ITEM 8. Financial
Statements and Supplementary Data
INCOME STATEMENTS
|
|
|
|
(In
millions, except earnings per share)
|
|
|
|
|
|
|
Year
Ended June 30
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
Revenue
|
|
$ 25,296
|
|
$ 28,365
|
|
$ 32,187
|
Operating expenses:
|
|
|
|
|
|
|
Cost of revenue
|
|
3,455
|
|
5,191
|
|
5,686
|
Research and development
|
|
4,379
|
|
4,307
|
|
4,659
|
Sales and marketing
|
|
4,885
|
|
5,407
|
|
6,521
|
General and administrative
|
|
857
|
|
1,550
|
|
2,104
|
Total operating expenses
|
|
13,576
|
|
16,455
|
|
18,970
|
Operating income
|
|
11,720
|
|
11,910
|
|
13,217
|
Losses on equity investees and other
|
|
(159)
|
|
(92)
|
|
(68)
|
Investment income/(loss)
|
|
(36)
|
|
(305)
|
|
1,577
|
Income before income taxes
|
|
11,525
|
|
11,513
|
|
14,726
|
Provision for income taxes
|
|
3,804
|
|
3,684
|
|
4,733
|
Income before accounting change
|
|
7,721
|
|
7,829
|
|
9,993
|
Cumulative effect of accounting change (net of income
taxes of $ 185)
|
|
(375)
|
|
-
|
|
-
|
Net income
|
|
$ 7,346
|
|
$ 7,829
|
|
$ 9,993
|
|
|
|
|
Basic earnings per share(1):
|
|
|
|
|
|
|
Before accounting change
|
|
$ 0.72
|
|
$ 0.72
|
|
$ 0.93
|
Cumulative effect of accounting change
|
|
(0.03)
|
|
-
|
|
-
|
|
|
$ 0.69
|
|
$ 0.72
|
|
$ 0.93
|
|
|
|
|
Diluted earnings per share(1):
|
|
|
|
|
|
|
Before accounting change
|
|
$ 0.69
|
|
$ 0.70
|
|
$ 0.92
|
Cumulative effect of accounting change
|
|
(0.03)
|
|
-
|
|
-
|
|
|
$ 0.66
|
|
$ 0.70
|
|
$ 0.92
|
|
|
|
|
Weighted average shares outstanding(1):
|
|
|
|
|
|
|
Basic
|
|
10,683
|
|
10,811
|
|
10,723
|
Diluted
|
|
11,148
|
|
11,106
|
|
10,882
|
(1) Earnings per share and weighted average shares outstanding have been
restated to reflect a two-for-one stock split in February 2003.
See accompanying notes.
BALANCE SHEETS
(In
millions)
|
|
|
|
|
June 30
|
|
2002
|
|
2003
|
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and equivalents
|
|
$ 3,016
|
|
$ 6,438
|
Short-term investments
|
|
35,636
|
|
42,610
|
Total cash and short-term investments
|
|
38,652
|
|
49,048
|
Accounts receivable, net
|
|
5,129
|
|
5,196
|
Inventories
|
|
673
|
|
640
|
Deferred income taxes
|
|
2,112
|
|
2,506
|
Other
|
|
2,010
|
|
1,583
|
Total current assets
|
|
48,576
|
|
58,973
|
Property and equipment, net
|
|
2,268
|
|
2,223
|
Equity and other investments
|
|
14,191
|
|
13,692
|
Goodwill
|
|
1,426
|
|
3,128
|
Intangible assets, net
|
|
243
|
|
384
|
Other long-term assets
|
|
942
|
|
1,171
|
Total assets
|
|
$ 67,646
|
|
$ 79,571
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$ 1,208
|
|
$ 1,573
|
Accrued compensation
|
|
1,145
|
|
1,416
|
Income taxes
|
|
2,022
|
|
2,044
|
Short-term unearned revenue
|
|
5,920
|
|
7,225
|
Other
|
|
2,449
|
|
1,716
|
Total current liabilities
|
|
12,744
|
|
13,974
|
Long-term unearned revenue
|
|
1,823
|
|
1,790
|
Deferred income taxes
|
|
398
|
|
1,731
|
Other long-term liabilities
|
|
501
|
|
1,056
|
Commitments and contingencies
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
Common stock and paid-in capital - shares authorized 24,000;
Shares issued and outstanding 10,718 and 10,771
|
|
31,647
|
|
35,344
|
Retained earnings, including accumulated other
comprehensive income of $ 583 and $ 1,840
|
|
20,533
|
|
25,676
|
Total stockholders' equity
|
|
52,180
|
|
61,020
|
Total liabilities and stockholders' equity
|
|
$ 67,646
|
|
$ 79,571
|
See accompanying notes.
CASH FLOWS STATEMENTS
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
Year Ended June 30
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
Operations
|
|
|
|
|
|
|
Net income
|
|
$ 7,346
|
|
$ 7,829
|
|
$ 9,993
|
Cumulative effect of accounting change, net of tax
|
|
375
|
|
-
|
|
-
|
Depreciation, amortization, and other noncash items
|
|
1,536
|
|
1,084
|
|
1,439
|
Net recognized losses on investments
|
|
2,221
|
|
2,424
|
|
380
|
Stock option income tax benefits
|
|
2,066
|
|
1,596
|
|
1,376
|
Deferred income taxes
|
|
(420)
|
|
(416)
|
|
336
|
Unearned revenue
|
|
6,970
|
|
11,152
|
|
12,519
|
Recognition of unearned revenue
|
|
(6,369)
|
|
(8,929)
|
|
(11,292)
|
Accounts receivable
|
|
(418)
|
|
(1,623)
|
|
187
|
Other current assets
|
|
(482)
|
|
(264)
|
|
412
|
Other long-term assets
|
|
(330)
|
|
(9)
|
|
(28)
|
Other current liabilities
|
|
774
|
|
1,449
|
|
35
|
Other long-term liabilities
|
|
153
|
|
216
|
|
440
|
Net cash from operations
|
|
13,422
|
|
14,509
|
|
15,797
|
|
|
|
|
Financing
|
|
|
|
|
|
|
Common stock issued
|
|
1,620
|
|
1,497
|
|
2,120
|
Common stock repurchased
|
|
(6,074)
|
|
(6,069)
|
|
(6,486)
|
Repurchases of put warrants
|
|
(1,367)
|
|
-
|
|
-
|
Common stock dividends
|
|
-
|
|
-
|
|
(857)
|
Other, net
|
|
235
|
|
-
|
|
-
|
Net cash used for financing
|
|
(5,586)
|
|
(4,572)
|
|
(5,223)
|
|
|
|
|
Investing
|
|
|
|
|
|
|
Additions to property and equipment
|
|
(1,103)
|
|
(770)
|
|
(891)
|
Acquisitions of companies, net of cash acquired
|
|
-
|
|
-
|
|
(1,063)
|
Purchases of investments
|
|
(66,346)
|
|
(89,386)
|
|
(89,621)
|
Maturities of investments
|
|
5,867
|
|
8,654
|
|
9,205
|
Sales of investments
|
|
52,848
|
|
70,657
|
|
75,157
|
Net cash used for investing
|
|
(8,734)
|
|
(10,845)
|
|
(7,213)
|
Net change in cash and equivalents
|
|
(898)
|
|
(908)
|
|
3,361
|
Effect of exchange rates on cash and equivalents
|
|
(26)
|
|
2
|
|
61
|
Cash and equivalents, beginning of year
|
|
4,846
|
|
3,922
|
|
3,016
|
Cash and equivalents, end of year
|
|
$ 3,922
|
|
$ 3,016
|
|
$ 6,438
|
See accompanying notes.
STOCKHOLDERS' EQUITY STATEMENTS
|
|
|
|
(In millions) |
|
|
|
|
|
|
Year Ended June 30 |
|
2001 |
|
2002 |
|
2003 |
|
|
|
|
Common stock and paid-in capital |
|
|
|
|
|
|
Balance, beginning of year |
|
$ 23,195 |
|
$ 28,390 |
|
$ 31,647 |
Common stock issued |
|
5,154 |
|
1,801 |
|
3,012 |
Common stock repurchased |
|
(394) |
|
(676) |
|
(691) |
Repurchases of put warrants |
|
(1,367) |
|
- |
|
- |
Stock option income tax benefits |
|
2,066 |
|
1,596 |
|
1,376 |
Other, net |
|
(264) |
|
536 |
|
- |
Balance, end of year |
|
28,390 |
|
31,647 |
|
35,344 |
|
|
|
|
Retained earnings |
|
|
|
|
|
|
Balance, beginning of year |
|
18,173 |
|
18,899 |
|
20,533 |
Net income |
|
7,346 |
|
7,829 |
|
9,993 |
Other comprehensive income: |
|
|
|
|
|
|
Cumulative effect of accounting change |
|
(75) |
|
- |
|
-
|
Net gains/(losses) on derivative instruments |
|
634 |
|
(91) |
|
(102) |
Net unrealized investment gains/(losses) |
|
(1,460) |
|
5 |
|
1,243 |
Translation adjustments and other |
|
(39) |
|
82 |
|
116 |
Comprehensive income |
|
6,406 |
|
7,825 |
|
11,250 |
Common stock repurchased |
|
(5,680) |
|
(6,191) |
|
(5,250) |
Common stock dividends |
|
-
|
|
- |
|
(857) |
Balance, end of year |
|
18,899 |
|
20,533 |
|
25,676 |
Total stockholders' equity |
|
$ 47,289 |
|
$ 52,180 |
|
$ 61,020 |
See accompanying notes.
QUARTERLY INFORMATION
(In
millions, except earnings per share) (Unaudited)
|
Quarter Ended
|
|
Sept. 30
|
|
Dec. 31
|
|
Mar. 31
|
|
June 30
|
|
Year
|
Fiscal 2001
|
|
|
|
|
|
|
|
|
|
Revenue
|
$ 5,766
|
|
$ 6,550
|
|
$ 6,403
|
|
$ 6,577
|
|
$ 25,296
|
Gross profit
|
4,941
|
|
5,686
|
|
5,504
|
|
5,710
|
|
21,841
|
Net income
|
2,206(2)
|
|
2,624
|
|
2,451
|
|
65(3)
|
|
7,346
|
Basic earnings per share(1)
|
0.21(2)
|
|
0.25
|
|
0.23
|
|
0.01
|
|
0.69
|
Diluted earnings per share(1)
|
0.20(2)
|
|
0.24
|
|
0.22
|
|
0.01
|
|
0.66
|
Fiscal 2002
|
|
|
|
|
|
|
|
|
|
Revenue
|
$ 6,126
|
|
$ 7,741
|
|
$ 7,245
|
|
$ 7,253
|
|
$ 28,365
|
Gross profit
|
5,242
|
|
6,197
|
|
5,850
|
|
5,885
|
|
23,174
|
Net income
|
1,283(4)
|
|
2,283
|
|
2,738(5)
|
|
1,525(6)
|
|
7,829
|
Basic earnings per share(1)
|
0.12
|
|
0.21
|
|
0.25
|
|
0.14
|
|
0.72
|
Diluted earnings per share(1)
|
0.12
|
|
0.21
|
|
0.25
|
|
0.14
|
|
0.70
|
Fiscal 2003
|
|
|
|
|
|
|
|
|
|
Revenue
|
$ 7,746
|
|
$ 8,541
|
|
$ 7,835
|
|
$ 8,065
|
|
$ 32,187
|
Gross profit
|
6,547
|
|
6,507
|
|
6,620
|
|
6,827
|
|
26,501
|
Net income
|
2,726
|
|
2,552
|
|
2,794
|
|
1,921
|
|
9,993
|
Basic earnings per share
|
0.25
|
|
0.24
|
|
0.26
|
|
0.18
|
|
0.93
|
Diluted earnings per share
|
0.25
|
|
0.23
|
|
0.26
|
|
0.18
|
|
0.92
|
(1) Earnings per share have been restated
to reflect a two-for-one stock split in February 2003.
style='mso-bidi-font-size:12.0pt'> Includes an unfavorable cumulative effect of accounting
change of $ 375 million or $ 0.03 per basic share and diluted share, reflecting
the adoption of SFAS No. 133.
(3) Includes $ 3.92 billion (pre-tax) in
impairments of certain investments.
(4) Includes $ 1.82 billion (pre-tax) in
impairments of certain investments.
(5) Includes $ 1.25 billion (pre-tax) gain
on the sale of Expedia, Inc. and $ 1.19 billion (pre-tax) in impairments of
certain investments.
(6) Includes $ 1.19 billion (pre-tax) in
impairments of certain investments.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Microsoft
Corporation:
We have audited the accompanying
consolidated balance sheets of Microsoft Corporation and subsidiaries as of June 30, 2002
and 2003, and the related consolidated statements of income, cash flows, and
stockholders' equity for each of the three years in the period ended June 30, 2003.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. 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 consolidated
financial statements present fairly, in all material respects, the financial
position of Microsoft Corporation and subsidiaries as of June 30, 2002 and 2003, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 3 to the
financial statements, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, effective July 1, 2000, and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, effective July 1, 2001.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Seattle, Washington
July
17, 2003
(September 3, 2003 as to certain information in Note 20)
|