sec filings - microsoft - 0000891020-96-001130

8/14/2019 SEC Filings - Microsoft - 0000891020-96-001130

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0000891020-96-001130.txt : 199609300000891020-96-001130.hdr.sgml : 19960930ACCESSION NUMBER: 0000891020-96-001130CONFORMED SUBMISSION TYPE: 10-KPUBLIC DOCUMENT COUNT: 9

CONFORMED PERIOD OF REPORT: 19960630FILED AS OF DATE: 19960927SROS: NASD

FILER:

COMPANY DATA:COMPANY CONFORMED NAME: MICROSOFT CORPCENTRAL INDEX KEY: 0000789019STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED

SOFTWARE [7372]

IRS NUMBER: 911144442STATE OF INCORPORATION: WAFISCAL YEAR END: 0630

FILING VALUES:FORM TYPE: 10-KSEC ACT: 1934 ActSEC FILE NUMBER: 000-14278FILM NUMBER: 96635668

BUSINESS ADDRESS:STREET 1: ONE MICROSOFT WAY #BLDG 8

STREET 2: NORTH OFFICE 2211CITY: REDMONDSTATE: WAZIP: 98052BUSINESS PHONE: 2068828080

MAIL ADDRESS:STREET 1: ONE MICROSOFT WAY - BLDG 8STREET 2: NORTH OFFICE 2211CITY: REDMONDSTATE: WA

ZIP: 98052-6399


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10-K1

FORM 10-K FOR THE FISCAL YEAR ENDED 6/30/96

1UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1996

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____ TO ____

COMMISSION FILE NUMBER 0-14278

MICROSOFT CORPORATION

(Exact name of registrant as specified in its charter)

WASHINGTON 91-1144442(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)

ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (206) 882-8080

Securities registered pursuant to Section 12(b) of the Act: NONE


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Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes|X| No|_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. |_|

The aggregate market value of common stock held by non-affiliates of theregistrant as of September 9, 1996 was $45,936,687,455.

The number of shares outstanding of the registrant's common stock as ofSeptember 9, 1996 was 596,226,947.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1996 Annual Report to Shareholders are incorporated by referenceinto Parts I, II and IV.

Portions of the definitive Proxy Statement dated September 27, 1996 to be

delivered to shareholders in connection with the Annual Meeting of Shareholdersto be held November 12, 1996 are incorporated by reference into Part III.

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FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 1996

INDEX

PART I

Item 1. Business...................................................................................... 1


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Item 2. Properties.................................................................................... 10

Item 3. Legal Proceedings............................................................................. 10

Item 4. Submission of Matters to a Vote of SecurityHolders........................................... 10

PART II

Item 5. Market for Registrant's Common Stock and Related StockholderMatters.......................... 11

Item 6. Selected Financial Data....................................................................... 11

Item 7. Management's Discussion and Analysis of Financial Condition and

Results of Operations......... 11

Item 8. Financial Statements and SupplementaryData................................................... 11

Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures......... 11

PART III

Item 10. Directors and Executive Officers of theRegistrant............................................ 12

Item 11. Executive Compensation........................................................................13

Item 12. Security Ownership of Certain Beneficial Owners andManagement................................ 13

Item 13. Certain Relationships and RelatedTransactions................................................ 13

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14

Signatures .............................................................................................. 15

3PART I


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Item 1. Business

GENERAL

Microsoft Corporation (the "Company" or "Microsoft") was founded as apartnership in 1975 and incorporated in 1981. Microsoft develops, manufactures,licenses, sells, and supports a wide range of software products, includingoperating systems for personal computers (PCs) and servers; server applicationsfor client/server environments, business and consumer productivity applications;interactive media programs; and Internet platform and development tools.Microsoft also offers online services, sells personal computer books and inputdevices, and researches and develops advanced technology software products.Microsoft(R) products are available for most PCs, including Intel

microprocessor-based computers and Apple computers.

Microsoft's business strategy emphasizes the development of a broad line of PCsoftware products for business and personal use, marketed through multiplechannels of distribution. The Company is divided into four main groups: thePlatforms Product Group; the Applications and Content Product Group; the Salesand Support Group; and the Operations Group.

The Platforms Product Group is comprised of three divisions, each responsiblefor a particular area of platforms software development and marketing. TheDesktop and Business Systems Division develops PC and server operating systemsand a suite of server applications. The Internet Platform and Tools Division

creates software development tools, Internet browser technology, and otherInternet and online products and technologies. The Consumer Platforms Divisiondevelops system software for non-PC devices, integrated software systems forpublic networks, and software for the creation of content for digital mediaproductions.

The Applications and Content Product Group creates and markets productivityprograms, desktop finance products, PC input devices, and interactiveentertainment and information products. The group also includes an advancedtechnology research division. The Desktop Applications Division creates businessproductivity applications and products designed for the home, school, and the

small business market. The Interactive Media Division develops kids titles,games, information products, and The Microsoft Network (MSN(TM)). The InputDevice Division creates PC peripherals. The Desktop Finance Division developspersonal finance products. Microsoft Research is a research lab dedicated tocreating new technology in support of the Company's vision for the evolution ofpersonal computing.

The Sales and Support Group is responsible for building long-term businessrelationships with customers. This group is organized to serve three customertypes: original equipment manufacturers (OEMs), end-users, and organizations.The group also focuses directly on large enterprises, offering tailored licenseprograms, enterprisewide support, consulting services, and other specialized


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services. The group manages the channels that serve customers by working withOEMs, distributors, and resellers. In addition to the OEM channel, Microsoft hasthree major geographic sales organizations: U.S. and Canada, Europe, and OtherInternational. The group supports the Company's products with technical support

for end-users, developers, and organizations.

The Operations Group is responsible for managing business operations and overallbusiness planning. This includes the process of manufacturing and deliveringfinished goods and licenses; the publishing efforts of Microsoft Press; andcorporate functions such as finance, administration, human resources, and legal.

PRODUCTS

DESKTOP AND BUSINESS SYSTEMS

The Desktop and Business Systems Division has overall responsibility for theMicrosoft Windows(R) and Microsoft BackOffice(TM) product families. Operatingsystem software performs a variety of functions, such as allocating computermemory, scheduling applications software execution, managing information andcommunication flow among the various PC components, and enabling end-users toaccess files and information. The division's products are: (Please note: Windows3.1 and Windows for Workgroups 3.11 are hereafter referred to collectively as"Windows 3.X.")

WINDOWS 95: Microsoft's newest personal operating system, the successor toMS-DOS and Windows 3.X, was released commercially in August 1995; periodic

service releases have been made available to hardware OEMs and to end-users viathe Internet on www.microsoft.com. Windows 95 is a fully integrated,multitasking 32-bit operating system,

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designed to be compatible with most Intel microprocessor-based PCs, hardwaredevices, and Windows 3.X and MS-DOS applications.

WINDOWS NT WORKSTATION (NTW): Also a fully integrated, multitasking 32-bitoperating system, Windows NTW provides greater security, robustness andportability. Given this optimization, Windows NTW is not as fully compatiblewith as many legacy applications and device drivers as Windows 95. WindowsNTW


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is a multithreaded operating system for mission critical computing whichprovides the same features and applications programming interfaces (APIs) acrossfour hardware platforms: Intel, Alpha AXP, MIPS, and Power PC.

MS-DOS: MS-DOS is a single-user, single-tasking operating system designed forIntel microprocessor-based PCs. MS-DOS was introduced in 1981 and waspreinstalled by OEMs on most PCs shipped prior to the release of Windows 95.

WINDOWS 3.1: Microsoft Windows 3.1 provides a graphical user interface andother enhancements for MS-DOS-based PCs. Windows 3.1 supports high-performanceWindows-based applications, and offers ease of use, aesthetic appeal, andstraightforward integration into corporate computing environments.

WINDOWS FOR WORKGROUPS 3.11: Windows for Workgroups 3.11 integrates

network andworkgroup functionality directly into the Windows operating system. WithWindowsfor Workgroups, users can share files, data, and printers, with ease of accessand security.

WINDOWS NT SERVER (NTS): Windows NTS is a powerful operating systemfoundationfor both server applications and file and print serving, providing extensivenetwork management features, administration tools, security, and faulttolerance, and is a platform for business critical applications and databases,connectivity, system management, and mail servers. Windows NTS integrates Web

services such as Microsoft Internet Information Server (IIS), a server used tomanage intranet and Internet functionality, Microsoft FrontPage(TM) Webauthoring and management tool, and Microsoft Index Server, a content indexingand querying search engine.

MICROSOFT BACKOFFICE: The Microsoft BackOffice family of serverapplications isan integrated series of software products that work together running on a singleserver, on multiple servers across a network or intranet, or on the Internet.BackOffice enables desktop users to access and integrate information from avariety of sources inside and outside an organization. Microsoft Exchange Server

provides e-mail, group scheduling, and integrated groupware capabilities;Microsoft SQL Server(TM) manages and stores data; Microsoft SNA Serverprovidesconnectivity to host data and applications; and Microsoft Systems ManagementServer centrally manages this distributed environment.

INTERNET PLATFORM AND TOOLS PRODUCTS

The Internet Platform and Tools Division provides Internet browser technology,software development tools, Internet and online server products, and technicalinformation to Windows and Internet applications developers. These products and


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services empower independent software developers, corporate developers,solutions developers, and Webmasters to create a broad spectrum of applications,primarily for Windows 95 and Windows NT, but also for the platform-independentInternet and intranets.

INTERNET SOFTWARE: The division has overall development and marketingresponsibility for Microsoft Internet Explorer, the Company's Internet browser.It also provides products for developing, running, and managing Internet andintranet applications and content, including ActiveX(TM) controls. Formerlyknown as object linking and embedding (OLE) controls, ActiveX controls arecomponents (or objects) that can be inserted into a Web page or otherapplication which allow packaged functionality programmed elsewhere to bereused and enables realtime, interactive content.

DESKTOP DATABASE PRODUCTS: Database products control the maintenance

andutilization of structured data organized into a set of records or files. TheCompany offers database products which span the needs of a wide variety ofusers, from individuals to large corporations. Microsoft Access is a relationaldatabase management application which provides access to structured businessdata. Microsoft FoxPro is a desktop database development tool which iscompatible with the industry standard xBase development language.

SOFTWARE DEVELOPMENT TOOLS AND COMPUTER LANGUAGES:Software development toolsand computer languages allow software developers to write programs in aparticular computer language and translate programs into a binary

machine-readable set of commands that activate and instruct PC hardware. TheCompany develops and markets a number of software development environments,language compilers, and software testing tools. Microsoft Visual C++(TM) is theCompany's development system for Windows application development. TheMicrosoftVisual Basic(TM) programming system provides easy access to a wide variety ofdata sources by integrating the Microsoft Access

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database engine and the ability to leverage investments in commercialapplications through ActiveX controls. Microsoft(R) Visual J++, a developmentenvironment for Java applications and Internet applets, contains a highproductivity Integrated Development Environment and a collection of integratedcomponents to create, test, tune and deploy Java code on multiple platforms


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using ActiveX controls.

DEVELOPER INFORMATION: The Company provides third party softwaredevelopers with

a wide range of technical and support information that assists them indeveloping software products intended to run on Windows operating systems,taking advantage of key technologies such as ActiveX controls and Windows 32-bitAPIs. Developers can subscribe to the Microsoft Developer Network (MSDN)information service and receive periodic updates via CD-ROMs, magazines, andseveral on-line information services.

ELECTRONIC COMMERCE AND INTERNET SERVICES: Microsoft is currentlydevelopingsoftware to enable retailing on the Internet. Microsoft Merchant Server, whichwill run on Windows NTS, will allow merchants to provide online shopping to

customers and handle credit card transaction payments. Microsoft is alsodeveloping a new platform for commercial Internet services designed for Internetservice providers and commercial Web publishers built on Windows NTS andintegrated with IIS. The technologies under development include the majorcomponents needed to run a commercial, fee-based service, including value-addedmail, forum areas, chat, news, indexing, and other content management services.

CONSUMER PLATFORMS

The Consumer Platforms Division is developing software for three distinctplatforms: non-PC devices, the Broadcast PC, and Network Multimedia.

NON-PC DEVICES: The division is responsible for Windows CE development,Microsoft's open and scaleable Windows platform for a broad range ofcommunications, entertainment, and mobile computing devices. The Windows CEplatform is a new operating system enabling new categories of business andconsumer non-PC devices to communicate with each other, share information withWindows PCs, and connect to the Internet. Windows CE devices are based on theWin32 API and build on and extend the Company's technology and tools base. Thefirst non-PC product which will be available is the Handheld PC, designed to bea companion to a Windows-based PC.

BROADCAST PC: The Broadcast PC will extend the Windows family by enablingPCs tobe clients of existing and emerging broadcast networks, supporting new contentopportunities for Windows-based PCs through the use of data broadcastingtechnology. Examples of these networks include: satellite television networks,Internet's Multicast backbone, cable television networks that support cablemodems, wireless cable networks, and conventional TV networks that broadcastdata in the vertical blanking interval (VBI) of the TV.

NETWORK MULTIMEDIA: The division is also developing multicasting toolswhichwill enable network administrators to efficiently deploy rich multimedia content


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and applications, streaming technology enabling the client to view audio andillustrated audio without downloading anything to the PC, and NT-based serversoftware designed to reliably deliver high-bandwidth video over dedicatednetworks to a large number of PC clients.

The Consumer Platforms Division is also responsible for Softimage, whichdevelops, markets, and supports a family of interactive software productsenabling digital media producers to create and edit two- and three-dimensionalcontent for digital media productions. Softimage supplies 3D visualizationsoftware for broadcast, film production, and other high-end animationapplications. In addition, Softimage has a product line of 2D visualizationsoftware for use on high-end applications, including post production editing andthe integration of visual images, text, sound, and special effects technology.These products are designed for the Windows NT and IRIX operating systems.

SOFTIMAGE 3D AND 3D EXTREME: Softimage 3D provides three-dimensionalanimationsoftware for film and video professionals, animators, and artists who create andproduce high-end three-dimensional imagery for traditional and new media. 3DExtreme includes both the features of 3D and advanced special effects formodeling and rendering.

DIGITAL STUDIO: Digital Studio is a fully integrated software-based environmentblending 2D and 3D graphics, digital video, and digital audio. Digital Studioaccommodates all types of projects for digital multimedia such as high endadvertising, entertainment, games, and integrated interactive multimedia,offering all of the tools needed to create every kind of digital media

production in a consistent, digital authoring environment.

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DESKTOP APPLICATIONS SOFTWARE

The Desktop Applications Division develops applications software, which providesthe PC with instructions for the performance of productivity tasks such asmanipulating text, numbers, or graphics. The Company's desktop applicationssoftware is designed for use by a broad class of end-users, regardless ofbusiness, industry, or market segment. Primary examples of desktop applications


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software are word processing, spreadsheet, and presentation graphics programs.The Company's desktop applications programs are developed principally forWindows and Macintosh operating systems.

MICROSOFT OFFICE: Microsoft Office(R) is a suite of software programsfeaturingseamless integration of the most commonly used desktop applications. MicrosoftOffice is based upon a document-centric concept, with common commands andextensive use of object linking and embedding (OLE) cross-applicationcapabilities. Microsoft Office is available in several versions, with certaincombinations of products available for the various operating system platforms.Products offered in the various versions include Microsoft Word, MicrosoftExcel, the Microsoft PowerPoint(R) presentation graphics program, Schedule+, theMicrosoft Access(R) database, Bookshelf, and others.

MICROSOFT WORD: The Company's principal word processing program isMicrosoftWord. Versions of Microsoft Word provide all the features that users of wordprocessing products expect in a graphical environment, plus the ability tohandle graphics, tables, spreadsheet data, charts, and images imported fromother software programs.

MICROSOFT EXCEL: The Company's spreadsheet program is Microsoft Excel. Itis anintegrated spreadsheet with pivot table, database, and business graphicscapabilities. Microsoft Excel allows full linking and embedding of objects thatpermits users to view and edit graphics or charts from other programs in the

worksheet in which the object is stored. Microsoft Excel graphics capabilitiescan be linked to its spreadsheets to allow simultaneous changes to charts aschanges are made to the spreadsheets.

MICROSOFT POWERPOINT: Microsoft PowerPoint is a presentation graphicsprogramfor producing transparencies, slides, overheads, and prints.

MICROSOFT PROJECT: Microsoft Project is a critical path project scheduling andresource allocation program. The product can perform as a budgeting, monitoring,and cost estimating tool for large business projects and as a critical path and

schedule planning tool.

OTHER PRODUCTIVITY PRODUCTS: The Company also offers otherproductivityproducts, including Microsoft Works, Microsoft Publisher, and MicrosoftFrontPage. Microsoft Works is an integrated software program that contains basicword processing, spreadsheet, and database capabilities that allows the easyexchange of information from one tool to another. Microsoft Publisher is aneasy-to-use, entry-level desktop publishing program. Microsoft FrontPage is aWeb authoring and management tool for Web sites on the Internet or intranets.


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INTERACTIVE MEDIA PRODUCTS

The Microsoft Interactive Media Division develops and markets interactiveentertainment and information products across a variety of media, including the

Internet, The Microsoft Network, and CD-ROM.

INFORMATION: Reference titles include Microsoft Encarta(TM) and MicrosoftBookshelf(R). The Encarta multimedia encyclopedia database blends text inarticles with a wealth of innovative, interactive information presented throughanimations, videos, maps, charts, sounds, and pictures. Bookshelf is amultimedia reference library that integrates seven well-respected andauthoritative works, including a dictionary, world atlas, world almanac,thesaurus, concise encyclopedia, and two books of quotations.

Personal interest titles include Microsoft Cinemania(TM), an interactive guide

to the movies with entries for 19,000 films, Microsoft Dinosaurs, and manymusical titles.

Geography and travel products include Automap Road Atlas, a comprehensiveroute-planning program with detailed maps and road information for routes inNorth America.

KIDS: Titles for children include Microsoft Creative Writer and Microsoft FineArtist. Creative Writer is a full-featured creative writing and publishingprogram; Fine Artist is a comprehensive art program. Both products takeadvantage of the computer's ability to integrate text, high-quality graphics,sound, and animation to produce an enriching creative experience for children.

The Company also has a series of products based on the popular children's booksand television series, The Magic School Bus.

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ENTERTAINMENT: The Company also has a line of entertainment products.MicrosoftFlight Simulator is a popular aircraft flight simulation product available forMS-DOS and Macintosh operating systems. Games include Space Simulator,MicrosoftGolf, Microsoft Fury(3), and Microsoft Arcade. Most games are available for theWindows 95 environment.


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THE MICROSOFT NETWORK: The Microsoft Network is an interactive onlineservice.MSN provides easy and inexpensive access for users to a wide range ofgraphically-rich online content, a compelling business model and platform for

independent content providers (ICPs), and rich and powerful development tools.The online service provides access to the Internet, electronic mail, bulletinboards, and a myriad of additional services offered by Microsoft and by ICPs.Content and service providers aligned with MSN have flexibility in creatingproducts and pricing their services, such as subscriptions, online transactions,and ticket events. Services may be supported by advertising and commerce.

MSN is owned by The Microsoft Network L.L.C. Microsoft owns 80% of the entitywhile a wholly owned subsidiary of Tele-Communications, Inc. (TCI) owns theremaining 20%.

JOINT VENTURES: The Company has entered into joint venture arrangements toleverage creative talent and content from other organizations. Microsoft owns50% of DreamWorks Interactive L.L.C., a software company that developsinteractive and multimedia products. DreamWorks SKG owns the remaining 50%.Microsoft owns 50% of MSNBC Cable L.L.C., a 24-hour cable news andinformationchannel; and 50% of MSNBC Interactive News L.L.C., an interactive online newsservice. National Broadcasting Company (NBC) owns the remaining 50% of thesetwo

joint ventures.

PC INPUT DEVICES

The Company's major input device is the Microsoft Mouse, a hand-held pointingdevice that facilitates use of a PC. It can be used with MS-DOS and Windowsoperating systems and works with most applications products from Microsoft andother companies. Microsoft also offers a mouse designed for the home and a mousefor young children. The Company also markets the Microsoft NaturalKeyboard(TM),an ergonomically-designed keyboard. Additionally, Microsoft sells two versionsof Sidewinder(TM), a joystick for games.

DESKTOP FINANCE

Microsoft Money is a financial organization product that allows users tocomputerize their household finances. Microsoft Money is available for systemsrunning Windows 95. It is visually appealing, easy to use, and focuses on thefinancial tasks that people do most often. Microsoft Money provides enhancedonline home-banking services with 17 different banks in the U.S. Users who arecustomers of participating banks are able to pay bills online, access up-to-datestatements and balances, transfer funds, and send email messages and inquiriesto their banks.


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MICROSOFT PRESS

Microsoft Press publishes books about software products from Microsoft and other

software developers and about current developments in the industry. Bookspublished by Microsoft Press typically are written and copyrighted byindependent authors who submit their manuscripts to the Company for publicationand who receive royalties based on net revenues generated by the book.

Microsoft Press contracts with an independent commercial printer for themanufacturing of its books. Publisher's Resources, Inc. acts as the Company'smain fulfillment house in the United States, maintaining the majority of theinventory of Microsoft Press books. Books are marketed by independent salesrepresentatives and by Microsoft Press sales personnel. Internationally,Microsoft Press has numerous international agreements with publishers for the

worldwide distribution of its books. Microsoft Press has granted a publisher inEngland the right to distribute English language versions of its books in allcountries except the United States, Canada, Central and South America, andcertain Asian countries. In most cases, Microsoft Press provides each publisherwith a book's manuscript, and the publisher arranges for its translation and theprinting, marketing, and distribution of the translated version.

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PRODUCT DEVELOPMENT

The PC software industry is characterized by extremely rapid technologicalchange, which requires constant attention to software technology trends andshifting consumer demand, and rapid product innovation. The pace of change hasrecently become even greater due to the surge of interest in the Internet, otherforms of online services, networking generally, and new programming languages,such as Java.

Most of the Company's software products are developed internally. The Companyalso purchases technology, licenses intellectual property rights, and overseesthird party development for certain products. Internal development enablesMicrosoft to maintain closer technical control over the products and gives theCompany the freedom to designate which modifications and enhancements are most


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important and when they should be implemented. The Company has created asubstantial body of proprietary development tools and has evolved developmentmethodologies for creating and enhancing its products. These tools andmethodologies are also designed to simplify a product's portability among

different operating systems, microprocessors, or computers. Productdocumentation is generally created internally.

The Company believes that a crucial factor in the success of a new product isgetting it to market quickly to respond to new user needs or advances in PCs,servers, peripherals, and the Internet, without compromising product quality.The Company strives to become as informed as possible at the earliest possibletime about changing usage patterns and hardware advances that may affectsoftware design.

During fiscal years 1994, 1995, and 1996, the Company spent $610 million, $860

million, and $1,432 million, respectively, on product research and developmentactivities. Those amounts represented 13.1%, 14.5%, and 16.5%, respectively, ofnet revenues in each of those years. The Company is committed to continued highexpenditures for research and product development.

LOCALIZATION

In order to best serve the needs of users in foreign countries, Microsoft"localizes" many of its products to reflect local languages and conventions. InFrance, for example, all user messages and documentation are in French and allmonetary references are in French francs, and in the United Kingdom, monetary

references are in British pounds and user messages and documentation reflectcertain British conventions. Various Microsoft products have been localized intomore than 30 languages.

MANUFACTURING

Microsoft contracts a substantial portion of its manufacturing activity to thirdparties. Outside manufacturers produce various retail software packagedproducts, documentation, and hardware such as mouse pointing devices, keyboards,and joysticks. There are other custom manufacturers in the event that outsourced

manufacturing becomes unavailable from current sources.

In recent years the Company's sales mix has shifted to corporate and OEMlicenses from packaged products. Online distribution of software may increase inthe future. During July 1996, Microsoft sold its domestic manufacturing anddistribution operation.

The Company's remaining manufacturing facilities are located in Puerto Rico andIreland. The Irish manufacturing facility replicates disks, assembles otherpurchased parts, and packages final product. The Puerto Rican facilitymanufactures CD-ROMs, assembles other purchased parts, and packages finalproduct. Quality control tests are performed on purchased parts, finished disks


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and CD-ROMs, and other products. The chief materials and components used inMicrosoft products include disks or CD-ROMs, books, and multicolor printedmaterials. The Company is often able to acquire component parts and materials ona volume discount basis. The Company has multiple sources for raw materials,

supplies, and components.

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MARKETING AND DISTRIBUTION

Microsoft aligns its sales and marketing people with several customer types,including end-users, organizations and enterprises, and OEMs. The Company'ssales and marketing staff seeks to build long-term relationships with customersof Microsoft products. In addition to the OEM channel, Microsoft has three majorgeographic sales and marketing organizations: the U.S. and Canada, Europe, and

elsewhere in the world (Other International).

The end-user customer unit has responsibility for activities that targetend-users who make individual buying decisions for the PCs they use at work orhome. Most sales and marketing activities aimed at end-user customers areperformed by this unit, including developing and administering resellerrelationships; reseller sales terms and conditions; channel marketing andpromotions; end-user marketing programs; support policies; and seminars, events,and sales training for resellers. The key products licensed and sold are theCompany's desktop operating systems, desktop applications, and interactive mediaproducts.

The organization customer unit has responsibility for activities that targetgroups of users in small and medium organizations. The unit works with channelpartners such as distributors, aggregators, value-added resellers, and SolutionProviders to provide complete business solutions to this customer segment. Theunit's sales and marketing activities include providing technical training ofSolution Providers and channel resellers; developing support policies; andsupporting and providing seminars, events, and sales training for channelpartners.

The enterprise customer unit has responsibility for sales and marketingactivities that target large organizations (enterprises). The unit works


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directly with these organizations, and through large account resellers, tocreate enterprisewide, mission critical solutions to business computingproblems.

Key products for the organization and enterprise customer units are theCompany's business systems; applications and Internet developer software;desktop productivity applications; and desktop operating systems.

The OEM customer unit includes the sales force which works with originalequipment manufacturers that preinstall Microsoft software on their PCs.

FINISHED GOODS CHANNELS

DISTRIBUTORS AND RESELLERS: The Company markets its products in the

finishedgoods channels primarily through independent non-exclusive distributors andresellers. Distributors include Computer 2000, Ingram Micro, Tech Data, andMerisel. Resellers include Egghead Software, Softbank, Software Spectrum, andStream International. Microsoft has a network of field sales representatives andfield support personnel who solicit orders from distributors and resellers andprovide product training and sales support.

LARGE ACCOUNTS: The Company has a program designed to make it easier forlargeorganizations to acquire and maintain Microsoft products. The program, MicrosoftSelect, offers flexible software acquisition, licensing, and maintenance options

specially designed to meet the needs of large multinational organizations.Targeted audiences include technology specialists and influential end-users inlarge enterprises. Marketing efforts and fulfillment are generally coordinatedwith the Microsoft network of large account resellers.

SOLUTION PROVIDERS: Microsoft's Solution Providers program is acomprehensivesupport relationship with independent organizations that provide network andsystem integration, custom development, training, and technical support forbusiness computing solutions. The program supports value-added resellers (VARs),system integrators, consultants, custom application developers, solution

developers, Internet service and hosting organizations, independent contentproviders, and sitebuilders (companies that build Web sites for othercompanies), as well as technical support and training organizations. Under thisbusiness partnership strategy, the Company provides sales and productinformation, development services, early access to Microsoft products, andcustomer support tools including priority telephone support, education, andbusiness development support. To ensure high-quality technical services for theCompany's products, Microsoft Solution Providers are required to haveMicrosoft-certified professionals on staff.

CONSULTING SERVICES: The Company's Consulting Services Division assistscustomers in using the Company's computer operating systems, applications, and


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communications products. The group works with Solution Providers and helpscreate enterprisewide computing solutions for large corporate accounts.

DIRECT MARKETING: Microsoft promotes some of its products through direct

marketing techniques directed toward existing and potential users of theCompany's products. Promotional materials are typically delivered through the

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mail, utilizing lists of targeted individuals. Fulfillment of product to theend-user is accomplished by either direct shipment or through resellers.

INTERNATIONAL SALES SITES: The Company has established marketing and/orsupportsubsidiaries in more than 60 countries. Sales are generally made by the localsales subsidiary, while product is delivered by either the Company's owned oroutsourced manufacturing operations. In some locations, sales are made directlyby the Company from the U.S.

The Company's international operations, both OEM and finished goods, are subjectto certain risks common to foreign operations in general, such as governmentalregulations, import restrictions, and foreign exchange rate fluctuations.Microsoft hedges a portion of its foreign exchange risk.

OEM CHANNEL

The Company's operating systems are licensed primarily to OEMs under agreementsthat grant the OEMs the right to distribute copies of Microsoft's products withtheir computers. The Company also markets certain desktop applications and

interactive media programs to OEMs under similar arrangements. In addition, theCompany markets the Microsoft Mouse and Natural Keyboard to OEMs fordistribution to buyers of their computers. In almost all cases, the products aredistributed under Microsoft trademarks. The Company has OEM agreementscoveringone or more of its products with virtually all of the major PC OEMs, includingAST Research, Acer, Compaq, Digital Equipment Corporation, Dell, Fujitsu,Gateway 2000, Hewlett-Packard, IBM, NEC, Olivetti, Packard Bell, Siemens,Toshiba, and Vobis.

ADVERTISING


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The Company works closely with large advertising and direct marketing firms.Advertising, direct marketing, worldwide packaging, and marketing materials aretargeted to various end-user segments. The Company utilizes broad consumer

media(television, radio, and business publications) and trade publications. Microsofthas programs under which qualifying resellers and OEMs are reimbursed forcertain advertising expenditures. Microsoft also invests in direct marketing andcustomer satisfaction areas. The Company maintains a broad advertising campaignemphasizing the Microsoft brand identity.

CUSTOMERS

As described above, Microsoft has four customer types: end-users, organizations,

enterprises, and OEMs. Most end-users of Microsoft products are individuals inbusinesses, government agencies, educational institutions, and at home. Theseend-users obtain Microsoft products primarily through distributors, resellers,and OEMs, which include certain Microsoft products with their hardware. Notes toFinancial Statements (see Item 8) describe customers that represent more than10% of the Company's revenues. The Company's practice is to ship its productspromptly upon receipt of purchase orders from its customers and, consequently,backlog is not significant.

PRODUCT SUPPORT

The Company provides product support coverage options to meet the needs of usersof Microsoft products. Support personnel are located in various sites in theU.S. and in various Microsoft subsidiaries. Certain support is also supplied byqualified third-party support organizations. The Company hires individuals withproduct expertise and provides them with productivity tools, continuous producteducation and training, and consistent processes to deliver quality support forMicrosoft products. Coverage options range from standard no-charge tolltelephone support to fee-based offerings providing unlimited 800 numbertelephone and electronic technical support for all Microsoft products 24 hoursper day, 7 days per week.

Users have access to Microsoft KnowledgeBase, a library of thousands oftechnical articles that is updated regularly with useful information regardingMicrosoft products. Microsoft provides access to KnowledgeBase via MSN,AmericaOnline, CompuServe, GEnie, Prodigy, and the Internet. Additionally, the Companyoffers two information subscription services: Microsoft TechNet and MicrosoftDeveloper Network.


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811

As a supplement or alternative to direct support, the Company enhances the thirdparty support channel by providing Microsoft Solution Providers with education,training, tools, and support. Microsoft Solution Providers include AuthorizedTraining Centers, which offer advanced product education and certification onMicrosoft products; and Authorized Support Centers, which provide a widespectrum of multinational support, multivendor support, and integrationservices.

COMPETITION

The PC software business is intensely competitive and subject to extremely rapidtechnological change. Microsoft faces formidable competition in all areas of itsbusiness activity (including competition from many companies much larger thanMicrosoft). The extremely rapid pace of technological change constantly createsnew opportunities for existing competitors and start-ups and can quickly renderexisting technologies less valuable. The Company also faces constantcompetition from software pirates who unlawfully copy and distributeMicrosoft's copyrighted software products.

THE INTERNET: The Company faces intense competition in the development andmarketing of Internet (and intranet) software from a wide variety of companiesand organizations including IBM, Netscape, Novell, Oracle, O'Reilly, SunMicrosystems, Apache Group, the National Center for Supercomputing Applications(NCSA), and the European Laboratory for Particle Physics (CERN).

OPERATING SYSTEMS: Microsoft's operating system products face substantialcompetition from a wide variety of companies. Major competitors such as IBM,Apple Computer, Digital Equipment Corporation, Hewlett-Packard, SunMicrosystems, and others, are vertically integrated in both software development

and hardware manufacturing and have developed operating systems that theypreinstall on computers of their own manufacture. Many of these operating systemsoftware products are also licensed to third party OEMs for preinstallation ontheir machines. Microsoft's operating system products compete with UNIX-basedoperating systems from a wide range of companies including IBM, AT&T,Hewlett-Packard, Sun Microsystems, The Santa Cruz Operation, and others.Variants of UNIX run on a wide variety of computer platforms and have gainedincreasing acceptance as desktop operating systems. As PC technologyincreasingly moves toward connectivity and communications, Microsoft's operatingsystem products will face increased competition from network server operatingsystems such as Novell NetWare, Banyan Vines, the many variants of UNIX, OS/2,"middleware" products such as Lotus Notes from IBM, and intranet servers from


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Netscape and others. In addition, Netscape is seeking to position its browsersoftware as a computing platform that would perform many of the functionsperformed by operating systems from Microsoft and other vendors.

BUSINESS SYSTEMS: The Company is a fairly recent entrant into the business ofproviding enterprisewide computing solutions. Several competitors enjoy a largershare of sales and larger installed bases. Many companies offer operating systemsoftware for mainframes and midrange computers, including IBM, DEC,Hewlett-Packard, and Sun Microsystems. Since legacy business systems aretypically support-intensive, these competitors also offer substantive supportservices. Software developers that provide competing server applications forPC-based distributed client/server environments include Oracle, Sybase, andInformix. There are also several software vendors who offer connectivityservers. As mentioned above, there are numerous companies and organizations thatoffer Internet and intranet server software which compete against the Company's

business systems. Additionally, IBM has a large installed base of Lotus Notesand cc:Mail, both of which compete with the Company's workgroup and mailproducts.

DESKTOP APPLICATIONS: The Company's competitors include many softwareapplication vendors, such as IBM (Lotus), Oracle, Apple (Claris), and Corel. IBMand Corel have large installed bases with their spreadsheet and word processorproducts, respectively, and both appear to have adopted aggressive pricingstrategies in recent months. Also, IBM and Apple preinstall certain of theirsoftware products on various models of their PCs, competing directly withMicrosoft application software.

ONLINE SERVICES: An enormous range of companies, including mediaconglomerates,telephone companies, cable companies, retailers, hardware manufacturers, andsoftware developers, are competing to make online services widely available tocomputer users. Microsoft's new online services network, MSN, faces formidablecompetition from both established online networks, such as America Online,CompuServe, Prodigy, and impending entrants. MSN also faces competition fromonline services that are offered to users directly via the Internet, including,in particular, the World Wide Web.

912

INTERACTIVE MEDIA: The Company's Interactive Media division faces manysmallerbut focused competitors, particularly in the areas of entertainment andeducation. Many of these competitors have strong brand identification.Consolidation in this area of software development has made certain competitors


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even stronger. Examples of competitors include Intuit, Broderbund, ElectronicArts, Softkey (including The Learning Company and Compton's), Voyager, Edmark,CUC International (including Sierra On Line and Davidson Associates), andDorling Kindersley. Still other competitors own branded content, such as Disney

and Lucas Arts. Additionally, as platforms become more powerful, PC-based gameswill compete head-to-head with games created for proprietary systems such asNintendo and Sega. Input devices face substantial competition from computermanufacturers, since computers are typically sold with a keyboard and mouse, andother manufacturers of these devices.

NEWS SERVICES: The Company's MSNBC joint ventures face formidablecompetitionfrom another, more established 24-hour cable and Internet news organization,CNN. Additionally, the Fox network has announced plans for its own 24-hour cablenews service. MSNBC also competes with traditional news media such as

newspapers and broadcast TV, and Internet news services.

DEVELOPER: The Company's developer products compete against offerings fromBorland, Oracle, Sun Microsystems, Sybase, Symantec, and many other companies.

The Company believes that the principal competitive factors in marketing PCsoftware are a product's features and functions, ease of use, reliability, pricerelative to performance, timeliness of delivery, reputation, and availabilityand quality of support services. There is no assurance that the Company'scompetitive position will not be adversely affected by one or more of thesefactors in the future, particularly in view of the fast pace of technologicalchange in the software industry.

EMPLOYEES

As of June 30, 1996, the Company employed 20,561 people on a full-time basis,13,991 domestically and 6,570 internationally. Of the total, 6,861 were inproduct research and development, 10,097 in sales, marketing, and support, 1,485in manufacturing and distribution, and 2,118 in finance and administration.Microsoft's success is highly dependent on its ability to attract and retainqualified employees. Competition for employees is intense in the softwareindustry. To date, the Company believes it has been successful in its efforts to

recruit qualified employees, but there is no assurance that it will continue tobe as successful in the future. None of the Company's employees are subject tocollective bargaining agreements. The Company believes relations with itsemployees are excellent.

Item 2. Properties

The Company's corporate offices consist of approximately 3.1 million square feetof office building space located in King County, Washington. There are two sitesthat total approximately 300 acres of land. The Company is constructing threeoffice buildings comprising approximately 350,000 square feet of space, whichare expected to be completed in the summer of 1997. Additionally, construction


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is continuing on another series of office buildings with approximately 565,000square feet of space. Occupancy on this site will be phased starting in thewinter of 1997 and completed by spring of 1998. The Company owns all of itscorporate campus.

The Company sold its domestic manufacturing and distribution operation inSnohomish County, Washington, in July 1996 but retains a 45,000 square foot diskduplication facility in Humacao, Puerto Rico. The Puerto Rican facility, whichbegan operation in April 1990, is leased under a 10-year lease, with an optionto renew for an additional 10 years. The Company's European manufacturingoperation consists of a 161,000 square foot facility situated on 12 acres inDublin, Ireland. The Ireland site also includes office buildings with 157,000square feet for international localization. The Ireland facilities are fullyowned by the Company.

The Company is constructing an office building complex with 225,000 square feeton 33 acres of land near Redding, England. Occupancy is expected in the fall of1997. In Les Ulis, France, the Company owns a 199,000 square foot officebuilding on four acres of land. In addition, the Company leases office space innumerous locations in the United States and many other countries.

Item 3. Legal Proceedings

In connection with an ongoing investigation, the Antitrust Division of the U.S.Department of Justice requested information from Microsoft in September 1996concerning Web browsers. Management currently believes that resolution of thismatter will not have a material adverse impact on its financial position or

results of operations.

Additionally, the information set forth in Notes to FinancialStatements--Commitments and Contingencies on page 27 of the 1996 AnnualReportto Shareholders is incorporated herein by reference and is filed herewith asExhibit 13.4.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth

quarter of fiscal 1996.

1013

PART II


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Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The information set forth on page 28 of the 1996 Annual Report to Shareholders

is incorporated herein by reference and is filed herewith as Exhibit 13.1.

Item 6. Selected Financial Data

The information set forth on page 4 of the 1996 Annual Report to Shareholders isincorporated herein by reference and is filed herewith as Exhibit 13.2.

Item 7. Management's Discussion and Analysis of Financial Condition and Resultsof Operations

The information set forth on pages 16-19, 22, and 23 of the 1996 Annual Report

to Shareholders is incorporated herein by reference and is filed herewith asExhibit 13.3.

Item 8. Financial Statements and Supplementary Data

The following financial statements for the Company and independent auditors'report set forth on pages 14, 15, 20, 21, 24-29, and 31 of the 1996 AnnualReport to Shareholders is incorporated herein by reference and is filed herewithas Exhibit 13.4.

- Income Statements for the three years ended June 30, 1996

- Cash Flows Statements for the three years ended June 30, 1996

- Balance Sheets as of June 30, 1995 and 1996

- Stockholders' Equity Statements for the three years ended June 30, 1996

- Notes to Financial Statements

- Independent Auditors' Report

Item 9. Changes in and Disagreements with Accountants on Accounting and

Financial Disclosures

None.

1114


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PART III

Item 10. Directors and Executive Officers of the Registrant

Information with respect to Directors may be found under the caption "Electionof Directors and Management Information" on pages 1 and 2 of the Company'sProxyStatement dated September 27, 1996, for the Annual Meeting of Shareholders to beheld November 12, 1996 (the "Proxy Statement"). Such information is incorporatedherein by reference.

The executive officers of Microsoft as of September 9, 1996 were as follows:

NAME

AGEPOSITION

WITH THECOMPANY

WilliamH. Gates

40Chairman ofthe Board;

ChiefExecutive

OfficerSteven A.

Ballmer40

ExecutiveVice

President,Sales andSupportRobert J.

Herbold54


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ExecutiveVice

President;Chief

OperatingOfficerFrank M.(Pete)

Higgins38 Group

VicePresident,

Applicationsand Content

Paul A.

Maritz41Group VicePresident,PlatformsNathan P.

Myhrvold37

Group VicePresident,

Applicationsand Content

Jeffrey S.Raikes

38Group VicePresident,Sales andMarketing

James E.Allchin

44Senior Vice

President,Desktop and

BusinessSystemsDivision

JoachimKempin

54Senior VicePresident,

OEM SalesCraig J.


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Mundie47

Senior VicePresident,

ConsumerPlatformsDivision

WilliamH. Neukom

54Senior VicePresident,Law andCorporateAffairs;

SecretaryBrad A.Silverberg

42Senior VicePresident,InternetPlatform

and ToolsDivision

PatriciaQ.

Stonesifer40

Senior VicePresident,Interactive

MediaDivision

BernardP. Vergnes

51Senior Vice

President,Microsoft;President,MicrosoftEuropeMichael

W. Brown50

VicePresident,Finance;

Chief


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FinancialOfficer

Mr. Gates co-founded Microsoft in 1975 and has been its Chief Executive Officerand Chairman of the Board since the original partnership was incorporated in1981.

Mr. Ballmer was named Executive Vice President, Sales and Support in February1992. He had been Senior Vice President, Systems Software since 1989. From 1984until 1989, Mr. Ballmer served as Vice President, Systems Software. He joinedMicrosoft in 1980.

Mr. Herbold joined Microsoft as Executive Vice President and Chief OperatingOfficer in November 1994. Mr. Herbold had been with The Procter & Gamble

Companysince 1968, with experience in information services, advertising and marketresearch. Most recently, he was P&G's Senior Vice President, InformationServices and Advertising.

Mr. Higgins was named Group Vice President, Applications and Content in May1995. He was named Senior Vice President, Desktop Applications Division inMarch1993. He had been Vice President, Desktop Applications Division since 1992 andpreviously, Vice President, Analysis Business Unit since 1991. Mr. Higgins

joined Microsoft in 1983.

Mr. Maritz was named Group Vice President, Platforms in May 1995. He wasnamedSenior Vice President, Product and Technology Strategy in November 1994 and hadbeen Senior Vice President, Systems Division since February 1992. He had beenVice President, Advanced Operating Systems since 1989. Mr. Maritz joinedMicrosoft in 1986.

Mr. Myhrvold was named Group Vice President, Applications and Content in May1995. He was named Senior Vice President, Advanced Technology in July 1993. Hehad been Vice President, Advanced Technology and Business Development since1989. Mr. Myhrvold joined Microsoft in 1986.

Mr. Raikes was named Group Vice President, Sales and Marketing in July 1996. Hewas named Senior Vice President, Microsoft North America in January 1992 andhadbeen Vice President, Office Systems since 1990. Mr. Raikes joined Microsoft in1981.

12


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15

Mr. Allchin was named Senior Vice President, Desktop and Business SystemsDivision in February 1996. He was named Senior Vice President, Business SystemsDivision in November 1994 and had been Vice President, Business SystemsDivision, since July 1991. Mr. Allchin joined Microsoft in 1991.

Mr. Kempin was named Senior Vice President, OEM Sales in August 1993. He hadbeen Vice President, OEM Sales since 1987. Mr. Kempin joined Microsoft in 1983.

Mr. Mundie was named Senior Vice President, Consumer Platforms Division inFebruary 1996. He was named Senior Vice President, Consumer Systems DivisioninMay 1995 and had been Vice President, Advanced Consumer Technology since July1993. He joined Microsoft as General Manager, Advanced Consumer TechnologyGroupin December 1992. Previously, Mr. Mundie had been CEO of Alliant ComputerSystems Corporation, which declared bankruptcy on May 25, 1992 and wasliquidated.

Mr. Neukom was named Senior Vice President, Law and Corporate Affairs inFebruary 1994. He joined Microsoft in 1985 as Vice President.

Mr. Silverberg was named Senior Vice President, Internet Platform and ToolsDivision in February 1996. He was named Senior Vice President, Personal SystemsDivision in November 1994 after joining Microsoft in August 1990 as VicePresident, Personal Operating Systems Division.

Ms. Stonesifer was named Senior Vice President, Interactive Media Division inFebruary 1996. She was named Senior Vice President, Consumer Division inNovember 1994, after having been Vice President, Consumer Division since June1993. She had been Vice President, Support since 1992 and General Manager ofProduct Support Services since 1991. Ms. Stonesifer joined Microsoft in 1988.

Mr. Vergnes is a Senior Vice President of Microsoft and was named President,Microsoft Europe in April 1992. He had been Vice President, Europe since 1989.Mr. Vergnes joined Microsoft in 1983.

Mr. Brown was named Chief Financial Officer in August 1994 and Vice President,Finance in April 1993. He was named Treasurer shortly after joining Microsoft inJanuary 1990.

Item 11. Executive Compensation

The information in the Proxy Statement set forth under the captions "Information


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Regarding Executive Officer Compensation" on pages 4 through 8 and "InformationRegarding the Board and its Committees" on page 2 is incorporated herein byreference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption "Information Regarding BeneficialOwnership of Principal Shareholders, Directors, and Management" on page 3 of theProxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

None.

1316

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Schedules

The financial statements as set forth under Item 8 of this report on Form

10-K are incorporated herein by reference.

Financial statement schedules have been omitted since they are either notrequired, not applicable, or the information is otherwise included.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of fiscal 1996.

(c) Exhibit Listing

ExhibitNumber Description

3.1 Restated Articles of Incorporation (1)

3.2 Bylaws (1)

10.1 Microsoft Corporation 1991 Stock Option Plan (1)

10.2 Microsoft Corporation 1981 Stock Option Plan (2)

10.3 Microsoft Corporation Stock Option Plan for Non-Employee


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Directors (1)

10.4 Microsoft Corporation Stock Option Plan for Consultantsand Advisors (1)

10.5 Microsoft Corporation 1991 Employee Stock PurchasePlan (3)

10.6 Microsoft Corporation Savings Plus Plan (1)

10.7 Trust Agreement dated June 1, 1993 between MicrosoftCorporation and First Interstate Bank of Washington (4)

10.8 Form of Indemnification Agreement (4)

11. Computation of Earnings Per Share

13.1 Quarterly and Market Information Incorporated by Referenceto Page 28 of 1996 Annual Report to Shareholders ("1996Annual Report")

13.2 Selected Financial Data Incorporated by Reference to Page4 of 1996 Annual Report

13.3 Management's Discussion and Analysis of FinancialCondition and Results of Operations Incorporated byReference to Pages 16-19, 22, and 23 of 1996 Annual Report

13.4 Financial Statements Incorporated by Reference to Pages14, 15, 20, 21, 24-29, and 31 of 1996 Annual Report

21. Subsidiaries of Registrant (5)

23. Independent Auditors' Consent

27. Financial Data Schedule

99.1 Financial Statements for the Microsoft Corporation 1991

Employee Stock Purchase Plan for the Three Years EndedJune 30, 1996

- ----------------(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year

Ended June 30, 1994.

(2) Incorporated by reference to Registration Statement 33-37623 on FormS-8.

(3) Incorporated by reference to Annual Report on Form 10-K For The FiscalYear Ended June 30, 1995.


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(4) Incorporated by reference to Annual Report on Form 10-K For The FiscalYear Ended June 30, 1993.

(5) Incorporated by reference to Exhibit 13.4 filed herein.

1417

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Redmond,State of Washington, on September 26, 1996.


By /s/ Michael W. Brown----------------------------------------------

Michael W. BrownVice President, Finance; Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of Registrant and inthe capacities indicated on September 26, 1996.

SIGNATURE TITLE

/s/ William H. Gates- -----------------------------

William H. Gates Chairman of the Board of Directorsand Chief Executive Officer

/s/ Paul G. Allen- -----------------------------

Paul G. Allen Director

- -----------------------------Jill E. Barad Director

/s/ Richard A. Hackborn- -----------------------------

Richard A. Hackborn Director

/s/ David F. Marquardt


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- -----------------------------David F. Marquardt Director

/s/ Robert D. O'Brien

- -----------------------------Robert D. O'Brien Director

/s/ Wm. G. Reed, Jr.- -----------------------------

Wm. G. Reed, Jr. Director

/s/ Jon A. Shirley- -----------------------------

Jon A. Shirley Director

/s/ Michael W. Brown- -----------------------------Michael W. Brown Vice President, Finance; Chief

Financial Officer (PrincipalFinancial and Accounting Officer)

15

EX-112COMPUTATION OF EARNINGS PER SHARE

1

EXHIBIT 11.

COMPUTATION OF EARNINGS PER SHARE(In millions, except earnings per share)


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YearEnded June

30- ----------

------------------------------------------------------------------------------------------------

-

19941995

1996- ----------------------------------------------------------------------------------

------------------------

-

Weightedaveragecommon

sharesoutstanding

571582

592

Commonequivalent

sharesfrom stock


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options

3945

48- ----------------------------------------------------------------------------------------------------------

-

Averagecommon

andequivalent

sharesoutstanding(1)

610627640

- ----------

------------------------------------------------------------------------------------------------

-

Net

income

$1,146$1,453$2,195

- ----------------------------------------------------------


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------------------------------------------------

-

Earningsper share

(1)

$ 1.88$ 2.32$ 3.43

- ----------

------------------------------------------------------------------------------------------------

-

- ------------------

(1) Fully diluted earnings per share have not been presented because theeffects are not material.

EX-13.13QUARTERLY AND MARKET INFORMATION

1


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EXHIBIT 13.1

QUARTERLY INFORMATION(In millions, except per share data) (Unaudited)

Quarter

Ended- -------------------------------------------------------------------------------------------------------------

Sept.30

Dec. 31Mar. 31

June30Year

- ---------

----------------------------------------------------------------------------------------------------


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1994Net

revenues

$983 $

1,129 $1,244 $1,293 $

4,649

Operatingincome

343415

4804881,726Net

income

239289

2563621,146

Earningsper share

0.39

0.480.420.59

1.88Common

stockprice per

share:High

44-


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1/443-1/444-5/854-5/8

54-5/8Low

35-1/83839

4135-1/8

- ---------

----------------------------------------------------------------------------------------------------

1995Net

revenues

$1,247 $1,482 $1,587 $1,621 $

5,937Operatingincome

437520

5495322,038Net

income

316


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373396

3681,453

Earningsper share

0.510.60

0.630.58

2.32Common

stock

price pershare:High

59-1/4

65-1/874-1/892-3/8

92-3/8Low

46-7/8

53-7/858-1/468-3/4

46-7/8- -----------------------------

--------------------------------------------------------------------------------

1996Net

revenues


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$

2,016 $2,195 $

2,205 $2,255 $

8,671Operatingincome

708786

774810

3,078Netincome

499575

5625592,195

Earningsper share

0.780.90

0.880.87

3.43Common

stockprice per

share:

High

109-1/4

103-3/8107-1/16

125-7/8

125-7/8Low


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85 80-3/8

79-7/899-5/8

79-7/8- -------------------------------------------------------------------------------

------------------------------

The Company's common stock is traded on The Nasdaq Stock Market under thesymbolMSFT. On July 31, 1996, there were 37,883 holders of record of the Company'scommon stock. The Company has not paid cash dividends on its common stock.

EX-13.24SELECTED FINANCIAL DATA

1

EXHIBIT 13.2

FINANCIAL HIGHLIGHTS(In millions, except earnings per share)


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YearEnded June

30- ------------------------------------------------------------------------------------------------

-----------------

19921993

19941995

1996- ----------------------------------------

----------------------------------------------------------------------

---

Net revenues

$2,759$3,753$4,649

$5,937 $8,671

Net income

708


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9531,1461,453

2,195

Earnings pershare

1.201.571.882.32

3.43Return on

net revenues

25.7%25.4%24.7%

24.5%25.3%

Cash andshort-term

investments

$1,345$2,290$3,614

$4,750 $6,940

Total assets

2,6403,8055,3637,21010,093

Stockholders'

equity

2,1933,2424,4505,333

6,908- --------------------------------------------------------------------


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------------------------------------------

---

EX-13.3

5MANAGEMENT'S DISCUSSION AND ANALYSIS

1

EXHIBIT 13.3

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS FOR 1994, 1995, AND 1996

Microsoft develops, manufactures, licenses, sells, and supports a wide range ofsoftware products, including operating systems for personal computers (PCs) andservers, server applications for client/server environments, business andconsumer productivity applications, interactive media programs, and Internet

platform and development tools. Microsoft also offers online services, sellspersonal computer books and input devices, and researches and develops advancedtechnology software products.

NET REVENUES

The Company's net revenues grew 28% in the fiscal year ended June 30, 1995 and46% in fiscal year 1996. Software license volume increases have been theprincipal factor in Microsoft's revenue growth. The average selling price perlicense has decreased, primarily because of general shifts in the sales mix fromretail packaged products to licensing programs, from new products to product


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upgrades, and from stand-alone desktop applications to integrated productsuites. Average revenue per license from original equipment manufacturer (OEM)licenses and corporate license programs, such as Microsoft Select, is lower thanaverage revenue per license from retail versions. Likewise, product upgrades

have lower prices than new products. Also, prices of integrated suites, such asMicrosoft Office, are less than the sum of the prices for the individualprograms included in these suites when such programs are licensed separately.

PRODUCT GROUPS. Microsoft has a Platforms Product Group and anApplications andContent Product Group.

Platforms Product Group revenues were $1.83 billion, $2.36 billion, and $4.11billion in 1994, 1995, and 1996.

The Company's principal desktop operating system product in 1996 was MicrosoftWindows 95. Released in August 1995, Windows 95 was a successor to MS-DOS(R) andMicrosoft Windows 3.X operating systems. Windows 95, and before its release,MS-DOS and Windows 3.X, were preinstalled on PCs by most OEMs. Desktopoperatingsystems increasingly contributed to revenues as new PCs preinstalled with suchsystems increased rapidly during the three-year period. Additionally, retailsales of Windows 95 were a major factor in the platforms revenue increase in1996, reflecting the typical sales pattern for operating systems upgrades.

Business systems products offer an enterprise-wide distributed client/server

environment based on the Microsoft Windows NT operating system and the serverapplications in the Microsoft BackOffice family of products. Revenues from theseproducts increased strongly in 1994, 1995, and 1996 due to greater corporatedemand for Windows NT Workstation and Windows NT Server.

During 1996, Microsoft implemented its policy of offering customers the latestInternet technology at no additional cost. Given this strategy, and becauseInternet browsers are a fundamental and integral part of Windows-based operatingsystems, ratable revenue recognition is required for a portion of allWindows-based operating system license fees, including those licensed throughretail and OEM channels. Unearned revenues as of June 30, 1996 on the

accompanying balance sheet include $425 million for future support commitments,Internet browser updates, and other unspecified enhancements to Windows-basedoperating systems that will be recognized ratably over the products' lifecycles.

Revenues from developer products increased steadily in all three years, as moreindependent software vendors, corporate developers, and solutions developerslicensed tools such as the Microsoft Visual Basic(R) programming system todevelop software for Windows 95, Windows NT, and the Internet.

Applications and Content Product Group revenues were $2.82 billion, $3.58billion, and $4.56 billion in 1994, 1995, and 1996.


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Increases in desktop applications revenues were led by strong sales of 16-bitand 32-bit versions of Microsoft Office. The Microsoft Office Standard productincludes the Microsoft Excel spreadsheet; Microsoft Word, a word-

2

processing program; and the Microsoft PowerPoint presentation graphics program.The Microsoft Office for Windows 95 (32-bit) version also includes the MicrosoftSchedule+ calendar and scheduling program. Microsoft Office Professional versionincludes all of the above plus the Microsoft Access database management system.Sales of stand-alone versions of Microsoft Excel and Microsoft Word continued todecrease as the sales mix shifted to integrated product suites. Sales ofMicrosoft Project and Microsoft Works also increased during the three-yearperiod.

Microsoft licenses a broad range of consumer software products, which alsoshowed continued growth. Products include CD-ROM multimedia reference titlesand

programs for home and small office productivity, children's creativity, andentertainment.

The Company also markets input devices. Mouse and keyboard sales increasedduring the three-year period, while the joystick's initial introductionincreased revenues in 1996.

SALES CHANNELS. The Company distributes its products primarily through OEMlicenses, corporate licenses, and retail packaged products. OEM channel revenuesare license fees from original equipment manufacturers. Microsoft has threemajor geographic sales and marketing organizations: the United States and

Canada, Europe, and elsewhere in the world (Other International). Sales ofcorporate licenses and packaged products in these channels are primarily todistributors and resellers.

OEM channel revenues were $1.18 billion in 1994, $1.65 billion in 1995, and$2.50 billion in 1996. The primary source of OEM revenues is the licensing ofdesktop operating systems. As such, OEM channel revenues are highly dependent onPC shipment volume.

Corporate licenses continued to grow in popularity across all geographic areasduring the three-year period. Packaged product volume increased in 1996 due tothe release of retail upgrade versions of Windows 95 and 32-bit desktop


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applications. U.S. and Canadian channel revenues were $1.58 billion, $1.88billion, and $2.68 billion in 1994, 1995, and 1996. Revenues in Europe were$1.36 billion, $1.49 billion, and $2.02 billion in 1994, 1995, and 1996. Growthrates have been lower in Europe than in other geographic areas due to general

economic slowness, higher existing market shares, and a more dramatic shift tocorporate licensing programs. Other International channel revenues were $532million in 1994, $924 million in 1995, and $1.47 billion in 1996. Growth ratescontinue to be strong due to customers accepting newly localized products,particularly in Japan, and early entrance into emerging markets.

The Company's operating results are affected by foreign exchange rates.Approximately 40%, 37%, and 38% of the Company's revenues were collected inforeign currencies during 1994, 1995, and 1996. Since much of the Company'sinternational manufacturing costs and operating expenses are also incurred inlocal currencies, the impact of exchange rates on net income is less than on

revenues.

OPERATING EXPENSES

COST OF REVENUES. As a percentage of revenues, cost of revenues was 16.4%in1994, 14.8% in 1995, and 13.7% in 1996. The percentage decreased due to agreater proportion of licenses to OEMs and corporations, a higher proportion ofCD-ROM versions, and manufacturing efficiencies. These factors were offsetsomewhat by increased sales of lower-margin products such as integrated suitesand retail upgrades.

RESEARCH AND DEVELOPMENT. Microsoft invested heavily in the future byfundingresearch and development (R&D). Expense increases of 41% in 1995 and 67% in1996resulted primarily from development staff headcount growth and higher levels ofthird-party development costs in many areas, including development efforts forWindows 95 in 1995 and Windows NT and the Internet in 1996. R&D costs alsoincreased for business systems, consumer systems, desktop applications, andinteractive media products such as The Microsoft Network and other onlineservices.

SALES AND MARKETING. The increase in the absolute dollar amount of salesandmarketing expenses in the three-year period was due primarily to increasedproduct-specific marketing programs, particularly for Windows 95 during 1996.Also, expenses increased due to higher levels of Microsoft brand advertising andproduct support.


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GENERAL AND ADMINISTRATIVE. Increases in general and administrativeexpenseswere primarily attributable to growth in the number of people and computersystems necessary to support overall increases in the scope of the Company'soperations.

NONOPERATING ITEMS

Interest income increased primarily as a result of a larger investment portfoliogenerated by cash from operations. Other expenses increased in 1996 due torecognition of Microsoft's share of joint venture operational expenses,including DreamWorks Interactive and the MSNBC entities. During 1995,Microsoftpaid a $46 million breakup fee to Intuit Inc. in connection with the terminationof a planned merger. During 1994, the Company recorded a net pretax charge of$90 million, reflecting the patent litigation settlement with Stac Electronics.

PROVISION FOR INCOME TAXES

The effective tax rate was 33.5% in 1994, 33.0% in 1995, and 35.0% in 1996. The1996 increase was primarily attributable to the research and experimental creditexpiring in the United States.

NET INCOME

Net income as a percent of revenues increased in 1996 due to the lower relativecost of revenues, sales and marketing expenses, general and administrative

expenses, and nonoperating expenses, offset by higher relative research anddevelopment expenses and the higher tax rate. The net income percentagedecreased in 1995 due to increased relative research and development, sales andmarketing, and general and administrative expenses, offset by the lower relativecost of revenues and the higher relative net nonoperating income.

FINANCIAL CONDITION

The Company's cash and short-term investments equaled $6.94 billion at June 30,1996. The portfolio is diversified among security types, industries, andindividual issuers. The Company's investments are generally investment grade and


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liquid. The portfolio is invested predominantly in U.S. dollar denominatedsecurities, but also includes foreign currency positions in anticipation ofcontinued international expansion. The Company's portfolio is primarily investedin short-term securities to minimize interest rate risk and facilitate rapid

deployment in the event of immediate cash needs.

Microsoft has no material long-term debt. The Company has $70 million of standbymulticurrency lines of credit that support foreign currency hedging andinternational cash management.

Stockholders' equity at June 30, 1996 exceeded $6.9 billion.

Cash generated from operations has been sufficient historically to fund theCompany's investment in research and development activities and facilitiesexpansion. As the Company grows, investments will continue in research and

development in existing and advanced areas of technology. The Company's cashwill also be used to acquire technology and to fund ventures and other strategicopportunities. Additions to property, plant, and equipment are expected tocontinue, including facilities and computer systems for research anddevelopment, sales and marketing, product support, and administrative staff. OnJune 30, 1996, commitments for constructing new buildings approximated $293million.

Employees exercising stock options provides additional cash. These proceeds havefunded the Company's open market stock repurchase program through whichMicrosoft provides shares for stock option and stock purchase plans. Thisprogram will continue in 1997.

To enhance its stock repurchase program, Microsoft sold equity put warrants toindependent third parties. These put warrants entitle the holders to sell sharesof Microsoft common stock to the Company on certain dates at specified prices.

A subsidiary of Tele-Communications, Inc. (TCI) owns a 20% minority interest inThe Microsoft Network. TCI contributed $125 million of TCI common stock, andMicrosoft contributed the business assets of this online service.

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During 1996, Microsoft and National Broadcasting Company (NBC) establishedtwo


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MSNBC joint ventures: a 24-hour cable news and information channel, and aninteractive online news service. Microsoft agreed to pay $220 million over afive-year period for its interest in the cable venture and to pay one-half ofoperational funding of both joint ventures for a multiyear period.

Management believes existing cash and short-term investments together with fundsgenerated from operations will be sufficient to meet operating requirements in1997. The Company's cash and short-term investments are also managed to beavailable for strategic investment opportunities or other potential large-scalecash needs that may arise in pursuing the Company's long-term strategies.

Microsoft shareholders have also authorized issuing up to 100 million shares ofpreferred stock, which may be used for any proper corporate purpose.

OUTLOOK: ISSUES AND UNCERTAINTIES

Microsoft does not provide forecasts of future financial performance. WhileMicrosoft's management is optimistic about the Company's long-term prospects,the following issues and uncertainties, among others, should be considered inevaluating its growth outlook.

RAPID TECHNOLOGICAL CHANGE. The PC software industry is characterizedby rapidchange and uncertainty due to new and emerging technologies. The pace of changehas recently accelerated due to the Internet, online services, networking, andnew programming languages, such as Java.

PC GROWTH RATES. The underlying PC unit growth rate, which may increase ataslower rate in the future, impacts software revenue growth.

CUSTOMER ACCEPTANCE. While the Company performs extensive usabilityand betatesting of new products, user acceptance and corporate penetration ratesultimately dictate the success of development and marketing efforts.

PRODUCT SHIP SCHEDULES. Delays in new-product releases impact revenue

growthrates and can cause operational inefficiencies that impact manufacturing anddistribution logistics, independent software vendor (ISV) and OEM relationships,and telephone support staffing.

PRICES. Future prices the Company can obtain for its products may decrease fromhistorical levels, depending on competitive market or cost factors. European andFar Eastern software prices are generally higher than in the United States tocover localization costs and higher costs of distribution. Such price upliftscould erode in the future.

EARNINGS PROCESS. An increasingly higher percentage of the Company's


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revenues isearned after the initial shipment or licensing of the software product.Microsoft also offers product support, Internet browsers and add-ons, and otherunspecified enhancements, so the applicable portion of revenues is recognized

over the product's life cycle. This policy may be required for future productssuch as Microsoft Office 97, depending on specific license terms and conditions.

SATURATION. Product upgrades, which enable users to upgrade from earlierversions of the Company's products or from competitors' products, have lowerprices and margins than new products. As the desktop applications market hasbecome saturated, the sales mix has shifted from standard products to upgradeproducts. This trend is likely to continue.

CORPORATE LICENSES. Average revenue per unit from corporate licenseprograms is

lower than average revenue per unit from retail versions shipped through thefinished goods channels. Unit sales under corporate licensing programs maycontinue to increase.

CHANNEL MIX. Average revenue per license is lower from OEM licenses thanfromretail versions, reflecting the relatively lower direct costs

sec filings - microsoft - 0000891020-96-001130

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