Exhibit 13.4
Microsoft Corporation
Financial Statements
Income Statements for the three years ended June 30, 1999
Cash Flows Statements for the three years ended June 30, 1999
Balance Sheets as of June 30, 1998 and 1999
Stockholders' Equity Statements for the three years ended June 30,
1999
Notes to Financial Statements
Independent Auditors' Report
Income Statements
(In millions, except earnings per share)
(1) Earnings per share have been restated to reflect a two-for-one stock split
in March 1999.
See accompanying notes.
Cash Flows Statements
(In millions)
See accompanying notes.
Balance Sheets
(In millions)
See accompanying notes.
Stockholders' Equity Statements
(In millions)
See accompanying notes.
Notes to Financial Statements
Accounting Policies
Accounting principles. The financial statements and accompanying notes are
prepared in accordance with generally accepted accounting principles.
Principles of consolidation. The financial statements include the accounts of
Microsoft and its subsidiaries. Significant intercompany transactions and
balances have been eliminated. Investments in 50% owned joint ventures are
accounted for using the equity method; the Company's share of joint ventures'
activities is reflected in other expenses.
Estimates and assumptions. Preparing financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples include provisions for returns and
bad debts and the length of product life cycles and buildings' lives. Actual
results may differ from these estimates.
Foreign currencies. Assets and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average rates of
exchange prevailing during the year. Gains and losses on foreign currency
transactions are included in other expenses.
Revenue recognition. Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with all applicable accounting
regulations, including American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP
98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue
from products licensed to original equipment manufacturers is recorded when OEMs
ship licensed products while revenue from certain license programs is recorded
when the software has been delivered and the customer is invoiced. Revenue from
packaged product sales to and through distributors and resellers is recorded
when related products are shipped. Maintenance and subscription revenue is
recognized ratably over the contract period. Revenue attributable to undelivered
elements, including technical support and Internet browser technologies, is
based on the average sales price of those elements and is recognized ratably on
a straight-line basis over the product's life cycle. When the revenue
recognition criteria required for distributor and reseller arrangements are not
met, revenue is recognized as payments are received. Costs related to
insignificant obligations, which include telephone support for certain products,
are accrued. Provisions are recorded for returns and bad debts.
Cost of revenue. Cost of revenue includes direct costs to produce and
distribute product and direct costs to provide online services, consulting,
product support, and training and certification of system integrators.
Research and development. Research and development costs are expensed as
incurred. Statement of Financial Accounting Standards (SFAS) 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, does
not materially affect the Company.
Income taxes. Income tax expense includes U.S. and international income taxes,
plus the provision for U.S. taxes on undistributed earnings of international
subsidiaries. Certain items of income and expense are not reported in tax
returns and financial statements in the same year. The tax effect of this
difference is reported as deferred income taxes. Tax credits are
accounted for as a reduction of tax expense in the year in which the credits
reduce taxes payable.
Stock split. During March 1999, outstanding shares of common stock were split
two-for-one. All share and per share amounts have been restated.
Financial instruments. The Company considers all liquid interest-earning
investments with a maturity of three months or less at the date of purchase to
be cash equivalents. Short-term investments generally mature between three
months and six years from the purchase date. All cash and short-term investments
are classified as available for sale and are recorded at market using the
specific identification method; unrealized gains and losses are reflected in
other comprehensive income. Cost approximates market for all classifications of
cash and short-term investments; realized and unrealized gains and losses were
not material.
Equity and other investments include debt and equity instruments. Debt
securities and publicly traded equity securities are classified as available for
sale and are recorded at market using the specific identification method.
Unrealized gains and losses are reflected in other comprehensive income. All
other investments, excluding joint venture arrangements, are recorded at cost.
Derivative financial instruments are used to hedge certain investments,
international revenue, accounts receivable, and interest rate risks, and are,
therefore, held primarily for purposes other than trading. These instruments may
involve elements of credit and market risk in excess of the amounts recognized
in the financial statements. The Company monitors its positions and the credit
quality of counter parties, consisting primarily of major financial
institutions, and does not anticipate nonperformance by any counter party.
During June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 and does not
believe that adoption of the Statement will have a material impact on its
financial statements.
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.
Reclassifications. The Company changed the way it reports revenue and costs
associated with product support, consulting, MSN Internet access, and
certification and training of system integrators. Amounts received from
customers for these activities have been classified as revenue in a manner more
consistent with Microsoft's primary businesses. Direct costs of these activities
are classified as cost of revenue. Prior financial statements have been
reclassified for consistent presentation. Certain other reclassifications have
also been made for consistent presentation.
Unearned Revenue
A portion of Microsoft's revenue is earned ratably over the product life cycle
or, in the case of subscriptions, over the period of the license agreement.
End users receive certain elements of the Company's products over a period of
time. These elements include browser technologies and technical support.
Consequently, Microsoft's earned revenue reflects the recognition of the fair
value of these elements over the product's life cycle. Upon adoption of SOP 98-9
during the fourth quarter of fiscal 1999, the Company was required to change the
methodology of attributing the fair value to undelivered elements. The
percentages of undelivered elements in relation to the total arrangement
decreased, reducing the amount of Windows and Office revenue treated as
unearned, and increasing the amount of revenue recognized upon shipment. The
percentage of revenue recognized ratably decreased from a range of 20% to 35% to
a range of approximately 15% to 25% of Windows desktop operating systems. For
desktop applications, the percentage decreased from approximately 20% to a range
of approximately 10% to 20%. The ranges depend on the terms and conditions of
the license and prices of the elements. The impact on fiscal 1999 was to
increase reported revenue $170 million. In addition, the Company extended the
life cycle of Windows from two to three years based upon
management's review of product shipment cycles. The impact on fiscal 1999 was to
decrease reported revenue $90 million. Product life cycles are currently
estimated at 18 months for desktop applications. The Company also sells
subscriptions to certain products via maintenance and certain organizational
license agreements. At June 30, 1999, Windows platforms products unearned
revenue was $2.17 billion and unearned revenue associated with productivity
applications and developer products totaled $1.96 billion. Unearned revenue for
other miscellaneous programs totaled $116 million at June 30, 1999.
Financial Risks
The Company's cash and short-term investment portfolio is diversified and
consists primarily of investment grade securities. Investments are held with
high-quality financial institutions, government and government agencies, and
corporations, thereby reducing credit risk concentrations. Interest rate
fluctuations impact the carrying value of the portfolio. The Company routinely
hedges the portfolio's return with options in the event of a catastrophic
increase in interest rates. At June 30, 1999, the notional amount of the options
outstanding was $4.0 billion. The fair value and premiums paid for the options
were not material. Much of the Company's equity security portfolio is highly
volatile, so certain positions are hedged.
Finished goods sales to international customers in Europe, Japan, Canada, and
Australia are primarily billed in local currencies. Payment cycles are
relatively short, generally less than 90 days. Certain international
manufacturing and operational costs are disbursed in local currencies. Local
currency cash balances in excess of short-term operating needs are generally
converted into U.S. dollar cash and short-term investments on receipt. Although
foreign exchange rate fluctuations generally do not create a risk of material
balance sheet gains or losses, the Company hedges a portion of accounts
receivable balances denominated in local currencies, primarily with purchased
options. At June 30, 1999, the notional amount of options outstanding was $662
million. The fair value and premiums paid for the options were not material.
Foreign exchange rates affect the translated results of operations of the
Company's foreign subsidiaries. The Company hedges a portion of planned
international revenue with purchased options. The notional amount of the options
outstanding at June 30, 1999 was $2.25 billion. The fair value and premiums paid
for the options were not material.
At June 30, 1998 and 1999, approximately 40% and 50% of accounts receivable
represented amounts due from 10 customers. One customer accounted for
approximately 12%, 8%, and 11% of revenue in 1997, 1998, and 1999.
Microsoft lends certain fixed income and equity securities to enhance investment
income. Adequate collateral and/or security interest is determined based upon
the underlying security and the credit worthiness of the borrower.
During 1997, 1998, and 1999, depreciation expense, of which the majority related
to computer equipment, was $353 million, $528 million, and $483 million;
disposals were not material.
Debt securities include corporate and government notes and bonds and derivative
securities. Debt securities maturing beyond 15 years are composed entirely of
AT&T 5% convertible preferred debt with a contractual maturity of 30 years. The
debt is convertible into AT&T common stock on or after December 1, 2000, or may
be redeemed by AT&T upon satisfaction of certain conditions on or after June 1,
2002. Unrealized gains on equity securities recorded at market were $1.4 billion
on June 30, 1998. Equity securities and instruments recorded at cost include
primarily preferred stock, common stock, and warrants that are restricted or not
publicly traded. At June 30, 1998 and 1999, the estimated fair value of these
investments was $2.4 billion and $6.1 billion, based on publicly available
market information or other estimates determined by management. The Company
hedges the risk of significant market declines on certain highly volatile equity
securities with options. The options are recorded at market, consistent with the
underlying equity securities. At June 30, 1999, the notional amount of the
options outstanding was $2.1 billion; the fair value was $1.0 billion; and
premiums paid for the options were not material. Realized gains and losses of
equity and other investments in 1997 and 1998 were not material; realized gains
were $623 million and losses were not material in 1999.
Income Taxes
The provision for income taxes consisted of:
U.S. and international components of income before income taxes were:
The effective income tax rate was 35.0% in 1997 and increased to 36.9% in 1998
due to the nondeductible write-off of WebTV in-process technologies. In 1999,
the effective tax rate was 35.0%, excluding the impact of the gain on the sale
of Softimage, Inc. The components of the differences between the U.S. statutory
tax rate and the Company's effective tax rate were not significant.
Income taxes payable were:
Income taxes have been settled with the Internal Revenue Service (IRS) for all
years through 1989. The IRS has assessed taxes for 1990 and 1991, which the
Company is contesting in U.S. Tax Court. The IRS is examining the Company's U.S.
income tax returns for 1992 through 1994. Management believes any related
adjustments that might be required will not be material to the financial
statements. Income taxes paid were $1.1 billion in 1997, $1.1 billion in 1998,
and $874 million in 1999.
Convertible Preferred Stock
During 1996, Microsoft issued 12.5 million shares of 2.75% convertible
exchangeable principal-protected preferred stock. Dividends are payable
quarterly in arrears. Preferred stockholders have preference over common
stockholders in dividends and liquidation rights. In December 1999, each
preferred share is convertible into common shares or an equivalent amount of
cash determined by a formula that provides a floor price of $79.875 and a cap of
$102.24 per preferred share, equivalent to $19.97 and $25.56 per common share.
Net proceeds of $980 million were used to repurchase common shares.
Common Stock
Issued and outstanding. Shares of common stock outstanding were as follows:
Repurchase program. The Company repurchases its common stock in the open market
to provide shares for issuing to employees under stock option and stock purchase
plans. The Company's Board of Directors authorized continuation of this program
in 2000.
During 1998, the Company executed two forward settlement structured repurchase
agreements with an independent third party totaling 42 million shares of stock
and paid cash for a portion of the purchase price. In 1999, the Company settled
the agreements by returning 28 million shares of stock, based upon the stock
price on the date of settlement. The timing and method of settlement were at the
discretion of the Company. The differential between the cash paid and the price
of Microsoft common stock on the date of the agreement was originally reflected
in common stock and paid-in capital.
Put Warrants
To enhance its stock repurchase program, Microsoft sells put warrants to
independent third parties. These put warrants entitle the holders to sell shares
of Microsoft common stock to the Company on certain dates at specified prices.
On June 30, 1999, 163 million warrants were outstanding with strike prices
ranging from $59 to $65 per share. The put warrants expire between September
1999 and March 2002. The outstanding put warrants permit a net-share settlement
at the Company's option and do not result in a put warrant liability on the
balance sheet.
Employee Stock and Savings Plans
Employee stock purchase plan The Company has an employee stock purchase plan
for all eligible employees. Under the plan, shares of the Company's common stock
may be purchased at six-month intervals at 85% of the lower of the fair market
value on the first or the last day of each six-month period. Employees may
purchase shares having a value not exceeding 10% of their gross compensation
during an offering period. During 1997, 1998, and 1999, employees purchased 5.6
million, 4.4 million, and 2.7 million shares at average prices of $14.91,
$27.21, and $52.59 per share. At June 30, 1999, 70.9 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 up
to 15% of their pretax salary, but not more than statutory limits. The Company
contributes fifty cents for each dollar a participant contributes, with a
maximum contribution of 3% of a participant's earnings. Matching contributions
were $28 million, $39 million, and $49 million in 1997, 1998, and 1999.
Stock option plans The Company has stock option plans for directors, officers,
and employees, which provide for nonqualified and incentive stock options.
Options granted prior to 1995 generally vest over four and one-half years and
expire 10 years from the date of grant. Options granted during and after 1995
generally vest over four and one-half years and expire seven years from the date
of grant, while certain options vest over seven and one-half years and expire
after 10 years. At June 30, 1999, options for 406 million shares were vested and
998 million shares were available for future grants under the plans.
Stock options outstanding were as follows:
For various price ranges, weighted average characteristics of outstanding stock
options at June 30, 1999 were as follows:
The Company follows Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, to account for stock option and employee stock purchase
plans. Historically, exercise prices of grants of ESOs were struck at the lowest
price in the 30 days following July 1 for annual grants and the 30 days after
the start date for new employees. In connection with this practice, which is no
longer employed, a charge of $217 million was recorded in the fourth quarter for
fiscal 1999 compensation expense.
An alternative method of accounting for stock options is SFAS 123, Accounting
for Stock-Based Compensation. Under SFAS 123, employee stock options are valued
at grant date using the Black-Scholes valuation model, and compensation cost is
recognized ratably over the vesting period. Had compensation cost for the
Company's stock option and employee stock purchase plans been determined based
on the Black-Scholes value at the grant dates for awards, pro forma income
statements for 1997, 1998, and 1999 would have been as follows:
The pro forma disclosures in the previous table include the amortization of the
fair value of all options vested during 1997, 1998, and 1999, regardless of the
grant date. If only options granted after 1996 were valued, as prescribed by
SFAS 123, pro forma net income would have
been $3,179 million, $4,019 million, and $7,109 million, and earnings per share
would have been $0.61, $0.75, and $1.30 for 1997, 1998, and 1999.
The weighted average Black-Scholes value of options granted under the stock
option plans during 1997, 1998, and 1999 was $5.86, $11.81, and $20.90. Value
was estimated using an expected life of five years, no dividends, volatility of
.32 in 1999 and 1998 and .30 in 1997, and risk-free interest rates of 6.5%,
5.7%, and 4.9% in 1997, 1998, and 1999.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method, assumed
net-share settlement of common stock structured repurchases, and outstanding
stock options using the "treasury stock" method.
The components of basic and diluted earnings per share were as follows:
Operational Transactions
In August 1997, Microsoft acquired WebTV Networks, Inc., an online service that
enables consumers to experience the Internet through their televisions via set-
top terminals based on proprietary technologies. A director of the Company owned
10% of WebTV. Microsoft paid $425 million in stock and cash for WebTV. The
Company recorded an in-process technologies write-off of $296 million in the
first quarter of fiscal 1998.
In August 1998, the Company sold a wholly-owned subsidiary, Softimage, Inc. to
Avid Technology, Inc. and recorded a pretax gain of $160 million. As part of a
transitional service agreement, Microsoft agreed to make certain development
tools and management systems available to Avid for use in the Softimage
business.
In November 1998, Microsoft acquired LinkExchange, Inc., a leading provider of
online marketing services to Web site owners and small and medium-sized
businesses. Microsoft paid $265 million in stock. During fiscal 1999, Microsoft
also acquired several other entities primarily providing online technologies and
services. The Company did not record significant in-process technology write-
offs in connection with these transactions.
In July 1999, Ticketmaster Online CitySearch, Inc. agreed to purchase certain
online properties of Sidewalk in exchange for stock and warrants at a price to
be determined upon closing.
Commitments
The Company has operating leases for most U.S. and international sales and
support offices and certain equipment. Rental expense for operating leases was
$92 million, $95 million, and $135 million in 1997, 1998, and 1999. Future
minimum rental commitments under
noncancelable leases, in millions of dollars, are: 2000, $133; 2001, $121; 2002,
$97; 2003, $83; 2004, $75; and thereafter, $194.
In connection with the Company's communications infrastructure and the operation
of online services, Microsoft has certain communication usage commitments.
Future related minimum commitments, in millions of dollars, are: 2000, $125 and
2001, $22. Also, Microsoft has committed to certain volumes of outsourced
telephone support and manufacturing of packaged product and has committed $275
million for constructing new buildings.
During 1996, Microsoft and National Broadcasting Company (NBC) established two
MSNBC joint ventures: a 24-hour cable news and information channel and an
interactive online news service. Microsoft agreed to pay $220 million over a
five-year period for its interest in the cable venture, to pay one-half of
operational funding of both joint ventures for a multiyear period, and to
guarantee a portion of MSNBC debt.
Contingencies
On October 7, 1997, Sun Microsystems, Inc. brought suit against Microsoft in the
U.S. District Court for the Northern District of California. Sun's complaint
alleges several claims against Microsoft, all related to the parties'
relationship under a March 11, 1996 Technology License and Distribution
Agreement (Agreement) concerning certain Java programming language technology.
The Complaint seeks: a preliminary and permanent injunction against Microsoft
distributing certain products with the Java Compatibility logo, and against
distributing Internet Explorer 4.0 browser technology unless certain alleged
obligations are met; an order compelling Microsoft to perform certain alleged
obligations; an accounting; termination of the Agreement; and an award of
damages, including compensatory, exemplary, and punitive damages, and liquidated
damages of $35 million for the alleged source code disclosure.
On March 24, 1998, the court entered an order enjoining Microsoft from using the
Java Compatibility logo on Internet Explorer 4.0 and the Microsoft Software
Developers Kit (SDK) for Java 2.0. Microsoft has taken steps to fully comply
with the order.
On November 17, 1998, the court entered an order granting Sun's request for a
preliminary injunction, holding that Sun had established a likelihood of success
on its copyright infringement claims, because Microsoft's use of Sun's
technology in its products was beyond the scope of the parties' license
agreement. The court ordered Microsoft to make certain changes in its products
that include Sun's Java technology and to make certain changes in its Java
software development tools. The court also enjoined Microsoft from entering into
any licensing agreements that were conditioned on exclusive use of Microsoft's
Java Virtual Machine. Microsoft appealed that ruling to the 9th Circuit on
December 16, 1998. Oral argument on that appeal was held on June 16, 1999. In
the interim, Microsoft is complying with the ruling and has not sought a stay of
the injunction pending appeal. On December 18, 1998, Microsoft filed a motion
requesting an extension of the 90-day compliance period for certain Microsoft
products, which was granted in part in January 1999. Microsoft filed a motion on
February 5, 1999, seeking clarification of the court's order that Microsoft
would not be prevented from engaging in independent development of Java
technology under the order. The court granted that motion. On July 23, 1999 the
court also granted Microsoft's motion to increase the bond on the preliminary
injunction from $15 million to $35 million.
On January 22, 1999, Microsoft and Sun filed a series of summary judgment
motions regarding the interpretation of the contract and other issues. On May
20, 1999, the court issued tentative rulings on three of the motions. In the
preliminary rulings, the court (1) granted Sun's motion for summary judgment
that prior versions of Internet Explorer 4.0, Windows 98, Windows NT, Visual J++
(R) 6.0 development system, and the SDK for Java
infringe Sun's copyrights, because they contain Sun's program code but do not
pass Sun's compatibility tests and, therefore, Microsoft's use of Sun's
technology is outside the scope of the Agreement and unlicensed; (2) granted
Microsoft's motion that the Agreement authorizes Microsoft to distribute
independently developed Java Technology that is not subject to the compatibility
obligations in the Agreement; and (3) denied Sun's motion for summary judgment
on the meaning of certain provisions of the Agreement, tentatively adopting
Microsoft's interpretation that Sun is required to deliver certain new Java
Technology, called "Supplemental Java Classes," in working order on Microsoft's
then existing and commercially distributed virtual machine. On June 24, 1999,
the court heard oral argument on the three tentative rulings. No final orders
have been issued. At the hearing, the court also directed the parties to
identify other pending summary judgment motions that the court should next
consider. There are no other hearing or trial dates set.
On May 18, 1998, the Antitrust Division of the U.S. Department of Justice (DOJ)
and a group of 20 state Attorneys General filed two antitrust cases against
Microsoft in the U.S. District Court for the District of Columbia. The DOJ
complaint alleges violations of Sections 1 and 2 of the Sherman Act. The DOJ
complaint seeks declaratory relief as to the violations it asserts and
preliminary and permanent injunctive relief regarding: the inclusion of Internet
browsing software (or other software products) as part of Windows; the terms of
agreements regarding non-Microsoft Internet browsing software (or other software
products); taking or threatening "action adverse" in consequence of a person's
failure to license or distribute Microsoft Internet browsing software (or other
software product) or distributing competing products or cooperating with the
government; and restrictions on the screens, boot-up sequence, or functions of
Microsoft's operating system products. The state Attorneys General allege
largely the same claims and various pendent state claims. The states seek
declaratory relief and preliminary and permanent injunctive relief similar to
that sought by the DOJ, together with statutory penalties under the state law
claims. The foregoing description is qualified in its entirety by reference to
the full text of the complaints and other papers on file in those actions, case
numbers 98-1232 and 98-1233.
On May 22, 1998, Judge Jackson consolidated the two actions. The judge granted
Microsoft's motion for summary judgment as to the states' monopoly leverage
claim and permitted the remaining claims to proceed to trial. Trial began on
October 19, 1998. Microsoft believes the claims are without merit and is
defending against them vigorously. In other ongoing investigations, the DOJ and
several state Attorneys General have requested information from Microsoft
concerning various issues.
Caldera, Inc. filed a lawsuit against Microsoft in July 1996. It alleges Sherman
Act violations relating to Microsoft licensing practices of the MS-DOS(R)
operating system and Windows in the late 80s and early 90s --essentially the
same complaints that resulted in the 1994 DOJ consent decree. Caldera claims to
own the rights of Novell, Inc. and Digital Research, Inc. relating to DR-DOS and
Novell DOS products. It also asserts a claim that Windows 95 is a technological
tie of Windows and MS-DOS. Trial is scheduled for January 2000. Some partial
summary judgment motions are pending. Microsoft believes the claims are without
merit and is vigorously defending the case.
The Securities and Exchange Commission is conducting a non-public investigation
into the Company's accounting reserve practices. Microsoft is also subject to
various legal proceedings and claims that arise in the ordinary course of
business.
Management currently believes that resolving these matters will not have a
material adverse impact on the Company's financial position or its results of
operations.
Segment Information
The Company's organizational structure and fundamental approach to business
reflect the needs of its customers. As such, Microsoft has three major segments:
Windows Platforms; Productivity Applications and Developer; and Consumer,
Commerce, and Other. Windows Platforms includes the Business and Enterprise
Division, which is primarily responsible for Windows NT and developing Windows
2000. Windows Platforms also includes the Consumer Windows Division, which
oversees Windows 98 and Windows 95. Productivity Applications and Developer
includes the Business Productivity Division, which is responsible for developing
and marketing desktop applications, server applications, and developer tools.
Consumer, Commerce, and Other products and services include primarily learning,
entertainment, and PC input device products; WebTV and PC online access; and
portal and other Internet services. Assets of the segment groups are not
relevant for management of the businesses nor for disclosure. In addition, it is
not practicable to discern operating income for 1997 for the above segments due
to previous internal reorganizations.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including profit and loss
statements (P&Ls) prepared on a basis not consistent with generally accepted
accounting principles. Reconciling items include certain elements of unearned
revenue, the treatment of certain channel inventory amounts and estimates, and
revenue from product support, consulting, and training and certification of
system integrators. Additionally, the internal P&Ls use accelerated methods of
depreciation and amortization, but do not reflect the charge for the ESO
exercise price methodology previously employed by the Company.
Revenue attributable to U.S. operations includes shipments to customers in the
United States, licensing to OEMs and certain multinational organizations, and
exports of finished goods, primarily to Asia, Latin America, and Canada. Revenue
from U.S operations totaled $7.8 billion, $10.1 billion, and $13.7 billion in
1997, 1998, and 1999. Revenue from outside the United States, excluding
licensing to OEMs and certain multinational organizations and U.S. exports,
totaled $4.1 billion, $5.2 billion, and $5.9 billion in 1997, 1998, and 1999.
Long-lived assets totaled $1.2 billion and $1.5 billion in the United States in
1998 and 1999 and $287 million and $154 million in other countries in 1998 and
1999.
Independent Auditors' Report
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To the Board of Directors and Stockholders
of Microsoft Corporation:
We have audited the accompanying balance sheets of Microsoft Corporation and
subsidiaries as of June 30, 1998 and 1999, and the related statements of income,
cash flows, and stockholders' equity for each of the three years ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Microsoft Corporation and subsidiaries as of
June 30, 1998 and 1999, and the results of their operations and their cash flows
for each of the three years ended June 30, 1999 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
July 19, 1999