Microsoft 1998 Annual Report
2
To our s hareholders
7
W hat it m eans
15
Financ ial Rev iew
39
Direc t ors and Of f ic ers
40
I nv est or Relat ions
Financial Highlights
I n m i l l i o n s , e xc e p t e a r ni ng s p e r s h a r e
Year Ended June 30
Rev enue
Net inc om e
Dilut ed earnings per s hare 1
Cas h and s hort -t erm inv es tm ent s
Tot al as s et s
St oc k holders ’ equit y
1
1994
1995
1996
1997
1998
$4, 649
1, 146
0. 47
3, 614
5, 363
4, 450
$5, 937
1, 453
0. 58
4, 750
7, 210
5, 333
$ 8, 671
2, 195
0. 86
6, 940
10, 093
6, 908
$11, 358
3, 454
1. 32
8, 966
14, 387
10, 777
$14, 484
4, 490
1. 67
13, 927
22, 357
16, 627
D i l ut e d e a r ni ng s p e r s h a r e h a v e b e e n r e s t a t e d t o r e f l e c t a t w o - f o r - o n e s t o c k s p l i t i n F e b r u a r y 1 9 9 8 .
in classrooms, in business, at home,
and online, our technology is improving
the way we work, live, and learn. what
it means to people everywhere is what
this year’s annual report is all about.
1
to our shareholders
Microsoft had another remarkable year in 1998. We made major advances in all
our key businesses.
The demand for great software that helps people work,
communicate, and learn is stronger than ever.
Our products are doing well
because they deliver on these needs.
Microsoft® Windows® 98 is proving a great success. Customers appreciate its
ability to work better and play better, while its robustness means that Windows 98
is generating less than half the customer calls of its predecessor. Integrated with
the latest Internet Explorer technology, Windows 98 helps our customers leverage
the interactivity of the Internet with the intelligence of the PC. Microsoft Windows
NT® Workstation is making deeper inroads onto the desktop, based on its productivity, reliability, and lower total cost of ownership. And Microsoft Windows CE, a
compact version of the Windows operating system designed for a wide range of
intelligent devices, is finding its way into everything from interactive televisions to
hand-held computers.
Licensed sales of Microsoft Office 97 are strong, as our productivity applications continue to set the standard for features, functionality, and integration.
Microsoft Office 2000, which is scheduled to come out in the first half of 1999, will
take each of these factors to a significantly higher level, offering a simpler, personalized interface that learns each user’s working style and adapts to it, plus
many other productivity-enhancing features.
Likewise our development tools
continue to lead the market with the release of Visual Studio® 6.0.
Microsoft Windows NT Server and Microsoft BackOffice® applications continue to make solid progress in the marketplace, and are now the clear enterprise
solution of choice over the various UNIX-based platforms. Windows NT 5.0 will
raise our platform’s scalability to even higher levels, while offering customers the
lowest possible total cost of ownership. Growth in the Microsoft SQL Server ™
database in fiscal 1998 continued, and the launch of SQL Server 7.0 will maintain
this momentum. In many installations our enterprise solutions already deliver the
level of performance achieved by mainframes, combined with the benefits of the
low cost PC model. Our goal now is to take that model even deeper into the
mission-critical computing market.
2
Our interactive media and services strategy continues to advance, focusing
on online services, packaged software, and hardware. In Expedia™ travel service,
CarPoint™ automotive service, Hotmail, Microsoft Investor, Gaming Zone, and
Microsoft HomeAdvisor™ real estate service we are building some of the most
powerful brands on the Internet. Our strategy going forward is to unify these sites
around the MSN™ brand, so customers can easily reach all of them via a single
portal, msn.com. Combined with our packaged-software products, among them
Microsoft Money, Encarta®, and games such as Flight Simulator, our strategy is to
break down the barriers between online and offline products and services, making
it even simpler and more enjoyable for our customers to experience the power of
the Internet.
Another important effort for us is bringing the power of software and the Internet to the television with our WebTV® product. We plan to more than double the
installed base to over one million users during the next year based on the very
positive word-of-mouth this product has generated.
Microsoft intends to invest heavily in all these businesses, in the firm belief
that online services will eventually be a key element of our relationship with
customers. But as I wrote last year, online is still at an early stage of development. However, we are learning fast and I am seeing increasing synergy between
our online work and our software products.
The power of innovation
Our product goals require breakthrough innovation. During fiscal 1999 Microsoft
will invest more than $3 billion in research and development, broadly defined. Our
research centers in Redmond, San Francisco, and Cambridge, England, now
employ experts in everything from graphics to decision theory and advanced
linguistics.
Much of Microsoft’s research and development is focused on ma king our products easier to use, even as the underlying software grows
more complex, so our customers don’t have to learn as many utilities
and commands. Simplifying the user interface is our top priority. The
adaptive user interface in Microsoft Office 2000 will tailor each copy of
the application to the individual customer, pers onalizing menus so that
your copy of Office 2000 helps you use it in the most productive way.
Natural language processing automatically detects which language you
3
are typing in, and assigns the appropriate proofing tools and user
interface. If you inadvertently delete some of the application’s files, it’s
smart enough to repair the damage.
Microsoft will also unify and simplify how PCs and networks store and handle
information.
At present, information is scattered about file systems, message
stores, Web caches, directory services, and databases. This is complicated for
developers and system managers, and confusing for customers.
Sharing a
calendar across the Internet, or personal information across Web sites, is very
difficult.
By unifying storage across all these media, Microsoft will help make
information anytime, anywhere a reality.
As consumers require all their infor-
mation to be accessible from any Internet device and any location, the boundary
between Web sites and software products will blur.
In time, computers will see, speak, read handwriting, listen, and learn. We
will include these new input techniques into our products. Microsoft SQL Server
7.0, for example, already has a natural language interface that allows our customers to search their databases using questions phrased in everyday English.
Caring about customers
To build on our already strong commitment to customers, we plan to increase by
$200 million our spending on technical support, information-technology consultants, and other customer initiatives. We are listening carefully and constantly to
our customers and partners to really understand what they want from our products
and services, both today and in the future. The feedback loop drives our priorities.
This effort is being led by Steve Ballmer, who was promoted to President of
Microsoft in July. Steve’s job is to ensure that every dollar we spend on technology, product development, marketing, and support is focused on delighting our
customers. In recognition of just how central to Microsoft’s thinking its customers
are, in this year’s annual report a few of them will tell you just what Microsoft and
its products mean to their lives.
The coming year will test us on many fronts. We need to make our software
simpler and easier to deploy as well as making it more powerful. Pressure from
competitors and regulators is intensifying. PC sales growth is slowing and a lot of
the growth is in the consumer segment where software sales are lower than in the
business segment. The growing size and diversity of our product portfolio means
that we have to execute across a broadening front.
4
As Microsoft approaches the 21st century it faces many challenges and risks,
but the opportunities are greater than ever. With continued innovation and hard
work, I am convinced that we will reap the rewards. I appreciate the unwavering
support and trust of our shareholders in these exciting times.
Bill Gates
5
An IT professional in Wisconsin. PC
makers in Texas. A small business
in Georgia and a car dealer going
online in Michigan. A high-tech
startup in California. A young mother
in D.C., and a schoolteacher in Kentucky. Our technology has helped
improve their businesses and their
lives. This is what it means to them.
6
it means we’re connected
it means a strong foundation
Ge n er al E l ec tr i c c on s o l i da te d m or e t ha n 2 0
s e p ar at e e -m a i l s ys t em s w h e n i t s ta n d ar di z e d o n
Mi c r os of t E xc h an g e, w hi c h n o w l i nk s n e arl y
15 0 ,0 0 0 em p l o ye es at 2 ,0 0 0 l o c ati o ns w or l d w i de .
T he r e s ul ti ng i m pr ov em en ts i n c om m u ni c a ti o n a n d
w o rk fl o w a re no t o nl y h el pi n g G E o p er a te m o r e
ef fi c i e nt l y t od a y, b ut h av e p os i ti on e d i t f or
c o nti n ui ng gr o w t h i nt o t he ne x t c e nt u r y.
GENERAL ELECTRIC
C om pa q’ s l o ng - t e rm p ar t n e rs hi p wi t h Mi c r os of t
of f e rs ou r c us t om er s c om pl et e, op t i m i z e d s ol u t i on s
f o r t h ei r p a rt i c u l a r e nv i r onm e nt s ac ro s s t h e
bu s i ne s s e n t e r pr i s e. A t C om pa q w e r u n o ur
bu s i ne s s o n a Mi c r os of t i nf r as t r uc t u r e gi v i n g u s
c om pl et e f l e xi bi l i t y, s c al ab i l i t y, an d c om p at i bi l i t y.
T he u l t i m at e e f f ec t of a l l t h i s e f f i c i e nc y? C om pa q
i s a m or e c om p et i t i v e c om pa n y an d i s a bl e t o
pr ov i d e o u r c u s t om e rs wi t h be t t er pr o du c t s an d
f a s t er t i m e -t o -s ol ut i o n.
COMPAQ COMPUT ER CORPORATION
W ei Speagl e
Lead Si x Sig ma Black Belt
MR Sy ste m Engineering
GE Medical Syste ms
M i l wa u k e e , W i s c o n s i n
John T. Rose
Senior Vice President
Enterprise Co mputing Group
C o mp a q C o m p u t e r C o r p o r a t i o n
H o u s t o n , T e xa s
the revolution has arrived for
enterprise computing
7
Our ap pro ach to the ente rp ri se
custom er is sim ple: provid e
feature -rich p rod ucts at very
com petitive prices, suppo rt
their pe ople with trai ning, an d
comm it to helping them
develop n e w b usiness oppo rt unities. It’s an approach that is
resonati ng with custom ers.
Two e xam ples: General
Electric standardized o n
Microsoft E xchan ge, an d no w
links 150,000 p eopl e wo rld wide
while Com paq runs thei r enti re
enterprise on a Microsoft
infrastructure.
The app eal is clear.
W indows NT Server an d
W orkstation, along with server
and desktop ap plications, work
togethe r to help custom ers
integrate their entire system s
architecture. The n , they ca n
share docum ents across
divisions, access sales and
custom er service info rm ation,
link orde r entry to m anufactu ring and distributio n, m anage
person nel, an d integ rate
supply chai ns – eve n lau nch
and m anage el ectronic
comm erce ventures – with
softwa re that ad apts to users,
elim inates the difference
bet wee n rem ote and l ocal, and
reduces com ple xity. These are
som e of the m ost powerful
tools ever conceive d to hel p
com panies seam lessly reengin eer th eir o perations for
great er, m ore effective control.
Just as the popularit y of
W indows helpe d m ake PC
com puting m ore po werful, le ss
costly, and easier to m aintai n,
W indows NT is havin g the
sam e effect in the enterp rise
com puting space. W ith
thousands of com panies at
work on e nterprise solutio ns
based on o ur W indo ws NT
envi ronm ent, custom ers in any
size business will be a ble to
choose from an unprecede nted
num ber of applicatio ns and
support o rga niz ations.
As extensi ve as these co m bined efforts are, they share
one critical com ponent: the
custom er. Devel opin g an
understandi ng of our custo mers’ specific business needs is
the onl y way in which we can
pro vide the ans wers that trul y
solve custom ers’ problem s –
helping organi zations m ove
from the som etim es random
m ix of systems and program s
deployed today to a tru l y
integrated m ethod of collecting
and applyi ng data. W e are
comm itted to having the
resources and the m indset to
pro vide our custom ers with a
com prehensive soluti on. In
fiscal 1999, this will be the
focus of thousands of Microsoft
peopl e, worldwi de. An d
further, m ore than 270,000
independent Microsoft Certif ied
Professionals will share this
goal by working on custom er
satisfaction, one -on -one.
These rel ationships serve
another long-term goal:
feedback from our custom ers’
e xp eriences wit h our soft ware
is key in develo pi ng new
feature sets and functional
enhancem ents.
Another way we hel p our
custom ers is to follow our own
advice. Microsoft itself is a
laboratory for our custom ers.
W e have deployed Microsoft
technology throughout our
com pany: from order ent ry t o
virtual m eetings, and distri buting inform ation through our
corporate intranet. W e are
running a m ulti -billion doll ar
enterprise on a Microsoft
infrastructure. In our financ e,
procurem ent, hum an r esources, and other depar t m ents, Microsoft has experienced increased efficiency,
im proved comm unication and
workflow, and uniform ly lower
costs. As we confront and
resolve problem s, we’re not
only helpi ng ourselves, we’re
helping our custom ers realize
the m axim um benefit our
products offer.
The potential of this techno l ogy and what it offers an
enterprise is just now beco m ing clear. Innovations are
arri ving at an accelerating
pace. Microsoft E xchange
Server offers the stability,
storage, and security to
enhance comm unication and
collaboration on nothi n g short
of a global scale. Increased
scalability and natural la n guage capabil ity highlight our
upcom ing SQL 7.0 database
program . Office 2000 will
adapt to indivi dual user
preferences and will perform a
vari ety of routine tasks
autom atically. These are
evidence of the way in which
we are engi neering software to
provide our custom ers with an
increased sense of im m ediacy
and productivity in thei r work.
W e are focused on putting the
productivity and innovation
software enables at the cent er
of everythi ng an enterprise
does. To accom plish this we
are int roducing a broad range
of com petitively priced
products to a m arket that has
historically been offered onl y a
narrow selection of the high
priced products of other
com panies. Our goal is
nothing short of he lping our
custom ers build a Digital
Nervous System tailored
specifically around their needs
and capable of reaching out to
every aspect of their oper a tions to create a profoundly
rich and effective infrastru cture. And in m aking the
software transpa rent, and the
support effective, our custo m ers can concentrate full y on
running thei r businesses and
responding to opportuniti es in
ways that gi ve them new
advantages, every day, in
every aspect of their oper a tions.
8
it means opportunity
it means working smarter
W e’ re c om m i tt ed t o C arP oi nt an d to Int e rn e t
c om m er c e . W e’ v e s ee n i m p r ov em e nt s ev e r y d a y,
i nc l u di n g hi gh e r q ual i t y s al es l e ad s . Mi c r os o f t h as
be e n s u p po r ti v e. W e’ v e s h a re d p r obl em s an d
op p or t un i ti es , m ak i n g o ur r el a ti on s hi p f e el l i k e a
re al p a rt n er s h i p . E s p ec i al l y b e c a us e w e al s o s ha r e
th e v i s i o n t o m ak e c a r b u yi n g e as i e r.
T he r e ar e s o m an y c a p a bi l i t i es w e’ v e gai n e d
t h a nk s t o S m al l B us i n es s S e rv e r, i t ’ s h ar d t o k n o w
w h er e t o s t ar t . F r om l au n c hi n g an d m a na gi n g o ur
o w n W eb s i t e t o s h a ri ng s p ec i f i c a t i o n s an d
dr a w i n gs w i t h o ur s up pl i e rs i n E ur o pe an d o u r
c u s t om e rs a l l ov e r t h e w or l d , w e’ re m o r e ef f i c i e nt
an d j u s t e nj o yi n g t he bu s i ne s s : Mi c r os of t t e c hn o l o g y r e al l y m ak es i t a l l w o rk .
JEROME-DUNCAN FORD
ASSOCIATED IMPORT S
Gail Duncan
President
J e r o me - D u n c a n F o r d
Sterling Heights, Michigan
Rob W orden
O p e r a t i o n s / P r o je c t M a n a g e r
Associated I mport s
( a r c h i t e c t u r a l s t o n e wo r k )
Atlanta, Georgia
with tools specifically
designed for small business,
everything is possible
9
Personall y or p rofession ally,
ask any sm all business own er
about thei r busin ess and the y’ll
respon d the sam e wa y: “It’s
not sm all to m e.” And it’s not
sm all to Microsoft, either.
It’s an area in which our
softwa re is sim plifying routin e
tasks and stream lining
operations to allo w business
o wne rs m ore tim e to focus on
the im portant things – enh an cing custom er service, develo ping ne w business, and m aking
better busin ess decisions.
Even, no w and a gain, g ettin g
hom e on tim e. Ask Rob
W orden at Associated Im ports
and he’ ll tell yo u he can n o w
literall y sho w specific patterns
and stone types – onlin e – to
his suppliers in Italy, which
m eans the job is right the first
tim e. Talk to Gail Duncan at
Jerom e-Dunca n Ford abo ut
what he r rel atio nship with
Microsoft m eans to her
deale rship a nd she will tel l you
that it has added a com plete ly
ne w dim ension of conveni en ce
and ease fo r he r cu stom ers.
Our focus for sm all business is
on t wo m utually supp orti ve
ideas. First, as alwa ys, we are
listening closely to custom ers.
It’s essential in findin g wa ys to
m ake our system s and
softwa re becom e m ore
intuitive, m ore productive an d
better inte grate d, so that we
can add function ality a nd ke ep
our p rod ucts affordable.
Second, we’re hel ping Val ue
Added Pro vid ers (VAPs) buil d
their o wn busin esses. That
equates to hu ndreds of
thousands of professionals,
indep end ent of Microsoft,
whose sole pu rp ose is to help
sm all businesses install and
m aintain their inform ation
systems.
There are 2 2 m illion sm all
businesses in the U.S. alone ,
and the y re prese nt such a
dive rse va riet y of nee ds,
issues, and oppo rtunities th at
we are m aking an e xtra effort
to understand those needs and
problem s in very specific
term s. Only then can we
create products that succes sfully address flexibility and
ease of use. Microsoft
BackOffice Sm all Bu siness
Server offers just such
features. Its unique console
interface was specifically
created to sim plify installation
and m anagem ent of a com plete
net work solution. W izards
sim plify the m ost comm on
tasks like adding or del eting
users, m anaging pri nters ,
fa xes, and e -m ail, or m aking
back-ups of vital inform ation.
It m akes connectivity with the
Internet easy whil e also
m aking im plem entation as
efficient as possible. To m ake
support alm ost autom atic,
Sm all Business Server
effectively provides our
custom ers with an in -house
help -desk.
And even m ore functionalit y is
being built in. From the abil ity
to m anage rem ote users to the
efficiency of sharing m odem s
across the office, Sm all
Business Server also works
easily with Office and other
leading application s so that
inform ation can be integrat ed
from alm ost any source into
the com pany’s desktop PCs.
These are all exam ples of our
focus on m aking software
sim ple. W hich m eans that the
po wer big business has come
to e xpect from their system s is
no w avail able t o sm all bus iness.
That new level of opportunit y is
probabl y m ost visible in the
gro wt h of electronic comm erce
and the W eb. Just as the
Sidewalk T M city guides and
Expedi a have changed the way
peopl e plan and book events
and travel, CarPoint is
transform ing the way people
shop for and buy cars with
online reviews, pricing
inform ation, and the ability f or
consum ers to shop from hom e
and specify the car they want.
Electronic comm erce is
growing at a rate that is almost
im possible to m easure,
leveli ng the pl a yi ng field and
elim inating boundaries. And
because Microsoft is always
listening to custom ers and
looking ahead, our products
are designed to support and
encourage growt h. That’s the
work of all our product groups,
and especiall y our Interactive
Media Gr oup and its focus on
discoveri ng and creating
m eaningful business opport u nities in the Internet space that
work in both directions:
im proved experience for
consum ers and increased
opportunities for bus inesses.
It is a spirit of goal -oriented
innovation extending from
Microsoft to the productivit y
and comm unication gains sm all
businesses experience through
technologi es as basic as e m ail, as effective as connec ting their i nternal net work to the
Internet, and as powerful as
developi ng, hosting, and
m anaging thei r own W eb sites.
Together, our tools and the
expert support of VAPs are
providing sm all business with
the infrastructure to run like
big business whil e tailori ng
their services and products to
each of their custom ers. It
m eans that a com pany
designin g and m anufacturi ng
custom hom e fixtures in Boston
can present thei r products to a
custom er in Seattle, wit hout
ever leaving the office. It
m eans that businesses can
find new custom ers in ways
that cost less and accom plish
m ore than at any tim e in the
history of comm erce. It is
technology that doesn’t lim it
the opportunit y for growt h, but
enabl es it in both qual itative
and quantitative term s. It even
m eans som e sm all business
owners m ight be getting hom e
a little earli er every day, and
spending a little m ore tim e wit h
the kids.
10
it means new business
it means win-win
D el l i s a l e ad e r i n Int e rn e t c om m er c e a n d s e r v i c e,
an d i s d el i v eri n g g re a te r c u s t o m er b e ne fi ts a n d
i nc r ea s i ng t h e v e l o c i t y of o u r u ni qu e di r ec t
bu s i ne s s m o d el th r o ug h o ur W eb s i t e a t
w w w . d el l .c om . Mi c r os o ft p r od u c ts a n d Mi c r o s o f t
pe o pl e h av e pl a ye d k e y ro l e s i n D el l ’ s c r e at i o n,
e x p an s i on , a nd m ai n te n an c e of ou r s ub s t a nt i al
on l i ne c ap a bi l i ti es . W e’ re a v er ag i n g t w o m i l l i o n
v i s i to r s t o d el l .c om ev e r y w e ek , a n d ou r Int e rn et en a bl ed s al es h a v e g r o w n to $6 m i l l i o n pe r d a y.
D el l .c om i s f un c ti o na l , r el i a bl e, an d r o bu s t , an d
Mi c r os of t h as h el p ed u s m ak e i t s o.
O u r s t r at e gi c r el at i o ns hi p w i t h Mi c r os of t h as h el p ed
C om m e r c e O n e d el i v e r o ur b u s i ne s s -t o -b u s i n e s s
el ec t r o ni c c om m e rc e s ol u t i on t o t he m a rk e t qu i c k l y.
Mi c r os of t pl at f orm t ec h nol o gi es a n d de v el o p er
s u p po rt e n a bl e us t o re a c t t o r a pi dl y c h an gi ng
m ark e t c o n di t i o ns an d d el i v e r a c om p re h e ns i v e
s ol ut i o n t o m ee t o ur c us t om e rs ’ r e qui r em e n t s .
DELL CO MPUTER CORPOR ATIO N
W al nut Creek, Cal i forni a
COMMERCE ONE
Mark Hoff man
CEO
Co mmerc e One
Kevin Rollins
V i c e C h a i r ma n
D e l l C o mp u t e r C o r p o r a t i o n
A u s t i n , T e xa s
to excel in the
marketplace, just do
what you do best
11
Our busin ess is one of inter depe nde nce: our o perating
systems need applicatio ns,
applicatio ns need o perating
systems, and both need
hard wa re to ru n. The prom ise
and dem and of hi gh technol ogy
is so far flung and inte rrelat ed
that the idea of a ny singl e
com pany effectively a ddressing
each pro blem and seizin g ea ch
oppo rtunit y is unre alistic.
Right from the start, we m ade
the decision that to best
succeed with our o pe rating
systems, we woul d ne ed to
work with h ard wa re m anufa cturers and app lication de ve l opers outsid e Microsoft. Their
success woul d en able o urs,
and ou r success would ena b le
theirs.
The concept wo rks. W e wo rk
closely with PC m akers like
Dell, Com paq, Qua nte x, an d
Siem ens Nixd orf. And we al so
work with 1 00,00 0 m ore PC
m akers and indepe nde nt
hard wa re vend ors (IHVs),
ensurin g custom ers that the
systems they buy will be wel l tested, highly fu nctional, an d
com patible. In software, we
comm unicate the inform ation
indep end ent de vel ope rs nee d
to m ake sure that their
prod ucts achieve optim al
results on the W indows
platform . Som e are focused on
electronic comm erce and tools,
like Comm erc e One. Others,
like FileNet, are transform ing
the wa y com panies will b e a ble
to m anage doc um ents, no
m atter what form those
docum ents take.
Our focus on core techn olog ies
like operating system s
dem ands a huge comm itm ent
in talent an d resou rces. And in
orde r not to short - chang e th e
potential fo r ou r ope ratin g
systems by neglecting a ppli c ations devel opm ent, we ha ve
al wa ys worked with PC
m akers, IHVs and ISVs, the
indep end ent software ve ndo rs
who in vest their tim e and
resources in d evelopi ng
applicatio ns with th e sam e
focus and e xp ertise we plac e
on ou r ope ratin g system s. By
encouragin g m ore developm ent
on ou r platform s, we ha ve
reali zed t wo key strategic
goals in a single stroke: in
supporti ng ind epe nde nt
hard wa re an d software m akers
we have helped streng then the
popul arit y of W indows while, in
turn, we have helped creat e a
gro wing dem and, large enough
and dynam ic enough to support
thousands of independent
com panies worldwi de. After
all, the way m ost people trul y
e xp erience their com puting i s
through the hardware and
applications they use. W ithout
a rich selection of hardware
and applications that run on
our operating system s, there
would be fewer com pelling
reasons to choose Micr osoft .
This cycle of m utual benefit
rep resents the real val ue of
open stand ards. For PC
m akers, IHVs, and ISVs, it
m eans new opportunities and
open access to a growi ng
custom er base. To custom ers,
it m eans m ore choices at lower
prices. For us, it m eans an
enorm ous pool of talent
focused on products that run
on our platform s. W in-win-win.
other and Microsoft through
conferences such as the
Microsoft Professional Deve l oper’s Conference, Microsof t
TechEd, and Microsoft
Developer Days.
By working with independent
hardware and software
develop ers we’ re doing m ore
than buil ding a business. This
strategy is building an indus try
capable of helping sm all and
big businesses realize greater
return on thei r technol ogy
investm ents. Their products
and ours will fuel the growt h of
electronic comm erce and the
success of the Intern et as a
comm ercial vehicle. Taken as
a whol e, our relationships wi th
others in our industry repr esent one of the m ost form id able forces in high -tech. It
requires nothi ng less to m ake
the ongoing prom ise of
technology a reality.
On the PC and IHV side, we
work closely with m anufactu rers in optim izing system
design, ensuring that our
operating system s deliver the
best possible perform ance, and
that we m ove forward i n
concert, comm unicating new
ideas and sharing the c oncepts
that wi ll create the next
breakthrough in perform ance
and price. Together, Dell and
Microsoft have helped m ake
dell.com the m ost profitable
W eb site in the world.
On the appl ications side, we
are focused on helpi ng ISV
startups succeed. In the p ast
yea r m ore than 1,200 startups
have engaged in the MSDN T M
ISV Startups Program , a part
of MSDN, the Microsoft
Developer Net work. W e m ade
a direct investm ent of our tim e
and effort to provide these new
com panies with exposure to
the vent ure capit al comm unity
and product exposure to
potential custom ers.
W e also support the developer
comm unity by providi ng access
to the tim ely, com prehensive
resources devel opers need to
stay ahead of the curve, and
we offer opportunities for
develop ers to interact and
e xchange ideas with each
12
it means learning
it means tomorrow
I re al l y j u s t w an t to s a y t h ank s . W i th t he s u pp o rt
of Mi c ro s oft an d t he hel p o f th e C om m u ni t y
P r es er v a ti o n an d D ev el opm e nt C o rp o r ati o n I ha v e
a c a r ee r w i th a f ut u r e. T h ei r i n v e s tm en t h as m a de
a bi g di ff er e nc e f or m y f am i l y a nd f o r m e. A n d i t ’ s
he l p i n g s o m a n y ot h er p e o pl e l e ar n t he s k i l l s t h e y
ne e d to go o u t i nt o t he j ob m a rk et a n d fi nd t h e
op p or t un i t y t o b ui l d a b et t er l i fe .
BRIDGET McLAURIN
Bridget Mc Laurin
Office Assistant / Database Specialist
fisource.com
W ashi ngton, D.C.
E nc a rt a i s s o ea s y t o us e. E v e n f o r s t u de n t s u s i n g
i t f o r t he f i rs t t i m e. T he y r es po nd t o i t b ec a us e i t
he l p s t h em w o rk t o t he i r o w n s t re n gt hs : s o v i s ual l yor i e nt e d c h i l dr e n c a n b e as e n g ag e d as c hi l d re n
w h o l e a rn b es t b y l i s t e ni ng . I t gi v es t h em ha n ds on e x pe ri e nc e, s o t h a t l e ar ni n g i s n ’ t s om e t hi n g
pa s s i v e. I t b ec om e s e x c i t i n g a nd f i l l ed wi t h
di s c o v er y. Le a rn i n g t hi s w a y h as h el p ed m ak e m y
s t ud e nt s m or e s e l f - rel i a nt , a nd m or e c o n n ec t e d t o
t h ei r o w n e d uc at i o n.
MENDY BROW N
M e n d y B r o wn
6th Grade Science Teacher
North Oldha m Middle School
Goshen, Kentucky
in the classroom, at work,
at home – this is where it really starts
13
Our soft ware is a po we rful t ool
in dem ocratizing i nform ation
and op enin g the do or to
oppo rtunit y. W hile we m ea sure fina ncial pe rform ance an d
econom ic im pact, while we
count in terrab ytes and
nanosecon ds, we also wei gh
our effo rts in the way o ur
prod ucts help peo ple li ve an d
learn.
Kno wle dge is the im perative
when it com es to finding a
good jo b an d securing a futu re
for yo urself an d yo ur fa m ily.
For Bridg et McLa uri n, our
inves tm ent in comm unities has
m ade all the difference. By
partic ipatin g in the Comm unity
Preservation a nd Deve lopm ent
Corporation p rog ram she
becam e the first graduate of
their com puter lab, sponso re d
by Microsoft. By lea rni ng ou r
applicatio ns Bridget no w ha s a
job with a futu re. Since our
investm ent in the CPDC
center, m any m ore have
com pleted the prog ram and
m oved into the job m arket with
the com puter skills businesses
seek.
W e are also comm itted to
helpin g all schoo ls de velo p a
learning comm unity whe re
students, teachers, and
pare nts can learn th rou gho u t
their lives. By wo rking wit h
teaching colle ges, state
depa rtm ents of education, and
throu gh the distrib ution of
professiona l de velo pm ent
m aterials, we p rovide e duc a tors with th e tools and r esources they ne ed to su c cessfully integ rate techn olog y int o
the classroom . Last year
Microsoft and our e ducatio n
partn ers touched 8 00,0 00
teachers thro ugh va rious
prog ram s and m aterials. In
1999, we hop e to reach m ore
than on e m illion teachers
worl d wid e.
W e provide teachers wit h
training m aterials, lesson
plans, wizards, and tem plates
that help stream line routine
tasks and help educators
incorporate the Office produ ctivity suite into thei r dail y
curriculum , helping them use
technology in a way that will
com plem ent their own teachi ng
styles and bri ng to schools the
sam e rich, stable, and scalable
systems on which businesses
no w rely.
Everyday, we see the im pact in
the m ost im portant place of all:
the eyes of children. In
Goshen, Kentucky, Mendy
Bro wn’s si xth grade science
class used Microsoft Encarta
to help construct a virt ual fi eld
trip of the St. Louis Zoo.
Encarta enabled her students
to learn i n a way that best
suited their own skills and
interests. And, in addition t o
learning about anim als and
habitats, they discovered a
sim ple truth: our pl anet is full
of peopl e who care deepl y
about thei r work and the world
around them . The students
connected with their subject in
a way no textbook can m atch:
trading e-m ail with zool ogists
from all over the worl d, the
students got ans wers in a way
that transform ed the som etim es abstract nature of
classroom learning into
som ething very personal and
very real.
W e are bringing the world into
the classroom and helping
adm inistrators run efficient
educational organi zations.
W hether students are using
Encarta to expl ore the world
around them , accessing the
W orld W ide W eb, or just
checking out a book from the
school library, Microsoft and
the com panies we team with
are helping to bring tech nol ogy
into a new worl d of learning.
And this is typical of the way in
which our technology opens
the doors to learni ng that is
m ore profound, m ore personal.
W hat m ust be obvious by now
is that, as a com pany and as
indivi duals, we’ re very
passionate abou t what we do.
The im plications of our
technology m ultiply and the
prom ise grows. You exper i ence that passion in the details
m aking our software and
systems recognize you as an
indivi dual with specific
prefe rences and your own way
of doing thi ngs.
The technology that helps Mrs.
Brown’s class with a virtual
field trip is basically the sam e
technology businesses use for
electronic comm erce and you
use when you l ook for inform ation, entertainm ent, goods
and ser vices at hom e.
By interacting with Sidewalk,
Expedi a, CarPoint, Hom eAdv isor or the Internet Gam ing
Zone. By getting news and
opinion from MSNBC and
Slate ® online m agazi ne. By
m onitoring your portfolio with
Microsoft Investor. Our
success on the Internet
dem ands that we not onl y
engineer our soft war e to be the
best, but that we develop
content and functionality that
is com pelling to consum ers, to
students and educators, and to
businesses, so that the
Internet reall y hel ps everyone
in learning, work, and leisure.
Making it possible for peopl e to
find new opportuniti es. Making
a connected learni ng comm unity and a connected world.
Making it safe and easy to pay
your light bill over the Internet.
Making technology a tool for
the discovery of new ideas.
W hen it’s all said and done,
m aybe this is where it real ly
starts.
it means, cool
14
financial review
16
I nc om e St at em ent s
17
M anagem ent ’s Disc uss ion and Analys is
24
Cas h Flo ws St at em ents
25
Balanc e Sheets
26
St oc k holders ’ Equit y St at em ent s
27
Not es t o Financ ial St at em ents
37
Report s
38
Subs idiaries
15
Income Statements
I n m i l l i o n s , e xc e p t e a r ni ng s p e r s h a r e
Year Ended June 30
1996
1997
1998
$8, 671
$11, 358
$14, 484
1, 188
1, 432
–
2, 657
316
19
1, 085
1, 925
–
2, 856
362
259
1, 197
2, 502
296
3, 412
433
230
5, 612
6, 487
8, 070
Operat ing inc om e
I nt erest inc om e
3, 059
320
4, 871
443
6, 414
703
I nc om e bef ore inc om e t axes
Prov is ion f or inc om e t axes
3, 379
1, 184
5, 314
1, 860
7, 117
2, 627
Net inc om e
Pref erred s t oc k div idends
2, 195
–
3, 454
15
4, 490
28
Net inc om e av ailable f or c omm on s hareholders
$2, 195
$ 3, 439
$ 4, 462
Earnings per s hare 1 :
Bas ic
$ 0. 93
$
1. 44
$
1. 83
$ 0. 86
$
1. 32
$
1. 67
Rev enue
Operat ing expens es :
Cos t of rev enue
Res earc h and dev elopm ent
Ac quired in -proc ess t ec hnology
Sales and m a rk et ing
General and adm inist rat iv e
Ot her expens es
Tot al operat ing expens es
Dilut ed
1
E a r ni ng s p e r s h a r e ha v e b e e n r e s t a t e d t o r e f l e c t a t w o - f o r - o n e s t o c k s p l i t i n F e b r u a r y 1 9 9 8 .
See ac c om panying not es .
16
M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l ys i s
Results of Operations for 1996, 1997, and 1998
M ic ros of t dev elops , m anuf ac tures , lic ens es , and s upports a wide range of s of t ware prod uc t s, inc luding
s c alable operat ing s ys t ems for int elligent dev ic es, pers onal c om put ers (PCs ), and serv ers ; s erv er
applic at ions f or c lient /s erv er env ironm ents ; bus ines s and cons um er product iv it y applic at ions ; s of t ware
dev elopm ent t ools ; and I nt ernet and int ranet s of t ware an d t ec hnologies . The Com pany’s int erac t iv e
ef f orts inc lude ent ert ainm ent and inf orm at ion s of t war e pr ogram s ; M SN, t he M ic ros of t Net work on line
s erv ic e; I nt ernet -bas ed s erv ic es ; and allianc es wit h c om panies inv olv ed wit h v arious form s of digit al
int erac t iv it y. M ic ros of t als o s ells pers onal c om put er input dev ic es and book s, and res earc hes and
dev elops adv anc ed t ec hnologies f or f ut ure s oft ware produc ts .
Revenue
The Com pany’s rev enue growt h rat e c on t inued t o s low, f rom 46% in t he f isc al year ended J une 30,
1996 and 31% in f is c al 1997 t o 28% in f is c al 1998. Rev enue gro wt h was part ic ularly s t rong in 1996
due t o t he ret ail int roduc t ion of t he M ic ros of t W indo ws 95 operat ing s ys t em . The 1997 and 1998
gro wt h rat es , alt hough s lo we r t han t hat of 1996, ref lect ed t he c ont inued adopt ion of W indo ws 32 -bit
operat ing s ys t ems and M ic rosof t Of f ic e 97, part ic ularly as M ic ros of t s of t ware is deploye d ac ros s ent ire
c orporat e, ac adem ic , and governm ent al organizat ions . Soft ware lic ens e v olum e inc reases hav e been
t he princ ipal f ac t or in M ic ros of t ’s rev enue gro wt h. The av erage s elling pric e per lic ens e has d ec reas ed, prim arily bec aus e of general s hif t s in t he s ales m ix f rom ret ail pac k aged produc t s t o lic ens ing
program s , f rom ne w produc t s t o produc t upgrades , and f rom s t and -alone des kt op applic at ions to
int egrat ed produc t s uit es . Av erage rev enue per lic ens e f rom original equipm ent m anufac t urer (OEM )
lic ens es and organi zat ion lic ens e program s is lo wer t han av erage rev enue per lic ens e f rom ret ail
v ers ions. Lik e wis e, produc t upgrades hav e lo wer pric es t han ne w produc t s . Als o, pric es of int egrat ed
s uit es, s uc h as M ic ros of t Off ic e, are les s t han t he s um of t he pric es f or t he indiv idual program s
inc luded in t hes e s uit es when s uc h program s are lic ens ed s eparat ely. During eac h of t he t hree years
an inc reas ed perc ent age of produc t s and program s inc luded elem ent s whic h we re billed but unearned
and rec ognize d rat ably, s uc h as W indo ws operat ing s ys t em s , Of f ic e 97, m aint enanc e, and o t her
s ubs c ri pt ion m odels . See ac com p anying not es.
P r od uc t g ro u ps
Plat f orm product rev enue wa s $4. 11 billion, $5. 97 billion, and $7. 64
billion in 1996, 1997, and 1998. Plat f orm rev enue is prim arily lic ens es
of PC operat ing s ys t em s ; bus ines s s yst ems wit h c lient / s erver, I nt ernet,
and int ranet arc hit ect ures; and s oft ware dev elo pm ent t ools .
The Com pany’s princ ipal des k t op plat f orm product s are its 32 -bit
operat ing s ys t ems : W indows 95, W indo ws 98, and W indo ws N T
W orks t at ion. Releas ed in Augus t 1995, W indows 95 was a s ucc ess or
t o t he M S -DOS ® and M ic ros of t W indows 3. x operat ing s ys t em s.
W indo ws NT W orks t at ion v ers ion 4. 0 was releas ed in f is c al 1997.
W indo ws 98 bec am e av ail -able at t he end of f is c al 1998. A lt hough t he
gro wt h rat e of ne w PC s hipm ent s s lowed, des k t op operat ing s ys t ems
c ont ribut ed t o rev enue growt h as s hipm ent s of new PCs preins t alled
wit h s uc h s ys t em s inc reas ed during t he t hree -year pe riod. Addit ionally, inc reas ed penet rat ion of higher v alue 32 -bit operat ing s ys t em s, part ic ularly W indows NT W o rk s t at ion, led t o gro wt h in 1996, 1997, and 1998. I n 1996, ret ail lic ens e s ales of W indo ws 95 were a
m aj or f act or in t he Platf orm rev enue inc reas e, ref lect ing the t ypic al s ales patt ern f or maj or operat ing
s ys t em upgrades . Als o in 1996, a port ion of W indo ws opera t ing s ys t em rev enue becam e s ubj ec t t o
rat able rec ognit ion.
Bus ines s s ys t ems produc ts off er an ent erpris e -wide dis t rib ut ed c lient /s erv er, I nt ernet , and int ranet
env ironm ent bas ed on t he M icros of t W indo ws NT Serv er operat ing s ys t em, M ic ros oft Exchang e Serv er,
M ic ros of t SQL Serv er, and ot her s erv er applic at ions in t he M ic ros oft Back Off ic e f am ily of product s.
Rev enue f rom t hes e produc ts inc reas ed s t rongly due t o great er c orporat e dem and, part ic ularly f or
int ranet s olut ions , alt hough t he gro wt h rat e s lo wed in 1998.
Alt hough rev enue was not s ignif ic ant , s ales of W ebTV t erm inals and s erv ic e, and preins tallat ions of
W indo ws CE by OEM s on int elligent dev ic es were s t rong in 1998.
I ndependent s oft ware v endors, c orporat e dev elopers , and solut ions dev elopers lic ens e t ools s uc h as
t he M ic ros oft Vis ual Bas ic ® dev elopm ent s ys t em t o dev elop s of t ware f or W indo ws operat ing s ys t em s
17
and t he I nt ernet .
in 1998.
Rev enue f rom dev eloper produc ts inc reas ed st eadily in 1996 and 1997 and was f lat
Applic at ions and Cont ent rev e nue was $4. 56 billion, $5. 39
billion, and $6. 84 billion in 1996, 1997, and 1998. Applic ations
and Cont ent rev enue inc ludes prim arily lic ens es of des k t op and
c ons um er produc t iv it y applic at ions , int eract iv e m edia program s,
and PC input dev ic es. M ic ros of t O f f ic e f or W indo ws 95 was
releas ed in f isc al 1996 and Mic ros oft Off ic e 97 was releas ed in
f is c al 1997. Applic at ions and Cont ent rev enue gre w 27 % in
1996, 18% in 1997, and 27% in 1998. The lo wer gro wt h rat e in
1997 was due prim arily t o t he applic at ion of t he rat able rev enue
rec ognit ion m odel f or O f f ic e 97.
Abs olut e inc reas es in desk t op applic at ions rev enue during
t he t hree -year period were led by t he v arious M ic ros of t Of f ic e
int egrat ed s uit es , inc luding St andard, Prof es s ional, and Sm all
Bus ines s Edit ions . The prim ary program s in M ic ros oft Of f ice
are t he word proc es s or M ic ros of t W ord, M ic ros oft Exc el
s preads heet, and M ic ros of t Po werPo int ® pres ent at ion graphic s program . Various v ers ions of Of f ice,
wh ic h are av ailable f or t he 32 -bit v ers ion of W indows , t he 16 -bit v ers ion of W indows , and M ac int os h
operat ing s ys t ems , als o i nc lude M ic ros of t Acc ess dat abas e m anagem ent program , M ic ros of t Out look™
m ess aging and c ollaborat ion c lient , or ot her programs . Rev enue f rom st and -alone v ers ions of M ic ros oft Exc el, W ord, and PowerPo int c ont inued t o dec reas e as t he s ales m ix s hif t ed t o int egrat ed
produc t s uit es. M ic ros of t Proj ect s c heduling and proj ect m anagem ent program rev enue inc reas ed
during t he t hree -year period.
M ic ros of t off ers a broad range of int erac t iv e m edia produc t s , wh ic h als o s ho wed m oderat e gro wt h.
Produc t s inc lude CD -ROM m ult im edia ref erenc e t it les and program s f or hom e and s m all of f ic e produ c t iv it y, c hildren’s c reat iv it y, and ent ert ainm ent. I n addit ion t o t he M ic ros oft Net work , online I nt ernet
s erv ic es inc lud e t rav el inf orm at ion and res erv at ions , local ev ent inf orm at ion, and c ar buying inf orm at ion.
The Com pany als o m ark et s input dev ic es . M ous e and gam ing dev ic e s ales inc reas ed while k e yboard rev enue was s t eady during t he t hree -year period.
S al es c ha n n el s
The Com pany dis t ribut es its produc t s prim arily t hrough OEM lic ens es, organizat ion lic ens es , and ret ail
pac k aged product s . OEM c hannel rev enue repres ent s licens e f ees f rom original equipm ent m anuf a c t urers . M ic ros oft has t hree m aj or s ales and m ark et ing geogra phies : t he Unit ed St at es and Canada,
Europe, and els ewhe re in t he wor ld (Ot her I nt ernat ional). Sales of organizat ion lic ens es and pac k aged
produc t s in t hes e c hannels are prim arily t o dis t ribut ors and res ellers . The t rend has c ont inued t o ward
a higher pe rc ent age of organizat ion lic ens ing v ers us pack aged produc ts .
OEM c hannel rev enue was $ 2. 50 billion in 199 6, $3. 48 bi llion in 1997, and $4. 72 billi on in 1998.
The prim ary s ourc e of OEM rev enue is t he lic ens ing of des kt op operat ing s ys t em s, and OEM rev enue i s
highly depen dent on PC s hipm ent v olum e.
U. S. and Canadian c hannel rev enue was $2. 68 billion, $3. 41 billion, and $4. 36 billion in 1996, 1997,
and 1998. Rev enue in Europe was $2. 02 billion, $2. 54 b illion, and $3. 15 billion in 19 96, 1997, and
1998. Gro wt h rat es hav e been lo wer in Europe t han in ot her geographic areas due t o higher exis t ing
m ark et s hares and a m ore dram at ic s hift t o lic ens ing program s . Ot her I nt ernat ional c hannel rev enue
was $1. 47 billion in 1996, $1.93 billion in 1997, and $2. 26 billion i n 1998. Gro wt h rat es were higher in
t he Ot her I nt ernat ional c hannel in 1996 and 1997 due t o c us t om ers ac c ept ing ne wly loc al i zed produc t s ,
part ic ularly in J apan, and penet rat ion in em erging m ark ets . Ho wev er, rev enue was re lat iv ely f lat in
J apan and Sout heas t As ia in 1998 due t o ec onom ic is s ues and weak c urrenc ies .
The Com pany’s operat ing res ult s are af f ec t ed by f oreign exc hange rat es . Approxim at ely 34%, 32%,
and 34% of t he Com pany’s rev enue was c ollec t ed in f oreign c urrenc ies during 1996, 1997, and 1998.
Sinc e a port ion of loc al c urrenc y rev enue is hedged and muc h of t he Com pany’s int ernational m an uf ac t uring c os t s and operat ing expens es are als o inc urred in loc al c urrenc ies , t he im pac t of exc hange rat es
is part ially m it igat ed.
Operating Expenses
C os t o f re v en u e
As a perc ent age of rev enue, cos t of rev enue was 13. 7% in 1996, 9. 6% in 1997, and 8. 3% in 1998. The
dec reas e was due t o t he s hif t s in m ix t o CD -ROM s ( whi c h c arry lo wer c os t of goods t han dis ks ),
lic ens es t o OEM s and organizat ions , and higher -m argin W indo ws NT Serv er, ot her s erv ers , and c lient
18
ac c ess lic ens es in t he Bac k Off ic e produc t f am ily. I n 1998, t he dec reas e was of f s et s om ewhat by c os t s
of W ebTV.
R es e a rc h a nd d ev el o pm e nt
M ic ros of t c ont inued t o inv est heav ily in t he f ut ure by funding res earc h and dev elopm ent (R&D).
Expens e inc reas es of 67% in 1996, 34% in 1997, and 30% i n 1998 res ult ed prim arily f rom dev elopm ent
s t aff headc ount gro wt h and higher lev els of t hird -part y dev elopm ent c os t s in m any areas , part ic ularly
W indo ws -bas ed plat f orms , inc l uding des kt op operat ing s ys t em s, s erv er s ys t ems , and c ons um er
applianc es , along wit h I nt ernet and int ranet t ec hnologies . R&D c os ts als o inc reas ed f or des kt op and
s erv er applic at ions , dev elopment t ools, and int erac t iv e m edia init iat iv es s uc h as M SN and ot h er online
s erv ic es .
I n Augus t 1997, t he Com pany ac quired W ebTV Net work s , Inc . , an online s erv ic e t hat enables c o ns um ers t o experienc e t he I nternet t hrough t heir t elev is ions v ia s et -t op t erm inals . M ic ros of t paid $425
m illion in s t oc k and c as h. The ac c om pa nying inc om e s tat em ent ref lec ts a one -t im e wr it e -of f of in proc es s t ec hnologies under dev elopm ent by W ebTV Net wor k s of $296 m illion.
S al es a n d m ark eti n g
The inc reas e in t he abs olut e dollar am ount of s ales and mark et ing expens es in t he t hree -year period
was due prim aril y t o expand ed produc t -s pec if ic m ark et ing program s , s uc h as W indows 95 in 1996,
Of f ic e 97 in 1997, and W indows 98 in 1998. Sales and mark et ing c os ts as a perc ent age of rev enue
dec reas ed due t o m oderat e headc ount gro wt h.
M ic rosof t brand adv er t is ing and produc t s upport
expens es dec lined in 1997, but ros e s light ly in 1998.
Ge n er al a n d a dm i n i s tr at i v e
I nc reas es in general and adminis t rat iv e expens es were at t r ibut able t o higher legal c os t s and gro wt h in
t he num ber of people and c om put er s yst ems ne c ess ary t o s upport ov erall inc reas es in t he s c ope of t he
Com pany’s operat ions .
Ot he r e x p e ns es
Ot her expens es inc reas ed due t o rec ognit ion of M ic ros of t ’s s hare of j oint v ent ure ac t iv it ies , inc luding
DreamW orks I nt eract iv e and the M SNBC ent it ies .
Interest Income and Income Taxes
I nt erest inc om e inc reas ed prim arily as a res ult of a larger inv es tm ent port f olio generat ed by c as h f rom
operat ions . The ef f ec t iv e incom e t ax rat e was 35. 0% in 1996 and 1997. The ef f ec t iv e inc om e t ax rat e
inc reas ed t o 36. 9% in 199 8 due t o t he nondeduct ible writ e - of f of W ebTV in -proc ess t ec hnologies .
Net Income
Net inc om e as a perc ent of rev enue inc reas ed in 1996, 1997, and 1998 due t o t he lo wer r elat iv e c ost of
rev enue, s ales and m ark et ing expens es , and general and adm inis t rat iv e expens es , partially of f s et by
inv es tm ents in res earc h and dev e lopm ent, j oint v ent ures , and W ebTV.
Financial Condition
M ic ros of t ’s c as h and s hort -term inv es tm ent port f olio t ot aled $13. 93 billion at J une 30, 1998. The
port f olio is div ers if ied am ong s ec ur it y t ypes , indus t ries , and indiv idual iss uers. M ic ros of t ’s inv est m ent s
are generally liquid and inv es tm ent grade. The port f olio is inv es t ed predom inant ly in U. S. dollar
denom inat ed s ec ur it ies , but als o inc ludes f oreign c urrenc y pos it ions in ant ic ipat ion of c ont inued
int ernat ional expans ion. The port f olio is prim arily inv est ed in s hort -t erm s ec urit ies t o m inim ize int eres t
rat e ris k and f ac ilit at e rapid deploym ent in t he ev ent of immediat e c as h needs.
M ic ros of t als o inv es t s in equit ies , inc luding f inanc ia l inv est m ents and s t rat egic t ec hnology c om p anies in m any areas . During 1997, M ic ros of t inv est ed $1. 0 billion in Com c as t Corporat ion, a c able
t elev is ion and div ers if ied t elec omm unic at ions c om pany. Com c as t Spec ial Class A c omm on s t oc k and
c onv ert ible pref e rred s t ock are inc luded in equit y inv estm ents at f air m ark et v alue on t he balanc e
s heet .
During 1996, M ic ros oft and Nat ional Broadc as t ing Com pany (NBC) es t ablis hed t wo M SNBC j oint
v ent ures: a 24 -hour c able ne ws and inf orm at ion c hannel and an int erac t iv e on line ne ws s erv ic e.
M ic ros of t agreed t o pay $220 m illion ov er a f iv e -year period f or it s int erest in t he c able vent ure, t o pay
one-half of operat ional f undin g of bot h j oint v ent ures f or a m ult iyear period, and t o guar ant ee a port ion
of M SNBC debt .
19
M ic ros of t has no m at erial long -t erm debt and has $100 m illion of s t andby m ult ic urrenc y lines of
c redit t o s upport f oreign c urrenc y hedging and c as h m anagem ent . St oc k holders ’ equit y at J une 30,
1998 was $16. 63 billion.
M ic ros of t will c ont inue t o inv es t in s ales , m ark et ing, and produc t s upport inf rast ruct ure. Addit io nally, res earc h and dev elopm ent ac t iv it ies will inc lude inv est m ents in exis t ing and adv anc ed areas of
t ec hnology, inc luding us ing c as h t o ac quire t ec hnology and t o f und v ent ures and ot her st rat egic
opport unit ies . Addit ions t o propert y and equipm ent will c ont inue, inc luding new f ac ilit ies and c om put er
s ys t em s f or res earc h and dev elopm ent, s ales and m ark et ing, s upport , and adm inis t rat iv e s t af f.
Com m itm ents f or c ons t ruc t ing ne w buildings were $420 m illion on J une 30, 1998.
Cas h wil l als o be us ed t o repurc has e c omm on st ock t o prov ide s hares f or em ployee st ock opt ion and
purc has e plans. The buybac k program has not k ept pac e wit h em ployee s t oc k opt ion grant s or
exerc is es . Beginning in f is c al 1990, M ic ros oft has repurc has ed 347 m illion c omm on s hares while 807
m illion s hares were is s ued under t he Com pany’s em ployee s t oc k opt ion and purc has e plans . The
m ark et v alue of all out s t anding s t ock opt ions was $48 billio n as of J une 30, 1998. M ic ros of t enhanc es
it s repurc has e pr ogram by s elling put wa rrant s . During Dec em ber 1996, M ic ros oft iss ued 12. 5 m illion
s hares of 2. 75% c o nv ert ible pref erred s t ock . Net proc eeds of $980 m illion were us ed t o repurc has e
c omm on s hares .
M anagem ent believ es exis t ing c as h and s hort -t erm inv es tm ents t oget her wit h f unds generat ed f rom
operat ions will be s uf f ic ient to m eet operat ing requirem ents f or t he next 12 m ont hs. M ic ros oft ’s c ash
and s hort -t erm inv es tm ents are av ailable f or s t rat egic inv es tm ents , m ergers and ac quis it ions , ot her
pot ent ial large -sc ale c as h needs t hat m ay aris e, and t o f und an inc reas ed s t ock buyback program ov er
his t oric al lev els t o reduc e t he dilut iv e im pac t of t he Company’s em ployee s t oc k opt ion and purc has e
program s .
M ic ros of t has not paid c as h div idends on it s c om m on s t oc k . The pref erred s t oc k pays $2. 196 per
annum per s hare.
Issues and Uncertainties
M ic ros of t does not prov ide f orec as ts of f ut ure f inanc ial perf orm anc e. W hile M ic ros of t managem ent is
opt im ist ic about t he Com pany’s long -t erm pros pect s , t he f ollo wi ng is s ues and unc ertaint ies , am ong
ot hers , s hould be c ons idered in ev alua t ing it s growt h out look .
R a pi d te c h n ol og i c al c ha n ge a n d c om p eti ti o n
Rapid c hange, unc ert aint y due t o new and em erging t ec hnologies , and f ierc e c om pet it ion c haract erize
t he PC s of t war e indus t ry. T he pac e of c hange has rec ent ly ac c elerat ed due t o t he I nternet and ne w
program m ing languages , s uc h as J av a.
F ut ur e i n i ti a ti v es
The Com pany is expanding it s ef f orts t o prov ide and s upport m is s ion -c rit ic al s ys t ems to large ent e rpris es . Sc alab ilit y of Back Offic e s erv er and applic at ion produc t s, t ot al c os t of o wners hip of W indo ws and Of f ic e -bas ed s ys t em s, inf orm at ion s t orage unif ic at ion, us er int erf ac e s im plif ic at ion, and I nt ernet
and int ranet int egrat ion are a ls o m aj or f oc us areas. Addit ional ly, M ic ros of t is c omm it t ed t o prov iding
t ec hnologies , operat ing s yst em s, and int eract iv e c ont ent for t he f ut ure c onv ergenc e of PCs , t elev is ions , and t he I nt ernet. F ut ure rev enue f rom t hes e init iat iv es m ay not duplic at e his toric al rev enue
gro wt h rat es .
P C gr o w t h ra t es
The underlying PC unit gro wt h rat e and perc ent age of new PCs ac quired as replac em ent unit s direc t ly
im pac t t he Com pany’s s of t ware rev enue growt h.
The PC s hipm ent gro wt h rat e may c ont inue to
dec reas e and t he replac ement rat e m ay c ont inue t o i nc reas e, reduc ing f ut ure s of t ware rev enue
opport unit y.
P r od uc t s h i p s c h e du l e s
Delays in ne w-pro duc t releases dam pen rev enue gro wt h rat es and c an c aus e operat ional inef f ic ienc ies
t hat im pac t m anuf ac t uring and dis t ribut ion logis t ic s, independent s oft ware v e ndor (ISV) and OEM
relat ions hips , and c us t om er support e xpens es .
C us t om e r ac c ep ta n c e
W hile t he Com pany perf orms ext ens iv e us abilit y and bet a tes t ing of new produc t s , us er ac c ept anc e and
c orporat e penet rat ion rat es ult im at ely dict at e t he s ucc ess of dev elop m ent and m ark et ing ef f orts .
20
P ri c e s
Fut ure produc t pric es m ay dec reas e f rom hist oric al lev els, depending on c om pet it iv e mark et and c os t
f ac t ors . European and As ian s oft ware pric es v ary by c ount ry and are generally higher t han in t he
Unit ed St at es t o c ov er loc alizat ion c os t s and higher c osts of dis t ribut ion. I nc reas ed global lic ens e
agreem ent s, European m onet ary unif ic at ion, or ot her f act ors c ould erode s uc h pric e uplif t s in t he
f ut ure.
E a rni n gs p r oc es s
An inc reas ingly higher perc ent age of t he Com pany’s r ev enue is s ubj ect t o rat able rec ognit ion.
Subs equent product s upport and deliv ery of uns pec if ied enhanc em ents require t he applic able port ion of
rev enue f or c ert ain produc t s t o be rec ogni zed ov er t he produc t ’s lif e c yc le. This polic y m ay be
required f or a ddit ional produ c t s, depending on s pec if ic lic ens e t erm s and c ondit ions . Als o, m aint enanc e and ot her s ubsc ript ion program s m ay c ont inue to inc reas e in popularit y, part ic ularly wit h
organi zat ions .
S at u ra ti on
Produc t upgrades , whic h ena ble us ers t o upgrade f rom earlier v ers ions of t he Com pany’s produc ts or
f rom c om pet it ors ’ produc t s, hav e lo wer pric es and m argins t han ne w produc t s .
As t he des kt op
applic at ions m ark et has becom e s at urat ed, t he s ales mix has s hif t ed f rom s t andard produc t s t o
upgrade produc ts . This t rend is lik ely t o c ont inue.
Or g an i z ati o n l i c en s es
Av erage rev enue per unit f rom organizat ion lic ens e program s is lower t han av erage rev enue per unit
f rom ret ail v ers ions s hipped through t he f inis hed goods c hannels . Unit s ales under lic ens ing progr ams
m ay c ont inue t o inc reas e.
C h an n el m i x
Av erage rev enue per lic ens e is lo wer f rom OEM lic ens es t han f rom ret ail v ers ions, ref lec t ing t he
relat iv ely lo wer direc t c os ts of operat ions in t he OEM c hannel. An inc reas ingly higher perc ent age of
rev enue was ac hiev ed t hrough t he OEM c hannel during 1997 and 1998.
C os t o f re v en u e
Alt hough c os t of rev enue as a perc ent age of rev enue dec reas ed in 1997 and 1998, it v aries wit h
c hannel m ix, product m ix wit h in c hannels , and us age of online operat ions . The t rend of dec lining c ost
of rev enue as a perc ent age of rev enue is unlik ely t o c ont inue in 1999.
P a y a n d p ar ti c i p at i o n m o de l
M ic ros of t em ployees c urrent ly rec eiv e s alaries , inc ent iv e bonus es, ot her f ringe benefit s , and s t ock
opt ions . New gov ernm ent regulat ions , poor s t oc k pric e perf orm anc e, or ot her f act ors c ould dim inish
t he v alue of t he opt ion program t o c urrent and pros pec t iv e em ployees and f orc e t he Company int o m ore
of a c as h c o m pens at ion m odel. Had t he Com pany paid em ployees in c as h t he grant dat e Black Sc holes v alue of opt ions v es t ed in 1996, 1997, and 1998, t he pret ax expens e wou ld hav e been
approxim at ely $450 m illion, $620 m illion, and $850 m i llion.
Lo n g - t erm r es e ar c h an d d ev el o pm e nt i nv es t m e nt c yc l e
Dev eloping and loc ali zing s o f t ware is e xpens iv e and t he inv est m ent in produc t dev elopm ent of t en
inv olv es a long paybac k c yc le. The Com pany plans t o cont inue s ignif ic ant inv es tm ent s in s of t ware
res earc h and dev elopm ent and relat ed product opport unit ies f rom whic h s ignif ic ant rev enue is not
ant ic ipat ed f or a num ber of years . M anagem ent expec t s tot al s pending f or res earc h and dev elopm ent
in 1999 t o inc reas e ov er s pending in 1998.
S al es , m ark e ti ng , a nd s u pp o rt i nv es tm e nt s
The Com pany’s plans f or 19 99 inc lude ac c elerat ed inv es tm ents in it s s ales , m ark et ing, and s uppo rt
groups .
F or ei g n e x c h a ng e
A large perc ent age of t he Com pany’s s ales , c os ts of m anuf ac t uring, and m ark et ing is t rans ac t ed in
loc al c urrenc ies . As a res ult , t he Com pany’s int ernat ional res ult s of operat ions are s ubjec t t o f oreign
exc hange rat e f luc t uat i ons .
21
In v e s tm en ts v al ue s e ns i ti v i t y
The Com pany’s inv es tm ent port f olio is s ubj ec t t o int erest rat e and m ark et pric e ris k. A 10% inc reas e in
t reas ury s ec urit y yields woul d reduc e t he c arrying v alue of int erest -s ens it iv e s ec urit ies at J une 30,
1998 by $128 m illion, and a 10% dec reas e in m ark et v alues would reduc e t he c arrying v alue of t he
Com pany’s public ly t raded equit y s ec urit ies by $300 m illion. M any of t hes e equit y s ec urit ies are highly
v olat ile st ock s.
In te l l e c t u al p ro p er t y r i g h ts
M ic ros of t diligent ly def ends it s int ellec t ual propert y rights , but unlic ens ed c opying of sof t ware repr es ent s a loss of rev enue t o t he Com pany. W hile t his adv ers ely af f ect s U. S. rev enue, rev enue loss is
ev en m ore s ignif ic ant outs ide of t he Unit ed St at es , part ic ularly in c ount ries where l a ws are les s
prot ec t iv e of int elle ct ual propert y right s . Throughout t he world, M ic ros of t ac t iv ely educ at es c ons um ers
on t he benef it s of l ic ens ing genuine produc t s and educ at es la wm ak ers on t he adv ant ages of a bus ines s
c lim at e where int elle c t ual propert y right s are prot ect ed. Ho wev er, c ont inued eff ort s m ay not af f ec t
rev enue pos it iv ely.
F ut ur e g r o wt h r at e
The rev enue gro wt h rat e in 1999 m ay not approac h t he l ev el att ained in prior years . As dis c uss ed
prev ious ly, operat ing expens es are expec t e d t o inc reas e in 1999. Bec aus e of t he f ixed nat ure of a
s ignif ic ant port ion of s uc h expens es , c oupled wit h t he pos s ibilit y of s lo wer rev enue growt h, operat ing
m argins in 1999 m ay dec rease f rom t hos e in 1998.
Li t i g at i o n
Lit igat ion regarding int ellect ual p ropert y right s , pat ent s , and c opyright s oc c urs in t he PC s oft ware
indus t ry. I n addit ion, t here are gov ernm ent regulat ion and inv es t igat ion risk s along wit h ot her general
c orporat e legal risk s.
Y e ar 2 0 00
The Year 2000 pres ent s pot ent ial c onc erns f or bus in es s and c ons um er c om put ing. The c ons equenc es
of t his is s ue m ay inc lude s ys t em s f ailures and bus ines s proc es s int errupt ion. I t m ay als o inc lude
addit ional bus ines s and c ompet it iv e dif f erent iat ion. As ide f rom t he well -k no wn c alc ulat ion problem s
wit h t he u s e of 2-digit dat e f orm at s as t he year c hanges f rom 1999 t o 2000, t he Year 2000 is a s pec ial
c as e leap year and in m any organi zat ions us ing older t ec hnology, dat es were us ed f or s pec ial pr ogram m at ic f unct ions .
The problem exis t s f or m any k inds of s of t ware and hard war e, inc luding m ainf ram es, m ini c om put ers,
PCs , and em bedded s ys t ems . M ic ros of t is in t he proc es s of gat hering, t est ing, and produc ing inf orm at ion about M ic ros of t t ec hnologies im pac t ed by t he Year 2000 t rans it ion. Firs t, M ic ros of t c las s if ied
it s c ore produc ts int o c at egories of c om plianc e: c om pliant , c om pliant wit h m inor is s ues , and not
c om pliant. Sec ond, if a produc t is s t at ed t o be non -c om pliant , M ic ros of t will prov ide inform at ion as t o
ho w an organi zat ion c ould bring t hat produc t int o c om plia nc e. M ic ros of t is is s uing pat c hes and/ or
work arounds at no addit ional c harge f or m ost is s ues . Third, M ic ros of t is work ing t o hel p organi zat ions
f ind s olut ions t o Year 2000 pro blem s .
The t ec hnologi es and s erv ic es off ered by M ic ros oft and
c om panies it wor k s wit h c an be c om ponent s in ov erall Year 2000 s olut ions . M ic ros of t is ass is t ing
c om panies wit h t he t as k of rec ognizing ho w dis parat e t ec hnologies c an f it t oget her t o creat e a v iable
s olut ion s et .
Current inf orm at ion about t he Com pany’s produc t, bus iness , and t ec hnic al c onc erns is av ailable at
t he M ic ros of t Year 2000 Res ourc e Cent er W eb s it e ( www. m ic ros oft . c om / year2000). The W eb s it e als o
c ont ains inf orm at ion about obt aining s oft ware pat c hes t o res olv e v arious Year 2000 iss ues in c ert ain
M ic ros of t product s . I nf orm ation on t he Com pany’s W eb s it e is prov ided t o c us t om ers f or t he s ole
purpos e of ass is t ing in planning f or t he t rans it ion t o t he Year 2000. Suc h inf orm at ion is t he m ost
c urrent ly av ailable c o nc erning t he behav ior of t he Com pany’s produc t s in t he next cent ury and is
prov ided “as is ” wit hout warr ant y of any k ind. Ho wev er, v ariabilit y of def init ions of “c om plianc e” wit h
t he Year 2000 and of dif f erent c om b inat ions of s of t ware, f irm ware, and hard ware will lik ely lead t o
la ws uit s agains t t he Com pany. The out c om e of s uc h laws u it s and t he im pact on t he Com pany are not
es t im able at t his t im e.
The Year 2000 is s ue als o af fec t s t he Com pany’s int ernal sys t ems , inc luding inf orm at ion t ec hnology
(I T) and non -I T s ys t em s. M ic ros oft is ass ess ing t he readines s of its s ys t ems f or handling t he Year
2000. Alt hough t he ass essm ent is st ill under wa y, m anagem ent c urrent ly believ es that all m at erial
s ys t em s will be c om pliant by t he Year 2000 and t hat t he c os t t o addres s t he is s ues is not m at erial.
Nev ert heles s, M ic r os of t is c reat ing c ont ingenc y plans f or c ert ain i nt ernal s yst ems .
All organi zat ions dealing wit h t he Year 2000 m us t address t he ef f ect t his is s ue will hav e on t heir
t hird-part y s upply c hain. M ic ros oft is undert ak ing st eps t o ident if y its v endors and to f orm ula t e a
22
s ys t em of work ing wit h k ey t hird -part ies t o underst and t heir abilit y t o c ont inue prov iding s erv ic es and
produc t s t hrough t he c hange t o 2000. M ic ros oft wi ll wor k direc t ly wit h it s k ey v endors , dis t ribut ors ,
and res ellers , and part ner wi t h t hem if nec e ss ary, t o av oid any bus ines s int errupt ions in 2000. For
t hes e k ey t hird -part ies, c ont i ngenc y plans wi ll be dev eloped.
Res olv ing Year 2000 is s ues is a world wide phenom enon t hat will lik ely abs orb a s ubst ant ial port ion
of I T budgets and at t ent ion in t he nea r t erm . Cert ain indus try analys t s believ e t he Year 2000 is s ue will
ac c elerat e t he t rend t oward di s t ribut ed PC -bas ed s yst ems f rom m ainf ram e s yst ems , while ot hers
believ e a m aj orit y of I T res ourc es will be dev ot ed t o f ixing older m ainf ram e s of t ware in lie u of large s c ale t rans it ions t o s y st ems bas ed on s of t ware s uc h as t hat s old by M ic ros of t. The im pact of t he Year
2000 on f ut ure M ic ros of t rev enue is diff ic ult t o dis c ern but is a ris k t o be c ons idered in ev aluat ing
f ut ure growt h of t he Com pany .
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Ca s h Fl o w s S t a t e me n t s
In millions
Year Ended June 30
1996
Operat ions
Net inc om e
$ 2, 195
Deprec iat ion and am ort izat ion
480
W rit e-off of ac quired in -proc es s t ec hnology
–
Unearned rev enue
983
Rec ognit ion of unearned rev enue f rom prior periods
(477)
Ot her c urrent liabilit ies
584
Ac c ounts rec eiv able
(71)
Ot her c urrent ass ets
25
Net c as h f rom operat ions
1997
$ 3, 454
557
–
1, 601
(743)
321
(336)
(165)
1998
$ 4, 490
1, 024
296
3, 268
(1, 798)
208
(520)
(88)
3, 719
4, 689
6, 880
504
(1, 385)
124
–
–
352
744
(3, 101)
95
980
(15)
796
959
(2, 468)
538
–
(28)
1, 553
(405)
(501)
I nv est m ent s
Addit ions t o propert y and equipm ent
Cas h port ion of W ebTV purc has e pric e
Equit y inv es tm ents and ot her
Short -t erm inv estm ent s
(494)
–
(625)
(1, 551)
(499)
–
(1, 669)
(921)
(656)
(190)
(1, 598)
(4, 828)
Net c as h us ed f or inv es tm ent s
(2, 670)
(3, 089)
(7, 272)
Net c hange in c as h and equiv alent s
Ef f ect of exc hange rat es on cas h and equiv alent s
Cas h and equiv alents , beginning of year
644
(5)
1, 962
1, 099
6
2, 601
162
(29)
3, 706
Cas h and equiv alents , end of year
Short -t erm inv estm ent s
2, 601
4, 339
3, 706
5, 260
3, 839
10, 088
$ 6, 940
$ 8, 966
$13, 927
Financ ing
Com m on s t oc k is s ued
Com m on s t oc k repurc has ed
Put warrant proc eeds
Pref erred s t oc k iss ued
Pref erred s t oc k div idends
St oc k opt ion inc om e t ax benefit s
Net c as h f rom (us ed f or) f inanc ing
Cas h and s hort -t erm inv es tm ent s
554
See ac c om panying not es .
24
Balance Sheets
In millions
J u ne 3 0
As s ets
Current as s et s :
Cas h and s hort -t erm inv es tm ent s
Ac c ounts rec eiv able
Ot her
1997
1998
$ 8, 966
980
427
$13, 927
1, 460
502
10, 373
1, 465
2, 346
203
15, 889
1, 505
4, 703
260
$14, 387
$22, 357
Tot al c urrent as s et s
Propert y and equipm ent
Equit y inv es tm ents
Ot her ass ets
Tot al as s et s
Liabilit ies and st ock holders ’ equit y
Current liabilit ies :
Ac c ounts payable
Ac c rued c om pens at ion
I nc om e t axes payable
Unearned rev enue
Ot her
Tot al c urrent liabilit ies
Com m itm ents and c ont ingenc ies
St oc k holders ’ equit y:
Conv ert ible pref erred st ock – s hares aut ho rized 100;
s hares is s ued and outs t anding 13
Com m on s t oc k and paid -in c apit al – s hares aut horized 8, 000;
s hares is s ued and outs t anding 2, 408 and 2, 470
Ret ained earnings
Tot al s t oc k holders ’ equit y
Tot al liabilit ies and st ock holders ’ equit y
$
721
336
466
1, 418
669
$
759
359
915
2, 888
809
3, 610
5, 730
980
980
4, 509
5, 288
8, 025
7, 622
10, 777
16, 627
$14, 387
$22, 357
See ac c om panying not es .
25
S t o c k h o l d e rs ’ E q u i t y S t a t e m e n t s
In millions
Year Ended June 30
Conv ert ible pref erred st ock
Balanc e, beginning of year
Conv ert ible pref erred st ock iss ued
Balanc e, end of year
Com m on s t oc k and paid -in c apit al
Balanc e, beginning of year
Com m on s t oc k is s ued
Com m on s t oc k repurc has ed
St ruc t ured repurc has es pric e dif f er ent ial
Proc eeds f rom s ale of put wa r rant s
Rec las s if ic at ion of put warran t obligat ion
St oc k opt ion inc om e t ax benefit s
Balanc e, end of year
Ret ained earnings
Balanc e, beginning of year
Net inc om e
Pref erred s t oc k div idends
Com m on s t oc k repurc has ed
Rec las s if ic at ion of put warran t obligat ion
Net unreali zed inv es tm ent gains and ot her
Balanc e, en d of year
Tot al s t oc k holders ’ equit y
1996
–
–
–
1997
$
–
980
980
1998
$
980
–
980
$ 2, 005
504
(41)
–
124
(20)
352
2, 924
744
(91)
–
95
45
792
4, 509
1, 262
(165)
328
538
–
1, 553
2, 924
4, 509
8, 025
3, 328
2, 195
–
(1, 344)
(210)
15
3, 984
3, 454
(15)
(3, 010)
590
285
5, 288
4, 490
(28)
(2, 631)
–
503
3, 984
5, 288
7, 622
$ 6, 908
$10, 777
$16, 627
See ac c om panying not es .
26
No t e s t o Fi n a n c i a l S t a t e me n t s
Accounting Policies
P ri nc i pl es of c on s o l i da ti on
The f inanc ial s t at em ents inc lude t he ac c ounts of M ic ros oft and it s s ubs idiaries . Signif ic ant int erc o m pany t rans ac t ions and balances hav e been elim inat ed. I nv es tm ents in 50% o wned j oint v ent ures are
ac c ount ed f or us ing t he equity m et hod; t he Com pany’s s hare of j oint v ent ures ’ act iv it ies is ref lect ed in
ot her expens es .
E s ti m at es an d as s um p ti on s
Preparing f inanc ial s t at em ents requires m anagem ent t o mak e es t im at es and as s um pt ions t hat aff ect
t he report ed am ount s of asset s , liabilit ies , rev enue, and expens es . Exam ples inc lude prov is ions f or
ret urns and bad debts and t he len gt h of produc t lif e c yc les and buildings ’ liv es. Act ual res ult s m ay
dif f er f rom t hes e es t im at es .
F or ei g n c u rr e nc i e s
As s ets and liabilit ies rec orded in f oreign c urrenc ies are t rans lat ed at t he exc hange rat e on t he balanc e
s heet dat e. Trans lat ion adjus tm e nt s res ult ing f rom t his proc es s are c harged or c redit ed t o equit y.
Rev enue, c os ts , and expens es are t rans lat ed at av erage rat es of exc hange prev ailing during t he year.
Gains and los s es on f oreign currenc y t rans act ions are inc luded in ot her e xpens es .
R ev e n ue r e c o g ni ti o n
Rev enue is rec ognized when earned. The Com pany’s rev enue rec ognit ion polic ies are in c om plianc e
wit h Am eric an I ns t it ut e of Cert if ied Public Ac c ount ant s St atem ents of Pos it ion 97 -2 and 98 -4, Sof t ware
Rev enue Rec ognit ion.
Rev enue f rom prod uc ts lic ens ed t o original equipm ent m anuf ac t urers is
rec orded when OEM s s hip lic ens ed product s while rev enue f rom organizat ion lic ens e program s is
rec orded when t he s of t ware h as been deliv ered and t he c us t om er is inv oic ed. Rev enue f rom pac k aged
produc t s a les t o dis t ribut ors and res ellers is rec orded when relat ed produc t s are s hipped. M aint enance
and s ubsc ript ion rev enue is rec o gnized rat abl y ov er t he c ont rac t period. Rev enue at t ribut able t o
s ignif ic ant s upport (t ec hnic al s upport and uns pec if ied enhanc em e nts s uc h as s erv ic e pac ks and
I nt ernet brows er updat es ) is bas ed on t he pric e c harged or deriv ed v alue of t he undeliv ered elem ents
and is rec ogni zed rat ably o n a s t raight -line bas is ov er t he produc t ’s lif e c yc le. Cos t s relat ed to
ins ignif ic ant obligat ions , whic h inc lude t elephone s upport for c ert ain produc ts , are ac c rued. Prov is ions
are rec orded f or ret urns and bad debt s.
R es e a rc h a nd d ev el o pm e nt
Res earc h and dev elopm ent c os ts are expens ed as inc urred.
St at em ent of Financ ial Ac c ount ing
St andards (SFAS) 86, Ac c ount ing f or t he Cos t s of Com put er Sof t ware t o Be Sold, Leas ed , or Ot her wis e
M ark et ed, does not m at erially af f ec t t he Com pany.
T el e p h on e s up p or t
Telephone s upport c os ts are inc luded in s ales and m ark et ing.
In c om e ta x e s
I nc om e t ax expens e inc ludes U . S. and int ernat ional inc ome t axes , plus an ac c rual f or U. S. t axes on
undis t ribut ed earnings of internat ional s ubs idiaries . Cert ain it em s of inc om e and expens e are not
report ed in t ax ret urns and f inanc ial s t at em ents in t he s am e year. The t ax ef f ec t of t his dif f erenc e is
report ed as def erred inc om e taxes . Tax c redit s are ac c ount ed f or as a reduc t ion of t ax expens e in t he
year in wh ic h t he c redit s reduc e t axes payable.
S to c k s pl i t
I n February 1998, out s t anding s hares of c om m on st ock wer e s plit t wo -f or-one. All s hare and per s hare
am ounts hav e been rest at ed.
Fi na n c i al i n s t rum e nts
The Com pany c ons iders all liquid int eres t -earning inv es tment s wit h a m at urit y of t hree m ont hs or less
at t he dat e of purc has e t o be c as h equiv alent s . Short -term inv estm ent s gen erally mat ure bet ween
t hree m ont hs and f iv e years from t he purc has e dat e. All cas h and s hort -t erm inv est m ent s are c lass if ied as av ailable f or s ale and are rec orded at m ark et. Cos t approxim at es m ark et f or all c las s if ic at ions
of c as h and s hort -t erm inv estm ents ; realized and unreali ze d gains and los s es were not m at erial.
27
Public ly t radeable equit y s ec urit ies are rec orded at m ark et; unrealized gains and los s es are r ef lec t ed in s t oc k holders ’ equit y. The pret ax unrealized gain was $1. 4 billion at J une 30, 1998.
P r op e rt y a n d e q ui pm e nt
Propert y and equipm ent is s t at ed at c ost and deprec iat ed us ing t he s t raight -line m ethod ov er t he
s hort er of t he es t im at ed lif e of t he as s et or t he leas e t erm , ranging f rom one t o 30 years .
R ec l a s s i fi c a ti on s
Cert ain rec las s if ic at io ns hav e been m ade f or c ons is t ent pres ent at ion.
Unearned Revenue
M ic ros of t believ es t hat I nt ernet t ec hnologies are int egral t o it s produc t s and has c omm it ted t o int egrat ing t hes e t ec hnologies , s uc h as it s bro ws er s of t ware, M ic ros of t I nt ernet Explorer, int o exi s t ing produc ts
at no addit ional c os t t o its c us t om ers . Giv en t his s t rat egy and ot her c omm itm ent s s uc h as t elephone
s upport , I nt ernet -bas ed t ec hnic al s upport , and uns pec if ied produc t enhanc em ent s, M ic ros of t rec ognizes approxim at ely 20% of W indo ws oper at ing s ys t ems OEM rev enue and approxim at ely 35% of ret ail
v ers ions rev enue ov er t he produc t lif e c yc les, c urrent ly est im at ed at t wo years . The unearned port ion
of rev enue f rom W i ndows op e rat ing s ys t em s was $860 m il lion and $1. 19 billion at J une 30, 1997 a nd
1998.
Sinc e Off ic e 97 is als o t ight ly int egrat ed wit h t he I nt ernet , and in t he v iew of s ubs equent deliv ery of
ne w I nt ernet t ec hnologies, enhanc em ents , and ot her s upport , a rat able rev enue rec ognit ion polic y was
im plem ent ed f or Of f ic e 97. Approxim at ely 20% of Of f ic e 97 rev enue is rec ognized ra t ably ov er t he
es t im at ed 18 -m ont h produc t lif e c yc le. Unearned rev enue as s oc iat ed wit h Of f ic e 97 t ot aled $300 m illion
and $770 m i llion at J une 30, 1997 and 1998.
Unearned rev enue als o inc ludes m aint enanc e and ot her subs c ript ion c ont rac ts , inc luding organi z at ion lic ens e agreem ent s .
Financial Risks
The Com pany’s inv est m ent port f olio is div ers if ied and c ons is t s prim arily of s hort -t erm inv es tm ent grade
s ec urit ies. I nt erest rat e f luc tuat ions im pact t he c arrying v alue o f t he port f olio. W hile no hedge was in
plac e on J une 30, 1998, t he Com pany rout inely hedges t he port f olio in c as e of a c at astrophic inc rease
in int eres t rat es . At J une 30, 1997 and 1998, approximat ely 31% and 40% of acc ount s rec eiv able
repres ent ed am ounts due f rom t en c ust om ers . One c us t om er ac c ount ed f or approxim at ely 13%, 12%,
and 8% of rev enue in 1996, 1997, and 1998.
Finis hed goods s ales t o int ernat ional c ust om ers in Europe, J apan, and Aus t ralia are prim arily billed
in loc al c urrenc ies. Paym ent c yc l es are relat iv ely s hort , generally les s t han 90 days . European
m anuf ac t uring c os ts and int ernat ional s elling, dis t ribut ion, and s upport c ost s are generally dis burs ed in
loc al c urrenc ies . Loc al c urrenc y c as h balanc es in exc es s of s hort -t erm operat ing need s are generall y
c onv ert ed int o U. S. dollar c as h and s hort -t erm inv es tm ents on rec eipt . Theref ore, f oreign exc hange
rat e f luc t uat ions generally do not c reat e a ris k of m at erial balanc e s heet gains or los s es. As a res ult ,
M ic ros of t ’s hed ging ac t iv it ies f or balanc e s heet expos ures hav e been m inim al.
Foreign exc hange rat es aff ect t he t rans lat ed res ult s of operat ions of t he Com pany’s f oreign s ubs id iaries . The Com pany hedges a perc ent age of planned internat ional rev enue wit h purchas ed opt ions.
The not ional am ount of t he opt ions out st anding at J une 30, 1998 was $2. 1 billion. At J une 30, 1998,
t he f air v alue and prem iums paid f or t he opt ions were not mat erial.
28
Cash and Short-Term Investments
J u ne 3 0
1997
Cas h and equiv alents :
Cas h
Com m erc ial paper
M oney m ark et pref erreds
Cert if ic at es of depos it
$
Cas h and equiv alents
Short -t erm inv estm ent s:
Com m erc ial paper
M unic ipal s ec urit ies
Corporat e not es and bonds
U. S. gov ernm ent and agenc y s ec urit ies
Cert if ic at es of depos it
Short -t erm inv estm ent s
Cas h and s hort -t erm inv es tm ent s
246
1, 660
946
854
1998
$
195
2, 771
454
419
3, 706
3, 839
261
571
1, 907
1, 513
1, 008
868
1, 361
3, 998
3, 511
350
5, 260
10, 088
$8, 966
$13, 927
1997
1998
Property and Equipment
J u ne 3 0
Land
Buildings
Com put er equipm ent
Ot her
$
Propert y and equipm ent – at cos t
Ac c um ulat ed deprec iat ion
183
1, 027
1, 064
503
2, 777
(1, 312)
Propert y and equipm ent – net
$1, 465
$
183
1, 259
1, 182
428
3, 052
(1, 547)
$ 1, 505
During 1997 and 1998, deprec iat ion expens e, of whic h t he m aj orit y re lat ed t o c om put er equipm ent , was
$353 m illion and $528 m illion; dis pos als we re im m at erial.
Income Taxes
The prov is ion f or inc om e t axes c ons ist ed of:
Year Ended June 30
Current t axes :
U. S. and s t at e
I nt ernat ional
Current t axes
Def erred t axes
Prov is ion f or inc om e t axes
1996
1997
1998
$1, 139
285
$1, 710
412
$2, 518
526
1, 424
(240)
$1, 184
2, 122
(262)
3, 044
(417)
$1, 860
$2, 627
1996
1997
1998
$2, 356
1, 023
$3, 775
1, 539
$5, 072
2, 045
$3, 379
$5, 314
$7, 117
U. S. and int ernat ional c om ponent s of inc om e bef ore inc om e t axes were:
Year Ended June 30
U. S.
I nt ernat ional
I nc om e bef ore inc om e t axes
29
The ef f ec t iv e inc om e t ax rat e was 35. 0% in 1996 and 1997 . The ef f ect iv e t ax rat e inc reas ed t o 36. 9%
in 1998 due t o t he nondeduc t ible writ e -of f of W ebTV in -proces s t ec hnologies.
I nc om e t axes payable were:
J u ne 3 0
1997
Def erred inc om e t ax ass ets :
Rev enue it ems
Expens e it ems
$ 474
505
Def erred inc om e t ax ass ets
1998
$
979
Def erred inc om e t ax liabilit ies:
Unreali zed gain on inv estm ents
I nt ernat ional earnings
Ot her
Def erred inc om e t ax liabilit ies
Current inc om e t ax liabilit ies
I nc om e t axes payable
713
613
1, 326
–
(465)
(4)
(479)
(373)
(26)
(469)
(878)
(976)
(1, 363)
$(466)
$
(915)
I nc om e t axes hav e been s et tled wit h t he I nt ernal Rev enue Serv ic e (I R S) f or all years t hrough 1989.
The I RS has as s es s ed t axes f or 1990 and 1991 whic h t he Com pany is c ont es t ing in Tax Court . The
I RS is e xam ining t he Com pany’s U. S. inc om e t ax ret urns f or 1992 t hrough 1994. M anagem ent believ es
any relat ed adj us tm ent s t hat m ight be required will not be m at erial t o t he f inanc ial st at em ents . I nc om e
t axes paid we re $758 m illion in 1996, $1. 1 billion in 1997, and $1. 1 billion in 1998.
Convertible Preferred Stock
During 1996, M ic ros oft iss ued 12. 5 m illion s hares of 2. 75% c onv er t ible e xc hangeable princ ipal prot ec t ed pref erred s t ock . Div idends are payable quart erly in arrears . Pref erred s hareholders hav e
pref erenc e ov er c omm on s t oc k holders in div idends and liquidat ion right s . I n Dec em ber 1999, eac h
pref erred s hare is c onv ert ib le int o c om m on s hares or an e quiv alent am ount of c as h determ ined by a
f orm ula t hat prov ides a f loor pric e of $79. 875 and a c ap of $102. 24 per pref erred s hare. Net proc eeds
of $980 m illion were us ed t o repurc has e c omm on s hares.
Common Stock
Is s u ed an d o ut s t a ndi n g
Shares of c om m on st ock outs tanding were as f ollo ws :
Year Ended June 30
1996
1997
1998
Balanc e, beginning of year
I s s ued
Repurc has ed
2, 352
88
(52)
2, 388
94
(74)
2, 408
101
(39)
Balanc e, end of year
2, 388
2, 408
2, 470
R e pu r c h as e p r og r am
The Com pany repurc has es it s c omm on s t oc k in t he open m ark et t o prov ide s hares f or is s uing t o
em ployees under s t oc k opt ion and s t ock purc has e plans. The Com pany’s Board of Direc tors aut horized
c ont inuat ion of t his program in 1999.
I n addit ion, under st ruct ured re purc has es wit h an indepe ndent t hird -part y, t he Com pany exec ut ed
t wo f or ward purc has es t ot aling 21 m illion s hares of s t ock . Under t hes e arrangem ent s, a port ion of t he
purc has e pric e will be paid in t he next f iv e or s ix years and det erm ined bas ed upon t he p ric e of
M ic ros of t c om m on s t oc k at t hat t im e. The t im ing and m et hod of paym ent (net s hare or cas h) is at t he
dis c ret ion of t he Com pany. The dif f erent ial bet ween t he c as h paid and t he pric e of M ic ros of t c om m on
s t ock on t he t wo dat es of agreem ent is ref lec t ed in c omm on s t ock and paid -in c apit al.
30
Put W arrants
To enhanc e it s s t ock repurc has e program , t he Com pany s ells put warrant s t o independent t hird -part ies.
Thes e put warrant s ent it le t he holders t o s ell s hares of M ic ros oft c omm on s t oc k t o t he Com pany on
c ert ain dat es at s pec if ied pric es . On J une 30, 1998, 60 m illion warrant s were out s t anding. The
out s t anding put warrant s at J une 30, 1998 expire bet ween Nov em ber 1998 and J une 2000 and hav e
s t rik e pric es ranging f rom $72 t o $77 per s hare. The out s t anding put warrant s perm it a net -s hare
s et t lem ent at t he Com pany’s opt ion and do not res ult in a put warrant liabilit y on t he balanc e s heet .
Employee Stock and Savings Plans
E m pl o ye e s to c k p u rc h as e pl an
The Com pany has an em ployee s t ock purc has e plan f or all e ligible em ployees . Under t he plan, s hares
of t he Com pany’s c om m on s toc k m ay be purc has ed at s ix -m ont h int erv als at 85% of t he lo wer of t he
f air m ark et v alue on t he f irst or t he las t day of eac h s ix -m ont h period. Em ployees m ay purc has e
s hares hav ing a v al ue not exc eeding 10% of t heir gross c om pens at ion during an of f ering period.
During 1996, 1997, and 1998, em ployees purc has ed 3. 6 million, 2. 8 m illion, and 2. 2 m illion s hares at
av erage pric es of $18. 86, $29. 82, and $54. 42 per s hare. At J une 30, 1998, 36. 8 m illion s hares were
res erv ed f or f ut ure iss uanc e.
S av i n gs p l a n
The Com pany has a s av ings plan, wh ic h qualif ies under S ec t ion 401(k ) of t he I nt ernal Rev enue Code.
Part ic ipat ing em ployees m ay def er up t o 15% of pret ax s alary, but not m ore t han s t at ut ory lim it s . The
Com pany c ont ribut es f if t y c ent s f or eac h dollar a part ic ipant c ont ribut es , wit h a m axim um c ont ribut ion
of 3% of a part ic ipant ’s earnings . M atc hing c ont ribut ions were $15 m illion, $28 m illion, and $39 m illion
in 1996, 1997, and 1998.
S to c k o p t i o n pl a ns
The Com pany has s t oc k opt ion plans f or direc t ors , of f ic ers, and em ployees , whic h prov ide f or no nqualif ied and inc ent iv e s t oc k opt ions . The opt ion exerc is e pric e is t he f air m ark et v alue at t he dat e of grant.
Opt ions grant ed prior t o 1995 gener ally v es t ov er f our and one -half years and expire 10 years f rom t he
dat e of grant . Opt ions granted during and af t er 1995 generally v est ov er f our and one -half years and
expire s ev en years f rom t he dat e of grant, while c ert ain opt ions v es t ov er s ev en and o ne-half years and
expire af t er 10 years . At J u ne 30, 1998, opt ions f or 222 m illion s hares were v es t ed and 523 m illion
s hares were av ailable f or f ut ure grant s under t he plans .
St oc k opt ions outs t anding wer e as f ollo ws :
P r i c e p e r s ha r e
W ei g ht e d
S ha r e s
Range
average
– $20. 79
– 29. 47
– 22. 63
– 27. 72
Balanc e, J une 30, 1995
Grant ed
Exerc is ed
Canc eled
456
114
(80)
(14)
$ 0. 39
20. 05
0. 39
1. 30
$ 7. 28
22. 50
5. 38
13. 93
Balanc e, J une 30, 1996
Grant ed
Exerc is ed
Canc eled
476
110
(90)
(18)
0. 55
27. 66
0. 55
8. 50
–
–
–
–
29. 47
59. 60
29. 47
48. 57
11. 04
29. 15
6. 64
19. 42
Balanc e, J une 30, 1997
Grant ed
Exerc is ed
Canc eled
478
69
(88)
(13)
1. 12
33. 12
1. 12
1. 32
–
–
–
–
59. 60
87. 25
62. 47
83. 88
15. 72
62. 56
9. 27
29. 37
Balanc e, J une 30, 1998
446
1. 12 –
87. 25
23. 87
For v arious pric e ranges , we ight ed av erage c haract eris t ics of out st anding st ock opt ions at J une 30,
1998 were as f ollo ws :
31
Range of
e xe r c i s e p r i c e s
$ 1. 12
8. 51
11. 95
27. 26
59. 61
S ha r e s
– $ 8. 50
– 11. 94
– 27. 25
– 59. 60
– 87. 25
O ut s t a n d i n g o p t i o n s
R e m a i ni ng
W ei g ht e d
life (years)
average price
85
100
97
100
64
2. 7
4. 4
4. 9
5. 6
6. 5
E xe r c i s a b l e o p t i o ns
W ei g ht e d
S ha r e s
average price
$ 5. 06
10. 47
21. 62
29. 81
64. 00
84
83
38
17
–
$ 5. 07
10. 19
21. 14
28. 99
–
The Com pany f ollo ws Ac c ount ing Princ iples Board Opinion 25, Acc ount ing f or St ock Is s ued t o Em plo yees , t o ac c ount f or s t ock opt ion and em ployee s t oc k purc has e plans . No c om pens at ion c ost is
rec ognized bec aus e t he opt ion exerc is e pric e is equal t o t he m ark et pric e of t he underlying s t oc k on
t he dat e of grant .
An alt ernat iv e m et hod of account ing f or s t ock opt ions is SFAS 123, Ac c ount ing f or Stoc k -Bas ed
Com pens at ion. Under SFAS 123, em ployee s t oc k opt ions are v alued at grant dat e us ing t he Blac k Sc holes v aluat ion m odel and c om pens at ion c ost is rec ogni z ed rat ably ov er t he v es t ing period. Had
c om pens at ion c os t f or t he Com pany’s s t oc k opt ion and em ployee s t ock purc has e plans been det e rm ined bas ed on t he Blac k -Scholes v alue at t he grant dat es f or a wards as presc ribed by SFAS 123, pro
f orm a inc om e st at em ent s f or 1996, 1997, and 1998 would h av e been as f ollows :
1996
Year Ended June 30
1997
1998
Reported
Pro forma
Reported
Pro forma
Reported
Pro forma
$8, 671
$8, 671
$11, 358
$11, 358
$14, 484
$14, 484
1, 188
1, 204
1, 085
1, 107
1, 197
1, 227
1, 432
1, 655
1, 925
2, 230
2, 502
2, 924
–
2, 657
–
2, 823
–
2, 856
–
3, 082
296
3, 412
296
3, 725
316
19
362
19
362
259
424
259
433
230
520
230
5, 612
6, 063
6, 487
7, 102
8, 070
8, 922
Operat ing inc om e
I nt erest inc om e
3, 059
320
2, 608
320
4, 871
443
4, 256
443
6, 414
703
5, 562
703
I nc om e bef ore inc om e t axes
Prov is ion f or inc om e t axes
3, 379
1, 184
2, 928
1, 026
5, 314
1, 860
4, 699
1, 646
7, 117
2, 627
6, 265
2, 325
Net inc om e
Pref erred s t oc k div idends
2, 195
–
1, 902
–
3, 454
15
3, 053
15
4, 490
28
3, 940
28
Net inc om e av ailable f or
c omm on s hareholders
$2, 195
$1, 902
$ 3, 439
$ 3, 038
$ 4, 462
$ 3, 912
Dilut ed earnings per s hare
$ 0. 86
$ 0. 74
$
$
$
$
Rev enue
Operat ing expens es :
Cos t of rev enue
Res earc h and
dev elopm ent
Ac quired in -proc ess
t ec hnology
Sales and m ark et ing
General and
adm inis t rat iv e
Ot her expens es
Tot al operat ing
expens es
1. 32
1. 16
1. 67
1. 47
The pro f orm a disc los ures in t he prev ious t able inc lude t he am ort izat ion of t he f air v alue of all opt ions
v es t ed during 1996, 1997, and 1998, regardless of t he grant dat e. If o nly opt ions granted af t er 1996
were v alued, as presc ribed by SFAS 123, pro f orm a net incom e would hav e been $2, 073 m illion, $3, 179
m illion, and $4, 019 m illion, and earnings per s hare wou ld hav e been $0. 81, $1. 21, and $1. 50 f or 1996,
1997, and 1998.
The wei ght ed av erage Blac k -Sc holes v alue of opt ions grant ed under t he s t ock opt ion plans during
1996, 1997, and 1998 was $8. 86, $11. 72, and $23. 62. Value was es t im at ed us ing an expec t ed lif e of
f iv e years , no div idends , v olat ilit y of . 32 in 1998 and . 30 in prior years , and ris k -f ree int eres t rat es of
6. 0%, 6. 5%, and 5. 7% in 1996, 1997, and 1998.
32
Earnings Per Share
Bas ic earnings per s hare is com put ed on t he bas is of t he we ight ed av erage num ber of c omm on s hares
out s t anding. Dilut ed earnings per s hare is c om put ed on the bas is of t he weight ed av erage num ber of
c omm on s hares outs t anding plus t he ef f ect of out s t anding pref erred s hares us ing t he “if -c onv ert ed”
m et hod, as s um ed net -s hare set t lem ent of c omm on s t ock st ruc t ured repurc has es , and outs t anding st ock
opt ions us ing t he “t reas ury s toc k ” m et hod.
The c om ponents of bas ic and dilut ed earnings per s hare we re as f ollo ws :
Year Ended June 30
1996
1997
1998
Net inc om e
Pref erred s t oc k div idends
$2, 195
–
$3, 454
15
$4, 490
28
Net inc om e av ailable f or c omm on s hareholders
$2, 195
$3, 439
$4, 462
Av erage outs t anding s hares of c omm on st ock
Dilut iv e ef f ec t of :
Com m on s t oc k under st ruct ured repurc has es
Pref erred s t oc k
Em ployee s t oc k opt ions
2, 368
2, 391
2, 432
–
–
193
–
13
218
3
17
229
Com m on s t oc k and c omm on st oc k equiv alents
2, 561
2, 622
2, 681
$ 0. 93
$ 1. 44
$ 1. 83
$ 0. 86
$ 1. 32
$ 1. 67
Earnings per s hare:
Bas ic
Dilut ed
Acquisition
I n August 1997, M ic ros oft ac quired W ebTV Net work s , I nc . , an online s erv ic e t hat enables c ons um ers t o
experienc e t he I nt ernet t hrough t h eir t elev is ions v ia s et -t op t erm inals bas ed on propriet ary t ec hnol ogies . A direct or of t he Com pany o wned 10% of W ebTV. M ic ros of t paid $425 m illion in s t oc k and c as h
f or W ebTV. The Com pany rec orded an in -proc es s t ec hnologies writ e -of f of $296 m illion in t he f irst
quart er of 1998.
Subsequent Sale
I n Augus t 1998, t he Com pany s old a wholl y -o wned s ubs idia ry, Sof t im age, I nc. t o Av id Tec hnology, I nc.
A pret ax gain of $160 m illion will be rec ogni zed in t he f irst quart er of 1999. As part of a t rans it ional
s erv ic e agreem ent, M ic ros oft agreed t o m ak e c ert ain dev elopm ent t ools and m anagem ent s ys t em s
av ailable t o Av id f or us e in t he Sof t im age bus ines s.
Commitments
The Com pany has operat ing leas es f or m ost U. S. and int ernat ional s ales and s upport of f ic es and
c ert ain equipm ent . Rent al expens e f or operat ing leas es wa s $92 m illion, $92 m illion, and $95 m illion in
1996, 1997, and 1998. Fut ure m inim um rent al c omm itm ents under nonc anc elable leas es, in m illions of
dollars , are: 1999, $85; 2000, $72; 2001, $52; 2002, $2 5; 2003, $17; and t hereaft er, $17.
I n c onnect ion wit h t he Com p any’s c omm unic at ions inf ras truc t ure and t he operat ion of online s erv ic es, M ic ros of t has c ert ain com m unic at ion us age c omm itment s . Fut ure relat ed m inim um c omm itm ents ,
in m illions of dollars , are: 1999, $184; 2000, $100; and 2001, $30. Als o, M ic ros of t has c omm itt ed t o
c ert ain v olum es of out s ourced t elephone s upport and manuf ac t uring of pac k aged produc t and has
c omm it t ed $420 m illion f or c ons t ruct ing ne w buildings .
During 1996, M ic ros oft and Nat ion al Broadc as t ing Com pany (NBC) es t ablis hed t wo M SNBC j oint
v ent ures: a 24 -hour c able ne ws and inf orm at ion c hannel and an int erac t iv e online ne ws s erv ic e.
M ic ros of t agreed t o pay $220 m illion ov er a f iv e -year period f or it s int erest in t he c able vent ure, t o pay
one-half of operat ional f undin g of bot h j oint v ent ures f or a m ult iyear period, and t o guar ant ee a port ion
of M SNBC debt .
Contingencies
33
On Oc t ober 7, 1997, Sun M ic ros ys t em s , I nc. brought s uit agains t M ic ros oft in t he U. S. Dist ric t Court f or
t he Nort hern Dis t ric t of Calif ornia. Sun’s Com plaint alleges s ev eral c laims agains t M ic ros of t, all
relat ed t o t he part ies ’ relat ions hip under a M arc h 11, 1996 Tec hnology Lic ens e and Dis t ribut ion
Agreem ent (Agreem ent ) c oncerning c ert ain J av a programm ing language t ec hnology. The Com plaint
s eek s: a prelim inary and perm anent inj unc t ion agains t M ic ros oft dist ribut ing c ert ain produc t s wit h t he
J av a Com pat ibilit y logo, and agains t dis t ribut ing I nt ernet Explorer 4. 0 unles s c ert ain alleged obligat ions are m et; an order c o mpelling M ic ros of t t o perf orm c ert ain alleged obligat ions; an ac c ount ing;
t erm inat ion of t he Agreem ent ; and an a ward of d a m ages , inc luding c om pens at ory, exem plary and
punit iv e dam ages , and liquidat ed dam ages of $35 m illion f or t he alleged s ourc e c ode dis cl os ure.
On M arc h 24, 1998, t he c ourt ent ered an order enj oining M i c ros oft f rom us ing t he J av a Com pat ibilit y
logo on I nt ernet Explorer 4. 0 and t he M ic ros oft Sof t ware Dev elopers Kit f or J av a 2. 0. M ic ros of t has
t ak en s t eps t o f ully c om ply wit h t he order.
On M ay 12, 1998, Sun f iled c om panion m ot ions s eek ing a prelim inary inj unct ion bas ed on alleg at ions of c opyright inf ringem ent and unf air c om pet it ion. Sun reques t ed an order enj oining M ic ros oft
f rom dist ribu t ing any J av a -bas ed t ec hnology in any opera t ing s ys t em , bro ws er, or dev elopers t ools,
inc luding W indo ws 98, I nt ernet Explorer 4. 0 s of t ware, and t he Vis ual J ++™ 6. 0 dev elopment s ys t em f or
J av a, unles s and unt il M ic rosof t inc ludes wit h eac h s uc h produc t an im plem ent at ion of the J av a run t im e env ironm ent t hat pa s s es Sun’s c om pat ibilit y t es t s uit e or an operable im plem entat ion of Sun’s
c urrent J av a run -t im e env ironm ent . The hearing f or t hes e m ot ions is s et f or Sept em ber 4, 1998.
On Oc t ober 20, 1997, t he Antit rus t Div is ion of t he U. S. Depart m ent of J us t ic e (DOJ ) f iled a Pet it ion
f or An Order To Show Caus e i n Unit ed St at es Dis t ric t Court f or t he Dist ric t of Colum bia. In it s pet it ion,
t he DOJ c ont ends t hat M ic ros of t has v iolat ed a 1994 c ons ent dec ree by inc luding I nternet Explorer
t ec hnology in W indows 95, an d by pr ev ent ing OEMs f rom rem ov ing I nt ernet Explorer f unc t ionalit y f rom
v ers ions of W i ndows 95 t he OEM s are lic ens ed t o i ns t all on c om put er s ys t em s t hey s ell.
On Dec em ber 11, 1997, t he dis t ric t c ourt ent ered t wo or ders . I n t he f irs t order, J udge Thom as
Penf ield J ack s on denied t he DOJ ’s c ont em pt pet it ion, and dis m is s ed t he DOJ ’s reques t f or relief
c onc erning M ic r os oft ’s non -dis c los ure agreem ent s bec aus e t he DOJ had f ailed t o pres ent ev idenc e t hat
t he agreem ents had int erf ered wit h any DOJ inv es t igat ion. I n addi t ion, howev er, t he court ruled t hat
t here were d is put ed is s ues of f ac t regarding M ic ros oft ’s v iolat ion of t he c ons ent dec ree, and c onc luded
t hat t he DOJ was lik ely t o p rev ail on it s c laim t hat a v iolat ion had oc c urred. The c ourt ent ered a
prelim inary inj u nc t ion s ua s pont e requiring M ic ros oft not to c ondit ion t he lic ens ing of W indo ws 95 or
any s uc c ess or des kt op operat ing s ys t em on a c om put er m anuf act urer als o lic ens ing any M ic ros oft
bro ws er s of t ware, inc luding I nt ernet Explorer 3. 0 or 4. 0. I n t he s ec ond or der, t he c ourt appoint ed
Harv ard La w Prof es s or La wre nc e Les s ig as a s pec ial m as t er, t o whom t he c ourt delegat ed t he aut horit y
t o c onduc t dis c ov ery, t ak e ev idenc e, and m ak e propos ed f indings of f ac t and c onc lus ions of la w on all
is s ues in t he c as e by M ay 31 , 1998.
M ic ros of t im m ediat ely appealed t he prelim inary inj unc t ion to t he Dis t ric t of Colum bia Circuit Court of
Appeals . On M ay 5, 1998, Mic ros oft als o s ought a s t ay of t he Dis t ric t Court ’s inj unct ion ins of ar as it
applied t o W indo ws 98. On May 12, 1998, t he Court of Appeals grant ed M ic ros of t ’s reques t f or a s t ay.
The Court of Appeals iss ued an opinion on M ic ros oft ’s appeal on J une 23, 1998. It unanim ous ly
rev ers ed t he t rial c ourt , bot h as t o t he ent ry of t he inj unct ion and t he ref erenc e t o t he spec ial m ast er.
The opinion bot h c it ed proc edural errors in t he iss uanc e of t he inj unc t ion and errors of subs t ant iv e la w
in t he int erpret at ion of t he c ons ent dec ree. The c ourt rem anded t he c as e t o J udge J ac ks on f or f urt her
proc eedings c ons is t ent wit h t he Court ’s opinion. There ha s been no f urt her act ion in t hat c as e s inc e
t he Court of Appeals ’ dec is ion.
Alt hough t he Court of Appeals c ould hav e rev ers ed t he dis t ric t c ourt s olely on proc edural grounds , it
c hos e t o addres s at lengt h t he c ent ral iss ue in bot h t he c on s ent dec ree c as e and in t he ne w Sherm an
Ac t c as e brought by t he DOJ and 20 s t at e At t orneys General: whet her M ic ros of t is unla wf ully “t ying” a
“s eparat e produc t ” k nown as M ic ros of t I nt ernet Explorer t o t he W indo ws operat ing s ys t em . T wo
m em bers of t he Court rej ec t ed t he DOJ ’s m ain argum ent that I nt ernet Explorer c ons t it ut es a s eparat e
produc t bec aus e M ic ros of t t reat s it s eparat ely in s om e c irc ums t anc es . (One j udge dis s ent ed in part
f rom t he reas oning in t his part of t he opinion. ) The Court ’s dis c us s ion of ant it rust t ying la w, alt hough
m ade in t he c ont ext of t he c o ns ent dec ree c as e, c learly prov ides guidanc e on m any of t he is s ues
rais ed in t he ne w Sherm an Act c as e.
On M ay 18, 1998, t he DOJ and a group of 20 s t at e At torneys General f iled t wo ant it rus t c as es
agains t M ic ros oft in t he U. S. Dis t ric t Court f or t he Dis t rict of Colum bia. The DOJ c om plaint alleges
v iolat ions of Sect ions 1 and 2 of t he Sherm an Ac t. The DOJ c om plaint s eeks dec larat ory relief as t o
t he v iolat ions it ass erts and prelim inary and perm anen t inj unct iv e relief regarding: t he inc lus ion of
I nt ernet brows ing s of t ware (o r ot her s oft ware produc t s ) as part of W indo ws ; t he t erms of agreem ents
regarding non-M ic ros of t I nt ernet bro ws ing s of t ware (or ot h er s of t ware produc t s ); t ak ing or t hreat ening
“ac t ion adv ers e” in c ons equenc e of a pers on’s f ailure t o lic ens e or dis t ribut e M ic ros of t I nt ernet
bro ws ing s of t ware (or ot her s of t ware produc t ) or dis t ribut ing c om pet ing produc ts or c ooperat ing wit h
34
t he gov ernm ent ; and rest rict ions on t he sc reens , boot -up s eque nc e, or f unc t ions of M ic ros oft ’s
operat ing s ys t em product s . The s t at e Att orneys General allege largely t he s am e c laims , and v arious
pendent s t at e c laim s. The st at es s eek dec larat ory relief , and prelim inary and perm anent inj unc t iv e
relief s im ilar t o t hat s ought by t he DOJ , t oget her wit h s t at ut ory penalt ies under t he s t at e la w c laim s.
The f oregoing des c ript ion is qualif ied in it s ent iret y by referenc e t o t he f ull t ext of t he c om plaints and
ot her papers on f ile in t hos e ac t ions, c as e num bers 98 -1232 and 98 -1233.
On M ay 22, 1998, J udge J ack s on c ons olidat ed t he t wo ac t ions . Hearings f or t he plaintif f s ’ m ot ion
f or a prelim inary inj unc t ion, M ic ros of t ’s m ot ion f or s um mary j udgm ent, and a t rial on t he m erit s are
s c heduled t o begin in Sept em ber 1998. M ic ros oft believ es t hat t he c laim s are wit hout m erit and
int ends t o def end against t hem v igorous ly. I n ot her ongoing inv es t igat ions , t he DOJ and s ev eral s t ate
At t orneys General hav e reques t ed inf orm at ion f rom M ic ros of t c o nc erning v arious is s ues .
Caldera, I nc . f iled a laws uit a gains t M ic ros of t in J uly 1996. I t alleges Sherm an Act v iolat ions rela t ing t o M ic ros oft lic ens ing prac t ic es of M S -DOS and W indows in t he lat e 80’s and early 90’s — ess ent ially t he s am e c om plaint s t hat res ult ed in t he 1994 c ons ent dec ree. Calde ra c laim s t o o wn t he right s
of Nov ell, I nc . and Digit al Res earc h I nc . relat ing t o DR -DOS and Nov ell DOS product s. I t als o ass erts
a c laim t hat W indows 95 is a t ec hnologic al t ie of W indo ws and M S -DOS. Fac t dis c ov ery is s c heduled
t o end in Oc t ober 1998, an d t rial is sc heduled f or J une 1999. M ic ros of t is v igorous ly def ending t he
c as e.
M ic ros of t is als o s ubj ect t o v arious legal proc eedings and c laim s t hat aris e in t he ordinary c ours e of
bus ines s.
M anagem ent c urrent ly believ es t hat res olv ing t hes e m at t ers wil l not hav e a m at erial adv ers e im pac t
on t he Com pany’s f inanc ial pos it ion or it s res ults of operat ions .
Geographic Information
Year Ended June 30
Rev enue
U. S. operat ions
European operat ions
Ot her int ernat ional operat ions
Elim inat ions
Tot al rev enue
Operat ing inc om e
U. S. operat ions
European operat ions
Ot her int ernat ional oper at ions
Elim inat ions
Tot al operat ing inc om e
I dent if iable as s ets
U. S. operat ions
European operat ions
Ot her int ernat ional operat ions
Elim inat ions
Tot al ident if iable ass ets
1996
1997
1998
$ 6, 739
2, 215
1, 267
(1, 550)
$ 8, 877
2, 770
1, 757
(2, 046)
$11, 331
3, 719
1, 776
(2, 342)
$ 8, 671
$11, 358
$14, 484
$ 2, 118
649
297
(5)
$ 3, 474
1, 013
469
(85)
$ 3, 059
$ 4, 871
$ 6, 414
$ 8, 193
2, 280
1, 042
(1, 422)
$11, 630
3, 395
705
(1, 343)
$18, 294
5, 052
1, 113
(2, 102)
$10, 093
$14, 387
$22, 357
$
4, 591
1, 470
423
(70)
I nt erc om pany s ales bet ween geographic areas are ac c ounted f or at pric es repres ent at iv e of unaf f iliat ed
part y t rans act ions . “U. S. operat ions ” inc lude s hipm ent s t o c us t om e rs in t he Unit ed St at es , lic ens ing to
OEM s, and export s of f inis hed goods direc t ly t o int ernat ional c ust om ers , prim arily in As ia, Sout h
Am eric a, and Canada. Expo rt s and int ernat ional OEM t rans ac t ions are prim arily in U. S. dollars and
t ot aled $2. 1 billion, $2. 3 billion, and $2. 9 billion in 1996, 1997, and 1998.
“Ot her int ernat ional operat ions ” prim arily inc lude s ubs idiaries in J apan, Canada, Aus t ralia, and
Bra zil. I nt ernat ional rev enue, whic h inc ludes European operat ions , ot her i nt ernat ional operat ions ,
export s , and OEM dis t ribut ion, was 56%, 56%, and 53% of t ot al rev enue in 1996, 1997, and 1998.
M ost int ernat ional ident if iable as s et s are U. S. dollar denom inat ed inv est m ent s ec urit ies .
35
Quarterly Information (Unaudited)
Quarter Ended
Sept. 30
Dec. 31
Ma r. 3 1
June 30
Year
$2, 016
704
499
0. 21
0. 19
$2, 195
809
575
0. 24
0. 23
$2, 205
778
562
0. 24
0. 22
$2, 255
768
559
0. 23
0. 22
$ 8, 671
3, 059
2, 195
0. 93
0. 86
27. 32
21. 25
25. 85
20. 10
26. 77
19. 97
31. 47
24. 91
31. 47
19. 97
$2, 295
853
614
0. 26
0. 24
$2, 680
1, 035
741
0. 31
0. 28
$3, 208
1, 484
1, 042
0. 43
0. 40
$3, 175
1, 499
1, 057
0. 44
0. 40
$11, 358
4, 871
3, 454
1. 44
1. 32
34. 66
26. 88
43. 07
32. 72
51. 75
40. 38
67. 47
44. 88
67. 47
26. 88
$3, 130
1, 060
663
0. 27
0. 25
$3, 585
1, 613
1, 133
0. 47
0. 42
$3, 774
1, 867
1, 337
0. 55
0. 50
$3, 995
1, 874
1, 357
0. 55
0. 50
$14, 484
6, 414
4, 490
1. 83
1. 67
75. 38
61. 63
73. 31
59. 00
90. 94
62. 19
108. 56
81. 88
108. 56
59. 00
1996
Rev enue
Operat ing inc om e
Net inc om e
Bas ic earnings per s hare
Dilut ed earnings per s hare
Com m on s t oc k pric e per s hare:
High
Lo w
1997
Rev enue
Operat ing inc om e
Net inc om e
Bas ic earnings per s hare
Dilut ed earnings per s hare
Com m on s t oc k pric e per s hare:
High
Lo w
1998
Rev enue
Operat ing inc om e
Net inc om e
Bas ic earnings per s hare
Dilut ed earnings per s hare
Com m on s t oc k pric e per s hare:
High
Lo w
The Com pany’s c om m on s t ock is t raded on The Nas daq St oc k M ark et under t he s ym bol M SFT. On
J uly 31, 1998, t here were 70 , 491 regis t ered holders of rec ord of t he Com pany’s c ommon s t ock . The
Com pany has not paid c as h div idends on it s c omm on st ock .
36
Re p o r t s o f M a n a g e m e n t a n d I n d e p e n d e n t A u d i t o rs
M anagem ent is res pons ible for preparing t he Com pany’s financ ial s t at em ents and related inf orm at ion
t hat appears in t his annual report . M anagem ent believ es that t he f inanc ial s t at em ent s fairly ref lec t t he
f orm and s ubs t anc e of t ransac t ions and reas onably present t he Com pany’s f inanc ial c ondit ion and
res ult s of operat ions in c onform it y wit h generally ac c ept ed ac c ount ing princ iples . Managem ent has
inc luded in t he Com pany’s f i nanc ial s t at em ents am ounts that are bas ed on es t im at es and j udgm ents,
wh ic h it believ es are reas onable under t he c irc um st anc es .
The Com pany m aint ains a s ys t em of int ernal acc ount ing polic ies , proc edures , and c ont rols int ended
t o prov ide reas onable ass uranc e, at appropriat e c os t, t hat t rans ac t ions are exec ut ed in ac c ordance
wit h Com pany aut hori zat ion and are properly rec orded and report ed in t he f inanc ial s tat em ents , and
t hat as s ets are adequat ely s afeguarded.
Deloit t e & Touc he LLP audits t he Com pany’s f inanc ial s tat em ents in ac c ordanc e wit h g enerally
ac c ept ed audit ing s t andards and prov ides an obj ec t iv e, independent rev iew of t he Com pany’s int ernal
c ont rols and t he f airness of its report ed f inanc ial c ondit ion and res ult s of operat ions.
The M ic ros of t Board of Direct ors has an Audit Com m it t ee c o m pos ed of nonm anagem ent Direc t ors.
The Com m it t ee m eet s wit h f inanc ial m anagem ent , int ernal audit ors , and t he independent audit ors t o
rev iew int ernal ac c ount ing c ont rols and ac c ount ing, audit ing, and f inanc ial report ing m atters .
<s ignat ure>
Gregory B. M af f ei
V i c e P re s i d en t, F i n a nc e;
C hi ef Fi na n c i a l Of fi c e r
To t he Board of Direc t ors and St ock holders of M ic ros of t Corporat ion:
W e hav e audit ed t he ac c ompanying balanc e s heets of Mic ros oft Corporat ion and s ubs idiaries as of
J une 30, 1997 and 1998, and t he relat ed st at em ents of inc om e, c as h f lo ws , and s t oc k holders ’ equit y f or
eac h of t he t hree years ended J une 30, 1998, appearing on pages 26 and 34 t hrough 47. These
f inanc ial s t at em ents are t he res pons ibilit y of t he Com pany’s m anagem ent. Our res pons ibilit y is t o
expres s an opinion on t hes e f inanc ial s t at em ent s bas ed on our audit s .
W e c onduc t ed our audit s in ac c ordanc e wit h generally ac c ept ed audit ing st andards . Thos e st a ndards require t hat we plan and perf orm t he audit t o obt ain reas onable as s uranc e about whet her t he
f inanc ial s t at em ent s are f ree of m at erial m iss t at em ent . An audit inc ludes exam ining, on a t est bas is,
ev idenc e s upport ing t he am ount s and disc los ures in t he f inanc ial s t at em ent s . An audit als o inc ludes
as s ess ing t he ac c ount ing princ iples us ed and s ignif ic ant es t im at es m ade by m anagement , as well as
ev aluat ing t he ov erall f inanc ial s t at em ent pres ent at ion. W e believ e t hat our audit s prov ide a reas o nable bas is f or our opi nion.
I n our opinion, s uc h f inanc ial s t at em ents pres ent f airly, in all m at e rial res pec t s, t he f inanc ial pos it ion of M ic ros oft Corporat ion and s ubs idiaries as of J une 30, 1997 and 1998, and t he res ult s of t heir
operat ions and t heir c as h f lows f or eac h of t he t hree years ended J une 30, 1998 in conf orm it y wit h
generally ac c ept ed ac c ount ing princ iples .
<s ignat ure>
Deloit t e & Touc he LLP
S e att l e , W as hi n gt o n
J ul y 1 6, 1 9 98
(Augus t 3, 1998 as t o Subs equent Sale Not e)
37
S u b s i d i a ri e s
Microsoft Corporation
O ne M i c r o s o f t W a y
Redmond, W A
98052-6399
M i c r o s o f t D o m i ni c a n a , S . A .
( D o m i ni c a n R e p u b l i c )
Microsoft FSC Corp.
( U . S . V i r g i n I s l a nd s )
Microsoft El Salvador
S.A. de C.V.
M i c r o s o f t ( C hi na )
Company Limited
( T he P e o p l e ’ s R e p u b l i c
o f C hi n a )
M i c r o s o f t I nv e s t m e n t s , I n c .
(Nevada)
Microsoft Corporation
( R e p r e s e nt a t i v e O f f i c e )
(Egypt)
Microsoft Peru, S.A.
Microsoft Ireland
O p e r a t i o ns L i m i t e d
(Ireland)
M i c r o s o f t L i c e ns i ng , I n c .
(Nevada)
M i c r o s o f t P ue r t o R i c o , I n c .
(Manufacturing)
(Delaware)
T he M i c r o s o f t
Network L.L.C.
(Delaware)
Microsoft de
Panama, S.A.
of MICROSOFT
Corporation i n Hanoi
( V i e t na m )
Microsoft Del Ecuador S.A.
M i c r o s o f t P hi l i p p i ne s , I n c .
Microsoft Oy
( F i nl a n d )
M i c r o s o f t s p . z. o . o .
( P o l a nd )
Microsoft France S.A.R.L.
Microsoft G.m.b.H.
(Germany)
MSFT-Software Para
Microcomputadores, LDA
( P o r t ug a l )
Microsoft Hellas S.A.
(Greece)
Microsoft Caribbean, Inc.
( P ue r t o R i c o ) ( D e l a w a r e )
Microsoft de
G ua t e m a l a , S . A .
M i c r o s o f t R o m a ni a S R L
GraceMac Corporation
(Nevada)
Microsoft
H o n g K o ng L i m i t e d
M i c r o s o f t d e A r g e nt i na S . A .
Microsoft Hungary Kft.
Microsoft Pty. Limited
( A us t r a l i a )
Microsoft Corporation
( I nd i a ) P r i v a t e L i m i t e d
Microsoft Gesellschaft
m.b.H.
( A us t r i a )
M i c r o s o f t I nd i a ( R & D )
Private Limited
Microsoft ZAO
( R us s i a )
Microsoft
M a n u f a c t ur i n g B . V .
( R e p r e s e nt a t i v e O f f i c e )
( R us s i a )
Microsoft Corporation
( R e p r e s e nt a t i v e O f f i c e )
(Zimbabwe)
W ebTV Networks, Inc.
( C a l i f o r ni a )
D r e a mW o r k s
I nt e r a c t i v e L . L . C .
(W a s hi n g t o n , 5 0 % o w ne d )
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)
N i ne m s n P t y . L i m i t e d
( A us t r a l i a )
W ebTV Networks K.K.
( J a p a n)
Microsoft
S i ng a p o r e P t e L t d .
Microsoft Slovakia s.r.o.
PT. Microsoft Indonesia
Microsoft N.V.
(Belgium)
Microsoft
I nf o r m a t i c a L i m i t a d a
( B r a zi l )
Microsoft Canada Co.
SOFTIMAGE, Inc.
(Canada)
Microsoft Israel Ltd.
Microsoft S.p.A.
(Italy)
Microsoft Côte d’Ivoire
(Ivory Coast)
Microsoft
Company, Limited
( J a p a n)
M i c r o s o f t d . o . o . , L j ub l j a na
( S l o v e ni a )
Microsoft (S.A.)
(Proprietary) Limited (South
Africa)
Microsoft Iberica S.R.L.
( S p a i n)
Microsoft Aktiebolag
(Sweden)
M i c r o s o f t C hi l e S . A .
M i c r o s o f t C o l o m b i a I nc .
(Delaware)
Microsoft de Centroamérica
S.A.
(Costa Rica)
Microsoft Hrvatska d.o.o.
(Croatia)
Microsoft s.r.o.
( C ze c h R e p ub l i c )
Microsoft Danmark ApS
(Denmark)
East Africa
Software Limited
(Kenya)
Microsoft CH
(Korea)
Microsoft (Malaysia)
S d n. B h d .
M i c r o s o f t M é xi c o ,
S.A. de C.V.
Microsoft AG
( S w i t ze r l a nd )
Microsoft Taiwan
Corporation
M i c r o s o f t ( T h a i l a nd )
Limited
M i c r o s o f t B i l g i s a y a r Y a zi l i m
H i zm e t l e r i
Limited Sirketi
( T ur k e y )
M i c r o s o f t I nd i a n
O c e a n I s l a nd s L i m i t e d
( M a u r i t i us )
Microsoft Corporation
( U ni t e d A r a b E m i r a t e s )
Microsoft Maroc S.A.R.L.
(Morocco)
Microsoft Limited
( U ni t e d K i ng d o m )
Microsoft B.V.
( T he N e t he r l a nd s )
Microsoft
Research Limited
( U ni t e d K i ng d o m )
Microsoft
I nt e r na t i o na l B . V .
( T he N e t he r l a nd s )
Microsoft
N e w Z e a l a nd L i m i t e d
Microsoft Norge AS
(Norway)
M i c r o s o f t U r u g ua y , S . A .
Microsoft
Venezuela, S.A.
T he R e s i d e nt
R e p r e s e nt a t i v e O f f i c e
38
Di re c t o rs a n d Of f i c e rs
Direc t ors
William H. Gates
Chairman of the Board;
Chief Executive Officer,
Microsoft Corporation
Paul G. Allen
Jill E. Barad
President and Chief Executive
Officer, Mattel, Inc.
Richard A. Hackborn
David F. Marquardt
Jon A. Shirley
General Partner, Technology
Venture Investors and
August Capital
President and Chief Operating
Officer, Microsoft Corporation
(retired)
Executive Vice President, HewlettPackard Company (retired)
Wm. G. Reed, Jr.
William H. Gates
Nathan P. Myhrvold
Joachim Kempin
Craig Mundie
Chairman of the Board;
Chief Executive Officer
Group Vice President;
Chief Technology Officer
Senior Vice President,
OEM, Internet Customer Unit,
Embedded Systems
Senior Vice President,
Consumer Platforms Division
Steven A. Ballmer
Jeffrey S. Raikes
President
Group Vice President,
Sales and Support
Founder, Asymetrix Corp.;
Owner, Interval Research Corp.,
Vulcan Ventures Inc.
Chairman, Simpson Investment
Company (retired)
Exec ut iv e Of f ic ers *
Robert J. Herbold
Executive Vice President;
Chief Operating Officer
James E. Allchin
Frank M. (Pete) Higgins
Senior Vice President,
Personal and Business
Systems Division
Group Vice President,
Interactive Media
Orlando Ayala Lozano
Paul A. Maritz
Senior Vice President,
South Pacific and
Americas Region
Group Vice President,
Platforms and Applications
William H. Neukom
Michel Lacombe
Senior Vice President,
Europe, Middle East, and
Africa Region; President,
Microsoft Europe
Robert L. Muglia
Senior Vice President,
Applications and
Tools Division
Senior Vice President, Law and
Corporate Affairs; Secretary
Bernard P. Vergnes
Senior Vice President, Microsoft;
Chairman, Microsoft Europe
Gregory B. Maffei
Vice President, Finance;
Chief Financial Officer
Vic e Pres idents
Robert J. Bach
Moshe T. Dunie
Lewis Levin
Darryl E. Rubin
Learning, Entertainment,
and Productivity
Windows Operating Systems
Desktop Finance
Software Strategy
Dianne L. Gregg
Moshe Lichtman
Stephen A. Schiro
Eastern United States Region
Digital TV Platform Strategy
Consumer Customer Unit
Paul Gross
John Ludwig
Charles Stevens
Developer Tools
Web Essentials
Application Developers
Customer Unit
Developer Relations
and Windows Marketing
Sam Jadallah
Robert L. McDowell
Organization Customer Unit
Enterprise Business Relationships
Frank M. Clegg
Laura Jennings
Mike Murray
Central United States
and Canada Region
Web Essentials
Human Resources
and Administration
Rich Tong
Product Support Services
Cameron Myhrvold
David Vaskevitch
Distributed Applications Platform
Harel Kodesh
Strategic Relationships,
Internet Customer Unit
Dick Brass
Research/Technology Development
Brad Chase
Rick Thompson
Hardware
David Cole
Web Client and Consumer
Experience
Kevin Johnson
Joe Vetter
Consumer Appliances
John G. Connors
Information Technology;
Chief Information Officer
Thomas Koll
Jean-Philippe Courtois
Pieter Knook
Worldwide Customer Marketing
Asia Region
Jon DeVaan
John Leftwich
Desktop Applications
Europe, Middle East, and
Africa Region Marketing
Applications Marketing
John F. Neilson
Interactive Service Media
Western United States
and Australia Region
Umberto Paolucci
Deborah N. Willingham
Europe Region
Enterprise Customer Unit
Internet Customer Unit
Richard R. Devenuti
Rick Rashid
Research
Jon Reingold
Corporate Marketing
Operations

As defined by Section 16 of the Securities and Exchange Act of 1934
39
I n ve s t o r R e l a t i o n s
ht t p:/ / www. m ic ros of t. c om /m sf t/
As a M ic ros oft s hareh older, you’re inv it ed t o t ak e adv ant age of s hareholder s erv ic es or to reques t m ore
inf orm at ion about M ic ros of t:
Account questions
Investor Relations
Annual meeting
Our t ransf er agent c an help you
wit h a v ariet y of s hareholder relat ed s erv ic es, inc luding:
You c an c ont ac t M ic r os oft ’s
I nv est or Relat ions group any
t im e t o order f inanc ial doc um ents s uc h as t his annual report
and t he Form 10 -K. Call us t oll f ree at (800) 285 -7772. [ Out side
t he Unit ed St at es, c all (425)
936-4400. ] Or s end a f ax t o
(425) 936 -8000. W e c an be
c ont act ed during W est Coast
bus ines s hours t o ans wer
inv es tm ent -orient ed quest ions
about M ic ros of t . I n addit ion, you
c an writ e us at:
M ic ros of t s hareholders are
inv it ed t o at t end our annual
m eet ing, whic h will be held on
W ednes day, Nov em ber 11, 1998
f rom 8 t o
9 A. M. at t he M eydenbauer
Cent er, 11100
NE 6t h St reet , Bellev ue,
W as hin gt on. Park ing at t he
Cent er is lim it ed; pleas e plan
ahead if you are driv ing t o t he
m eet ing.
•
•
•
•
Change of address
Los t s t oc k c ert if ic at es
Trans f er of s t oc k t o
anot her pers on
Addit ional adm inist rat iv e
s erv ic es
You c an c all our t rans f er agent
t oll-f ree at (800) 285 -7772.
You c an als o wr it e t hem at :
Chas eM ellon
Shareholder Serv ic es
P. O. Box 3315
Sout h Hac k ens ack , NJ
07606-1915
Or you c an e -m ail our t rans f er
agent at :
m sf t @c has em ellon. c om
I nv est or Relat ions Depart m ent
M ic ros of t Corporat ion
One M ic ros oft W ay
Redm ond, W as hingt on
98052-6399
Or bet t er yet, s end us an e -mail
at ms ft @m ic ros of t. c om
Get financial
information online
Anyone wit h ac c es s t o t he
I nt ernet c an v ie w t his annual
report elec t ronic ally, along wit h
a wide v ariet y of ot her f ina nc ial
m at erials at :
www.microsoft.com/msft/
Shareholders of rec ord who
rec eiv e m ore t han one c opy of
t his annual report c an c ont ac t
our t rans f er agent and arrange
t o hav e t heir ac c ounts c ons ol idat ed. Shareholders who o wn
M ic ros of t s t oc k t hrough a
brok erage c an c ont ac t t heir
brok er t o reques t c ons olidat ion
of t heir ac c ount s.
No p art of t hi s re port m ay be r epr od u c ed or t r an sm i t t ed i n any f orm or by an y m eans, el ect roni c o r ot h er wi se, wi t ho ut t he ex pre ss wri t t en
perm i ssi on of Mi crosof t Corporati on.
© 1998 Mi cro sof t Corpor ati on. Al l ri ghts re serv ed.
Mi crosof t , BackOf f i ce, CarPoi nt , Enc art a, Ex pedi a, H om eAdv i sor, M S- DO S, MS DN, MSN, O ut l oo k, Po werPoi nt , Si d e wal k, Sl at e, Vi sual Ba si c,
Vi sual J++, Vi sual Stu di o, W ebTV, W here do you want to g o to day ?, W i ndows, a nd W i ndo ws NT ar e ei ther r egi ster ed tr ad e m arks o r tra dem ark s of
Mi crosof t Corpor ati on i n th e U.S. an d/or other cou ntri e s. Othe r pr od uct s a nd c o m pany nam e s m enti one d h erei n m ay be the tra dem ark s of thei r
re spe ct iv e own er s.
40