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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 MARCH 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
April 30, 1995 was 585,640,217.
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MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Income Statements
for the Three and Nine Months Ended March 31, 1995 and 1994 . . . . 1
b) Balance Sheets
as of March 31, 1995 and June 30, 1994 . . . . . . . . . . . . . . 2
c) Cash Flows Statements
for the Nine Months Ended March 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 . . . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 9
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3
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 Nine Months Ended
March 31 March 31
1994 1995 1994 1995
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Net revenues $1,244 $1,587 $3,356 $4,316
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Costs and expenses:
Cost of revenues 208 235 552 643
Research and development 156 219 440 596
Sales and marketing 359 516 1,008 1,390
General and administrative 41 68 118 181
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Total costs and expenses 764 1,038 2,118 2,810
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Operating income 480 549 1,238 1,506
Interest income-net 26 48 74 126
Litigation charge (120) 0 (120) 0
Other expenses (4) (5) (10) (12)
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Income before income taxes 382 592 1,182 1,620
Provision for income taxes 126 196 398 535
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Net income $ 256 $ 396 $ 784 $1,085
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Earnings per share(1) $ 0.42 $ 0.63 $ 1.29 $ 1.74
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Weighted average shares outstanding(1) 608 626 607 624
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(1) Share and per share amounts for the three and nine months ended March
31, 1994 have been restated to reflect a two-for-one stock split in
May 1994.
See accompanying notes.
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MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
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June 30 March 31
1994 1995(1)
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ASSETS
Current assets:
Cash and short-term investments $3,614 $4,465
Accounts receivable - net 475 580
Inventories 102 87
Other 121 155
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Total current assets 4,312 5,287
Property, plant,and equipment - net 930 1,027
Other assets 121 278
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Total assets $5,363 $6,592
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 324 $ 524
Accrued compensation 96 89
Income taxes payable 305 385
Other 188 187
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Total current liabilities 913 1,185
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Minority interest - 125
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Put warrants - 352
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Stockholders' equity:
Common stock and paid-in-capital --
shares authorized 2,000;
shares outstanding 581 and 584 1,500 1,862
Retained earnings 2,950 3,068
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Total stockholders' equity 4,450 4,930
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Total liabilities and stockholders' equity $5,363 $6,592
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(1) Unaudited
See accompanying notes.
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MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
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Nine Months Ended
March 31
1994 1995
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CASH FLOWS FROM OPERATIONS
Net income $ 784 $ 1,085
Depreciation and amortization 161 203
Current liabilities 356 237
Accounts receivable (187) (40)
Inventories (5) 17
Other current assets (21) (24)
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Net cash from operations 1,088 1,478
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CASH FLOWS FROM FINANCING
Common stock issued 193 259
Common stock repurchased (311) (664)
Stock option income tax benefits 109 123
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Net cash from financing (9) (282)
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CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant and equipment (191) (272)
Other assets (32) (91)
Short-term investments (714) (1,123)
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Net cash used for investments (937) (1,486)
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Net change in cash and equivalents 142 (290)
Effect of exchange rates on cash and equivalents (3) 18
Cash and equivalents, beginning of period 1,013 1,477
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Cash and equivalents, end of period 1,152 1,205
Short-term investments, end of period 1,991 3,260
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Cash and short-term investments, end of period $3,143 $ 4,465
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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. 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 Microsoft's stock repurchase program, put warrants were sold
to independent third parties during the first three quarters of fiscal 1995.
The put warrants entitle the holders to sell shares of Microsoft common stock
to Microsoft at specified prices. On March 31, 1995, 8.0 million warrants were
outstanding, with strike prices ranging from $49.49 to $60.47 per share. The
warrants mature on various dates between July 1995 and August 1996, are
exercisable only at maturity, and may be settled in cash at Microsoft's option.
The maximum potential repurchase obligation of $352 million has been
reclassified from stockholders' equity to put warrants as of March 31, 1995.
There was no impact on earnings per share for the first three quarters of
fiscal 1995.
AGREEMENT TO MERGE
On October 13, 1994, Microsoft announced its agreement to merge with Intuit
Inc. (Intuit), 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. The transaction is
anticipated to be accounted for as a pooling of interests. The agreement has
been approved by the shareholders of Intuit and is subject to satisfaction of
regulatory requirements. See Contingencies note.
MICROSOFT ONLINE SERVICES PARTNERSHIP
During November 1994, a wholly owned subsidiary of Tele-Communications, Inc.
(TCI) purchased a 20% minority interest in the newly formed Microsoft Online
Services Partnership. TCI contributed $125 million of TCI common stock and
Microsoft contributed the business assets of its online service, which is in
development. Microsoft owns 80% of the entity, whose operations have not been
material to the financial results of Microsoft.
CONTINGENCIES
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ) entered
into a consent decree resolving the DOJ's non-public 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. To become final, the consent decree must be approved
by the U.S. District Court for the District of Columbia. On February 14, 1995,
Judge Stanley Sporkin issued an order denying entry of the consent decree,
citing a lack of information sufficient to determine if the consent decree is
in the public interest. That order was appealed by the DOJ and Microsoft.
Oral argument on the appeal was heard by the United States Court of Appeals for
the District of Columbia on April 24, 1995. The appellate court may render its
decision at any time.
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On April 27, 1995, the DOJ filed a civil action in U.S. District Court in the
Northern District of California challenging the proposed merger of Microsoft
and Intuit. The suit alleges that the proposed merger would result in a
substantial reduction in competition among personal finance software products
and services, including PC-based home banking. To expedite resolution of the
matter, the DOJ's motion for a preliminary injunction has been consolidated
with the trial on the merits, which is scheduled to begin on June 26, 1995.
Microsoft and Intuit have agreed not to complete the proposed merger prior to
completion of the trial and a ruling on the DOJ's motion for an injunction
pending appeal if that motion is made within 72 hours following a decision at
trial in favor of Microsoft and Intuit.
Although there is no assurance that these matters will be resolved favorably
and that Microsoft's future financial statements will not be adversely
affected, Microsoft currently believes that their resolution will not have
material adverse effects on its financial condition or results of operations.
On April 12, 1995, Microsoft and Wang Laboratories, Inc. (Wang) announced a
broad multi-year technical, service, and marketing alliance designed to bring
improved document imaging and workflow management capabilities to users of the
Microsoft(R) Windows(R) operating system. Under the alliance, Wang's desktop
imaging and object controls will be incorporated as standard features in future
releases of Windows 95 and Windows NT(TM) and the image controls will be
included in the Visual Basic(R) development tool. As part of this agreement,
Microsoft will invest in Wang through the purchase of $90 million face amount
of 4.5% convertible preferred stock due in 2003 for $84 million. This
preferred stock is convertible into the common stock of Wang at $23 per share.
Microsoft's investment is subject to a Hart Scott Rodino Act review. In
addition, Microsoft will receive a license to Wang's portfolio of software and
software-related patents, which will resolve the outstanding litigation between
the two companies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Microsoft 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 third quarter of fiscal 1995 increased 28% over revenues for
the third quarter of fiscal 1994, while revenues for the first three quarters
of 1995 grew 29% compared to the same period of 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, in part due to shifts in sales mix from retail packaged products
to licensing programs, from new products to product upgrades, and from
stand-alone desktop applications programs to the Microsoft Office integrated
suite. Average revenue per license from 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, and the price of Microsoft Office is less than the sum of the prices
for the individual application programs included in this product when sold
separately.
PRODUCT GROUPS
Systems product group revenues are primarily from licenses of personal
operating systems and business systems with client-server architectures.
Systems revenues were $538 million in the third quarter of 1995, compared to
$393 million recorded in the same period of 1994, an increase of 37%. Systems
revenues were $1.50 billion in the first three quarters of 1995 compared to
$1.12 billion in the first three quarters of 1994. Revenues generated by both
Microsoft MS-DOS(R) and Microsoft Windows operating systems increased from the
prior year, primarily through the original equipment manufacturer channel.
During 1995, more than 80% of Windows units were licensed through the OEM
channel. Revenues from Microsoft's business system division's BackOffice line
of products also increased, due to greater corporate demand for Windows NT
Server and Windows NT Workstation.
Applications product group revenues include primarily licenses of desktop
productivity, consumer, and developer programs. Applications revenues were
$966 million in the third quarter of 1995, increasing 21% from $798 million in
the third quarter of 1994. For the first three quarters of 1995, applications
revenues were $2.61 billion, compared to $2.08 billion in 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 database management program.
Microsoft Home, a broad range of products in Microsoft's consumer applications
group, continued to show strong growth. New titles and new versions of
existing titles both contributed to the growth.
The hardware product group's principal products are the Microsoft Mouse and the
Natural Keyboard(TM). Hardware revenues were $83 million and $53 million in
the third quarters of 1995 and 1994. On a year to date basis, hardware
revenues increased 31% to $206 million from $157 million.
SALES CHANNELS
Microsoft 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.
Microsoft Select was introduced in 1993 and continues to grow in popularity.
Select is a retail channel corporate license program under which large accounts
download a contracted number of copies of specified software products. Average
revenue per license under Select is lower than average revenue per retail copy
of the same product shipped through the retail channels, reflecting lower costs
of distribution.
OEM revenues (primarily personal operating systems) grew 40% to $451 million
from the $323 million recorded in the comparable quarter of the prior year. In
the first three quarters of 1995, OEM revenues were $1.18 billion, up 40% from
$846 million in the first three quarters of 1994. MS-DOS continues to be
preinstalled on many PCs sold by original equipment manufacturers. In
addition, many major OEMs preinstall the Microsoft Windows operating system on
PCs. Higher levels of PC shipments have led to increased revenues through the
OEM channel.
Revenues in the U.S. and Canada were $481 million in the third quarter of 1995
compared to $381 million in 1994. On a year to date basis, revenues increased
23%, to $1.40 billion in 1995 from $1.13 billion in 1994.
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Revenues in Europe were $419 million in the third quarter of 1995 compared to
$391 million the prior year. European revenues for the first three quarters of
1995 were $1.11 billion, compared to $989 in 1994. Rates of growth for the
European channel have been lower than other retail channels of distribution due
to general economic slowness and a more dramatic shift to corporate licensing
in Europe. Additionally, the latest version of Microsoft Office for Windows was
introduced in Europe during the comparable quarter of the prior year.
Other International channel revenues showed strong growth, increasing 58% to
$236 million in the third quarter of 1995 from $149 million in the third
quarter of 1994. Revenues increased 62% to $630 million for the first three
quarters of 1995, compared to $389 million the prior year. Growth rates
continue to be strong due to customer acceptance of newly localized products,
particularly in Japan, and early entrance into emerging markets.
Microsoft's operating results are affected by foreign exchange rates. Had the
exchange rates in effect during the third quarter of the prior year been in
effect during the third quarter of 1995, translated revenues in Europe would
have been $41 million lower and translated Other International revenues would
have been $15 million lower. 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 14.8% in the third quarter of
1995, compared to 16.7% in the third quarter of 1994. Contributing to the
decrease were lower disk prices from vendors and a shift to more revenues from
OEM and corporate license programs, offset by greater sales of lower-margin
Microsoft Office. While license programs carry lower prices per license than
retail versions shipped though the retail channels, there is little cost of
revenues associated with such programs.
Research and development expenses increased 40% to $219 million, or 13.8% of
revenues in the third quarter of 1995 from $156 million, or 12.5% of revenues
in the corresponding quarter of 1994. For the first three quarters of 1995,
research and development expenses rose 35%. The increases 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 44% to $516 million from $359 million in
the comparable quarter. As a percentage of revenues, sales and marketing
expenses were 32.5% and 28.9% in the respective third quarters of 1995 and 1994
and 32.2% and 30.1% in the respective first three quarters of 1995 and 1994.
The increases in sales and marketing expenses were due to increased personnel
related expenses, product support costs, Microsoft brand advertising, and
marketing costs.
General and administrative expenses were 4.3% of revenues in the third quarter
of 1995 and 3.3% of revenues in the third quarter of 1994. Increases were due
to higher legal costs and growth in the systems and people necessary to support
overall increases in the scope of Microsoft's operations.
Net interest income increased as a result of a larger investment portfolio
generated by cash from operations combined with higher interest rates. In the
third quarter of 1994, Microsoft recorded a $120 million charge to reflect the
estimated impact of a jury verdict in the Stac Electronics patent litigation
and related expenses. In June 1994, Microsoft reached an agreement with Stac
to settle the litigation and adjusted its estimate accordingly, resulting in a
credit of $30 million in the fourth quarter and a net pretax charge of $90
million for fiscal 1994.
The effective income tax rate was 33% in the third quarters of both 1995 and
1994.
NET INCOME
Net income for the third quarter of 1995 was $396 million. Net income as a
percentage of revenues was 25.0% in the third quarter of 1995, compared with
20.6% in the third quarter of 1994 (27.0% excluding the litigation charge).
The decrease was the result of higher levels of operating expenses offset by
the lower cost of revenues and higher interest income percentages.
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FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $4.47 billion at
March 31, 1995. The portfolio is diversified among security types, industries,
and individual issuers. Microsoft's investments are liquid and primarily
investment grade. The portfolio, while invested predominantly in U.S. dollar
denominated securities, also includes foreign currency positions in
anticipation of local currency funding needs. Microsoft's portfolio is
invested in short-term securities to minimize interest rate risk and to
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 available. These lines support foreign currency
hedging and international cash management. Stockholders' equity at March 31,
1995 exceeded $4.9 billion.
Cash generated from operations has been sufficient 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 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 Microsoft'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, Microsoft enhanced its
stock repurchase program by selling put warrants during the first three
quarters of 1995. See Notes to Financial Statements.
Management believes existing cash and short-term investments together with
funds generated from operations should be sufficient to meet Microsoft's
operating requirements for the next 12 months. Microsoft's cash and short-term
investments are also managed so as to be available for such other strategic
investment opportunities or other potential large-scale cash needs as might
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.
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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 is on page 11.
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Microsoft during the
quarter ended March 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: May 12, 1995 By: /s/ Michael W. Brown
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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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Three Months Ended Nine Months Ended
March 31 March 31
1994 1995 1994 1995
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Weighted average number of common shares outstanding 571 582 568 581
Common stock equivalents from outstanding stock options 37 44 39 43
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Average common and common stock equivalents outstanding 608 626 607 624
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Net income $ 256 $ 396 $ 784 $1,085
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Earnings per share(1)(2) $0.42 $0.63 $1.29 $ 1.74
========================================================================================================
(1) Share and per share amounts for the three and nine months ended March 31,
1994 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.
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11
5
1,000,000
9-MOS
JUN-30-1995
MAR-31-1995
4,465
0
711
131
87
5,287
1,687
660
6,592
1,185
0
1,862
0
0
3,068
6,592
4,316
4,316
643
2,769
12
41
0
1,620
535
1,085
0
0
0
1,085
1.74
1.74
