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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____
--------------
Commission File Number 0-14278
MICROSOFT CORPORATION
(Exact name of registrant as specified in its charter)
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, 1994 was 582,384,075.
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2
MICROSOFT CORPORATION
FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
a) Income Statements
for the Three Months Ended September 30, 1994 and 1993............ 1
b) Balance Sheets
as of September 30, 1994 and June 30, 1994........................ 2
c) Cash Flows Statements
for the Three Months Ended September 30, 1994 and 1993............ 3
d) Notes to Financial Statements..................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 6
Part II. Other Information
Item 1. Legal Proceedings...................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................... 8
Item 6. Exhibits and Reports on Form 8-K....................................... 8
Signature............................................................................ 9
3
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
- --------------------------------------------------------------------------------
September 30
1993 1994
----- ------
Net revenues $ 983 $1,247
Cost of revenues 159 186
----- ------
Gross profit 824 1,061
----- ------
Operating expenses:
Research and development 134 178
Sales and marketing 312 395
General and administrative 35 51
----- ------
Total operating expenses 481 624
----- ------
Operating income 343 437
Interest income - net 23 36
Other expenses (4) (2)
----- ------
Income before income taxes 362 471
Provision for income taxes 123 155
----- ------
Net income $ 239 $ 316
===== ======
Earnings per share (1) $0.39 $ 0.51
===== ======
Weighted average shares outstanding (1) 606 622
===== ======
(1) Share and per share amounts for the three months ended September 30, 1993
have been restated to reflect a two-for-one stock split in May 1994.
See accompanying notes.
1
4
MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
June 30 Sept. 30
1994 1994(1)
------- -------
ASSETS
Current assets:
Cash and short-term investments $3,614 $3,776
Accounts receivable - net 475 527
Inventories 102 108
Other 121 143
------ ------
Total current assets 4,312 4,554
Property, plant, and equipment - net 930 936
Other assets 121 147
------ ------
Total assets $5,363 $5,637
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 324 $ 354
Accrued compensation 96 81
Income taxes payable 305 369
Other 188 200
------ ------
Total current liabilities 913 1,004
------ ------
Put warrants - 203
------ ------
Stockholders' equity:
Common stock and paid-in capital --
shares authorized 2,000;
shares outstanding 581 1,500 1,606
Retained earnings 2,950 2,824
------ ------
Total stockholders' equity 4,450 4,430
------ ------
Total liabilities and stockholders' equity $5,363 $5,637
====== ======
- ----------------
(1) Unaudited
See accompanying notes.
2
5
MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
Three Months Ended
September 30
------------------
1993 1994
-------- --------
CASH FLOWS FROM OPERATIONS
Net income $ 239 $ 316
Depreciation and amortization 41 67
Current liabilities 25 96
Accounts receivable (32) (59)
Inventories 31 (7)
Other current assets 12 (23)
------ ------
Net cash from operations 316 390
------ ------
CASH FLOWS FROM FINANCING
Common stock issued 45 81
Common stock repurchased (72) (242)
Stock option income tax benefits 21 39
------ ------
Net cash from financing (6) (122)
------ ------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (59) (67)
Other assets (3) (35)
Short-term investments (412) (313)
------ ------
Net cash used for investments (474) (415)
------ ------
Net change in cash and equivalents (164) (147)
Effect of exchange rates on cash and equivalents (6) (4)
Cash and equivalents, beginning of period 1,013 1,477
------ ------
Cash and equivalents, end of period 843 1,326
Short-term investments, end of period 1,689 2,450
------ ------
Cash and short-term investments, end of period $2,532 $3,776
====== ======
See accompanying notes.
3
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 necessary
for their fair presentation. 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 the Management's Discussion and Analysis and financial
statements and notes thereto included in the Microsoft Corporation 1994 Annual
Report.
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.
STOCK SPLIT
Effective May 6, 1994, outstanding shares of common stock were split
two-for-one. All fiscal 1994 share and per share amounts have been restated
for the stock split.
PUT WARRANTS
In connection with the Company's stock repurchase program, put warrants were
sold during the first quarter of fiscal 1995. These warrants entitle the
warrant holders to sell up to four million shares of Microsoft common stock to
the Company at prices ranging from $48.46 to $52.93 per share. The warrants
expire at various dates between November 1994 and February 1996. The maximum
potential repurchase obligation of $203 million has been reclassified from
stockholders' equity to put warrants as of September 30, 1994. There was no
impact on earnings per share for the first quarter of fiscal 1995.
AGREEMENT TO MERGE
On October 13, 1994, Microsoft announced its agreement to merge with
Intuit Inc., a leading developer of personal finance, tax preparation, and
small business accounting software. Under the terms of the reorganization
agreement, Microsoft will exchange approximately 27 million shares of its
common stock for all of the outstanding shares of Intuit. It is anticipated
the transaction will be accounted for as a pooling of interests. The agreement
is subject to approval by the shareholders of Intuit and is subject to
regulatory approval.
CONTINGENCIES
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ) entered
into a consent decree resolving the DOJ's nonpublic investigation of Microsoft.
In the consent decree, which involves no admission of wrongdoing on Microsoft's
part, Microsoft agreed to make certain changes in its OEM licensing practices.
Microsoft also agreed to employ a uniform duration in its nondisclosure
agreements for precommercial versions of certain operating system products, and
clarified the rights and responsibilities of those signing such nondisclosure
agreements. The DOJ has the right to monitor Microsoft's compliance during the
6-1/2 year term of the consent decree. To become final, the consent decree
must be approved by the U.S. District Court for the District of Columbia.
Microsoft does not expect the consent decree with the DOJ to materially affect
its OEM revenues.
On March 17, 1988, Apple Computer, Inc. (Apple) brought suit against Microsoft
and Hewlett-Packard Company for alleged copyright infringement in the U.S.
District Court, Northern District of California. The complaint included
allegations that the visual displays of Microsoft Windows version 2.03 (and
Windows version 3.0, which was added to the complaint later) infringed Apple's
copyrights and exceeded the scope of a 1985 Settlement Agreement between
Microsoft and Apple. The complaint sought to enjoin Microsoft from marketing
Microsoft Windows versions 2.03 and 3.0 or any derivative work based on Windows
2.03 or 3.0 and from otherwise infringing Apple's copyrights and sought damages
resulting from the alleged infringement.
The Company answered the complaint, raising affirmative defenses including its
claim that the 1985 Settlement Agreement entitled it to use the visual displays
in question, denying Apple's allegations that the visual displays in Microsoft
Windows version 2.03 and 3.0 infringe any protectible right of Apple, and
asserting counterclaims.
On August 24, 1993, the Court entered final judgment dismissing all of Apple's
claims. Apple appealed a number of the Court's decisions in the case to the
Ninth Circuit Court of Appeals, which on September 19, 1994 issued a decision
affirming the rulings of the U.S. District Court. Apple has until December 19,
1994 to petition the U.S. Supreme Court to grant review of the Ninth Circuit's
decision.
4
7
On July 30, 1993 Wang Laboratories, Inc. (Wang) filed suit in U.S. District
Court for the District of Massachusetts against Microsoft and Watermark
Software, Inc., alleging that unspecified Microsoft products infringe two
patents owned by Wang concerning object management and the handling of compound
documents (United States Patents 5,206,951 issued on April 27, 1993, and
5,129,061 issued on July 7, 1992, respectively). The suit also alleges that
Microsoft induced and continues to induce others, including Watermark Software,
Inc., to infringe the Wang patents. Microsoft's OLE technology appears to be
the subject of Wang's allegations against Microsoft. The complaint seeks a
determination that Microsoft's alleged infringement is willful, an award of
treble damages, an award of attorneys' fees, and to preliminarily and
permanently enjoin Microsoft from continuing the alleged infringement. In its
answer Microsoft denied that any of its products infringe the Wang patents and
asked the Court for a declaratory judgment that those patents are invalid and
unenforceable for failing to meet patent law requirements. The suit is
currently in the early stages of discovery.
Although there is no assurance that these lawsuits will be resolved favorably
and that the Company's financial condition will not be adversely affected, the
Company currently believes that resolution of these matters will not have
material adverse effects on its financial condition as reported in the
accompanying financial statements.
5
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF fINANCIAL CONDITION
RESULTS OF OPERATIONS
OVERVIEW
Microsoft Corporation develops, manufactures, markets, licenses, 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 software development
tools. The Company also markets personal computer books and hardware; and is
engaged in the research and potential development of advanced technology
software products.
REVENUES
Revenues for the first quarter of fiscal 1995 increased 27% over revenues for
the first quarter of fiscal 1994.
PRODUCT GROUPS
Systems product group revenues are primarily from licenses of personal
operating systems and business systems with client-server architectures.
Systems revenues were $444 million in the first quarter of 1995, compared to
$355 million recorded in the same period of 1994, an increase of 25%. Revenues
generated by both Microsoft MS-DOS and Microsoft Windows operating systems
increased from the prior year, particularly through the original equipment
manufacturer channel. During the first quarter of 1995, more than 80% of
Windows units were licensed through the OEM channel.
Applications product group revenues include licenses of desktop productivity,
consumer, and developer programs. Applications revenues were $754 million in
the first quarter of 1995, increasing 31% from $577 million in the first
quarter of 1994. Increases in applications revenues were led by sales of
Microsoft Office. Microsoft Office Standard includes Microsoft Excel,
Microsoft Word, a Microsoft Mail license, and the Microsoft PowerPoint(R)
presentation graphics program. Microsoft Office Professional for Windows
includes all of the above plus the Microsoft Access(R) database management
program. Additionally, during the first quarter of 1995, the Company released
new Macintosh-based versions of Microsoft Excel, Microsoft Word, and Microsoft
PowerPoint.
The hardware product group's principal products are the Microsoft Mouse and
BallPoint(R) mouse pointing devices. Hardware revenues were $49 million and
$51 million in the first quarters of 1995 and 1994.
SALES CHANNELS
The Company has four major channels of distribution: OEM; U.S. and Canada;
Europe; and Other International. OEM channel revenues are license fees from
original equipment manufacturers. Sales in the retail channels are primarily
to distributors and resellers.
OEM revenues (primarily personal operating systems) grew 36% to $348 million
from the $255 million recorded in the comparable quarter of the prior year.
MS-DOS continues to be pre-installed on many PCs sold by original equipment
manufacturers. In addition, many major OEMs are also preinstalling the
Microsoft Windows operating system on PCs, leading to increased revenues
through the OEM channel.
Revenues in the U.S. and Canada were $423 million in the first quarter of 1995
compared to $328 million in 1994, an increase of 29%. Revenues in Europe were
$289 million in the first quarter of 1995 compared to $274 million the prior
year. Other International channel revenues showed strong growth, increasing to
$187 million in the first quarter of 1995 from $126 million in the first
quarter of 1994. Sales in Japan were particularly strong.
The Company's operating results are affected by foreign exchange rates. Since
much of the Company's international manufacturing costs and operating expenses
are also incurred in local currencies, the relative impact of exchange rates on
net income is less than on revenues.
COST OF REVENUES, OPERATING EXPENSES, AND INCOME TAXES
Cost of revenues as a percentage of revenues was 14.9% in the first quarter of
1995, compared to 16.2% in the first quarter of 1994. Contributing to the
decrease were greater sales of higher-margin Microsoft Office, lower disk
prices, and a shift to more revenues from OEM and corporate license programs.
While license programs carry lower per unit prices than retail versions shipped
though the finished goods channels, there is little cost of revenues
associated with such programs.
6
9
Research and development expenses increased 33% to $178 million, or 14.3% of
revenues in the first quarter of 1995 from $134 million, or 13.6% of revenues
in the corresponding quarter of 1994. 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 increased 27% to $395 million from $312 million in
the comparable quarter. As a percentage of revenues, sales and marketing
expenses were 31.6% and 31.7% in the respective first quarters of 1995 and
1994. The increase in absolute amounts of sales and marketing expenses was
primarily due to increased marketing costs and headcount related expenses.
General and administrative expenses were 4.1% of revenues in the first quarter
of 1995 and 3.6% of revenues in the first quarter of 1994.
Net interest income increased as a result of a larger investment portfolio
generated by cash from operations combined with slightly higher interest rates.
Other expense did not fluctuate significantly.
The effective income tax rate was 33% in the first quarter of 1995, compared to
34% in the same quarter of 1994.
Net income for the third quarter of 1995 was $316 million. Net income as a
percentage of revenues was 25.3% in the first quarter of 1995, compared with
24.3% in the first quarter of 1994. The increase was the result of the higher
gross margin percentage and interest income offset by higher levels of
operating expenses.
FINANCIAL CONDITION
The Company's cash and short-term investment portfolio totaled $3.8 billion at
September 30, 1994 and represented 67% of total assets. The portfolio is
diversified among security types, industries, and individual issuers. The
Company's investments are investment grade and liquid. The portfolio, while
invested predominantly in U.S. dollar denominated securities, also includes
foreign currency positions in anticipation of continued international
expansion.
Microsoft has no material long-term debt. The Company has available $70 million
of standby multicurrency lines of credit. These lines support foreign currency
hedging and international cash management. Stockholders' equity at
September 30, 1994 exceeded $4 billion.
On October 28, 1994, Microsoft shareholders authorized the Company to issue up
to 100 million shares of preferred stock, which may be used by the Company for
any proper corporate purpose.
Cash generated from operations has been sufficient to fund the Company's
investment in research and development activities and facilities expansion. As
the Company grows, investments will continue in research and development in
existing and advanced areas of technology. The Company's cash will be used to
acquire technology or to fund strategic ventures. Additions to property,
plant, and equipment are expected to continue, including 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 the Company's open market stock repurchase program through
which Microsoft provides shares for stock option and stock purchase plans.
This practice is continuing in 1995. Additionally, the Company enhanced its
stock repurchase program by selling put warrants. See Notes to Financial
Statements.
Management believes existing cash and short-term investments together with
funds generated from operations should be sufficient to meet the Company's
operating requirements for the next 12 months.
7
10
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation with Apple Computer, Inc., and
Wang Laboratories, Inc. See Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Microsoft's Annual Meeting of Shareholders held on October 28, 1994, the
following proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting
of shareholders and until their successors are elected and qualified.
Number of Shares
------------------------
For Withheld
----------- ---------
William H. Gates 524,367,711 1,265,328
Paul G. Allen 524,328,464 1,304,575
Richard A. Hackborn 524,648,914 984,125
David F. Marquardt 524,657,599 975,440
Robert D. O'Brien 524,620,859 1,012,180
William G. Reed, Jr. 524,678,984 954,055
Jon A. Shirley 524,375,575 1,257,464
2. To authorize the Company to issue up to 100,000,000 shares of preferred
stock.
For 343,566,292
Against 103,855,468
Abstain 2,568,088
Broker Non-Votes 75,673,191
3. To ratify the selection of Deloitte & Touche as the independent public
auditors of the Company for the current fiscal year.
For 520,167,524
Against 4,408,638
Abstain 1,056,877
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
The Company filed one report on Form 8-K during the quarter ended
September 30, 1994. On July 29, 1994, the Company disclosed revenue and
net income amounts for the initial 30 days of combined operations of
Microsoft and SOFTIMAGE, Inc., which merged on June 27, 1994 in a share
for share exchange. Such transaction has been accounted for as a pooling
of interests. This information was reported for purposes of complying
with the Securities and Exchange Commission's Accounting Series Release 135.
ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
8
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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: November 14, 1994
By: /s/ Michael W. Brown
------------------------
Michael W. Brown,
Vice President, Finance;
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
9
1
EXHIBIT 11.
MICROSOFT CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In millions, except earnings per share)
Three Months Ended
September 30,
------------------
1993 1994
-------- --------
Weighted average number of common shares outstanding(1) 566 581
Common stock equivalents from outstanding stock options(1) 40 41
---- ----
Average common and common stock equivalents outstanding(1) 606 622
==== ====
Net income $239 $316
==== ====
Earnings per share(1)(2) $0.39 $0.51
===== =====
(1) Share and per share amounts for the three months ended September 30, 1993
have been restated to reflect a two-for-one stock split in May 1994.
(2) Fully diluted earnings per share have not been presented because the
effects are not material.
10
5
1,000,000
3-MOS
JUN-30-1994
SEP-30-1994
3,776
0
631
104
108
4,554
1,508
572
5,637
1,004
0
1,606
0
0
4,633
5,637
1,247
1,247
186
810
2
12
0
471
155
316
0
0
0
316
.51
.51
