================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2001
[_] 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
One Microsoft Way, Redmond, Washington 98052-6399
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (425) 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
February 28, 2002 was 5,416,006,543.
Pursuant to this Form 10-Q/A, the registrant amends "Item 1. Financial
Statements--Cash Flows Statement for the Three Months Ended September 30, 2001"
of Part I--Financial Information of its Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 to correct a clerical error in the
amount of Unearned revenue formerly reported as $1,104 million and the amount
of Recognition of unearned revenue formerly reported as $(914) million for the
Three Months Ended September 30, 2001. This change had no impact on Net cash
from operations. Besides the changes to the Cash Flows Statement and the number
of shares outstanding listed above, no other changes have been made to the Form
10-Q for the quarterly period ended September 30, 2001.
================================================================================
Part I. Financial Information
Item 1. Financial Statements
MICROSOFT CORPORATION
Income Statements
(In millions, except earnings per share)(Unaudited)
--------------------------------------------------------------------------------
Three Months Ended
Sept. 30
2000 2001
----------------------------------------------------------------------------------
Revenue $5,766 $6,126
Operating expenses:
Cost of revenue 825 884
Research and development 956 1,013
Sales and marketing 1,038 1,145
General and administrative 170 187
----------------------------------------------------------------------------------
Total operating expenses 2,989 3,229
----------------------------------------------------------------------------------
Operating income 2,777 2,897
Losses on equity investees and other (52) (30)
Investment income/(loss) 1,127 (980)
----------------------------------------------------------------------------------
Income before income taxes 3,852 1,887
Provision for income taxes 1,271 604
----------------------------------------------------------------------------------
Income before accounting change 2,581 1,283
Cumulative effect of accounting change (net of
income taxes of $185) (375) -
----------------------------------------------------------------------------------
Net income $2,206 $1,283
----------------------------------------------------------------------------------
Basic earnings per share:
Before accounting change $ 0.49 $ 0.24
Cumulative effect of accounting change (0.07) -
----------------------------------------------------------------------------------
$ 0.42 $ 0.24
----------------------------------------------------------------------------------
Diluted earnings per share:
Before accounting change $ 0.46 $ 0.23
Cumulative effect of accounting change (0.06) -
----------------------------------------------------------------------------------
$ 0.40 $ 0.23
----------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 5,299 5,398
----------------------------------------------------------------------------------
Diluted 5,557 5,567
----------------------------------------------------------------------------------
See accompanying notes.
--------------------------------------------------------------------------------
1
MICROSOFT CORPORATION
Balance Sheets
(In millions)
--------------------------------------------------------------------------------
June 30 Sept. 30
2001 2001 (1)
---------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 3,922 $ 3,113
Short-term investments 27,678 33,050
---------------------------------------------------------------------------------------------------------
Total cash and short-term investments 31,600 36,163
Accounts receivable 3,671 3,615
Deferred income taxes 1,949 1,993
Other 2,417 2,561
---------------------------------------------------------------------------------------------------------
Total current assets 39,637 44,332
Property and equipment, net 2,309 2,261
Equity investments 14,361 12,035
Goodwill 1,511 1,511
Intangible assets, net 401 394
Other assets 1,038 834
---------------------------------------------------------------------------------------------------------
Total assets $59,257 $61,367
---------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,188 $ 1,143
Accrued compensation 742 586
Income taxes 1,468 2,131
Unearned revenue 5,614 5,849
Other 2,120 3,153
---------------------------------------------------------------------------------------------------------
Total current liabilities 11,132 12,862
---------------------------------------------------------------------------------------------------------
Deferred income taxes 836 -
---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital -
shares authorized 12,000; outstanding 5,383 and 5,386 28,390 29,296
Retained earnings, including accumulated other comprehensive
income of $587 and $621 18,899 19,209
---------------------------------------------------------------------------------------------------------
Total stockholders' equity 47,289 48,505
---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $59,257 $61,367
---------------------------------------------------------------------------------------------------------
(1) Unaudited
See accompanying notes.
--------------------------------------------------------------------------------
2
MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
Three Months Ended
Sept. 30
------------------
2000 2001
-------- --------
Operations
Net income............................................ $ 2,206 $ 1,283
Cumulative effect of accounting change, net of tax.... 375 --
Depreciation, amortization, and other noncash items... 250 282
Net recognized (gains)/ losses on investments......... (599) 1,517
Stock option income tax benefits...................... 453 415
Deferred income taxes................................. 734 (839)
Unearned revenue...................................... 1,457 2,069
Recognition of unearned revenue....................... (1,507) (1,879)
Accounts receivable................................... 116 69
Other current assets.................................. (211) (39)
Other long-term assets................................ (61) 122
Other current liabilities............................. (253) 389
-------- --------
Net cash from operations........................... 2,960 3,389
-------- --------
Financing
Common stock issued................................... 375 391
Common stock repurchased.............................. (1,752) (1,125)
Put warrant proceeds.................................. 81 --
-------- --------
Net cash used for financing........................ (1,296) (734)
-------- --------
Investing
Additions to property and equipment................... (245) (150)
Purchases of investments.............................. (13,723) (16,020)
Maturities of investments............................. 1,570 861
Sales of investments.................................. 8,462 11,840
-------- --------
Net cash used for investing........................ (3,936) (3,469)
-------- --------
Net change in cash and equivalents.................... (2,272) (814)
Effect of exchange rates on cash and equivalents...... 67 5
Cash and equivalents, beginning of period............. 4,846 3,922
-------- --------
Cash and equivalents, end of period................... $ 2,641 $ 3,113
======== ========
3
MICROSOFT CORPORATION
Stockholders' Equity Statements
(In millions)(Unaudited)
--------------------------------------------------------------------------------
Three Months Ended
Sept. 30
2000 2001
---------------------------------------------------------------------------------------------
Common stock and paid-in capital
Balance, beginning of period $23,195 $28,390
Common stock issued 3,055 609
Common stock repurchased (123) (118)
Proceeds from sale of put warrants 81 -
Stock option income tax benefits 453 415
---------------------------------------------------------------------------------------------
Balance, end of period 26,661 29,296
---------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of period 18,173 18,899
---------------------------------------------------------------------------------------------
Net income 2,206 1,283
Other comprehensive income:
Cumulative effect of accounting change (75) -
Net gains/(losses) on derivative instruments 432 (51)
Net unrealized investment gains/(losses) (484) 46
Translation adjustments and other 59 39
---------------------------------------------------------------------------------------------
Comprehensive income 2,138 1,317
Common stock repurchased (1,629) (1,007)
---------------------------------------------------------------------------------------------
Balance, end of period 18,682 19,209
---------------------------------------------------------------------------------------------
Total stockholders' equity $45,343 $48,505
=============================================================================================
See accompanying notes.
--------------------------------------------------------------------------------
4
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, cash flows, and stockholders' equity include all
adjustments, consisting only of normal recurring items, as well as the
accounting changes to adopt Statement of Financial Accounting Standards (SFAS)
133, Accounting for Derivative Instruments and Hedging Activities, SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets,
necessary for their fair presentation in conformity with U.S. generally accepted
accounting principles. 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,
concessions and bad debts, and the length of product life cycles and buildings'
lives. Actual results may differ from these 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 2001 Form 10-K. Certain reclassifications have been made for
consistent presentation.
Accounting Changes
Effective July 1, 2000, Microsoft adopted SFAS 133, which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The adoption
of SFAS 133 resulted in a pre-tax reduction to income of $560 million ($375
million after-tax) and a pre-tax reduction to other comprehensive income (OCI)
of $112 million ($75 million after-tax).
Effective July 1, 2001, Microsoft adopted SFAS 141 and SFAS 142. SFAS 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from
goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be
amortized, but instead tested for impairment at least annually. There was no
impairment of goodwill upon adoption of SFAS 142.
Net income and earnings per share for the first quarter of fiscal 2001 adjusted
to exclude amortization expense (net of taxes) is as follows:
Three Months
Ended
Sept. 30,
(In millions, except earnings per share) 2000
--------------------------------------------------------
Net income:
Reported net income $2,206
Goodwill amortization 56
Equity method goodwill amortization 5
--------------------------------------------------------
Adjusted net income $2,267
========================================================
Basic earnings per share:
Reported basic earnings per share $0.42
Goodwill amortization 0.01
Equity method goodwill amortization -
--------------------------------------------------------
Adjusted basic earnings per share $0.43
========================================================
Diluted earnings per share:
Reported diluted earnings per share $0.40
Goodwill amortization 0.01
Equity method goodwill amortization -
--------------------------------------------------------
Adjusted diluted earnings per share $0.41
========================================================
During the first quarter of fiscal 2002, no goodwill was acquired, impaired, or
written off. As of September 30, 2001, Desktop and Enterprise Software and
Services goodwill was $1.10 billion, Consumer Software, Services, and Devices
goodwill was $256 million, and Consumer Commerce Investments goodwill was $151
million.
All of Microsoft's acquired intangible assets are subject to amortization.
During the first quarter of fiscal 2002, the Company acquired $35 million in
contract-based intangible assets and $13 million in technology-based intangible
assets, which will be amortized over approximately 3 years. No
--------------------------------------------------------------------------------
5
significant residual value is estimated for these intangible assets.
Intangible assets amortization expense for the first quarter of fiscal 2002 was
$55 million. The components of intangible assets were as follows:
June 30, 2001 Sept. 30, 2001
-------------------------------------- --------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In millions) Amount Amortization Amount Amortization
----------------------------------------------------------------------------------------------------------
Contract-based $407 $(177) $442 $(215)
Technology-based 157 (27) 170 (38)
Marketing-related and other 83 (42) 83 (48)
----------------------------------------------------------------------------------------------------------
Intangible assets $647 $(246) $695 $(301)
==========================================================================================================
Intangible assets amortization expense is estimated to be $142 million for the
remainder of fiscal 2002, $125 million in fiscal 2003, $87 million in fiscal
2004, $38 million in fiscal 2005, and $2 million in fiscal 2006.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding put warrants using the "reverse treasury stock" method and
outstanding stock options using the "treasury stock" method.
The components of basic and diluted earnings per share were as follows:
Earnings Per Share
(In millions, except earnings per share)
--------------------------------------------------------------------------------
Three Months Ended
Sept. 30
2000 2001
-------------------------------------------------------------------------------------------------
Income before accounting change (A) $2,581 $1,283
Cumulative effect of accounting change (375) -
-------------------------------------------------------------------------------------------------
Net income available for common shareholders $2,206 $1,283
=================================================================================================
Weighted average outstanding shares of common stock (B) 5,299 5,398
Dilutive effect of:
Put warrants 10 -
Employee stock options 248 169
-------------------------------------------------------------------------------------------------
Common stock and common stock equivalents (C) 5,557 5,567
=================================================================================================
Earnings per share before accounting change:
Basic (A/B) $ 0.49 $ 0.24
-------------------------------------------------------------------------------------------------
Diluted (A/C) $ 0.46 $ 0.23
=================================================================================================
Unearned Revenue
A portion of Microsoft's revenue is earned ratably over the product life cycle
or, in the case of subscriptions, over the period of the license agreement.
End users receive certain elements of the Company's products over a period of
time. These elements include browser technologies and technical support.
Consequently, Microsoft's earned revenue reflects the recognition of the fair
value of these elements over the product's life cycle. The percentage of revenue
recognized ratably ranges from approximately 15% to 25% of Windows desktop
operating systems and approximately 10% to 20% of desktop applications,
depending on the terms and conditions of the license and prices of the elements.
Product life cycles are currently estimated at three years for Windows operating
systems and 18 months for desktop applications. The Company also sells
subscriptions to certain products via maintenance and certain organization
license agreements. At September 30, 2001, unearned revenue was $5.85 billion,
compared to $4.77 billion at September 30, 2000. Desktop Applications unearned
revenue was $2.39 billion, compared to $1.68 billion at September 30, 2000.
Desktop Platforms unearned revenue was $2.66 billion, compared to $2.36 billion
at September 30, 2000.
--------------------------------------------------------------------------------
6
Enterprise Software and Services unearned revenue was $470 million, compared to
$400 million at September 30, 2000. Unearned revenue associated with Consumer
Software, Services, and Devices and Other was $325 million, compared to $328
million a year ago.
Stockholders' Equity
The Company repurchases its common shares in the open market to provide shares
for issuance to employees under stock option and stock purchase plans. During
the first quarter of fiscal 2001 and 2002, the Company repurchased 25.5 million
and 21.6 million shares of Microsoft common stock.
Operational Transactions
On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a
controlling interest in Expedia, Inc. through the purchase of up to 37.5 million
shares, approximately 75% of the current outstanding shares. If holders of more
than 37.5 million Expedia shares elect to sell their shares to USA, there will
be a pro rata reduction among all of those electing shareholders. Microsoft has
agreed to transfer all of its 33.7 million shares and warrants, subject to
pro-ration. It is expected that the transaction will close by December 31, 2001.
Investment Income/(Loss)
The components of investment income/(loss) are as follows:
Three Months Ended
Sept. 30
(In millions) 2000 2001
------------------------------------------------------------------------------------------
Dividends $ 97 $ 88
Interest 431 449
Recognized net gains/(losses) on investments 599 (1,517)
------------------------------------------------------------------------------------------
Investment income/(loss) $1,127 $ (980)
==========================================================================================
Contingencies
The Company is a defendant in U.S. v. Microsoft, a lawsuit filed by the
Antitrust Division of the U.S. Department of Justice (DOJ) and a group of
eighteen state Attorneys General alleging violations of the Sherman Act and
various state antitrust laws. After the trial, the District Court entered
Findings of Fact and Conclusions of Law stating that Microsoft had violated
Sections 1 and 2 of the Sherman Act and various state antitrust laws. A Judgment
was entered on June 7, 2000 ordering, among other things, the breakup of
Microsoft into two companies. The Judgment was stayed pending an appeal. On June
28, 2001, the U.S. Court of Appeals for the District of Columbia Circuit
affirmed in part, reversed in part, and vacated the Judgment in its entirety and
remanded the case to the District Court for a new trial on one Section 1 claim
and for entry of a new judgment consistent with its ruling. In its ruling, the
Court of Appeals substantially narrowed the bases of liability found by the
District Court, but affirmed some of the District Court's conclusions that
Microsoft had violated Section 2. On September 6, 2001, the plaintiffs announced
that on remand they will not ask the Court to break Microsoft up, that they will
seek imposition of conduct remedies, and that they will not retry the one
Section 1 claim returned to the District Court by the Court of Appeals. On
August 7, 2001, Microsoft petitioned the Supreme Court for a writ of certiorari
to review the appellate court's ruling concerning its disqualification of the
District Court judge. The Supreme Court denied the petition on October 9, 2001.
Microsoft may petition the Supreme Court to review other aspects of the
appellate court's decision after final judgment is entered. On October 12, 2001,
the trial court held a status conference and entered orders requiring the
parties to engage in settlement discussions until November 2, 2001. If no
settlement is reached by that date, the parties will begin discovery leading to
an evidentiary hearing on remedies on March 11, 2002.
In other ongoing investigations, the DOJ and several state Attorneys General
have requested information from Microsoft concerning various issues. In
addition, the European Commission has instituted proceedings in which it alleges
that Microsoft has failed to disclose information that Microsoft competitors
claim they need to interoperate fully with Windows 2000 clients and servers and
has engaged in discriminatory licensing of such technology. The remedies sought,
though not fully defined, include mandatory disclosure of Microsoft Windows
operating system technology and imposition of fines. Microsoft denies the
European Commission's allegations and intends to contest the proceedings
vigorously.
--------------------------------------------------------------------------------
7
A large number of overcharge class action lawsuits have been initiated against
Microsoft. These cases allege that Microsoft has competed unfairly and
unlawfully monopolized alleged markets for operating systems and certain
software applications and seek to recover alleged overcharges that the
complaints contend Microsoft charged for these products. Microsoft believes the
claims are without merit and is vigorously defending the cases. To date,
Microsoft has won dismissals of all claims for damages by indirect purchasers
under Federal law and in 15 separate state court proceedings. Claims on behalf
of foreign purchasers have also been dismissed. Plaintiffs have appealed most of
these rulings. While no trials or other proceedings have been held concerning
any liability issues, courts in several states have ruled that these cases may
proceed as class actions, while one court has denied class certification status
to the claims in that state proceeding.
A purported class action employment discrimination case is pending against
Microsoft, Donaldson v. Microsoft, a single action consolidating three
separately filed class action complaints filed in October 2000 and February 2001
in Federal court in Seattle, Washington. The Donaldson plaintiffs purport to
represent a nationwide class of current and former African American and female
Microsoft employees and seek injunctive relief, an unspecified amount of
compensatory and punitive damages, and attorneys' fees. The Donaldson plaintiffs
allege that Microsoft's compensation, evaluation, and promotion policies are
discriminatory with respect to the plaintiffs in violation of Title VII of the
1964 Civil Rights Act and 42 U.S.C. (S) 1981. A class certification hearing was
held before the district court on October 19, 2001 and a decision is expected
shortly. Microsoft denies the allegations and is vigorously defending the case.
The Securities and Exchange Commission is conducting a non-public investigation
into the Company's accounting reserve practices. 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.
Segment Information
(In millions)
--------------------------------------------------------------------------------------------------------------
Desktop and Consumer
Enterprise Software, Consumer
Three Months Software Services, Commerce Reconciling
Ended Sept. 30 and Services and Devices Investments Other Amounts Consolidated
--------------------------------------------------------------------------------------------------------------
2000
Revenue $5,119 $ 463 $ 63 $156 $ (35) $5,766
Operating income (loss) 3,385 (261) (39) 20 (328) $2,777
--------------------------------------------------------------------------------------------------------------
2001
Revenue $5,433 $ 484 $ 94 $126 $ (11) $6,126
Operating income (loss) 3,413 (318) 6 16 (220) 2,897
--------------------------------------------------------------------------------------------------------------
Desktop and Enterprise Software and Services Revenue:
Three Months Ended
Sept. 30
(In millions) 2000 2001
----------------------------------------------------------------------------
Desktop Applications $2,075 $2,212
Desktop Platforms 1,992 2,016
----------------------------------------------------------------------------
Desktop Software 4,067 4,228
Enterprise Software and Services 1,052 1,205
----------------------------------------------------------------------------
Total Desktop and Enterprise Software
and Services $5,119 $5,433
----------------------------------------------------------------------------
Microsoft has four segments: Desktop and Enterprise Software and Services;
Consumer Software, Services, and Devices; Consumer Commerce Investments; and
Other. Desktop and Enterprise Software and Services operating
--------------------------------------------------------------------------------
8
segment includes Desktop Applications, Desktop Platforms, and Enterprise
Software and Services. Desktop Applications include Microsoft Office; Microsoft
Project; Visio; client access licenses for Windows NT Server and Windows 2000
Server, Exchange, and BackOffice; Microsoft Great Plains; and bCentral. Desktop
Platforms include Windows 2000 Professional, Windows NT Workstation, Windows
Millennium Edition (Windows Me), Windows 98, and other desktop operating
systems. Enterprise Software and Services includes Server Platforms; Server
Applications; developer tools and services; and Enterprise services. Consumer
Software, Services, and Devices operating segment includes MSN Internet access,
MSN network services, PC and online games, Xbox, learning and productivity
software, mobility and embedded systems. Consumer Commerce Investments operating
segment includes Expedia, Inc., the HomeAdvisor online real estate service, and
the CarPoint online automotive service. Other primarily includes Hardware and
Microsoft Press.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including internal profit and
loss statements (P&Ls) prepared on a basis not consistent with generally
accepted accounting principles. Assets are not allocated to segments for
internal reporting presentations.
Reconciling items for revenue include certain elements of unearned revenue and
the treatment of certain channel inventory amounts and estimates. In addition to
the reconciling items for revenue, reconciling items for operating income/(loss)
include general and administrative expenses ($170 million in 2000 and $187
million in 2001), certain research expenses ($39 million in 2000 and $37 million
in 2001), and other corporate level adjustments. The internal P&Ls use
accelerated methods of depreciation and amortization. Additionally, losses on
equity investees and minority interest are classified in operating income for
internal reporting presentations.
--------------------------------------------------------------------------------
9
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
By: /S/ JOHN G. CONNORS
-----------------------------
John G. Connors
Senior Vice President; Chief
Financial Officer
(Principal Financial and
Accounting Officer
and Duly Authorized Officer)
Date: March 25, 2002
10