<PAGE> 1
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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 SEPTEMBER 30, 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
October 31, 1996 was 597,593,969.
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<PAGE> 2
MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
a) Income Statements
for the Three Months Ended September 30, 1996 and 1995................... 1
b) Balance Sheets
as of September 30, 1996 and June 30, 1996............................... 2
c) Cash Flows Statements
for the Three Months Ended September 30, 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............................................................ 8
Item 6. Exhibits and Reports on Form 8-K............................................. 8
SIGNATURE...................................................................................... 9
</TABLE>
<PAGE> 3
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
<TABLE>
<CAPTION>
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
- -----------------------------------------------------------------------------------------
Three Months Ended
September 30
1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $2,016 $2,295
- -----------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 322 250
Research and development 302 432
Sales and marketing 621 625
General and administrative 63 86
- -----------------------------------------------------------------------------------------
Total operating expenses 1,308 1,393
- -----------------------------------------------------------------------------------------
Operating income 708 902
Interest income 66 92
Other expenses (4) (49)
- -----------------------------------------------------------------------------------------
Income before income taxes 770 945
Provision for income taxes 271 331
- -----------------------------------------------------------------------------------------
Net income $ 499 $ 614
=========================================================================================
Earnings per share $ 0.78 $ 0.95
=========================================================================================
Weighted average shares outstanding 640 647
=========================================================================================
</TABLE>
See accompanying notes.
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1
<PAGE> 4
MICROSOFT CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEETS
(In millions)
- -----------------------------------------------------------------------------------------------------------------------
June 30 Sept. 30
1996 1996 (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 6,940 $ 7,098
Accounts receivable 639 855
Other 260 279
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 7,839 8,232
Property, plant, and equipment 1,326 1,304
Equity investments 675 896
Other assets 253 308
- -----------------------------------------------------------------------------------------------------------------------
Total assets $10,093 $10,740
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 808 $ 887
Accrued compensation 202 196
Income taxes payable 484 514
Unearned revenues 560 651
Other 371 415
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,425 2,663
- -----------------------------------------------------------------------------------------------------------------------
Minority interest 125 125
- -----------------------------------------------------------------------------------------------------------------------
Put warrants 635 675
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock and paid-in capital --
shares authorized 2,000;
shares outstanding 597 and 597 2,924 3,220
Retained earnings 3,984 4,057
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,908 7,277
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,093 $10,740
=======================================================================================================================
</TABLE>
(1) Unaudited
See accompanying notes.
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2
<PAGE> 5
MICROSOFT CORPORATION
<TABLE>
<CAPTION>
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30
1995 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 499 $ 614
Depreciation and amortization 69 162
Current liabilities 410 227
Accounts receivable (504) (205)
Other current assets 26 (15)
- -----------------------------------------------------------------------------------------------------------------
Net cash from operations 500 783
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR FINANCING
Common stock issued 98 215
Common stock repurchased (129) (697)
Stock option income tax benefits 58 106
- -----------------------------------------------------------------------------------------------------------------
Net cash used for financing 27 (376)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (116) (99)
Equity investments and other (98) (156)
Short-term investments (370) 259
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investments (584) 4
- -----------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents (57) 411
Effect of exchange rates on cash 1 6
Cash and equivalents, beginning of period 1,962 2,601
- -----------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period 1,906 3,018
Short-term investments, end of period 3,158 4,080
- -----------------------------------------------------------------------------------------------------------------
Cash and short-term investments, end of period $5,064 $7,098
================================================================================================================
</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 in
conformity with generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses. Examples
include provisions for returns and bad debts and the length of product life
cycles and buildings' lives. Actual results may differ from these 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 1996 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
In connection with an ongoing investigation, the Antitrust Division of the U.S.
Department of Justice requested information from Microsoft in September 1996
concerning Web browsers. Microsoft is also subject to various legal proceedings
and claims that arise in the ordinary course of business. Management currently
believes that resolving these matters will not have a material adverse impact on
the Company's financial position or its results of operations.
SUBSEQUENT EVENTS
During October 1996, Microsoft and a subsidiary of Tele-Communications, Inc.
(TCI) terminated a partnership under which TCI owned a 20% minority interest in
The Microsoft Network, LLC, owner of the business assets of MSN, The Microsoft
Network, an online service. Due to the evolving nature of the online industry
and MSN's move to a Web-based offering, the original direction of the
partnership changed and both Microsoft and TCI agreed to terminate this
partnership focused exclusively on MSN. In return for approximately $125
million of TCI securities, Microsoft became the sole owner of MSN. There was
no other material financial impact of the dissolution.
On November 12, 1996, the Company's Board of Directors approved a two-for-one
stock split, effective November 22, 1996. Share and per share amounts have not
been restated for the upcoming stock split.
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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 applications, interactive media programs, and Internet
platform and development tools. Microsoft also offers online services, sells
personal computer books and input devices, and researches and develops advanced
technology software products.
REVENUES
Revenues for the first quarter of fiscal 1997 increased 14% over revenues for
the first quarter of fiscal 1996. Revenues experienced large growth in the first
quarter of the prior year due to the introduction of the Microsoft(R) Windows
95(R) operating system.
Software license volume 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 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, such as Microsoft Office, are less
than the sum of the prices for the individual programs included in these suites
when such programs are licensed separately.
A portion of the Company's revenues will be earned later than billed. Unearned
revenues as of September 30, 1996 on the accompanying balance sheet were $651
million. Approximately $525 million of this amount represented the unearned
portion of Windows-based desktop operating systems revenues attributable to
future support commitments, Internet browser updates, and other unspecified
enhancements that will be recognized ratably over the products' life cycles. The
balance of unearned revenues was primarily attributable to maintenance and other
subscription contracts.
PRODUCT GROUPS
Platforms product group revenues were $1.19 billion in the first quarter of
1997, compared to $1.04 billion for the same period of 1996, an increase of 15%.
Platforms product group revenues are primarily from licenses of PC operating
systems, business systems with client/server architectures, and software
development tools.
As expected, revenues from retail upgrade versions of Microsoft Windows 95
decreased compared to the comparable quarter of the prior year, the quarter
during which Windows 95 was released. Total Windows 95 unit volume continued to
build, as units licensed through the OEM channel increased strongly.
Windows NT(R) 4.0 was released during the first quarter of 1997, fueling revenue
increases for both Windows NT Workstation and Windows NT Server. Additionally,
revenues from server applications in the BackOffice(TM) family of business
systems were strong.
Applications and content product group revenues were $1.11 billion in the first
quarter of 1997, increasing 13% from $977 million in the first quarter of 1996.
Applications and content product group revenues include primarily licenses of
desktop and consumer productivity applications, interactive media programs,
and PC input devices. Most desktop application revenues are generated by
integrated suites. The primary programs in Microsoft Office are the Microsoft
Word word processor, the Microsoft Excel spreadsheet, and the Microsoft
PowerPoint(R) presentation graphics program. Various versions of Office, which
are available for Windows 32-bit, Windows 16-bit, and Macintosh operating
systems, also include applications such as the Microsoft Access(R) database
management program, the Microsoft Schedule+ calendar and scheduling program,
and an email client license. Increases in applications and content revenues
were led by strong sales of 32-bit Windows versions of Microsoft Office.
SALES CHANNELS
Microsoft distributes its products primarily through OEM licenses, corporate
licenses, and retail packaged products. OEM channel revenues are license fees
from original equipment manufacturers. Microsoft has three major geographic
sales and marketing organizations: the 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.
- --------------------------------------------------------------------------------
5
<PAGE> 8
OEM earned revenues were $663 million in the first quarter compared to the $548
million recorded in the comparable quarter of the prior year. The primary source
of OEM revenues is the licensing of desktop operating systems. Higher levels of
PC shipments was the principal driver of increased revenues through the OEM
channel. The percentage of new PCs with Windows 95 preinstalled increased to
more than 70% of reported shipments during the first quarter of 1997, while
MS-DOS and Windows 3.x continued to be preinstalled on many of the remainder of
PCs sold by OEMs. The above-mentioned ratable revenue recognition policy was
extended to operating systems licensed through the OEM channel in the third
quarter of the prior fiscal year.
Revenues in the U.S. and Canada were $812 million in the first quarter of 1997
compared to $745 million in the first quarter of 1996. Revenues in Europe were
$427 million in the first quarter of 1997 compared to $426 million in the prior
year. Growth rates slowed in the U.S. and Canada and European channels due to
the strong sales of Windows 95 the prior year, reflecting typical retail upgrade
sales patterns of new versions of PC operating systems. Other International
channel revenues increased 32% to $393 million in the first quarter of 1997 from
$297 million in the first quarter of 1996, reflecting strong sales in Japan. The
Japanese version of Windows 95 was released in Japan during the second quarter
of fiscal 1996.
Excluding the impact of the shipment of Windows 95 retail upgrades and 32-bit
versions of desktop applications in the first quarter of fiscal 1996, the trend
has continued toward a higher percentage of corporate licensing (versus packaged
products).
Microsoft's operating results are affected by foreign exchange rates. Had the
exchange rates in effect during the first quarter of the prior year been in
effect during the first quarter of 1997, translated revenues in Europe would
have been $23 million higher and translated Other International revenues would
have been $28 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. Also, a portion of planned translated international
finished goods revenues in fiscal 1997 is hedged with purchased options.
OPERATING EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES
Cost of revenues as a percentage of revenues was 10.9% in the first quarter of
1997 compared to 16.0% in the first quarter of 1996. The decrease was primarily
due to high shipments of retail upgrade versions of Windows 95 and Microsoft
Office for Windows 95 in the comparable quarter. Cost of revenues also decreased
because of general trends toward more corporate licensing and more shipments of
products on CD-ROM, which carry lower cost of goods than floppy disks.
Research and development expenses increased 43% to $432 million (18.8% of
revenues) in the first quarter of 1997 from $302 million (15.0% of revenues) in
the corresponding quarter of 1996. The increase in research and development
expenses resulted primarily from planned hiring of software developers and
higher levels of third-party development costs.
Sales and marketing expenses were $625 million in the first quarter of 1997,
flat with the comparable quarter's $621 million. As a percentage of revenues,
sales and marketing expenses were 27.2% and 30.8% in the respective first
quarters of 1997 and 1996. Sales and marketing expenses as a percent of revenues
decreased due to the high level of marketing and support associated with the
launch of Windows 95 in the prior year.
General and administrative expenses were $86 million (3.8% of revenues) in the
first quarter of 1997 and $63 million (3.1% of revenues) in the first quarter of
1996. The increase was due to growth in the systems and number of people
necessary to support overall increases in the scope of the Company's operations.
Interest income increased as a result of a larger investment portfolio generated
by cash from operations.
Other expenses increased in the first quarter of 1997 due to recognition of the
Company's share of operational expenses of joint ventures, including DreamWorks
Interactive and the MSNBC entities.
The effective income tax rate was 35% in both periods.
NET INCOME
Net income for the first quarter of 1997 was $614 million. Net income as a
percentage of revenues was 26.8% in the first quarter of 1997 compared with
24.8% in the first quarter of 1996. The increase in net income as a percentage
of revenues was primarily the result of substantial reductions in relative cost
of revenues and sales and marketing expenses, partially offset by increases in
research and development and funding of joint ventures.
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6
<PAGE> 9
FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $7.10 billion at
September 30, 1996. The portfolio is diversified among security types,
industries, and individual issuers. Microsoft's investments are generally 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 primarily
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 September 30, 1996 was $7.28 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, research and development investments will
continue 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. On
September 30, 1996, commitments for constructing new buildings approximated $360
million.
Employees exercising stock options provide additional cash. These proceeds have
funded Microsoft's open market stock repurchase program through which Microsoft
provides shares for stock option and stock purchase plans. This practice is
continuing in 1997.
To enhance its stock repurchase program, Microsoft sold equity put warrants to
independent third parties. These put warrants entitle the holders to sell shares
of Microsoft common stock to the Company on certain dates at specified prices.
On September 30, 1996, 14 million warrants were outstanding with strike prices
ranging between $100 and $110 per share. The warrants expire at various dates
between the second quarter of fiscal 1997 and the second 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 September 30, 1996,
$675 million, has been reclassified from stockholders' equity to put warrants.
During 1996, Microsoft and National Broadcasting Company (NBC) established two
joint ventures: a 24-hour cable news and information channel and an interactive
online news service. Microsoft agreed to pay $220 million over a five-year
period for its interest in the cable venture and to pay one-half of operational
funding of both joint ventures for a multiyear period.
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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7
<PAGE> 10
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 10.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Microsoft during the quarter ended
September 30, 1996.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
- --------------------------------------------------------------------------------
8
<PAGE> 11
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: November 13, 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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9
<PAGE> 1
EXHIBIT 11.
MICROSOFT CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In millions, except earnings per share) (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30
1995 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of common shares outstanding 589 597
Common stock equivalents from outstanding stock options 51 50
- ----------------------------------------------------------------------------------------------
Average common and common stock equivalents outstanding 640 647
==============================================================================================
Net income $ 499 $ 614
==============================================================================================
Earnings per share (1) $0.78 $0.95
==============================================================================================
</TABLE>
(1) Fully diluted earnings per share have not been presented because the effects
are not material.
- --------------------------------------------------------------------------------
10
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 7,098
<SECURITIES> 0
<RECEIVABLES> 855
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,232
<PP&E> 2,404
<DEPRECIATION> 1,100
<TOTAL-ASSETS> 10,740
<CURRENT-LIABILITIES> 2,663
<BONDS> 0
0
0
<COMMON> 3,220
<OTHER-SE> 4,057
<TOTAL-LIABILITY-AND-EQUITY> 10,740
<SALES> 2,295
<TOTAL-REVENUES> 2,295
<CGS> 250
<TOTAL-COSTS> 250
<OTHER-EXPENSES> 1,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 945
<INCOME-TAX> 331
<INCOME-CONTINUING> 614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 614
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
</TABLE>
