Convertible Preferred Stock

During 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred stock. Dividends are payable quarterly in arrears. Preferred shareholders have preference over common stockholders in dividends and liquidation rights. In December 1999, each preferred share is convertible into common shares or an equivalent amount of cash determined by a formula that provides a floor price of $79.875 and a cap of $102.24 per preferred share. Net proceeds of $980 million were used to repurchase common shares.

Common Stock

Issued and outstanding
Shares of common stock outstanding were as follows:

In millions

Repurchase program
The Company repurchases its common stock in the open market to provide shares for issuing to employees under stock option and stock purchase plans. The Company’s Board of Directors authorized continuation of this program in 1999.

In addition, under structured repurchases with an independent third-party, the Company executed two forward purchases totaling 21 million shares of stock. Under these arrangements, a portion of the purchase price will be paid in the next five or six years and determined based upon the price of Microsoft common stock at that time. The timing and method of payment (net share or cash) is at the discretion of the Company. The differential between the cash paid and the price of Microsoft common stock on the two dates of agreement is reflected in common stock and paid-in capital.

Put Warrants

To enhance its stock repurchase program, the Company sells put warrants to independent third-parties. These put warrants entitle the holders to sell shares of Microsoft common stock to the Company on certain dates at specified prices. On June 30, 1998, 60 million warrants were outstanding. The outstanding put warrants at June 30, 1998 expire between November 1998 and June 2000 and have strike prices ranging from $72 to $77 per share. The outstanding put warrants permit a net-share settlement at the Company’s option and do not result in a put warrant liability on the balance sheet.

Employee Stock and Savings Plans

Employee stock purchase plan
The Company has an employee stock purchase plan for all eligible employees. Under the plan, shares of the Company’s common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. During 1996, 1997, and 1998, employees purchased 3.6 million, 2.8 million, and 2.2 million shares at average prices of $18.86, $29.82, and $54.42 per share. At June 30, 1998, 36.8 million shares were reserved for future issuance.

Savings plan
The Company has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may defer up to 15% of pretax salary, but not more than statutory limits. The Company contributes fifty cents for each dollar a participant contributes, with a maximum contribution of 3% of a participant’s earnings. Matching contributions were $15 million, $28 million, and $39 million in 1996, 1997, and 1998.

Stock option plans
The Company has stock option plans for directors, officers, and employees, which provide for nonqualified and incentive stock options. The option exercise price is the fair market value at the date of grant. Options granted prior to 1995 generally vest over four and one-half years and expire 10 years from the date of grant. Options granted during and after 1995 generally vest over four and one-half years and expire seven years from the date of grant, while certain options vest over seven and one-half years and expire after 10 years. At June 30, 1998, options for 222 million shares were vested and 523 million shares were available for future grants under the plans.

Stock options outstanding were as follows:

In millions, except per share amounts

For various price ranges, weighted average characteristics of outstanding stock options at June 30, 1998 were as follows:

Last updated May 27, 2010

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