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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
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, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____
______________
COMMISSION FILE NUMBER 0-14278
MICROSOFT CORPORATION
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-1144442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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 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. [ ]
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 [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of September 9, 1994 was $19,715,785,692.
The number of shares outstanding of the registrant's common stock as of
September 9, 1994 was 580,345,861.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1994 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.
Portions of the definitive Proxy Statement dated
September 27, 1994 to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held October 28,
1994 are incorporated by reference into Part III.
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MICROSOFT CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1994
INDEX
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PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 14
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 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
Signatures 22
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PART I
Item 1. Business
GENERAL
Microsoft Corporation (the "Company" or "Microsoft") was founded as a
partnership in 1975 and was incorporated in 1981. The Company operates in one
business segment - the development, manufacture, marketing, licensing, and
support of a wide range of software products, including operating systems for
personal computers (PCs), office machines, and personal information devices;
applications programs; and languages; as well as personal computer books,
hardware, and multimedia products. Microsoft(R) products are available for
most PCs, including Apple(R) computers and those running Intel(R)
microprocessors.
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 three main
groups: the Products Group; the Sales and Support Group; and the Operations
Group.
The Products Group is comprised of five main divisions, each responsible for a
particular area of software development, technology development, and product
marketing. The Personal Operating Systems Division designs and develops
operating systems for desktop PCs. The Business Systems Division is
responsible for enterprise-wide computing solutions, including client-server
architectures, networking products, and workgroup applications. The Desktop
Applications Division creates productivity applications. The Developer
Division creates database products, as well as programming language products
and software development tools. The Consumer Division develops products
designed for the home, school, and small business market, including multimedia
consumer products and computer input devices (hardware).
Microsoft also has an Advanced Technology Division, which is involved in
research of new technologies for the evolution of personal computing and the
development of innovative consumer software architectures.
The Sales and Support Group is responsible for building long-term business
relationships with customers. This group is aligned with one of three customer
types: end users, organizations, and OEMs (original equipment manufacturers).
The Sales and Support group manages the channels that serve those customers.
These channels include the U.S. and Canada, Europe, Other International, and
OEM. 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 manufacture and
delivery of finished goods, licenses, subscriptions, and fulfillment orders;
the publishing efforts of Microsoft Press; and other corporate functions.
PRODUCTS PERSONAL OPERATING SYSTEMS
The Personal Operating Systems Division develops desktop operating systems
software, which controls PCs, allocates computer memory, schedules the
execution of applications software, and manages the flow of information and
communication among the various components of the PC. The Company's primary
proprietary operating systems for PCs are: the Microsoft MS-DOS(R) operating
system, the Microsoft Windows(TM) operating system, and Microsoft Windows(TM)
for Workgroups.
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 on the IBM PC in 1981, the Company has enhanced MS-DOS
as new technologies are developed and user needs have arisen. MS-DOS is
preinstalled by OEMs on most PCs.
WINDOWS: Microsoft Windows is a graphical operating system for MS-DOS-based
PCs. Microsoft Windows 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.
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WINDOWS FOR WORKGROUPS: Windows for Workgroups 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.
WINDOWS 95: Microsoft is developing a new personal operating system, designed
to replace MS-DOS, Windows, and Windows for Workgroups as the Company's desktop
operating system offering. Windows 95 will be a fully integrated 32-bit
operating system, compatible with existing software applications and capable of
performing as the platform for the next generation of applications, games, PCs,
and peripherals.
BUSINESS SYSTEMS
The Business Systems division is focused on delivering a broad range of
business solutions for organizations. The division develops and markets an
integrated product line of software for creating business solutions, including
operating systems for servers and workstations, as well as applications for
business servers. Server applications development is divided into the areas of
databases, connectivity, and workgroup applications.
WINDOWS NT: Microsoft Windows NT Workstation is a 32-bit, multithreaded
operating system for client-server computing. It is capable of running on
Intel 386, 486, and Pentium(TM) systems and exploiting the next generation of
microprocessor systems, including most RISC architectures and multiprocessor
systems. Windows NT has the power to serve as a business workstation to
integrate client-server business applications with existing Windows-based
desktop applications or as a technical workstation to run high-end engineering
or scientific applications. The operating system provides integrated mail and
networking with remote access, pre-emptively scheduled multitasking, and
support for background communication sessions. Windows NT also provides for
the automatic migration of information from previously installed versions of
Windows. The Windows NT(TM) Server, in addition to the features of Windows NT
Workstation, provides extensive network management features, administration
tools, support for Macintosh(R) clients, and fault tolerance. It is a platform
for database, communications, and mail servers.
SQL SERVER: The Company also offers Microsoft SQL Server. Originally
developed cooperatively by Microsoft and Sybase, Inc., SQL Server is a
high-performance relational database management system for client-server
architectures and personal computer local area networks. 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 and SQL Server for OS/2.
LAN MANAGER: The Company also markets Microsoft LAN Manager, which is a
network operating system offering the user the ability to run applications,
share files and devices, and perform remote processing in a true client-server
computing environment, from MS-DOS, Windows, or Microsoft Operating System/2
(MS(R) OS/2) workstations. LAN Manager runs on MS OS/2, UNIX Systems, and VAX
VMS systems. LAN Manager clients and servers can interoperate in a network
with Windows NT, Windows NT Server, and Windows for Workgroup systems.
MICROSOFT MAIL: The Company markets Microsoft Mail for PC networks. Microsoft
Mail includes client software for the Microsoft Windows, 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(R) 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+: In 1992, the Company introduced the first of its workgroup
applications to take advantage of the Microsoft Mail messaging system,
Microsoft Schedule+. Schedule+ is a calendaring and scheduling program that
helps individuals and groups manage their time and resources. The program
searches other workgroup members' schedules to determine meeting availability
times, provides invitees the means to accept, decline, or tentatively accept
invitations to meetings, and automatically notifies attendees if a meeting is
canceled or rescheduled.
MICROSOFT AT WORK: The Company announced a new architecture which focuses on
making digital office machines more functional and easier to use while creating
digital connections between office machines to allow information to flow freely
among many device types throughout the workplace. The Microsoft At Work(TM)
software components are planned to be incorporated into office devices, making
these products easier to use, compatible with one another and compatible with
PCs running the Microsoft Windows operating system. Partners in the Microsoft
At Work initiative include more than 70 companies representing the office
automation, communications, and computer industries.
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DESKTOP APPLICATIONS SOFTWARE
The Desktop Applications Division develops applications software, which
provides the microcomputer 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 and Macintosh
operating systems.
MICROSOFT OFFICE
Microsoft Office is a suite of software products featuring seamless integration
of the most commonly used desktop applications. The Company's suite of
products is based upon a document-centric concept, with common commands and
extensive use of object linking and embedding (OLE) cross-application
capabilities. Microsoft Office comes in two editions, Standard and
Professional. The Standard Edition includes Microsoft Word, Microsoft Excel,
the Microsoft PowerPoint(R) presentation graphics program, and a workstation
license for Microsoft Mail. The Standard Edition is available for Windows and
Macintosh operating systems. The Microsoft Office Professional Edition for
Windows adds the Microsoft Access(R) database.
WORD PROCESSING
The Company's word processing program is Microsoft Word. Microsoft Word for
the MS-DOS operating system was introduced in 1983. Since its first release,
Microsoft Word has been enhanced with innovations that make it easier for users
to do everyday word processing tasks. Microsoft Word for Windows provides 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 a version for the Macintosh operating system.
SPREADSHEETS
The Company's spreadsheet program is Microsoft Excel, which is available for
the Windows and Macintosh operating systems. It is an integrated spreadsheet
with 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 Excel was first introduced in 1985 for the Apple
Macintosh. Microsoft Excel for Windows was introduced in 1987.
GRAPHICS
Microsoft PowerPoint is a presentation graphics program for producing slides,
transparencies, overheads, and prints. The Company markets versions of
PowerPoint for Microsoft Windows and the Macintosh.
PROJECT MANAGEMENT
Microsoft Project is a critical path project scheduling and resource allocation
program that runs on Windows 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.
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 and Windows NT.
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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 individual users up 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, 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. In 1994, the
Company shipped Microsoft Visual C++(TM) development system for 16 and 32-bit
application development on Windows and Windows NT. The Microsoft Visual
Basic(TM) programming system for the Windows operating system 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 Assembly and FORTRAN
languages for MS-DOS, Windows, and Windows NT.
DEVELOPER INFORMATION PRODUCTS
The Company supplies software developers with technical and support information
which is critical for successful development on Windows and Windows NT.
Developers subscribe to the Microsoft Developer Network (MSDN) information
service and receive quarterly updates on CD-ROMs, magazines, and electronically
via several on-line information services.
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 a synergistic product line focusing on several
categories of home software usage, including Personal Tools, Personal
Transactions, Family Reference/Information, Lifestyle, Entertainment, and Kids.
Many of the Family Reference/Information and Lifestyle titles are available on
CD-ROM. The Consumer division is also responsible for hardware input devices
such as the Microsoft Mouse and the Microsoft BallPoint Mouse.
PERSONAL TOOLS
The Company's leading Personal Tools products are Microsoft Works and Microsoft
Publisher. The Company markets versions of Microsoft Works that run on the
Windows, MS-DOS, and Macintosh operating systems. Microsoft Works is an
integrated software program that contains word processing with spell-checking
and thesaurus; spreadsheet with charting; and database with reporting
capabilities. Microsoft Works allows the easy exchange of information from one
tool to another. A large percentage of Microsoft Works is licensed through the
OEM channel in addition to the finished goods channels. Microsoft Publisher is
an easy-to-use, entry-level desktop publishing tool for the Windows operating
system. Publisher features PageWizards(TM) design assistants, an interactive
tool that automates the design process of 12 custom publications, including
newsletters, calendars, greeting cards, and invitations.
PERSONAL TRANSACTIONS
Microsoft Money is a financial organization product that provides the user with
a variety of features for tracking personal or business expenses. Introduced
in 1991, Microsoft Money runs on the Windows operating system and provides easy
tracking of account balances, income, and expenses, as well as quick reporting
and charting of financial information.
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FAMILY REFERENCE/INFORMATION
Reference and information titles include Microsoft Encarta(TM) and Microsoft
Bookshelf(R), which are both available for Windows and Macintosh operating
systems. The Encarta multimedia encyclopedia database blends 9 million words
of text in 26,000 articles with a wealth of innovative, interactive information
presented through animations, videos, maps, charts, sounds, and pictures.
Bookshelf is a multimedia reference library for the desktop PC that integrates
seven well-respected and authoritative works on one compact disc. As a source
of general reference information, Bookshelf includes a dictionary, world atlas,
world almanac, thesaurus, concise encyclopedia, and two books of quotations.
LIFESTYLE
Lifestyle titles include Microsoft Dinosaurs, Microsoft Dangerous Creatures,
Microsoft Ancient Lands, and Microsoft Cinemania(TM), an interactive guide to
the movies with entries for 19,000 films. Musical titles include Microsoft
Beethoven: The Ninth Symphony, Microsoft Stravinsky: The Rite of Spring,
Microsoft Mozart: Dissonant Quartet, Microsoft Multimedia Strauss for Windows,
and Microsoft Musical Instruments.
ENTERTAINMENT
The Company also has a line of entertainment products. The Company has
marketed Microsoft Flight Simulator(TM) since 1983. Licensed from Bruce Artwick
Organization Ltd., Microsoft Flight Simulator has been updated several times
and is available for MS-DOS and Macintosh operating systems. Microsoft Golf
was introduced in 1992. Licensed from Access Software, Inc., the product is a
realistic simulation of the sport of golf for the Windows operating system.
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.
In September 1994, The Company released the first in a series of products based
on the popular children's books and television series, Magic School Bus.
INPUT DEVICES
The Company's major hardware product is the Microsoft Mouse, a hand-held
pointing device that facilitates editing of text on the screen. It can be used
with MS-DOS and Windows operating systems and works with many applications
products from Microsoft and other companies. The mouse for the Intel
microprocessor-based PC was first introduced in 1983. The mouse is sold
separately or with Microsoft Windows.
In 1991, the Company began marketing the Microsoft BallPoint(R) Mouse, 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 the user to adjust the angle of the
mouse to the keyboard. In August 1994, the Company began shipping the
Microsoft Natural Keyboard, an ergonomically superior keyboard input device.
MICROSOFT PRESS
Founded in 1983, 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 product.
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.
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LOCALIZATION
Microsoft has a practice of localizing its products, including user messages
and documentation, for distribution in other countries. Thus, 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 pounds and user messages and documentation reflect certain British
conventions. Various Microsoft products have been localized into more than 30
languages.
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 builds
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. As such, the end user unit handles 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. Key products 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 large, medium, and small organizations. 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 handles computing strategy for organizations; consulting
strategy for organizations and Solutions Providers; vertical marketing
programs; and large account licensing programs. Additionally, the unit is
responsible for the technical training of Solutions Providers and channel
resellers; support policies; and seminars, events, and sales training for
resellers and Solutions Providers. Key products are the Company's business
systems, developer software, and software licensed via large corporate account
programs.
The OEM customer unit includes the sales force which works with original
equipment manufacturers who 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 Corporate Software, Egghead Software, Softmart, and Software
Spectrum. 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: The Microsoft Solutions Providers is a comprehensive
support relationship with independent companies who provide integration,
development, training, and support for business computing solutions. The
program supports value-added resellers, system integrators, consultants, 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, 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.
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DIRECT MARKETING: Microsoft uses direct marketing techniques aimed at existing
and potential users of the Company's products. Programs are typically directed
through the mail, utilizing lists of targeted individuals. The Company uses
direct marketing to promote sales of new versions of products to existing
users. 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, the Czech Republic, Denmark, Dubai, Ecuador,
Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel,
Italy, Japan, Malaysia, Mexico, Morocco, the Netherlands, New Zealand, Norway,
People's Republic of China, Peru, Poland, Portugal, Puerto Rico, Russia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan,
Thailand, Turkey, 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. Information with respect to international operations and export
sales may be found on page 17 of the 1994 Annual Report to Shareholders, which
is incorporated herein by reference.
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
the OEMs' microcomputers. The Company also markets certain language and
applications programs to OEMs under similar arrangements. In addition, the
Company markets the Microsoft Mouse and BallPoint Mouse to OEMs for
distribution to buyers of the OEMs' 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, DEC, Dell, Compaq, Fujitsu, Gateway
2000, IBM, NEC, Olivetti, Packard Bell, Toshiba, Unisys, and Zenith.
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
medium (television, radio, and business publications) and trade publications.
Microsoft also invests heavily in direct marketing and customer satisfaction
areas. In 1995, the Company plans to spend more than $100 million on a broad
campaign emphasizing Microsoft brand identity.
PRODUCT SUPPORT
The Company's Product Support Services group, with locations in the
U.S. and in 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. Coverage options range from
standard no-charge toll telephone support to fee-based offerings providing
unlimited 800# telephone and electronic technical support across all Microsoft
products 24 hours per day, 7 days per week.
Users have access to Microsoft KnowledgeBase, a repository of over
55,000 technical articles that is updated regularly with useful information
regarding Microsoft products. Microsoft provides access to KnowledgeBase via
CompuServe(R), GEnie(TM), Prodigy, America Online, and 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.
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CUSTOMERS
As described above, Microsoft has three customer types: end users,
organizations, and OEMs. The Company believes that most of the end users of
its 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 on page 13 of the
1994 Annual Report to Shareholders 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.
PRODUCT DEVELOPMENT
The microcomputer software industry is characterized by rapid technological
change, which requires a continuous high level of expenditures for enhancing
existing products and developing new products. The Company is committed to
continued 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 a new user need or an advance in
hardware design, without compromising product quality. The Company strives to
become as informed as possible at the earliest possible time about
technological advances and changing usage patterns.
During fiscal years 1992, 1993, and 1994, the Company spent $352 million, $470
million, and $610 million, respectively, on product research and development
activities. Those amounts represented 12.8%, 12.5%, and 13.1%, respectively,
of net revenues in each of those years.
COMPETITION
The microcomputer software market is intensely competitive and subject to rapid
change. The Company's competitors include many independent software vendors,
such as Lotus Development, Oracle, and Novell. These companies generally have
a narrower focus than the Company in product offerings such as spreadsheets,
relational databases, word processors, and networking software.
Large personal computer OEMs are devoting significant resources to creating
operating systems, notably IBM, Apple Computer, and Sun Microsystems.
Microsoft markets its operating systems products to OEMs and end users. The
Company competes for that business with the large OEMs and joint ventures of
OEMs, and independent systems software vendors, such as Novell.
The Company believes that the principal competitive factors in marketing
microcomputer 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.
See "Outlook: Issues and Risks" on page 6 of the 1994 Annual Report to
Shareholders, which is incorporated herein by reference.
8
<PAGE> 11
PRODUCT PROTECTION
Microsoft regards the intellectual property used in its software as proprietary
and attempts to protect it with copyrights, patents, trade secret laws,
internal and external nondisclosure safeguards, and restrictions on disclosure
and transfer that are incorporated into its software license agreements.
Despite these restrictions, it is possible for competitors and users to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Existing laws protecting intellectual property
are helpful but imperfect aids in preventing unauthorized copying and use of
the Company's products. Monitoring and identifying unauthorized copying and
use of software can be difficult, and software piracy is a persistent problem
for the software industry. Piracy is particularly acute in international
markets. Some of the Company's products distributed internationally use
electronic copy protection to assist in preventing unauthorized copies, but the
more typical Company antipiracy strategy is to work with others in the industry
to secure the passage of appropriate laws protecting software, to educate the
market and persuade users about the benefits of legitimate software, and to
participate in selective enforcement actions.
MANUFACTURING
The Company has manufacturing facilities located in the United States, Puerto
Rico, and Ireland. The Company's manufacturing operations involve the
duplication of disks, assembly of purchased parts, and final packaging.
Quality control tests are performed on purchased parts, duplicated disks, and
finished products. The chief materials and components used in Microsoft
products include disks, 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 portion of its manufacturing activity to third parties.
Outside manufacturers produce software products, documentation, and hardware
such as mouse pointing devices. There are other custom manufacturers in the
event that products become unavailable from current sources.
EMPLOYEES
As of June 30, 1994, the Company employed 15,257 people, 10,264 domestically
and 4,993 internationally. Of the total, 4,417 were in product research and
development, 8,079 in sales, marketing, and support, 1,344 in manufacturing and
distribution, and 1,417 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.
9
<PAGE> 12
Item 2. Properties
The Company's corporate offices consist of approximately two 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 1995. Additionally, construction has started on another series of
office buildings with approximately 675,000 square feet of space. Occupancy is
expected by the end of calendar 1995. 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.
The Company owns a 65,000 square foot office building on seven acres of land
near London, England. In Les Ulis, France, the Company owns a 110,000 square
foot office building on four acres of land.
In addition, the Company leases office space in numerous locations in the
United States and many other countries.
Item 3. Legal Proceedings
The Company is currently involved in litigation with Apple Computer, Inc. and
Wang Laboratories, Inc. The information set forth in Notes to Financial
Statements on page 15 of the 1994 Annual Report to Shareholders is incorporated
herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last quarter
of fiscal 1994.
10
<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 9, 1994 were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
William H. Gates 38 Chairman of the Board; Chief Executive Officer
Steven A. Ballmer 38 Executive Vice President, Sales and Support
Michael J. Maples 52 Executive Vice President, Products
Roger J. Heinen, Jr. 43 Senior Vice President, Developer Division
Frank M. (Pete) Higgins 36 Senior Vice President, Desktop Applications Division
Joachim Kempin 52 Senior Vice President, OEM Sales Division
Paul A. Maritz 39 Senior Vice President, Systems Division
Nathan P. Myhrvold 35 Senior Vice President, Advanced Technology
William H. Neukom 52 Senior Vice President, Law and Corporate Affairs; Corp. Secretary
Jeffrey S. Raikes 36 Senior Vice President, Microsoft North America
Bernard P. Vergnes 49 Vice President, Microsoft; President, Microsoft Europe
James E. Allchin 42 Vice President, Business Systems Division
Michael W. Brown 48 Vice President, Finance; Chief Financial Officer
Raymond A. Emery 52 Vice President, Operations
Richard W. Fade 39 Vice President, Advanced Technology Sales
Michel Lacombe 43 Vice President, End User Customer Business Unit, Europe
Jonathan D. Lazarus 43 Vice President, Strategic Relations
Robert L. McDowell 48 Vice President, Strategic Enterprise Services
Craig J. Mundie 45 Vice President, Advanced Consumer Technology
Michael R. Murray 39 Vice President, Human Resources
G. Christopher Peters 35 Vice President, Office Business Unit
Richard F. Rashid 42 Vice President, Research
Darryl E. Rubin 40 Vice President, Software Strategy
Brad A. Silverberg 40 Vice President, Personal Operating Systems Division
Rolf B. Skoglund 40 Vice President, Organization Customer Business Unit, Europe
Christopher F. Smith 59 Vice President, International Operations
Charles G. V. Stevens 37 Vice President, Far East
Patricia Q. Stonesifer 38 Vice President, Consumer Division
Deborah N. Willingham 38 Vice President, Product Support Services
</TABLE>
Mr. Gates was a founder of the Company and has been its Chief Executive Officer
and Chairman of the Board since the Company's predecessor partnership was
incorporated in 1981. From 1975 to 1981, Mr. Gates was a partner with Paul
Allen, Microsoft's other founder, in the predecessor partnership.
Mr. Ballmer was named Executive Vice President, 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. Since
joining the Company in 1980, Mr. Ballmer has also served as Assistant to the
President; Vice President, Corporate Staffs; and Vice President, Marketing.
Mr. Maples was named Executive Vice President, Products in February 1992. He
had been Senior Vice President, Applications Software since 1991. Mr. Maples
joined the Company as Vice President, Applications Software in 1988, after 23
years with International Business Machines Corporation. At IBM, Mr. Maples was
Director of Software Strategy from 1986 to 1988, and prior to 1986 held a
variety of positions in marketing and product development.
11
<PAGE> 14
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. Higgins 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 and has held various positions in product and
program management, including General Manager of the Analysis Business Unit.
Mr. Kempin was named Senior Vice President, OEM Sales Division 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. Maritz was named Senior Vice President, Systems Division in February 1992.
He had been Vice President, Advanced Operating Systems since 1989. Mr. Maritz
joined Microsoft in 1986 and served as General Manager for Networks and XENIX.
Mr. Myhrvold 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 and served as Director of Special
Projects prior to his promotion.
Mr. Neukom was named Senior Vice President, Law and Corporate Affairs in
February 1994. He joined the Company 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), the Company's 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 and has held a variety of management positions, including
General Manager of the Office Business Unit.
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. Allchin was named Vice President, Business Systems Division, effective 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. 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, the Company's independent auditors.
Mr. Emery was named Vice President, Operations in April 1993. He had been
General Manager of Worldwide Manufacturing since joining Microsoft in July
1990. From 1988 to 1990, Mr. Emery was Divisional General Manager of
Prestolite Electric, Inc.
Mr. Fade was named Vice President, Advanced Technology Sales in June 1994. He
had served as Vice President, Far East Region since August 1992. Since
joining Microsoft in 1986, he has served as Director, Far East OEM Sales;
Director, U.S. OEM Sales; and Group Sales Manager, Microsoft OEM Division.
Mr. Lacombe was named Vice President, End User Customer Unit, Europe in April
1994. Mr. Lacombe joined Microsoft in 1983 as retail sales manager in the
Company's French subsidiary before being promoted to general manager of the
subsidiary in 1989. He was appointed Regional Director of Southern Europe in
May 1991.
Mr. Lazarus was named Vice President, Strategic Relations in April 1994. He
had served as Vice President, Systems Marketing since April 1992. Mr. Lazarus
had been General Manager of System Software Marketing after having joined
Microsoft in 1986 as the Director of Systems Strategy and Publisher of
Microsoft Systems Journal.
Mr. McDowell joined Microsoft as Vice President, Strategic Enterprise Services
in March 1990. Mr. McDowell came to Microsoft from Ernst & Young,
where he was a partner and National Director of Strategic Business Systems.
From 1983 to 1989, he was a partner with Arthur Young.
12
<PAGE> 15
Mr. Mundie was named Vice President, Advanced Consumer Technology in 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. Murray was named Vice President, Human Resources and Administration in
December 1991. He joined Microsoft in 1989 as General Manager of the Network
Business Unit. Previously, Mr. Murray was President of Dataline, a systems
integrator. He also held general management positions at Hewlett-Packard,
Convergent Technologies, and Apple Computer.
Mr. Peters was named Vice President, Office Product Unit, effective November
1993. Prior to his promotion, he was general manager of the Word business
unit. Mr. Peters was involved in the development of several key products since
joining Microsoft in 1981.
Mr. Rashid was named Vice President, Research, effective July 1994. Since
joining Microsoft in 1991, he was director of research. Mr. Rashid was
Professor of Computer Science at Carnegie Mellon University, where he was on
the faculty since 1979.
Mr. Rubin was named Vice President, Software Strategy, effective February 1990.
Mr. Rubin joined Microsoft in 1986 and prior to his promotion held several
management positions in the Network Development Division, most recently as
Chief Architect.
Mr. Silverberg 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.
Mr. Skoglund was named Vice President, Organization Customer Unit, Europe in
April 1994. Mr. Skoglund joined Microsoft in 1985 as general manager of the
Company's Swedish subsidiary. He was appointed Regional Director of Northern
Europe in May 1991.
Mr. Smith was named Vice President, International Operations, effective July
1990. From 1987, when Mr. Smith joined Microsoft, until his promotion, he
served as Senior Director, European Operations.
Mr. Stevens was named Vice President, Far East, effective June 1994. He had
been general manager of worldwide business strategy for the sales and support
divisions and before that general manager of database products. Mr. Stevens
joined Microsoft in 1984.
Ms. Stonesifer was named Vice President, Consumer Division in 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.
Ms. Willingham was named Vice President, Product Support Services in April
1994. She joined Microsoft in 1993 as general manager of end user support, and
was later responsible for worldwide technical support strategy and all U.S.
technical support personnel and operations. Prior to joining Microsoft, Ms.
Willingham was director of IBM's Worldwide Manufacturing Technical Center in
its application business systems unit.
13
<PAGE> 16
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The information set forth on page 18 of the 1994 Annual Report to Shareholders
is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth on page 19 of the 1994 Annual Report to Shareholders
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth on pages 3, 4, 5, 6, 7, 11, and 12 of the 1994
Annual Report to Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary financial information for
the Company and report of independent auditors set forth on pages 2, 8, 9,
10, and 13 through 17 of the 1994 Annual Report to Shareholders are incorporated
herein by reference:
o Income Statements for each of the three years in the period ended June
30, 1994
o Balance Sheets as of June 30, 1994 and 1993
o Statements of Stockholders' Equity for each of the three years in the
period ended June 30, 1994
o Cash Flows Statements for each of the three years in the period ended
June 30, 1994
o Report of Independent Auditors
o Notes To Financial Statements
o Quarterly Financial And Market Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
14
<PAGE> 17
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 27, 1994, for the Annual Meeting of
Shareholders to be held October 28, 1994 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers may be found on pages 11 through 13 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 7 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 7 of
the Proxy Statement is incorporated herein by reference.
15
<PAGE> 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of Form 10-K
1. Financial Statements
The financial statements of the Company as set forth under Item 8 of
this report on Form 10-K are incorporated herein by reference.
2. Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
Number Description Number
-------- ----------- ------
<S> <C> <C>
II Amounts Receivable from Related Parties and Underwriters, Promoters,
and Employees other than Related Parties 18
VIII Valuation and Qualifying Accounts 19
X Supplementary Income Statement Information 20
</TABLE>
The independent auditors' report with respect to the above-listed
financial statement schedules appears on page 21 of this report on Form
10-K. 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.
3. Exhibit Listing
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation
3.2 Bylaws
10.1 Microsoft Corporation 1991 Stock Option Plan
10.2 Microsoft Corporation 1981 Stock Option Plan (1)
10.3 Microsoft Corporation Stock Option Plan for Non-Employee Directors
10.4 Microsoft Corporation Stock Option Plan for Consultants and Advisors
10.5 Microsoft Corporation 1991 Employee Stock Purchase Plan
10.6 Microsoft Corporation Savings Plus Plan
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation and First
Interstate Bank of Washington (2)
10.8 Form of Indemnification Agreement (2)
11. Computation of Earnings Per Share
13. 1994 Annual Report to Shareholders
21. Subsidiaries
23. Independent Auditors' Consent
27. Financial Data Schedule
</TABLE>
16
<PAGE> 19
(a) Documents filed as part of Form 10-K (Continued)
3. Exhibit Listing (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
99.1 Financial Statements for the Microsoft Corporation 1991 Employee Stock Purchase
Plan for the Three Years Ended June 30, 1994
99.2 Financial Statements for the Microsoft Corporation Savings Plus Plan for the Year Ended
December 31, 1993 and the Nine Months Ended December 31, 1992
</TABLE>
________________
(1) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1993.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1994.
17
<PAGE> 20
SCHEDULE II --- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
(In thousands)
<TABLE>
<CAPTION> Balance
Balance Additions Deductions at End of Period
at Beginning --------------------- ------------------------ --------------------
of Period Principal Interest Collected Written Off Current Long-term
------------ --------- -------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended June 30, 1992:
Brad A. Silverberg (1) $264 $ -- $13 $ 52 $ -- $ -- $225
Paul J. Leach (2) -- 250 1 251 -- -- --
---- ---- --- ---- ---- ---- ----
$264 $250 $14 $303 $ -- $ -- $225
==== ==== === ==== ==== ==== ====
Year ended June 30, 1993:
Brad A. Silverberg (1) $225 $ -- $ 5 $230 $ -- $ -- $ --
Craig J. Mundie (3) -- 250 6 -- -- -- 256
---- ---- --- ---- ---- ---- ----
$225 $250 $11 $230 $ -- $ -- $256
==== ==== === ==== ==== ==== ====
Year ended June 30, 1994:
Craig J. Mundie (3) $256 $ -- $16 $ -- $ -- $ -- $272
==== ==== === ==== ==== ==== ====
</TABLE>
____________________
(1) Consisted of a promissory note for $300,000 dated August 20, 1990, bearing
interest at 8 1/2% simple interest during the first year and 5 1/2% during
the second year. For the third year the interest rate was 3.48%. The note
was paid February 11, 1993.
(2) Consisted of a 90-day interest free promissory note for $250,000 dated
September 3, 1991. After 90 days, the note bore interest at 10% per annum
simple interest and was paid December 27, 1991.
(3) Consists of a promissory note for $250,000 dated February 5, 1993 which
bears interest at the rate of 6.25% per annum simple interest. The note is
due in five years, with accelerated payments in accordance with a stock
option exercise schedule.
18
<PAGE> 21
Schedule VIII --- VALUATION AND QUALIFYING ACCOUNTS
(In millions)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1992. . . . . . $36 $26 -- $ 5 $57
Year ended June 30, 1993. . . . . . 57 47 -- 28 76
Year ended June 30, 1994. . . . . . 76 27 -- 11 92
</TABLE>
19
<PAGE> 22
SCHEDULE X --- SUPPLEMENTARY INCOME STATEMENT INFORMATION (1)
(In millions)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
Year Ended June 30
-----------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Royalties . . . . . . . . . . . . . . . . . . $21 $ 36 $ 60
Advertising costs . . . . . . . . . . . . . . 87 101 107
</TABLE>
- -------------------
(1) The amounts for maintenance and repairs; amortization of intangible assets,
preoperating costs and similar deferrals; and taxes other than payroll and
income taxes are not reported as these items did not exceed 1% of total
revenues.
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the financial statements of Microsoft Corporation and
subsidiaries as of June 30, 1994 and 1993, and for each of the three years in
the period ended June 30, 1994, and have issued our report thereon dated July
20, 1994; such financial statements and report are included in your 1994 Annual
Report to Shareholders and are incorporated herein by reference. Our audits
also included the financial statement schedules of Microsoft Corporation and
subsidiaries, listed in Item 14(a)2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE
Seattle, Washington
July 20, 1994
21
<PAGE> 24
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 23, 1994.
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 23, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ William H. Gates Chairman of the Board of Directors
- ---------------------------------- amd 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
/s/ Wm. G. Reed, Jr. Director
- ----------------------------------
Wm. G. Reed, Jr.
/s/ Jon A. Shirley Director
- ----------------------------------
Jon A. Shirley
/s/ Michael W. Brown Vice President, Finance; Chief Financial
- ---------------------------------- Officer (Principal Financial and
Michael W. Brown Accounting Officer)
</TABLE>
22
<PAGE> 25
MICROSOFT CORPORATION
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation
3.2 Bylaws
10.1 Microsoft Corporation 1991 Stock Option Plan
10.2 Microsoft Corporation 1981 Stock Option Plan (1)
10.3 Microsoft Corporation Stock Option Plan for Non-Employee Directors
10.4 Microsoft Corporation Stock Option Plan for Consultants and Advisors
10.5 Microsoft Corporation 1991 Employee Stock Purchase Plan
10.6 Microsoft Corporation Savings Plus Plan
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation and
First Interstate Bank of Washington (2)
10.8 Form of Indemnification Agreement (2)
11. Computation of Earnings Per Share
13. 1994 Annual Report to Shareholders
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, 1994
99.2 Financial Statements for the Microsoft Corporation Savings Plus Plan for the Year
Ended December 31, 1993 and the Nine Months Ended December 31, 1992
</TABLE>
________________
(1) Incorporated by reference to Registration Statement 33-37623 on Form
S-8.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1993.
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
MICROSOFT CORPORATION
Pursuant to RCW 23B.10.070, the following Restated Articles of
Incorporation are hereby submitted for filing:
ARTICLE I
NAME
The name of the corporation is Microsoft Corporation.
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the "Corporation" is 5000
Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104-7078, and the name
of the registered agent at such address is PTSGE Corp.
ARTICLE III
PURPOSE
The Corporation is organized for the purposes of transacting any and
all lawful business for which a corporation may be incorporated under the
Washington Business Corporation Act, Title 23B of the Revised Code of
Washington, now or hereafter in force (the "Act").
ARTICLE IV
CAPITAL
The total number of shares of stock which the Corporation shall have
authority to issue is 2,000,000,000 shares, which shall consist entirely of
2,000,000,000 shares of common stock, $.00005 par value per share ("Common
Stock"). All shares of Common Stock have one vote per share.
<PAGE> 2
ARTICLE V
NO PREEMPTIVE RIGHTS
Shareholders of the Corporation have no preemptive rights to acquire
additional shares of stock or securities convertible into shares of stock
issued by the Corporation.
ARTICLE VI
DIRECTORS
6.1 The number of directors of the Corporation shall be fixed in
the manner specified by the bylaws of the Corporation.
6.2 Vacancies and newly created directorships resulting from any
increase in the authorized number of directors shall be filled only by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director, unless for any reason there are no directors in office
in which case they shall be filled by a special election by shareholders.
ARTICLE VII
ELECTION OF DIRECTORS
Shareholders of the Corporation shall not have the right to cumulate
votes in the election of directors.
ARTICLE VIII
SPECIAL SHAREHOLDER MEETINGS
Special meetings of the shareholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, or by
a committee of the Board of Directors which has been duly designated by the
Board of Directors and whose powers and authority, as provided in a resolution
of the Board of Directors or in the bylaws of the Corporation, include the
power to call such meetings, but such special meetings may not be called by any
other person or persons.
-2-
<PAGE> 3
ARTICLE-IX
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, adopt, repeal,
alter, amend, and rescind the bylaws of the Corporation by a resolution adopted
by a majority of the directors.
ARTICLE X
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director,
except for:
(a) Acts or omissions involving intentional misconduct by the
director or a knowing violation of law by the director;
(b) Conduct violating Section 23B.08.310 of the Act (which
involves distributions by the Corporation);
(c) Any transaction from which the director will personally
receive a benefit in money, property, or services to which the
director is not legally entitled.
If the Washington Business Corporation Act is amended to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent not prohibited by the Washington Business
Corporation Act, as so amended. The provisions of this Article shall be deemed
to be a contract with each Director of the Corporation who serves as such at
any time while such provisions are in effect, and each such Directors shall be
deemed to be serving as such in reliance on the provisions of this Article.
Any repeal or modification of the foregoing paragraph by the shareholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation with respect to any acts or omissions of such
director occurring prior to such repeal or modification.
ARTICLE XI
MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS
A merger, share exchange, sale of substantially all of the
Corporation's assets, or dissolution must be approved by the affirmative vote
of a majority of the Corporation's
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outstanding shares entitled to vote, or if separate voting by voting groups is
required then by not less than a majority of all the votes entitled to be cast
by that voting group.
ARTICLE XII
INDEMNIFICATION
12.1 Definitions. As used in this Article:
a. "Agent" means an individual who is or was an agent of
the Corporation or an individual who, while an agent of the
Corporation, is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise. "Agent" includes, unless
the context requires otherwise, the spouse, heirs, estate and personal
representative of an agent.
b. "Corporation" means the Corporation, and any domestic
or foreign predecessor entity which, in a merger or other transaction,
ceased to exist.
c. "Director" means an individual who is or was a
director of the Corporation or an individual who, while a director of
the Corporation, is or was serving at the Corporation's request as a
director officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. "Director" includes,
unless the context requires otherwise, the spouse, heirs, estate and
personal representative of a director.
d. "Employee" means an individual who is or was an
employee of the Corporation or an individual, while an employee of the
Corporation, is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise- "Employee" includes,
unless the context requires otherwise, the spouse, heirs, estate and
personal representative of an employee.
e. "Expenses" include counsel fees.
f. "Indemnitee" means an individual made a party to a
proceeding because the individual is or was a Director, Officer,
Employee, or Agent of the Corporation, and who possesses
indemnification rights pursuant to these Articles or other corporate
action. "Indemnitee" includes, unless the context requires otherwise,
the spouse, heirs, estate, and personal representative of such
individuals.
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g. "Liability" means the obligation to pay a judgment,
settlement penalty, fine, including an excise tax with respect to an
employee benefit plan, or reasonable Expenses incurred with respect to
a proceeding.
h. "Officer" means an individual who is or was an
officer of the Corporation (regardless of whether or not such
individual was also a Director) or an individual who, while an officer
of the Corporation, is or was serving at the Corporation's request as
a director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise. "Officer" includes,
unless the context requires otherwise, the spouse, heirs, estate and
personal representative of an officer.
i. "Party" includes an individual who was, is, or is
threatened to be named a defendant, respondent or witness in a
proceeding.
j. "Proceeding" means any threatened, pending, or
completed action, suit, or proceeding, whether civil, derivative,
criminal, administrative, or investigative, and whether formal or
informal.
12.2 Indemnification Rights of Directors and Officers. The
Corporation shall indemnify its Directors and Officers to the full extent not
prohibited by applicable law now or hereafter in force against liability
arising out of a Proceeding to which such individual was made a Party because
the individual is or was a Director or an Officer. However, such indemnity
shall not apply on account of:
(a) Acts or omissions of a Director or Officer finally adjudged to
be intentional misconduct or a knowing violation of law;
(b) Conduct of a Director or Officer finally adjudged to be in
violation of Section 23B.09.3 10 of the Act relating to
distributions by the Corporation; or
(c) Any transaction with respect to which it was finally adjudged
that such Director or Officer personally received a benefit in
money, property, or services to which the Director or Officer
was not legally entitled.
Subject to the foregoing, it is specifically intended that Proceedings covered
by indemnification shall include Proceedings brought by the Corporation
(including derivative actions) Proceedings by government entities and
governmental officials or other third party actions.
12.3 Indemnification of Employees and Agents of the Corporation.
The Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay Expenses in advance of the final disposition of
a Proceeding to Employees and Agents of the Corporation who are not also
Directors, in each case to the same extent as to a Director with
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respect to the indemnification and advancement of Expenses pursuant to rights
granted under, or provided by, the Act or otherwise.
12.4 Partial Indemnification. If an Indemnitee is entitled to
indemnification by the Corporation for some or a portion of Expenses,
liabilities, or losses actually and reasonably incurred by Indemnitee in an
investigation, defense, appeal or settlement but not, however, for the total
amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the
portion of such Expenses, liabilities or losses to which Indemnitee is
entitled.
12.5 Procedure for Seeking Indemnification and/or Advancement of
Expenses. The following procedures shall apply in the absence of (or at the
option of the Indemnitee, in lieu thereof), specific procedures otherwise
applicable to an Indemnitee pursuant to a contract, trust agreement, or general
or specific action of the Board of Directors:
12.5.1 NOTIFICATION AND DEFENSE OF CLAIM. Indemnitee shall
promptly notify the Corporation in writing of any proceeding for which
indemnification could be sought under this Article. In addition,
Indemnitee shall give the Corporation such information and cooperation
as it may reasonably require and as shall be within Indemnitee's
power.
With respect to any such proceeding as to which Indemnitee has
notified the Corporation:
(a) The Corporation will be entitled to participate
therein at its own expense; and
(b) Except as otherwise provided below, to the extent
that it may wish, the Corporation, jointly with any
other indemnifying party similarly notified, will be
entitled to assume the defense thereof, with counsel
satisfactory to Indemnitee. Indemnitee's consent to
such counsel may not be unreasonably withheld.
After notice from the Corporation to Indemnitee of its
election to assume the defense, the Corporation will not be liable to
Indemnitee under this Article for any legal or other Expenses
subsequently incurred by Indemnitee in connection with such defense.
However, Indemnitee shall continue to have the right to employ its
counsel in such proceeding, at Indemnitee's expense; and if:
(i) The employment of counsel by Indemnitee has
been authorized by the Corporation;
(ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest
between the Corporation and Indemnitee in the
conduct of such defense; or
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(iii) The Corporation shall not in fact have
employed counsel to assume the defense of
such proceeding,
the fees and Expenses of Indemnitee's counsel shall be at the expense of the
Corporation.
The Corporation shall not be entitled to assume the defense of
any proceeding brought by or on behalf of the Corporation or as to
which Indemnitee shall reasonably have made the conclusion that a
conflict of interest may exist between the Corporation and the
Indemnitee in the conduct of the defense.
12.5.2 INFORMATION TO BE SUBMITTED AND METHOD OF
DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. For the purpose
of pursuing rights to indemnification under this Article, the
Indemnitee shall submit to the Board a sworn statement requesting
indemnification and reasonable evidence of all amounts for which such
indemnification is requested (together, the sworn statement and the
evidence constitute an "Indemnification Statement").
Submission of an Indemnification Statement to the Board shall
create a presumption that the Indemnitee is entitled to
indemnification hereunder, and the Corporation shall, within sixty
(60) calendar days thereafter, make the payments requested in the
Indemnification Statement to or for the benefit of the Indemnitee,
unless: (1) within such sixty (60) calendar day period it shall be
determined by the Corporation that the Indemnitee is not entitled to
indemnification under this Article; (2) such determination shall be
based upon clear and convincing evidence (sufficient to rebut the
foregoing presumption); and (3) the Indemnitee shall receive notice in
writing of such determination, which notice shall disclose with
particularity the evidence upon which the determination is based.
The foregoing determination may be made: (1) by the Board of
Directors by majority vote of a quorum of Directors who are not at the
time parties to the proceedings; (2) if a quorum cannot be obtained,
by majority vote of a committee duly designated by the Board of
Directors (in which designation Directors who are parties may
participate) consisting solely of two (2) or more Directors not at the
time parties to the proceeding; (3) by special legal counsel; or (4)
by the shareholders as provided by Section 23B.08.550 of the Act.
Any determination that the Indemnitee is not entitled to
indemnification, and any failure to make the payments requested in the
Indemnification Statement, shall be subject to judicial review by any
court of competent jurisdiction.
12.5.3 SPECIAL PROCEDURE REGARDING ADVANCE FOR EXPENSES. An
Indemnitee seeking payment of Expenses in advance of a final
disposition of the proceeding must furnish the Corporation, as part of
the Indemnification Statement:
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(a) A written affirmation of the Indemnitee's
good faith belief that the Indemnitee has met
the standard of conduct required to be
eligible for indemnification; and
(b) A written undertaking, constituting an
unlimited general obligation of the
Indemnitee, to repay the advance if it is
ultimately determined that the Indemnitee did
not meet the required standard of conduct.
Upon satisfaction of the foregoing the Indemnitee shall have a
contractual right to the payment of such Expenses.
12.5.4 SETTLEMENT. The Corporation is not liable to
indemnify Indemnitee for any amounts paid in settlement of any
proceeding without the Corporation's written consent. The Corporation
shall not settle any proceeding in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee may unreasonably
withhold its consent to a proposed settlement.
12.6. Contract and Related Rights.
12.6.1 CONTRACT RIGHTS. The right of an Indemnitee to
indemnification and advancement of Expenses is a contract right upon
which the Indemnitee shall be presumed to have relied in determining
to serve or to continue to serve in his or her capacity with the
Corporation. Such right shall continue as long as the Indemnitee
shall be subject to any possible proceeding. Any amendment to or
repeal of this Article shall not adversely affect any right or
protection of an Indemnitee with respect to any acts or omissions of
such Indemnitee occurring prior to such amendment or repeal.
12.6.2 OPTIONAL INSURANCE, CONTRACTS, AND FUNDING. The
Corporation may:
(a) Maintain insurance, at its expense, to
protect itself and any Indemnitee against any
liability, whether or not the Corporation
would have power to indemnify the individual
against the same liability under Section
23B.08.5 10 or .520 of the Act;
(b) Enter into contracts with any Indemnitee in
furtherance of this Article and consistent
with the Act; and
(c) Create a trust fund, grant a security
interest, or use other means (including
without limitation a letter of credit) to
ensure the
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payment of such amounts as may be necessary
to effect indemnification as provided in
this Article.
12.6.3 SEVERABILITY. If any provision or application of
this Article shall be invalid or unenforceable, the remainder of this
Article and its remaining applications shall not be affected thereby,
and shall continue in full force and effect.
12.6.4 RIGHT OF INDEMNITEE TO BRING SUIT. If (1) a claim
under this Article for indemnification is not paid in full by the
Corporation within sixty (60) days after a written claim has been
received by the Corporation; or (2) a claim under this Article for
advancement of Expenses is not paid in full by the Corporation within
twenty (20) days after a written claim has been received by the
Corporation, then the Indemnitee may, but need not, at any time
thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. To the extent successful in whole or in part,
the Indemnitee shall be entitled to also be paid the expense (to be
proportionately prorated if the Indemnitee is only partially
successful) of prosecuting such claim. Neither (1) the failure of the
Corporation (including its Board of Directors, its shareholders, or
independent legal counsel) to have made a determination prior to the
commencement of such proceeding that indemnification or reimbursement
or advancement of Expenses to the Indemnitee is proper in the
circumstances; nor (2) an actual determination by the Corporation
(including its Board of Directors, its shareholders, or independent
legal counsel that the Indemnitee is not entitled to indemnification
or to the reimbursement or advancement of Expenses, shall be a defense
to the proceeding or create a presumption that the Indemnitee is not
so entitled.
12.6.5 NONEXCLUSIVITY OF RIGHTS. The right to
indemnification and the payment of Expenses incurred in defending a
Proceeding in advance of its final disposition granted in this Article
shall not be exclusive of any other right which any Indemnitee may
have or hereafter acquire under any statute, provision of this Article
or the Bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise. The Corporation shall have the express right
to grant additional indemnity without seeking further approval or
satisfaction by the shareholders. All applicable indemnity provisions
and any applicable law shall be interpreted and applied so as to
provide an Indemnitee with the broadest but nonduplicative indemnity
to which he or she is entitled.
12.7 Contribution. If the indemnification provided in Section 12.2
of this Article is not available to be paid to Indemnitee for any reason other
than those set forth in subparagraphs 12.2(a), 12.2(b), and 12.2(c) of Section
12.2 of this Article (for example, because indemnification is held to be
against public policy even though otherwise permitted under Section 12.2) then
in respect of any proceeding in which the Corporation is jointly liable with
Indemnitee (or would be if joined in such proceeding), the Corporation shall
contribute to the amount of loss paid or payable by Indemnitee in such
proportion as is appropriate to reflect:
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The relative benefits received by the Corporation on
the one hand and the Indemnitee on the other hand
from the transaction from which such proceeding
arose, and
The relative fault of the Corporation on the one hand
and the Indemnitee on the other hand in connection
with the events which resulted in such loss, as well
as any other relevant equitable consideration.
The relative benefits received by and fault of the Corporation on the
one hand and the Indemnitee on the other shall be determined by a court of
appropriate jurisdiction (which may be the same court in which the proceeding
took place) with reference to, among other things, the parties' relative
intent, knowledge, access to information, and opportunity to correct or prevent
the circumstances resulting in such loss. The Corporation agrees that it would
not be just and equitable if a contribution pursuant to this Article was
determined by pro rata allocation or any other method of allocation which does
not take account of the foregoing equitable considerations.
12.8 Exceptions. Any other provision herein to the contrary
notwithstanding, the Corporation shall not be obligated pursuant to the terms
of these Articles to indemnify or advance Expenses to Indemnitee with respect
to any proceeding.
12.8.1 CLAIMS INITIATED BY INDEMNITEE. Initiated or brought
voluntarily by Indemnitee and not by way of defense, but such
indemnification or advancement of Expenses may be provided by the
Corporation in specific cases if the Board of Directors finds it to be
appropriate. Notwithstanding the foregoing, the Corporation shall
provide indemnification including the advancement of Expenses with
respect to Proceedings brought to establish or enforce a right to
indemnification under these Articles or any other statute or law or as
otherwise required under the statute.
12.8.2 LACK OF GOOD FAITH. Instituted by Indemnitee to
enforce or interpret this Article, if a court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee in such proceeding was not made in good faith or was
frivolous.
12.8.3 INSURED CLAIMS. For which any of the Expenses or
liabilities for indemnification is being sought have been paid
directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the
Corporation.
12.8.4 PROHIBITED BY LAW. If the Corporation is prohibited
by the Act or other applicable law as then in effect from paying such
indemnification and/or advancement of Expenses. For example, the
Corporation and Indemnitee acknowledge that the Securities and
Exchange Commission ("SEC") has taken the position that
indemnification is not possible for liabilities arising under certain
federal securities laws. Indemnitee understands and acknowledges that
the Corporation has undertaken or may be required in
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the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a
determination of the Corporation's right to indemnify Indemnitee.
12.9 Successors and Assigns. All obligations of the Corporation to
indemnify any Director or Officer shall be binding upon all successors and
assigns of the Corporation (including any transferee of all or substantially
all of its assets and any successor by merger or otherwise by operation of
law). The Corporation shall not effect any sale of substantially all of its
assets, merger, consolidation, or other reorganization, in which it is not the
surviving entity, unless the surviving entity agrees in writing to assume all
such obligations of the Corporation.
ARTICLE XIII
CORPORATION'S ACQUISITION OF ITS OWN SHARES
The Corporation may purchase, redeem, receive, take or otherwise
acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of,
pledge, use and otherwise deal with and in its own shares. As a specific
modification of Section 23B.06.310 of the Act, pursuant to the authority in
Section 23B.02.020(5)(c) of the Act, to include provisions related to the
management of the business and the regulation of the affairs of the
Corporation, shares of the Corporation's stock acquired by it pursuant to this
Article shall be considered "Treasury Stock" and so held by the Corporation.
The shares so acquired by the Corporation shall not be considered as authorized
and unissued but rather as authorized, issued, and held by the Corporation.
The shares, so acquired shall not be regarded as cancelled or as a reduction to
the authorized capital of the Corporation unless specifically so designated by
the Board of Directors in an amendment to these Articles of Incorporation. The
provisions of this Article do not alter or effect the status of the
Corporation's acquisition of its shares as a "distribution" by the Corporation
as defined in Section 23B.01.400(6) of the Act, nor alter or effect the
limitations on distributions by the Corporation as set forth in Section
23B.06.400 of the Act. Any shares so acquired by the Corporation, unless
otherwise specifically designated by the Board of Directors, at the time of
acquisition, shall be considered on subsequent disposition, as transferred
rather than reissued. Nothing in this Article limits or restricts the right of
the Corporation to resell or otherwise dispose of any of its shares previously
acquired for such consideration and according to such procedures as established
by the Board of Directors.
The undersigned has signed these Restated Articles of Incorporation on
May ____, 1994.
-----------------------------------------
William H. Neukom
Secretary
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CERTIFICATE
The undersigned, as Secretary of Microsoft Corporation, hereby
certifies that the accompanying Restated Articles of Incorporation were adopted
by the Board of Directors on April 23, 1994 and do not contain any amendment
requiring shareholder approval.
Dated: May ___, 1994.
Microsoft Corporation
_________________________________________
William H. Neukom
Secretary
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EXHIBIT 3.2
BYLAWS
OF
MICROSOFT CORPORATION
ARTICLE I
SHAREHOLDERS
1.1 ANNUAL MEETING. The annual meeting of the shareholders of the
Corporation for the election of Directors and for the transaction of such other
business as properly may be submitted to such annual meeting, shall be held at
the hour and on the date designated by the Board of Directors or an authorized
committee of the Board of Directors, such date to be within 150 days of the end
of the fiscal year.
1.2 SPECIAL MEETINGS. Special meetings of the shareholders of the
Corporation, for any purpose or purposes, may be called at any time by the
Board of Directors or an authorized committee of the Board of Directors.
1.3 PLACE OF MEETINGS. Meetings of shareholders shall be held at
such place within or without the State of Washington as determined by the Board
of Directors, or an authorized committee, pursuant to proper notice.
1.4 NOTICE. Written notice of each shareholders' meeting stating
the date, time, and place and, in case of a special meeting, the purpose(s) for
which such meeting is called, shall be given by the Corporation not less than
ten (10) (unless a greater period of notice is required by law in a particular
case) nor more than sixty (60) days prior to the date of the meeting, to each
shareholder of record, to the shareholder's address as it appears on the
current record of shareholders of the Corporation.
1.5 QUORUM OF SHAREHOLDERS. At any meeting of the shareholders, a
majority in interest of all the shares entitled to vote on a matter,
represented by shareholders of record in person or by proxy, shall constitute a
quorum of that voting group for action on that matter.
Once a share is represented at a meeting, other than to object to
holding the meeting or transacting business, it is deemed to be present for
quorum purposes for the remainder of the meeting and for any adjournment of
that meeting unless a new record date is or must be set for the adjourned
meeting. At such reconvened meeting, any business may be transacted that might
have been transacted at the meeting as originally notified.
If a quorum exists, action on a matter is approved by a voting group
if the votes cast within the voting group favoring the action exceed the votes
cast within the voting group opposing the action, unless the question is one
upon which by express provision of the Washington Business Corporation Act, as
amended ("WBCA"), or of the Articles of Incorporation or of these Bylaws a
different vote is required.
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1.6 ADJOURNMENT. A majority of the shares represented at the
meeting, even if less than a quorum, may adjourn the meeting from time to time.
At such reconvened meeting at which a quorum is present any business may be
transacted at the meeting as originally notified. If a meeting is adjourned to
a different date, time, or place, notice need not be given of the new date,
time, or place if a new date, time, or place is announced at the meeting before
adjournment; however, if a new record date for the adjourned meeting is or must
be fixed in accordance with the WBCA, notice of the adjourned meeting must be
given to persons who are shareholders as of the new record date.
1.7 RECORD DATE AND TRANSFER BOOKS. For the purpose of determining
shareholders who are entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors may fix in advance a record date for any
such determination of shareholders, such date in any case to be not more than
seventy (70) days and, in case of a meeting of shareholders, not less than ten
(10) days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken.
If no record date is fixed for such purposes, the date on which notice
of the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, unless the Board of Directors fixes a
new record date, which it must do if the meeting is adjourned more than one
hundred twenty (120) days after the date is fixed for the original meeting.
1.8 VOTING RECORD. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make at least ten (10) days
before each meeting of shareholders a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged by any
applicable voting groups and in alphabetical order, with the address of and the
number of shares held by each. Such record shall be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
shareholder or any shareholder's agent during the whole time of the meeting for
the purposes thereof.
1.9 PROXIES. Shareholders of record may vote at any meeting either
in person or by proxy executed in writing. A proxy is effective when received
by the person authorized to tabulate votes for the Corporation. A proxy is
valid for eleven (11) months unless a longer period is expressly provided in
the proxy.
1.10 ORGANIZATION OF MEETING. The officer designated by the Board of
Directors as Chief Executive Office (or in his absence, any other officer
designated by the Board of Directors) may call any meeting of shareholders to
order and shall be the Chairman thereof. The Secretary of the Corporation, if
present at any meeting of its shareholders, shall act as the Secretary of such
meeting. If the Secretary is absent from any such meeting, the Chairman of
such meeting may appoint a Secretary for the meeting.
1.11 ORDER OF BUSINESS. The Chairman of a meeting of shareholders,
determined in accordance with Section 1.10, shall have discretion to establish
the order of
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business for such meeting subject to any specific order established by the
Board of Directors.
ARTICLE II
BOARD OF DIRECTORS
2.1 NUMBER AND QUALIFICATIONS. The business affairs and property of
the Corporation shall be managed by a Board of not less than three directors
nor more than eleven directors. The number of directors may at any time be
increased or decreased by resolution of the Board of Directors or by the
shareholders at the annual meeting. Directors need not be shareholders of the
Corporation or residents of the state of Washington.
2.2 ELECTION - TERM OF OFFICE. The directors shall be elected by
the shareholders at each annual shareholders' meeting to hold office until the
next annual meeting of the shareholders and until their respective successors
are elected and qualified. If, for any reason, the directors shall not have
been elected at any annual meeting, they may be elected at a special meeting of
shareholders called for that purpose in the manner provided by these Bylaws.
2.3 REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such places, and at such times as the Board may determine,
and, if so determined, no notice thereof need be given. A regular meeting of
the Board may be held without notice immediately after the annual meeting of
shareholders at the same place at which such meeting was held.
2.4 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held at any time or place upon the call of a majority of directors, the
Chief Executive Officer or the Chief Operating Officer by oral or written
notice, given or mailed to each director not less than two (2) days before such
meeting.
2.5 NOTICE. No notice is required for regular meetings of the Board
of Directors. Notice of special meetings of the Board of Directors, stating
the date, time, and place thereof, shall be given at least two (2) days prior
to the date of the meeting. The purpose of the meeting need not be given in
the notice. Such notice may be oral or written.
2.6 WAIVER OF NOTICE. A director may waive notice of a special
meeting of the Board either before or after the meeting, and such waiver shall
be deemed to be the equivalent of giving notice. The waiver must be in writing,
signed by the director entitled to the notice and delivered to the Corporation
for inclusion in its corporate records. Attendance or participation of a
director at a meeting shall constitute waiver of notice of that meeting unless
said director attends or participates for the express purpose of objecting to
the transaction of business because the meeting has not been lawfully called or
convened.
2.7 QUORUM OF DIRECTORS. A majority of the members of the Board of
Directors shall constitute a quorum for the transaction of business, but if at
any meeting of the Board there shall be less than a quorum present, a majority
of those present may adjourn the meeting from time to time until a quorum shall
have been obtained. When a quorum is present at any meeting, a majority of the
members present shall decide any question brought before such meeting, except
as otherwise provided by the Articles of Incorporation or by these Bylaws.
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2.8 ADJOURNMENT. A majority of the directors present, even if less
than a quorum, may adjourn a meeting and continue it to a later time. Notice
of the adjourned meeting or of the business to be transacted thereat, other
than by announcement, shall not be necessary. At any adjourned meeting at
which a quorum is present, any business may be transacted which could have been
transacted at the meeting as originally called.
2.9 RESIGNATION. Any director of the Corporation may resign at any
time by giving written notice to the Board of Directors, the Chairman, the
President, or the Secretary of the Corporation. Any such resignation is
effective when the notice is delivered, unless the notice specifies a later
effective date.
2.10 VACANCIES. Unless otherwise provided by the WBCA, in case of
any vacancy in the Board of Directors, including a vacancy resulting from an
increase in the number of directors, the remaining directors, whether
constituting a quorum or not, may fill the vacancy.
2.11 COMPENSATION. The Board shall have the sole authority to fix
the amount of compensation of directors.
2.12 COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate from among its members
one or more committees, each of which:
a. Shall have two (2) or more members;
b. Shall be governed by the same rules regarding
meetings, action without meetings, notice, and waiver of notice, and
quorum and voting requirements as applied to the Board of Directors;
and
c. To the extent provided in such resolution, shall have
and may exercise all the authority of the Board of Directors, except
no such committee shall have the authority to:
(1) Authorize or approve a distribution except
according to a general formula or method prescribed by the
Board of Directors;
(2) Approve or propose to shareholders action
which the WBCA requires to be approved by shareholders;
(3) Fill vacancies on the Board of Directors or
on any of its committees;
(4) Amend the Articles of Incorporation;
(5) Adopt, amend, or repeal the Bylaws;
(6) Approve a plan of merger not requiring
shareholder approval; or
(7) Authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and
relative rights, preferences, and limitations on a class or
series of shares, except that the Board of Directors may
authorize a committee, or a senior executive officer of the
Corporation, to do so within limits specifically prescribed
by the Board of Directors.
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ARTICLE III
SPECIAL MEASURES APPLYING TO MEETINGS OF
SHAREHOLDERS, THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
3.1 ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken at a meeting of the Board of Directors or a committee of the Board may
be accomplished without a meeting if the action is taken by all the members of
the Board or all the members of the committee, as the case may be. The action
must be evidenced by one or more written consents describing the action to be
taken, signed by all directors or all members of the committee, as the case may
be, and delivered to the Corporation for inclusion in the minutes. Directors'
consents may be signed either before or after the action taken.
Action taken by unanimous written consent is effective when the last
director signs the consent, unless the consent specifies a later effective
date.
3.2 USE OF COMMUNICATIONS EQUIPMENT. Meetings of the shareholders,
the Board of Directors and committees of the Board may be effectuated by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other during the
meeting. Participation by such means shall constitute presence in person at
such meeting.
3.3 ORAL AND WRITTEN NOTICE. Oral notice may be communicated in
person or by telephone, wire or wireless equipment that does not transmit a
facsimile of the notice. Oral notice is effective when communicated if
communicated in a comprehensible manner.
Written notice may be transmitted by mail, private carrier, or
personal delivery; telegraph or teletype; or telephone, wire, or wireless
equipment that transmits a facsimile of the notice and provides the transmitter
with an electronically generated receipt. Written notice is effective at the
earliest of the following: (a) when received; (b) five (5) days after its
deposit in the US. mail if mailed with first-class postage; (c) on the date
shown on the return receipt, if sent by registered or certified mail, return
receipt requested, and the receipt is signed by or on behalf of the addressee.
ARTICLE IV
OFFICERS
4.1 POSITIONS. The officers of the Corporation may consist of a
Chairman, a President, one or more Vice Presidents (who may be designated as
Vice Presidents, Senior Vice Presidents or Executive Vice Presidents), a
Secretary and a Treasurer as appointed by the Board of Directors or the Chief
Executive Officer. The Corporation may have such additional or assistant
officers (sometimes referred to as "additional officers") as the Board of
Directors, Chief Executive Officer or Chief Operating Officer may deem
necessary for its business and may appoint from time to time. The Board of
Directors shall also have the authority, but shall not be required, to
designate officers as the Chief Executive Officer, the Chief Operating Officer
the Chief Financial Officer or similar such titles. Any two or more offices
may be held by the same person.
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If a director/officer has not been designated as Chairman, or if the
designated Chairman is not present, the Board of Directors shall elect a
Chairman from amongst its members to serve as Chairman of the Board of
Directors. The Chairman shall preside at all meetings of the Board of
Directors, and shall have such other powers as the Board may determine.
4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the Corporation
shall be appointed annually by the Board of Directors at the first meeting of
the Board of Directors held after each annual meeting of the shareholders. If
officers are not appointed at such meeting, such appointment shall occur as
soon as possible thereafter, or may be left vacant. Each officer shall hold
office until a successor shall have been appointed and qualified or until said
officer's earlier death, resignation, or removal.
4.3 AUTHORITY AND DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief
Executive Officer shall have general charge and supervision of the business of
the Corporation, shall see that all orders, actions and resolutions of the
Board of Directors are carried out, and shall have such other authority and
shall perform such other duties as set forth in these bylaws or, to the extent
consistent with the bylaws, such other authorities and duties as prescribed by
the Board of Directors.
4.4 AUTHORITY AND DUTIES OF OTHER OFFICERS. Each officer other than
the Chief Executive Officer shall have the authority and shall perform the
duties set forth in these bylaws or, to the extent consistent with the bylaws,
the duties prescribed by the Board of Directors, by the Chief Executive
Officer, or by an officer authorized by the Board of Directors to prescribe the
duties of such officer. Any designation of duties by the Chief Executive
Officer or other officer shall be subject to review by the Board of Directors
but shall be in full force and effect in the absence of such review.
4.5 COMPENSATION AND CONTRACT RIGHTS. The Board of Directors shall
have authority (a) to fix the compensation, whether in the form of salary,
bonus, stock options or otherwise, of all officers and employees of the
Corporation, either specifically or by formula applicable to particular classes
of officers or employees, and (b) to authorize officers of the Corporation to
fix the compensation of subordinate employees. The Board of Directors shall
have authority to appoint a Compensation Committee and may delegate to such
committee any or all of its authority relating to compensation. The
appointment of an officer shall not of itself create contract rights.
4.6 RESIGNATION OR REMOVAL. Any officer of the Corporation may
resign at any time by giving written notice to the Board of Directors. Any
such resignation is effective when the notice is delivered, unless the notice
specifies a later date, and shall be without prejudice to the contract rights,
if any, of such officer.
The Board of Directors, by majority vote of the entire Board, may
remove any officer or agent, with or without cause. An officer or assistant
officer, if appointed by another officer, may also be removed by any officer
authorized to appoint officers or assistant officers. The removal shall be
without prejudice to the contract rights, if any, of the person so removed.
4.7 VACANCIES. If any office becomes vacant by any reason, the
directors may appoint a successor or successors who shall hold office for the
unexpired term or leave such office vacant.
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ARTICLE V
CERTIFICATES OF SHARES AND THEIR TRANSFER
5.1 ISSUANCE; CERTIFICATES OF SHARES. No shares of the Corporation
shall be issued unless authorized by the Board. Such authorization shall
include the maximum number of shares to be issued, the consideration to be
received, and a statement that the Board considers the consideration to be
adequate. Shares may but need not be represented by certificates.
Certificates for shares of the Corporation shall be in such form as is
consistent with the provisions of the WBCA or the law of a predecessor
corporation and after the effective date of these Bylaws shall state:
a. The name of the Corporation and that the Corporation
is organized under the laws of the State of Washington;
b. The name of the person to whom issued; and
c. The number and class of shares and the designation of
the series, if any, which such certificate represents.
The certificate shall be signed by original or facsimile signature of
two officers of the Corporation, and the seal of the Corporation may be affixed
thereto.
5.2 TRANSFER OF STOCK. Shares of stock represented by certificates
may be transferred by delivery of the certificate accompanied by either an
assignment in writing on the back of the certificate or by a written power of
attorney to assign and transfer the same on the books of the Corporation,
signed by the record holder of the certificate. The shares shall be
transferable on the books of the Corporation upon surrender thereof so assigned
or endorsed.
5.3 RULES AND REGULATIONS CONCERNING THE ISSUE, TRANSFER AND
REGISTRATION OF SHARES. The Board of Directors shall have power and authority
to make all such rules and regulations as the Board may deem proper or
expedient concerning the issue, transfer and registration of shares of stock.
In case of the loss, mutilation, or destruction of a certificate of stock, a
duplicate certificate may be issued upon such terms as the Board shall
authorize. The Board shall have power and authority to appoint from time to
time one or more transfer agents and registrar of the shares of stock.
5.4 SHARES WITHOUT CERTIFICATES. The Board of Directors may
authorize the issue of some or all of the shares without certificates. Within
a reasonable time after the issue or transfer of shares without certificates,
the corporation shall send the shareholder a written statement of the
information required on certificates by the WBCA.
ARTICLE VI
BOOKS AND RECORDS
6.1 BOOKS OF ACCOUNTS, MINUTES, AND SHARE REGISTER. Except as
otherwise provided by law the Corporation:
a. Shall keep as permanent records minutes of all
meetings of its shareholders and Board of Directors, a record of all
actions taken by the Board of
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Directors without a meeting, and a record of all actions taken by a
committee of the Board of Directors exercising the authority of the
Board of Directors on behalf of the Corporation;
b. Shall maintain appropriate accounting records;
c. Or its agent shall maintain a record of its
shareholders, in a form that permits preparation of a list of the
names and addresses of all shareholders, in alphabetical order by
class of shares showing the number and class of shares held by each;
and
d. Shall keep a copy of the following records at its
principal office:
(1) The Articles or Restated Articles of
Incorporation and all amendments to them currently in effect;
(2) The Bylaws or Restated Bylaws and all
amendments to them currently in effect;
(3) The minutes of all shareholders' meetings,
and records of all actions taken by shareholders without a
meeting, for the past three (3) years;
(4) Its financial statements for the past three
(3) years, including balance sheets showing in reasonable
detail the financial condition of the Corporation as of the
close of each fiscal year, and an income statement showing the
results of its operations during each fiscal year prepared on
the basis of generally accepted accounting principles or, if
not, prepared on a basis explained therein;
(5) All written communications to shareholders
generally within the past three (3) years;
(6) A list of the names and business addresses of
its current directors and officers; and
(7) Its most recent annual report delivered to
the Secretary of State of Washington.
6.2 COPIES OF RESOLUTIONS. Any person dealing with the Corporation
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the
Secretary, an assistant secretary, or other officer authorized by the Board.
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EXHIBIT 10.1
MICROSOFT CORPORATION
1991 STOCK OPTION PLAN, AS AMENDED
1. Purpose of the Plan. The purposes of this Stock Option Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to such
individuals, and to promote the success of the Company's business by aligning
employee financial interests with long-term shareholder value.
Options granted hereunder may be either Incentive Stock
Options or Nonqualified Stock Options, at the discretion of the Board and as
reflected in the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Committee, if such Committee has
been appointed, or the Board of Directors of the Company, if such Committee has
not been appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with paragraph (a) of Section 4 of the Plan,
if one is appointed; provided, however, if the Board of Directors appoints more
than one Committee pursuant to Section 4, then "Committee" shall refer to the
appropriate Committee, as indicated by the context of the reference.
(d) "Common Stock" shall mean the common stock of Microsoft
Corporation.
(e) "Company" shall mean Microsoft Corporation, a Washington
corporation and any successor thereto.
(f) "Continuous Status as an Employee" shall mean the absence
of any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of sick
leave, maternity leave, infant care leave, medical emergency leave, military
leave, or any other leave of absence authorized in writing by a Vice President
of the Company prior to its commencement.
<PAGE> 2
(g) "Disinterested Person" shall have the same meaning as
defined in Rule 16b-3(c)(2) promulgated by the Securities and Exchange
Commission pursuant to its authority under the Exchange Act.
(h) "Employee" shall mean any person, including officers,
employed by the Company or any Parent or Subsidiary of the Company.
(i) "Incentive Stock Option" shall mean any Option intended
to qualify as an incentive stock option within the meaning of Section 422 of
the Code.
(j) "Maximum Annual Employee Grant" shall have the meaning
set forth in Section 5(e).
(k) "Nonqualified Stock Option" shall mean an Option not
intended to qualify as an Incentive Stock Option.
(l) "Option" shall mean a stock option granted pursuant to
the Plan.
(m) "Optioned Stock" shall mean the Common Stock subject to
an Option.
(n) "Optionee" shall mean an Employee who receives an Option.
(o) "Outside Director" shall have the same meaning as defined
or interpreted for purposes of Section 162(m) of the Code.
(p) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Plan" shall mean this 1991 Stock Option Plan, including
any amendments thereto.
(r) "Share" shall mean one share of Common Stock, as adjusted
in accordance with Section 11 of the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and sold under the Plan is 160,000,000 shares of Common Stock. The
Shares may be authorized, but unissued, or reacquired Common Stock.
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If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the
Board of Directors of the Company.
(1) The Board of Directors may appoint one or more
Committees each consisting of not less than two members of the Board of
Directors to administer the Plan on behalf of the Board of Directors, subject
to such terms and conditions as the Board of Directors may prescribe. Once
appointed, such Committees shall continue to serve until otherwise directed by
the Board of Directors.
(2) Any grants of Options to officers who are
subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") shall only be made by a Committee of two or more directors, each of whom
is a Disinterested Person and an Outside Director.
(3) Subject to the foregoing subparagraphs (1) and
(2), from time to time the Board of Directors may increase the size of the
Committee(s) and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, or fill
vacancies however caused.
(b) Powers of the Board. Subject to the provisions of the
Plan, the Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options or Nonqualified Stock Options; (ii) to determine, in
accordance with Section 8(b) of the Plan, the fair market value of the Common
Stock; (iii) to determine, in accordance with Section 8(a) of the Plan, the
exercise price per share of Options to be granted; (iv) to determine the
Employees to whom, and the time or times at which, Options shall be granted and
the number of Shares to be represented by each Option; (v) to interpret the
Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to
the Plan; (vii) to determine the terms and provisions of each Option granted
(which need not be identical) and, with the consent of the holder thereof,
modify or amend each Option; (viii) to reduce the exercise price per share of
outstanding and unexercised Options; (ix) to accelerate or defer (with the
consent of the Optionee) the exercise date of any Option; (x) to authorize any
person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted by the Board; and (xi) to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
(c) Effect of Board's Decision. All decisions,
determinations, and interpretations of the Board shall be final and binding on
all Optionees and any other holders of any Options granted under the Plan.
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5. Eligibility.
(a) Options may be granted only to Employees. Notwithstanding
the foregoing, William H. Gates III is not eligible to participate in the Plan.
For avoidance of doubt, directors are not eligible to participate in the Plan
unless they are full-time Employees.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonqualified Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
fair market value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company) exceeds $100,000,
such Options shall be treated as Nonqualified Stock Options.
(c) For purposes of Section 5(b), Options shall be taken into
account in the order in which they were granted, and the fair market value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(d) Nothing in the Plan or any Option granted hereunder shall
confer upon any Optionee any right with respect to continuation of employment
with the Company, nor shall it interfere in any way with the Optionee's right
or the Company's right to terminate the employment relationship at any time,
with or without cause.
(e) The maximum number of Shares with respect to which an
Option or Options may be granted to any Employee in any one taxable year of the
Company shall not exceed 1,000,000 shares (the "Maximum Annual Employee
Grant").
6. Term of Plan. The Plan shall become effective upon its
adoption by the Board. It shall continue in effect until August 16, 2001,
unless sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be no more than
ten (10) years from the date of grant. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be no more than five (5) years from the date of grant.
8. Exercise Price and Consideration.
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(a) The per Share exercise price under each Option shall be
such price as is determined by the Board, subject to the following:
(1) In the case of an Incentive Stock Option
(i) granted to an Employee who, at the time
of the grant of such Incentive Stock Option, owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the fair market value per Share on the date of grant.
(ii) granted to any other Employee, the per
Share exercise price shall be no less than 100% of the fair market value per
Share on the date of grant.
(2) In the case of a Nonqualified Stock Option the
per Share exercise price may be less than, equal to, or greater than the fair
market value per Share on the date of grant.
(b) The fair market value per Share shall be the closing
price per share of the Common Stock on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System on the date of
grant. If the Common Stock ceases to be listed on the NASDAQ National Market
System, the Board shall designate an alternative method of determining the fair
market value of the Common Stock.
(c) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be
determined by the Board at the time of grant and may consist of cash and/or
check. Payment may also be made by delivering a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale proceeds necessary to pay the exercise price.
If the Optionee is an officer of the Company within the meaning of Section 16
of the Exchange Act, he may in addition be allowed to pay all or part of the
purchase price with Shares of Common Stock. Shares used by officers to pay the
exercise price shall be valued at their fair market value on the exercise date.
(d) Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay any federal, state, and local withholding
obligations of the Company, if applicable. If an Optionee is an officer of the
Company within the meaning of Section 16 of the Exchange Act, he may elect to
pay such withholding tax obligations by having the Company withhold Shares of
Common Stock having a value equal to the amount required to be withheld. The
value of the Shares to be withheld shall equal the fair market value of the
Shares on the day the Option is exercised. The following provisions shall apply
to such elections: (i) if an Optionee has received multiple Options, a
separate election must be made for each Option;
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(ii) the election may be a "standing election", i.e., upon making an election,
a fixed date need not be set for the exercise of the Option to which the
election relates; (iii) the election will be subject to the approval or
disapproval of the Board, which approval or disapproval may be given at any
time after the election to which it relates; (iv) the election may not be made
within six months following the date of grant of the Option to which it
relates; (v) the election must be made six months prior to the day the Option
is exercised, or both the election and exercise must be made in the ten-day
"window period" beginning on the third day following the release of the
Company's quarterly or annual summary statement of sales and earnings; and (vi)
an election may be revoked, or may be reinstituted after a revocation, only
upon six months' prior notice.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board at the time of grant, and as shall be
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly upon exercise of the
Option. In the event that the exercise of an Option is treated in part as the
exercise of an Incentive Stock Option and in part as the exercise of a
Nonqualified Stock Option pursuant to Section 5(b), the Company shall issue a
stock certificate evidencing the Shares treated as acquired upon the exercise
of an Incentive Stock Option and a separate stock certificate evidencing the
Shares treated as acquired upon the exercise of a Nonqualified Stock Option,
and shall identify each such certificate accordingly in its stock transfer
records. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
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(b) Termination of Status as Employee. In the event of
termination of an Optionee's Continuous Status as an Employee, such Optionee
may exercise stock options to the extent exercisable on the date of
termination. Such exercise must occur within three (3) months (or such shorter
time as may be specified in the grant), after the date of such termination (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement). To the extent that the Optionee was not
entitled to exercise the Option at the date of such termination, or does not
exercise such Option within the time specified herein, the Option shall
terminate.
(c) Disability of Optionee. Notwithstanding the provisions
of Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee as a result of total and permanent disability (i.e., the
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of twelve (12) months), the Optionee may exercise the Option, but only
to the extent of the right to exercise that would have accrued had the Optionee
remained in Continuous Status as an Employee for a period of twelve (12) months
after the date on which the Employee ceased working as a result of the total
and permanent disability. Such exercise must occur within eighteen (18) months
(or such shorter time as is specified in the grant) from the date on which the
Employee ceased working as a result of the total and permanent disability (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement). To the extent that the Optionee was not
entitled to exercise such Option within the time specified herein, the Option
shall terminate.
(d) Death of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of the death of an Optionee:
(i) who is at the time of death an Employee of the
Company, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as an Employee twelve (12) months after the date of death; or
(ii) whose Option has not yet expired but whose
Continuous Status as an Employee terminated prior to the date of death, the
Option may be exercised, at any time within six (6) months following the date
of death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
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(e) Notwithstanding subsections (b), (c), and (d) above, the
Board shall have the authority to extend the expiration date of any outstanding
option in circumstances in which it deems such action to be appropriate
(provided that no such extension shall extend the term of an option beyond the
date on which the option would have expired if no termination of the Employee's
Continuous Status as an Employee had occurred).
10. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject
to any required action by the stockholders of the Company, the number of shares
of Common Stock covered by each outstanding Option, the Maximum Annual Employee
Grant and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Board. The Board may,
in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise an Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable. In
the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, each
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless such successor corporation does not agree to assume the Option or to
substitute an equivalent option, in which case the Board shall, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable.
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If the Board makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the Optionee that the Option shall be fully exercisable for a period of fifteen
(15) days from the date of such notice, and the Option will terminate upon the
expiration of such period.
12. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Company completes the
corporate action relating to the grant of an option and all conditions to the
grant have been satisfied, provided that conditions to the exercise of an
option shall not defer the date of grant. Notice of a grant shall be given to
each Employee to whom an Option is so granted within a reasonable time after
the determination has been made.
13. Substitutions and Assumptions. The Board shall have the right
to substitute or assume Options in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code applies,
provided such substitutions and assumptions are permitted by Section 424 of the
Code and the regulations promulgated thereunder. The number of Shares reserved
pursuant to Section 3 may be increased by the corresponding number of Options
assumed and, in the case of a substitution, by the net increase in the number
of Shares subject to Options before and after the substitution.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable (including, but not limited to amendments which the Board deems
appropriate to enhance the Company's ability to claim deductions related to
stock option exercises); provided that, the following revisions or amendments
shall require approval of or ratification by the stockholders of the Company:
(i) any increase in the number of Shares subject to
the Plan, other than in connection with an adjustment under Section 11 of the
Plan; or
(ii) if the Company has a class of equity securities
registered under Section 12 of the Exchange Act at the time of such revision or
amendment, any change which would require stockholder approval pursuant to Rule
16b-3 promulgated by the Securities and Exchange Commission pursuant to its
authority under the Exchange Act.
(b) Employees in Foreign Countries. The Board shall have the
authority to adopt such modifications, procedures, and subplans as may be
necessary or desirable to comply with provisions of the laws of foreign
countries in which the Company or its Subsidiaries may operate to assure the
viability of the benefits from Options granted to Employees employed in such
countries and to meet the objectives of the Plan.
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<PAGE> 10
(c) Effect of Amendment or Termination. Any such amendment
or termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
16. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
17. Stockholder Approval. The Plan is subject to approval by the
shareholders of the Company at the Annual Meeting of Shareholders to be held on
October 29, 1993. If the Plan, as herein amended, is not so approved by the
shareholders, the Plan, as previously approved, shall continue in effect.
[The number of shares in Sections 3 and 5(e) have been increased to reflect the
2-for-1 stock split in May 1994.]
10
<PAGE> 1
EXHIBIT 10.3
MICROSOFT CORPORATION
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS, AS AMENDED
1. Purpose
The purpose of the Microsoft Corporation Stock Option Plan for
Non-Employee Directors (the "Plan") is to attract and retain the services of
experienced and knowledgeable independent directors of Microsoft Corporation
(the "Corporation") for the benefit of the Corporation and its stockholders and
to provide additional incentive for such directors to continue to work for the
best interests of the Corporation and its stockholders through continuing
ownership of its common stock.
2. Shares Subject to the Plan
The total number of shares of common stock ("Shares"), of the
Corporation for which options may be granted under the Plan shall not exceed
2,250,000 in the aggregate, subject to adjustment in accordance with Section 12
hereof. Within the foregoing limitations, Shares for which options have been
granted pursuant to the Plan but which options have lapsed or otherwise
terminated shall become available for the grant of additional options. There
will initially be reserved for issuance or transfer from the Corporation's
treasury upon the exercise of options granted under the Plan 2,250,000 Shares,
subject to adjustment in accordance with Section 13 hereof.
3. Administration of Plan
All aspects of the Plan relating to non-discretionary options shall be
administered by the Board of Directors of the Corporation. All aspects of the
Plan relating to the grant of discretionary options pursuant to Section 5, and
all administrative functions relating to discretionary options, shall be
handled by a Board committee of two or more directors, each of whom is a
"disinterested person" (as that term is defined in Rule 16b-3(c)(2) promulgated
by the Securities and Exchange Commission pursuant to its authority under the
Securities Exchange Act of 1934). The Board of the Committee, as the case may
be, shall have the power to construe the Plan, to determine all questions
arising thereunder, and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable. References to the "Board"
in this Plan shall be deemed to refer to either the Board or the Committee,
whichever is appropriate in the context in which the word is used.
4. Grant of Non-Discretionary Options
Each director who (a) satisfies all of the following criteria:
(i) such person is not, and has not during the immediately
preceding 12 month period been, an employee of the Corporation or any
subsidiary of the Corporation;
<PAGE> 2
(ii) such person does not own any common stock of the
Corporation which (x) he acquired directly from the Corporation and
(y) is currently subject to any contractual provision whereby such
stock is either forfeitable or subject to mandatory resale to the
Corporation on the occurrence of certain specified events; and
(iii) such person does not hold any unvested stock options to
purchase common stock of the Corporation, except for non-discretionary
stock options previously granted pursuant to this Section 4 of the
Plan.
and (b) who is in office on November 30 of any year (commencing with November
30, 1989) shall, on the immediately succeeding January 1, automatically be
granted an option to acquire 5,000 Shares under the Plan.
5. Discretionary Option Grants for New Directors
An option may be granted by the Board in its discretion to any person
who (i) is elected a director of the Corporation, (ii) has not previously
served as a director of the Corporation, and (iii) at the time of his election,
satisfied criterion (a)(i) of Section 4 above. No options under this Section 5
may be granted for more than 50,000 shares. An option under this Section 5
must be granted either on the date the new director is first elected as a
director or on a prior date, but any option granted on a prior date shall be
conditioned on the election of the optionee as a director. No director shall
be eligible for an option grant under this Section 5 after the date he is first
elected as a director.
6. Option Agreement
Each option granted under the Plan shall be evidenced by an option
agreement (the "Agreement") duly executed on behalf of the Corporation and by
the director to whom such option is granted, which Agreements may but need not
be identical and which shall (i) comply with and be subject to the terms and
conditions of the Plan and (ii) provide that the director agrees to continue to
serve as a director of the Corporation during the term for which he or she was
elected. Any Agreement may contain such other terms, provisions, and
conditions not inconsistent with the Plan as may be determined by the Board.
No option shall be deemed granted within the meaning of the Plan and no
purported grant of any option shall be effective, until such Agreement shall
have been duly executed on behalf of the Corporation and the director to whom
the option is to be granted.
7. Option Exercise Price
(a) The option exercise price for a non-discretionary
option granted pursuant to Section 4 of the Plan shall be the fair market value
of the Shares covered by the option on the date of grant, or, if such date is
not a day on which Shares are traded, on the trading day (the "Pricing Date"),
immediately preceding the date on which the option is granted.
(b) The option exercise price for a discretionary option
granted pursuant to Section 5 of the Plan shall be set by the Board in its
discretion.
2
<PAGE> 3
(c) For purposes hereof, the fair market value of the
Shares covered by an option shall be the closing price of the Shares on the
applicable date as reported in the National Market List of the National
Association of Securities Dealers Inc. Automated Quotation System or on the
principal national securities exchange on which the Shares are then listed for
trading.
8. Time and Manner of Exercise of Option
(a) Non-discretionary options granted pursuant to Section
4 of the Plan shall not be immediately exercisable, but shall become
exercisable in full upon the first anniversary of the date of grant.
(b) The exercisability of discretionary options pursuant
to Section 5 of the Plan shall be set by the Board in its discretion and shall
be memorialized in the Agreement between the Corporation and the director to
whom the option is granted.
(c) To the extent that the right to exercise an option
has accrued and is in effect, the option may be exercised from time to time, by
giving written notice, signed by the person or persons exercising the option,
to the Corporation, stating the number of Shares with respect to which the
option is being exercised, accompanied by payment in full for such Shares,
which payment may be in whole or in part in shares of the common stock of the
Corporation already owned by the person or persons exercising the option,
valued at fair market value on the date of payment (as determined pursuant to
Section 7(c) hereof).
(d) Upon exercise of the option, delivery of a
certificate for fully paid and non-assessable Shares shall be made at the
principal office of the Corporation in the State of Washington to the person or
persons exercising the option as soon as practicable (but in no event more than
30 days) after the date of receipt of the notice of exercise by the
Corporation, or at such time, place, and manner as may be agreed upon by the
Corporation and the person or persons exercising the option.
9. Term of Options
Each option shall expire ten years from the date of the granting
thereof, but shall be subject to earlier termination as follows:
(a) In the event of the death of an option holder, the
option granted to such person may be exercised, to the extent exercisable on
the date of death pursuant to Section 8(a) or (b), by the estate of such
person, or by any person or persons who acquired the right to exercise such
option by will or by the laws of descent and distribution. Such option may be
exercised at any time within 180 days after the date of death of such person or
prior to the date on which the option expires by its terms, whichever is
earlier.
(b) In the event that an option holder ceases to be a
director of the Corporation, other than by reason of his or her death, the
option granted to such person may be exercised, to the extent exercisable on
the date such person ceases to be a director, for a period of 30 days after
such date, or prior to the date on which the option expires by its terms,
whichever is earlier.
3
<PAGE> 4
10. Merger, Consolidation, Sale of Assets, etc., Resulting in a
Change in Control
(a) In the event of a Change in Control (as hereinafter
defined), notwithstanding the provisions of Sections 8 and 9, an option granted
to a director pursuant to the Plan shall become fully exercisable if, within
one year of such Change in Control, such director shall cease for any reason to
be a member of the Board. For purposes hereof, a Change in Control of the
Corporation shall be deemed to have occurred if (i) there shall be consummated
(x) any consolidation or merger of the Corporation in which the Corporation is
not the continuing or surviving corporation or pursuant to which shares of the
common stock of the Corporation would be converted into cash, securities, or
other property, other than a merger of the Corporation in which the holders of
the common stock of the Corporation immediately prior to the merger have the
same proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange, or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Corporation; or (ii) the stockholders
of the Corporation approve any plan or proposal for the liquidation or
dissolution of the Corporation; or (iii) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act"), other than William H. Gates, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the
Corporation's outstanding common stock; or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Corporation's stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of the period.
(b) Any exercise of an option permitted pursuant to
Section 10(a) shall be made within 180 days of the related director's
termination as a director of the Corporation.
11. Options Not Transferable
The right of any director to exercise an option granted to him or her
under the Plan shall not be assignable or transferable by such person otherwise
than by will or the laws of descent and distribution, and any such option shall
be exercisable during the lifetime of such person only by him or her.
12. No Rights as Stockholder Until Exercise
Neither the recipient of an option under the Plan nor his successors
in interest shall have any rights as a stockholder of the Corporation with
respect to any Shares subject to an option granted to such person until such
person becomes a holder of record of such Shares.
13. Adjustments Upon Changes in Capitalization or Merger
Subject to any required action by the shareholders of the Corporation,
the number of shares of common stock covered by each outstanding option, and
the number of shares of common stock which have been authorized for issuance
under the Plan but as to which no options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an option, as well
as the price per share of common stock covered by each outstanding option,
shall be
4
<PAGE> 5
proportionately adjusted for any increase or decrease in the number of issued
shares of common stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the common stock, or any other
increase or decrease in the number of issued shares of common stock effected
without receipt of consideration by the Corporation; provided, however, that
conversion of any convertible securities of the Corporation shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding, and conclusive. Except as expressly provided herein, no issuance by
the Corporation of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of common stock
subject to an option.
In the event of the proposed dissolution or liquidation of the
Corporation, an outstanding option will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the Board.
The Board may, in the exercise of its sole discretion in such instances,
declare that any option shall terminate as of a date fixed by the Board and
give each option holder the right to exercise an option as to all or any part
of the stock covered by such option, including Shares as to which the option
would not otherwise be exercisable. In the event of a proposed sale of all or
substantially all of the assets of the Corporation, or the merger of the
Corporation with or into another corporation, each option shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless such successor
corporation does not agree to assume each option or to substitute an equivalent
option, in which case the Board shall, in lieu of such assumption or
substitution, provide for the option holder to have the right to exercise such
option as to all of the stock covered by such option, including Shares as to
which such option would not otherwise be exercisable. If the Board makes an
option fully exercisable in lieu of assumption or substitution in the event of
a merger or sale of assets, the Board shall notify the option holder that the
option shall be fully exercisable for a period of fifteen (15) days from the
date of such notice, and the option will terminate upon the expiration of such
period.
14. Restrictions on Issue of Shares
Anything in this Plan to the contrary notwithstanding, the Corporation
may delay the issuance of Shares covered by the exercise of any option and the
delivery of a certificate for such Shares until one of the following conditions
shall be satisfied:
(a) the Shares with respect to which an option has been
exercised are at the time of the issue or transfer of such Shares effectively
registered under applicable federal securities laws now in force or hereafter
amended; or
(b) counsel for the Corporation shall have given an
opinion, which opinion shall not be unreasonably conditioned or withheld, that
such Shares are exempt from registration under applicable federal securities
laws now in force or hereafter amended.
It is intended that all exercises of options shall be effective.
Accordingly, the Corporation shall use its best efforts to bring about
compliance with the above conditions within a reasonable time, except that the
Corporation shall be under no obligation to cause a registration statement or a
5
<PAGE> 6
post-effective amendment to any registration statement to be prepared at its
expense solely for the purpose of covering the issuance or transfer from the
Corporation's treasury of Shares in respect of which any option may be
exercised.
15. Purchase for Investment
Unless the Shares to be issued upon exercise of an option granted
under the Plan have been effectively registered under the Securities Act of
1933 as now in force or hereafter amended, the Corporation shall be under no
obligation to issue or transfer any Shares covered by any option unless the
person or persons who exercise such option, in whole or in part, shall give a
written representation and undertaking to the Corporation, which is
satisfactory in form and scope to counsel to the Corporation and upon which, in
the opinion of such counsel, the Corporation may reasonably rely, that he or
she is acquiring the shares issued or transferred to him or her for his or her
own account as an investment and not with a view to, or for sale in connection
with, the distribution for any such Shares, and that he or she will make no
transfer of the same except in compliance with any rules and regulations in
force at the time of such transfer under the Securities Act of 1933, or any
other applicable law, and that if Shares are issued or transferred without such
registration a legend to this effect may be placed upon the certificates
representing the Shares.
16. Effective Date
The effective date (the "Effective Date") of this Plan shall be the
date on which the Plan is approved by stockholders of the corporation.
17. Expenses of the Plan
All costs and expenses of the adoption and administration of the Plan
shall be borne by the Corporation and none of such expenses shall be charged to
any director.
18. Termination and Amendment of Plan
Unless sooner terminated as herein provided, the Plan shall terminate
ten years from the Effective Date. The Board may at any time terminate the
Plan or make such modification or amendment thereof as it deems advisable;
provided, however, that, except as provided in Section 13, the Board may not,
without the approval of the stockholders of the Corporation, (i) increase the
maximum aggregate number of shares for which options may be granted under the
Plan, (ii) increase the size of the non-discretionary option grants to
individual directors, (iii) change the method of setting the option exercise
price for non-discretionary options, or (iv) make any other change which would
require shareholder approval pursuant to Rule 16b-3. In addition, the
provisions in the Plan regarding the amount, pricing, timing, and class of
persons eligible for non-discretionary grants shall not be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder. Termination or any modification or amendment of the Plan shall
not, without the consent of an option holder, affect his or her rights under an
option previously granted to him or her.
[As amended through April 24, 1993. The number of shares in Section 2
has been increased to reflect stock splits through May 1994]
6
<PAGE> 1
EXHIBIT 10.4
MICROSOFT CORPORATION
STOCK OPTION PLAN
FOR CONSULTANTS AND ADVISORS, AS AMENDED
1. Purposes of the Plan. The purposes of this Stock Option Plan
are to attract and maintain a long-term relationship with the best available
consultants and advisors, to provide additional incentive to such individuals,
and to promote the success of the Company's business. Options granted
hereunder shall be Nonqualified Stock Options, and shall be evidenced by
written Stock Option Agreements.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Committee, if such Committee
has been appointed, or the Board of Directors of the Company, if such Committee
has not been appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with paragraph (a) of Section 4 of the Plan,
if one is appointed.
(d) "Common Stock" shall mean the common stock of
Microsoft Corporation.
(e) "Company" shall mean Microsoft Corporation, a
Washington corporation.
(f) "Continuous Status as a Consultant or Advisor" shall
mean the absence of any interruption, expiration, or termination of an
Optionee's consulting or advisory relationship with the Company. Continuous
Status as a Consultant or Advisor shall not be considered interrupted in the
case of any temporary interruption in such person's availability to provide
services to the Company which has been authorized in writing by a Vice
President of the Company prior to its commencement; provided, however, that the
Company may require suspension of vesting in such cases. Continuous Status as
a Consultant or Advisor shall not be considered terminated if such person
accepts employment with the Company, and thereafter a person's Continuous
Status as an Employee, and the effects of an interruption or termination
thereof (including by reason of death or disability), shall be determined with
reference to the Company's 1991 Stock Option Plan.
(g) "Nonqualified Stock Option" shall mean an Option not
intended to qualify as an incentive stock option within the meaning of Section
422 of the Code.
(h) "Option" shall mean a stock option granted pursuant
to the Plan.
(i) "Optioned Stock" shall mean the Common Stock subject
to an Option.
(j) "Optionee" shall mean any consultant or advisor who
receives an Option.
(k) "Plan" shall mean this Stock Option Plan for
Consultants and Advisors.
<PAGE> 2
(l) "Share" shall mean one share of Common Stock, as
adjusted in accordance with Section 11 of the Plan.
3. Stock Subject to the Plan. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and sold under the Plan is 300,000 shares of Common Stock. The Shares
may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the
Board of Directors of the Company.
(1) The Board of Directors may appoint a
Committee, consisting of not less than two members of the Board of Directors,
to administer the Plan on behalf of the Board of Directors, subject to such
terms and conditions as the Board of Directors may prescribe. Once appointed,
such Committee shall continue to serve until otherwise directed by the Board of
Directors.
(2) The Board of Directors may, from time to
time, increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all members of
the Committee and thereafter directly administer the Plan.
(b) Powers of the Board. Subject to the provisions of
the Plan, the Board shall have the authority, in its discretion: (i) to grant
Nonqualified Stock Options; (ii) to determine, in accordance with Section 8(b)
of the Plan, the fair market value of the Common Stock; (iii) to determine, in
accordance with Section 8(a) of the Plan, the exercise price per share of
Options to be granted, (iv) to determine the individuals to whom, and the time
or times at which, options shall be granted and the number of Shares to be
represented by each Option; (v) to interpret the Plan; (vi) to prescribe,
amend, and rescind rules and regulations relating to the Plan; (vii) to
determine the terms and provisions of each Option granted (which need not be
identical) and, with the consent of the holder thereof, modify or amend each
Option; (viii) to reduce the exercise price per share of outstanding and
unexercised Options; (ix) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option; (x) to authorize any person to
execute, on behalf of the Company, any instrument required to effectuate the
grant of an Option previously granted by the Board; and (xi) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
(c) Effect of Board's Decision. All decisions,
determinations, and interpretations of the Board shall be final and binding on
all Optionees and any other holders of any Options granted under the Plan.
5. Eligibility.
(a) Options may be granted to consultants and advisors
who provide consulting services to the Company. In no event shall any
employees (full-time or part-time) of the Company be eligible for the grant of
an Option under the Plan. Notwithstanding the foregoing, the fact that an
Optionee
2.
<PAGE> 3
subsequently becomes an employee of the Company shall not affect such
Optionee's Option, so long as the Optionee's Continuous Status as a Consultant
or Advisor was uninterrupted prior to his or her commencement of employment
with the Company.
(b) Nothing in the Plan or any Option granted hereunder
shall confer upon any Optionee any right to continue or require the continuance
of the Optionee's consulting or advisory relationship with the Company, nor
shall it interfere in any way with the Optionee's right or the Company's right
to terminate such relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its
adoption by the Board and shall continue in effect for ten (10) years, unless
sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be no more than
ten (10) years from the date of grant.
8. Exercise Price and Consideration.
(a) The per Share exercise price under each Option shall
be such price as is determined by the Board, which price may be less than,
equal to, or greater than the fair market value per Share on the date of grant.
(b) The fair market value per Share shall be the closing
price per share of the Common Stock on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System on the date of
grant. If the Common Stock ceases to be listed on the NASDAQ National Market
System, the Board shall designate an alternative method of determining the fair
market value of the Common Stock.
(c) The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall be
determined by the Board at the time of grant and may consist of cash and/or
check. Payment may also be made by delivering a properly executed exercise
notice, together with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale proceeds necessary to pay the exercise price.
(d) Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay any federal, state, and local withholding
obligations of the Company, if applicable.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board at the time of grant, and as shall be
permissible under the terms of the Plan. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section 8(c)
of the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent
3.
<PAGE> 4
of the Company) of the stock certificate evidencing such Shares, no right to
vote or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
upon exercise of the Option. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
The exercise of an Option in any manner shall result
in a decrease in the number of Shares which thereafter may be available, both
for purposes of the Plan and for sale under the Option, by the number of Shares
as to which the Option is exercised.
(b) Termination of Consulting Relationship with Optionee.
In the event of termination of an Optionee's Continuous Status as a Consultant
or Advisor, such Optionee may exercise stock options to the extent exercisable
on the date of termination. Such exercise must occur within three (3) months
(or such shorter time as may be specified in the grant), after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement). To the extent that the
Optionee was not entitled to exercise the Option at the date of such
termination, or does not exercise such Option within the time specified herein,
the Option shall terminate.
(c) Termination of Consulting Relationship Due to
Disability of Optionee. Notwithstanding the provisions of Section 9(b) above,
in the event of termination of an Optionee's Continuous Status as a Consultant
or Advisor as a result of total and permanent disability (i.e., the inability
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
twelve (12) months), such Optionee may exercise stock options to the extent
exercisable on the date of termination. Such exercise must occur within
eighteen (18) months (or such shorter time as may be specified in the grant),
after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement).
To the extent that the Optionee was not entitled to exercise such Option within
the time specified herein, the Option shall terminate.
(d) Death of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of the death of an Optionee:
(i) who is at the time of death a consultant or
advisor to the Company, the Option may be exercised, at any time within six (6)
months following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement), by
the Optionee's Personal Representative or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued as of the date of death; or
(ii) whose Option has not yet expired, but whose
Continuous Status as a Consultant or Advisor terminated prior to the date of
death, the Option may be exercised, at any time within six (6) months following
the date of death (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), by the Optionee's
Personal Representative or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
4.
<PAGE> 5
(e) Notwithstanding subsections (b), (c), and (d) above,
the Board shall have the authority to extend the expiration date of any
outstanding option in circumstances in which it deems such action to be
appropriate (provided that no such extension shall extend the term of an option
beyond the date on which the option would have expired if no termination of the
Optionee's Continuous Status as a Consultant or Advisor had occurred).
10. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject
to any required action by the stockholders of the Company, the number of shares
of Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from stock split, reverse stock split, stock dividend,
combination, or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding, and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reasons thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Board. The Board may,
in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise an Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable. In
the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless such successor corporation does not agree to assume the Option or to
substitute an equivalent option, in which case the Board shall, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. If the Board makes an
Option fully exercisable in lieu of assumption or substitution in the event of
a merger or sale of assets, the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Board makes the determination
granting such Option. Notice of the determination shall be given to each
consultant or advisor to whom an Option is so granted within a reasonable time
after the date of such grant.
5.
<PAGE> 6
13. Substitutions and Assumptions. The Board shall have the right
to substitute or assume Options in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code applies,
provided such substitutions and assumptions are permitted by Section 424 of the
Code and the regulations promulgated thereunder. The number of Shares reserved
pursuant to Section 3 may be increased by the corresponding number of Options
assumed and, in the case of a substitution, by the net increase in the number
of Shares subject to Options before and after the substitution.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable.
(b) Effect of Amendment or Termination. Any such
amendment or termination of the Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Plan had not
been amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by the
Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such shares pursuant to thereto shall comply
with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
16. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
[The number of shares in Section 3 has been adjusted for stock splits in 1992
and 1994.]
6.
<PAGE> 1
EXHIBIT 10.5
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
<PAGE> 2
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
Microsoft Corporation (the "Company") does hereby establish its 1991
Employee Stock Purchase Plan as follows:
1. Purpose of the Plan. The purpose of this Plan is to provide
eligible employees who wish to become shareholders in the Company a convenient
method of doing so. It is believed that employee participation in the
ownership of the business will be to the mutual benefit of both the employees
and the Company. It is the intention of the Company to have the Plan qualify
as an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986. The provisions of the Plan shall, accordingly, be construed so as
to extend and limit participation in a manner consistent with the requirements
of that Section of the Code.
2. Definitions.
2.1 "Base pay" means regular straight time earnings, plus
review cycle bonuses and overtime payments, payments for incentive
compensation, and other special payments except to the extent that any such
item is specifically excluded by the Board of Directors of the Company (the
"Board").
2.2 "Account" shall mean the funds accumulated with respect
to an individual employee as a result of deductions from his paycheck for the
purpose of purchasing stock under this Plan. The funds allocated to an
employee's account shall remain the property of the respective employee at all
times but may be commingled with the general funds of the Company.
3. Employees Eligible to Participate. Any regular employee of
the Company or any of its subsidiaries who is in the employ of the Company on
one or more offering dates is eligible to participate in the Plan, except (a)
employees whose customary employment is 20 hours or less per week, and (b)
employees whose customary employment is for not more than five months in any
calendar year.
4. Offerings. There will be twelve separate consecutive
six-month offerings pursuant to the Plan. The first offering shall commence on
January 1, 1991. Thereafter, offerings shall commence on each subsequent July 1
and January 1, and the final offering under this Plan shall commence on July 1,
1996 and terminate on December 31, 1996. In order to become eligible to
purchase shares, an employee must sign an Enrollment Agreement, and any other
necessary papers on or before the commencement date (January 1 or July 1) of
the particular offering in which he wishes to participate. Participation in
one offering under the Plan shall neither limit, nor require, participation in
any other offering.
5. Price. The purchase price per share shall be the lesser of
(1) 85% of the fair market value of the stock on the offering date; or (2) 85%
of the fair market value of the stock on the last business day of the offering.
Fair market value shall mean the closing bid price as reported on the National
Association of Securities Dealers Automated Quotation System or, if the stock
is traded on a stock exchange, the closing price for the stock on the principal
such exchange.
6. Offering Date. The "offering date" as used in this Plan shall
be the commencement date of the offering, if such date is a regular business
day, or the first regular business day following such commencement date. A
different date may be set by resolution of the Board.
7. Number of Shares to be Offered. The maximum number of shares
that will be offered under the Plan is 6,750,000. The shares to be sold to
participants under the Plan will be common stock of the Company. If the total
number of shares for which options are to be granted on any date in accordance
with Section 10 exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are
then outstanding), the Company shall make a pro rata allocation of the shares
remaining available in as nearly
2
<PAGE> 3
a uniform manner as shall be practicable and as it shall determine to be
equitable. In such event, the payroll deductions to be made pursuant to the
authorizations therefor shall be reduced accordingly and the Company shall give
written notice of such reduction to each employee affected thereby.
8. Participation.
8.1 An eligible employee may become a participant by
completing an Enrollment Agreement provided by the Company and filing it with
Shareholder Services prior to the Commencement of the offering to which it
relates.
8.2 Payroll deductions for a participant shall commence on
the offering date, and shall end on the termination date of such offering
unless earlier terminated by the employee as provided in Paragraph 14.
9. Payroll Deductions.
9.1 At the time a participant files his authorization for a
payroll deduction, he shall elect to have deductions made from his pay on each
payday during the time he is a participant in an offering at the rate of 2%,
4%, 6%, 8%, or 10% of his base pay.
9.2 All payroll deductions made for a participant shall be
credited to his account under the Plan. A participant may not make any
separate cash payment into such account nor may payment for shares be made
other than by payroll deduction.
9.3 A participant may discontinue his participation in the
Plan as provided in Section 14, but no other change can be made during an
offering and, specifically, a participant may not alter the rate of his payroll
deductions for that offering.
10. Granting of Option. On the offering date, this Plan shall be
deemed to have granted to the participant an option for as many full shares as
he will be able to purchase with the payroll deductions credited to his account
during his participation in that offering. Notwithstanding the foregoing, no
participant may purchase more than 2,250 shares of stock during any single
offering.
11. Exercise of Option. Each employee who continues to be a
participant in an offering on the last business day of that offering shall be
deemed to have exercised his option on such date and shall be deemed to have
purchased from the Company such number of full shares of common stock reserved
for the purpose of the Plan as his accumulated payroll deductions on such date
will pay for at the option price.
12. Employee's Rights as a Shareholder. No participating employee
shall have any right as a shareholder with respect to any shares until the
shares have been purchased in accordance with Section 11 above and the stock
has been issued by the Company.
13. Evidence of Stock Ownership.
13.1 Promptly following the end of each offering, the number
of shares of common stock purchased by each participant shall be deposited into
an account established in the participant's name at a stock brokerage or other
financial services firm designated by the Company (the "ESPP Broker").
13.2 The participant may direct, by written notice to the
Company at the time of his enrollment in the Plan, that his ESPP Broker account
be established in the names of the participant and one other person designated
by the participant, as joint tenants with right of survivorship, tenants in
common, or community property, to the extent and in the manner permitted by
applicable law.
13.3 A participant shall be free to undertake a disposition
(as that term is defined in Section 424(c) of the Code) of the shares in his
account at any time, whether by sale, exchange, gift, or other transfer of
3
<PAGE> 4
legal title, but in the absence of such a disposition of the shares, the shares
must remain in the participant's account at the ESPP Broker until the holding
period set forth in Section 423(a) of the Code has been satisfied. With
respect to shares for which the Section 423(a) holding period has been
satisfied, the participant may move those shares to another brokerage account
of participant's choosing or request that a stock certificate be issued and
delivered to him.
13.4 A participant who is not subject to payment of U.S.
income taxes may move his shares to another brokerage account of his choosing
or request that a stock certificate be issued and delivered to him at any time,
without regard to the satisfaction of the Section 423(a) holding period.
14. Withdrawal.
14.1 An employee may withdraw from an offering, in whole but
not in part, at any time prior to the last business day of such offering by
delivering a Withdrawal Notice to the Company, in which event the Company will
refund the entire balance of his deductions as soon as practicable thereafter.
14.2 To re-enter the Plan, an employee who has previously
withdrawn must file a new Enrollment Agreement in accordance with Section 8.1.
The employee's re-entry into the Plan will not become effective before the
beginning of the next offering following his withdrawal, and if the withdrawing
employee is an officer of the Company within the meaning of Section 16 of the
Securities Exchange Act of 1934 he may not re-enter the Plan before the
beginning of the second offering following his withdrawal.
15. Carryover of Account. At the termination of each offering the
Company shall automatically re-enroll the employee in the next offering, and
the balance in the employee's account shall be used for option exercises in the
new offering, unless the employee has advised the Company otherwise. Upon
termination of the Plan, the balance of each employee's account shall be
refunded to him.
16. Interest. No interest will be paid or allowed on any money in
the accounts of participating employees.
17. Rights Not Transferable. No employee shall be permitted to
sell, assign, transfer, pledge, or otherwise dispose of or encumber either the
payroll deductions credited to his account or any rights with regard to the
exercise of an option or to receive shares under the Plan other than by will or
the laws of descent and distribution, and such right and interest shall not be
liable for, or subject to, the debts, contracts, or liabilities of the
employee. If any such action is taken by the employee, or any claim is
asserted by any other party in respect of such right and interest whether by
garnishment, levy, attachment or otherwise, such action or claim will be
treated as an election to withdraw funds in accordance with Section 14.
18. Termination of Employment. Upon termination of employment for
any reason whatsoever, including but not limited to death or retirement, the
balance in the account of a participating employee shall be paid to the
employee or his estate.
19. Amendment or Discontinuance of the Plan. The Board shall have
the right to amend, modify, or terminate the Plan at any time without notice,
provided that no employee's existing rights under any offering already made
under Section 4 hereof may be adversely affected thereby, and provided further
that no such amendment of the Plan shall, except as provided in Section 20,
increase above 6,750,000 the total number of shares to be offered unless
shareholder approval is obtained therefor.
20. Changes in Capitalization. In the event of reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, offerings of rights, or any other change in the structure of the
common shares of the Company, the Board may make such adjustment, if any, as it
may deem appropriate in the number, kind, and the price of shares available for
purchase under the Plan, and in the number of shares which an employee is
entitled to purchase.
4
<PAGE> 5
21. Share Ownership. Notwithstanding anything herein to the
contrary, no employee shall be permitted to subscribe for any shares under the
Plan if such employee, immediately after such subscription, owns shares
(including all shares which may be purchased under outstanding subscriptions
under the Plan) possessing 5% or more of the total combined voting power or
value of all classes of shares of the Company or of its parent or subsidiary
corporations. For the foregoing purposes the rules of Section 425(d) of the
Internal Revenue Code of 1986 shall apply in determining share ownership. In
addition, no employee shall be allowed to subscribe for any shares under the
Plan which permits his rights to purchase shares under all "employee stock
purchase plans" of the Company and its subsidiary corporations to accrue at a
rate which exceeds $25,000 of the fair market value of such shares (determined
at the time such right to subscribe is granted) for each calendar year in which
such right to subscribe is outstanding at any time.
22. Administration. The Plan shall be administered by the Board.
The Board shall be vested with full authority to make, administer, and
interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision, or action of the Board in connection
with the construction, interpretation, administration, or application of the
Plan shall be final, conclusive, and binding upon all participants and any and
all persons claiming under or through any participant.
The Board may delegate any or all of its authority hereunder to such
committee as it may designate.
23. Notices. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to have
been duly given when received by Shareholder Services of the Company or when
received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
24. Termination of the Plan. This Plan shall terminate at the
earliest of the following:
24.1 December 31, 1996;
24.2 The date of the filing of a Statement of Intent to
Dissolve by the Company or the effective date of a merger or consolidation
wherein the Company is not to be the surviving corporation, which merger or
consolidation is not between or among corporations related to the Company.
Prior to the occurrence of either of such events, on such date as the Company
may determine, the Company may permit a participating employee to exercise the
option to purchase shares for as many full shares as the balance of his account
will allow at the price set forth in accordance with Section 5. If the employee
elects to purchase shares, the remaining balance of his account will be
refunded to him after such purchase.
24.3 The date the Board acts to terminate the Plan in
accordance with Section 19 above.
24.3 The date when all shares reserved under the Plan have
been purchased.
25. Limitations on Sale of Stock Purchased Under the Plan. The
Plan is intended to provide common stock for investment and not for resale.
The Company does not, however, intend to restrict or influence any employee in
the conduct of his own affairs. An employee, therefore, may sell stock
purchased under the Plan at any time he chooses, subject to compliance with any
applicable Federal or state securities laws. THE EMPLOYEE ASSUMES THE RISK OF
ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
26. Governmental Regulation. The Company's obligation to sell and
deliver shares of the Company's common stock under this Plan is subject to the
approval of any governmental authority required in connection with the
authorization, issuance, or sale of such shares.
[The number of shares set forth in Sections 7, 10, and 19 have been
changed to reflect the effect of three-for-two stock splits in 1991 and 1992,
and a two-for-one stock split in 1994.]
5
<PAGE> 1
EXHIBIT 10.6
MICROSOFT CORPORATION
SAVINGS PLUS PLAN, AS AMENDED
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS Page
----------- ----
<S> <C> <C>
1.1 BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . 1-1
1.2 CODE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1
1.3 COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . 1-1
1.4 EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1
1.5 ELIGIBLE EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . 1-1
1.6 EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2
1.7 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3
1.8 PARTICIPANT . . . . . . . . . . . . . . . . . . . . . . . . . 1-3
1.9 PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3
1.10 PLAN ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . 1-3
1.11 PLAN YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3
1.12 TRUST FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3
1.13 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4
ARTICLE II
ELIGIBILITY TO PARTICIPATE IN PLAN
----------------------------------
2.1 ELIGIBILITY AND ENTRY DATE . . . . . . . . . . . . . . . . . . 2-1
2.2 REEMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . 2-1
2.3 ELECTION AGAINST PARTICIPATION . . . . . . . . . . . . . . . . 2-1
ARTICLE III
EMPLOYEE CONTRIBUTIONS
----------------------
3.1 ELECTION TO DEFER . . . . . . . . . . . . . . . . . . . . . . 3-1
3.2 DEFERRAL ELECTION DATES . . . . . . . . . . . . . . . . . . . 3-1
3.3 TERMINATING AN ELECTION TO DEFER . . . . . . . . . . . . . . . 3-1
3.4 VESTING IN DEFERRALS . . . . . . . . . . . . . . . . . . . . . 3-2
3.4 DISTRIBUTION OF EXCESS DEFERRALS . . . . . . . . . . . . . . . 3-2
ARTICLE IV
EMPLOYER MATCHING CONTRIBUTIONS AND FORFEITURES
-----------------------------------------------
4.1 EMPLOYER MATCHING CONTRIBUTIONS . . . . . . . . . . . . . . . 4-1
4.2 ALLOCATION OF FORFEITURES . . . . . . . . . . . . . . . . . . 4-1
ARTICLE V
VESTING - YEARS OF SERVICE
--------------------------
5.1 EMPLOYEE CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 5-1
</TABLE>
1-1
<PAGE> 3
<TABLE>
<S> <C> <C>
5.2 EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . 5-1
5.3 YEARS OF SERVICE . . . . . . . . . . . . . . . . . . . . . . . . 5-1
5.4 HOUR OF SERVICE . . . . . . . . . . . . . . . . . . . . . . . . 5-1
5.5 PERIOD OF SEVERANCE . . . . . . . . . . . . . . . . . . . . . . 5-2
5.6 FORFEITURES . . . . . . . . . . . . . . . . . . . . . . . . . . 5-2
ARTICLE VI
PARTICIPANTS' ACCOUNTS AND INVESTMENTS
--------------------------------------
6.1 INDIVIDUAL ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . 6-1
6.2 INVESTMENT FUNDS . . . . . . . . . . . . . . . . . . . . . . . . 6-1
6.3 CHANGING ACCOUNT INVESTMENTS . . . . . . . . . . . . . . . . . . 6-2
6.4 PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2
6.5 VALUATION OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . 6-2
ARTICLE VII
PAYMENT OF ACCOUNT BALANCES UPON TERMINATION, DEATH,
DISABILITY, QUALIFIED DOMESTIC RELATIONS ORDERS, DIRECT
ROLLOVERS, SALE OF TRADE OR BUSINESS
------------------------------------
7.1 TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . 7-1
7.2 PAYMENT AT 59-1/2 . . . . . . . . . . . . . . . . . . . . . . . 7-1
7.3 PAYMENT OF ACCOUNT BALANCES UPON DEATH . . . . . . . . . . . . . 7-1
7.4 PAYMENT OF ACCOUNT BALANCES UPON DISABILITY . . . . . . . . . . 7-2
7.5 EARLY RETIREMENT . . . . . . . . . . . . . . . . . . . . . . . . 7-2
7.6 DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS . . . . 7-2
7.7 SALE OF TRADE OR BUSINESS . . . . . . . . . . . . . . . . . . . 7-3
7.8 NOTICE OF RIGHT TO DEFER PAYMENT . . . . . . . . . . . . . . . . 7-4
ARTICLE VIII
HARDSHIP WITHDRAWALS
--------------------
ARTICLE IX
LIMITATIONS ON EMPLOYEE AND EMPLOYER CONTRIBUTIONS
--------------------------------------------------
9.1 LIMITATIONS ON TOTAL CONTRIBUTIONS TO ACCOUNTS . . . . . . . . 9-1
9.2 AVERAGE ACTUAL DEFERRAL PERCENTAGE TESTS . . . . . . . . . . . 9-1
9.3 ELECTIVE DEFERRALS OR QUALIFIED EMPLOYER DEFERRAL
CONTRIBUTIONS UNDER TWO OR MORE PLANS OR ARRANGEMENTS. . . . . 9-2
9.4 ELECTIVE DEFERRALS, QUALIFIED EMPLOYER DEFERRAL
CONTRIBUTIONS, AND COMPENSATION OF FAMILY MEMBERS. . . . . . . 9-2
9.5 ACTIONS AVAILABLE WHEN TESTS UNSATISFIED . . . . . . . . . . . 9-2
9.6 DISTRIBUTION OF EXCESS CONTRIBUTIONS . . . . . . . . . . . . . 9-3
9.7 AVERAGE CONTRIBUTIONS PERCENTAGE TESTS . . . . . . . . . . . . 9-3
9.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS . . . . . . . . 9-4
</TABLE>
1-2
<PAGE> 4
<TABLE>
<S> <C> <C>
9.9 DEFINITIONS APPLICABLE TO DISCRIMINATION TESTS . . . . . . . . . 9-5
ARTICLE X
ROLLOVER CONTRIBUTIONS
----------------------
10.1 PERMITTED ROLLOVERS . . . . . . . . . . . . . . . . . . . . . . 10-1
10.2 VESTING AND ACCOUNTING . . . . . . . . . . . . . . . . . . . . . 10-1
10.3 DISTRIBUTION UPON TERMINATION . . . . . . . . . . . . . . . . . 10-1
10.4 DIRECT ROLLOVER DISTRIBUTIONS . . . . . . . . . . . . . . . . . 10-1
ARTICLE XI
ADMINISTRATION
--------------
11.1 NAMED FIDUCIARY . . . . . . . . . . . . . . . . . . . . . . . . 11-1
11.2 PLAN ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . . 11-1
11.3 FACILITY OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . 11-2
11.4 APPOINTMENT OF INVESTMENT MANAGER . . . . . . . . . . . . . . . 11-2
11.5 INVESTMENT MANAGER AND TRUSTEE . . . . . . . . . . . . . . . . . 11-2
ARTICLE XII
CLAIMS PROCEDURE
----------------
12.1 DENIAL OF CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . 12-1
12.2 ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1
ARTICLE XIII
NONALIENATION PROVISION
-----------------------
ARTICLE XIV
TERMINATION
-----------
14.1 PLAN TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 14-1
14.2 NO REVERSION TO EMPLOYER -- ACCRUED RIGHTS NONFORFEITABLE . . . 14-1
14.3 DISTRIBUTION UPON TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS 14-1
</TABLE>
1-3
<PAGE> 5
ARTICLE XV
MERGER OR CONSOLIDATION
ARTICLE XVI
AMENDMENTS
ARTICLE XVII
RIGHTS RESERVED
ARTICLE XVIII
TOP-HEAVY PROVISIONS
ARTICLE XIX
LOANS
1-4
<PAGE> 6
ARTICLE I
DEFINITIONS
The following words shall have the following meanings unless the
context clearly indicates otherwise.
1.1 BENEFICIARY means a person designated by a participant, or by
this Plan if there is no effective designation, to receive benefits payable
under this Plan in the event of the participant's death.
1.2 CODE means the Internal Revenue Code of 1986, as amended.
1.3 COMPENSATION is defined and limited as set forth in Appendix
I, attached hereto and incorporated herein.
1.4 EMPLOYEE means any common law employee of the employer who
receives remuneration for personal services rendered to the employer, and any
"leased employee" as defined in Code Section 414 (n)(2).
1.5 ELIGIBLE EMPLOYEE means a regular employee of the employer who
satisfies the eligibility requirements of section 2.1. For purposes of this
Plan, a "regular employee" of the employer is an employee who is in an approved
headcount position with the employer and on the employer's payroll. An
approved headcount position is one which is (1) authorized in writing during
the annual or out-of-cycle budgeting process and approved by an officer of
Microsoft (or by a Regional Director for positions in subsidiaries of
Microsoft) and (2) on the official human resources database of Microsoft or one
of its subsidiaries. An employee is on an employer's payroll if the employee
is paid from the payroll department of the employer (including payroll
departments of the employer's foreign branches, but not subsidiaries) and the
employer withholds U.S. employment taxes (e.g., income tax, FICA) from the
employee's pay. Notwithstanding the foregoing, the following are not eligible
employees and are not eligible to participate in this Plan even if they meet
the definition of regular employee of the employer:
a. interns;
b. cooperatives;
c. apprentices;
d. nonresident aliens with no U.S. source income;
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e. employees covered by a collective bargaining
agreement resulting from negotiations in which retirement benefits were the
subject of good faith bargaining and participation in this Plan was not
provided for;
f. leased employees (including leased employees as
defined in Code Section 414(n)(2));
g. temporary employees hired through or employed by
temporary or leasing agencies;
h. temporary employees of the employer; and
i. workers who hold themselves out to the employer as
being independent contractors, or as being employed by another company while
providing services to the employer. For purposes of this Plan, a temporary
employee is one who is hired to work on a specific project or series of
projects which in the aggregate is not expected to exceed six (6) months. This
definition of Eligible Employee is added effective July 1, 1994.
1.6 EMPLOYER means MICROSOFT CORPORATION and any subsidiary or
affiliate of Microsoft Corporation which, with MICROSOFT CORPORATION's
approval, elects to adopt the Plan for its employees. Employers maintaining
the Plan are listed in Appendix II, attached hereto and incorporated herein.
Microsoft Corporation shall have sole discretionary authority over the Plan,
including, without limitation, authority to amend the Plan and appoint
fiduciaries. For purposes of applying to this Plan Code Sections 401, 410,
411, 414 and 415, which sections relate to tax-qualified plans generally,
to minimum participation standards, to minimum vesting standards, to
compensation, and to limitations on benefits and contributions under qualified
retirement plans, all employees of businesses under common control, as defined
in Code Section 414(b) and (c), employees of affiliated service groups under
Code Section 414(m), and employees of any group of employers who must be
aggregated and treated as one employer pursuant to Code Section 414(o), shall
be considered to be employed by the employer.
1.7 ERISA means the Employee Retirement Income Security Act of
1974, as amended.
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1.8 PARTICIPANT means an employee who meets the eligibility
requirements of Article II and who has entered the Plan by electing to defer
compensation. An employee shall be considered a participant as long as one or
more accounts are maintained under this Plan on his or her behalf.
1.9 PLAN means the MICROSOFT CORPORATION SAVINGS PLUS PLAN set
forth in this document, as amended from time to time.
1.10 PLAN ADMINISTRATOR means the vice president of finance and
administration. Effective July 1, 1994, Plan Administrator means the Vice
President, Human Resources.
1.11 PLAN YEAR, effective January 1, 1993, means the twelve month
period beginning January 1 and ending December 31. Prior to January 1, 1993,
"Plan Year" meant the twelve month period beginning April 1 and ending March
31.
1.12 TRUST FUND means the assets of the trust established and
maintained according to the provisions of this Plan.
1.13 TRUSTEE means any individual, life insurance company, bank or
trust company or a combination of the foregoing, which the employer has
designated to manage and invest the assets of the Plan.
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ARTICLE II
ELIGIBILITY TO PARTICIPATE IN PLAN
2.1 ELIGIBILITY AND ENTRY DATE. Each eligible employee who is 18
years of age or older and who has been employed with the employer for six
months shall be eligible to participate in this Plan except as provided in this
Article II. The eligible employee shall be eligible to elect to defer a
percentage of his or her compensation as of the first day of the month
coinciding with or occurring after the date the eligibility requirements are
met. Preparticipation service with certain companies as set forth in Appendix
II, attached hereto and incorporated herein, shall be counted toward
eligibility. The amendment of the term "employee" to "eligible employee" in
this Section 2.1 is effective July 1, 1994.
2.2 REEMPLOYMENT. If a former plan participant is reemployed as
an eligible employee, that person shall be eligible to participate as of, the
first day of the month coinciding with or occurring after his or her
reemployment.
2.3 ELECTION AGAINST PARTICIPATION. Any eligible employee may
elect not to participate in the Plan at any time for any reason in writing
signed by the eligible employee, a copy of which is delivered to the employer.
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ARTICLE III
EMPLOYEE CONTRIBUTIONS
3.1 ELECTION TO DEFER. Each participant may elect, in the manner
provided by the Plan Administrator, to contribute from 1% to 15% of his or her
compensation to a salary deferral account under the Plan, except that such
contribution shall not exceed the annual limitation on elective deferrals under
Code Section 402(g) in any taxable year, which limitation is increased as
permitted by Internal Revenue Service publication to reflect cost-of-living
adjustments ($9,240 for 1994). The employer may, from time to time, change the
percentage of salary that may be deferred. Except as authorized by the Plan
Administrator, all such contributions shall be by payroll reduction.
Contributions shall be transferred to the trust fund within 60 days.
3.2 DEFERRAL ELECTION DATES. On entering the Plan initially or
upon reemployment, an employee may elect to contribute as of the day he or she
is eligible to enter the Plan. All other employees or participants may elect
to contribute, or to change their contribution percentage, effective as of any
January 1, April 1, July 1, and October 1, which dates may be changed from time
to time by the Plan Administrator. An election to contribute may be made on
any date prior to the effective date of the election, in the manner provided by
the Plan Administrator.
3.3 TERMINATING AN ELECTION TO DEFER. A participant may terminate
an election to contribute as of the first day of any month, provided notice of
termination has been given by the fifteenth day of the previous month in the
manner provided by the Plan Administrator. If an employee terminates an
election to contribute, he or she must wait five months (prior to July 1, 1994,
three months) before being eligible again to elect to contribute as of a
January 1, April 1, July 1, or October 1 following the five-month (prior to
July 1, 1994, three-month) waiting period.
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3.4 DISTRIBUTION OF EXCESS DEFERRALS. Notwithstanding any other
provision of the Plan, excess deferrals (amounts in excess of the annual
limitation on elective deferrals under Code Section 402(g), as increased by a
cost of living factor) and income allocable thereto may be distributed no later
than April 15 to participants who claim for the preceding calendar year such
excess deferrals under two or more plans or to participants who have such
excess deferrals under this Plan. A participant may allocate excess deferrals
to this Plan by submitting to the Plan Administrator no later than March 1 a
statement specifying the excess deferral amount for the preceding calendar year
and stating that, if such amount is not distributed, such excess deferral, when
added to amounts deferred under other plans, exceeds the applicable annual
limit. The excess deferrals distributed to a participant with respect to a
calendar year shall be adjusted for income and, if there is a loss allocable to
the excess deferral, shall in no event be less than the lesser of the
participant's account under the Plan or the participant's elective deferrals
for the calendar year.
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ARTICLE IV
EMPLOYER MATCHING CONTRIBUTIONS AND FORFEITURES
4.1 EMPLOYER MATCHING CONTRIBUTIONS. The employer shall
contribute funds to the Plan, from its current or retained profits, to match a
portion of each participant's salary deferral. The employer contribution shall
match 50% of each participant's contribution in any plan year up to six percent
of the participant's compensation for the plan year, for a maximum employer
matching contribution of three percent of compensation. The matching
contribution shall be allocated to the participant's employer contribution
account. The employer may from time to time change the amount of the employer
matching contribution, provided any decrease in the matching contribution
formula must be effective only for matching elective deferrals after the date
of change. Total employer contributions for any plan year shall not exceed the
maximum amount which is deductible by the employer for federal income tax
purposes. The employer contribution shall be transferred to the trust fund at
such times as the employer determines, but such contributions shall in no event
be transferred to the trust fund later than the time prescribed by law for the
employer to obtain a federal income tax deduction for the plan year for which
the contribution is made. Employer contributions shall be credited to
participants' employer contribution accounts as of the date of receipt by the
plan.
4.2 ALLOCATION OF FORFEITURES. As of the end of each plan year
forfeitures which have become available for distribution during such year shall
be allocated among the employer contribution accounts of participants employed
on the last day of the plan year in the same proportion as the employer
matching contribution allocated to each such account bears to the aggregate
employer contributions allocated to all such accounts for the plan year.
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ARTICLE V
VESTING - YEARS OF SERVICE
5.1 EMPLOYEE CONTRIBUTIONS. Each participant shall be 100% vested
in all amounts in his or her salary deferral account.
5.2 EMPLOYER CONTRIBUTIONS. A participant whose employment is
terminated on or after reaching age 65, whose employment is terminated because
of a total and permanent disability, or who dies while employed, shall be 100%
vested in all amounts in his or her employer contribution account. All other
participants who terminate shall be entitled to the vested percentage of their
employer contribution account determined in accordance with the following
schedule:
<TABLE>
<CAPTION>
Years of Service Vested Percentage Forfeited Percentage
---------------- ----------------- --------------------
<S> <C> <C>
Less than 2 0% 100%
2 or more years 100% 0%
</TABLE>
In computing years of service, all of an employee's years of service shall be
taken into account, except that if an employee has five or more consecutive
one-year periods of severance, years of service after such period of severance
shall not be taken into account for purposes of determining the nonforfeitable
percentage of the employee's accrued benefit derived from employer
contributions which accrued before the period of severance. Preparticipation
service with certain companies as set forth in Appendix II, attached hereto and
incorporated herein, shall be counted toward vesting.
5.3 YEARS OF SERVICE. An employee's years of service at any date
shall equal the number of years, including fractional portions of years, which
have elapsed between the date the employee first performed an hour of service,
or first performed an hour of service upon reemployment, and the date a period
of severance begins. If a period of severance is less than twelve months, the
period of severance shall be included in determining years of service.
5.4 HOUR OF SERVICE. An hour of service means each hour for which
an employee is paid or entitled to payment for the performance of duties for
the employer.
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5.5 PERIOD OF SEVERANCE. A period of severance is a period which
begins on the earlier of (i) the date the employee quits, is discharged,
retires, dies; or (ii) the first anniversary of the date the employee is absent
from service for any other reason, such as disability leave, vacation, or leave
of absence; and which ends when the employee performs an hour of service upon
reemployment. However, if an employee is absent from employment for maternity
or paternity reasons, the period of severance shall begin on the second
anniversary of the first date of such absence. The period between the first
and second anniversaries of the first date of absence from work is neither a
year or fractional year of service, nor a period of severance. An absence for
maternity or paternity reasons includes an absence because of the following:
pregnancy of the individual, birth of a child of the individual, placement of a
child with the individual in connection with the adoption of such child by such
individual or caring for such child for a period beginning immediately
following such birth or placement.
5.6 FORFEITURES. There shall be no forfeiture of any nonvested or
forfeitable interest of any terminating participant until the terminating
participant has had a one-year period of severance. Such non-vested interests
of terminated participants shall be held by the trustee in a separate
forfeiture suspense account until the expiration of a one-year period of
severance when the forfeitures shall be available for distribution as set forth
in Article IV. If the participant is reemployed before sustaining five
consecutive one-year periods of severance, any amount forfeited shall be
restored to his or her employer contribution account, unadjusted by any gains
or losses.
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ARTICLE VI
PARTICIPANTS' ACCOUNTS AND INVESTMENTS
6.1 INDIVIDUAL ACCOUNTS. The trustee shall maintain records to
show the interest in the Plan of each participant and former participant. Such
records shall be in the form of individual accounts. When appropriate, a
participant shall have two accounts, a salary deferral account and an employer
contribution account. The maintenance of individual accounts is only for
accounting purposes, and a segregation of the assets of the trust fund to each
account shall not be required. Notwithstanding the foregoing, to the extent
provided in a written loan policy, a loan made to a participant will be treated
as a participant direction of investment. The participant alone shares in any
principal and interest paid on the loan, and he or she alone bears any expense
or loss incurred in connection with the loan. The Trustee will reflect the
participant's loan on his or her account. Distributions and withdrawals made
from an account shall be charged to the account as of the date paid. Each
participant and former participant shall be advised from time to time, but at
least once a year, as to the status of his or her account or accounts.
6.2 INVESTMENT FUNDS. The trust fund shall consist of the
following investment funds: common stock funds, bond funds, income funds,
money market funds, and the Microsoft Corporation stock fund. The employer may
change the investment funds from time to time. Each participant and former
participant shall direct the trustee as to what portion of his or her accounts
shall be deposited in each fund (or, in the case of a Participant loan pursuant
to Article XIX, what portion of his or her account shall be loaned). If a
participant or former participant wishes to utilize more than one investment
fund, he or she shall designate the percentage of his or her account balances
to be invested in each fund, and the percentages designated shall be in 10%
increments. The trust fund may hold qualified employer securities and
qualified employer real estate in any amount. The Plan is intended to
constitute a plan described in ERISA Section 404(c), and the fiduciaries of
the Plan may be relieved in accordance with ERISA Section 404(c) of liability
for any losses which are the direct and necessary result of investment
instructions given by a participant or former participant.
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6.3 CHANGING ACCOUNT INVESTMENTS. A change in the designation of
investment funds may be made effective as of any January 1, April 1, July 1,
and October 1 of each year. The dates for changing investment funds may be
changed from time to time by the Plan Administrator.
6.4 PROCEDURES. The Plan Administrator shall adopt such rules and
procedures as it deems advisable with respect to all matters relating to the
selection and use of the investment funds.
6.5 VALUATION OF ACCOUNTS. As of the end of each plan year, the
Plan Administrator shall adjust the net credit balances in the accounts of
participants or former participants in the trust fund, upward or downward, pro
rata, so that the aggregate of such net credit balances will equal the net
worth of each investment fund of the trust fund, using fair market values as
determined by the trustee and after such net worth for the appropriate
investment fund has been reduced by any expenses (to the extent not paid
directly by the employer), withdrawals, distributions and transfers chargeable
to that investment fund which have been incurred but not yet paid. All
determinations made by the trustee with respect to fair market values and net
worth shall be made in accordance with generally accepted principles of trust
accounting, and such determinations when so made by the trustee shall be
conclusive and binding upon all persons having an interest under the Plan.
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ARTICLE VII
PAYMENT OF ACCOUNT BALANCES UPON
TERMINATION, DEATH, DISABILITY,
QUALIFIED DOMESTIC RELATIONS ORDERS,
SALE OF TRADE OR BUSINESS
7.1 TERMINATION OF EMPLOYMENT. Upon termination of employment for
any reason other than death or disability, the participant shall elect either
to receive his or her balances upon termination or upon reaching age 65, except
that if the value of the participant's accounts does not exceed $3,500 (and did
not exceed $3,500 at the time of any prior distribution), payment shall be made
upon termination. Account balances shall be valued as of the most recent
valuation date prior to date of payment and shall be paid in a single cash
payment, except that the participant or former participant may elect to receive
any or all of the shares allocated to him or her in the Microsoft Corporation
stock fund. Account balances shall be distributed no later than 60 days after
the latest of (i) the plan year in which the participant terminates or (ii) the
plan year in which the participant reaches age 65. Notwithstanding the
foregoing, a person's entire interest must be distributed, or must begin to be
distributed, no later than the first day of April following the calendar year
in which the participant reaches age 70-1/2.
7.2 PAYMENT AT 59-1/2. A participant may elect to receive a
distribution of all or a portion of his or her account balance or balances
under this Plan in a single sum payment upon or after reaching age 59-1/2.
7.3 PAYMENT OF ACCOUNT BALANCES UPON DEATH. If a participant dies
while employed, his or her employer contribution account shall be 100% vested.
Each participant shall designate a beneficiary or beneficiaries to receive all
amounts credited to his or her accounts in the event of the participant's
death. The accounts shall be valued as of the most recent valuation date prior
to payment and shall be paid in a single cash payment to the designated
beneficiary or beneficiaries as soon as feasible after the death. If a
participant is married, the participant may not designate a beneficiary other
than his or her spouse without the
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spouse's written consent which has been witnessed by a plan representative or a
notary public. If a participant fails to designate a beneficiary, or the
participant has no surviving beneficiary, the amounts payable to a married
participant shall be distributed to his or her spouse and the benefits of a
single participant shall be distributed to his or her estate.
7.4 PAYMENT OF ACCOUNT BALANCES UPON DISABILITY. If a
participant's employment is terminated prior to retirement because of a total
and permanent disability, the employer contribution account shall be 100%
vested. A participant shall be deemed to be totally and permanently disabled
if he or she is eligible for and is receiving Social Security disability
benefits. The participant's accounts shall be valued as of the most recent
valuation date prior to payment and shall be paid in a single cash payment
within sixty (60) days after the disability has been established under this
section, except that the participant may elect to receive any or all of the
shares allocated to him or her in the Microsoft Corporation stock fund. If the
value of the participant's accounts exceeds $3,500 (or exceeded $3,500 at the
time of a prior distribution), the participant may elect to receive the balance
of his or her accounts upon reaching age 65.
7.5 EARLY RETIREMENT. Upon reaching age 55, a participant may
elect early retirement and shall receive the value of his or her salary
deferral account and the vested portion of his or her employer contribution
account, which shall be paid in the time and manner described in Section 7.1 as
if the employee had terminated.
7.6 DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS.
Distribution to an alternate payee under a qualified domestic relations order
as defined in Code Section 414(p) may be made at any time prior to the
participant's attainment of earliest retirement age if the court order
specifies distribution at an earlier time or permits an agreement between the
Plan and the alternate payee to authorize an earlier distribution and the
alternate payee consents to the distribution.
7.6.1 Qualified Status of Order. The Plan Administrator
shall establish reasonable procedures to determine the qualified status of a
domestic relations order. Upon receiving a domestic relations order, the Plan
Administrator shall promptly notify the participant
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and any alternate payee named in the order in writing of the receipt of the
order and the Plan's procedures for determining the qualified status of the
order. Within a reasonable period of time after receiving the domestic
relations order, the Plan Administrator shall determine the qualified status of
the order and shall notify the participant and each alternate payee in writing
of its determination. The Plan Administrator shall provide notice under this
paragraph by mailing to the individual's address specified in the domestic
relations order, or in a manner consistent with Department of Labor
regulations.
7.6.2 Amounts Payable During Determination Process. If any
portion of the participant's nonforfeitable accrued benefit is payable during
the period the Plan Administrator is making its determination of the qualified
status of the domestic relations order, the Trustee shall make a separate
accounting of the amounts payable. If the Plan Administrator determines the
order is a qualified domestic relations order within 18 months of the date
amounts first are payable following receipt of the order, the amounts shall be
payable in accordance with the order. If the Plan Administrator does not make
its determination of the qualified status of the order within the 18 month
determination period, the amounts shall be payable in the manner in which they
would be distributed if the order did not exist. The order shall be applied
prospectively if the Plan Administrator determines after the 18 month period
that the order is a qualified domestic relations order.
7.6.3 Investment of Amounts Payable. To the extent it is
not inconsistent with the provisions of the qualified domestic relations order,
any partitioned funds may be invested in a segregated subaccount and may be
invested in fixed income investments. A segregated subaccount shall remain a
part of the Trust, but it alone shall share in any income it earns, and it
alone shall bear any expense or loss it incurs. The Trustee shall make any
payments or distributions to the alternate payee(s) by separate benefit checks
or other separate distribution.
7.7 SALE OF TRADE OR BUSINESS. Distributions may also be made in
the event of termination of the Plan, or any part thereof, as described in Code
Section 401(k)(a)(A)(i) and the regulations thereunder, or a disposition of
the assets of a trade or business or the stock of a
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subsidiary with respect to employees who continue employment with the acquiring
corporation or subsidiary as described in Code Section 401(k)(10)(A)(ii) and
(iii) and the regulations thereunder. In no event may amounts attributable to
401(k) elective deferrals be distributed earlier than upon one of the following
events:
(a) Retirement, death, disability or separation from
service (see Code Section 401(k)(10)(A)(i));
(b) Termination of this Plan without establishment of a
successor plan (see Code Section 401(k)(10)(A)(i));
(c) The employee's attainment of age 59-1/2;
(d) The sale or other disposition by a corporation to an
unrelated corporation, which does not maintain this Plan, of substantially all
of the assets used in a trade or business, but only with respect to employees
who continue employment with the acquiring corporation (see Code Section
401(k)(10)(A)(ii));
(e) The sale or other disposition by a corporation of its
interest in a subsidiary to any unrelated entity which does not maintain this
Plan, but only with respect to employees who continue employment with the
subsidiary (see Code Section 401(k)(10)(A)(iii)).
7.8 NOTICE OF RIGHT TO DEFER PAYMENT. A participant whose total
account balances exceed (or have exceeded at the time of a prior distribution)
$3,500 shall be given an explanation of the optional forms of benefit
available, and of his or her right to defer receipt of distribution. If a
participant fails to consent to an immediate distribution, it shall be deemed
an election to defer the commencement of payment of any benefit. However, any
election to defer the receipt of benefits shall not apply with respect to
distributions which are required under Code Section 401(a)(9). Notice of the
rights specified under this Section 7.8 shall be provided no less than 30 days
and no more than 90 days before the "Annuity Starting Date." The "Annuity
Starting Date" is the first day on which all events have occurred which entitle
the participant to receive a distribution (e.g., termination of employment,
consent to distribution). Distribution may
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commence less than 30 days after the notice required under Section
1.411(a)-11(c) of the Income Tax Regulations is given if:
(A) the plan administrator clearly informs the
participant that the participant has a right to a period of at least 30 days
after receiving the notice to consider the decision of whether or not to elect
a distribution (and, if applicable, a particular distribution option), and
(B) the participant, after receiving the notice,
affirmatively elects a distribution. Written consent of the participant to the
distribution must not be made before the participant receives the notice and
must not be made more than 90 days before the Annuity Starting Date. No
consent shall be valid if a significant detriment is imposed under the plan on
any participant who does not consent to the distribution. Consent to an
immediate distribution is not required after the participant has reached age 65
or has died.
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ARTICLE VIII
HARDSHIP WITHDRAWALS
If a participant has a financial hardship, the participant may
withdraw so much of his or her salary deferral contributions as is necessary to
meet the hardship. The salary deferral contributions will be valued as of the
valuation date on or immediately before the withdrawal and shall be valued at
85% of their value as of the valuation date. Notwithstanding the foregoing, a
participant who has an outstanding loan from the Plan (or must take such a loan
prior to the hardship distribution pursuant to this Article VIII) may not take
a hardship distribution in an amount which exceeds 40% of his or her vested
account balance.
A hardship withdrawal shall be available for any of the following
reasons:
(a) Medical expenses incurred by the participant, the
participant's spouse, or any dependents of the participant or expenses
necessary for those persons to obtain medical care;
(b) Purchase (excluding mortgage payments) of a principal
residence for the participant;
(c) Payment of tuition and related educational expenses
for the next 12 months of post-secondary education for the participant, his or
her spouse, children or dependents;
(d) Preventing the eviction of the participant from his
or her principal residence or foreclosure on the mortgage of the participant's
principal residence; or
(e) Need due to critical financial emergencies, defined
as circumstances of sufficient severity that a participant is confronted by
present or impending financial ruin. The need shall be based on the
participant's net worth statement, which shall form an objective criterion for
determining hardship.
A participant who receives a hardship distribution
(a) shall not receive a distribution in excess of the
participant's immediate and heavy financial need;
(b) shall, prior to the distribution, have received all
other distributions and loans available under all plans maintained by the
employer;
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(c) shall not make elective contributions or have
nonelective participant contributions made to this Plan or any other retirement
plan, stock purchase plan, stock option or similar plan of the employer, until
12 months after receipt of the hardship distribution; and
(d) shall not make contributions to any plan of the
employer, including this Plan, for his or her tax year immediately following
the tax year in which the hardship distribution was received, in excess of (i)
the annual limit applicable under Code Section 402(g) ($9,240 for 1994), as
increased by a cost of living factor, minus (ii) the amount of participant
contributions in the tax year of the hardship distribution.
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ARTICLE IX
LIMITATIONS ON EMPLOYEE AND EMPLOYER CONTRIBUTIONS
9.1 LIMITATIONS ON TOTAL CONTRIBUTIONS TO ACCOUNTS.
Notwithstanding anything in this Plan to the contrary, the total of employee
and employer contributions and forfeitures allocated to a participant's
accounts under this and any other employer sponsored defined contribution plan
for any year shall not exceed the lesser of (i) 25% of the participant's
compensation, reduced by employee compensation deferrals under this Plan for
such year, or (ii) $30,000, or if greater, one-fourth of the defined benefit
dollar limitation set forth in Code Section 415(b)(1) as in effect for the
plan year. The year used to determine the limits on annual additions shall be
the plan year. If such additions exceed the limitation, the excess employer
contributions for the year on behalf of the participant shall be used to reduce
future employer contributions.
9.2 AVERAGE ACTUAL DEFERRAL PERCENTAGE TESTS. With respect to
participant contributions in a plan year, the actual deferral percentage shall
satisfy one of the tests described in (a) or (b) below. (Definitions of words
used in the tests are given in Section 9.9.)
(a) The average actual deferral percentage for eligible
participants who are highly compensated employees for the plan year shall not
exceed the average actual deferral percentage for eligible participants who are
non-highly compensated employees for the plan year multiplied by 1.25;
(b) the average actual deferral percentage for eligible
participants who are highly compensated employees for the plan year shall not
exceed the average actual deferral percentage for eligible participants who are
non-highly compensated employees for the plan year multiplied by 2, provided
that the average actual deferral percentage for eligible participants who are
highly compensated employees does not exceed the average actual deferral
percentage for eligible participants who are non-highly compensated employees
by more than two (2) percentage points or such lesser amount as the Secretary
of the Treasury shall prescribe to
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prevent the multiple use of this alternative limitation with respect to any
highly compensated employee.
9.3 ELECTIVE DEFERRALS OR QUALIFIED EMPLOYER DEFERRAL
CONTRIBUTIONS UNDER TWO OR MORE PLANS OR ARRANGEMENTS. The actual deferral
percentage for any eligible participant who is a highly compensated employee
for the plan year and who is eligible to have elective deferrals or qualified
employer deferral contributions allocated to his account under two or more
plans or arrangements described in Code Section 401(k) that are maintained by
the employer or an affiliated employer shall be determined as if all such
elective deferrals and qualified employer deferral contributions were made
under a single arrangement.
9.4 ELECTIVE DEFERRALS, QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS,
AND COMPENSATION OF FAMILY MEMBERS. For purposes of determining the actual
deferral percentage of a participant who is a highly compensated employee
subject to the family aggregation rules of Code Section 414(q)(6), the
elective deferrals, qualified employer deferral contributions and compensation
of such participant shall include the elective deferrals, qualified employer
deferral contributions and compensation of family members, and such family
members shall be disregarded in determining the actual deferral percentage for
participants who are non-highly compensated employees.
The determination and treatment of the elective deferrals, qualified
nonelective contributions and actual deferral percentage of any participant
shall satisfy such other requirements as may be prescribed by the Secretary of
the Treasury.
9.5 ACTIONS AVAILABLE WHEN TESTS UNSATISFIED. In the event that
the Plan Administrator shall at any time have reasonable cause to conclude that
neither of the tests will be satisfied for a plan year, then the Plan
Administrator shall take such actions as the Plan Administrator deems necessary
in accordance with Appendix III, attached hereto and incorporated herein.
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9.6 DISTRIBUTION OF EXCESS CONTRIBUTIONS. Excess contributions
and income allocable thereto shall be distributed no later than the last day of
each plan year to participants on whose behalf such excess contributions were
made for the preceding plan year. "Excess contributions" shall mean the
difference between the participant contributions made by highly compensated
employees and the maximum amount of allowable participant contributions for
those employees. The income allocable to excess contributions shall be
determined by multiplying income allocable to the participant's elective
deferrals and qualified employer deferral contributions for the plan year by a
fraction, the numerator of which is the excess contribution on behalf of the
participant for the preceding plan year and the denominator of which is the sum
of the participant's account balances attributable to elective deferrals and
qualified employer deferral contributions on the last day of the preceding plan
year. The excess contributions which would otherwise be distributed to the
participant shall be adjusted for income; shall be reduced, in accordance with
regulations, by the amount of excess deferrals distributed to the participant;
shall, if there is a loss allocable to the excess contributions, in no event be
less than the lesser of the participant's account under the Plan or the
participant's elective deferrals and qualified employer deferral contributions
for the plan year. Amounts distributed under this section shall be treated as
distributions from the participant's elective deferral account and shall be
treated as distributed from the participant's qualified employer deferral
contribution account only to the extent such excess contributions exceed the
balance in the participant's elective deferral account.
9.7 AVERAGE CONTRIBUTIONS PERCENTAGE TESTS. With respect to
participant contributions and employer matching contributions, the average
contribution percentage shall satisfy one of the tests described in, (a) or (b)
below (definitions of words used in the tests are given in Section 9.9).
(a) The average contribution percentage for eligible
participants who are highly compensated employees for the plan year shall not
exceed the average contribution
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<PAGE> 27
percentage for eligible participants who are non-highly compensated employees
for the plan year multiplied by 1.25;
(b) the average contribution percentage for eligible
participants who are highly compensated employees for the plan year shall not
exceed the average contribution percentage for eligible participants who are
non-highly compensated employees for the plan year multiplied by 2, provided
that the average contribution percentage for eligible participants who are
highly compensated employees does not exceed the average contribution
percentage for eligible participants who are non-highly compensated employees
by more than two (2) percentage points or such lesser amount as the Secretary
of the Treasury shall prescribe to prevent the multiple use of this alternative
limitation with respect to any highly compensated employee.
9.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Excess
aggregate contributions and income allocable thereto shall be distributed no
later than the last day of each plan year to participants to whose accounts
employee contributions or matching contributions were allocated for the
preceding plan year. "Excess aggregate contributions" shall mean the amount
described in Code Section 401(m)(6)(B). The income allocable to excess
aggregate contributions shall be determined by multiplying the income allocable
to the participant's employee contributions and matching employer contributions
for the plan year by a fraction, the numerator of which is the excess aggregate
contributions on behalf of the participant of the preceding plan year and the
denominator of which is the sum of the participant's account balances
attributable to employee contributions and matching employer contributions on
the last day of the preceding plan year. The excess aggregate contributions to
be distributed to a participant shall be adjusted for income, and, if there is
a loss allocable to the excess aggregate contribution, shall in no event be
less than the lesser of the participant's account under the Plan or the
participant's employee contributions and matching contributions for the plan
year. Excess aggregate contributions shall be distributed from the
participant's matching contribution account
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<PAGE> 28
in proportion to the participant's employee contributions and matching
contributions for the plan year.
9.9 DEFINITIONS APPLICABLE TO DISCRIMINATION TESTS. For purposes
of this Article, the following definitions shall be used:
Actual deferral percentage shall mean the ratio (expressed as a
percentage) of elective deferrals and qualified employer deferral contributions
on behalf of the eligible participant for the plan year to the eligible
participant's compensation for the plan year.
Average actual deferral percentage shall mean the average (expressed
as a percentage) of the actual deferral percentages of the eligible
participants in a group.
Compensation shall mean compensation paid by the employer to the
participant during the taxable year ending with or within the plan year which
is required to be reported as wages on the participant's Form W-2 and shall
also include compensation which is not currently includible in the
participant's gross income by reason of the application of Code Section 125,
or Section 402(e)(3).
Elective deferrals shall mean contributions made to the Plan during
the plan year by the employer, at the election of the participant, in lieu of
cash compensation and shall include contributions made pursuant to a salary
reduction agreement.
Eligible participant shall mean any employee of the employer who is
otherwise authorized under the terms of the Plan to have elective deferrals or
qualified employer deferral contributions allocated to his or her account for
the plan year.
Family Member shall mean an individual described in Code Section
414(q)(6)(B).
Highly Compensated Employee shall mean an individual described in Code
Section 414(q).
Inactive Participant shall mean any employee or former employee who
has ceased to be a participant and on whose behalf an account is maintained
under the Plan.
Matching contribution shall mean any contribution to the Plan made by
the employer for the plan year and allocated to a participant's account by
reason of the participant's employee contributions or elective deferrals.
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<PAGE> 29
Non-highly compensated employee shall mean an employee of the employer
who is neither a highly compensated employee nor a family member.
Participant shall mean any employee of the employer who has met the
eligibility and participation requirements of the Plan.
Qualified employer deferral contributions shall mean qualified
nonelective contributions taken into account under the terms of the Plan in
determining the actual deferral percentage.
Qualified nonelective contributions shall mean contributions (other
than matching contributions) made by the employer and allocated to
participants' accounts that the participant may not elect to receive in cash
until distributed from the Plan; that are 100 percent vested and nonforfeitable
when made; and that are not distributable under the terms of the Plan to
participants or their beneficiaries except in events upon which elective
deferrals may be distributed as described in Section 7.7(a) through (e) of this
Plan.
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ARTICLE X
ROLLOVER CONTRIBUTIONS
10.1 PERMITTED ROLLOVERS. Subject to terms and conditions
established by the Plan Administrator, an employee, whether or not a
participant, may transfer rollover or, effective January 1, 1993, direct
rollover amounts to the trust from other eligible retirement plans as permitted
under, and pursuant to the provisions of, Code Sections 402(c) and 401(a)(31),
respectively. The Plan Administrator shall require written certification that
the contribution qualifies under Code Sections 402(c) or 401(a)(31),
respectively.
10.2 VESTING AND ACCOUNTING. Rollover contributions and earnings
shall be 100% vested and shall be accounted for separately in a rollover
account. All rollover contributions shall be invested and reinvested along
with the assets of the Plan and treated in all respects as other assets of the
Plan.
10.3 DISTRIBUTION UPON TERMINATION. The rollover account shall be
distributed at the same time and in the same manner as the employee's other
accounts. If an employee terminates with no other amounts payable from this
Plan, the rollover account shall be valued as of the valuation date coinciding
with or preceding the date of termination and shall be paid in a single sum
within 60 days after the end of the plan year.
10.4 DIRECT ROLLOVER DISTRIBUTIONS. Notwithstanding any provision
of the Plan to the contrary and subject to the following limitations, on or
after January 1, 1993, a distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an eligible
rollover distribution paid directly to an eligible retirement plan. Direct
rollovers may not be divided among several plans. A participant may elect to
receive a distribution partly as a direct rollover and partly in a direct
payment to the participant only if the direct rollover amount equals or exceeds
$500.
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The following definitions shall apply to this section 10.4:
(a) Eligible Rollover Distribution. An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include:
(i) any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more;
(ii) any mandatory minimum distribution at age
70-1/2 under Code Section 401(a)(9); and
(iii) the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(b) Eligible Retirement Plan. An eligible retirement
plan is an individual retirement account described in Code Section 408(a), an
individual retirement annuity described in Code Section 408(b) (other than an
endowment contract), an annuity plan described in Code Section 403(a), or a
qualified trust described in Code Section 401(a) of a defined contribution
plan, that accepts the distributee's eligible rollover distribution. However,
in the case of an eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account or individual
retirement annuity.
(c) Distributee. A distributee includes an employee or
former employee. In addition, the employee's or former employee's surviving
spouse and the employee's or former employee's spouse or former spouse who is
the alternate payee under a qualified domestic relations order, as defined in
Code Section 414(p), are distributees with regard to the interest of the
spouse or former spouse.
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ARTICLE XI
ADMINISTRATION
11.1 NAMED FIDUCIARY. The employer and the Plan Administrator are
named fiduciaries for purposes of ERISA.
11.2 PLAN ADMINISTRATOR. The Plan Administrator may from time to
time employ agents to aid in the administration of the Plan. The Plan
Administrator shall have the sole power and discretion to interpret and
construe the provisions of this Plan and to determine all questions, including
both interpretive and factual questions arising in connection with the
administration, interpretation and application of the Plan, and shall supply
any omission or reconcile any inconsistency in the Plan. The Plan
Administrator's authority includes, without limitation, the sole authority to
interpret and construe the Plan and determine a participant's eligibility to
participate in the Plan and to receive benefits, and amount of benefits, if
any. Any such action shall be final and conclusive upon all persons. The Plan
Administrator shall decide any disputes which may arise under this Plan
relative to the rights of employees, past and present, and their beneficiaries.
Further, the Plan Administrator shall adopt such rules as it deems necessary,
and give instructions and directions to the trustee as necessary and, in
general, shall direct the administration of the Plan. The Plan Administrator's
authority includes, but is not limited to, the following:
a. to compute, certify, and direct the trustee with
respect to the amount and the kind of benefits to which any participant shall
be entitled hereunder;
b. to authorize and direct the trustee with respect to
all nondiscretionary or otherwise directed disbursements from the trust;
c. to compute and certify to the employer and to the
trustee from time to time the sums of money necessary or desirable to be
contributed to the Plan;
d. to consult with the employer and the trustee
regarding the short and long-term liquidity needs of the Plan in order that the
trustee can exercise any investment discretion in a manner designed to
accomplish specific objectives; and
11-1
<PAGE> 33
e. to prepare and implement a procedure to notify
eligible employees that they may elect to have a portion of their compensation
deferred or paid to them in cash.
11.3 FACILITY OF PAYMENTS. Whenever, in the Plan Administrator's
opinion, a person who is entitled to receive any payment of a benefit or
installment thereof is under a legal disability or is incapacitated in any way
so as to be unable to manage his or her financial affairs, the Plan
Administrator may direct the trustee to make payments to such person or to the
participant's legal representative or to a relative or friend of the
participant for his or her benefit. Any payment of a benefit or installment
thereof made in accordance with the provisions of this section shall be a
complete discharge of any liability for the making of such payment under this
Plan.
11.4 APPOINTMENT OF INVESTMENT MANAGER. The employer shall have
the authority described in ERISA Section 402(c)(3) to appoint one or more
investment managers and contract with each for management of any part of the
trust fund for a reasonable fee. Selection and retention of an investment
manager shall be in the trustee's discretion. Each investment manager shall
have the power to manage, acquire, and dispose of the part of the trust fund
designated by the employer. The investment manager shall have no
responsibility for plan operation or administration.
11.5 INVESTMENT MANAGER AND TRUSTEE. If an investment manager is
appointed:
(a) The trustee shall segregate the trust fund or any
part thereof into one or more investment accounts. The trustee shall appoint
an investment manager for each account and designate the part of the trust fund
to be managed by each investment manager.
(b) The trustee may terminate at any time the authority
of an investment manager to manage an account. In such event or upon
resignation of an investment manager, the trustee may appoint a successor
investment manager for the account.
(c) Each investment manager to whom any fiduciary
responsibility with respect to the Plan or the trust funds allocated is
delegated, shall discharge such responsibility in
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<PAGE> 34
accordance with the standards set forth in ERISA 404(a) and shall acknowledge
such responsibility in writing.
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<PAGE> 35
ARTICLE XII
CLAIMS PROCEDURE
12.1 DENIAL OF CLAIMS. Any denial by the Plan Administrator of a
claim for benefits under the trust by a participant or beneficiary shall be
stated in writing and delivered or mailed to the participant or beneficiary.
Such notice shall set forth the specific reasons for the denial in a manner
that may be understood without legal or actuarial counsel. Any denial of a
claim may be appealed to the Plan Administrator by sending to the Plan
Administrator a written request for review within 90 days after receiving
notice of denial. The Plan Administrator shall give the applicant an
opportunity to review pertinent documents in preparing the applicant's request
for review. The request shall set forth all grounds on which it is based,
supporting facts and other matters which the applicant deems pertinent. The
Plan Administrator may require the applicant to submit such additional facts,
documents or other material as it deems necessary or advisable in making its
review and shall act upon such request within 60 days after the receipt
thereof, unless special circumstances require further time. If the Plan
Administrator confirms the denial in whole or in part, the Plan Administrator
shall notify the applicant, setting forth in a manner calculated to be
understood by the applicant, specific reasons for denial and specific
references to Plan provisions on which the decision was based.
12.2 ARBITRATION. Any controversy or claim arising out of or
relating to this Plan, which is asserted by any person as an employee, former
employee, participant, or beneficiary, shall be settled by arbitration in
accordance with the Commercial Rules of the American Arbitration Association.
Judgment upon the award rendered by the arbitrator shall be entered in a court
having jurisdiction thereof. All such arbitration cases shall be heard by an
attorney licensed in the jurisdiction where the arbitration hearing is to
occur.
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ARTICLE XIII
NONALIENATION PROVISION
No participant shall have the right or power to alienate, anticipate,
commute, pledge, encumber, or assign any of the funds allocated to the
participant under the terms of this Plan, and such funds shall not be subject
to seizure by any creditor of the participant under any writ or proceedings at
law or in equity; provided, that the terms of this Article shall not prohibit
the creation, assignment or recognition of a right to any benefit payable with
respect to a participant if such creation, assignment or recognition of a right
is made under a qualified domestic relations order defined under Code Section
414(p).
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ARTICLE XIV
TERMINATION
14.1 PLAN TERMINATION. The employer shall have the right to
terminate the Plan at any time as to its employees by action of its board of
directors or by action of any committee or officer to whom such board of
directors has delegated the right to terminate the Plan. In addition,
Microsoft Corporation reserves the right to terminate the Plan in its entirety
at any time by action of the Board of Directors of Microsoft Corporation or by
action of any committee or officer to whom the Board of Directors has delegated
such authority to terminate the Plan, and the Plan shall terminate in its
entirety unless Microsoft Corporation permits employers wishing to continue the
Plan as to their respective employees to arrange a spin-off of Plan assets
attributable to accounts of their employees.
14.2 NO REVERSION TO EMPLOYER -- ACCRUED RIGHTS NONFORFEITABLE. No
termination shall have the effect of vesting in the employer any part of the
principal or income of the plan funds. In the case of a termination, partial
termination, or complete discontinuance of contributions, the rights of all
affected employees accrued to the date of such termination or partial
termination, to the extent funded as of such date, shall be nonforfeitable.
14.3 DISTRIBUTION UPON TERMINATION OR DISCONTINUANCE OF
CONTRIBUTIONS. Upon termination of the Plan or a complete discontinuance of
contributions to the Plan the interests of all participants shall fully vest
and distribution shall be made to each participant in the form and manner
determined by the Plan Administrator and as permitted by the Code and ERISA.
See Section 7.7 of this Plan.
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ARTICLE XV
MERGER OR CONSOLIDATION
In the case of any merger or consolidation with, or transfer of,
assets or liabilities to any other retirement Plan, the termination benefits of
participants, former participants and beneficiaries immediately subsequent to
the merger, consolidation or transfer shall be equal to or greater than the
termination benefits immediately prior to such merger, consolidation, or
transfer.
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ARTICLE XVI
AMENDMENTS
Microsoft Corporation reserves the right, from time to time, to make any
amendment or amendments to this Plan by resolution of its Board of Directors,
or by action of any committee or officer to whom the Board of Directors has
delegated authority to amend the Plan, which amendment or amendments shall not
cause any part of the plan funds to be used for, or directed to, any purposes
other than the exclusive benefit of participants, former participants or their
beneficiaries, nor shall any such amendment reduce the amount of accrued
benefit of any participant or beneficiary within the meaning of Code Section
411(d)(6) except to the extent permitted by Code Section 411(d)(6) or the
Treasury Regulations thereunder.
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ARTICLE XVII
RIGHTS RESERVED
The establishment of the Plan as evidenced hereby or as hereafter
modified, the creation of any funds or accounts or the payment of any benefit
hereunder shall not be construed as giving any participant, or any other
person, any legal or equitable right against the employer, the trustee, or the
Plan Administrator, unless the same shall be specifically provided for in this
document or conferred by affirmative action of the employer in accordance with
the terms and provisions of this Plan or as giving any employee or participant
the right to be retained in the service of the employer. All employees shall
remain subject to discharge by the employer to the same extent as if this Plan
had never been executed.
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ARTICLE XVIII
TOP-HEAVY PROVISIONS
If the Plan is top-heavy in any plan year, the provisions of Appendix IV,
attached hereto and incorporated herein, shall supersede any conflicting
provisions in the Plan.
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ARTICLE XIX
LOANS
Beginning January 1, 1993, a participant may borrow from his or her
account in accordance with a non-discriminatory written loan policy, which is
incorporated herein by reference.
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APPENDIX I
DEFINITION OF COMPENSATION
Section 1.3
I.1.3.A. Compensation:
(a) For all plan years commencing on or after April 1,
1989, and prior to January 1, 1994, compensation means an employee's salary or
wages paid during the plan year. Compensation includes bonuses, commissions,
overtime and salary reduction contributions made by an employee to a benefit
plan, but shall not include reimbursement of moving expenses, car allowances,
club dues, income attributable to life insurance, and similar items.
Notwithstanding anything in this Plan to the contrary, the compensation of each
employee taken into account for any such plan year shall not exceed $200,000,
except that such $200,000 shall be increased as permitted by Internal Revenue
Service publication to reflect cost-of-living adjustment.
(b) For all plan years commencing on or after January 1,
1994, an employee's wages, salaries, fees for professional services, and other
amounts received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment with the
employer maintaining the plan to the extent that the amounts are includible in
gross income (including, but not limited to, bonuses, commissions, and overtime
pay). Compensation includes the employee's elective salary reduction
contributions not includible in gross income under Code Section 125 (cafeteria
plans) or Section 402(e)(3) (401(k) plans); and compensation includes foreign
earned income (as defined in Code Section 911(b)), whether or not excludable
from gross income under Code Section 911. Compensation shall not include:
(i) (even if includible in gross income)
reimbursements or other expense allowances, fringe benefits (cash and noncash),
moving expenses, deferred compensation, and welfare benefits;
(ii) employer contributions to a simplified
employee pension described in Code Section 408(k), distributions from a plan
of deferred compensation (regardless of whether such amounts are includible in
the gross income of the employee when distributed);
I-1
<PAGE> 44
(iii) amounts realized from the exercise of a
nonqualified stock option, or when restricted stock (or property) held by an
employee either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
(iv) amounts realized by the employee from the
sale, exchange or other disposition of stock acquired under a qualified stock
option; and
(v) other amounts which receive special tax
benefits, such as premiums for group-term life insurance.
I.1.3.B. Compensation for Employees of Controlled Group
In the case of an employee of an employer which is a member of
a controlled group of corporations (as defined in Code Section 414(b) as
modified by Code Section 415(h)), the term "compensation" for such employee
includes compensation from all employers that are members of the group,
regardless of whether the employee's particular employer has a qualified plan.
This rule is also applicable to an employee of two or more trades or businesses
(whether or not incorporated) that are under common control (as defined in Code
Section 414(c) as modified by Code Section 415(h)), to an employee of two or
more members of an affiliated service group as defined in Code Section 414(m),
and to an employee of two or more members of any group of employers who must be
aggregated and treated as one employer pursuant to Code Section 414(o).
I.1.3.C. Limitations on Compensation
(a) In addition to the applicable limitations set forth
in the Plan, and notwithstanding any other provisions of the Plan to the
contrary, for plan years beginning on or after January 1, 1994, the annual
compensation of each employee taken into account under the Plan shall not
exceed the OBRA '93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000, as adjusted by the Commissioner for increases
in the cost of living in accordance with Code Section 401(a)(17)(B). The
cost-of-living adjustment in effect for a calendar year applies to any period,
not exceeding 12 months, over which compensation is determined (the
"determination period") beginning in such calendar year. If a determination
period consists of fewer than 12 months, the OBRA '93 annual compensation limit
will be
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<PAGE> 45
multiplied by a fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For plan years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Code Section 401(a)(17) shall
mean the OBRA '93 annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken
into account in determining an employee's benefit accruing in the current plan
year, the compensation for that prior determination period is subject to the
OBRA '93 annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the first
date of the first plan year beginning on or after January 1, 1994, the OBRA '93
annual compensation limit is $150,000.
For purposes of determining the maximum dollar amount referred
to in this provision, the compensation of any participant who is either a 5%
owner (as defined in Code Section 416(i)) or one of the ten most highly paid
highly compensated employees during the Plan year shall be aggregated with:
(i) the compensation of any lineal descendant who has not attained the age of
19, and (ii) the compensation of a participant who is his or her spouse.
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<PAGE> 46
APPENDIX II
Sections 1.6, 2.1 and 5.2
EMPLOYERS MAINTAINING THE PLAN
<TABLE>
<CAPTION>
Employer Effective Date
___________________________________________ ________________________________
<S> <C>
Microsoft Corporation January 1, 1987
Technology Resources Management Corporation November 23, 1992
</TABLE>
EMPLOYEES' PREPARTICIPATION SERVICE WITH THESE COMPANIES
IS COUNTED FOR ELIGIBILITY AND VESTING
<TABLE>
<CAPTION>
Company Effective Date Credit is Granted
___________________________________________ ________________________________
<S> <C>
Microsoft Corporation January 1, 1987
Technology Resources Management Corporation November 23, 1992
Fox Software, Inc. July 1, 1992
SOFTIMAGE, Inc. June 27, 1994
Bauer Group, Inc. July 1, 1989
Forethought, Inc. August 1, 1987
</TABLE>
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<PAGE> 47
APPENDIX III
CODE SECTION 401(k) LIMITATIONS OF COMPENSATION DEFERRALS AND
CODE SECTION 401(m) LIMITATIONS ON COMPENSATION DEFERRALS
III.9.5.A. Definition of Highly Compensated Employee
"Highly compensated employee" shall mean:
(a) Any employee who performs services for the employer
during the "determination year" and who, during the "look-back year" (1) was a
5% owner of the employer; (2) received compensation from the employer in excess
of $75,000 (as adjusted for increases in cost of living as reported in IRS
publications); (3) received compensation from the employer in excess of $50,000
(as adjusted for increases in cost of living as reported in IRS publications)
and was a member of the "top-paid group" for such year; or (4) was an officer
of the employer and received compensation during such year that is greater than
50% of the dollar limitation in effect under Code Section 415(c)(1)(A);
(b) Any employee who performs services for the employer
during the determination year and who, with respect to the determination year,
is either described in (a)(1) above or is both one of the 100 employees who
received the most compensation from the employer during the determination year
and is described in (a)(2), (a)(3) or (a)(4); or
(c) Any employee who separated from service (or was
deemed to have separated) prior to the determination year, and met the
description in (a) or (b) above for either the separation year or any
determination year ending on or after the employee's 55th birthday.
(d) If no officer of the employer has compensation in
excess of 50% of the dollar limitation in effect under Code Section
415(b)(1)(A) during a determination year or a look-back year, the highest paid
officer for such year shall be treated as a highly compensated employee.
(e) If an employee is, during a determination year or
look-back year, a "family member" of either a 5% owner who is an employee or of
a highly compensated employee in the group consisting of the 10 most highly
compensated employees ranked on the basis of compensation paid by the employer
during such year, then the family member and 5% owner or
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<PAGE> 48
top-ten highly compensated employee shall be treated as a single employee, and
their compensation and contributions or benefits under this Plan shall be
aggregated. Except as otherwise provided under Code Section 401(a)(17),
"family member" includes the spouse, lineal ascendants and descendants of the
employee or former employee, and the spouses of such lineal ascendants and
descendants.
(f) The "determination year" shall be the Plan year for
which compliance is being tested, and the "look-back year" shall be the
12-month period immediately preceding the determination year.
(g) The "top-paid group" for a determination year or a
look-back year shall consist of the top 20% of employees ranked on the basis of
compensation received during the year excluding employees described in Code
Section 414(q)(8) and Treasury regulations thereunder. The number of
employees treated as officers shall be limited to 50 (or, if less, the greater
of 3 employees or 10% of the employees). For purposes of this definition of
"highly compensated employee", "compensation" means compensation within the
meaning of Code Section 415(c)(3), but including elective or salary reduction
contributions to a cafeteria Plan, cash or deferred arrangement, or
tax-sheltered annuity.
III.9.5.B. Code Section 401(k) Limitations on Compensation
Deferrals.
(a) The Plan Administrator will estimate as soon as
practicable before the close of the plan year and at such other times as the
Plan Administrator in its discretion determines, the extent, if any, to which
any participant or class of participants will have to reduce contributions
under this Plan.
(b) For each plan year, an actual deferral percentage
will be determined for each participant equal to the ratio of the total amount
of the participant's salary deferrals under section 3.1 for the plan year
divided by the participant's compensation in the plan year. In the case of
family members treated as a single highly compensated employee under the
definition of "highly compensated employee", in accordance with the family
aggregation rules of Code Section 414(q)(6), the actual deferral percentage
shall be the greater of the (1) the actual deferral
III-2
<PAGE> 49
percentage determined by combining the compensation deferrals and compensation
of all eligible family members who are highly compensated employees without
regard to family aggregation, and (2) the actual deferral percentage determined
by combining the salary deferrals and compensation of all eligible family
members. Except to the extent taken into account in the preceding sentence,
the deferrals and compensation of such family members shall be disregarded for
purposes of this section. Except as otherwise provided in this paragraph (b),
with respect to participants who have made no salary deferrals under this plan,
such actual deferral percentage will be zero.
(c) The average of the actual deferral percentages for
highly compensated employees ("high average") when compared with the average of
the actual deferral percentages for non-highly compensated employees ("low
average") must meet one of the following requirements:
(1) The high average is no greater than 1.25
times the low average; or
(2) The high average is no greater than two times
the low average and the high average is no greater than the low average plus
two percentage points.
(d) If, pursuant to the estimates by the Plan
Administrator under (a) and (b) above, a participant or class of participants
is not eligible for salary deferral treatment for any or all of the amounts
deferred, then the Plan Administrator may elect, at its discretion, to pursue
any of the following courses of action or any combination thereof:
(1) Excess salary deferrals, and any earnings
attributable thereto through the date of distribution, may be returned to the
employer employing the participant, solely for the purpose of enabling the
employer to withhold any federal, state, or local taxes due on such amounts.
The employer will pay all remaining amounts to the participant within the 2-1/2
month period following the close of the plan year to which the excess salary
deferrals relate to the extent feasible, but in all events no later than 12
months after the close of such plan year.
(2) The Plan Administrator may authorize a
suspension or reduction of salary deferrals.
III-3
<PAGE> 50
(3) The company, in its discretion, may make a
contribution to the Plan, which will be allocated as a fixed dollar amount
among the accounts of non-highly compensated employees who have met the
requirements of section 2.1
(e) The amount of the excess salary deferrals will be
determined by the Plan Administrator by reducing the actual deferral percentage
of the highly compensated employee(s) with the highest actual deferral
percentage to the extent required to enable the plan to meet the limits in (c)
above or to cause the actual deferral percentage of such employee(s) to equal
the actual deferral percentage of the highly compensated employee(s) with the
next-highest actual deferral percentage. The process in the preceding sentence
shall be repeated until the Plan satisfies the limits in (c) above. In the
case of family members subject to the family aggregation rules of Code Section
414(q)(6), excess salary deferrals will be allocated among family members in
proportion to the salary deferrals of each family member that have been
combined under section III.9.5.B.(b) above. Where the actual deferral
percentage is determined under section III.9.5.B.(b)(1) above, however, excess
salary deferrals will be allocated first among the eligible highly compensated
employee family members in proportion to the salary deferrals of each such
highly compensated employee family member until the actual deferral percentage
of the eligible highly compensated employee family members has been reduced to
the actual deferral percentage of the eligible non-highly compensated employee
family members. If reduction of the actual deferral percentage below that of
the eligible non-highly compensated employee family members is required under
section III.9.5.B.(b)(1) to enable the plan to meet the limits in section
III.9.5.B.(c) above, such further reduction shall take into account the salary
deferrals of all eligible family members and shall be allocated among all such
family members in proportion to their salary deferrals. The earnings
attributable to excess salary deferrals will be determined in accordance with
Treasury Regulations.
(f) In the discretion of the Plan Administrator, the
tests described in this section may be applied by aggregating the Plan with any
other defined contribution plans permitted under the Code.
III-4
<PAGE> 51
III.9.5.C. Code Section 401(m) Limitations on Employer Matching
Contributions
(a) For each plan year, a contribution percentage will be
determined for each participant equal to the ratio of the total amount of the
participant's employer matching contributions under section 4.1 for the plan
year divided by the participant's compensation for the plan year. Any employer
matching contributions or employer contributions treated as salary deferrals
under section III.9.5.B.(b) shall not be used to satisfy the requirements of
this Section III.9.5.B.(a), except as otherwise permitted by the Code or
Treasury Regulations. In the case of family members treated as a single highly
compensated employee under the definition of "highly compensated employee" in
accordance with the family aggregation rules of Code Section 414(q)(6), the
contribution percentage shall be the greater of (1) the contribution percentage
determined by combining the employer matching contributions and compensation of
all eligible family members who are highly compensated employees without regard
to family aggregation, and (2) the actual contribution percentage determined by
combining the employer matching contributions and compensation of all eligible
family members. Except to the extent taken into account in the preceding
sentence, the employer matching contributions, compensation and all amounts
treated as employer matching contributions of such family members shall be
disregarded for purposes of this section III.9.5.C. Except as otherwise
provided in this Section III.9.5.C.(b), with respect to participants and for
whom there were no employer matching contributions under this plan, such
contribution percentage will be zero.
(b) The average of the contribution percentages for
highly compensated employees ("high average") when compared with the average of
the contribution percentages for non-highly compensated employees ("low
average") does not exceed the greater of:
(1) 1.25 times the low average; or
(2) The lesser of two times the low average, or
the low average plus two percentage points.
(c) If the contribution percentage for any plan year for
highly compensated employees exceeds the limits established in (b), the excess
contributions for such plan year (and
III-5
<PAGE> 52
the earnings attributable to such excess contributions through the date of
distribution) shall be distributed to the highly compensated employees so that
the contribution percentage of the highly compensated employee(s) with the
highest contribution percentage is reduced to the extent required to enable the
plan to meet the limits in (b) above or to cause the contribution percentage of
such employee(s) to equal the contribution percentage of the highly compensated
employee(s) with the next-highest contribution percentage. The process in the
preceding sentence shall be repeated until the plan satisfies the limits in (b)
above. In the case of family members subject to the family aggregation rules
of Code Section 414(q)(6), excess contributions will be allocated among family
members in proportion to the employer matching contributions of each family
member that have been combined under section III.9.5.C.(a) above. Where the
contribution percentage is determined under section III.9.5.C.(a)(1) above,
however, excess employer matching contributions will be allocated first among
the eligible highly compensated employee family members in proportion to the
employer matching contributions of each such highly compensated employee family
member until the contribution percentage of the eligible highly compensated
employee family members has been reduced to the contribution percentage of the
eligible non-highly compensated employee family members. If reduction of the
contribution percentage below that of the eligible non-highly compensated
employee family members is required under section III.9.5.C.(a)(1) to enable
the plan to meet the limits in section A.3(b) above, such further reduction
shall take into account the employer matching contributions of all eligible
family members in proportion to their employer matching contributions. The
earnings attributable to excess contributions will be determined in accordance
with Treasury Regulations.
(d) The tests of sections III.9.5.B.(c) and III.9.5.C.(b)
shall be met in accordance with the prohibition against the multiple use of the
alternative limitation under Code Section 401(m)(9).
III-6
<PAGE> 53
APPENDIX IV
IV.18.A. TOP-HEAVY DEFINITIONS. The definitions relating to
top-heavy plan provisions are as follows:
(a) Key Employee shall mean any employee or former
employee (and the beneficiaries of such employee) who, in the plan year
containing the determination date, or any of the four preceding plan years is:
(i) An officer of the employer having an annual
compensation from the employer greater than 150 percent of the amount in effect
under Code Section 415(b)(1)(A) for any such plan year. Not more than fifty
employees (or, if fewer, the greater of three employees or ten percent of the
employees), including those employees included under subparagraph (ii), (iii)
and (iv) below, shall be considered as officers for purposes of this
subparagraph.
(ii) One of the ten employees having an annual
compensation from the employer of more than the amount in effect under Code
Section 415(c)(1)(A) in the plan year and owning (or considered as owning
within the meaning of Code Section 318) the largest interests in the employer.
(iii) A five-percent owner of the employer.
(iv) A one-percent owner of the employer having an
annual compensation (within the meaning of Code Section 414(q)(7)) from the
employer of more than $150,000 for a plan year.
Whether an employee is a five-percent owner or a one-percent owner
shall be determined in accordance with Code Section 416(i). If any individual
has not performed services for the employer at any time during the five year
period ending on the determination date, any accrued benefit for such
individual shall not be taken into account.
(b) Top-Heavy Plan shall mean that this Plan is
considered top-heavy for any plan year if any of the following conditions
exists:
(i) If the top-heavy ratio for this Plan exceeds
60% and this Plan is not part of any required aggregation group or permissive
aggregation group of plans.
IV-1
<PAGE> 54
(ii) If this Plan is a part of a required
aggregation group of plans but not part of a permissive aggregation group and
the top-heavy ratio for the group of plans exceeds 60%.
(iii) If this Plan is a part of a required
aggregation group and part of a permissive aggregation group of plans and the
top-heavy ratio for the permissive aggregation group exceeds 60%.
(c) Top-Heavy Ratios shall mean the ratios calculated as
follows:
(i) If the employer maintains one or more defined
contribution plans (including any simplified employee pension plan) and the
employer has not maintained any defined benefit plan which during the 5-year
period ending on the determination date(s) has or has had accrued benefits, the
top-heavy ratio for this Plan alone or for the required or permissive
aggregation group as appropriate is a fraction, the numerator of which is the
sum of the account balances of all key employees as of the determination
date(s) (including any part of any account balance distributed in the 5-year
period ending on the determination date(s)), and the denominator of which is
the sum of all account balances (including any part of any account balance
distributed in the 5-year period ending on the determination date(s)), both
computed in accordance with Code Section 416 and the regulations thereunder.
Both the numerator and denominator of the top-heavy ratio are adjusted to
reflect any contribution not actually made as of the determination date, but
which is required to be taken into account on that date under Code Section 416
and the regulations thereunder.
(ii) If the employer maintains one or more defined
contribution plans (including any simplified employee pension plan) and the
employer maintains or has maintained one or more defined benefit plans which
during the 5-year period ending on the determination date(s) has or has had any
accrued benefits, the top-heavy ratio for any required or permissive
aggregation group as appropriate is a fraction, the numerator of which is the
sum of account balances under the aggregated defined contribution plan or plans
for all key employees, determined in accordance with (i) above, and the present
value of accrued benefits under the
IV-2
<PAGE> 55
aggregated defined benefit plan or plans for all key employees as of the
determination date(s), and the denominator of which is the sum of the account
balances under the aggregated defined contribution plan or plans for all
participants, determined in accordance with (i) above, and the present value of
accrued benefits under the defined benefit plan or plans for all participants
as of the determination date(s), all determined in accordance with Code Section
416 and the regulations thereunder. The accrued benefits under a defined
benefit plan in both the numerator and denominator of the top-heavy ratio are
adjusted for any distribution of an accrued benefit made in the five-year
period ending on the determination date.
(iii) For purposes of (i) and (ii) above the value
of account balances and the present value of accrued benefits will be
determined as of the most recent valuation date that falls within or ends with
the 12-month period ending on the determination date, except as provided in
Code Section 416 and the regulations thereunder for the first and second plan
years of a defined benefit plan. The account balances and accrued benefits of
a participant (1) who is not a key employee but who was a key employee in a
prior year, or (2) who has not been credited with at least one hour of service
with any employer maintaining the Plan at any time during the 5-year period
ending on the determination date will be disregarded. The calculation of the
top-heavy ratio, and the extent to which distributions, rollovers, and
transfers are taken into account will be made in accordance with Code Section
416 and the regulations thereunder. Deductible employee contributions will not
be taken into account for purposes of computing the top-heavy ratio. When
aggregating plans the value of account balances and accrued benefits will be
calculated with reference to the determination dates that fall within the same
calendar year.
(d) Permissive Aggregation Group shall mean the required
aggregation group of plans plus any other plan or plans of the employer which,
when considered as a group with the required aggregation group, would continue
to satisfy the requirements of Code Sections 401(a)(4) and 410.
(e) Required Aggregation Group shall mean each qualified
plan of the employer in which at least one key employee participates or
participated at any time during the
IV-3
<PAGE> 56
determination period (regardless of whether the plan has terminated), and any
other qualified plan of the employer which enables such a plan to, meet the
requirements of Code Section 401(a)(4) or Section 410.
(f) Determination Date shall mean for any plan year
subsequent to the first plan year, the last day of the preceding plan year; for
the first plan year of the Plan, the last day of that year.
(g) Valuation Date shall mean the date as of which
account balances or accrued benefits are valued for purposes of calculating the
top-heavy ratio.
(h) Present value shall be based only on the interest and
mortality rates specified in the adoption agreement.
IV.18.B. MINIMUM ALLOCATION.
The employer contributions and forfeitures allocated on behalf of any
participant employed on the last day of the plan year, who is not a key
employee, shall not be less than the lesser of three percent of such
participant's compensation or in the case where the employer has no defined
benefit plan which designates this plan to satisfy Code Section 401, the
largest percentage of employer contributions and forfeitures, as a percentage
of the first $150,000 (or the adjusted limitation under Code Section
401(a)(17)) of the key employee's compensation, allocated on behalf of any key
employee for that year. If the highest rate allocated to a key employee for a
year in which the Plan is top heavy is less than 3%, amounts contributed as a
result of a salary deferral agreement shall be included in determining
contributions made on behalf of key employees. The minimum allocation is
determined without regard to any Social Security contribution. This minimum
allocation shall be made even though, under other plan provisions, the
participant would not otherwise be entitled to receive an allocation, or would
have received a lesser allocation for the year because of (1) the participant's
failure to complete 1,000 hours of service (or any equivalent provided in the
Plan), or (2) the participant's failure to make mandatory employee
contributions to the Plan, or (3) compensation less than a stated amount. An
allocation under this section shall not be made if the participant is covered
under any other plan or plans of
IV-4
<PAGE> 57
the employer and the minimum allocation or benefit requirement applicable to
top-heavy plans will be met in the other plan or plans. The definition of
compensation in section 1.3 of the Plan shall be the definition for determining
minimum allocations under this section. This definition shall be used for all
top-heavy purposes, including determining whether an employee is a key
employee.
The employer has caused this restated Plan to be duly executed on this
_____ day of June, 1994.
MICROSOFT CORPORATION
By _________________________________
Title: _____________________________
IV-5
<PAGE> 1
EXHIBIT 11.
COMPUTATION OF EARNINGS PER SHARE
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Year Ended June 30
1992 1993 1994
----- ----- ------
<S> <C> <C> <C>
Weighted average number of common shares outstanding . . . . . . . . . . . . 533 556 571
Common equivalent shares from outstanding stock options. . . . . . . . . . . 55 50 39
----- ----- ------
Average common and common equivalent shares outstanding (1) (2). . . . . . . 588 606 610
===== ===== ======
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 708 $ 953 $1,146
===== ===== ======
Earnings per share (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . $1.20 $1.57 $ 1.88
===== ===== ======
</TABLE>
- -------------------
(1) Fully diluted earnings per share have not been presented because the
effects are not material.
(2) Share and per share amounts for the years ended June 30, 1992 and 1993 have
been restated to reflect a two-for-one stock split in May 1994.
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In millions, except earnings per share) Year Ended June 30
-------------------------------------------------------------
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues $1,183 $1,843 $2,759 $3,753 $4,649
Net income 279 463 708 953 1,146
Earnings per share 0.52 0.82 1.20 1.57 1.88
Return on net revenues 23.6% 25.1% 25.7% 25.4% 24.7%
Cash and short-term investments $ 449 $ 686 $1,345 $2,290 $3,614
Total assets 1,105 1,644 2,640 3,805 5,363
Stockholders' equity 919 1,351 2,193 3,242 4,450
</TABLE>
FINANCIAL RESULTS
Due in large measure to the ongoing success of the Microsoft(R)
Windows(TM) operating system and Microsoft Office, Microsoft posted its 19th
consecutive year of revenue and earnings growth.
Revenues were $4.65 billion in 1994, an increase of 24% over the $3.75
billion recorded the preceding year. Net income totaled $1.15 billion, up 20%
from the $953 million of 1993. Earnings per share reached $1.88, compared with
$1.57 last year (restated to reflect the Company's two-for-one stock split in
May 1994).
In the third quarter of 1994, Microsoft recorded a $120 million pretax
charge after a jury verdict in the Stac Electronics patent litigation. In the
fourth quarter, Microsoft reached an agreement with Stac to settle the
litigation and reversed $30 million of the charge. The net $90 million pretax
charge reduced earnings per share for 1994 by $0.10.
<PAGE> 2
MICROSOFT CORPORATION 1994 FINANCIAL RESULTS
TABLE OF CONTENTS
<TABLE>
<S> <C>
Income Statements 2
Management's Discussion and
Analysis - Results of Operations 3
Management's Discussion and
Analysis - Outlook: Issues and Risks 6
Management's Discussion and
Analysis - Financial Condition 7
Cash Flows Statements 8
Balance Sheets 9
Statements of Stockholders' Equity 10
Management's Discussion and
Analysis - Employee Stock Options 11
Management's Discussion and
Analysis - Outstanding Common
Shares and Options and Computed Values 12
Notes to Financial Statements 13
Quarterly Financial and Market
Information 18
Selected Five-Year Financial Data 19
Reports of Management and
Independent Auditors 20
</TABLE>
<PAGE> 3
INCOME STATEMENTS
(In millions, except earnings per share)
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues $2,759 $3,753 $4,649
Cost of revenues 467 633 763
------ ------ ------
Gross profit 2,292 3,120 3,886
------ ------ ------
Operating expenses:
Research and development 352 470 610
Sales and marketing 854 1,205 1,384
General and administrative 90 119 166
------ ------ ------
Total operating expenses 1,296 1,794 2,160
------ ------ ------
Operating income 996 1,326 1,726
Interest income -- net 56 82 102
Litigation charge -- -- (90)
Other expenses (11) (7) (16)
------ ------ ------
Income before income taxes 1,041 1,401 1,722
Provision for income taxes 333 448 576
------ ------ ------
Net income $ 708 $ 953 $1,146
====== ====== ======
Earnings per share $ 1.20 $ 1.57 $ 1.88
====== ====== ======
Weighted average shares outstanding 588 606 610
====== ====== ======
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
NET REVENUES NET INCOME EARNINGS PER SHARE
-------------- -------------- ------------------
YEAR AMOUNT YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
1992 $2,759 1992 $ 708 1992 $1.20
1993 $3,753 1993 $ 953 1993 $1.57
1994 $4,649 1994 $1,146 1994 $1.88
</TABLE>
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In millions)
RESULTS OF OPERATIONS
OVERVIEW
Microsoft develops, manufactures, markets, licenses, and supports a wide range
of software products, including operating systems for personal computers (PCs),
office machines, and personal information devices; applications programs; and
languages; as well as personal computer books, hardware, and multimedia
products.
NET REVENUES
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues $2,759 36% $3,753 24% $4,649
</TABLE>
Product groups. Operating systems product group revenues were $1,104
million, $1,267 million, and $1,519 million in 1992, 1993, and 1994. The
MS-DOS(R) operating system is preinstalled on PCs by most original equipment
manufacturers (OEMs), and revenues from such licenses increased steadily in
both 1993 and 1994. Revenues from retail upgrade versions of MS-DOS decreased
in 1994 after a strong increase in 1993. The Microsoft Windows operating
system was an increasingly strong contributor to systems revenues as the number
of new PCs preinstalled with Windows increased rapidly during the
three-year period.
Applications product group revenues were $1,401 million, $2,253
million, and $2,927 million in 1992, 1993, and 1994. Increases in applications
revenues were led by strong sales of Microsoft Office. The Microsoft Office
Standard product includes Microsoft Excel, Microsoft Word, the Microsoft
PowerPoint(R) presentation graphics program, and a Microsoft Mail license,
while the Microsoft Office Professional product also includes Microsoft
Access(R) database. Sales of stand-alone versions of the Microsoft Excel
spreadsheet and the Microsoft Word word processor increased in 1993 but
decreased in 1994 as the sales mix continued to shift to integrated products.
Microsoft Home, a broad range of products in the Company's consumer
applications group, also showed continued growth. The Microsoft Home brand
includes CD-ROM multimedia library titles and products for children's
creativity, personal productivity, and entertainment.
Windows-based software programs represented approximately 85% of
applications revenues in 1994, up from 65% in 1992 and 75% in 1993.
Hardware product group revenues were $254 million, $233 million, and
$203 million in 1992, 1993, and 1994. The hardware product group's principal
products are the Microsoft Mouse and BallPoint(R) Mouse pointing devices.
<TABLE>
<CAPTION>
SYSTEMS REVENUES APPLICATIONS REVENUES
---------------- ---------------------
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
<S> <C> <C> <C>
1992 $1,104 1992 $1,401
1993 $1,267 1993 $2,253
1994 $1,519 1994 $2,927
</TABLE>
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
(In millions)
Sales channels. The Company has four major channels of distribution including:
finished goods sales in the U.S. and Canada, Europe, and Other International;
and OEM. Sales in the finished goods channels are primarily to distributors
and resellers. OEM channel revenues are license fees from original equipment
manufacturers.
U.S. and Canada channel revenues were $1,062 million, $1,371 million,
and $1,575 million in 1992, 1993, and 1994.
Revenues in Europe were $997 million, $1,259 million, and $1,363
million in 1992, 1993, and 1994. Other International channel revenues
increased 36% in 1994 to $532 million. Revenues were $223 million in 1992 and
$392 million in 1993.
The Company's operating results are affected by foreign exchange
rates. Approximately 46%, 44%, and 40% of the Company's revenues were
collected in foreign currencies during 1992, 1993, and 1994. Since much of the
Company's international manufacturing costs and operating expenses are also
incurred in local currencies, the relative impact of exchange rates on net
income is less than on revenues.
OEM revenues grew 61% from the prior year to $1,179 million. OEM
revenues were $477 million in 1992 and $731 million in 1993. The primary
source of OEM revenues is licenses of operating systems, particularly MS-DOS
and Microsoft Windows. During 1994, approximately 80% of Windows units were
sold through the OEM channel, up from approximately 50% in 1992 and 75% in
1993.
<TABLE>
<CAPTION>
U.S. AND CANADA REVENUES EUROPE REVENUES
------------------------ ---------------
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
<S> <C> <C> <C>
1992 $1,062 1992 $ 997
1993 $1,371 1993 $1,259
1994 $1,575 1994 $1,363
</TABLE>
<TABLE>
<CAPTION>
OTHER INTERNATIONAL REVENUES OEM REVENUES
---------------------------- ---------------
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
<S> <C> <C> <C>
1992 $223 1992 $ 477
1993 $392 1993 $ 731
1994 $532 1994 $1,179
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
(In millions, except earnings per share)
COST OF REVENUES
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Cost of revenues $467 36% $633 21% $763
Percentage of net revenues 16.9% 16.9% 16.4%
---- ---- ----
</TABLE>
Cost of revenues as a percentage of net revenues was 16.4% in 1994, down from
16.9% in 1992 and 1993. The percentage decreased due to lower disk prices from
vendors and a greater percentage of sales of licenses to OEMs and corporations,
offset by increased sales of lower-margin Microsoft Office and upgrade
products.
OPERATING EXPENSES
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Research and development $352 34% $ 470 30% $ 610
Percentage of net revenues 12.8% 12.5% 13.1%
---- ------ ------
Sales and marketing $854 41% $1,205 15% $1,384
Percentage of net revenues 31.0% 32.1% 29.8%
---- ------ ------
General and administrative $ 90 32% $ 119 39% $ 166
Percentage of net revenues 3.3% 3.2% 3.6%
---- ------ ------
</TABLE>
Increases in research and development expenses resulted primarily from
planned additions to the Company's software development and advanced technology
staffs, as well as higher levels of third-party development costs.
In 1994, sales and marketing expenses increased at a slower rate than
revenues due to a concerted performance orientation at all sales sites. The
increases in the absolute dollars of sales and marketing expenses in 1993 and
1994 were due to increased marketing programs and advertising for the launch of
new products, planned hiring of marketing personnel, and continued development
of Product Support Services.
Increases in general and administrative expenses are primarily
attributable to higher legal costs and growth in the systems and people
necessary to support overall increases in the scope of the Company's
operations.
NONOPERATING INCOME
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Nonoperating income $45 67% $75 15% $86
Litigation charge -- -- $90
--- --- ---
</TABLE>
The primary component of nonoperating income is interest income, which
was $58 million, $83 million, and $104 million in 1992, 1993, and 1994.
Increased interest income is the result of a larger investment portfolio
generated by cash from operations, offset in both 1993 and 1994 by declining
interest rates.
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 the year.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Provision for income taxes $333 35% $448 29% $576
Effective tax rate 32.0% 32.0% 33.5%
---- ---- ----
</TABLE>
The effective tax rate increased in 1994 primarily because of an increase in
the U.S. statutory income tax rate. Notes To Financial Statements describe
the differences between the U.S. statutory and effective income tax rates.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
1992 Change 1993 Change 1994
----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net income $ 708 35% $ 953 20% $1,146
Percentage of net revenues 25.7% 25.4% 24.7%
Earnings per share $1.20 31% $1.57 20% $ 1.88
----- -- ----- -- ------
</TABLE>
Net income as a percentage of net revenues decreased in 1994, primarily due to
the Stac Electronics patent litigation charge and increased research and
development expenses, offset by the lower relative level of sales and marketing
expenses. The slight percentage decrease in 1993 from 1992 was attributable to
higher relative sales and marketing expenditures.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
OUTLOOK: ISSUES AND RISKS
The Company's 1994 Annual Report includes discussions of its long-term growth
outlook. The following issues and risks, among others, should also be
considered in evaluating its outlook.
Rapid technological change. The personal computer software industry
is characterized by rapid technological change and uncertainty as to the
widespread acceptance of new products.
Long-term investment cycle. Developing, manufacturing, and licensing
software is expensive and the investment in product development often involves
a long pay-back cycle. The Company began investing in the principal products
that are significant to its current revenues in the early 1980s. The Company's
plans for 1995 include significant investments in software research and
development and related product opportunities from which significant revenues
are not anticipated for a number of years.
Product ship schedules. Delays in the release of new products can
cause operational inefficiencies that impact manufacturing capabilities,
distribution logistics, and telephone support staffing.
Microsoft Office. Revenues from Microsoft Office may increase as a
percentage of total revenues in 1995. The price of Microsoft Office is less
than the sum of the prices for the individual application programs included in
this product when such programs are sold separately.
Prices. Future prices the Company is able to obtain for its products
may decrease from historical levels depending upon market or other cost
factors.
Saturation. Product upgrades, enabling users to upgrade from earlier
versions of the Company's products or from competitors' products, have lower
prices than new products. As the desktop PC software market becomes saturated,
the sales mix shifts from standard products to upgrade products. This trend is
expected to continue in 1995.
Introductory pricing. The Company has offered certain new products at
low introductory prices. This practice may continue with other new product
offerings.
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 1993 and 1994.
Volume discounts. In 1994, unit sales increased under Microsoft
Select, a large account program designed to permit large organizations to
license Microsoft products. Average revenue per copy from Select license
programs is lower than average revenue per copy from retail versions shipped
through the finished goods channels.
Foreign exchange. A large percentage of the Company's sales are
transacted in local currencies. As a result, the Company's revenues are
subject to foreign exchange rate fluctuations.
Cost of revenues. Although cost of revenues as a percentage of net
revenues was relatively consistent in 1993 and 1994, it varies with channel mix
and product mix within channels. Changes in channel and product mix, as well
as in the cost of product components, may affect cost of revenues as a
percentage of net revenues in 1995.
Sales and marketing and support investments. The Company's plans for
1995 include continued investments in its sales and marketing and support
groups. Competitors may be able to enter the market without making investments
of such scale.
Accounting standards. Accounting standards promulgated by the
Financial Accounting Standards Board change periodically. Changes in such
standards, including currently proposed changes in the accounting for employee
stock option plans, may have a negative impact on the Company's future reported
earnings.
Unlicensed copying. Unlicensed copying of software represents a loss
of revenues to the Company. The Company is actively educating consumers and
lawmakers on this issue. However, there can be no assurance that continued
efforts will affect revenues positively.
Growth rates. Management believes the Company's recent revenue growth
rates are not sustainable. Operating expenses as a percentage of revenues may
increase in 1995 because of the above factors, among others.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
(In millions)
Litigation. Litigation regarding intellectual property rights,
patents, and copyrights is increasing in the PC software industry. In
addition, there are other general corporate legal risks. See Notes To
Financial Statements regarding contingencies related to government regulation
and legal proceedings.
FINANCIAL CONDITION
The Company's cash and short-term investments totaled $3,614 million at June
30, 1994 and represented 67% of total assets. The portfolio is diversified
among security types, industries, and individual issuers. The Company's
investments are investment grade and liquid.
Microsoft has no material long-term debt. Stockholders' equity at June
30, 1994 was over $4.4 billion.
Cash generated from operations has been sufficient to fund the
Company's investment in research and development activities and facilities
expansion. As the Company grows, investments will continue in research and
development in existing and advanced areas of technology. The Company's cash
will be used to acquire technology or to fund strategic ventures. 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.
The exercise of stock options by employees provides additional cash.
These proceeds have funded the Company's open market stock repurchase program
through which Microsoft provides shares for stock option and stock purchase
plans. This practice is expected to continue in 1995.
The Company has available $70 million of standby multicurrency lines
of credit. These lines support foreign currency hedging and international cash
management.
Management believes existing cash and short-term investments together
with funds generated from operations will be sufficient to meet the Company's
operating requirements in 1995.
<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT SPENDING SALES AND MARKETING SPENDING
--------------------------------- ----------------------------
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
<S> <C> <C> <C>
1992 $352 1992 $ 854
1993 $470 1993 $1,205
1994 $610 1994 $1,384
</TABLE>
7
<PAGE> 9
CASH FLOWS STATEMENTS
(In millions)
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
1992 1993 1994
------ ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 708 $ 953 $ 1,146
Depreciation and amortization 112 151 237
Current liabilities 167 177 360
Accounts receivable (33) (121) (146)
Inventories (40) (51) 23
Other current assets (18) (35) (27)
------ ------ -------
Net cash from operations 896 1,074 1,593
------ ------ -------
CASH FLOWS FROM FINANCING
Common stock issued 135 229 280
Common stock repurchased (135) (250) (348)
Stock option income tax benefits 130 207 151
------ ------ -------
Net cash from financing 130 186 83
------ ------ -------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (317) (236) (278)
Other assets (41) (17) (64)
Short-term investments (284) (723) (860)
------ ------ -------
Net cash used for investments (642) (976) (1,202)
------ ------ -------
Net change in cash and equivalents 384 284 474
Effect of exchange rates (10) (62) (10)
Cash and equivalents, beginning of year 417 791 1,013
------ ------ -------
Cash and equivalents, end of year 791 1,013 1,477
Short-term investments 554 1,277 2,137
------ ------ -------
Cash and short-term investments $1,345 $2,290 $ 3,614
====== ====== =======
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CASH AND SHORT-TERM INVESTMENTS
-------------------------------
YEAR AMOUNT
---- ------
<S> <C>
1992 $1,345
1993 $2,290
1994 $3,614
</TABLE>
8
<PAGE> 10
BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
June 30
-------------------------
1993 1994
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $2,290 $3,614
Accounts receivable -- net of allowances of $76 and $92 338 475
Inventories 127 102
Other 95 121
------ ------
Total current assets 2,850 4,312
Property, plant, and equipment -- net 867 930
Other assets 88 121
------ ------
Total assets $3,805 $5,363
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 239 $ 324
Accrued compensation 86 96
Income taxes payable 127 305
Other 111 188
------ ------
Total current liabilities 563 913
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital -- shares authorized 2,000;
issued and outstanding 565 and 581 1,086 1,500
Retained earnings 2,156 2,950
------ ------
Total stockholders' equity 3,242 4,450
------ ------
Total liabilities and stockholders' equity $3,805 $5,363
====== ======
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
ASSETS - 1994 EQUITY - 1994
--------------------- -----------------------------
LIABILITIES &
STOCKHOLDERS'
ASSETS PERCENT EQUITY PERCENT
------ ------- ------------- -------
<S> <C> <C> <C>
Cash 67% Stockholders'
PP&E 18% Equity 83%
Other Liabilities 17%
Current
Assets 13%
Other 2%
</TABLE>
9
<PAGE> 11
STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning of year $ 395 $ 657 $1,086
Common stock issued 135 229 280
Common stock repurchased (3) (7) (17)
Stock option income tax benefits 130 207 151
------ ------ ------
Balance, end of year 657 1,086 1,500
------ ------ ------
RETAINED EARNINGS
Balance, beginning of year 956 1,536 2,156
Common stock repurchased (132) (243) (331)
Net income 708 953 1,146
Translation adjustment 4 (90) (21)
------ ------ ------
Balance, end of year 1,536 2,156 2,950
------ ------ ------
Total stockholders' equity $2,193 $3,242 $4,450
====== ====== ======
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
YEAR AMOUNT
---- ------
<S> <C>
1992 $2,193
1993 $3,242
1994 $4,450
</TABLE>
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
EMPLOYEE STOCK OPTIONS
At Microsoft, every employee is eligible to become a stockholder in the Company
through the Company's employee stock purchase and stock option plans.
Management believes stock options have made a major contribution to the success
of the Company by aligning employee interests with those of other stockholders.
Stock options enjoy widespread use today, and many of the Company's competitors
have similar programs.
During the last several years there has been considerable debate about
the appropriate accounting for stock options. Questions in this ongoing
discussion include how stock options should be measured; whether they should be
recorded in traditional financial statements, subject to already complex and
increasingly difficult rules; whether they should be highlighted in a separate
new financial statement or table; or whether further information concerning
stock options should be disclosed in footnotes to financial statements.
Pending resolution of these outstanding issues, on the accompanying page we
have provided a table of outstanding common shares and net options and changes
in their computed values based on quoted prices for the Company's stock. It
provides a clear understanding of the Company's equity, its equity holders, and
the value or possible value of their vested and unvested holdings.
In this table, common shares are those outstanding. Net vested and
unvested options represent the number of common shares issuable upon exercise
of such stock options less the number of common shares that could be
repurchased with proceeds from their exercise. Computed values are calculated
based on the closing price of the Company's common stock on the Nasdaq National
Market System on the dates indicated.
<TABLE>
<CAPTION>
STAKEHOLDINGS - 1994
--------------------
<S> <C>
Employees' and Directors'
Shares and Options 47%
Other Investors' Shares 53%
</TABLE>
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
(In millions)
<TABLE>
<CAPTION>
June 30
-----------------------------------------------------
1992 Change 1993 Change 1994
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
OUTSTANDING COMMON SHARES AND OPTIONS
Directors' and officers' common shares 273 (13) 260 (21) 239
Employees' and directors' net vested
and unvested stock options 78 (11) 67 (5) 62
------- ------ ------- ------ -------
Employees' and directors' shares and options 351 (24) 327 (26) 301
Other investors' common shares 271 34 305 37 342
------- ------ ------- ------ -------
Total 622 10 632 11 643
======= ====== ======= ====== =======
Nasdaq closing price per share $35 $44 $51-5/8
======= ======= =======
COMPUTED VALUES
Directors' and officers' common shares $ 9,579 $1,886 $11,465 $ 845 $12,310
Employees' and directors' net vested
and unvested stock options 2,714 245 2,959 269 3,228
------- ------ ------- ------ -------
Employees' and directors' shares and options 12,293 2,131 14,424 1,114 15,538
Other investors' common shares 9,486 3,930 13,416 4,259 17,675
------- ------ ------- ------ -------
Total $21,779 $6,061 $27,840 $5,373 $33,213
======= ====== ======= ====== =======
</TABLE>
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The financial statements include the accounts of
Microsoft and its wholly owned subsidiaries. Significant intercompany
transactions and balances have been eliminated.
Foreign currencies. Current assets and liabilities denominated in
foreign currencies are translated at the exchange rate on the balance sheet
date. Fixed assets and resulting depreciation are translated at historical
rates. 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 finished goods sales to
distributors and resellers is recognized when related products are shipped.
Revenue billed upon shipment of finished goods products attributable to both
specified and unspecified future product enhancements is deferred and
recognized when such enhancements are delivered. Revenue from software
maintenance contracts is recognized ratably over the contract period.
The Company warrants products against defects and has policies
permitting the return of products under certain circumstances. Provision is
made for warranty costs and returns. Such costs generally have not been
material.
Revenue from products licensed to original equipment manufacturers
is recognized when the licensed products are shipped by the OEM. License fees
received prior to product acceptance are recorded as customer deposits.
Provision is made for bad debts. Such costs generally have not been
material.
Research and development. Research and development costs are expensed
as incurred.
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.
Stock split. In May 1994, outstanding shares of common stock were
split two-for-one. All shares and per share amounts have been restated.
Cash and short-term investments. 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 are stated at the lower of cost or
market. Cost approximates market value for all classifications of cash and
short-term investments.
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.
Diversification of risk. The Company's investment portfolio is
diversified and consists of short-term investment grade securities. At June
30, 1993 and 1994, approximately 40% of accounts receivable represented amounts
due from ten channel purchasers. Two of these each accounted for approximately
10% of revenues in 1993 and 13% in 1994. The Company hedges certain foreign
exchange exposures although no material hedge contracts were outstanding at
June 30, 1994.
Statements of Financial Accounting Standards (SFAS). SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, does not materially affect the Company. SFAS No. 109, Accounting for
Income Taxes, was adopted in 1994, and the effect on current year and
cumulative net income was not material. Required adoption of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, in the first
quarter of 1995 will not have a material impact on the financial statements.
In its current form, a proposed new SFAS, Accounting for Stock-based
Compensation, if adopted, is expected to have a material adverse effect on the
way future net income is reported.
Reclassifications. Certain reclassifications have been made for
consistent presentation.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (cont.)
(In millions)
CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
June 30
--------------------
1993 1994
------ ------
<S> <C> <C>
Cash and equivalents:
Cash $ 225 $ 263
Commercial paper 326 619
Money market preferreds 159 180
Certificates of deposit 160 218
Bank loan participations 143 197
------ ------
Cash and equivalents 1,013 1,477
------ ------
Short-term investments:
Municipal securities 788 1,245
Corporate notes and bonds 226 423
U.S. Treasury securities 199 417
Commercial paper 64 52
------ ------
Short-term investments 1,277 2,137
------ ------
Cash and short-term investments $2,290 $3,614
====== ======
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
June 30
--------------------
1993 1994
------ ------
<S> <C> <C>
Land $ 144 $ 162
Buildings 389 440
Computer equipment 415 532
Other 233 311
------ ------
Property, plant, and equipment - at cost 1,181 1,445
Accumulated depreciation (314) (515)
------ ------
Property, plant, and equipment - net $ 867 $ 930
====== ======
</TABLE>
INCOME TAXES
The provision for income taxes was composed of:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Current taxes:
U.S. and state $225 $352 $470
International 112 123 94
---- ---- ----
Current taxes 337 475 564
Deferred taxes (4) (27) 12
---- ---- ----
Provision for income taxes $333 $448 $576
==== ==== ====
</TABLE>
Differences between the U.S. statutory and effective tax rates were:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate 34.0% 34.0% 35.0%
Tax exempt income (0.6) (0.6) (0.9)
Foreign sales corporation (1.0) (1.0) (1.0)
Tax credits (1.1) (0.9) (2.1)
State taxes and other - net 0.7 0.5 2.5
---- ---- ----
Effective tax rate 32.0% 32.0% 33.5%
==== ==== ====
</TABLE>
Deferred income tax balances were:
<TABLE>
<CAPTION>
JUNE 30
1994
-------
<S> <C>
Deferred income tax assets:
Gross margin items $ 72
Expense items 132
------
Deferred income tax assets 204
------
Deferred income tax liabilities:
International earnings (147)
Other (4)
------
Deferred income tax liabilities (151)
------
Net deferred income tax asset $ 53
======
</TABLE>
U.S. and international components of income before income taxes were:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
U.S. $ 658 $ 960 $1,281
International 383 441 441
------ ------ ------
Income before income taxes $1,041 $1,401 $1,722
====== ====== ======
</TABLE>
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. Income taxes paid were $175 million, $187
million, and $247 million in 1992, 1993, and 1994.
COMMON STOCK
Shares of common stock outstanding were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year 522 544 565
Issued 26 27 25
Repurchased (4) (6) (9)
--- --- ---
Balance, end of year 544 565 581
=== === ===
</TABLE>
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
1995.
In June 1994, the Company merged with SOFTIMAGE, Inc. (SI), a leading
developer of 2-D and 3-D computer animation and visualization software, in a
pooling of interests. The Company exchanged 2.7 million shares, shown as
outstanding at June 30, 1994,
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (cont.)
(In millions, except per share data)
for all of the outstanding stock of SI. SI's assets and liabilities, which
were nominal, are included with those of Microsoft as of June 30, 1994.
Operating results for SI during 1992, 1993, and 1994 were not material to the
combined results of the two companies. Accordingly, the financial statements
for such periods have not been restated.
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 1992, 1993, and 1994, employees
purchased 0.9 million, 1.0 million, and 1.1 million shares at average prices of
$24.59, $33.29, and $34.16 per share. At June 30, 1994, 6.5 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 $5 million, $7 million, and $9 million in 1992, 1993, and 1994.
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. The
options generally expire ten years from the date of grant and vest over four
and one-half years. At June 30, 1994, options for 52.6 million shares were
vested and 111.0 million shares were available for future grants under the
plans.
<TABLE>
<CAPTION>
Outstanding Options
- -----------------------------------------------------------------------------
Price per Share
--------------------------------
Weighted
Number Range Average
------ -------------- --------
<S> <C> <C> <C>
Balance, June 30, 1991 115.0 $ 0.31 - 22.39 $ 8.27
Granted 29.7 20.59 - 39.79 23.77
Exercised (20.7) 0.31 - 16.61 6.50
Canceled (3.7) 1.50 - 38.84 7.39
-----
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
=====
</TABLE>
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
$44 million, $54 million, and $68 million in 1992, 1993, and 1994. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 1995, $67; 1996, $49; 1997, $38; 1998, $32; 1999, $24; and thereafter,
$22.
CONTINGENCIES
On July 15, 1994, Microsoft entered into an undertaking with the Commission of
the European Communities (European Commission) resolving a complaint submitted
by Novell, Inc. claiming that certain practices of Microsoft violated Articles
85 and 86 of the Treaty of Rome. The undertaking is effective immediately,
requires no further approval, and closes the investigation of Novell's
complaint by the European Commission's Directorate-General for Competition. In
the undertaking, 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
agreements for precommercial
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (cont.)
versions of certain operating system products, and clarified the rights and
responsibilities of those signing such nondisclosure agreements. The European
Commission has the right to monitor Microsoft's compliance during the 6-1/2
year term of the settlement agreement.
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ)
entered into a consent decree resolving the DOJ's nonpublic investigation of
Microsoft. The consent decree contained the same provisions as the undertaking
between Microsoft and the European Commission. To become final, the consent
decree must be approved by the U.S. District Court for the District of
Columbia. The Court's consideration of the consent decree and any comments and
responses submitted concerning it will occur no sooner than 60 days after
publication of the consent decree in the Federal Register.
Microsoft does not expect the undertaking with the European Commission
or the consent decree with the DOJ to affect its OEM revenues.
On March 17, 1988, Apple Computer, Inc. (Apple) brought suit against
Microsoft and Hewlett-Packard Company for alleged copyright infringement in the
U.S. District Court, Northern District of California. The complaint included
allegations that the visual displays of Microsoft Windows version 2.03 (and
Windows version 3.0, which was added to the complaint later) infringed Apple's
copyrights and exceeded the scope of a 1985 Settlement Agreement between
Microsoft and Apple. The complaint sought to enjoin Microsoft from marketing
Microsoft Windows versions 2.03 and 3.0 or any derivative work based on Windows
2.03 or 3.0 and from otherwise infringing Apple's copyrights and sought damages
resulting from the alleged infringement.
The Company answered the complaint, raising affirmative defenses
including its claim that the 1985 Settlement Agreement entitled it to use the
visual displays in question, denying Apple's allegations that the visual
displays in Microsoft Windows version 2.03 and 3.0 infringe any protectible
right of Apple, and asserting counterclaims.
On August 24, 1993, the Court entered final judgment dismissing all of
Apple's claims. Apple has appealed a number of the Court's decisions in the
case to the Ninth Circuit Court of Appeals. Microsoft has cross-appealed the
dismissal of one of its counterclaims and related issues. Oral argument on the
appeal and cross-appeal was heard by Judges Ferdinand Fernandez, Pamela Rymer,
and Thomas Nelson on July 11, 1994.
On July 30, 1993 Wang Laboratories, Inc. (Wang) filed suit in U.S.
District Court for the District of Massachusetts against Microsoft and
Watermark Software, Inc., alleging that unspecified Microsoft products infringe
two patents owned by Wang concerning object management and the handling of
compound documents (United States Patents 5,206,951 issued on April 27, 1993,
and 5,129,061 issued on July 7, 1992, respectively). The suit also alleges
that Microsoft induced and continues to induce others, including Watermark
Software, Inc., to infringe the Wang patents. Microsoft's OLE technology
appears to be the subject of Wang's allegations against Microsoft. The
complaint seeks a determination that Microsoft's alleged infringement is
willful, an award of treble damages, an award of attorneys' fees, and to
preliminarily and permanently enjoin Microsoft from continuing the alleged
infringement. In its answer Microsoft denied that any of its products infringe
the Wang patents and asked the Court for a declaratory judgment that those
patents are invalid and unenforceable for failing to meet patent law
requirements. The suit is currently in the early stages of discovery.
Although there is no assurance that these lawsuits will be resolved
favorably and that the Company's financial condition will not be adversely
affected, the Company currently believes that resolution of these matters will
not have material adverse effects on its financial condition as reported in the
accompanying financial statements.
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (cont.)
(In millions)
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
NET REVENUES
U.S. operations $1,878 $2,655 $3,472
European operations 1,019 1,289 1,401
Other international operations 272 395 375
Eliminations (410) (586) (599)
------ ------ ------
Total net revenues $2,759 $3,753 $4,649
====== ====== ======
OPERATING INCOME
U.S. operations $ 664 $ 961 $1,394
European operations 329 360 346
Other international operations 11 18 31
Eliminations (8) (13) (45)
------ ------ ------
Total operating income $ 996 $1,326 $1,726
====== ====== ======
IDENTIFIABLE ASSETS
U.S. operations $1,858 $2,944 $4,397
European operations 872 1,133 1,366
Other international operations 289 310 423
Eliminations (379) (582) (823)
------ ------ ------
Total identifiable assets $2,640 $3,805 $5,363
====== ====== ======
</TABLE>
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 $255 million, $426 million, and $787 million in 1992, 1993,
and 1994. "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 55.1%, 55.3%, and 54.0% of total revenues in 1992, 1993, and
1994.
17
<PAGE> 19
QUARTERLY FINANCIAL AND MARKET INFORMATION
(In millions, except per share data; unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Year
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1992
Net revenues $ 581 $ 682 $ 681 $ 815 $2,759
Gross profit 476 567 571 678 2,292
Net income 144 175 179 210 708
Earnings per share 0.25 0.30 0.30 0.35 1.20
Common stock price per share:
High 30 37-3/8 44-1/2 43-1/8 44-1/2
Low 20-1/8 28-3/4 36-1/2 32-7/8 20-1/8
====== ====== ====== ====== ======
1993
Net revenues $ 818 $ 938 $ 958 $1,039 $3,753
Gross profit 683 781 797 859 3,120
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
GROSS PROFIT 824 944 1,036 1,082 3,886
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
====== ====== ====== ====== ======
</TABLE>
The Company has not paid cash dividends on its common stock. The Company's
common stock is traded on the over-the-counter market and is quoted on the
Nasdaq National Market System under the symbol MSFT. On July 29, 1994, there
were 26,790 holders of record of the Company's common stock.
18
<PAGE> 20
SELECTED FIVE-YEAR FINANCIAL DATA
(In millions, except employee and per share data)
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net revenues $1,183 $1,843 $2,759 $3,753 $4,649
Cost of revenues 253 362 467 633 763
------ ------ ------ ------ ------
Gross profit 930 1,481 2,292 3,120 3,886
------ ------ ------ ------ ------
Research and development 181 235 352 470 610
Sales and marketing 317 534 854 1,205 1,384
General and administrative 39 62 90 119 166
------ ------ ------ ------ ------
Total operating expenses 537 831 1,296 1,794 2,160
------ ------ ------ ------ ------
Operating income 393 650 996 1,326 1,726
Interest income - net 31 37 56 82 102
Litigation charge -- -- -- -- (90)
Other expenses (14) (16) (11) (7) (16)
------ ------ ------ ------ ------
Income before income taxes 410 671 1,041 1,401 1,722
Provision for income taxes 131 208 333 448 576
------ ------ ------ ------ ------
Net income $ 279 $ 463 $ 708 $ 953 $1,146
====== ====== ====== ====== ======
AT YEAR END
Working capital $ 533 $ 735 $1,323 $2,287 $3,399
Total assets $1,105 $1,644 $2,640 $3,805 $5,363
Stockholders' equity $ 919 $1,351 $2,193 $3,242 $4,450
Number of employees 5,635 8,226 11,542 14,430 15,257
====== ====== ====== ====== ======
COMMON STOCK DATA
Earnings per share $ 0.52 $ 0.82 $ 1.20 $ 1.57 $ 1.88
Cash and short-term investments per share $ 0.88 $ 1.31 $ 2.47 $ 4.05 $ 6.22
Average common and equivalent
shares outstanding 537 563 588 606 610
Shares outstanding at year end 512 522 544 565 581
====== ====== ====== ====== ======
KEY RATIOS
Current ratio 3.9 3.5 4.0 5.1 4.7
Return on net revenues 23.6% 25.1% 25.7% 25.4% 24.7%
Return on average total assets 30.6% 33.7% 33.1% 29.6% 25.0%
Return on average stockholders' equity 37.7% 40.8% 40.0% 35.1% 29.8%
====== ====== ====== ====== ======
GROWTH PERCENTAGES -- INCREASES
Net revenues 47% 56% 50% 36% 24%
Net income 63% 66% 53% 35% 20%
Earnings per share 55% 58% 47% 31% 20%
====== ====== ====== ====== ======
</TABLE>
19
<PAGE> 21
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS
REPORT OF MANAGEMENT
Management is responsible for preparing the Company's financial statements and
related information that appears in this annual report. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies,
procedures, and controls intended to provide reasonable assurance, at
appropriate cost, that transactions are executed in accordance with Company
authorization and are properly recorded and reported in the financial
statements, and that assets are adequately safeguarded.
Deloitte & Touche audits the Company's financial statements in
accordance with generally accepted auditing standards and provides an
objective, independent review of the fairness of reported financial condition
and results of operations.
The Microsoft Board of Directors has an Audit Committee composed
of nonmanagement Directors. The Committee meets with financial management,
internal auditors, and the independent auditors to review internal accounting
controls and accounting, auditing, and financial reporting matters.
MICHAEL W. BROWN
Vice President, Finance;
Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
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, 1993 and 1994, and the related
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1994, appearing on pages 2, 8, 9, 10,
and 13 through 17. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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, 1993 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Seattle, Washington
July 20, 1994
20
<PAGE> 22
Appendix A
<TABLE>
<CAPTION>
PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC AND IMAGE MATERIAL
APPEARS (In millions, except earnings per share)
<S> <C>
2 Bar graph of Net Revenues.
Data points: 1992-$2,759, 1993-$3,753, 1994-$4,649
2 Bar graph of Net Income.
Data points: 1992-$708, 1993-$953, 1994-$1,146
2 Bar graph of Earnings Per Share.
Data points: 1992-$1.20, 1993-$1.57, 1994-$1.88
3 Bar graph of Systems Revenues.
Data points: 1992-$1,104, 1993-$1,267, 1994-$1,519
3 Bar graph of Applications Revenues.
Data points: 1992-$1,401, 1993-$2,253, 1994-$2,927
4 Bar graph of U.S. and Canada Revenues.
Data points: 1992-$1,062, 1993-$1,371, 1994-$1,575
4 Bar graph of Europe Revenues.
Data points: 1992-$997, 1993-$1,259, 1994-$1,363
4 Bar graph of Other International Revenues.
Data points: 1992-$223, 1993-$392, 1994-$532
4 Bar graph of OEM Revenues.
Data points: 1992-$477, 1993-$731, 1994-$1,179
7 Bar graph of Research and Development Spending.
Data points: 1992-$352, 1993-$470, 1994-$610
7 Bar graph of Sales and Marketing Spending.
Data points: 1992-$854, 1993-$1,205, 1994-$1,384
8 Bar graph of Cash and Short-Term Investments
Data points: 1992-$1,345, 1993-$2,290, 1994-$3,614
9 Pie Chart of Assets - 1994.
Data points: Cash-67%, Other Current Assets-13%, PP&E-18%, Other-2%
9 Pie Chart of Liabilities and Stockholders' Equity - 1994.
Data points: Liabilities-17%, Stockholders' Equity-83%
10 Bar graph of Stockholders' Equity.
Data points: 1992-$2,193, 1993-$3,242, 1994-$4,450
11 Pie Chart of Stakeholdings - 1994.
Data points: Other Investors' Shares-53%, Employees' and Directors' Shares and Options-47%
</TABLE>
<PAGE> 1
EXHIBIT 21.
SUBSIDIARIES
<TABLE>
<S> <C>
CorporacionMicrosoft del Ecuador SA Microsoft Institute PTY Limited (Australian Educational Centre)
Corporation MS 90 de Venezuela SA Microsoft International BV (The Netherlands Holding Company)
Dram Realty, Inc. Microsoft Israel Limited
Forethought Inc. Microsoft Kft (Hungary)
Fox Software, Inc. Microsoft KK (Japan)
Fox Software Limited (United Kingdom) Microsoft Limited (United Kingdom)
Fox Software SARL (France) Microsoft Limited (Thailand)
Fox Software GmbH (Germany) Microsoft Manufacturing BV (Ireland manufacturing)
ImageWare Research and Development, Inc. Microsoft Maroc SARL (Morocco)
(Canada) Microsoft Mexico, SA de CV
MSHC Inc. Microsoft Middle East (United Arab Emirates)
Microsoft BYHLS (Turkey) Microsoft Oy (Finland)
Microsoft AO (Russia) Microsoft New Zealand Limited
Microsoft AG (Switzerland) Microsoft Norge AS (Norway)
Microsoft Aktiebolag (Sweden) Microsoft NV (Belgium)
Microsoft BV (The Netherlands) Microsoft PTY Limited (Australia)
Microsoft Canada Inc. Microsoft PRC (Peoples Republic of China)
Microsoft Caribbean, Inc. Microsoft Peru, SA
Microsoft CH (Korea) Microsoft Properties France SARL
Microsoft Chile SA Microsoft Properties UK Limited (United Kingdom)
Microsoft Colombia, Inc. Microsoft Puerto Rico, Inc. (Manufacturing)
Microsoft Consulting Services Europe Limited Microsoft SA Limited (South Africa)
Microsoft Coris SPA (Italy Joint Venture/Olivetti) Microsoft Sdn Bhd (Malaysia)
Microsoft Corporation (Dubai) Microsoft Singapore PTE Limited
Microsoft Corporation Limitada (Colombia) Microsoft Software Para Microcomputadoras, LDA (Portugal)
Microsoft Corporation Private Limited (India) Microsoft SpA (Italy)
Microsoft Danmark ApS (Denmark) Microsoft sp zo o (Poland)
Microsoft Distribution Limited (Ireland) Microsoft sro (Czech Republic)
Microsoft de Argentina SA Microsoft Systems Private Limited (India)
Microsoft de Centroamerica (Costa Rica) Microsoft Taiwan Corporation
Microsoft Europe SARL (European Headquarters) Microsoft Workgroup Canada, Inc.
Microsoft France SARL Microsoft Venezuela, SA
Microsoft FSC Corporation NRI India, Inc.
Microsoft Gesellschaft mbH (Austria) Technology Resources Management Corporation
Microsoft GmbH (Germany) SOFTIMAGE Inc. (Canada)
Microsoft HC, Inc. (Holding Company) SOFTIMAGE France SARL
Microsoft Hellas SA (Greece) SOFTIMAGE Italy SRL
Microsoft Hong Kong Limited SOFTIMAGE U.K. Limited
Microsoft Iberica SRL (Spain) SoftCapital, Inc.
Microsoft Informatica Limitada (Brazil) The Monotype Corporation
</TABLE>
<PAGE> 1
EXHIBIT 23.
INDEPENDENT AUDITORS' CONSENT
Microsoft Corporation:
We consent to the incorporation by reference in Registration Statement Numbers
33-37623, 33-33695, 33-25575, 33-18381, and 33-06335 (Microsoft Corporation
1981 Stock Option Plan), 33-44302 (Microsoft Corporation 1991 Stock Option
Plan), 33-37622 (Microsoft Corporation 1991 Employee Stock Purchase Plan),
33-10732 (Microsoft Corporation Savings Plus Plan), 33-36498 (Microsoft
Corporation Stock Option Plan for Non-Employee Directors) and 33-45617
(Microsoft Corporation Stock Option Plan for Consultants and Advisors) of
Microsoft Corporation on Forms S-8 and 33-29823, 33-34794, 33-36347, 33-46958,
and 33-49496 of Microsoft Corporation on Forms S-3 of our report dated July 20,
1994 appearing in and incorporated by reference in this Annual Report on Form
10-K of Microsoft Corporation for the year ended June 30, 1994.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-END> JUN-30-1994
<CASH> 3,614
<SECURITIES> 0
<RECEIVABLES> 567
<ALLOWANCES> 92
<INVENTORY> 102
<CURRENT-ASSETS> 4,312
<PP&E> 1,445
<DEPRECIATION> 515
<TOTAL-ASSETS> 5,363
<CURRENT-LIABILITIES> 913
<BONDS> 0
<COMMON> 1,500
0
0
<OTHER-SE> 2,950
<TOTAL-LIABILITY-AND-EQUITY> 5,363
<SALES> 4,649
<TOTAL-REVENUES> 4,649
<CGS> 763
<TOTAL-COSTS> 2,923
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,722
<INCOME-TAX> 576
<INCOME-CONTINUING> 1,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,146
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
Financial Statements for the Three
Years Ended June 30, 1994, 1993, and 1992
And Independent Auditors' Report
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Plan Administrator
Microsoft Corporation
1991 Employee Stock Purchase Plan
Redmond, Washington
We have audited the accompanying statements of assets available for benefits of
the Microsoft Corporation 1991 Employee Stock Purchase Plan (the Plan) as of
June 30, 1994 and 1993, and the related statements of changes in assets
available for benefits for the years ended June 30, 1994, 1993, and 1992.
These financial statements are the responsibility of the Plan Administrator.
Our responsibility is to express an opinion on these financial statements 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 the Plan Administrator, 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 assets available for benefits of the Plan as of June 30, 1994 and
1993, and the changes in assets available for benefits for the years ended June
30, 1994, 1993, and 1992, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
September 16, 1994
<PAGE> 3
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF ASSETS AVAILABLE FOR BENEFITS
JUNE 30, 1994 AND 1993
<TABLE>
<CAPTION> June 30
-------
1994 1993
---- ----
<S> <C> <C>
ASSETS:
Cash $492,243 $961,962
-------- --------
ASSETS AVAILABLE FOR BENEFITS $492,243 $961,962
======== ========
</TABLE>
See note to financial statements.
<PAGE> 4
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF CHANGES IN ASSETS
AVAILABLE FOR BENEFITS
YEARS ENDED JUNE 30, 1994, 1993, AND 1992
<TABLE>
<CAPTION> Year ended June 30
------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
ASSETS AVAILABLE FOR BENEFITS, beginning
of period $ 961,962 $ 366,638 $ 92,313
----------- ----------- ------------
ADDITIONS:
Employee contributions 38,614,990 34,114,121 23,416,492
DEDUCTIONS:
Cost of shares purchased 39,084,709 33,518,797 23,142,167
----------- ----------- ------------
CHANGES IN ASSETS AVAILABLE FOR
BENEFITS (469,719) 595,324 274,325
----------- ----------- ------------
ASSETS AVAILABLE FOR BENEFITS,
end of period $ 492,243 $ 961,962 $ 366,638
=========== =========== ============
</TABLE>
See note to financial statements.
<PAGE> 5
MICROSOFT CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
NOTE TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1993, AND 1992
NOTE 1: THE PLAN
The following description of the Microsoft Corporation 1991 Employee Stock
Purchase Plan (the Plan) provides only general information. Participants
should refer to the Plan agreement for a complete description of the Plan's
provisions.
GENERAL: The Plan Administrator believes the Plan meets the
qualification standards of Section 423 of the Internal Revenue Code of
1986, and is exempt from federal income taxes. The Plan is not
subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA).
The Plan covers substantially all employees of Microsoft Corporation
(the Company) whose customary employment is greater than 20 hours per
week, and more than five months in any calendar year.
CONTRIBUTIONS: Participants may make contributions to the Plan
through payroll deductions (not exceeding 10% of their compensation)
for the purpose of purchasing the Company's common stock. The Plan
commenced on January 1, 1991, and participants are given the
opportunity to purchase shares on each June 30 and December 31 until
such time as the Plan is terminated (see Termination of the Plan).
The maximum number of shares that will be offered under the Plan is
6,750,000.
OPTIONS GRANTED AND WITHDRAWALS: Participants are granted the option
to purchase shares of Microsoft Corporation common stock from the
Company at 85% of the lesser of the fair market value on the first or
last day of each six-month period ending June 30 or December 31. If
the participant does not exercise the option, the Company refunds the
participant for amounts withheld. The Plan purchased 1,147,508,
1,006,988, and 940,140 shares during the years ended June 30, 1994,
1993, and 1992, respectively. A total of 3,636,422 shares have been
purchased under the Plan since inception with 3,113,578 shares
reserved for future issue.
ASSETS AVAILABLE FOR BENEFITS: Assets available for benefits
represent cash in participant accounts that was less than the amount
necessary to purchase a full share and cash contributed to the Plan
greater than the cost of the maximum number of shares allowed to be
purchased in a six-month period (see Limitations). Participants may
carry over such amounts to the next period.
LIMITATIONS: No employee shall be permitted to subscribe for any
shares under the Plan if such employee owns shares representing 5% or
more of the total combined voting power or value of all classes of
shares of the Company. Additionally, no participant may purchase more
than 2,250 shares of stock during a six-month period, or purchase
shares through the Plan with an aggregate fair market value in excess
of $25,000 in any one calendar year.
<PAGE> 6
TERMINATION OF THE PLAN: The Plan shall terminate at the earliest of
the following:
o December 31, 1996
o The date of the filing of a statement of intent to dissolve by
the Company or the effective date of a merger or consolidation
(except with a related company) where the Company is not to be
the surviving corporation
o The date the Board acts to terminate the Plan
o The date when all shares reserved under the Plan have been
purchased
In the event of a dissolution, merger, or acquisition, the Company may
permit a participating employee to exercise options to the extent that
employee payroll deductions have accumulated. In the event of
termination, Plan assets will be distributed to the participants.
PLAN ADMINISTRATION: All expenses for administration of the Plan are
paid by the Company, and are not reflected in the accompanying
statements.
<PAGE> 1
EXHIBIT 99.2
MICROSOFT CORPORATION
SAVINGS PLUS PLAN
Financial Statements for the Year Ended December 31, 1993
and the Nine Months Ended December 31, 1992
And Independent Auditors' Report
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Plan Administrator
Microsoft Corporation Savings Plus Plan
Redmond, Washington
We have audited the accompanying statements of assets available for benefits of
the Microsoft Corporation Savings Plus Plan (the Plan) as of December 31, 1993
and 1992, and the related statements of changes in assets available for
benefits for the year ended December 31, 1993, and the nine-month period ended
December 31, 1992. These financial statements are the responsibility of the
Plan Administrator. Our responsibility is to express an opinion on these
financial statements 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 the significant
estimates made by the Plan Administrator, 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 assets available for benefits of the Plan as of December 31, 1993
and 1992, and the related statements of changes in assets available for
benefits for the year ended December 31, 1993, and the nine-month period ended
December 31, 1992, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment as of December 31, 1993, and reportable transactions for
the year then ended are presented for the purpose of additional analysis and
are not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. These supplemental schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Deloitte & Touche LLP
Seattle, Washington
May 27, 1994
<PAGE> 3
MICROSOFT CORPORATION SAVINGS PLUS PLAN
STATEMENTS OF ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION> December 31
-----------
1993 1992
---- ----
<S> <C> <C>
ASSETS:
Cash $ -- $ 122,324
Investments held by trustee at fair value:
Microsoft Corporation Stock Fund 57,717,671 53,422,326
Fidelity U.S. Equity Index Fund 20,685,406 16,240,119
Fidelity Retirement Money Market Fund 16,776,143 14,432,521
Fidelity Intermediate Bond Fund 14,653,568 10,914,219
Fidelity Magellan Fund 19,930,432 8,021,122
Fidelity Growth Company Fund 11,638,038 5,052,734
Fidelity Overseas Fund 5,292,574 1,597,921
------------ ------------
Total investments 146,693,832 109,680,962
Participant loans 1,122,588 --
------------ ------------
ASSETS AVAILABLE FOR BENEFITS $147,816,420 $109,803,286
============ ============
</TABLE>
See notes to financial statements.
<PAGE> 4
MICROSOFT CORPORATION SAVINGS PLUS PLAN
STATEMENTS OF CHANGES IN ASSETS
AVAILABLE FOR BENEFITS
YEAR ENDED DECEMBER 31, 1993, AND
NINE-MONTH PERIOD ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1993 December 31, 1992
----------------- -----------------
<S> <C> <C>
ADDITIONS:
Investment income:
Interest and dividends $ 4,978,058 $ 2,530,108
Realized and unrealized gain on
investments 328,116 4,705,139
------------- -------------
Total investment income 5,306,174 7,235,247
Contributions:
Employer 8,539,976 5,003,882
Employee 26,901,086 16,310,632
------------- -------------
Total contributions 35,441,062 21,314,514
------------- -------------
Total additions 40,747,236 28,549,761
DEDUCTIONS:
Benefits paid to participants 2,734,102 1,320,423
-------------- --------------
CHANGES IN ASSETS AVAILABLE
FOR BENEFITS 38,013,134 27,229,338
ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 109,803,286 82,573,948
------------ -------------
End of year $147,816,420 $109,803,286
============ ============
</TABLE>
See notes to financial statements.
<PAGE> 5
MICROSOFT CORPORATION SAVINGS PLUS PLAN
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1993, AND
NINE-MONTH PERIOD ENDED DECEMBER 31, 1992
NOTE 1: DESCRIPTION OF THE PLAN AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following description of the Microsoft Corporation Savings Plus Plan (the
Plan) provides only general information. Participants should refer to the Plan
agreement for a complete description of the Plan's provisions.
PLAN DESCRIPTION: The Plan is a defined contribution plan. All
employees of Microsoft Corporation (the Company) who have reached 18
years of age may enroll during the month following completion of six
months of service or during any subsequent quarterly enrollment
period. The Plan is subject to the provisions of the Employee
Retirement Income Security Act (ERISA). The Plan has obtained a
determination letter from the Internal Revenue Service which stated
the Plan was in compliance with the applicable requirements of the
Internal Revenue Code. The Plan is administered by the Vice President
of Finance and Administration of Microsoft Corporation. The Plan
Administrator believes the Plan is currently designed and is being
operated in compliance with the applicable regulations.
CONTRIBUTIONS: Participants may contribute from 1% to 15% of their
compensation, tax-deferred, through payroll deductions up to a maximum
of $8,994 under current law. The amount of a participant's
tax-deferred contributions may be subject to limitations. Participant
contributions may be suspended at any time. Contributions may be
reinstated on the first day of the quarter that is at least six months
after contributions were suspended.
The Company makes a matching contribution equal to 50% of
participants' contributions up to 6% of participants' individual
compensation. Company contributions are funded on a semimonthly
basis.
VESTING: Employee contributions are fully vested immediately.
Employer contributions vest fully upon completion of two years of
service by a participant, or when a participant reaches age 65, dies,
or becomes disabled.
DISTRIBUTIONS: Participants may make a withdrawal from the vested
portion of their account if the Plan Administrator determines a
withdrawal is necessary to avoid a financial hardship or if the
participant is at least 59-1/2 years of age.
FORFEITURES: Any nonvested interest of a terminated employee shall
not be forfeited to the Plan until a one-year period of severance
service has passed. At this time, the forfeited amount is distributed
to the Plan. If a terminated employee is reemployed before five
consecutive one-year periods of severance have passed, the forfeited
amount will be reallocated to the individual's account.
ADMINISTRATIVE EXPENSES: Expenses for administration of the Plan are
paid by the Company.
PLAN AMENDMENT AND TERMINATION: The Company has the right to modify,
amend, suspend or terminate the Plan at any time and for any reason.
If the Plan is terminated, account balances will be fully vested and
will be distributed in the form and manner determined by the Plan
Administrator.
VALUATION OF INVESTMENTS AND PARTICIPANTS' LOANS: Investments are
recorded at fair market value. Security transactions are accounted
for as of the trade date. Fair market value is estimated based on
quoted prices. Loans to participants are recorded at contract value,
which approximates fair value. Dividend income is recorded on the
ex-dividend date and interest income is recorded as earned.
<PAGE> 6
NOTE 2: INVESTMENTS
Fidelity Investments (Fidelity) is trustee of the Plan. All Plan investments
are held by Fidelity. Investment funds available to participants are
summarized as follows:
MICROSOFT CORPORATION STOCK FUND: The Microsoft Corporation Stock
Fund consists entirely of the Company's common stock.
FIDELITY U.S. EQUITY INDEX FUND: The Fidelity U.S. Equity Index Fund
consists mainly of common stocks of the companies that make up
Standard & Poor's 500 Index. The fund seeks investment results that
correspond to the total return performance of United States publicly
traded common stocks.
FIDELITY RETIREMENT MONEY MARKET FUND: The Fidelity Retirement Money
Market Fund strives to maintain a stable $1 share price while its
yield will fluctuate with changes in market conditions. The fund
seeks as high a level of current income as is consistent with the
preservation of capital and liquidity.
FIDELITY INTERMEDIATE BOND FUND: The Fidelity Intermediate Bond Fund
consists of investment-grade fixed income obligations. The fund seeks
a high level of current income.
FIDELITY MAGELLAN FUND: The Fidelity Magellan Fund consists of common
stocks, and securities convertible to common stock, issued by
companies operating in the United States or abroad. The fund seeks
long-term capital appreciation.
FIDELITY GROWTH COMPANY FUND: The Fidelity Growth Company Fund
consists mainly of investments in companies with above average growth
characteristics as demonstrated in earnings or gross sales. The fund
seeks long-term capital appreciation.
FIDELITY OVERSEAS FUND: The Fidelity Overseas Fund consists of
investments in securities of issuers whose principal activities are
outside the United States. The fund seeks long-term capital
appreciation.
NOTE 3: PARTICIPANT LOANS
Effective January 1, 1993, Plan participants are permitted to borrow up to 50%
of the total vested account balance. Participants are limited to one
residential loan and one nonresidential loan outstanding. The interest rate
for residential loans is based on the yield for the Federal Home Loan Mortgage
Corporation 30-year mortgage commitment for a standard conventional fixed rate
mortgage, plus 1%. The interest rate for nonresidential loans will be the
prime rate on corporate loans plus 1%. The range of interest rates was 7% -
8.93% for the year ended December 31, 1993. Loan repayment is made through
after-tax semimonthly payroll deductions over a period of up to 15 years for
residential loans and five years for nonresidential loans. If a participant's
employment terminates for any reason and the loan balance is not paid in full
by the participant in the month of termination, the loan balance will be
canceled and become taxable income to the participant.
<PAGE> 7
MICROSOFT CORPORATION SAVINGS PLUS PLAN
SUPPLEMENTAL SCHEDULE OF ASSETS HELD FOR INVESTMENT
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Shares Market
or units Cost value
---------- ------------- --------------
<S> <C> <C> <C>
DESCRIPTION OF ASSETS:
Microsoft Corporation Stock Fund 715,878 $ 33,905,044 $ 57,717,671
Fidelity U.S. Equity Index Fund 1,197,765 18,511,037 20,685,406
Fidelity Retirement Money Market Fund 16,776,144 16,776,144 16,776,143
Fidelity Intermediate Bond Fund 1,359,329 14,182,245 14,653,568
Fidelity Magellan Fund 281,305 19,300,737 19,930,432
Fidelity Growth Company Fund 400,483 11,268,835 11,638,038
Fidelity Overseas Fund 192,948 4,786,436 5,292,574
------------ ------------
$118,730,478 $146,693,832
============ ============
</TABLE>
<PAGE> 8
MICROSOFT CORPORATION SAVINGS PLUS PLAN
SUPPLEMENTAL SCHEDULE OF REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
Number of Cost Amount
purchases/ of of Net gain
sales purchases proceeds on sale
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
SERIES OF TRANSACTIONS:
Microsoft Corporation Stock Fund 251 $13,196,163 $5,804,119 $2,208,875
Fidelity Magellan Fund 357 11,947,738 1,090,453 38,152
Fidelity Intermediate Bond Fund 401 5,547,662 2,199,338 90,118
Fidelity Retirement Money Market Fund 423 6,328,218 3,984,596
Fidelity U.S. Equity Index Fund 389 6,015,224 2,527,591 250,572
Fidelity Growth Company Fund 328 7,316,725 918,736 88,261
</TABLE>
