================================================================================
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 December 31, 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 Six Months Ended December 31, 2001" of
Part I--Financial Information of its Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2001 to correct a clerical error in the
amount of Unearned revenue formerly reported as $3,825 million and the amount
of Recognition of unearned revenue formerly reported as $(2,863) million for
the Six Months Ended December 31, 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 December 31, 2001.
================================================================================
Part I. Financial Information
Item 1. Financial Statements
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
-------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
2000 2001 2000 2001
-------------------------------------------------------------------------------------------------------------------
Revenue $6,550 $7,741 $12,316 $13,867
Operating expenses:
Cost of revenue 864 1,544 1,689 2,428
Research and development 990 1,044 1,946 2,057
Sales and marketing 1,290 1,479 2,328 2,624
General and administrative 212 833 382 1,020
-------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,356 4,900 6,345 8,129
-------------------------------------------------------------------------------------------------------------------
Operating income 3,194 2,841 5,971 5,738
Losses on equity investees and other (28) (37) (80) (67)
Investment income/(loss) 751 553 1,878 (427)
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,917 3,357 7,769 5,244
Provision for income taxes 1,293 1,074 2,564 1,678
-------------------------------------------------------------------------------------------------------------------
Income before accounting change 2,624 2,283 5,205 3,566
Cumulative effect of accounting change (net of
income taxes of $185) - - (375) -
-------------------------------------------------------------------------------------------------------------------
Net income $2,624 $2,283 $ 4,830 $ 3,566
===================================================================================================================
Basic earnings per share:
Before accounting change $0.49 $0.42 $0.98 $0.66
Cumulative effect of accounting change - - (0.07) -
-------------------------------------------------------------------------------------------------------------------
$0.49 $0.42 $0.91 $0.66
===================================================================================================================
Diluted earnings per share:
Before accounting change $0.47 $0.41 $0.93 $0.64
Cumulative effect of accounting change - - (0.06) -
-------------------------------------------------------------------------------------------------------------------
$0.47 $0.41 $0.87 $0.64
===================================================================================================================
Weighted average shares outstanding:
Basic 5,330 5,395 5,325 5,396
===================================================================================================================
Diluted 5,570 5,556 5,572 5,561
===================================================================================================================
See accompanying notes.
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1
MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
----------------------------------------------------------------------------------------------------------
June 30 Dec. 31
2001 2001 (1)
----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $3,922 $5,256
Short-term investments 27,678 32,973
----------------------------------------------------------------------------------------------------------
Total cash and short-term investments 31,600 38,229
Accounts receivable, net of allowance for doubtful
accounts of $174 and $204 3,671 5,095
Deferred income taxes 1,522 1,972
Other 2,417 2,692
----------------------------------------------------------------------------------------------------------
Total current assets 39,210 47,988
Property and equipment, net 2,309 2,240
Equity and other investments 14,361 12,212
Goodwill 1,511 1,511
Intangible assets, net 401 344
Deferred income taxes - 141
Other long-term assets 1,038 951
----------------------------------------------------------------------------------------------------------
Total assets $58,830 $65,387
==========================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $1,188 $1,229
Accrued compensation 742 899
Income taxes 1,468 2,396
Short-term unearned revenue 4,395 5,300
Other 1,461 1,743
----------------------------------------------------------------------------------------------------------
Total current liabilities 9,254 11,567
Long-term unearned revenue 1,219 1,321
Deferred income taxes 409 -
Other long-term liabilities 659 951
Commitments and contingencies
Stockholders' equity:
Common stock and paid-in capital -
shares authorized 12,000; outstanding 5,383 and 5,403 28,390 30,175
Retained earnings, including accumulated other comprehensive
income of $587 and $754 18,899 21,373
----------------------------------------------------------------------------------------------------------
Total stockholders' equity 47,289 51,548
----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $58,830 $65,387
==========================================================================================================
(1) Unaudited
See accompanying notes.
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2
MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
Six Months Ended Dec. 31
-----------------------
2000 2001
-------- --------
Operations
Net income............................................ $ 4,830 $ 3,566
Cumulative effect of accounting change, net of tax.... 375 --
Depreciation, amortization, and other noncash items... 489 577
Net recognized (gains)/losses on investments.......... (843) 1,462
Stock option income tax benefits...................... 897 751
Deferred income taxes................................. 996 (861)
Unearned revenue...................................... 3,288 4,790
Recognition of unearned revenue....................... (2,980) (3,828)
Accounts receivable................................... (898) (1,399)
Other current assets.................................. (448) 97
Other long-term assets................................ (31) (25)
Other current liabilities............................. 155 1,602
Other long-term liabilities........................... 49 222
-------- --------
Net cash from operations........................... 5,879 6,954
-------- --------
Financing
Common stock issued................................... 698 786
Common stock repurchased.............................. (3,225) (1,266)
Repurchases of put warrants........................... (405) --
-------- --------
Net cash used for financing........................ (2,932) (480)
-------- --------
Investing
Additions to property and equipment................... (517) (322)
Purchases of investments.............................. (26,525) (32,439)
Maturities of investments............................. 2,970 2,290
Sales of investments.................................. 19,818 25,322
-------- --------
Net cash used for investing........................ (4,254) (5,149)
-------- --------
Net change in cash and equivalents.................... (1,307) 1,325
Effect of exchange rates on cash and equivalents...... (8) 9
Cash and equivalents, beginning of period............. 4,846 3,922
-------- --------
Cash and equivalents, end of period................... $ 3,531 $ 5,256
======== ========
3
MICROSOFT CORPORATION
STOCKHOLDERS' EQUITY STATEMENTS
(In millions)(Unaudited)
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
2000 2001 2000 2001
-------------------------------------------------------------------------------------------------------------------------
Common stock and paid-in capital
Balance, beginning of period $26,661 $29,296 $23,195 $28,390
Common stock issued 656 432 3,711 1,041
Common stock repurchased (97) (23) (220) (141)
Repurchases of put warrants (486) - (405) -
Stock option income tax benefits 444 336 897 751
Other, net - 134 - 134
-------------------------------------------------------------------------------------------------------------------------
Balance, end of period 27,178 30,175 27,178 30,175
-------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of period 18,682 19,209 18,173 18,899
-------------------------------------------------------------------------------------------------------------------------
Net income 2,624 2,283 4,830 3,566
Other comprehensive income:
Cumulative effect of accounting change - - (75) -
Net gains/(losses) on derivative instruments 67 8 499 (43)
Net unrealized investments gains/(losses) (682) 105 (1,166) 151
Translation adjustments and other (71) 20 (12) 59
-------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,938 2,416 4,076 3,733
Common stock repurchased (1,376) (252) (3,005) (1,259)
-------------------------------------------------------------------------------------------------------------------------
Balance, end of period 19,244 21,373 19,244 21,373
-------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $46,422 $51,548 $46,422 $51,548
=========================================================================================================================
See accompanying notes.
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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 building
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 second quarter and first six months of
fiscal 2001 adjusted to exclude amortization expense (net of taxes) is as
follows:
Three Months Six Months
Ended Ended
Dec. 31 Dec. 31
(In millions, except earnings per share) 2000 2000
------------------------------------------------------------------------------------
Net income:
Reported net income $2,624 $4,830
Goodwill amortization 62 118
Equity method goodwill amortization 7 12
------------------------------------------------------------------------------------
Adjusted net income $2,693 $4,960
====================================================================================
Basic earnings per share:
Reported basic earnings per share $0.49 $0.91
Goodwill amortization 0.01 0.02
Equity method goodwill amortization - -
------------------------------------------------------------------------------------
Adjusted basic earnings per share $0.50 $0.93
====================================================================================
Diluted earnings per share:
Reported diluted earnings per share $0.47 $0.87
Goodwill amortization 0.01 0.02
Equity method goodwill amortization - -
------------------------------------------------------------------------------------
Adjusted diluted earnings per share $0.48 $0.89
====================================================================================
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5
During the second quarter and first six months of fiscal 2002, no goodwill was
acquired, impaired, or written off. As of December 31, 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. There
were no material acquisitions of intangible assets during the second quarter of
fiscal 2002. During the first six months of fiscal 2002, the Company acquired
$28 million in contract-based intangible assets, $13 million in technology-based
intangible assets, and $1 million in marketing-related and other intangible
assets, which will be amortized over approximately 3 years. No significant
residual value is estimated for these intangible assets. Intangible assets
amortization expense was $51 million for the second quarter of fiscal 2002 and
$99 million for the first six months of fiscal 2002. The components of
intangible assets were as follows:
June 30, 2001 Dec. 31, 2001
-------------------------------------- -------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In millions) Amount Amortization Amount Amortization
-----------------------------------------------------------------------------------------------------------------
Contract-based $407 $(177) $435 $(240)
Technology-based 157 (27) 170 (49)
Marketing-related and other 83 (42) 84 (56)
-----------------------------------------------------------------------------------------------------------------
Intangible assets $647 $(246) $689 $(345)
=================================================================================================================
Amortization expense for the net carrying amount of intangible assets at
December 31, 2001 is estimated to be $90 million for the remainder of fiscal
2002, $125 million in fiscal 2003, $88 million in fiscal 2004, $38 million in
fiscal 2005, and $3 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 Six Months Ended
Dec. 31 Dec. 31
2000 2001 2000 2001
------------------------------------------------------------------------------------------------------------------------------
Income before accounting change (A) $2,624 $2,283 $5,205 $3,566
Cumulative effect of accounting change - - (375) -
------------------------------------------------------------------------------------------------------------------------------
Net income available for common shareholders $2,624 $2,283 $4,830 $3,566
==============================================================================================================================
Weighted average outstanding shares of common stock (B) 5,330 5,395 5,325 5,396
Dilutive effect of:
Put warrants 31 - 20 -
Employee stock options 209 161 227 165
------------------------------------------------------------------------------------------------------------------------------
Common stock and common stock equivalents (C) 5,570 5,556 5,572 5,561
==============================================================================================================================
Earnings per share before accounting change:
Basic (A/B) $0.49 $0.42 $0.98 $0.66
==============================================================================================================================
Diluted (A/C) $0.47 $0.41 $0.93 $0.64
==============================================================================================================================
Revenue Recognition
Revenue from products licensed to original equipment manufacturers (OEMs) has
historically been recorded when OEMs ship licensed products to their customers.
With the introduction of Windows XP in the second quarter of
--------------------------------------------------------------------------------
6
fiscal 2002 and the implementation of a new internet-based system for granting
licenses to OEMs on a just in time basis, revenue for certain products is
recorded when the OEMs receive the licensed product, rather than when they ship
licensed products to their customers. The effect of this change in the second
quarter of fiscal 2002 was not material.
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 December 31, 2001, unearned revenue was $6.62 billion, compared to $5.12
billion at December 31, 2000. Desktop Applications unearned revenue was $2.88
billion, compared to $1.94 billion at December 31, 2000. Desktop Platforms
unearned revenue was $2.96 billion, compared to $2.49 billion at December 31,
2000. Enterprise Software and Services unearned revenue was $493 million,
compared to $393 million at December 31, 2000. Unearned revenue associated with
Consumer Software, Services, and Devices and Other was $287 million, compared to
$304 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 December quarter, the Company repurchased 2.7 million shares of common stock
for $141 million, compared to 22.8 million shares for $1.5 billion in the
comparable quarter of the prior year. For the first six months of fiscal 2002,
the Company repurchased 24.3 million shares of common stock for $1.3 billion,
compared to 48.2 million shares of common stock for $3.2 billion in the
comparable period of the prior year. In addition, 2.6 million shares of common
stock were acquired in the second quarter of fiscal 2002 under a structured
stock repurchase transaction. The Company entered into the structured stock
repurchase transaction in fiscal 2001 and agreed to acquire 5.1 million of its
shares (half in October 2001 and half in June 2002) in exchange for an up-front
net payment of $264 million.
Operational Transactions
On December 19, 2001, AT&T and Comcast Corporation announced a definitive
agreement to combine AT&T Broadband with Comcast in a new company to be called
AT&T Comcast Corporation. In conjunction with the transaction, Microsoft has
agreed to exchange its AT&T 5% convertible preferred debt for approximately 115
million shares of AT&T Comcast Corporation. It is expected that the transaction
will close by December 31, 2002.
Investment Income/(Loss)
The components of investment income/(loss) are as follows:
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
(In millions) 2000 2001 2000 2001
-------------------------------------------------------------------------------------------------------------------
Dividends $ 88 $ 81 $ 185 $ 169
Interest 419 417 850 866
Recognized net gains/(losses) on investments 244 55 843 (1,462)
-------------------------------------------------------------------------------------------------------------------
Investment income/(loss) $751 $553 $1,878 ($427)
===================================================================================================================
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
--------------------------------------------------------------------------------
7
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
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. Microsoft entered into a settlement with the United States on November 2,
2001. Nine states (New York, Ohio, Illinois, Kentucky, Louisiana, Maryland,
Michigan, North Carolina and Wisconsin) agreed to settle on substantially the
same terms on November 6, 2001. Nine states and the District of Columbia
continue to litigate the remedies phase of United States v. Microsoft. The Court
will now decide whether to approve the settlement as being in the public
interest. With respect to the non-settling states remedies proceeding, the Court
has scheduled an evidentiary hearing to begin on March 11, 2002. The
non-settling States are seeking imposition of a remedy that would impose much
broader restrictions on Microsoft's business than the proposed settlement with
the Department of Justice and nine other states.
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.
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. On November 20, 2001, Microsoft
announced that it and lead counsel for the Federal plaintiffs reached an
agreement to settle all of these cases. On January 11, 2002, the District Court
announced its decision not to approve the proposed settlement. The Company has
recorded a contingent liability of approximately $660 million representing
Management's estimate of the costs of resolving the contingency. The Company
intends to continue vigorously defending these lawsuits.
Netscape Communications Inc., a subsidiary of AOL-Time Warner Inc., filed an
antitrust law suit against Microsoft on January 22, 2002 in Federal court in the
District of Columbia, alleging a number of claims relating to competition with
Netscape's Navigator browser. Netscape seeks injunctive relief, treble damages
and its fees and costs. Microsoft denies these allegations and will vigorously
defend this action.
A purported class action employment discrimination case filed in October 2000 in
Federal court in Seattle, Washington against Microsoft, Donaldson v. Microsoft,
was denied class certification status by a Federal judge on November 16, 2001.
The Donaldson plaintiffs purported to represent a nationwide class of current
and former African American and female Microsoft employees and alleged that
Microsoft's compensation, evaluation, and promotion policies were discriminatory
with respect to the plaintiffs in violation of Title VII of the 1964 Civil
Rights Act and 42 U.S.C. ss. 1981. The court disagreed, finding no statistical
support for plaintiffs' allegations and held that Microsoft's managerial system
is not flawed. Following the court's ruling, the parties resolved their
differences and the case is expected to be dismissed shortly.
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.
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8
Segment Information
(In millions)
--------------------------------------------------------------------------------------------------------------------------
Desktop and Consumer
Enterprise Software, Consumer
Three Months Software Services, Commerce Reconciling
Ended Dec. 31 and Services and Devices Investments Other Amounts Consolidated
--------------------------------------------------------------------------------------------------------------------------
2000
Revenue $5,967 $ 479 $ 64 $188 $(148) $6,550
Operating income (loss) 3,982 (436) (25) 31 (358) 3,194
--------------------------------------------------------------------------------------------------------------------------
2001
Revenue $6,435 $1,063 $ 91 $163 $ (11) $7,741
Operating income (loss) 4,098 (465) 6 22 (820) 2,841
--------------------------------------------------------------------------------------------------------------------------
Desktop and Consumer
Enterprise Software, Consumer
Six Months Software Services, Commerce Reconciling
Ended Dec. 31 and Services and Devices Investments Other Amounts Consolidated
--------------------------------------------------------------------------------------------------------------------------
2000
Revenue $11,086 $ 942 $127 $344 $ (183) $12,316
Operating income (loss) 7,367 (697) (64) 51 (686) 5,971
--------------------------------------------------------------------------------------------------------------------------
2001
Revenue $11,868 $1,547 $185 $289 $ (22) $13,867
Operating income (loss) 7,511 (783) 12 38 (1,040) 5,738
--------------------------------------------------------------------------------------------------------------------------
Desktop and Enterprise Software and Services Revenue:
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
(In millions) 2000 2001 2000 2001
-----------------------------------------------------------------------------------------------------------------
Desktop Applications $2,526 $2,451 $4,601 $4,663
Desktop Platforms 2,181 2,678 4,173 4,694
-----------------------------------------------------------------------------------------------------------------
Desktop Software 4,707 5,129 8,774 9,357
Enterprise Software and Services 1,260 1,306 2,312 2,511
-----------------------------------------------------------------------------------------------------------------
Total Desktop and Enterprise Software
and Services $5,967 $6,435 $11,086 $11,868
-----------------------------------------------------------------------------------------------------------------
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 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 XP Professional and Home, 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
Xbox video game system, MSN Internet access, MSN network services, PC and online
games, 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,
--------------------------------------------------------------------------------
9
including profit and loss statements (P&Ls) prepared on a basis not consistent
with U.S. 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)
for the three months ended December 31, include general and administrative
expenses ($212 million in 2000 and $833 million in 2001), certain research
expenses ($35 million in 2000 and $40 million in 2001), and other corporate
level adjustments. For the six months ended December 31, reconciling items for
operating income (loss) include general and administrative expenses ($382
million in 2000 and $1.02 billion in 2001), certain research expenses ($74
million in 2000 and $77 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 interests are classified
in operating income for internal reporting presentations.
Subsequent Event
On February 4, 2002, USA Networks, Inc. (USA) shareholders approved the merger
transaction in which USA became the controlling shareholder of Expedia, Inc. As
part of the transaction, Microsoft transferred all of its 33.7 million Expedia
shares and warrants. In return, Microsoft received 20.1 million shares of USA
common stock, 12.8 million shares of USA cumulative convertible preferred stock,
and 14.2 million USA warrants.
--------------------------------------------------------------------------------
10
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
11