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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____
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COMMISSION FILE NUMBER 0-14278
MICROSOFT CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1144442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (425) 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
September 30, 1997 was 1,206,691,442.
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MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Income Statements
for the Three Months Ended September 30, 1996 and 1997....... 1
b) Balance Sheets
as of June 30, 1997 and September 30, 1997................... 2
c) Cash Flows Statements
for the Three Months Ended September 30, 1996 and 1997....... 3
d) Notes to Financial Statements................................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 11
SIGNATURE.......................................................................... 12
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
Income Statements
(In millions, except earnings per share)(Unaudited)
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Three Months Ended
Sept. 30
1996 1997
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Revenue $2,295 $3,130
Operating expenses:
Cost of revenue 250 253
Research and development 432 567
Acquired in-process technology 0 296
Sales and marketing 625 788
General and administrative 86 95
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Total operating expenses 1,393 1,999
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Operating income 902 1,131
Interest income 92 142
Other expenses (49) (71)
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Income before income taxes 945 1,202
Provision for income taxes 331 539
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Net income 614 663
Preferred stock dividends 0 7
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Net income available for common shareholders $ 614 $ 656
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Earnings per share (1) $ 0.47 $ 0.50
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Weighted average shares outstanding (1) 1,294 1,333
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(1) Share and per share amounts for the three months ended September 30, 1996
have been restated to reflect a two-for-one stock split in December 1996.
See accompanying notes.
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1
MICROSOFT CORPORATION
Balance Sheets
(In millions)
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June 30 Sept. 30
1997 1997(1)
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ASSETS
Current assets:
Cash and short-term investments $ 8,966 $ 9,634
Accounts receivable 980 788
Other 427 416
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Total current assets 10,373 10,838
Property, plant and equipment 1,465 1,484
Equity investments 2,346 2,733
Other assets 203 311
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Total assets $14,387 $15,366
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 721 $ 761
Accrued compensation 336 193
Income taxes payable 466 554
Unearned revenue 1,418 1,671
Other 669 723
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Total current liabilities 3,610 3,902
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Commitments and contingencies
Stockholders' equity:
Convertible preferred stock -
shares authorized 100; outstanding 13 980 980
Common stock and paid-in-capital -
shares authorized 4,000; outstanding
1,204 and 1,207 4,509 5,630
Retained earnings 5,288 4,854
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Total stockholders' equity 10,777 11,464
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Total liabilities and stockholders' equity $14,387 $15,366
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(1) Unaudited
See accompanying notes.
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2
MICROSOFT CORPORATION
Cash Flows Statements
(In millions)(Unaudited)
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Three Months Ended
Sept. 30
1996 1997
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CASH FLOWS FROM OPERATIONS
Net income $ 614 $ 663
Depreciation and amortization 162 228
Write-off of acquired in-process technologies 0 296
Unearned revenue 194 533
Recognition of unearned revenue from prior periods (103) (280)
Other current liabilities 136 53
Accounts receivable (205) 180
Other current assets (15) 7
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Net cash from operations 783 1,680
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CASH FLOWS USED FOR FINANCING
Common stock issued 215 207
Common stock repurchased (729) (913)
Put warrant proceeds 32 280
Preferred stock dividends 0 (7)
Stock option income tax benefits 106 199
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Net cash used for financing (376) (234)
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CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (99) (117)
Cash portion of WebTV purchase price 0 (190)
Equity investments and other (156) (455)
Short-term investments 259 (429)
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Net cash used for investments 4 (1,191)
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Net change in cash and equivalents 411 255
Effect of exchange rates on cash and equivalents 6 (16)
Cash and equivalents, beginning of period 2,601 3,706
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Cash and equivalents, end of period 3,018 3,945
Short-term investments, end of period 4,080 5,689
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Cash and short-term investments, end of period $7,098 $9,634
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See accompanying notes.
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3
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 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, revenue, 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 1997 Form 10-K.
STOCK SPLIT
In December 1996, outstanding shares of common stock were split two-for-one.
All prior share and per share amounts have been restated to reflect the stock
split.
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 and preferred shares using the "if-converted" method.
Beginning in the second quarter of fiscal 1998, Microsoft will be required to
report earnings per outstanding common share in addition to diluted earnings per
share. Earnings per common share computed under the new pronouncement would
have been $0.51 and $0.55 in the first quarters of fiscal 1997 and 1998, while
reported diluted earnings per share were $0.47 and $0.50.
UNEARNED REVENUE
In fiscal 1996, Microsoft committed to integrating its Internet technologies,
such as the Company's Internet browser, Microsoft Internet Explorer, into
existing products at no additional cost to its customers. Given this strategy
and other support commitments such as telephone support, Internet-based
technical support, and unspecified product enhancements, Microsoft recognizes
approximately 20% of Windows operating systems revenue over the product life
cycles, currently estimated at two years. The unearned portion of revenue from
Windows operating systems was $860 million at June 30, 1997 and $930 million at
September 30, 1997.
Since Office 97 is also tightly integrated with the rapidly evolving Internet,
and subsequent delivery of new Internet technologies, enhancements, and other
support is likely to be more than minimal, a ratable revenue recognition policy
became effective for Office 97 licenses beginning in 1997. Approximately 20% of
Office 97 revenue is recognized ratably over the estimated 18-month product life
cycle. Unearned revenue associated with Office 97 totaled $300 million at June
30, 1997 and $430 million at September 30, 1997.
Unearned revenue also includes maintenance and other subscription contracts,
including custom corporate license agreements.
STOCKHOLDERS' EQUITY
Microsoft repurchases common stock on the open market. This program provides
shares for issuance to employees under the Company's stock option and stock
purchase plans. During the first quarter of fiscal 1998, the Company
repurchased 2.1 million shares of Microsoft common stock in the open market. In
addition, under an agreement with an independent third party, the Company
purchased 5.8 million shares of stock through a forward purchase arrangement.
Under this arrangement, a portion of the purchase price will be paid in the next
five years and determined based upon the price of Microsoft common stock at that
time. The timing and method of payment (net-share or cash) is at the discretion
of the Company. The difference between the cash paid and the price of Microsoft
common stock on the date of the agreement is reflected in stockholders' equity.
To enhance its stock repurchase program, Microsoft sells equity put warrants to
independent third parties. These put warrants entitle the purchasers to sell
shares of Microsoft common stock to the Company on certain dates at specified
prices. On September 30, 1997, 23 million warrants were outstanding with strike
prices ranging from $123 to $129 per share. The warrants expire at various
dates between the third quarter of fiscal 1998 and the first
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4
quarter of fiscal 2001 and are exercisable only at maturity. These put warrant
contracts permit a net-share settlement at the Company's option, and do not
result in a put warrant liability on the balance sheet.
During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible
exchangeable principal-protected preferred stock. Dividends are payable
quarterly in arrears. Preferred shareholders have preference over common
stockholders in dividends and liquidation rights. In December 1999, each
preferred share is convertible into common shares or an equivalent amount of
cash determined by a formula that provides a floor price of $79.875 and a cap of
$102.24 per preferred share. Net proceeds of $980 million from the issuance
were used to repurchase common shares.
ACQUISITION OF WEBTV
On August 1, 1997, the Company acquired WebTV Networks, Inc. (WebTV), an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals. Microsoft paid $190 million in cash and $235
million of common stock for WebTV. The acquired net working capital of WebTV
was not material. The accompanying income statement reflects a one-time write-
off of in-process technologies under development by WebTV of $296 million.
CONTINGENCIES
On October 7, 1997, Sun Microsystems, Inc. brought suit against Microsoft in the
U.S. District Court for the Northern District of California. On October 14,
1997, Sun filed a First Amended Complaint (Complaint). The Complaint alleges
nine claims against Microsoft, all related to the parties' relationship under a
March 11, 1996 Technology License and Distribution Agreement (Agreement)
concerning certain Java programming language technology. The Complaint alleges:
statutory and contractual trademark claims related to Microsoft's alleged
improper use of the Java Compatibility logo; a false advertising claim related
to statements Microsoft allegedly has made about its Java support and products;
a claim that Microsoft has breached the Agreement in several respects; a claim
that Microsoft allegedly made Sun's source code generally available to the
public; a claim for breach of the covenant of good faith and fair dealing; a
claim for unfair competition; a claim for intentional interference with
contractual relations between Sun and its customers or prospective customers;
and a claim that Microsoft induced software developers to breach their license
agreements with Sun. The Complaint seeks: a preliminary and permanent
injunction against Microsoft distributing certain products with the Java
Compatibility logo, and against distributing Internet Explorer 4.0 unless
certain alleged obligations are met (no motion for preliminary injunction had
been filed as of October 29, 1997); an order compelling Microsoft to perform
certain alleged obligations; an accounting; termination of the Agreement; and an
award of damages, including compensatory, exemplary and punitive damages, and
liquidated damages of $35 million for the alleged source code disclosure.
On October 27, 1997, Microsoft filed its Answer, Affirmative Defenses and
Counterclaims (Answer). In its Answer, Microsoft denies Sun's claims, and
denies that Sun is entitled to any relief. Microsoft alleges that Sun agreed to
limit its remedies for all claims such as those alleged in the Complaint to
compensatory damages capped by the total license fees paid (to date, $7
million). Microsoft specifically denies that Sun is entitled to any injunctive
relief. Although the Agreement does provide for liquidated damages of $35
million if Microsoft makes Sun's Source Code generally available to the public
under certain conditions, Microsoft denies that there is any basis for such a
claim. Microsoft asserts other defenses to each of Sun's claims. In addition,
Microsoft alleges counterclaims against Sun, including claims that: Sun has
breached the Agreement in many respects; Microsoft is entitled to a court order
that Microsoft may terminate Sun's license under the Agreement to certain
Microsoft technology and otherwise determining the parties' rights and
responsibilities; Sun has breached the covenant of good faith and fair dealing;
and Sun has violated California's unfair competition statute. Microsoft also
alleges that it has put Sun on notice of other breaches of contract and that
Microsoft will seek to amend its counterclaim to state additional claims if
those breaches are not timely cured. Microsoft seeks a declaratory judgment
consistent with its claims and seeks compensatory damages consistent with the
limitations in the Agreement.
On October 20, 1997, the Antitrust Division of the U.S. Department of Justice
(DOJ) filed a Petition for An Order To Show Cause in United States District
Court for the District of Columbia. The DOJ contends that Microsoft has
violated a consent decree that was entered into by the DOJ and Microsoft on July
15, 1994, and approved by the Court on August 18, 1995, to conclude an earlier
investigation by the DOJ. In its petition, the DOJ contends that Microsoft has
violated the consent decree by including Internet Explorer technology in Windows
95, and by preventing original equipment manufacturers (OEMs) from removing
Internet Explorer functionality from versions of Windows 95 the OEMs are
licensed to install on computer systems they sell. In addition, the DOJ alleges
that
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5
certain non-disclosure agreements between Microsoft and its customers
prohibiting the release of confidential information without prior notice to the
other party are impairing the DOJ's ability to enforce the consent decree. The
DOJ's petition seeks an order from the Court requiring Microsoft to demonstrate
that it has not violated the consent decree. If such proceedings are ordered,
and if the Court thereafter finds Microsoft to have violated the consent decree,
the DOJ petition seeks a further order directing Microsoft to: permit OEMs to
license and install Windows 95 independent of Internet Explorer; advise certain
end users that they are not required to use Internet Explorer and provide those
end users with instructions for removing Internet Explorer from the Windows 95
desktop; modify all existing and future non-disclosure provisions in any
agreement; and other relief. Microsoft does not believe it has violated the
consent decree and intends to vigorously contest this lawsuit.
On October 27, 1997, the Court held a scheduling conference. The Court ruled
that it will enter a scheduling order, pursuant to which Microsoft is to respond
to the Petition within ten days after the order is entered, and the DOJ is to
reply ten days thereafter. Following those submissions, the Court will hold an
additional scheduling conference to set the schedule for any additional
proceedings it may deem necessary.
In other ongoing investigations, the DOJ has requested information from
Microsoft concerning various issues. 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.
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6
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 scalable operating systems for information
appliances, personal computers (PCs), and servers; server applications for
client/server environments; business and consumer productivity applications;
software development tools; and Internet and intranet software and technologies.
The Company has recently expanded its interactive content efforts, including
entertainment and information software programs, MSN(TM), the Microsoft Network
online service, Internet-based services, and alliances with companies involved
with other forms of digital interactivity. Microsoft also sells personal
computer input devices and books, and researches and develops advanced
technologies for future software products.
REVENUE
Revenue of $3.13 billion in the first quarter of fiscal 1998 increased 36% over
the first quarter of fiscal 1997. The strong growth rate reflected the
continued adoption of Windows(R) 32-bit operating systems and Microsoft(R)
Office 97. Software license volume increases have been the principal factor in
the Company'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 OEM licenses and corporate and organization 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. Microsoft recognizes a portion of
Windows operating systems revenue over the products' life cycles. This revenue
recognition policy was extended to Office 97 licenses in the third quarter of
fiscal 1997. (See notes to financial statements.)
PRODUCT GROUPS
Platforms product revenue grew 43% to $1.70 billion in the first quarter,
compared to $1.19 billion in the comparable quarter of the prior year.
Platforms product group revenue is primarily licenses of PC operating systems,
business systems with client/server architectures, and software development
tools.
Windows 95 unit volume continued to build, as units licensed through the OEM
channel increased strongly. Additionally, revenue from the Microsoft Windows
NT(R) Workstation operating system showed healthy growth. The revenue growth
rate for Microsoft BackOffice(R) server and server applications products slowed
from the rapid rates experienced in prior quarters.
Applications and Content product revenue increased 29% to $1.43 billion in the
September quarter. Applications and Content product group revenue include
primarily licenses of desktop and consumer productivity applications,
interactive media programs, and PC input devices. Integrated suites generate
most desktop application revenue. The primary programs in Microsoft Office are
Microsoft Word word processor, Microsoft Excel spreadsheet, and 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 Microsoft Access database
management program, Microsoft Outlook(TM) desktop manager, Microsoft Schedule+
calendar and scheduling program, and an email client license.
Revenue from the various Microsoft Office integrated suites, including the
Standard, Professional, and Small Business Editions, increased strongly, while
stand-alone versions of Microsoft Excel, Microsoft Word, and Microsoft
PowerPoint continued to decrease.
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7
SALES CHANNELS
Microsoft distributes its products primarily through OEM licenses, corporate and
organizational licenses, and retail packaged products. OEM channel revenue
represents 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 and
organization licenses and packaged products in these channels are primarily to
distributors and resellers. The trend has continued toward a higher percentage
of corporate licensing versus packaged products.
Royalties from OEMs reached a record level. Revenue from the OEM channel was
$983 million in the first quarter, up 48% over the prior year. The primary
source of OEM revenue is the licensing of desktop operating systems. PC
shipment growth coupled with an increased penetration of higher value 32-bit PC
operating systems drove the OEM revenue increase.
For the first fiscal quarter, finished goods revenue in the U.S. and Canada
increased 19% to $968 million from $812 million the prior year. The growth rate
in the U.S. and Canada reflected slowing growth of desktop applications and
business systems and flat shipments and licensing of retail versions of 32-bit
personal operating systems.
First quarter revenue of $641 million in Europe grew 50% from $427 million due
to the increased popularity of corporate licensing of Microsoft Office and
Windows products and greater demand for BackOffice family server products.
Other International channel revenue in the first quarter was $538 million, an
increase of 37% from $393 million the prior year. Key drivers of growth were
increased corporate licensing of Microsoft Office, BackOffice packaged product,
and expansion in emerging markets.
Microsoft's operating results are affected by foreign exchange rates. Since a
portion of local currency denominated revenue is hedged and much of the
Company's international manufacturing costs and operating expenses are also
incurred in local currencies, the impact of exchange rates is partially
mitigated.
OPERATING EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES
Cost of revenue as a percent of revenue declined to 8.1% in the first quarter
from 10.9% the prior year. The decrease was due to the shifts in mix to CD-ROMs
(which carry lower cost of goods than disks), licenses to OEMs and corporations,
and higher-margin Windows NT Server and other BackOffice server products.
Research and development expenses increased 31% in the first quarter to $567
million, primarily driven by higher development headcount-related costs, third
party development, and charges from purchased R&D.
On August 1, 1997, the Company acquired WebTV Networks, Inc. (WebTV), an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals. Microsoft paid $425 million in stock and
cash for WebTV. The accompanying income statement reflects a one-time write-off
of in-process technologies under development by WebTV of $296 million.
Sales and marketing expenses were $788 million in the first quarter of fiscal
1998, which represented 25.2% of revenue, compared to 27.3% in the first quarter
of the prior year. The total expense as a percent of revenue decreased due to
lower relative marketing costs.
General and administrative costs were $95 million in the first quarter compared
to $86 million in the comparable quarter of the prior year.
Interest income increased as a result of a larger investment portfolio generated
by cash from operations. Other expenses include primarily the recognition of
the Company's share of joint venture activities, including DreamWorks
Interactive and the MSNBC entities.
The effective income tax rate increased due to the nondeductibility of the
write-off of the WebTV in-process technologies and amortization of other WebTV
intangible assets.
NET INCOME
Net income for the first quarter of fiscal 1998 was $663 million. Excluding the
one-time write-off of WebTV in-process R&D, net income represented 30.6% of
revenue compared with 26.8% in the first quarter of 1997. Earnings per share
without the write-off were $0.72, representing a 53% increase compared to the
$0.47 earned during the same quarter the prior year.
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8
EMPLOYEE STOCK OPTIONS
As disclosed in the Microsoft Annual Report and elsewhere, the Company
encourages broad-based employee ownership of Microsoft stock through a stock
option program in which all employees are eligible to participate. At September
30, 1997, 258 million options were outstanding.
The Company follows APB Opinion 25 to account for stock option plans in its
published financial statements. Accordingly, no compensation cost is recognized
because the option exercise price is equal to the market price of the underlying
stock on the date of grant. Earnings per share calculations reflect exercised
options and the effect of outstanding stock options under the "treasury stock"
method.
In addition, as required by Statement of Financial Accounting Standard 123, the
Company discloses the Black-Scholes value of option grants and the proforma
impact of expensing such value over the vesting period of the options in the
footnotes to its annual financial statements.
Options are granted upon hire to new employees and annually to current
employees. The annual grant occurs during the first quarter and represents the
majority of options granted during any given fiscal year.
In an effort to aid understanding of the impact of the Company's stock option
plan, proforma "look-through" income statements are provided below as an
alternative presentation of accounting for stock options. This proforma income
statement is not required under generally accepted accounting principles, but
offers an additional method of considering stock options. In this presentation,
the expense of option grants, based on the Black-Scholes value of the options
(using similar assumptions to those disclosed in the 1997 Annual Report), is
reflected in the income statement operating expense line items in the quarter
that the options are granted. In addition, it is assumed that the options are
"hedged" through the purchase of offsetting call options and therefore excluded
from average shares outstanding used to calculate earnings per share.
Alternative Presentation of Accounting for Stock Options
(In millions, except earnings per share)(Unaudited)
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Twelve Months Ended Three Months Ended
Sept. 30, 1997 Sept. 30, 1997
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Reported Proforma Reported Proforma
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Revenue $12,193 $12,193 $3,130 $ 3,130
Operating expenses:
Cost of revenue 1,088 1,132 253 293
Research and development 2,060 2,729 567 1,137
Acquired in-process technology 296 296 296 296
Sales and marketing 3,019 3,472 788 1,192
General and administrative 371 523 95 210
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Total operating expenses 6,834 8,152 1,999 3,128
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Operating income 5,359 4,041 1,131 2
Interest income 493 493 142 142
Other expenses (281) (281) (71) (71)
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Income before income taxes 5,571 4,253 1,202 73
Provision for income taxes 2,068 1,596 539 133
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Net income 3,503 2,657 663 (60)
Preferred stock dividends 22 22 7 7
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Net income available for common shareholders $ 3,481 $ 2,635 $ 656 ($ 67)
=============================================================================================
Earnings per share $ 2.65 $ 2.05 $ 0.50 ($ 0.05)
=============================================================================================
Weighted average shares outstanding 1,322 1,298 1,333 1,305
=============================================================================================
Options granted 34 34 28 28
=============================================================================================
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9
FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $9.63 billion at
September 30, 1997. 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.
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.
Microsoft has no material long-term debt and has $70 million of standby
multicurrency lines of credit to support foreign currency hedging and cash
management. Stockholders' equity at September 30, 1997 was $11.46 billion.
Microsoft will continue to invest in sales, marketing, and product support
infrastructure. Additionally, research and development activities will include
investments in existing and advanced areas of technology, including using cash
to acquire technology and to fund ventures and other strategic opportunities.
Additions to property and equipment will continue, including new facilities and
computer systems for research and development, sales and marketing, support, and
administrative staff. Commitments for constructing new buildings were $300
million on September 30, 1997.
Cash will also be used to repurchase common stock to provide shares for employee
stock option and purchase plans. Despite recent increases in stock repurchases,
the buyback program has not kept pace with employee stock option grants or
exercises. Beginning in fiscal 1990, Microsoft has repurchased 162 million
common shares for $7.1 billion while 371 million shares were issued under the
Company's employee stock option and purchase plans. The market value of all
outstanding stock options was $34.2 billion as of September 30, 1997. Microsoft
enhances its repurchase program by selling put warrants. During December 1996,
Microsoft issued 12.5 million shares of 2.75% convertible preferred stock. Net
proceeds of $980 million were used to repurchase common shares.
Management believes existing cash and short-term investments together with funds
generated from operations will be sufficient to meet operating requirements for
the next 12 months. Microsoft's cash and short-term investments are available
for strategic investments, mergers and acquisitions, other potential large-scale
cash needs that may arise, and to fund the continuation of its stock buyback
program to reduce the dilutive impact of the Company's employee stock option and
purchase programs.
Microsoft has not paid cash dividends on its common stock. The preferred stock
pays $2.196 per annum per share.
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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 13.
27. Financial Data Schedule
(B) Reports on Form 8-K
Microsoft filed no reports on Form 8-K during the quarter ended
September 30, 1997.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: October 29, 1997 By: /s/ Gregory B. Maffei
-----------------------
Gregory B. Maffei,
Vice President, Finance;
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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12
EXHIBIT 11.
MICROSOFT CORPORATION
Computation of Earnings Per Share
(In millions, except earnings per share) (Unaudited)
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Three Months Ended
Sept. 30
1996 1997
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Weighted average number of common shares outstanding (3) 1,194 1,205
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Earnings per common share (3) $0.51 $0.55
=========================================================================================
Common stock equivalents:
Preferred stock (1) 0 10
Employee stock options (2) 100 118
- -----------------------------------------------------------------------------------------
Average common and common stock equivalents outstanding (3) 1,294 1,333
=========================================================================================
Diluted earnings per share (3) $0.47 $0.50
=========================================================================================
(1) Calculated under the "if-converted" method.
(2) Calculated under the "treasury stock" method.
(3) Share and per share amounts for the three months ended September 30, 1996
have been restated to reflect a two-for-one stock split in December 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, Earnings Per Share. The new rule will
require specific disclosure of both diluted earnings per share and earnings per
common share calculated without the dilutive impacts of outstanding stock
options or convertible securities such as preferred stock. There was no
material difference between reported earnings per share and diluted earnings per
share for any period presented.
- -------------------------------------------------------------------------------
13
5
1,000,000
3-MOS
JUN-30-1998
SEP-30-1997
$9,634
0
788
0
0
10,838
2,800
1,316
15,366
3,902
0
0
980
5,630
4,854
15,366
3,130
3,130
253
253
1,746
0
0
1,202
539
663
0
0
0
663
0.50
0.50
