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EXHIBIT 13.4
MICROSOFT CORPORATION
FINANCIAL STATEMENTS
Income Statements for the three years ended June 30, 1996
Cash Flows Statements for the three years ended June 30, 1996
Balance Sheets as of June 30, 1995 and 1996
Stockholders' Equity Statements for the three years ended June 30, 1996
Notes to Financial Statements
Independent Auditors' Report
2
INCOME STATEMENTS
(In millions, except earnings per share)
Year Ended June 30
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1994 1995 1996
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Net revenues $4,649 $5,937 $8,671
Operating expenses:
Cost of revenues 763 877 1,188
Research and development 610 860 1,432
Sales and marketing 1,384 1,895 2,657
General and administrative 166 267 316
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Total operating expenses 2,923 3,899 5,593
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Operating income 1,726 2,038 3,078
Interest income 102 191 320
Noncontinuing items (90) (46) --
Other expenses (16) (16) (19)
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Income before income taxes 1,722 2,167 3,379
Provision for income taxes 576 714 1,184
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Net income $1,146 $1,453 $2,195
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Earnings per share $ 1.88 $ 2.32 $ 3.43
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Weighted average shares outstanding 610 627 640
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See accompanying notes.
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CASH FLOWS STATEMENTS
(In millions)
Year Ended June 30
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1994 1995 1996
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CASH FLOWS FROM OPERATIONS
Net income $1,146 $1,453 $2,195
Depreciation and amortization 237 269 480
Current liabilities 360 419 1,090
Accounts receivable (146) (91) (71)
Other current assets (4) (60) 25
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Net cash from operations 1,593 1,990 3,719
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CASH FLOWS USED FOR FINANCING
Common stock issued 280 332 504
Common stock repurchased (348) (649) (1,261)
Stock option income tax benefits 151 179 352
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Net cash used for financing 83 (138) (405)
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CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (278) (495) (494)
Other assets (64) (230) (625)
Short-term investments (860) (651) (1,551)
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Net cash used for investments (1,202) (1,376) (2,670)
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Net change in cash and equivalents 474 476 644
Effect of exchange rates on cash (10) 9 (5)
Cash and equivalents, beginning of year 1,013 1,477 1,962
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Cash and equivalents, end of year 1,477 1,962 2,601
Short-term investments 2,137 2,788 4,339
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Cash and short-term investments $3,614 $4,750 $6,940
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See accompanying notes.
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BALANCE SHEETS
(In millions)
June 30
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1995 1996
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ASSETS
Current assets:
Cash and short-term investments $4,750 $ 6,940
Accounts receivable 581 639
Other 289 260
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Total current assets 5,620 7,839
Property, plant, and equipment 1,192 1,326
Other assets 398 928
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Total assets $7,210 $10,093
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 $ 808
Accrued compensation 130 202
Income taxes payable 410 484
Unearned revenues 54 560
Other 190 371
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Total current liabilities 1,347 2,425
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Minority interest 125 125
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Put warrants 405 635
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Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital -- shares authorized 2,000;
shares issued and outstanding 588 and 597 2,005 2,924
Retained earnings 3,328 3,984
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Total stockholders' equity 5,333 6,908
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Total liabilities and stockholders' equity $7,210 $10,093
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See accompanying notes.
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STOCKHOLDERS' EQUITY STATEMENTS
(In millions)
Year Ended June 30
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1994 1995 1996
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COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning of year $1,086 $1,500 $2,005
Common stock issued 280 332 504
Common stock repurchased (17) (30) (41)
Proceeds from sale of put warrants -- 49 124
Reclassification of put warrant obligation -- (25) (20)
Stock option income tax benefits 151 179 352
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Balance, end of year 1,500 2,005 2,924
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RETAINED EARNINGS
Balance, beginning of year 2,156 2,950 3,328
Common stock repurchased (331) (668) (1,344)
Reclassification of put warrant obligation -- (380) (210)
Net income 1,146 1,453 2,195
Equity adjustments (21) (27) 15
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Balance, end of year 2,950 3,328 3,984
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Total stockholders' equity $4,450 $5,333 $6,908
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See accompanying notes.
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NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES. The financial statements are prepared on a basis
consistent with U.S. generally accepted accounting principles and International
Accounting Standards formulated by the International Accounting Standards
Committee (IASC).
PRINCIPLES OF CONSOLIDATION. The financial statements include the accounts of
Microsoft and its subsidiaries. Significant intercompany transactions and
balances have been eliminated. Investments in 50% owned joint ventures are
accounted for using the equity method; the Company's share of joint ventures'
operating results is reflected in nonoperating expenses.
ESTIMATES AND ASSUMPTIONS. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, 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.
FOREIGN CURRENCIES. Assets and liabilities recorded in foreign currencies on the
books of foreign subsidiaries are translated at the exchange rate on the balance
sheet date. Translation adjustments resulting from this process are charged or
credited to equity. Revenues, costs, and expenses are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign
currency transactions are included in nonoperating expenses.
REVENUE RECOGNITION. Revenue from sales to distributors and resellers is
recognized when related products are shipped. Revenue from corporate license
programs generally is recognized when the user installs the product. Revenue
attributable to significant support (telephone support and unspecified
enhancements such as service packs and Internet browser updates) is recognized
ratably over the product's life cycle, which may exceed one year. Costs related
to insignificant obligations, which include telephone support for certain
products, are accrued.
Revenue from products licensed to original equipment manufacturers is recognized
when the OEM ships the licensed products.
Provisions are recorded for returns and bad debts.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred. The current U.S. accounting rule, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, does not materially affect
the Company.
TELEPHONE SUPPORT. Telephone support costs are included in sales and marketing.
INCOME TAXES. Income tax expense includes U.S. and international income taxes,
plus an accrual for U.S. taxes on undistributed earnings of international
subsidiaries. Certain items of income and expense are not reported in tax
returns and financial statements in the same year. The tax effect of this
difference is reported as deferred income taxes. Tax credits are accounted for
as a reduction of tax expense in the year in which the credits reduce taxes
payable.
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, computed using the treasury stock method.
FINANCIAL INSTRUMENTS. The Company considers all liquid interest-earning
investments with a maturity of three months or less at the date of purchase to
be cash equivalents. Short-term investments generally mature between three
months and five years from the purchase date. All cash and short-term
investments are classified as available for sale and are recorded at market.
Cost approximates market for all classifications of cash and short-term
investments; realized and unrealized gains and losses are reflected in
stockholders' equity and are not material.
Equity securities are recorded at market in other assets; unrealized gains and
losses are reflected in stockholders' equity and are not material.
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is stated at cost
and depreciated using the straight-line method over the shorter of the estimated
life of the asset or the lease term, ranging from one to 30 years.
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DIVERSIFICATION OF RISK. The Company's investment portfolio is diversified and
consists primarily of short-term investment grade securities. At June 30, 1995
and 1996, approximately 38% of accounts receivable represented amounts due from
ten channel purchasers. One customer accounted for approximately 13%, 12%, and
13% of revenues while another customer accounted for approximately 13%, 12%, and
8% of revenues in 1994, 1995, and 1996.
Finished goods sales to international customers in Europe, Japan, Australia, and
Canada are primarily billed in local currencies. Payment cycles are relatively
short, generally less than 90 days. European manufacturing costs and
international selling, distribution, and support costs are generally disbursed
in local currencies. Local currency cash balances in excess of short-term
operating needs are generally converted into U.S. dollar cash and short-term
investments upon receipt. Therefore, foreign exchange rate fluctuations
generally do not create a risk of material transaction gains or losses. As a
result, Microsoft's hedging activities for transaction exposures have been
minimal. No material hedge contracts were outstanding at June 30, 1996.
Foreign exchange rates affect the translated results of operations of the
Company's foreign subsidiaries. During 1995, 1996, and for 1997, the Company
hedged a percentage of planned translated international finished goods revenues
by purchasing options on the applicable currencies. Premiums paid for the
options were not material.
RECLASSIFICATIONS. Certain reclassifications have been made for consistent
presentation.
CASH AND SHORT-TERM INVESTMENTS
June 30
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1995 1996
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Cash and equivalents:
Cash $ 135 $ 64
Commercial paper 1,035 1,447
Money market preferreds 255 105
Certificates of deposit 492 768
Bank loan participations 45 217
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Cash and equivalents 1,962 2,601
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Short-term investments:
Municipal securities 1,291 1,357
Corporate notes and bonds 866 1,125
U.S. Treasury securities 444 1,591
Commercial paper 187 266
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Short-term investments 2,788 4,339
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Cash and short-term investments $4,750 $ 6,940
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PROPERTY, PLANT, AND EQUIPMENT
June 30
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1995 1996
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Land $ 206 $ 183
Buildings 607 787
Computer equipment 707 885
Other 387 491
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Property, plant, and equipment -- at cost 1,907 2,346
Accumulated depreciation (715) (1,020)
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Property, plant, and equipment -- net $1,192 $ 1,326
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During 1995 and 1996, depreciation expense, of which the majority related to
computer equipment, was $227 million and $363 million; disposals were
immaterial.
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INCOME TAXES
The provision for income taxes consisted of:
1994 1995 1996
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Current taxes:
U.S. and state $470 $518 $1,139
International 94 151 285
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Current taxes 564 669 1,424
Deferred taxes 12 45 (240)
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Provision for income taxes $576 $714 $1,184
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Income taxes payable were:
June 30
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1995 1996
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Deferred income tax assets:
Revenue items $ 25 $ 193
Expense items 189 322
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Deferred income tax assets 214 515
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Deferred income tax liabilities:
International earnings (201) (261)
Other (5) (6)
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Deferred income tax liabilities (206) (267)
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Current income tax liabilities (418) (732)
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Income taxes payable $(410) $(484)
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U.S. and international components of income before income taxes were:
1994 1995 1996
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U.S. $1,281 $1,549 $2,356
International 441 618 1,023
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Income before income taxes $1,722 $2,167 $3,379
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Income taxes have been settled with the Internal Revenue Service for all years
through 1989. The IRS concluded its field examination of the Company's U.S.
income tax returns for 1990 and 1991 and has assessed taxes that the Company is
contesting in Tax Court. Management believes any related adjustments that might
be required will not be material to the financial statements. Income taxes paid
were $247 million, $430 million, and $758 million in 1994, 1995, and 1996.
COMMON STOCK
Shares of common stock outstanding were as follows:
1994 1995 1996
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Balance, beginning of year 565 581 588
Issued 25 19 22
Repurchased (9) (12) (13)
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Balance, end of year 581 588 597
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The Company repurchases its common stock in the open market to provide shares
for issuing to employees under stock option and stock purchase plans. The
Company's Board of Directors authorized continuation of this program in 1997.
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PUT WARRANTS
To enhance its stock repurchase program, the Company sold 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 at specified
prices, are exercisable only at maturity, and are settleable in cash at
Microsoft's option. On June 30, 1995 and 1996, 8.0 million and 13.0 million
warrants were outstanding. The outstanding warrants at June 30, 1996 expire on
various dates between December 1996 and December 1997 and have strike prices
ranging from $95 per share to $104 per share. The maximum potential repurchase
obligations of $405 million and $635 million at June 30, 1995 and 1996 have been
reclassified from stockholders' equity to put warrants. There was no impact on
earnings per share in 1995 or 1996.
EMPLOYEE STOCK AND SAVINGS PLANS
EMPLOYEE STOCK PURCHASE PLAN. The Company has an employee stock purchase plan
for all eligible employees. Under the plan, shares of the Company's common stock
may be purchased at six-month intervals at 85% of the lower of the fair market
value on the first or the last day of each six-month period. Employees may
purchase shares having a value not exceeding 10% of their gross compensation
during an offering period. During 1994, 1995, and 1996, employees purchased 1.0
million, 1.1 million, and .9 million shares at average prices of $34.16, $46.76,
and $75.44 per share. At June 30, 1996, 1.2 million shares were reserved for
future issuance.
SAVINGS PLAN. The Company has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. The Company contributes fifty cents for each dollar a
participant contributes, with a maximum contribution of 3% of a participant's
earnings. The Company's matching contributions to the savings plan were $9
million, $12 million, and $15 million in 1994, 1995, and 1996.
STOCK OPTION PLANS. The Company has stock option plans for directors, officers,
and all employees, which provide for nonqualified and incentive stock options.
The Board of Directors determines the option price (not to be less than fair
market value for incentive options) at the date of grant. Options granted prior
to 1995 generally vest over four and one-half years and expire ten years from
the date of grant. Options granted during and after 1995 generally vest over
four and one-half years and expire seven years from the date of grant, while
certain options vest over seven and one-half years and expire after ten years.
At June 30, 1996, options for 60.2 million shares were vested and 67.8 million
shares were available for future grants under the plans.
Stock options outstanding were as follows:
Price per Share
Weighted
Number Range Average
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Balance, June 30, 1993 114.1 $0.31 - 44.25 $18.06
Granted 26.2 35.50 - 50.13 37.47
Exercised (20.9) 1.51 - 44.25 11.42
Canceled (5.5) 5.01 - 44.13 28.67
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Balance, June 30, 1994 113.9 0.31 - 50.13 23.29
Granted 21.7 47.75 - 83.13 50.50
Exercised (17.6) 0.31 - 47.75 15.81
Canceled (4.2) 5.11 - 75.00 35.40
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Balance, June 30, 1995 113.8 1.54 - 83.13 29.12
Granted 28.5 80.19 - 117.88 89.97
Exercised (19.6) 1.54 - 90.50 21.49
Canceled (3.6) 5.17 - 110.88 55.70
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Balance, June 30, 1996 119.1 2.19 - 117.88 44.14
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THE MICROSOFT NETWORK
During 1995, a wholly owned subsidiary of Tele-Communications, Inc. (TCI)
purchased a 20% minority interest in The Microsoft Network. TCI contributed $125
million of TCI common stock and Microsoft contributed the business assets of
this online service. Microsoft owns 80% of the entity, whose operations have not
been material to the financial results of Microsoft.
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NONCONTINUING ITEMS
During 1995, Microsoft paid a $46 million breakup fee to Intuit Inc. in
connection with the termination of a planned merger. During 1994, the Company
recorded a net pretax charge of $90 million, reflecting the settlement of patent
litigation with Stac Electronics.
COMMITMENTS AND CONTINGENCIES
The Company has operating leases for most U.S. and international sales and
support offices and certain equipment. Rental expense for operating leases was
$68 million, $86 million, and $92 million in 1994, 1995, and 1996. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 1997, $89; 1998, $76; 1999, $58; 2000, $28; 2001, $24; and thereafter, $19.
In connection with the Company's communications infrastructure and the operation
of The Microsoft Network, Microsoft has certain communication usage commitments.
Future related minimum commitments, in millions of dollars, are: 1997, $65;
1998, $78; 1999, $106; 2000, $80; and 2001, $11. Also, Microsoft has committed
to certain volumes of outsourced manufacturing of packaged product in the United
States and has committed $293 million for constructing new buildings.
During 1996, Microsoft and National Broadcasting Company (NBC) established two
MSNBC 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 is 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.
GEOGRAPHIC INFORMATION
1994 1995 1996
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NET REVENUES
U.S. operations $3,472 $4,495 $ 6,614
European operations 1,401 1,575 2,241
Other international operations 375 558 965
Eliminations (599) (691) (1,149)
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Total net revenues $4,649 $5,937 $ 8,671
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OPERATING INCOME
U.S. operations $1,394 $1,709 $ 2,408
European operations 346 412 680
Other international operations 31 91 376
Eliminations (45) (174) (386)
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Total operating income $1,726 $2,038 $ 3,078
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IDENTIFIABLE ASSETS
U.S. operations $4,397 $5,862 $ 8,193
European operations 1,366 1,806 2,280
Other international operations 423 689 1,042
Eliminations (823) (1,147) (1,422)
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Total identifiable assets $5,363 $7,210 $10,093
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Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions. "U.S. operations" include
shipments to customers in the United States, licensing to OEMs, and exports of
finished goods directly to international customers, primarily in Canada, South
America, and Asia. Exports and international OEM transactions are primarily in
U.S. dollars and totaled $787 million, $1,263 million, and $2,148 million in
1994, 1995, and 1996. "Other international operations" primarily include
subsidiaries in Australia, Japan, Korea, and Taiwan. International revenues,
which include European operations, other international operations, exports, and
OEM distribution, were 54%, 55%, and 60% of total revenues in 1994, 1995, and
1996.
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SUBSIDIARIES
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
GraceMac Corporation (NEVADA)
Microsoft FSC Corp. (U.S. VIRGIN ISLANDS)
Microsoft Manufacturing B.V. (THE NETHERLANDS)
Microsoft Puerto Rico, Inc. (Manufacturing) (DELAWARE)
Vermeer Technologies, Inc. (DELAWARE)
Microsoft de Argentina S.A.
Microsoft Pty Limited (AUSTRALIA)
Microsoft Gesellschaft m.b.H. (AUSTRIA)
Microsoft N.V. (BELGIUM)
Microsoft Informatica Limitada (BRAZIL)
Microsoft Canada Inc.
Softimage, Inc. (CANADA)
Microsoft Chile S.A.
Microsoft Colombia Inc. (DELAWARE)
Microsoft De Centroamerica S.A. (COSTA RICA)
Microsoft s.r.o. (CZECH REPUBLIC)
Microsoft Danmark ApS (DENMARK)
CorporacionMicrosoft Del Ecuador S.A.
Microsoft Corporation (Representative Office) (EGYPT)
Microsoft Oy (FINLAND)
Microsoft France S.A.R.L.
Softimage France S.A.R.L.
Microsoft G.m.b.H. (GERMANY)
Softimage G.m.b.H. (GERMANY)
Microsoft Hellas S.A. (GREECE)
Microsoft De Guatemala, S.A.
Microsoft Hong Kong Limited
Microsoft Kft (HUNGARY)
Microsoft Corporation (India) Private Limited
PT. Microsoft Indonesia
Microsoft Israel Ltd.
Microsoft S.p.A. (ITALY)
Microsoft Company, Limited (JAPAN)
Microsoft CH (KOREA)
Microsoft (Malaysia) Sdn. Bhd.
Microsoft Mexico, S.A. de C.V.
Microsoft Maroc S.A.R.L. (MOROCCO)
Microsoft B.V. (THE NETHERLANDS)
Microsoft International B.V. (THE NETHERLANDS)
Microsoft New Zealand Limited
Microsoft Norge AS (NORWAY)
Microsoft De Panama, S.A.
Microsoft (China) Company Limited (THE PEOPLE'S REPUBLIC OF CHINA)
Microsoft Peru, S.A.
Microsoft Philippines, Inc.
Microsoft sp. z.o.o. (POLAND)
MSFT-Software Para Microcomputadores, LDA (PORTUGAL)
Microsoft Caribbean, Inc. (DELAWARE)
Microsoft Taiwan Corporation (REPUBLIC OF CHINA)
Microsoft A.O. (RUSSIA)
Microsoft Singapore Pte Ltd
Microsoft Slovakia s.r.o. (SLOVAK REPUBLIC)
Microsoft d.o.o., Ljubljana (SLOVENIA)
Microsoft (S.A.) (Proprietary) Limited (SOUTH AFRICA)
Microsoft Iberica S.R.L. (SPAIN)
Microsoft Aktiebolag (SWEDEN)
Microsoft AG (SWITZERLAND)
Microsoft (Thailand) Limited
Microsoft Bilgisayar Yazilim Hizmetleri Limited Sirketi (TURKEY)
Microsoft Corporation (Dubai Branch) (UNITED ARAB EMIRATES)
Microsoft Limited (UNITED KINGDOM)
Softimage U.K. Limited
Microsoft Uruguay S.A.
Corporation MS 90 de Venezuela S.A.
The Resident Representative Office of Microsoft Corporation in Hanoi (VIETNAM)
DreamWorks Interactive L.L.C. (WASHINGTON, 50% owned)
The Microsoft Network L.L.C. (DELAWARE, 80% owned)
MSNBC Cable L.L.C. (DELAWARE, 50% owned)
MSNBC Interactive News L.L.C. (DELAWARE, 50% owned)
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying balance sheets of Microsoft Corporation and
subsidiaries as of June 30, 1995 and 1996, and the related statements of income,
cash flows, and stockholders' equity for each of the three years ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Microsoft Corporation and subsidiaries as of
June 30, 1995 and 1996, and the results of their operations and their cash flows
for each of the three years ended June 30, 1996 in conformity with accounting
principles generally accepted in the United States and International Accounting
Standards.
/S/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Seattle, Washington
July 22, 1996