and a Microsoft Mail client-access license, while
the Microsoft Office Professional version also includes the Microsoft Access
database management system. Sales of stand-alone versions of Microsoft Excel and
Microsoft Word decreased in 1994 and 1995 as the sales mix continued to shift to
integrated product suites.
Microsoft Home, a broad range of consumer products, also showed continued
growth. The Microsoft Home brand includes CD-ROM multimedia reference titles and
software products for home and small office productivity, children's creativity,
and entertainment. Microsoft also markets the Microsoft Mouse and Microsoft
Natural Keyboard. Mouse sales were flat during the three-year period, while the
initial introduction of the keyboard increased revenues in 1995.
Sales channels. Microsoft distributes its products primarily through OEM
licenses, corporate licenses, and retail packaged products. OEM channel revenues
are license fees from original equipment manufacturers. Microsoft has three
major geographic sales and marketing organizations: U.S. and Canada, Europe, and
elsewhere in the world (Other International). Sales of corporate licenses and
packaged products in these channels are primarily to distributors and resellers.
OEM channel revenues were $731 million in 1993, $1.18 billion in 1994, and
$1.65 billion in 1995. The primary source of OEM revenues is the licensing of
operating systems, particularly MS-DOS and Microsoft Windows. As such, OEM
channel revenues are highly dependent on PC shipment volume.
U.S. and Canada channel revenues were $1.37 billion, $1.58 billion, and
$1.88 billion in 1993, 1994, and 1995.
Revenues in Europe were $1.26 billion, $1.36 billion, and $1.49 billion in
1993, 1994, and 1995. Growth rates have been lower in Europe than in other
geographic areas due to general economic slowness, higher existing market
shares, and a more dramatic shift to corporate licensing programs.
Other International channel revenues were $392 million in 1993, $532
million in 1994, and $924 million in 1995. Growth rates continue to be strong
due to customer acceptance of newly localized products, particularly in Japan,
and early entrance into emerging markets.
Microsoft's operating results are affected by foreign exchange rates.
Approximately 44%, 40%, and 37% of Microsoft's revenues were collected in
foreign currencies during 1993, 1994, and 1995. Since much of Microsoft's
international manufacturing costs and operating expenses are also incurred in
local currencies, the impact of exchange rates on net income is less than on
revenues.
OPERATING EXPENSES
Cost of revenues. As a percentage of revenues, cost of revenues was 16.9%
in 1993, 16.4% in 1994, and 14.8% in 1995. The percentage decreased due to a
greater proportion of licenses to OEMs and corporations, lower disk prices from
vendors, and a higher proportion of CD-ROM versions. These factors were offset
somewhat by increased sales of lower-margin products such as integrated suites
and upgrades.
Research and development. Microsoft made substantial investments in R&D in
1994, and the rate of growth accelerated in 1995. Expense increases resulted
primarily from development staff headcount growth and higher levels of
third-party development costs in many areas, including development efforts for
Windows 95 and The Microsoft Network. R&D costs also increased for business
systems, consumer systems, desktop applications, and consumer products.
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Sales and marketing. The increase in the absolute dollar amount of sales
and marketing expense in 1995 was due primarily to increased product-specific
marketing programs, a Microsoft brand advertising campaign, and continued
expansion of Product Support Services. In 1994, sales and marketing expenses
increased at a slower rate than revenues due to a concerted performance
orientation at all sales sites.
General and administrative. Increases in general and administrative
expenses in 1994 and 1995 were primarily attributable to higher legal costs and
growth in the computer systems and the number of people necessary to support
overall increases in the scope of Microsoft's operations.
NONOPERATING ITEMS
Interest income, which was $83 million, $104 million, and $193 million in
1993, 1994, and 1995, increased primarily as a result of a larger investment
portfolio generated by cash from operations.
In the fourth quarter of 1995, Microsoft paid a $46 million breakup fee to
Intuit Inc. in connection with the termination of a planned merger.
In the third quarter of 1994, Microsoft recorded a $120 million charge to
reflect the estimated impact of a jury verdict in the Stac Electronics patent
litigation and related expenses. In June 1994, Microsoft reached an agreement
with Stac to settle the litigation and adjusted its estimate accordingly,
resulting in a credit of $30 million in the fourth quarter and a net pretax
charge of $90 million for 1994.
PROVISION FOR INCOME TAXES
The effective tax rate increased from 32.0% in 1993 to 33.5% in 1994 and
33.0% in 1995 primarily because of an increase in the U.S. statutory income tax
rate.
NET INCOME
Net income as a percent of revenues decreased in 1995 due to increased
relative research and development, sales and marketing, and general and
administrative expenses, offset by the lower relative cost of revenues and the
higher relative net nonoperating income. The net income percentage decreased in
1994, primarily due to the patent litigation charge and increased research and
development expenses, offset by the lower relative level of sales and marketing
expenses.
FINANCIAL CONDITION
Microsoft's cash and short-term investments totaled $4.75 billion at June
30, 1995. The portfolio is diversified among security types, industries, and
individual issuers. Microsoft's investments are investment grade and liquid. The
portfolio is invested predominantly in U.S. dollar denominated securities, but
also includes foreign currency positions in anticipation of continued
international expansion. Microsoft's portfolio is invested in short-term
securities to minimize interest rate risk and facilitate rapid deployment in the
event of immediate cash needs. Microsoft has no material long-term debt.
Microsoft has $70 million of standby multicurrency lines of credit that support
foreign currency hedging and international cash management.
Stockholders' equity at June 30, 1995 exceeded $5.3 billion.
Cash generated from operations has been sufficient historically to fund
Microsoft's investment in research and development activities and facilities
expansion. As Microsoft grows, investments will continue in research and
development in existing and advanced areas of technology. Microsoft's cash will
also be used to acquire technology and to fund ventures and other strategic
opportunities. Additions to property, plant, and equipment are expected to
continue, including facilities and computer systems for research and
development, sales and marketing, product support, and administrative staff. For
example, on June 30, 1995, commitments related to the construction of new
buildings approximated $150 million.
The exercise of stock options by employees provides additional cash. These
proceeds have been used in Microsoft's open market stock repurchase program
through which Microsoft provides shares for stock option and stock purchase
plans. This program will continue in 1996.
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During 1995, to enhance its stock repurchase program, Microsoft sold equity
put warrants to independent third parties. These put warrants entitle the
holders to sell shares of Microsoft common stock to Microsoft on certain dates
at specified prices.
Also during 1995, a subsidiary of Tele-Communications, Inc. (TCI) purchased
a 20% minority interest in the newly formed Microsoft Online Services
Partnership. TCI contributed $125 million of TCI common stock, and Microsoft
contributed the business assets of its online service, The Microsoft Network,
which was in development.
Management believes existing cash and short-term investments together with
funds generated from operations will be sufficient to meet operating
requirements in 1996. Microsoft's cash and short-term investments are also
managed to be available for strategic investment opportunities or other
potential large-scale cash needs that may arise in pursuit of Microsoft's
long-term strategies.
Microsoft shareholders have also authorized the issuance of up to 100
million shares of preferred stock, which may be used for any proper corporate
purpose.
Microsoft has not paid cash dividends on its common stock.
OUTLOOK AND UNCERTAINTIES
Microsoft does not provide forecasts of potential future financial
performance. While management of Microsoft is optimistic about Microsoft's
long-term prospects, the following issues and uncertainties, among others,
should be considered in evaluating its growth outlook.
Rapid technological change. The personal computer software industry is
characterized by rapid technological change and uncertainty as to the impact of
emerging areas such as the Internet and online services, the information
highway, networked collaboration products, and electronic commerce.
Long-term investment cycle. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
Microsoft's plans for 1996 include significant investments in software research
and development and related product opportunities from which significant
revenues are not anticipated for a number of years. Management expects total
spending for research and development in 1996 to increase over spending in 1995.
Customer acceptance. While Microsoft performs extensive usability and beta
testing of new products, user acceptance and corporate penetration rates
ultimately dictate the success of development and marketing efforts of products
such as Windows 95, Microsoft Office for Windows 95, or the Microsoft BackOffice
family of products.
Product ship schedules. Delays in the release of new products can cause
operational inefficiencies that impact manufacturing and distribution logistics,
independent software vendor (ISV) and OEM relationships, and telephone support
staffing.
Prices. Future prices Microsoft is able to obtain for its products may
decrease from historical levels depending on competitive market or cost factors.
Prices of software in Europe are generally higher than in the U.S. to cover
localization costs and higher costs of distribution. Such price uplifts could
erode in the future.
Integrated suites. The price of integrated suites such as Microsoft Office,
is less than the sum of the prices for the individual programs included in this
product when such programs are licensed separately. Revenues from Microsoft
Office may continue to increase as a percentage of total revenues.
Saturation. Product upgrades, enabling users to upgrade from earlier
versions of Microsoft's products or from competitors' products, have lower
prices and margins than new products. As the desktop applications market becomes
saturated, the sales mix shifts from standard products to upgrade products. This
trend is expected to continue.
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Channel mix. Average revenue per license is lower from OEM licenses than
from retail versions, reflecting the relatively lower direct costs of operations
in the OEM channel. An increasingly higher percentage of revenues was achieved
through the OEM channel during 1994 and 1995.
Corporate licenses. Average revenue per unit from corporate license
programs is lower than average revenue per unit from retail versions shipped
through the finished goods channels. Unit sales under corporate licensing
programs may continue to increase.
Cost of revenues. Although cost of revenues as a percentage of net revenues
decreased in 1994 and 1995, it varies with channel mix and product mix within
channels. Changes in channel and product mix, including the potential retail
upgrade cycle of Windows 95, may increase cost of revenues as a percentage of
net revenues in 1996.
Sales and marketing and support investments. Microsoft's plans for 1996
include continued investments in its sales and marketing and support groups.
Microsoft brand advertising is also expected to increase.
Foreign exchange. A large percentage of Microsoft's sales and costs of
manufacturing and marketing are transacted in local currencies. As a result,
Microsoft's international results of operations are subject to foreign exchange
rate fluctuations.
Intellectual property rights. Microsoft diligently defends its intellectual
property rights, but unlicensed copying of software represents a loss of
revenues to Microsoft. While this adversely affects U.S. revenues, revenue loss
is even more significant outside of the U.S., particularly in certain countries
where laws are less protective of intellectual property rights. Throughout the
world, Microsoft actively educates consumers on the benefits of licensing
genuine products and educates lawmakers on the advantages of a business climate
where intellectual property rights are protected. There can be no assurance that
continued efforts will affect revenues positively.
Future growth rates. If a substantial number of users upgrade to Windows
95, revenue growth rates in the initial shipping quarters of 1996 could be at
relatively high levels. Revenue growth rates in the comparable quarters of 1997
may not approach such levels. As discussed above, operating expenses are
expected to increase in 1996. Because of the fixed nature of a significant
portion of such expenses, coupled with the possibility of slower revenue growth,
operating margins in 1997 may decrease from those in 1996.
Litigation. Litigation regarding intellectual property rights, patents, and
copyrights is increasing in the PC software industry. In addition, there are
government regulation and investigation risks along with other general corporate
legal risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Income Statements for the three years ended June 30, 1995............................... 19
Cash Flows Statements for the three years ended June 30, 1995........................... 20
Balance Sheets as of June 30, 1995 and 1994............................................. 21
Stockholders' Equity Statements for the three years ended June 30, 1995................. 22
Notes to Financial Statements........................................................... 23
Independent Auditors' Report............................................................ 29
Schedule II -- Valuation and Qualifying Accounts for the three years ended June 30,
1995.................................................................................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
18
21
INCOME STATEMENTS
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
YEAR ENDED JUNE 30
----------------------------
1993 1994 1995
------ ------ ------
Net revenues..................................................... $3,753 $4,649 $5,937
Operating expenses:
Cost of revenues............................................... 633 763 877
Research and development....................................... 470 610 860
Sales and marketing............................................ 1,205 1,384 1,895
General and administrative..................................... 119 166 267
------ ------ ------
Total operating expenses............................... 2,427 2,923 3,899
------ ------ ------
Operating income................................................. 1,326 1,726 2,038
Interest income -- net........................................... 82 102 191
Noncontinuing items.............................................. -- (90) (46)
Other expenses................................................... (7) (16) (16)
------ ------ ------
Income before income taxes....................................... 1,401 1,722 2,167
Provision for income taxes....................................... 448 576 714
------ ------ ------
Net income....................................................... $ 953 $1,146 $1,453
====== ====== ======
Earnings per share............................................... $ 1.57 $ 1.88 $ 2.32
====== ====== ======
Weighted average shares outstanding.............................. 606 610 627
====== ====== ======
See accompanying notes.
19
22
CASH FLOWS STATEMENTS
(IN MILLIONS)
YEAR ENDED JUNE 30
------------------------------
1993 1994 1995
------ ------- -------
CASH FLOWS FROM OPERATIONS
Net income................................................... $ 953 $ 1,146 $ 1,453
Depreciation and amortization................................ 151 237 269
Current liabilities.......................................... 177 360 419
Accounts receivable.......................................... (121) (146) (91)
Inventories.................................................. (51) 23 15
Other current assets......................................... (35) (27) (75)
------ ------- -------
Net cash from operations............................. 1,074 1,593 1,990
------ ------- -------
CASH FLOWS FROM FINANCING
Common stock issued.......................................... 229 280 332
Common stock repurchased..................................... (250) (348) (649)
Stock option income tax benefits............................. 207 151 179
------ ------- -------
Net cash from financing.............................. 186 83 (138)
------ ------- -------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment.................. (236) (278) (495)
Other assets................................................. (17) (64) (230)
Short-term investments....................................... (723) (860) (651)
------ ------- -------
Net cash used for investments........................ (976) (1,202) (1,376)
------ ------- -------
Net change in cash and equivalents............................. 284 474 476
Effect of exchange rates on cash............................... (62) (10) 9
Cash and equivalents, beginning of year........................ 791 1,013 1,477
------ ------- -------
Cash and equivalents, end of year.............................. 1,013 1,477 1,962
Short-term investments......................................... 1,277 2,137 2,788
------ ------- -------
Cash and short-term investments................................ $2,290 $ 3,614 $ 4,750
====== ======= =======
See accompanying notes.
20
23
BALANCE SHEETS
(IN MILLIONS)
JUNE 30
-----------------
1994 1995
------ ------
ASSETS
Current assets:
Cash and short-term investments.......................................... $3,614 $4,750
Accounts receivable -- net of allowances of $92 and $139................. 475 581
Inventories.............................................................. 102 88
Other.................................................................... 121 201
------ ------
Total current assets............................................. 4,312 5,620
Property, plant, and equipment -- net...................................... 930 1,192
Other assets............................................................... 121 398
------ ------
Total assets................................................ $5,363 $7,210
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 324 $ 563
Accrued compensation..................................................... 96 130
Income taxes payable..................................................... 305 410
Other.................................................................... 188 244
------ ------
Total current liabilities........................................ 913 1,347
------ ------
Minority interest.......................................................... -- 125
------ ------
Put warrants............................................................... -- 405
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital -- shares authorized 2,000;
issued and outstanding 581 and 588.................................... 1,500 2,005
Retained earnings........................................................ 2,950 3,328
------ ------
Total stockholders' equity....................................... 4,450 5,333
------ ------
Total liabilities and stockholders' equity.................. $5,363 $7,210
====== ======
See accompanying notes.
21
24
STOCKHOLDERS' EQUITY STATEMENTS
(IN MILLIONS)
YEAR ENDED JUNE 30
----------------------------
1993 1994 1995
------ ------ ------
COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning of year..................................... $ 657 $1,086 $1,500
Common stock issued............................................ 229 280 332
Common stock repurchased....................................... (7) (17) (30)
Proceeds from sale of put warrants............................. -- -- 49
Reclassification of put warrant obligation..................... -- -- (25)
Stock option income tax benefits............................... 207 151 179
------ ------ ------
Balance, end of year................................... 1,086 1,500 2,005
------ ------ ------
RETAINED EARNINGS
Balance, beginning of year..................................... 1,536 2,156 2,950
Common stock repurchased....................................... (243) (331) (668)
Reclassification of put warrant obligation..................... -- -- (380)
Net income..................................................... 953 1,146 1,453
Translation adjustment......................................... (90) (21) (27)
------ ------ ------
Balance, end of year................................... 2,156 2,950 3,328
------ ------ ------
Total stockholders' equity........................ $3,242 $4,450 $5,333
====== ====== ======
See accompanying notes.
22
25
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS)
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The financial statements include the accounts
of Microsoft and its subsidiaries. Significant intercompany transactions and
balances have been eliminated.
Foreign currencies. Assets and liabilities recorded in foreign currencies
on the books of foreign subsidiaries are translated at the exchange rate on the
balance sheet date. Translation adjustments resulting from this process are
charged or credited to equity. Revenues, costs, and expenses are translated at
average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are included in other expenses.
Revenue recognition. Revenue from sales to distributors and resellers is
recognized when related products are shipped. Revenue from corporate license
programs generally is recognized when the product is installed by the user.
Finished goods revenue attributable to significant support (telephone support
and specified and unspecified enhancements) is recognized when such obligations
are fulfilled. Costs related to insignificant obligations, which includes
telephone support for certain products, are accrued.
Revenue from products licensed to original equipment manufacturers is
recognized when the licensed products are shipped by the OEM.
Revenue from software maintenance, service, and support contracts is
recognized ratably over the contract period.
Provisions are recorded for returns and bad debts.
Research and development. Research and development costs are expensed as
incurred. The current accounting rule, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, does not materially affect
the Company.
Telephone support. Telephone support costs are included in sales and
marketing.
Income taxes. Income tax expense includes U.S. and international income
taxes, plus an accrual for U.S. taxes on undistributed earnings of international
subsidiaries. Certain items of income and expense are not reported in tax
returns and financial statements in the same year. The tax effect of this
difference is reported as deferred income taxes. Tax credits are accounted for
as a reduction of tax expense in the year in which the credits reduce taxes
payable.
Earnings per share. Earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options, computed using the treasury stock method.
Financial instruments. The Company considers all liquid investments with a
maturity of three months or less at the date of purchase to be cash equivalents.
Short-term investments generally mature between three months and three years
from the purchase date. All cash and short-term investments are classified as
available for sale. Cost approximates market value for all classifications of
cash and short-term investments; realized and unrealized gains and losses are
not material.
Statement of Financial Accounting Standard Accounting for Certain
Investments in Debt and Equity Securities was adopted in 1995 and did not have a
material impact on the financial statements.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property, plant, and equipment. Property, plant, and equipment is stated at
cost and depreciated using the straight-line method. Estimated lives are as
follows: buildings, 30 years; leasehold improvements, the lease term; computer
equipment and other, principally three years.
23
26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Diversification of risk. The Company's investment portfolio is diversified
and consists of short-term investment grade securities. At June 30, 1994 and
1995, approximately 40% of accounts receivable represented amounts due from ten
channel purchasers. Two of these each accounted for approximately 10%, 13%, and
12% of revenues in 1993, 1994, and 1995.
Finished goods sales to international customers in Europe, Japan,
Australia, and Canada are primarily billed in local currencies. Payment cycles
are relatively short, generally less than 90 days. European manufacturing costs
and international selling, distribution, and support costs are generally
disbursed in local currencies. Local currency cash balances in excess of
short-term operating needs are generally converted into U.S. dollar cash and
short-term investments upon receipt. Therefore, foreign exchange rate
fluctuations generally do not create a risk of material transaction gains or
losses. As a result, Microsoft's hedging activities for transaction exposures
have been minimal. No material hedge contracts were outstanding at June 30,
1995.
Translated results of operations of the Company's foreign subsidiaries are
affected by foreign exchange rates. During 1995 and for 1996, the Company hedged
a percentage of planned translated international finished goods revenues by
purchasing options on the applicable currencies. Premiums paid for the options,
which were not material, are being amortized over the lives of the options. Any
gains will be recognized when and if realized.
Reclassifications. Certain reclassifications have been made for consistent
presentation.
CASH AND SHORT-TERM INVESTMENTS
JUNE 30
-----------------
1994 1995
------ ------
Cash and equivalents:
Cash..................................................... $ 263 $ 135
Commercial paper......................................... 619 1,035
Money market preferreds.................................. 180 255
Certificates of deposit.................................. 218 492
Bank loan participations................................. 197 45
------ ------
Cash and equivalents..................................... 1,477 1,962
------ ------
Short-term investments:
Municipal securities..................................... 1,245 1,291
Corporate notes and bonds................................ 423 866
U.S. Treasury securities................................. 417 444
Commercial paper......................................... 52 187
------ ------
Short-term investments................................... 2,137 2,788
------ ------
Cash and short-term investments.................. $3,614 $4,750
====== ======
PROPERTY, PLANT, AND EQUIPMENT
JUNE 30
-----------------
1994 1995
------ ------
Land....................................................... $ 162 $ 206
Buildings.................................................. 440 607
Computer equipment......................................... 532 707
Other...................................................... 311 387
------ ------
Property, plant, and equipment -- at cost.................. 1,445 1,907
Accumulated depreciation................................... (515) (715)
------ ------
Property, plant, and equipment -- net...................... $ 930 $1,192
====== ======
24
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
INCOME TAXES
The provision for income taxes was composed of:
1993 1994 1995
------ ------ ------
Current taxes:
U.S. and state................................. $352 $470 $518
International.................................. 123 94 151
---- ---- ----
Current taxes.................................. 475 564 669
Deferred taxes................................... (27) 12 45
---- ---- ----
Provision for income taxes....................... $448 $576 $714
==== ==== ====
Differences between the U.S. statutory and effective tax rates were:
1993 1994 1995
------ ------ ------
U.S. statutory rate.............................. 34.0% 35.0% 35.0%
Tax exempt income................................ (0.6) (0.9) (1.1)
Foreign sales corporation........................ (1.0) (1.0) (0.7)
Tax credits...................................... (0.9) (2.1) (1.6)
State taxes and other -- net..................... 0.5 2.5 1.4
---- ---- ----
Effective tax rate............................... 32.0% 33.5% 33.0%
==== ==== ====
Deferred income tax balances were:
JUNE 30
-----------------
1994 1995
------ ------
Deferred income tax assets:
Revenue items.................................. $ 61 $ 68
Expense items.................................. 143 221
----- -----
Deferred income tax assets..................... 204 289
----- -----
Deferred income tax liabilities:
International earnings......................... (147) (276)
Other.......................................... (4) (5)
----- -----
Deferred income tax liabilities................ (151) (281)
----- -----
Net deferred income tax asset............. $ 53 $ 8
===== =====
U.S. and international components of income before income taxes were:
1993 1994 1995
------ ------ ------
U.S.............................................. $ 960 $1,281 $1,549
International.................................... 441 441 618
------ ------ ------
Income before income taxes....................... $1,401 $1,722 $2,167
====== ====== ======
The Internal Revenue Service is examining the Company's U.S. income tax
returns for 1990 and 1991. The Company believes any adjustments from the
examination will not be material to the financial statements. Income taxes paid
were $187 million, $247 million, and $430 million in 1993, 1994, and 1995.
25
28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
COMMON STOCK
Shares of common stock outstanding were as follows:
1993 1994 1995
---- ---- ----
Balance, beginning of year.............................. 544 565 581
Issued.................................................. 27 25 19
Repurchased............................................. (6) (9) (12)
--- --- ---
Balance, end of year.................................... 565 581 588
=== === ===
The Company repurchases its common stock in the open market to provide
shares for issuance to employees under stock option and stock purchase plans.
The Company's Board of Directors authorized continuation of this program in
1996.
PUT WARRANTS
In connection with the Company's stock repurchase program, put warrants
were sold to independent third parties during 1995. The put warrants entitle the
holders to sell shares of Microsoft common stock to the Company at specified
prices. On June 30, 1995, 8.0 million warrants were outstanding with a strike
price of $69.75 per share. The warrants expire at various dates between February
1996 and November 1996, are exercisable only at maturity, and are settleable in
cash at Microsoft's option. The maximum potential repurchase obligation of $405
million has been reclassified from stockholders' equity to put warrants as of
June 30, 1995. There was no impact on earnings per share in 1995.
EMPLOYEE STOCK AND SAVINGS PLANS
Employee stock purchase plan. The Company has an employee stock purchase
plan for all eligible employees. Under the plan, shares of the Company's common
stock may be purchased at six-month intervals at 85% of the lower of the fair
market value on the first or the last day of each six-month period. Employees
may purchase shares having a value not exceeding 10% of their gross compensation
during an offering period. During 1993, 1994, and 1995, employees purchased 1.0
million, 1.1 million, and 1.0 million shares at average prices of $33.29,
$34.16, and $46.76 per share. At June 30, 1995, 2.1 million shares were reserved
for future issuance.
Savings plan. The Company has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. The Company contributes fifty cents for each dollar
contributed by a participant, with a maximum contribution of 3% of a
participant's earnings. The Company's matching contributions to the savings plan
were $7 million, $9 million, and $12 million in 1993, 1994, and 1995.
Stock option plans. The Company has stock option plans for directors,
officers, and all employees, which provide for nonqualified and incentive stock
options. The Board of Directors determines the option price (not to be less than
fair market value for incentive options) at the date of grant. Options granted
prior to 1995 generally vest over four and one-half years and expire ten years
from the date of grant. Options granted during and after 1995 generally vest
over four and one-half years and expire seven years from the date of grant,
while certain options vest over seven and one-half years and expire after ten
years. At June 30, 1995, options for 58.5 million shares were vested and 92.8
million shares were available for future grants under the plans.
26
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Stock options outstanding were as follows:
PRICE PER SHARE
-------------------------
WEIGHTED
NUMBER RANGE AVERAGE
------ ------------ --------
Balance, June 30, 1992..................... 120.3 $ 0.31-39.79 $12.44
Granted.................................... 24.4 30.88-44.25 34.30
Exercised.................................. (26.2) 0.31-36.92 7.95
Canceled................................... (4.4) 4.97-44.13 14.23
-----
Balance, June 30, 1993..................... 114.1 0.31-44.25 18.06
Granted.................................... 26.2 35.50-50.13 37.47
Exercised.................................. (20.9) 1.51-44.25 11.42
Canceled................................... (5.5) 5.01-44.13 28.67
-----
Balance, June 30, 1994..................... 113.9 0.31-50.13 23.29
Granted.................................... 21.7 47.75-83.13 50.50
Exercised.................................. (17.6) 0.31-47.75 15.81
Canceled................................... (4.2) 5.11-75.00 35.40
-----
Balance, June 30, 1995..................... 113.8 1.54-83.13 29.12
=====
LEASES
The Company has operating leases for most U.S. and international sales and
support offices and certain equipment. Rental expense for operating leases was
$54 million, $68 million, and $86 million in 1993, 1994, and 1995. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 1996, $78; 1997, $65; 1998, $56; 1999, $44; 2000, $28; and thereafter, $13.
THE MICROSOFT NETWORK
During 1995, a wholly owned subsidiary of Tele-Communications, Inc. (TCI)
purchased a 20% minority interest in the newly formed Microsoft Online Services
Partnership. TCI contributed $125 million of TCI common stock and Microsoft
contributed the business assets of its online service, The Microsoft Network,
which was in development. Microsoft owns 80% of the entity, whose operations
have not been material to the financial results of Microsoft. The entity was
subsequently reorganized into The Microsoft Network, LLC.
NONCONTINUING ITEMS
In the fourth quarter of 1995, the Company paid a $46 million breakup fee
to Intuit Inc. in connection with the termination of a planned merger.
In the third quarter of 1994, the Company recorded a $120 million charge to
reflect the estimated impact of a jury verdict in the Stac Electronics patent
litigation and related expenses. In June 1994, the Company reached an agreement
with Stac to settle the litigation and adjusted its estimate accordingly,
resulting in a credit of $30 million in the fourth quarter and a net pretax
charge of $90 million for 1994.
CONTINGENCIES
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ)
entered into a consent decree resolving the DOJ's non-public investigation of
Microsoft. In the consent decree, which involves no admission of wrongdoing on
Microsoft's part, Microsoft agreed to make certain changes in its OEM licensing
practices. Microsoft also agreed to employ a uniform duration in its
nondisclosure agreement for precommercial versions
27
30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
of certain operating system products, and clarified the rights and
responsibilities of those signing such nondisclosure agreements. The consent
decree was approved by the U.S. District Court for the District of Columbia on
August 21, 1995.
The Antitrust Division of the DOJ has stated that it is conducting an
investigation concerning Microsoft's inclusion of client-access software for The
Microsoft Network in Windows 95. Although there is no assurance that this matter
will be resolved favorably and that Microsoft's future financial statements will
not be adversely affected, Microsoft currently believes that resolution of this
matter will not have a material adverse effect on its financial condition or
results of operations.
INFORMATION BY GEOGRAPHIC AREA
1993 1994 1995
------ ------ ------
Net revenues
U.S. operations................................ $2,655 $3,472 $4,495
European operations............................ 1,289 1,401 1,575
Other international operations................. 395 375 558
Eliminations................................... (586) (599) (691)
------ ------ ------
Total net revenues..................... $3,753 $4,649 $5,937
====== ====== ======
Operating income
U.S. operations................................ $ 961 $1,394 $1,709
European operations............................ 360 346 412
Other international operations................. 18 31 91
Eliminations................................... (13) (45) (174)
------ ------ ------
Total operating income................. $1,326 $1,726 $2,038
====== ====== ======
Identifiable assets
U.S. operations................................ $2,944 $4,397 $5,862
European operations............................ 1,133 1,366 1,806
Other international operations................. 310 423 689
Eliminations................................... (582) (823) (1,147)
------ ------ ------
Total identifiable assets.............. $3,805 $5,363 $7,210
====== ====== ======
Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions. "U.S. operations" include
shipments to customers in the U.S., licensing to OEMs, and exports of finished
goods directly to international customers, primarily in Canada, South America,
and Asia. Exports and international OEM transactions are primarily in U.S.
dollars and totaled $426 million, $787 million, and $1,263 million in 1993,
1994, and 1995. "Other international operations" primarily include subsidiaries
in Australia, Japan, Korea, and Taiwan. International revenues, which include
European operations, other international operations, exports, and OEM
distribution, were 55.3%, 54.0%, and 55.3% of total revenues in 1993, 1994, and
1995.
28
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying balance sheets of Microsoft Corporation
and subsidiaries as of June 30, 1994 and 1995, the related statements of income,
cash flows, and stockholders' equity for each of the three years ended June 30,
1995. Our audits also included the financial statement schedule listed in the
Index at Item 8. These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Microsoft Corporation and subsidiaries as of
June 30, 1994 and 1995, and the results of their operations and their cash flows
for each of the three years ended June 30, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 17, 1995
(August 21, 1995 as to
Contingencies Note)
29
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors may be found under the caption
"Election of Directors and Management Information" on pages 1 and 2 of the
Company's Proxy Statement dated September 25, 1995, for the Annual Meeting of
Shareholders to be held October 27, 1995 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers may be found on pages 11 and 12 hereof, under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions
"Information Regarding Executive Officer Compensation" on pages 4 through 8 and
"Information Regarding the Board and its Committees" on page 2 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information Regarding
Beneficial Ownership of Principal Shareholders, Directors, and Management" on
page 3 of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" on page
8 of the Proxy Statement is incorporated herein by reference.
30
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements of Microsoft as set forth under Item 8 are
filed as part of this report.
Supplemental Schedule II -- Valuation and Qualifying Accounts is filed
on page 32 of this report.
Financial statement schedules other than those listed above have been
omitted since they are either not required, not applicable, or the
information is otherwise included.
The independent auditors' report with respect to the above-listed
financial statements and schedule appears on page 29 of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1995.
(c) Exhibit Listing
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Articles of Incorporation(1)
3.2 Bylaws(1)
10.1 Microsoft Corporation 1991 Stock Option Plan(1)
10.2 Microsoft Corporation 1981 Stock Option Plan(2)
10.3 Microsoft Corporation Stock Option Plan for Non-Employee Directors(1)
10.4 Microsoft Corporation Stock Option Plan for Consultants and Advisor(1)
10.5 Microsoft Corporation 1991 Employee Stock Purchase Plan
10.6 Microsoft Corporation Savings Plus Plan(1)
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation and First
Interstate Bank of Washington(3)
10.8 Form of Indemnification Agreement(3)
11. Computation of Earnings Per Share
21. Subsidiaries
23. Independent Auditors' Consent
27. Financial Data Schedule
99.1 Financial Statements for the Microsoft Corporation 1991 Employee Stock
Purchase Plan for the Three Years Ended June 30, 1995
99.2 Financial Statements for the Microsoft Corporation Savings Plus Plan for
the Two Years Ended December 31, 1994 and the Nine Months Ended December
31, 1992
- ---------------
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(2) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(3) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
31
34
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN MILLIONS)
YEAR ENDED JUNE 30
----------------------
1993 1994 1995
---- ---- ----
Balance, beginning of year............................................ $ 57 $ 76 $ 92
Additions charged to expense.......................................... 47 27 51
Deductions............................................................ (28) (11) (4)
---- ---- ----
Balance, end of year.................................................. $ 76 $ 92 $139
==== ==== ====
32
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Redmond, State of Washington, on September 13, 1995.
MICROSOFT CORPORATION
By /s/ MICHAEL W. BROWN
------------------------------------
Michael W. Brown,
Vice President, Finance;
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated on September 13, 1995.
SIGNATURE TITLE
--------- -----
/s/ WILLIAM H. GATES Chairman of the Board of Directors
- --------------------------------------------- and Chief Executive Officer
William H. Gates
/s/ PAUL G. ALLEN Director
- ---------------------------------------------
Paul G. Allen
/s/ RICHARD A. HACKBORN Director
- ---------------------------------------------
Richard A. Hackborn
/s/ DAVID F. MARQUARDT Director
- ---------------------------------------------
David F. Marquardt
/s/ ROBERT D. O'BRIEN Director
- ---------------------------------------------
Robert D. O'Brien
Director
- ---------------------------------------------
Wm. G. Reed, Jr.
/s/ JON A. SHIRLEY Director
- ---------------------------------------------
Jon A. Shirley
/s/ MICHAEL W. BROWN Vice President, Finance;
- --------------------------------------------- Chief Financial Officer
Michael W. Brown (Principal Financial and Accounting Officer)
33