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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 December 31, 1995
/ / 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
January 31, 1996 was 594,003,653.
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MICROSOFT CORPORATION
FORM 10-Q
For the Quarter Ended December 31, 1995
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements Page
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a) Income Statements
for the Three and Six Months Ended December 31, 1995 and 1994............ 1
b) Balance Sheets
as of December 31, 1995 and June 30, 1995................................ 2
c) Cash Flows Statements
for the Six Months Ended December 31, 1995 and 1994...................... 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>
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Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1994 1995 1994 1995
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<S> <C> <C> <C> <C>
Net revenues $1,482 $2,195 $2,729 $4,211
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Costs and expenses:
Cost of revenues 222 330 408 652
Research and development 199 313 377 615
Sales and marketing 479 690 874 1,311
General and administrative 62 76 113 139
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Total costs and expenses 962 1,409 1,772 2,717
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Operating income 520 786 957 1,494
Interest income - net 42 76 78 142
Other income (expense) (5) 23 (7) 19
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Income before income taxes 557 885 1,028 1,655
Provision for income taxes 184 310 339 581
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Net income $ 373 $ 575 $ 689 $1,074
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Earnings per share $ 0.60 $ 0.90 $ 1.10 $ 1.68
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Weighted average shares outstanding 625 638 624 639
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</TABLE>
See accompanying notes.
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MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
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<TABLE>
<CAPTION>
June 30 Dec. 31
1995 1995 (1)
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<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $4,750 $6,017
Accounts receivable - net 581 771
Inventories 88 108
Other 201 207
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Total current assets 5,620 7,103
Property, plant, and equipment - net 1,192 1,297
Other assets 398 706
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Total assets $7,210 $9,106
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 $ 651
Accrued compensation 130 148
Income taxes payable 410 680
Unearned revenues 54 495
Other 190 267
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Total current liabilities 1,347 2,241
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Minority interest 125 125
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Put warrants 405 560
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Stockholders' equity:
Common stock and paid-in capital --
shares authorized 2,000;
shares outstanding 588 and 590 2,005 2,285
Retained earnings 3,328 3,895
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Total stockholders' equity 5,333 6,180
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Total liabilities and stockholders' equity $7,210 $9,106
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</TABLE>
(1) Unaudited
See accompanying notes.
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MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
<TABLE>
<CAPTION>
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Six Months Ended
December 31
1994 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 689 $ 1,074
Depreciation and amortization 133 147
Current liabilities 194 892
Accounts receivable (134) (187)
Inventories (17) (20)
Other current assets (30) (5)
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Net cash from operations 835 1,901
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CASH FLOWS USED FOR FINANCING
Common stock issued 140 173
Common stock repurchased (560) (472)
Stock option income tax benefits 78 71
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Net cash used for financing (342) (228)
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CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (170) (204)
Other assets (90) (203)
Short-term investments (785) (906)
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Net cash used for investments (1,045) (1,313)
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Net change in cash and equivalents (552) 360
Effect of exchange rates on cash and equivalents (8) 1
Cash and equivalents, beginning of period 1,477 1,962
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Cash and equivalents, end of period 917 2,323
Short-term investments, end of period 2,922 3,694
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Cash and short-term investments, end of period $ 3,839 $ 6,017
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</TABLE>
See accompanying notes.
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MICROSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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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.
MERGER
During January 1996, Microsoft merged with Vermeer Technologies, Inc., a
developer of Web authoring software. The transaction will be accounted for as
a pooling of interests. Management does not expect the transaction to have a
material financial effect on the Company's financial results.
CONTINGENCIES
The Antitrust Division of the U.S. Department of Justice has stated that it is
conducting an investigation concerning Microsoft's inclusion of client-access
software for The Microsoft Network in Microsoft Windows(R) 95. Although there
is no assurance that this matter will be resolved favorably and that
Microsoft's future financial statements will not be adversely affected,
Microsoft currently believes that resolution of this matter will not have a
material adverse effect on its financial condition or results of operations.
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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),
workstations, and servers; business and consumer programs for productivity,
reference, education, and entertainment; 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 second quarter of fiscal 1996 increased 48% over revenues for
the second quarter of fiscal 1995. For the first half of the year, revenues
increased 54% 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 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 $1.13 billion in the second quarter of
1996, compared to $592 million recorded in the same period of 1995, an increase
of 90%. On a year-to-date basis, platforms product group revenues increased to
$2.17 billion from $1.10 billion. Platforms product group revenues are
primarily from licenses of personal computer operating systems and business
systems with client-server architectures.
During the first quarter of fiscal 1996, the Company released Microsoft Windows
95, its new personal computer operating system, which experienced strong demand
by users of existing PCs. To prevent stock outs in the retail channel, certain
distributors and resellers over-ordered Windows 95 product prior to its formal
launch on August 24, 1995 and began returning excess inventory in the first two
quarters of 1996. The Company provided for management's estimate of additional
product that will be returned to Microsoft. The Company's earned retail
revenues of Windows 95 were $260 million in the first quarter and $180 million
in the second quarter. Additionally, unearned revenues as of December 31, 1995
on the accompanying balance sheet include $200 million attributable to future
telephone support and unspecified enhancements to Windows 95 which will be
recognized ratably over the product's life cycle as it is earned. The Company
also experienced continued revenue growth in Microsoft MS-DOS(R), Microsoft
Windows 3.1, Microsoft Windows for Workgroups 3.11, and Windows 95 operating
systems licensed through the OEM channel. (Windows 3.1 and Windows for
Workgroups 3.11 are hereafter referred to collectively as "Windows 3.x.").
Revenues from business systems products (principally the Windows NT(TM)
operating system and server applications in the 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 $1.07 billion in the
second quarter of 1996, increasing 20% from $890 million in the second quarter
of 1995. For the first two quarters of 1996, applications and content product
revenues were $2.05 billion, compared to $1.63 billion in the corresponding
period of 1995. Applications product group revenues include primarily licenses
of desktop productivity, consumer, and developer programs.
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. The
accompanying balance sheet also includes $230 million of unearned revenues as
of December 31, 1995 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 Windows 95 version upgrades have been fulfilled.
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Revenues from consumer products grew 23% in the second quarter of 1996. New
titles and new versions of existing titles both contributed to the growth, in
spite of across-the-board price decreases. Developer product revenues also
grew, reflecting the introduction of Microsoft Visual Basic version 4.0.
SALES CHANNELS
Microsoft distributes its products primarily through OEM licenses, corporate
licenses, and retail packaged products. OEM channel revenues are license fees
from original equipment manufacturers. Microsoft has three major geographic
sales and marketing organizations: U.S. and Canada, Europe, and elsewhere in
the world (Other International). Sales of corporate licenses and packaged
products in these channels are primarily to distributors and resellers.
OEM revenues (primarily personal computer operating systems) grew 75% to $672
million in the second quarter from the $385 million recorded in the comparable
quarter of the prior year. On a year-to-date basis, OEM revenues were $1.22
billion, compared to $733 million in 1995. The percentage of OEMs
preinstalling Windows 95 on new PCs increased during the second quarter of
1996. Also, MS-DOS and Microsoft Windows 3.x continued to be preinstalled on
many 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 $632 million in the second quarter of 1996
compared to $491 million in 1995. Revenues in the first half of 1996 were
$1.38 billion, compared to $914 million recorded last year. The increase in
revenues of 51% for the first two quarters primarily reflects the release of
new versions of Windows 95 and 32-bit versions of desktop applications,
particularly Microsoft Office for Windows 95.
Revenues in Europe were $569 million in the second quarter of 1996 compared to
$399 million the prior year. European revenues were $995 million in the first
half of 1996 compared to $688 million the prior year, an increase of 45%.
Revenues in Europe benefited greatly by the release of localized versions of
Windows 95 and 32-bit desktop applications.
Other International channel revenues increased 56% to $322 million in the
second quarter of 1996 from $207 million in the second quarter of 1995,
reflecting the release of Kanji versions of Windows 95 and Microsoft Office in
Japan. Year-to-date revenues were $619 million in 1996 compared to $394
million in 1995. As in Europe, many localized versions of Windows 95 and
32-bit desktop applications were released through the Other International
channel in the first half of 1996.
Microsoft's operating results are affected by foreign exchange rates. Had the
exchange rates in effect during the second quarter of the prior year been in
effect during the second quarter of 1996, translated revenues in Europe would
have been $21 million lower and translated Other International revenues would
have been $4 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 15.0% in the second quarters
of both 1996 and 1995. For the first two quarters of 1996, cost of revenues
was 15.5% of revenues, compared to 15.0% the prior year. The slight increase
is principally attributable to a shift in sales mix due to high shipments of
retail upgrade versions of Windows 95 and Microsoft Office for Windows 95. The
increase in the cost of revenues percentage was somewhat offset by the
increased mix of CD-ROM media, which carry lower costs of goods sold than
floppy disks.
Research and development expenses increased 57% to $313 million, or 14.3% of
revenues in the second quarter of 1996 from $199 million, or 13.4% of revenues
in the corresponding quarter of 1995. The increase in research and development
expenses in both the second quarter and first half of 1996 resulted primarily
from planned hiring of software developers and higher levels of third-party
development costs.
Sales and marketing expenses increased 44% to $690 million from $479 million in
the comparable quarter. As a percentage of revenues, sales and marketing
expenses were 31.4% and 32.3% in the respective second quarters of 1996 and
1995. The increase in sales and marketing expenses in both the second quarter
and first half of 1996 was impacted by marketing costs of Windows 95 and
Microsoft Office for Windows 95 and increased product support costs.
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General and administrative expenses were $76 million (3.5% of revenues) in the
second quarter of 1996 and $62 million (4.2% of revenues) in the second quarter
of 1995. The increases in absolute dollars incurred in both the second quarter
and first half of 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% and 33% in the first halves of 1996 and
1995 with the increase due primarily to changes in the U.S. tax law.
NET INCOME
Net income for the second quarter of 1996 was $575 million. Net income as a
percentage of revenues was 26.2% in the second quarter of 1996, compared with
25.2% in the second quarter of 1995. On a year-to-date basis, net income as a
percent of revenues was 25.5% compared to 25.2% 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 gain.
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FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $6 billion at
December 31, 1995. 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 December 31, 1995
exceeded $6 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 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 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 December 31, 1995, 10 million warrants were
outstanding with strike prices ranging between $82 and $91 per share. The
warrants expire at various dates between the fourth quarter of 1996 and the
fourth quarter of 1997, are exercisable only at maturity, and are settleable in
cash at Microsoft's option. The maximum potential repurchase obligation as of
December 31, 1995, $560 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 December 1995, Microsoft and NBC announced the creation of two
joint ventures: a 24-hour cable news and information channel and an interactive
online news service 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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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
27. Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed by Microsoft during the quarter ended
December 31, 1995.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: February 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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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 Six Months Ended
December 31 December 31
1994 1995 1994 1995
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<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 581 590 581 590
Common stock equivalents from outstanding stock options 44 48 43 49
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Average common and common stock equivalents outstanding 625 638 624 639
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Net income $ 373 $ 575 $ 689 $1,074
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Earnings per share (1) $0.60 $0.90 $1.10 $ 1.68
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</TABLE>
(1) Fully diluted earnings per share have not been presented because the
effects are not material.
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<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 6017
<SECURITIES> 0
<RECEIVABLES> 771
<ALLOWANCES> 0
<INVENTORY> 108
<CURRENT-ASSETS> 7103
<PP&E> 2080
<DEPRECIATION> 783
<TOTAL-ASSETS> 9106
<CURRENT-LIABILITIES> 2241
<BONDS> 0
0
0
<COMMON> 2285
<OTHER-SE> 3895
<TOTAL-LIABILITY-AND-EQUITY> 9106
<SALES> 4211
<TOTAL-REVENUES> 4211
<CGS> 652
<TOTAL-COSTS> 652
<OTHER-EXPENSES> 2065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1655
<INCOME-TAX> 581
<INCOME-CONTINUING> 1074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1074
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
</TABLE>
