Exhibit 13.4
Microsoft Corporation
Financial Statements
Income Statements for the three years ended June 30, 1997
Cash Flows Statements for the three years ended June 30, 1997
Balance Sheets as of June 30, 1996 and 1997
Stockholders' Equity Statements for the three years ended June 30, 1997
Notes to Financial Statements
Independent Auditors' Report
Income Statements
(In millions, except earnings per share)
- -------------------------------------------------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------
Revenue $5,937 $8,671 $11,358
Operating expenses:
Cost of revenue 877 1,188 1,085
Research and development 860 1,432 1,925
Sales and marketing 1,895 2,657 2,856
General and administrative 267 316 362
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 3,899 5,593 6,228
- -------------------------------------------------------------------------------------------------------------
Operating income 2,038 3,078 5,130
Interest income 191 320 443
Other expenses (62) (19) (259)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 2,167 3,379 5,314
Provision for income taxes 714 1,184 1,860
- -------------------------------------------------------------------------------------------------------------
Net income 1,453 2,195 3,454
Preferred stock dividends -- -- 15
- -------------------------------------------------------------------------------------------------------------
Net income available for common shareholders $1,453 $2,195 $ 3,439
=============================================================================================================
Earnings per share(1) $ 1.16 $ 1.71 $ 2.63
=============================================================================================================
Weighted average shares outstanding(1) 1,254 1,281 1,312
=============================================================================================================
See accompanying notes.
(1) Share and per share amounts have been restated to reflect a two-for-one
stock split in December 1996.
Cash Flows Statements
(In millions)
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------
Cash flows from operations
Net income $ 1,453 $ 2,195 $ 3,454
Depreciation and amortization 269 480 557
Unearned revenue 69 983 1,601
Recognition of unearned revenue from prior periods (54) (477) (743)
Other current liabilities 404 584 321
Accounts receivable (91) (71) (336)
Other current assets (60) 25 (165)
- ------------------------------------------------------------------------------------------------------------
Net cash from operations 1,990 3,719 4,689
- ------------------------------------------------------------------------------------------------------------
Cash flows used for financing
Common stock issued 332 504 744
Common stock repurchased (698) (1,385) (3,101)
Put warrant proceeds 49 124 95
Preferred stock issued -- -- 980
Preferred stock dividends -- -- (15)
Stock option income tax benefits 179 352 796
- ------------------------------------------------------------------------------------------------------------
Net cash used for financing (138) (405) (501)
- ------------------------------------------------------------------------------------------------------------
Cash flows used for investments
Additions to property, plant, and equipment (495) (494) (499)
Equity investments and other (230) (625) (1,669)
Short-term investments (651) (1,551) (921)
- ------------------------------------------------------------------------------------------------------------
Net cash used for investments (1,376) (2,670) (3,089)
- ------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 476 644 1,099
Effect of exchange rates on cash and equivalents 9 (5) 6
Cash and equivalents, beginning of year 1,477 1,962 2,601
- ------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year 1,962 2,601 3,706
Short-term investments 2,788 4,339 5,260
- ------------------------------------------------------------------------------------------------------------
Cash and short-term investments $ 4,750 $ 6,940 $ 8,966
============================================================================================================
See accompanying notes.
Balance Sheets
(In millions)
- ---------------------------------------------------------------------------------------------------------
June 30 1996 1997
- ---------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments $ 6,940 $ 8,966
Accounts receivable 639 980
Other 260 427
- ---------------------------------------------------------------------------------------------------------
Total current assets 7,839 10,373
Property, plant, and equipment 1,326 1,465
Equity investments 675 2,346
Other assets 253 203
- ---------------------------------------------------------------------------------------------------------
Total assets $10,093 $14,387
=========================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 808 $ 721
Accrued compensation 202 336
Income taxes payable 484 466
Unearned revenue 560 1,418
Other 371 669
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 2,425 3,610
- ---------------------------------------------------------------------------------------------------------
Minority interest 125 --
- ---------------------------------------------------------------------------------------------------------
Put warrants 635 --
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock--shares authorized 0 and 100;
shares issued and outstanding 0 and 13 -- 980
Common stock and paid-in capital--shares authorized 4,000;
shares issued and outstanding 1,194 and 1,204 2,924 4,509
Retained earnings 3,984 5,288
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,908 10,777
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,093 $14,387
=========================================================================================================
See accompanying notes.
Stockholders' Equity Statements
(In millions)
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------
Convertible preferred stock
Convertible preferred stock issued -- -- $ 980
- ------------------------------------------------------------------------------------------------------------
Balance, end of year -- -- 980
- ------------------------------------------------------------------------------------------------------------
Common stock and paid-in capital
Balance, beginning of year $1,500 $ 2,005 2,924
Common stock issued 332 504 744
Common stock repurchased (30) (41) (91)
Proceeds from sale of put warrants 49 124 95
Reclassification of put warrant obligation (25) (20) 45
Stock option income tax benefits 179 352 792
- ------------------------------------------------------------------------------------------------------------
Balance, end of year 2,005 2,924 4,509
- ------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 2,950 3,328 3,984
Net income 1,453 2,195 3,454
Preferred stock dividends -- -- (15)
Common stock repurchased (668) (1,344) (3,010)
Reclassification of put warrant obligation (380) (210) 590
Net unrealized investment gains and other (27) 15 285
- ------------------------------------------------------------------------------------------------------------
Balance, end of year 3,328 3,984 5,288
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity $5,333 $ 6,908 $10,777
============================================================================================================
See accompanying notes.
Notes to Financial Statements
(In millions, except per share amounts)
- --------------------------------------------------------------------------------
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'
activities is reflected in other expenses.
Estimates and assumptions. Preparing financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples include provisions for returns and
bad debts and the length of product life cycles and buildings' lives. Actual
results may differ from these estimates.
Foreign currencies. Assets and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are charged or credited to equity.
Revenue, costs, and expenses are translated at average rates of exchange
prevailing during the year. Gains and losses on foreign currency transactions
are included in other expenses.
Revenue recognition. Revenue is recognized when earned. Revenue from products
licensed to original equipment manufacturers is recorded when OEMs ship licensed
products while revenue from corporate and organization license programs is
recorded when the user installs the product. Revenue from packaged product
sales to distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. Revenue attributable to significant support (technical support
and unspecified enhancements such as service packs and Internet browser updates)
is based on the price charged or derived value of the undelivered elements and
is recognized ratably on a straight-line basis over the product's life cycle.
Costs related to insignificant obligations, which include telephone support for
certain products, are accrued. 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, Statement of Financial Accounting
Standards (SFAS) 86, 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 using the "treasury stock" method and preferred shares using the "if-
converted" method. Beginning in the second quarter of 1998, Microsoft will be
required to report earnings per outstanding common share in addition to diluted
earnings per share. Earnings per common share computed under the new
pronouncement would have been $1.25, $1.85, and $2.87 while reported diluted
earnings per share were $1.16, $1.71, and $2.63 in 1995, 1996, and 1997.
Stock split. In December 1996, outstanding shares of common stock were split
two-for-one. All share and per share amounts have been restated.
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 were not material.
Publicly tradeable equity securities are recorded at market; unrealized gains
and losses are reflected in stockholders' equity.
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.
Reclassifications. Certain reclassifications have been made for consistent
presentation.
Unearned Revenue
In fiscal 1996, Microsoft committed to integrating its Internet technologies,
such as the Company's Internet browser, Microsoft Internet Explorer, into
existing products at no additional cost to its customers. Given this strategy
and other support commitments such as telephone support, Internet-based
technical support, and unspecified product enhancements, Microsoft recognizes
approximately 20% of Windows operating systems revenue over the product life
cycles, currently estimated at two years. The unearned portion of revenue from
Windows operating systems was $425 million and $860 million at June 30, 1996 and
1997.
Since Office 97 is also tightly integrated with the rapidly evolving Internet,
and subsequent delivery of new Internet technologies, enhancements, and other
support is likely to be more than minimal, a ratable revenue recognition policy
became effective for Office 97 licenses beginning in 1997. Approximately 20% of
Office 97 revenue is recognized ratably over the estimated 18-month product life
cycle. Unearned revenue associated with Office 97 totaled $300 million at June
30, 1997.
Unearned revenue also includes maintenance and other subscription contracts,
including custom corporate license agreements.
Financial Risks
The Company's investment portfolio is diversified and consists primarily of
short-term investment grade securities. At June 30, 1996 and 1997,
approximately 38% and 31% of accounts receivable represented amounts due from 10
channel purchasers. One customer accounted for approximately 12%, 13%, and 12%
of revenue while another customer accounted for approximately 12%, 8%, and 5% of
revenue in 1995, 1996, and 1997.
Finished goods sales to international customers in Europe, Japan, and Australia
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
on receipt. Therefore, foreign exchange rate fluctuations generally do not
create a risk of material balance sheet gains or losses. As a result,
Microsoft's hedging activities for balance sheet exposures have been minimal.
At June 30, 1997, the Company had contracts to deliver $500 million in a foreign
currency, expiring July 1998, which hedge foreign exchange rate risk related to
a foreign currency denominated investment.
Foreign exchange rates affect the translated results of operations of the
Company's foreign subsidiaries. The Company hedges a percentage of planned
international revenue with purchased options. The notional amount of the
options outstanding at June 30, 1997 was $2.1 billion. At June 30, 1997, the
fair value and premiums paid for the options were not material.
Cash and Short-Term Investments
- -----------------------------------------------------------------
June 30 1996 1997
- -----------------------------------------------------------------
Cash and equivalents:
Cash $ 64 $ 246
Commercial paper 1,664 1,660
Money market preferreds 105 946
Certificates of deposit 768 854
- -----------------------------------------------------------------
Cash and equivalents 2,601 3,706
- -----------------------------------------------------------------
Short-term investments:
Municipal securities 1,357 571
Corporate notes and bonds 1,125 1,907
U.S. Treasury securities 1,591 1,513
Certificates of deposit 266 1,269
- -----------------------------------------------------------------
Short-term investments 4,339 5,260
- -----------------------------------------------------------------
Cash and short-term investments $6,940 $8,966
=================================================================
Property, Plant, and Equipment
- ------------------------------------------------------------------
June 30 1996 1997
- ------------------------------------------------------------------
Land $ 183 $ 183
Buildings 787 1,027
Computer equipment 885 1,064
Other 491 503
- ------------------------------------------------------------------
Property, plant, and equipment--at cost 2,346 2,777
Accumulated depreciation (1,020) (1,312)
- ------------------------------------------------------------------
Property, plant, and equipment--net $ 1,326 $ 1,465
==================================================================
During 1996 and 1997, depreciation expense, of which the majority related to
computer equipment, was $363 million and $353 million; disposals were
immaterial.
Income Taxes
The provision for income taxes consisted of:
- ----------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- ----------------------------------------------------------------------
Current taxes:
U.S. and state $ 518 $1,139 $1,710
International 151 285 412
- ----------------------------------------------------------------------
Current taxes 669 1,424 2,122
Deferred taxes 45 (240) (262)
- ----------------------------------------------------------------------
Provision for income taxes $ 714 $1,184 $1,860
======================================================================
U.S. and international components of income before income taxes were:
- --------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- --------------------------------------------------------------------
U.S. $1,549 $2,356 $3,775
International 618 1,023 1,539
- --------------------------------------------------------------------
Income before income taxes $2,167 $3,379 $5,314
====================================================================
Income taxes payable were:
- ------------------------------------------------------------------
June 30 1996 1997
- ------------------------------------------------------------------
Deferred income tax assets:
Revenue items $ 193 $ 474
Expense items 322 505
- ------------------------------------------------------------------
Deferred income tax assets 515 979
- ------------------------------------------------------------------
Deferred income tax liabilities:
International earnings (261) (465)
Other (6) (4)
- ------------------------------------------------------------------
Deferred income tax liabilities (267) (469)
- ------------------------------------------------------------------
Current income tax liabilities (732) (976)
- ------------------------------------------------------------------
Income taxes payable $(484) $(466)
==================================================================
Income taxes have been settled with the Internal Revenue Service for all years
through 1989. The IRS has assessed taxes for 1990 and 1991 that the Company is
contesting in Tax Court. The IRS is examining the Company's U.S. income tax
returns for 1992 through 1994. Management believes any related adjustments that
might be required will not be material to the financial statements. Income
taxes paid were $430 million, $758 million, and $1.1 billion in 1995, 1996, and
1997.
Convertible Preferred Stock
During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible
exchangeable principal-protected preferred stock. Dividends are payable
quarterly in arrears. Preferred shareholders have preference over common
stockholders in dividends and liquidation rights. In December 1999, each
preferred share is convertible into common shares or an equivalent amount of
cash determined by a formula that provides a floor price of $79.875 and a cap of
$102.24 per preferred share. Net proceeds of $980 million were used to
repurchase common shares.
Common Stock
Shares of common stock outstanding were as follows:
- ----------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- ----------------------------------------------------------------------
Balance, beginning of year 1,162 1,176 1,194
Issued 38 44 47
Repurchased (24) (26) (37)
- ----------------------------------------------------------------------
Balance, end of year 1,176 1,194 1,204
======================================================================
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 1998.
Put Warrants
To enhance its stock repurchase program, the Company sells put warrants to
independent third parties. These put warrants entitle the holders to sell
shares of Microsoft common stock to the Company on certain dates at specified
prices. On June 30, 1996 and 1997, 13.0 million and 3.0 million warrants were
outstanding. Outstanding put warrants at June 30, 1997 expire in September 1997
and have strike prices of $105 per share. At June 30, 1996, the outstanding put
warrants were settleable in cash at Microsoft's option thus resulting in a
reclassification of the maximum potential repurchase obligation of $635 million
from stockholders' equity to put warrants. The outstanding put warrants at June
30, 1997 permitted a net-share settlement at the Company's option and did not
result in a put warrant liability on the balance sheet.
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 1995, 1996, and 1997, employees purchased 2.1
million, 1.8 million, and 1.4 million shares at average prices of $23.38,
$37.72, and $59.64 per share. At June 30, 1997, 19.4 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. Participating employees may defer up to
15% of 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. Matching contributions
were $12 million, $15 million, and $28 million in 1995, 1996, and 1997.
Stock option plans. The Company has stock option plans for directors, officers,
and all employees, which provide for nonqualified and incentive stock options.
The option exercise price is the fair market value at the date of grant.
Options granted prior to 1995 generally vest over four and one-half years and
expire 10 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 10 years. At June 30, 1997, options for 113 million shares were vested
and 290 million shares were available for future grants under the plans.
Stock options outstanding were as follows:
Price per Share
-----------------------------
Weighted
Shares Range Average
- ---------------------------------------------------------------------
Balance, June 30, 1994 228 $ 0.16 - $ 25.07 $11.65
Granted 44 23.88 - 41.57 25.25
Exercised (35) 0.16 - 23.88 7.91
Canceled (9) 2.56 - 37.50 17.70
---
Balance, June 30, 1995 228 0.77 - 41.57 14.56
Granted 57 40.10 - 58.94 44.99
Exercised (40) 0.77 - 45.25 10.75
Canceled (7) 2.59 - 55.44 27.85
---
Balance, June 30, 1996 238 1.10 - 58.94 22.07
Granted 55 55.31 - 119.19 58.29
Exercised (45) 1.10 - 58.94 13.27
Canceled (9) 17.00 - 97.13 38.83
---
Balance, June 30, 1997 239 2.24 - 119.19 31.43
=====================================================================
For various price ranges, weighted average characteristics of outstanding stock
options at June 30, 1997 were as follows:
Outstanding options Exercisable options
--------------------------------------------
Range of Shares Remaining Weighted Shares Weighted
exercise prices life average average
(years) price price
- --------------------------------------------------------------------------
$2.24-$17.00 65 3.5 $ 9.64 64 $ 9.63
17.01-24.00 65 5.4 20.81 39 20.10
24.01-55.00 56 5.8 43.13 10 41.02
55.01-119.19 53 6.6 58.47 -- --
==========================================================================
The Company follows APB Opinion 25, Accounting for Stock Issued to Employees, to
account for stock option and employee stock purchase plans. No compensation
cost is recognized because the option exercise price is equal to the market
price of the underlying stock on the date of grant. Had compensation cost for
these plans been determined based on the Black-Scholes value at the grant dates
for awards as prescribed by SFAS Statement 123, Accounting for Stock-Based
Compensation, pro forma net income and earnings per share would have been:
- --------------------------------------------------------------------
Year Ended June 30 1995 1996 1997
- --------------------------------------------------------------------
Pro forma net income $1,243 $1,902 $3,053
Pro forma earnings per share $ 0.99 $ 1.48 $ 2.32
====================================================================
The pro forma disclosures above include the amortization of the fair value of
all options vested during 1995, 1996, and 1997. If only options granted during
1996 and 1997 were valued, as prescribed by SFAS 123, pro forma net income would
have been $2,073 million and $3,179 million, and earnings per share would have
been $1.62 and $2.42 for 1996 and 1997.
The weighted average Black-Scholes value of options granted under the stock
option plans during 1995, 1996, and 1997 was $10.46, $17.72, and $23.43. Value
was estimated using an expected life of five years, no dividends, volatility of
.30, and risk-free interest rates of 7.0%, 6.0%, and 6.5% in 1995, 1996, and
1997.
MSN, The Microsoft Network
During October 1996, Microsoft and a subsidiary of Tele-Communications, Inc.
(TCI) terminated a partnership under which TCI owned a 20% minority interest in
The Microsoft Network, LLC, owner of the business assets of MSN, an online
service. Due to the evolving nature of the online industry and the move by MSN
to a Web-based offering, the original direction of the partnership changed and
both Microsoft and TCI agreed to terminate this partnership focused exclusively
on MSN. In return for approximately $125 million of TCI securities, Microsoft
became the sole owner of MSN and the minority interest on the accompanying
balance sheet was eliminated. There was no other material financial impact of
the dissolution.
Acquisition
On August 1, 1997, the Company acquired WebTV Networks, Inc. (WebTV), an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals based on proprietary technologies. A director
of the
Company owned 10% of WebTV. Microsoft paid $425 million in stock and
cash for WebTV. The Company expects to record an in-process R&D write-off of
$300 million in the first quarter of 1998.
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
$86 million, $92 million, and $92 million in 1995, 1996, and 1997. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 1998, $67; 1999, $54; 2000, $43; 2001, $30; 2002, $12; and thereafter, $16.
In connection with the Company's communications infrastructure and the operation
of MSN, Microsoft has certain communication usage commitments. Future related
minimum commitments, in millions of dollars, are: 1998, $133; 1999, $119; 2000,
$92; and 2001, $20. Also, Microsoft has committed to certain volumes of
outsourced telephone support and manufacturing of packaged product and has
committed $300 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, to pay one-half of
operational funding of both joint ventures for a multiyear period, and to
guarantee a portion of MSNBC debt.
In an ongoing investigation, the Antitrust Division of the U.S. Department of
Justice requested information from Microsoft concerning various issues.
Microsoft is also subject to various legal proceedings and claims that arise in
the ordinary course of business. Management currently believes that resolving
these matters will not have a material adverse impact on the Company's financial
position or its results of operations.
Geographic Information
Year Ended June 30 1995 1996 1997
- ------------------------------------------------------------------------
Revenue
U.S. operations $ 4,495 $ 6,739 $ 8,877
European operations 1,607 2,215 2,770
Other international operations 821 1,267 1,757
Eliminations (986) (1,550) (2,046)
- ------------------------------------------------------------------------
Total revenue $ 5,937 $ 8,671 $11,358
- ------------------------------------------------------------------------
Operating income
U.S. operations $ 1,414 $ 2,137 $ 3,733
European operations 444 649 1,013
Other international operations 163 297 469
Eliminations 17 (5) (85)
- ------------------------------------------------------------------------
Total operating income $ 2,038 $ 3,078 $ 5,130
- ------------------------------------------------------------------------
Identifiable assets
U.S. operations $ 5,862 $ 8,193 $11,630
European operations 1,806 2,280 3,395
Other international operations 689 1,042 705
Eliminations (1,147) (1,422) (1,343)
- ------------------------------------------------------------------------
Total identifiable assets $ 7,210 $10,093 $14,387
- ------------------------------------------------------------------------
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 Asia, South
America, and Canada. Exports and international OEM transactions are primarily in
U.S. dollars and totaled $1.3 billion, $2.1 billion, and $2.5 billion in 1995,
1996, and 1997.
"Other international operations" primarily include subsidiaries in Japan,
Canada, Australia, and Brazil. International revenue, which includes European
operations, other international operations, exports, and OEM distribution, was
55%, 56%, and 56% of total revenue in 1995, 1996, and 1997. Most international
identifiable assets are U.S. dollar denominated investment securities.
Subsidiaries
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Microsoft FSC Corp. (U.S. VIRGIN ISLANDS)
Microsoft Investments, Inc. (NEVADA)
Microsoft Licensing, Inc. (NEVADA)
Microsoft Manufacturing B.V. (THE NETHERLANDS)
Microsoft Puerto Rico, Inc. (Manufacturing) (DELAWARE)
Microsoft Research Limited (United Kingdom)
The Microsoft Network L.L.C. (DELAWARE)
GraceMac Corporation (NEVADA)
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 Co.
SOFTIMAGE, Inc. (CANADA)
Microsoft Chile S.A.
Microsoft Colombia Inc. (DELAWARE)
Microsoft de Centroamerica S.A. (COSTA RICA)
Microsoft Hrvatska d.o.o. (CROATIA)
Microsoft s.r.o. (CZECH REPUBLIC)
Microsoft Danmark ApS (DENMARK)
Microsoft Del Ecuador S.A.
Microsoft Corporation (Representative Office) (EGYPT)
Microsoft Oy (FINLAND)
Microsoft 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 Hungary Kft.
Microsoft Corporation (India) Private Limited
PT. Microsoft Indonesia
Microsoft Israel Ltd.
Microsoft S.p.A. (ITALY)
Microsoft Cote d'Ivoire (IVORY COAST)
Microsoft Company, Limited (JAPAN)
East Africa Software Limited (KENYA)
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. (PUERTO RICO) (DELAWARE)
Microsoft Romania SRL
Microsoft ZAO (RUSSIA)
Microsoft Singapore Pte Ltd
Microsoft Slovakia s.r.o.
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 Taiwan Corporation
Microsoft (Thailand) Limited
Microsoft Bilgisayar Yazilim Hizmetleri Limited Sirketi (TURKEY)
Microsoft Corporation (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)
MSBET L.L.C. (DELAWARE, 50% owned)
MSFDC, L.L.C. (DELAWARE, 50% owned)
MSNBC Cable, L.L.C. (DELAWARE, 50% owned)
MSNBC Interactive News, L.L.C. (DELAWARE, 50% owned)
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, 1996 and 1997, and the related statements of income,
cash flows, and stockholders' equity for each of the three years ended June 30,
1997. 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, 1996 and 1997, and the results of their operations and their cash flows
for each of the three years ended June 30, 1997 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 17, 1997 (August 1, 1997 as to Acquisition Note)