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Microsoft 2002 Annual Report and Form 10-K

Table of contents

  • Page 1
    Microsoft 2002 Annual Report and Form 10-K

  • Page 2
    ... console game system ever built. In the near future, we plan to launch Xbox Live, a groundbreaking online gaming service that will let broadband users play multiplayer Xbox games on the Internet. HELPING PEOPLE ENJOY ALL THE INTERNET HAS TO OFFER As more people turn to the Web for information...

  • Page 3
    ... and partners and integrates a powerful new application environment for developing XML Web Services and solutions to dramatically improve business processes. The Windows .NET Server 2003 family joins a comprehensive range of Microsoft server products, including Microsoft SQL Serverâ„¢ 2000, the...

  • Page 4
    ..., applications, and programming languages. In February 2002, we launched Visual Studio® .NET, the first development environment built from the ground up that enables software developers to create and integrate XML Web Services and connected Windows-based applications. WORKING TOGETHER TO BUILD THE...

  • Page 5
    .... Designed to equip young people with technology skills through education and training, the program has targeted projects in South Africa, Poland, and the Philippines. Additional resources from Microsoft expanded the program into Russia, additional Asian countries, and Latin America. GIVING KIDS THE...

  • Page 6
    ...launch of the Xbox video game system and strong growth in MSN subscription income. During the coming year, Microsoft will launch several important new products, including Windows XP Tablet PC Edition and Windows .NET Servers, and we plan to increase spending on research and development by 20 percent...

  • Page 7
    ... 120 companies as members. To provide software developers with the tools and infrastructure for building and deploying XML Web services and other .NET-connected solutions, we launched Visual Studio .NET and the .NET Framework in February 2002. In fiscal 2003 we plan to launch Windows .NET Servers...

  • Page 8
    ... instituted a number of changes to internal business systems. One of the most significant changes was giving the leaders of our key businesses the tools, resources, and responsibility for making the important decisions around product development, sales, marketing, and financial performance. Business...

  • Page 9

  • Page 10
    ...Computing Deepening customer trust through the quality of our products and services, our responsiveness and accountability, and our predictability in everything we do. Great People with Great Values Delivering on our mission requires great people who are bright, creative and energetic, and who share...

  • Page 11
    FORM 10-K

  • Page 12
    ... of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions 55 55 55 55 Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signatures Certifications 56 57 57

  • Page 13
    ... proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ï,¨ The aggregate market value of common stock held by non-affiliates of the registrant as of July 31, 2002 was $215,553,343,213. The number of shares outstanding of the...

  • Page 14
    ...Software and Services. For segment reporting purposes, Desktop Applications includes revenue from Microsoft Office; Microsoft Project; Visio; client access licenses (CALs) for Windows NT Server and Windows 2000 Server, Exchange, and BackOffice; Microsoft Great Plains; and bCentral. Desktop Platforms...

  • Page 15
    ... Manager delivers enterprise-class solutions for operations management of Windows 2000, the Microsoft Active Directory service, and other component services in Windows 2000, as well as other Microsoft .NET Enterprise Server applications such as Exchange and SQL Server. Mobile Information Server...

  • Page 16
    ... Flight Simulator is a popular aircraft flight simulation product. Other games include Age of Empires, Dungeon Siege, MechWarrior, Microsoft Links, Train Simulator, Zoo Tycoon, and other action and sports titles. Zone.com is a gaming community on the Internet allowing multiplayer gaming competitions...

  • Page 17
    ..., including Microsoft Works, Microsoft Word, Microsoft Money, Microsoft Encarta encyclopedia, Microsoft Picture It! Photo, and Microsoft Streets & Trips. Mobility and Embedded Systems. Microsoft develops a number of software platforms for mobile computing. Products such as Pocket PC, Pocket PC Phone...

  • Page 18
    ... the Windows 2000 Server family, make up Microsoft .NET's server infrastructure for deploying, managing, and orchestrating XML Web services. Designed with mission-critical performance in mind, they provide enterprises with the agility they need to integrate their systems, applications, and partners...

  • Page 19
    ...work with a variety of companies worldwide to help them develop and deploy end-to-end network solutions based on Microsoft platforms. NSPs focus on key network service industries including telecommunications and wireless companies and hosts. Online Services and Products. Microsoft distributes online...

  • Page 20
    ... priced. Additionally, Web-based application hosting services provide an alternative to PC-based applications such as Microsoft Office. Microsoft's PC and server operating system products face substantial competition from a wide variety of companies. Competitors such as IBM, Apple Computer...

  • Page 21
    ... Humacao, Puerto Rico and a 36,000 square-foot facility in Singapore for the Company's Asia Pacific Operations Center. Leased office building space includes the following locations: Tokyo, Japan 343,000 square feet; Unterschleissheim, Germany 253,000 square feet; United Kingdom campus 242,000 square...

  • Page 22
    ...Development and Strategy Senior Vice President, .NET Enterprise Servers Senior Vice President, Microsoft Americas Senior Vice President, Enterprise Storage Division Senior Vice President; Chief Technical Officer, Advanced Strategies and Policy Group Vice President, Productivity and Business Services...

  • Page 23
    ... since December 1998. Before managing the Windows group, Mr. Valentine managed the server applications division and had been responsible for the Exchange product unit. He joined Microsoft in 1987. Mr. Vaskevitch was named Senior Vice President and Chief Technical Officer, Business Platform in August...

  • Page 24
    ..., except earnings per share Year Ended June 30 Revenue Operating income Income before accounting change Net income Diluted earnings per share before accounting change Diluted earnings per share Cash and short-term investments Total assets Stockholders' equity (1) (2) $ 1998 15,262 6,585 4,490...

  • Page 25
    ... of Xbox video game system revenue and the strong penetration of Microsoft Windows XP Professional and Home operating systems. Revenue growth in fiscal 2001 was driven primarily by licensing of Microsoft Windows 2000 Professional, Microsoft SQL Server, and the other .NET Enterprise Servers. Revenue...

  • Page 26
    ... Xbox video game system released during the year, as well as strong Windows XP Professional licensing, MSN subscription revenue, and revenue from Microsoft Great Plains. In fiscal 2001, revenue growth was led by strong licensing of Windows 2000 Professional and the family of .NET Enterprise Servers...

  • Page 27
    ... versions of Microsoft Office 2000, especially the Office Personal Edition sold in Japan, Windows platform and server licensing, and strong adoption of SQL Server. The Company's operating results are affected by foreign exchange rates. Approximately 30%, 27%, and 25% of the Company's revenue was...

  • Page 28
    ... loss for the time value of options and the approximately $250 million loss for derivative instruments not designated as hedging instruments. FINANCIAL CONDITION The Company's cash and short-term investment portfolio totaled $38.65 billion at June 30, 2002. The portfolio consists primarily of fixed...

  • Page 29
    ... tender offer. Microsoft purchased Navision's shares for approximately $1.45 billion in stock and cash. Navision is a provider of integrated business software solutions for small and medium-sized companies. APPLICATION OF CRITICAL ACCOUNTING POLICIES Microsoft's financial statements and accompanying...

  • Page 30
    ... the prices it charges for its products, and revenues and operating margins may consequently decline. New Products and Services. The Company has made significant investments in research and development for new products, services and technologies, including Microsoft .NET, Xbox, business applications...

  • Page 31
    ... to foreign currency, interest rate, and equity price risks. A portion of these risks is hedged, but fluctuations could impact the Company's results of operations and financial position. The Company hedges the exposure of accounts receivable and a portion of anticipated revenue to foreign currency...

  • Page 32
    ... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCOME STATEMENTS In millions, except earnings per share Year Ended June 30 Revenue Operating expenses: Cost of revenue Research and development Sales and marketing General and administrative Total operating expenses Operating income Losses on equity...

  • Page 33
    Part II Item 8 BALANCE SHEETS In millions June 30 Assets Current assets: Cash and equivalents Short-term investments Total cash and short-term investments Accounts receivable, net Inventories Deferred income taxes Other Total current assets Property and equipment, net Equity and other investments ...

  • Page 34
    ...other noncash items Net recognized (gains)/losses on investments Stock option income tax benefits Deferred income taxes Unearned revenue Recognition of unearned revenue Accounts receivable Other current assets Other long-term assets Other current liabilities Other long-term liabilities Net cash from...

  • Page 35
    ...Net gains/(losses) on derivative instruments Net unrealized investment gains/(losses) Translation adjustments and other Comprehensive income Preferred stock dividends Immaterial pooling of interests Common stock repurchased Balance, end of year Total stockholders' equity See accompanying notes. 2000...

  • Page 36
    ...average rates of exchange prevailing during the year. REVENUE RECOGNITION Microsoft accounts for the licensing of software in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition. The Company recognizes revenue when...

  • Page 37
    ... the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies. Securities Price Risk. Strategic equity investments are subject to market price risk. From time to time, the Company uses and designates options to hedge fair values...

  • Page 38
    ... to the purchase and production of inventories. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated life of the asset or the lease term, ranging from one to 15 years. Computer software developed or obtained...

  • Page 39
    ... on the terms and conditions of the license and prices of the elements. Product life cycles are currently estimated at three years for Windows operating systems and 18 months for desktop applications. The components of unearned revenue were as follows: In millions June 30 Volume licensing programs...

  • Page 40
    ...$ $ $ In millions Cost Basis Unrealized Gains Unrealized Losses Recorded Basis June 30, 2002 Cash and equivalents: Cash Commercial paper Certificates of deposit Money market mutual funds Corporate notes and bonds Municipal securities Cash and equivalents Short-term investments: Commercial paper...

  • Page 41
    ... goods Raw materials and work in process Inventories $ $ 2001 78 5 83 2002 $ 505 168 $ 673 INVENTORIES NOTE 6 In millions June 30 Land Buildings Computer equipment and software Other Property and equipment - at cost Accumulated depreciation Property and equipment - net PROPERTY AND EQUIPMENT 2001...

  • Page 42
    ...connection with Microsoft's exchange of all of its 33.7 million shares and warrants of Expedia, Inc. to USA Networks, Inc. No goodwill was acquired or impaired during fiscal 2002. As of June 30, 2002, Desktop and Enterprise Software and Services goodwill was $1.1 billion, Consumer Software, Services...

  • Page 43
    ... hedges, and $179 million net loss for changes in the fair value of derivative instruments not designated as hedging instruments. Derivative gains and losses included in OCI are reclassified into earnings at the time forecasted revenue or the sale of an equity investment is recognized. During fiscal...

  • Page 44
    ...stock purchase plans. In 2002, the Company acquired 5.1 million of its shares as a result of a structured stock repurchase transaction entered into in 2001, which gave it the right to acquire such shares in exchange for an up-front net payment of $264 million. To enhance its stock repurchase program...

  • Page 45
    ... million shares at average prices of $72.38, $36.87, and $50.52 per share. At June 30, 2002, 56.8 million shares were reserved for future issuance. SAVINGS PLAN The Company has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute...

  • Page 46
    ... plans. An alternative method of accounting for stock options is SFAS 123, Accounting for Stock-Based Compensation. Employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. 48 / MSFT 2002 FORM...

  • Page 47
    ... and employee stock purchase plans been determined as prescribed by SFAS 123, pro forma income statements for 2000, 2001, and 2002 would have been as follows: In millions, except per share amounts Year Ended June 30 Reported Revenue Operating expenses: Cost of revenue Research and development Sales...

  • Page 48
    ... the financial statements for such periods have not been restated. In April 2001, the Company acquired Great Plains Software, Inc. for approximately $1.1 billion in stock. Great Plains is a leading supplier of mid-market business applications. The acquisition was accounted for by the purchase method...

  • Page 49
    .... A large number of overcharge class action lawsuits have been initiated against Microsoft in various state and Federal courts. These cases allege that Microsoft has competed unfairly and unlawfully monopolized alleged markets for operating systems and certain software applications and seek to...

  • Page 50
    ... and Services includes Server Platforms; Server Applications; developer tools and services; and Enterprise services. Consumer Software, Services, and Devices operating segment includes Xbox video game system, MSN Internet access, MSN network services, PC and online games, learning and productivity...

  • Page 51
    ... software solutions for small and medium-sized companies. The purchase price allocation is currently being developed for this acquisition. QUARTERLY INFORMATION In millions, except per share amounts (unaudited) Quarter Ended Fiscal 2000 Revenue Gross profit Net income Basic earnings per share...

  • Page 52
    ... Directors and Stockholders of Microsoft Corporation: We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the Company) as of June 30, 2001 and 2002, and the related consolidated statements of income, cash flows, and stockholders' equity for each of...

  • Page 53
    ... BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS EQUITY COMPENSATION PLAN INFORMATION In millions, except per share amounts June 30, 2002 (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) (c) Number of securities remaining available...

  • Page 54
    ... Directors (5) Microsoft Corporation Stock Option Plan for Consultants and Advisors Microsoft Corporation 1997 Employee Stock Purchase Plan (6) Microsoft Corporation Savings Plus Plan (7) Trust Agreement dated June 1, 1993 between Microsoft Corporation and First Interstate Bank of Washington Form of...

  • Page 55
    ...Vice President; Chief Financial Officer (Principal Financial and Accounting Officer) I, Steven A. Ballmer, certify that: 1. I have reviewed this annual report on Form 10-K of Microsoft Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact...

  • Page 56
    ....microsoft.com/middleeast/ www.microsoft.com/uk/ www.microsoft.com/uruguay/ www.microsoft.com/venezuela/ www.microsoft.com/vietnam/ * For a complete list of subsidiaries, joint ventures, and other legal entities, See the Exhibits to the Company's Form 10-K as Filed with the Securities and Exchange...

  • Page 57
    ... President, Office Bradford L. Smith Senior Vice President and General Counsel Brian Valentine Senior Vice President, Windows David Vaskevitch Senior Vice President; Chief Technical Officer, Business Platforms Deborah N. Willingham Senior Vice President, Human Resources 59 / MSFT 2002 FORM 10-K

  • Page 58
    ... and Services Lindsay Sparks Corporate Vice President, Worldwide Small & Medium Business Group Charles G. V. Stevens Corporate Vice President, Enterprise Storage Division Kirill Tatarinov Corporate Vice President, Windows Systems Management David M. Thompson Corporate Vice President, Windows Server...