<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
/ / 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)
WASHINGTON 91-1144442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (206) 882-8080
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 number of shares outstanding of the registrant's common stock as of
April 30, 1996 was 598,249,261.
<PAGE> 2
MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
<S> <C>
a) Income Statements
for the Three and Nine Months Ended March 31, 1996 and 1995.............. 1
b) Balance Sheets
as of March 31, 1996 and June 30, 1995................................... 2
c) Cash Flows Statements
for the Nine Months Ended March 31, 1996 and 1995........................ 3
d) Notes to Financial Statements............................................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 9
Item 6. Exhibits and Reports on Form 8-K............................................. 9
SIGNATURE...................................................................................... 10
</TABLE>
<PAGE> 3
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1995 1996 1995 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $1,587 $2,205 $4,316 $6,416
- -------------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 235 295 643 947
Research and development 219 364 596 979
Sales and marketing 516 685 1,390 1,996
General and administrative 68 87 181 226
- -------------------------------------------------------------------------------------
Total costs and expenses 1,038 1,431 2,810 4,148
- -------------------------------------------------------------------------------------
Operating income 549 774 1,506 2,268
Interest income - net 48 86 126 228
Other income (expense) (5) 4 (12) 23
- -------------------------------------------------------------------------------------
Income before income taxes 592 864 1,620 2,519
Provision for income taxes 196 302 535 883
- -------------------------------------------------------------------------------------
Net income $ 396 $ 562 $1,085 $1,636
=====================================================================================
Earnings per share $ 0.63 $ 0.88 $ 1.74 $ 2.56
=====================================================================================
Weighted average shares outstanding 626 639 624 639
=====================================================================================
</TABLE>
See accompanying notes.
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1
<PAGE> 4
MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 March 31
1995 1996 (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $4,750 $6,770
Accounts receivable - net 581 681
Inventories 88 33
Other 201 212
- --------------------------------------------------------------------------------
Total current assets 5,620 7,696
Property, plant, and equipment - net 1,192 1,281
Other assets 398 613
- --------------------------------------------------------------------------------
Total assets $7,210 $9,590
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 $ 652
Accrued compensation 130 142
Income taxes payable 410 616
Unearned revenues 54 545
Other 190 309
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Total current liabilities 1,347 2,264
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Minority interest 125 125
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Put warrants 405 606
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Stockholders' equity:
Common stock and paid-in capital --
shares authorized 2,000;
shares outstanding 588 and 595 2,005 2,678
Retained earnings 3,328 3,917
- --------------------------------------------------------------------------------
Total stockholders' equity 5,333 6,595
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,210 $9,590
================================================================================
</TABLE>
(1) Unaudited
See accompanying notes.
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2
<PAGE> 5
MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1995 1996
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
<S> <C> <C>
Net income $ 1,085 $ 1,636
Depreciation and amortization 203 336
Current liabilities 237 959
Accounts receivable (40) (154)
Inventories 17 53
Other current assets (24) (24)
- -------------------------------------------------------------------------------
Net cash from operations 1,478 2,806
- --------------------------------------------------------------------------------
CASH FLOWS USED FOR FINANCING
Common stock issued 259 384
Common stock repurchased (664) (800)
Stock option income tax benefits 123 243
- -------------------------------------------------------------------------------
Net cash used for financing (282) (173)
- -------------------------------------------------------------------------------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (272) (336)
Other assets (91) (257)
Short-term investments (1,123) (1,045)
- -------------------------------------------------------------------------------
Net cash used for investments (1,486) (1,638)
- -------------------------------------------------------------------------------
Net change in cash and equivalents (290) 995
Effect of exchange rates on cash and equivalents 18 (20)
Cash and equivalents, beginning of period 1,477 1,962
- -------------------------------------------------------------------------------
Cash and equivalents, end of period 1,205 2,937
Short-term investments, end of period 3,260 3,833
- -------------------------------------------------------------------------------
Cash and short-term investments, end of period $ 4,465 $ 6,770
===============================================================================
</TABLE>
See accompanying notes.
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3
<PAGE> 6
MICROSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses.
Actual results could differ from those estimates. Interim results are not
necessarily indicative of results for a full year. The information included in
this Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in the Microsoft
Corporation 1995 Annual Report on Form 10-K.
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, using
the treasury stock method.
CONTINGENCIES
Microsoft is subject to various legal proceedings and claims which arise in the
ordinary course of business. Management currently believes that resolution of
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
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4
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Microsoft develops, manufactures, licenses, sells, and supports a wide range of
software products, including operating systems for personal computers (PCs) and
servers; server applications for client-server environments; business and
consumer productivity programs; interactive media programs; and Internet
platform and development tools. Microsoft also offers an online service, sells
personal computer books and input devices, and is engaged in the research and
potential development of advanced technology software products.
REVENUES
Revenues for the third quarter of fiscal 1996 increased 39% over revenues for
the third quarter of fiscal 1995. For the first three quarters of the year,
revenues increased 49% over the comparable period of the prior year.
Software license volume (as opposed to price) increases have been the principal
factor in Microsoft's revenue growth. The average selling price per license has
decreased, primarily because of general shifts in the sales mix from retail
packaged products to licensing programs, from new products to product upgrades,
and from stand-alone desktop applications to integrated product suites. Average
revenue per license from original equipment manufacturer (OEM) licenses and
corporate license programs, such as Microsoft(R) Select, is lower than average
revenue per license from retail versions. Likewise, product upgrades have lower
prices than new products. Also, prices of integrated suites, e.g., Microsoft
Office, are less than the sum of the prices for the individual programs included
in these products when such programs are licensed separately.
PRODUCT GROUPS
Platforms product group revenues were $970 million in the third quarter of 1996,
compared to $617 million recorded in the same period of 1995, an increase of
57%. On a year-to-date basis, platforms product group revenues increased to
$3.14 billion from $1.72 billion. Platforms product group revenues are primarily
from licenses of PC operating systems and business systems with client-server
architectures.
Desktop operating system revenues increased strongly in the third quarter of
1996 compared to the third quarter of 1995, and also on a year-to-date basis
compared to the comparable period of the prior year. During the first quarter of
fiscal 1996, the Company released Microsoft Windows(R) 95, its new personal
computer operating system, which experienced strong demand by users of existing
PCs. Demand for Windows 95 through the retail channels decreased in the second
and third quarters, reflecting the typical sales pattern for upgrades of
operating systems. During the third quarter of fiscal 1996, demand for Windows
95 operating systems licensed through the OEM channel increased from the first
two quarters of fiscal 1996 while revenues declined from OEM licensing of
Microsoft MS-DOS(R), Microsoft Windows 3.1, and Microsoft Windows for Workgroups
3.11. (Windows 3.1 and Windows for Workgroups 3.11 are hereafter referred to
collectively as "Windows 3.x.")
During the quarter Microsoft implemented its policy of offering customers the
latest Internet technology at no additional cost. Given this strategy and
because Internet browsers are a fundamental and integral part of its
Windows-based operating systems, ratable revenue recognition is appropriate for
a portion of all Windows-based operating system license fees, including those
licensed through its retail and OEM channels. Unearned revenues as of
March 31, 1996 on the accompanying balance sheet include $300 million for
future support commitments, Internet browser updates, and other unspecified
enhancements to Windows-based operating systems which will be recognized
ratably over the products' life cycles as earned.
Revenues from business systems products (principally the Windows NT(R) operating
system and server applications in Microsoft's BackOffice(TM) family of products)
increased strongly, due to greater corporate demand for Windows NT Workstation
and Windows NT Server.
Applications and content product group revenues were $1.24 billion in the third
quarter of 1996, increasing 27% from $970 million in the third quarter of 1995.
For the first three quarters of 1996, applications and content product group
revenues were $3.28 billion, compared to $2.60 billion in the corresponding
period of 1995. Applications and content product group revenues include
primarily licenses of desktop and consumer productivity programs, interactive
media programs, and PC input devices.
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5
<PAGE> 8
Increases in applications and content revenues were led by strong sales of
16-bit and 32-bit versions of Microsoft Office. Microsoft Office Standard
includes the Microsoft Word word processor, the Microsoft Excel spreadsheet, and
the Microsoft PowerPoint(R) presentation graphics program. The Microsoft Office
for Windows 95 (32-bit) version also includes the Microsoft Schedule+ calendar
and scheduling program. Microsoft Office Professional includes all of the above
plus the Microsoft Access(R) database management program. Revenues from desktop
applications exceeded $1.0 billion in the third quarter of fiscal 1996. The
accompanying balance sheet also includes $110 million of unearned revenues as of
March 31, 1996 in connection with the sale of 16-bit versions of desktop
productivity programs that will not be earned and recognized as revenues until
related coupons for 32-bit version upgrades have been fulfilled.
SALES CHANNELS
Microsoft distributes its products primarily through OEM licenses, corporate
licenses, and retail packages. OEM channel revenues are license fees from
original equipment manufacturers. Microsoft has three major geographic sales and
marketing organizations: U.S. and Canada, Europe, and elsewhere in the world
(Other International). Sales of corporate licenses and packaged products in
these channels are primarily to distributors and resellers.
Royalties from OEMs (primarily for PC operating systems) reached a record level.
Earned revenues were $633 million in the third quarter compared to the $451
million recorded in the comparable quarter of the prior year, and reflected the
extension of the above-mentioned ratable revenue recognition policy to operating
systems licensed through the OEM channel. On a year-to-date basis, OEM revenues
were $1.85 billion in 1996, compared to $1.18 billion in 1995. The percentage of
new PCs with Windows 95 preinstalled increased to more than 70% of reported
shipments during the third quarter of 1996, while MS-DOS and Windows 3.x
continued to be preinstalled on many of the remainder of PCs sold by OEMs.
Higher levels of PC shipments was the principal driver of increased revenues
through the OEM channel.
Revenues in the U.S. and Canada were $620 million in the third quarter of 1996
compared to $481 million in the third quarter of 1995. Revenues in the first
three quarters of 1996 were $2.00 billion, compared to $1.40 billion recorded
last year. Revenues in Europe were $555 million in the third quarter of 1996
compared to $419 million in the prior year. European revenues were $1.55 billion
in the first three quarters of 1996 compared to $1.11 billion in the prior year.
Excluding the impact of shipment of retail upgrade packaged product of Windows
95 and 32-bit versions of desktop applications in the first two quarters of
fiscal 1996, the trend has continued toward a higher percentage of corporate
licensing (versus packaged products), particularly in Europe and the U.S.
and Canada channels.
Other International channel revenues increased 68% to $397 million in the third
quarter of 1996 from $236 million in the third quarter of 1995, reflecting
strong sales in Japan. Year-to-date revenues were $1.02 billion in 1996 compared
to $630 million in 1995.
Microsoft's operating results are affected by foreign exchange rates. Had the
exchange rates in effect during the third quarter of the prior year been in
effect during the third quarter of 1996, translated revenues in Europe would
have been $14 million lower and translated Other International revenues would
have been $25 million higher. Since much of Microsoft's international
manufacturing costs and operating expenses are also incurred in local
currencies, the relative translation impact of exchange rates on net income is
less than on revenues.
COSTS AND EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES
Cost of revenues as a percentage of revenues was 13.4% in the third quarter of
1996 and 14.8% in the third quarter of 1995. The decrease was due to channel
mix, more corporate licensing, and more shipments of products on CD-ROM, which
carry lower cost of goods than floppy disks. For the first three quarters of
1996, cost of revenues was 14.8% of revenues, compared to 14.9% the prior year.
This slight decrease is attributable to the above-mentioned mix shifts offset
somewhat by high shipments of retail upgrade versions of Windows 95 and
Microsoft Office for Windows 95, particularly in the first two quarters of
fiscal 1996.
Research and development expenses increased 66% to $364 million, or 16.5% of
revenues in the third quarter of 1996 from $219 million, or 13.8% of revenues in
the corresponding quarter of 1995. On a year-to-date basis, R&D expenses were
$979 million in 1996 and $596 million in 1995. The increase in research and
development expenses in 1996 resulted primarily from planned hiring of software
developers and higher levels of third-party development costs.
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6
<PAGE> 9
Sales and marketing expenses increased 33% to $685 million from $516 million in
the comparable quarter. As a percentage of revenues, sales and marketing
expenses were 31.1% and 32.5% in the respective third quarters of 1996 and 1995.
For the first three quarters, sales and marketing expenses were $2.00
billion in 1996 and $1.39 billion in 1995. The increase in sales and marketing
expenses in 1996 was impacted by greater sales expense, increased product
support costs, and higher product-specific marketing costs, particularly for
Windows 95 and Microsoft Office for Windows 95.
General and administrative expenses were $87 million (3.9% of revenues) in the
third quarter of 1996 and $68 million (4.3% of revenues) in the third quarter of
1995. For the first three quarters of 1996, general and administrative expenses
were $226 million compared to $181 million in 1995. The increases in absolute
dollars incurred in 1996 were due to growth in the systems and number of people
necessary to support overall increases in the scope of the Company's operations.
Net interest income increased as a result of a larger investment portfolio
generated by cash from operations combined with higher interest rates. Other
income in the second quarter of 1996 included a net gain of $30 million from the
disposal of long-term assets.
The effective income tax rate was 35% in 1996 and 33% in 1995, with the increase
due primarily to changes in U.S. tax law.
NET INCOME
Net income for the third quarter of 1996 was $562 million. Net income as a
percentage of revenues was 25.5% in the third quarter of 1996, compared with
25.0% in the third quarter of 1995. On a year-to-date basis, net income as a
percentage of revenues was 25.5% in 1996 compared to 25.1% the prior year. The
increase in net income as a percentage of revenues was primarily the result of
revenues growing faster than operating expenses other than those for research
and development and higher nonoperating income such as interest income and the
disposal net gain.
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7
<PAGE> 10
FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $6.77 billion at
March 31, 1996. The portfolio is diversified among security types, industries,
and individual issuers. Microsoft's investments are liquid and investment grade.
The portfolio is invested predominantly in U.S. dollar denominated securities,
but also includes foreign currency positions in anticipation of continued
international expansion. The portfolio is invested in short-term securities to
minimize interest rate risk and facilitate rapid deployment in the event of
immediate cash needs.
Microsoft has no material long-term debt and has $70 million of standby
multicurrency lines of credit that support foreign currency hedging and
international cash management. Stockholders' equity at March 31, 1996 was $6.60
billion.
Cash generated from operations has been sufficient historically to fund
Microsoft's investment in research and development activities and facilities
expansion. As Microsoft grows, investments will continue in research and
development in existing and advanced areas of technology. Microsoft's cash will
be used to acquire technology and to fund ventures and other strategic
opportunities. Additions to property, plant, and equipment are expected to
continue, including new 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 been used in Microsoft's open market stock repurchase program
through which Microsoft provides shares for stock option and stock purchase
plans. This practice is continuing in 1996.
To enhance its stock repurchase program, Microsoft sold equity put warrants to
independent third parties during 1995 and 1996. These put warrants entitle the
holders to sell shares of Microsoft common stock to the Company on certain dates
at specified prices. On March 31, 1996, 13 million warrants were outstanding
with strike prices ranging between $87 and $95 per share. The warrants expire at
various dates between the first quarter of fiscal 1997 and the first quarter of
fiscal 1998, are exercisable only at maturity, and are settleable in cash at
Microsoft's option. The maximum potential repurchase obligation as of March 31,
1996, $606 million, has been reclassified from stockholders' equity to put
warrants.
A subsidiary of Tele-Communications, Inc. (TCI) owns a 20% minority interest in
The Microsoft Network, LLC. TCI contributed $125 million of TCI common stock,
and Microsoft contributed the business assets of its online service, The
Microsoft Network, which began operation in August 1995.
During the third quarter of 1996, Microsoft and NBC established two joint
ventures: a 24-hour cable news and information channel and an interactive online
news service to be distributed on The Microsoft Network. Both of these services
will be offered worldwide and integrated with the NBC Television Network.
Microsoft has agreed to pay $220 million over five years for its interest in the
cable venture.
Management believes existing cash and short-term investments together with funds
generated from operations will be sufficient to meet operating requirements for
the next twelve months. Microsoft's cash and short-term investments are also
managed to be available for strategic investment opportunities or other
potential large-scale cash needs that may arise in pursuit of Microsoft's
long-term strategies. Additionally, Microsoft shareholders have authorized the
issuance of up to 100 million shares of preferred stock, which may be used by
Microsoft for any proper corporate purpose.
Microsoft has not paid cash dividends on its common stock.
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8
<PAGE> 11
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
See Notes to Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. Computation of Earnings Per Share is on page 11.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Microsoft during the quarter ended
March 31, 1996.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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9
<PAGE> 12
Signature
Pursuant to the requirements 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.
Microsoft Corporation
Date: May 15, 1996 By: /s/ Michael W. Brown
-------------------------------------------
Michael W. Brown,
Vice President, Finance;
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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10
<PAGE> 1
EXHIBIT 11.
MICROSOFT CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In millions, except earnings per share) (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1995 1996 1995 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 582 593 581 590
Common stock equivalents from outstanding stock options 44 46 43 49
- ---------------------------------------------------------------------------------------------------------
Average common and common stock equivalents outstanding 626 639 624 639
=========================================================================================================
Net income $ 396 $ 562 $1,085 $1,636
=========================================================================================================
Earnings per share (1) $0.63 $0.88 $ 1.74 $ 2.56
=========================================================================================================
</TABLE>
(1) Fully diluted earnings per share have not been presented because the effects
are not material.
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11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> $6,770
<SECURITIES> 0
<RECEIVABLES> 681
<ALLOWANCES> 0
<INVENTORY> 33
<CURRENT-ASSETS> 7,696
<PP&E> 2,201
<DEPRECIATION> 920
<TOTAL-ASSETS> 9,590
<CURRENT-LIABILITIES> 2,264
<BONDS> 0
0
0
<COMMON> 2,678
<OTHER-SE> 3,917
<TOTAL-LIABILITY-AND-EQUITY> 9,590
<SALES> 6,416
<TOTAL-REVENUES> 6,416
<CGS> 947
<TOTAL-COSTS> 947
<OTHER-EXPENSES> 3,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,519
<INCOME-TAX> 883
<INCOME-CONTINUING> 1,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.56
</TABLE>
