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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, 1995
[ ] 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: (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, 1995 was 592,305,901.
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MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Income Statements
for the Three Months Ended September 30, 1995 and 1994 . . . . . . 1
b) Balance Sheets
as of September 30, 1995 and June 30, 1995 . . . . . . . . . . . . . 2
c) Cash Flows Statements
for the Three Months Ended September 30, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 8
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 8
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended
September 30
1994 1995
- -------------------------------------------------------------------
Net revenues $1,247 $2,016
- -------------------------------------------------------------------
Costs and expenses:
Cost of revenues 186 322
Research and development 178 302
Sales and marketing 395 621
General and administrative 51 63
- -------------------------------------------------------------------
Total costs and expenses 810 1,308
- -------------------------------------------------------------------
Operating income 437 708
Interest income - net 36 66
Other expenses (2) (4)
- -------------------------------------------------------------------
Income before income taxes 471 770
Provision for income taxes 155 271
- -------------------------------------------------------------------
Net income $ 316 $ 499
===================================================================
Earnings per share $ 0.51 $ 0.78
===================================================================
Weighted average shares outstanding 622 640
===================================================================
See accompanying notes.
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MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
- -------------------------------------------------------------------------------
June 30 Sept. 30
1995 1995 (1)
- -----------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $4,750 $5,064
Accounts receivable - net 581 1,052
Inventories 88 125
Other 201 176
- -----------------------------------------------------------------
Total current assets 5,620 6,417
- -----------------------------------------------------------------
Property, plant, and equipment - net 1,192 1,265
Other assets 398 478
- -----------------------------------------------------------------
Total assets $7,210 $8,160
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 $ 621
Accrued compensation 130 103
Income taxes payable 410 522
Unearned revenues 54 307
Other 190 206
- -----------------------------------------------------------------
Total current liabilities 1,347 1,759
- -----------------------------------------------------------------
Minority interest 125 125
- -----------------------------------------------------------------
Put warrants 405 537
- -----------------------------------------------------------------
Stockholders' equity:
Common stock and paid-in capital --
shares authorized 2,000;
shares outstanding 588 and 590 2,005 2,172
Retained earnings 3,328 3,567
- -----------------------------------------------------------------
Total stockholders' equity 5,333 5,739
- -----------------------------------------------------------------
Total liabilities and stockholders'
equity $7,210 $8,160
=================================================================
(1) Unaudited
See accompanying notes.
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MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended
September 30
1994 1995
- --------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
Net income $ 316 $ 499
Depreciation and amortization 67 69
Current liabilities 96 410
Accounts receivable (59) (467)
Inventories (7) (37)
Other current assets (23) 26
- --------------------------------------------------------------------------
Net cash from operations 390 500
- --------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
Common stock issued 81 98
Common stock repurchased (242) (129)
Stock option income tax benefits 39 58
- --------------------------------------------------------------------------
Net cash from financing (122) 27
- --------------------------------------------------------------------------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (67) (116)
Other assets (35) (98)
Short-term investments (313) (370)
- --------------------------------------------------------------------------
Net cash used for investments (415) (584)
- --------------------------------------------------------------------------
Net change in cash and equivalents (147) (57)
Effect of exchange rates on cash and equivalents (4) 1
Cash and equivalents, beginning of period 1,477 1,962
- --------------------------------------------------------------------------
Cash and equivalents, end of period 1,326 1,906
Short-term investments, end of period 2,450 3,158
- --------------------------------------------------------------------------
Cash and short-term investments, end of period $3,776 $5,064
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See accompanying notes.
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MICROSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation. 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.
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.
NET REVENUES
Net revenues for the first quarter of fiscal 1996 increased 62% over net
revenues for the first quarter of fiscal 1995.
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 $1.04 billion in the first quarter of
fiscal 1996, compared to $509 million recorded in the same period of fiscal
1995, an increase of 104%. During the quarter, the Company released Microsoft
Windows 95, its new personal 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 prior to the end
of the quarter. The Company provided for management's estimate of additional
product that will be returned to Microsoft subsequent to September 30, 1995.
The Company's earned retail revenues of Windows 95 were $260 million.
Additionally, unearned revenues on the accompanying balance sheet include $130
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, and Microsoft Windows for
Workgroups 3.11 operating systems, primarily 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) also increased, due to greater corporate
demand for Windows NT Workstation and Windows NT Server.
Applications and content product group revenues were $977 million in the first
quarter of 1996, increasing 32% from $738 million in the first quarter of 1995.
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 $120 million of unearned revenues 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 upgrades have been fulfilled.
Microsoft Home, a broad range of consumer products, continued to show
growth. New titles and new versions of existing titles both contributed to the
growth, as did increased sales of the Microsoft Mouse and the Natural
Keyboard(TM).
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.
5
8
OEM revenues (primarily personal operating systems) grew 57% to $548 million
from the $348 million recorded in the comparable quarter of the prior year.
MS-DOS and Microsoft Windows 3.x continued to be preinstalled on many PCs sold
by OEMs. Certain OEMs began installing Windows 95 on new PCs during the
quarter ended September 30, 1995. Higher levels of PC shipments led to
increased revenues through the OEM channel.
Revenues in the U.S. and Canada were $745 million in the first quarter of 1996
compared to $423 million in 1995. The growth rate of 76% reflected strong
sales of Windows 95 and Microsoft Office.
Revenues in Europe were $426 million in the first quarter of 1996 compared to
$289 million the prior year and benefited greatly by the release of several
different localized versions of Windows 95 and 32-bit desktop programs.
Recently, growth rates have been lower in Europe than in other geographic areas
due to general economic slowness, higher existing market shares, and a more
dramatic shift to corporate licensing programs.
Other International channel revenues increased 59% to $297 million in the first
quarter of 1996 from $187 million in the first quarter of 1995. 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 first quarter of the prior year been in
effect during the first quarter of 1996, translated revenues in Europe would
have been $55 million lower and translated Other International revenues would
have been $14 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 16.0% in the first quarter of
1996, compared to 14.9% in the first quarter of 1995. The increase is
principally attributable to a shift in sales mix due to high shipments of
retail upgrade versions of Windows 95 and 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 70% to $302 million, or 15.0% of
revenues in the first quarter of 1996 from $178 million, or 14.3% of revenues
in the corresponding quarter of 1995. 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 57% to $621 million from $395 million in
the comparable quarter. As a percentage of revenues, sales and marketing
expenses were 30.8% and 31.6% in the respective first quarters of 1996 and
1995. The increase in sales and marketing expenses was impacted by costs
related to the August 24th launch of Windows 95 and increased product support
costs.
General and administrative expenses were 3.1% of revenues in the first quarter
of 1996 and 4.1% of revenues in the first quarter of 1995. The decrease was
due to a number of factors, including lower legal costs.
Net interest income increased as a result of a larger investment portfolio
generated by cash from operations combined with higher interest rates.
The effective income tax rate was 35% and 33% in the first quarters of 1996 and
1995 with the increase due primarily to changes in the U.S. tax law.
NET INCOME
Net income for the first quarter of 1996 was $499 million. Net income as a
percentage of revenues was 24.8% in the first quarter of 1996, compared with
25.3% in the first quarter of 1995. The decrease in net income as a percentage
of revenues was the result of higher cost of revenues and research and
development offset by lower sales and marketing and general and administrative
and higher interest income percentages.
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FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $5.1 billion at
September 30, 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. Microsoft's 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 September 30, 1995
exceeded $5.7 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 September 30, 1995, 10 million warrants were
outstanding with strike prices ranging between $80 and $86 per share. The
warrants expire at various dates between November 1995 and November 1996, are
exercisable only at maturity, and are settleable in cash at Microsoft's option.
The maximum potential repurchase obligation of $537 million has been
reclassified from stockholders' equity to put warrants as of September 30,
1995.
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 on August 24, 1995.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on October 27, 1995, 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 530,061,421 1,008,795
Paul G. Allen 530,073,699 996,517
Richard A. Hackborn 530,026,542 1,043,674
David F. Marquardt 530,071,808 998,408
Robert D. O'Brien 529,957,839 1,112,377
William G. Reed, Jr. 530,020,438 1,049,778
Jon A. Shirley 530,076,764 993,452
2. To ratify the selection of Deloitte & Touche LLP as the independent public
auditors of the Company for the current fiscal year.
For 527,183,535
Against 2,857,849
Abstain 1,028,832
ITEM 5. OTHER INFORMATION
PROPOSALS OF SHAREHOLDERS FOR 1996 ANNUAL MEETING OF SHAREHOLDERS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders on October 25, 1996 must be received by the Company no later than
May 29, 1996 to be included in the Company's Proxy Statement and form of proxy
related to that meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. Computation of Earnings Per Share is on page 10.
27. Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Microsoft during the quarter ended
September 30, 1995.
ITEMS 2 AND 3 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: November 14, 1995 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)
- --------------------------------------------------------------------------------
Three months ended
September 30
1994 1995
- --------------------------------------------------------------------------------
Weighted average number of common shares outstanding 581 589
Common stock equivalents from outstanding stock options 41 51
- --------------------------------------------------------------------------------
Average common and common stock equivalents outstanding 622 640
- --------------------------------------------------------------------------------
Net income $ 316 $ 499
- --------------------------------------------------------------------------------
Earnings per share(1) $0.51 $0.78
- --------------------------------------------------------------------------------
(1) Fully diluted earnings per share have not been presented because the
effects are not material.
10
5
1,000,000
3-MOS
JUN-30-1996
SEP-30-1995
5,064
0
1,208
156
125
6,417
1,944
679
8,160
1,759
0
2,172
0
0
3,567
8,160
2,016
2,016
322
1,287
4
21
0
770
271
499
0
0
0
499
0.78
0.78
