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Microsoft Corporation 2003 Annual Report
Your potential. Our passion.

Table of contents

  • Page 1
    Microsoft Corporation 2003 Annual Report Your potential. Our passion.

  • Page 2
    ... since we know we can't accomplish these goals alone, we're building relationships with the world's largest ecosystem of developers, channel partners, and hardware manufacturers who share our vision. Everything we do begins with a focus on customers. Every idea. Every solution. Every line of code.

  • Page 3
    ... Microsoft SQL Server™ continues to be a benchmark for performance in enterprise data management while offering customers the lowest implementation and maintenance costs in the industry. And Visual Studio® .NET offers a complete set of tools for developing enterprise solutions, letting businesses...

  • Page 4
    ...easy-to-use programs, servers, services, and solutions to connect people with the information and resources they need to drive business success. Enhanced support for XML enables users to connect customized information - such as sales reports - with automated business processes. New online workspaces...

  • Page 5
    ... and sharing information, and getting things done. To help them get the most from the Web, MSN® delivers exciting new innovations to consumers by offering advanced communications tools, premium search capabilities, enhanced home productivity software, state-of-the-art parental controls, and new...

  • Page 6
    ..., an unlimited number of opportunities could be created for millions of people around the world. By providing technology resources and technology skills development through community-based learning centers, Microsoft's Unlimited Potential program is designed to help create social and economic...

  • Page 7
    ...Customers, Partners, and Employees: Fiscal 2003 was a year of important and exciting innovations, reflected in many new Microsoft products that advance our mission of enabling people and businesses throughout the world to realize their full potential. Despite challenging economic conditions, revenue...

  • Page 8
    ... applications platform and information worker support, not to mention a #1 ranking in scalability. Exchange Server 2003, released June 30, offers new levels of integration in server and client capabilities, enabling organizations to easily create and manage business communications both in the office...

  • Page 9
    ... our platform. Our new Visual Studio .NET 2003 is the most advanced and complete set of software development tools, enabling developers to greatly improve their productivity with a single programming model for PC, mobile, and Web applications. It is the definitive tool set for building Web services...

  • Page 10
    ... and career-development efforts in core areas such as product development, marketing, finance, sales, and operations. Because Microsoft's success depends entirely on the great ideas of our employees, we are committed to continuing to provide a diverse workplace where people feel at home, have...

  • Page 11
    ... with our investors At Microsoft, we consider our investors to be important customers. We're focused on making the Microsoft Investor Relations Web site the best place to access and analyze the company's financial information by providing executive speeches and presentations, historical financial...

  • Page 12
    ... ENDED JUNE 30, 2003 ï,¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO _____ COMMISSION FILE NUMBER 0-14278 MICROSOFT CORPORATION WASHINGTON (STATE OF INCORPORATION) ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399 (425...

  • Page 13
    ... Control and Procedures 9 9 9 18 19 41 41 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accounting Fees and Services...

  • Page 14
    ...), and intelligent devices; server applications for client/server environments; information worker productivity applications; business solutions applications; and software development tools. We provide consulting services and product support services and we train and certify system integrators and...

  • Page 15
    ... automation for financial reporting, distribution, project accounting, electronic commerce, human resources and payroll, manufacturing, supply chain management, business intelligence, sales and marketing management, and customer service and support. Microsoft Business Solutions products are designed...

  • Page 16
    ...Before releasing new software platforms, we provide to application vendors a range of resources and guidelines for development, training, and testing. Microsoft .NET is our strategy and implementation of connecting people, information, systems and devices through the use of Web services. It includes...

  • Page 17
    ... Large Account Resellers (LARs), Direct Market Resellers (DMRs), and value added resellers. Many organizations that license products through Enterprise Agreements (EAs) now transact directly with us with sales support from our Enterprise Software Advisor channel partners. These Enterprise Software...

  • Page 18
    ...tools to consumers. MSN Network services deliver online email and messaging communication services as well as information services such as online search and premium content. The bCentral portal provides tools and expertise for small business owners to build, market and manage their businesses online...

  • Page 19
    ... number of Open Source software products that compete with Microsoft solutions, including Apache Web Server. The Open Source model of Linux and other server programs enables both services and hardware companies to provide customers with Open Source software at nominal cost and earn revenue...

  • Page 20
    ... also current or potential partners. EMPLOYEES As of June 30, 2003, we employed approximately 55,000 people on a full-time basis, 36,500 in the United States and 18,500 internationally. Of the total, 23,200 were in product research and development, 25,100 in sales, marketing, and support, 2,400 in...

  • Page 21
    ..., Human Resources Group Vice President, Worldwide Sales, Marketing and Services Corporate Vice President, Marketing Senior Vice President, Chief Technical Officer, Advanced Strategies and Policy Group Vice President, Productivity and Business Services Senior Vice President, Server and Tools Senior...

  • Page 22
    ... declared our first annual common stock dividend, of $0.08 per share, which was paid in March 2003. Our dividend policy is impacted by, among other items, our views on potential future capital requirements relating to research and development, creation and expansion of sales distribution channels...

  • Page 23
    ... in operating expenses. SEGMENT PRODUCT REVENUE/OPERATING INCOME (LOSS) We revised our segments for fiscal year 2003. Our seven segments are: Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment The revenue and operating...

  • Page 24
    ... software licenses and client access licenses (CALs) for Windows Server, SQL Server, Exchange Server, and other servers. It also includes developer tools, training, certification, Microsoft Press, Premier product support services, and Microsoft consulting services. Total Server and Tools revenue...

  • Page 25
    ...due to a higher mix of revenue from licensing business. In fiscal 2001, cost of revenue was $3.46 billion, an increase of $453 million compared to fiscal 2000. The higher sales associated with MSN Subscription and MSN Network services resulting in increased support and service costs drove 0.4 of the...

  • Page 26
    ... a lawsuit settlement charge recorded in fiscal 2000, partially offset by a 3% growth in headcount-related costs. NON-OPERATING ITEMS, INVESTMENT INCOME/(LOSS), AND INCOME TAXES Non-operating items Losses on equity investees and other consist of our share of income or loss from investments accounted...

  • Page 27
    ... earn actual shares of our stock over time, rather than options that give employees the right to purchase stock at a set price. As part of the changes, we announced that a significant portion of stock-based compensation for more than 600 of our senior leaders will depend on growth in the number and...

  • Page 28
    ...cash and short-term investments, as well as equity and other investments, reflects our views on potential future capital requirements relating to research and development, creation and expansion of sales distribution channels, investments and acquisitions, share dilution management, legal risks, and...

  • Page 29
    ... research and development costs, accounting for legal contingencies, and accounting for income taxes. We account 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 application...

  • Page 30
    ... in research, development and marketing for new products, services and technologies, including Microsoft .NET, Xbox, business applications, MSN, mobile and wireless technologies, and television. Significant revenue from new product and service investments may not be achieved for a number of...

  • Page 31
    ... uncertainties may include: warranty and other claims for hardware products such as Xbox; the effects of the Consent Decree in U.S. v. Microsoft and Final Judgment in State of New York v. Microsoft on the Windows operating system and server business, including those associated with protocol and...

  • Page 32
    ... 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 investees and other...

  • Page 33
    ...Other Total current assets Property and equipment, net Equity and other investments Goodwill Intangible assets, net Other long-term assets Total assets Liabilities and stockholders' equity Current liabilities: Accounts payable Accrued compensation Income taxes Short-term unearned revenue Other Total...

  • Page 34
    ... noncash items Net recognized 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 operations...

  • Page 35
    ... of accounting change Net gains/(losses) on derivative instruments Net unrealized investment gains/(losses) Translation adjustments and other Comprehensive income Common stock repurchased Common stock dividends Balance, end of year Total stockholders' equity See accompanying notes. 2001 2002 2003...

  • Page 36
    ... of software products on a whenand-if-available basis under Open, Select, and Enterprise Agreement volume licensing programs. MSN Internet Access subscriptions, Microsoft bCentral subscriptions, and Microsoft Developer Network subscriptions are also accounted for as subscriptions. Revenue related to...

  • Page 37
    ... time, we use and designate options to hedge fair values and cash flows on certain equity securities. We determine the security, or forecasted sale thereof, selected for hedging by market conditions, up-front costs, and other relevant factors. Once established, the hedges are not dynamically managed...

  • Page 38
    ... related 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...

  • Page 39
    ...support services to be performed in the future. The components of unearned revenue were as follows: (In millions) June 30 Volume licensing programs Undelivered elements Other Unearned revenue Unearned revenue by segment was as follows: (In millions) June 30 Client Server and Tools Information Worker...

  • Page 40
    ... 2004, and $1.79 billion thereafter. Note 5-Cash and Short-Term Investments (In millions) 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...

  • Page 41
    ... agreement to combine AT&T Broadband with Comcast into a new company called Comcast Corporation, Microsoft exchanged its AT&T 5% convertible preferred debt for 115 million shares of Comcast Corporation on November 18, 2002, resulting in a $20 million net recognized loss. Common and preferred stock...

  • Page 42
    ... millions) June 30 Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment Goodwill Note 10-Intangible Assets During fiscal 2003, we recorded additions of $306 million in intangible assets, primarily related to the acquisition of...

  • Page 43
    ... of a one-time benefit of $126 million from the reversal of previously accrued taxes related to a favorable tax court ruling and a 2.0% reduction from the U.S. statutory rate for other items. Excluding this reversal, the effective tax rate in 2003 would have been 33.0%. 30 / MSFT 2003 FORM 10-K

  • Page 44
    ... activities related to common stock repurchased may differ from the comparable change in Stockholders' Equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash. On January 16, 2003, our Board of Directors declared an annual dividend...

  • Page 45
    ... Savings Plans Employee Stock Purchase Plan $ 2002 86 603 (106) 583 $ 2003 (16) 1,846 10 1,840 $ $ We have an employee stock purchase plan for all eligible employees. Under the plan, shares of our common stock may be purchased at six-month intervals at 85% of the lower of the fair market value...

  • Page 46
    ....01 - 59.56 Shares 124 359 415 387 264 We follow Accounting Principles Board Opinion 25 to account for stock option and employee stock purchase plans. An alternative method of accounting for stock options is SFAS 123. Under SFAS 123, employee stock options are valued at grant date using the Black...

  • Page 47
    ... common shares of Microsoft stock valued at $773 million. The value of the common shares issued was determined based on the average market price of our common shares over the 2-day period before and after terms of the acquisition were agreed to and approved. Rare is a video game developer located...

  • Page 48
    ... useful life). The $180 million of goodwill was assigned to the Information Worker segment. None of the goodwill is expected to be deductible for tax purposes. Note 19-Commitments and Guarantees We have operating leases for most U.S. and international sales and support offices and certain equipment...

  • Page 49
    ...from the shop.Microsoft.com Web site or pursuant to a direct marketing campaign and otherwise denied certification of the proposed classes. Members of the certified class licensed fewer than 550,000 copies of operating system software from Microsoft. In 2003, we reached an agreement with counsel for...

  • Page 50
    ... 21-Segment Information (In millions) Year Ended June 30 Revenue Client Server and Tools Information Worker Microsoft Business Solutions MSN Mobile and Embedded Devices Home and Entertainment Reconciling Amounts Consolidated Revenue Operating Income/(Loss) Client Server and Tools Information Worker...

  • Page 51
    ... and rational allocation of development, sales, and marketing resources within businesses; and focus long-term planning efforts on key objectives and initiatives. Our seven new segments are: Client; Server and Tools; Information Worker; Microsoft Business Solutions; MSN; Mobile and Embedded Devices...

  • Page 52
    ... INFORMATION (In millions, except earnings per share) (Unaudited) Sept. 30 Fiscal 2001 Revenue Gross profit Net income Basic earnings per share(1) Diluted earnings per share(1) Fiscal 2002 Revenue Gross profit Net income Basic earnings per share(1) Diluted earnings per share(1) Fiscal 2003 Revenue...

  • Page 53
    ...' REPORT To the Board of Directors and Stockholders of Microsoft Corporation: We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries as of June 30, 2002 and 2003, and the related consolidated statements of income, cash flows, and stockholders' equity...

  • Page 54
    ... Beneficial Owners and Management and Related Stockholder Matters The information in the Proxy Statement set forth under the captions "Equity Compensation Plan Information" and "Information Regarding Beneficial Ownership of Principal Shareholders, Directors, and Management" is incorporated herein...

  • Page 55
    ... for Consultants and Advisors(6) Microsoft Corporation 2003 Employee Stock Purchase Plan(7) Trust Agreement dated June 1, 1993 between Microsoft Corporation and BNY Western Trust Company as trustee (formerly with First Interstate Bank of Washington as trustee)(6) Trust Agreement dated as of June 30...

  • Page 56
    ... the City of Redmond, State of Washington, on September 4, 2003. MICROSOFT CORPORATION By: /s/ John G. Connors Senior Vice President, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of...

  • Page 57
    Microsoft Corporation 2003 Annual Report_Investor Exhibit 10.1 WORLDWIDE MARKETING LOCATIONS* WWW.MICROSOFT.COM/WORLDWIDE/ Argentina Australia Austria Belgium Bolivia Brazil Bulgaria Canada Chile China Colombia Costa Rica Cote d'Ivoire Croatia Czech Republic Denmark Dominican Republic Ecuador ...

  • Page 58
    ... J. Mathews Corporate Vice President, Marketing Craig J. Mundie Senior Vice President and Chief Technical Officer, Advanced Strategies and Policy Jeffrey S. Raikes Group Vice President, Productivity and Business Services Eric D. Rudder Senior Vice President, Server &b Tools Bradford L. Smith...

  • Page 59
    Microsoft Corporation 2003 Annual Report_Investor DIRECTORS AND OFFICERS OF MICROSOFT CORPORATION OFFICERS

  • Page 60
    ... President, Business Solutions Marketing, Strategy & Services Peter Rinearson Corporate Vice President, Information Worker, New Markets Stephen A. (Steve) Schiro Corporate Vice President, Home & Entertainment Retail Sales, & Marketing Robert T. Short Corporate Vice President, Windows Core Technology...

  • Page 61
    ...this annual report can contact our transfer agent and arrange to have their accounts consolidated. Shareholders who own Microsoft stock through a brokerage account can contact their broker to request consolidation of their accounts. © 2003 Microsoft corporation. All rights reserved. Microsoft, MSN...