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United States Securities and Exchange
Commission
Washington, 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,
2002
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER 0-14278
MICROSOFT CORPORATION
| WASHINGTON
(STATE OF INCORPORATION) |
|
91-1144442
(I.R.S. ID) |
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(425) 882-8080
Securities
registered pursuant to Section 12(b) of the Act:
NONE
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 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The aggregate market value of common stock held by non-affiliates of the registrant as of July 31, 2002 was $215,553,343,213.
The number of shares outstanding of the registrant’s common stock as of July 31, 2002 was 5,378,746,853.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held November 5, 2002 are incorporated by reference into Part III.
FORM 10-K
For The Fiscal Year Ended June 30, 2002
INDEX
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Part I
Item 1
PART I
GENERAL
Microsoft Corporation (the “Company” or “Microsoft”) was founded as a partnership in 1975 and incorporated in 1981. Microsoft’s mission is to enable people and businesses
throughout the world to realize their full potential, and the Company’s vision is empowering people through great software—any time, any place, and on any device. Microsoft develops, manufactures, licenses, and supports a wide range of
software products for a multitude of computing devices. Microsoft software products include scalable operating systems for servers, personal computers (PCs), and intelligent devices; server applications for client/server environments; information
worker productivity applications; business solutions applications; and software development tools. During fiscal 2002, Microsoft launched Xbox, the Company’s next-generation video game system. The Company’s online efforts include the MSN
network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Microsoft licenses consumer software programs; sells hardware devices; provides consulting services;
and trains and certifies system integrators and developers.
Microsoft also researches and develops advanced technologies for future software products. A
significant portion of the Company’s focus is on Microsoft’s .NET architecture. Using common industry standards based on XML, a universal language for describing and exchanging data, the Company’s goal is to enable seamless sharing of
information across many platforms and programming languages, and over the Internet, with XML Web services. In addition, Microsoft has embarked on a long-term initiative called Trustworthy Computing, which aims to bring an enhanced level of security,
privacy, reliability, and business integrity to computer systems.
PRODUCTS
During fiscal 2002, Microsoft had four operating segments based on its product and service offerings: Desktop and Enterprise Software and Services; Consumer Software,
Services, and Devices; Consumer Commerce Investments; and Other. See Note 20 of the Notes to Financial Statements for financial information regarding segment reporting.
DESKTOP AND ENTERPRISE SOFTWARE AND SERVICES
Desktop and Enterprise Software and Services includes
Desktop Applications; Desktop Platforms; and Enterprise Software and Services. For segment reporting purposes, Desktop Applications includes revenue from Microsoft Office; Microsoft Project; Visio; client access licenses (CALs) for Windows NT Server
and Windows 2000 Server, Exchange, and BackOffice; Microsoft Great Plains; and bCentral. Desktop Platforms includes revenue from Windows XP Professional and Home; Windows 2000 Professional; Windows NT Workstation; Windows Millennium Edition; Windows
98; and other desktop operating systems. Enterprise Software and Services includes Server Platforms; Server Applications; Developer Tools and Services; and Enterprise Services.
DESKTOP APPLICATIONS
Microsoft Office. Microsoft Office
is a software product featuring commonly used desktop functionality. The product is based upon a document-centric concept, with common commands and extensive use of cross-application capabilities. Microsoft Office is available in several versions
for the Windows and Macintosh operating systems. Microsoft Office XP, the latest Microsoft Office release, helps users complete common business tasks, including word processing, electronic mail (e-mail), presentations, and data management, with
features like smart tags, task panes, integrated e-mail, document recovery, and send for review. The various versions of Microsoft Office include the word processor Microsoft Word, Microsoft Excel spreadsheet, Microsoft Outlook personal information
management and e-mail communication client, Microsoft PowerPoint presentation graphics program, and may include Microsoft Access database management application, Microsoft FrontPage Web site creation and management tool, and Microsoft
Publisher business desktop publishing program. Most of these applications are also licensed separately.
Other Desktop Application
Products. The Company also offers other stand-alone desktop application products. Microsoft Project is a project management program for scheduling, organizing, and analyzing tasks, deadlines, and resources. Visio is a
diagramming program that helps people visualize and communicate ideas, information, and systems.
Client Access
Licenses. A client access license gives its holder the legal right to access a computer running a Microsoft server product and the services supported by the server using a client computer.
Microsoft Great Plains. Microsoft Great Plains offers a range of integrated business and accounting products, including Dynamics, Solomon,
and eEnterprise. Dynamics provides Internet-ready accounting and business management capabilities for small- to mid-sized companies. Solomon offers a full range of e-business and accounting applications for small- to mid-sized companies. eEnterprise
supports mid-sized to larger companies by providing a collaborative environment for information management and sharing.
Part I
Item 1
bCentral. Microsoft’s small businesses portal, bCentral,
includes Site Manager, a Web site management and hosting service which empowers small businesses to easily create and manage their own Web sites, while allowing for higher-end editing in Microsoft FrontPage, and LinkExchange, which provides services
to small businesses and Web site owners to increase their online traffic and sales with free advertising banner ads on their site in exchange for placing ads on other network sites.
DESKTOP PLATFORMS
Windows XP. Microsoft launched Windows
XP in October 2001. Windows XP extends the personal computing experience by uniting PCs, devices, and services, while enhancing reliability, security, and performance. Windows XP Home Edition is designed for individuals or families and includes
experiences for digital photo, music, video, home networking, and communications. Windows XP Professional includes all the features of Home Edition, plus remote access, security, performance, manageability, and multilingual features to help users
improve productivity and connectivity.
Windows 2000 Professional. The successor to Windows NT Workstation, Windows
2000 Professional operating system combines features to create a mainstream operating system for desktop and notebook computing in all organizations. Windows 2000 Professional contains the enhanced business features of Windows 98 such as Plug and
Play, easy-to-use user interface, and power management and integrates the strengths of Windows NT Workstation including standards-based security, manageability, and reliability.
Windows NT Workstation. A fully integrated, multitasking 32-bit PC operating system, Windows NT Workstation provides improved security features, robustness, and portability. Windows
NT Workstation combines the Windows 98 operating system interface and usability features with the reliability and security of Windows NT for the business environment.
Windows Millennium Edition. Windows Millennium Edition (Me) operating system is designed specifically for home users, including capabilities to manage digital photos and music, work with video,
create a home network, and communicate with other consumers.
Windows 98. The successor to Windows 95, Windows 98 is
a personal computer operating system that provides a Web-oriented user interface and better system performance along with easier system diagnostics and maintenance. Windows 98 supports graphics, sound, and multimedia technologies and provides the
ability to easily add and remove peripheral devices and support for Universal Serial Bus (USB).
ENTERPRISE SOFTWARE AND SERVICES
Windows 2000 Server, Advanced Server, and Datacenter Server. Windows 2000 Server is a multipurpose network operating
system for businesses of all sizes. Windows 2000 Advanced Server operating system is ideal for e-commerce and line-of-business applications and provides enhanced performance and scalability through symmetric multiprocessing (SMP) and extended memory
support. Windows Datacenter Server operating system is built for large-scale line-of-business and enterprise backend usage and supports server consolidation and enhanced scalability.
Microsoft .NET Enterprise Servers. Microsoft .NET Enterprise Servers include Microsoft SQL Server, Exchange Server, Application Center, BizTalk Server, Commerce Server, Content
Management Server, Host Integration Server, Internet Security and Acceleration Server, Microsoft Operations Manager, Mobile Information Server, and SharePoint Portal Server.
SQL Server is a comprehensive data management and analysis platform that enables rapid delivery, dependable performance and secure operation of connected applications.
Exchange Server is a messaging and collaboration server that provides e-mail, group scheduling, task management, contact management and document routing
capabilities.
Application Center is Microsoft’s deployment and management tool for high-availability Web applications built on the
Microsoft Windows 2000 operating system.
BizTalk Server enables companies to rapidly build and deploy integrated business processes within
their organizations and with partners.
Commerce Server provides a comprehensive set of features for building scalable, user-centric,
business-to-consumer, and business-to-business e-commerce sites.
Content Management Server is the enterprise Web content management system
that enables companies to quickly and efficiently build, deploy, and maintain highly dynamic Internet, intranet, and extranet Web sites.
Host Integration
Server extends Microsoft Windows applications to other systems by providing application, data, and network integration.
Internet Security and
Acceleration Server provides secure, fast, and manageable Internet connectivity. It integrates an extensible, multilayer enterprise firewall and a scalable high-performance Web cache.
Microsoft Operations Manager delivers enterprise-class solutions for operations management of Windows 2000, the Microsoft Active Directory service, and other component services in Windows
2000, as well as other Microsoft .NET Enterprise Server applications such as Exchange and SQL Server.
Mobile Information Server mobile-enables
the enterprise, extending the reach of Microsoft .NET Enterprise applications, enterprise data, and intranet content to the mobile user.
SharePoint Portal
Server extends the capabilities of Microsoft Windows and Microsoft Office by offering information workers a powerful new way to easily organize, find, and share information. It combines the ability to easily create corporate Web
portals with document management, content searching, and team collaboration features.
Part I
Item 1
Other Servers. Small Business Server is the flexible network
solution designed to help businesses with up to 50 computers. Systems Management Server helps centrally manage the distributed environment with integrated features, including hardware inventory, software inventory and metering, software distribution
and installation, and remote troubleshooting tools.
Developer Tools and Services. Software development tools and
computer languages allow software developers to write programs in a particular computer language and translate programs into a binary machine-readable set of commands that activate and instruct various hardware devices. The Company develops and
markets a number of software development environments and language compilers. In February 2002, Microsoft launched Visual Studio .NET, a comprehensive tool for rapidly building and deploying XML Web services and applications. Visual Studio .NET
provides software developers with powerful tools to rapidly design broad-reach Web applications for any device and any platform, and to build powerful Windows applications. Microsoft Visual C++ is the Company’s development system for
Windows-based application development. Microsoft Visual C# offers beginning and intermediate developers with C++ or Java experience a modern language and robust development environment for creating XML Web services and Microsoft .NET-based
applications for Windows and the Web. The Microsoft Visual Basic development system provides easy access to a wide variety of data sources by integrating the Microsoft Access database engine and the ability to take advantage of investments in
commercial applications. The Microsoft Visual InterDev development system includes integrated, team-based development tools for building Web-based applications based on HTML, Script, and components written in any language. Developers can subscribe
to the Microsoft Developer Network (MSDN) information service and receive periodic updates via CD-ROMs, magazines, and several online information services. In addition, Microsoft receives certification fees through the Microsoft Certified
Professional (MCP) program, a program that provides credentials for those who have demonstrated in-depth knowledge of at least one Microsoft product.
Enterprise Services. Microsoft Enterprise Services assist organizations with every stage of technology planning, building, deployment, and support. Specializing in IT solutions for the enterprise,
Microsoft offers a full range of consulting services for advance technology requirements, including custom solutions services, enterprise application planning, architecture and design services, and proof-of-concept services. The Company
provides product support services aligned to customer segments, partner segments, and communities.
CONSUMER SOFTWARE, SERVICES,
AND DEVICES
Consumer Software, Services, and Devices includes Xbox video game system, MSN Internet Access, MSN Network Services, PC and Online
Games, Learning and Productivity Software, Mobility, and Embedded Systems.
Xbox. Microsoft Xbox, released in fiscal
2002, is Microsoft’s next-generation video game console system that delivers high quality graphics and audio gameplay experiences. For information on Xbox manufacturing, see “Manufacturing” below. Games for the Xbox are developed by
Microsoft Game Studios, such as Halo and Project Gotham Racing, and by third-party game development partners, such as Tecmo’s Dead or Alive 3. Xbox Live, an online service available to owners of Xbox systems, is expected to be launched in the
second quarter of fiscal 2003 and will allow online game play among users of online-enabled Xbox games.
MSN Internet
Access. MSN Internet access is Microsoft’s service for accessing the Web and experiencing a wide range of rich online services and content. MSN Internet access subscribers can access their account from multiple
sources, including a computer, television, Internet appliances, and Personal Data Assistants.
MSN Network
Services. The MSN network provides services, content and advertising on the Internet, encompassing MSN Search, Messenger, eShop, Hotmail, Money, and Music, as well as other services and content. MSN Search makes Web
searches more useful by providing users with the most relevant results for the most popular search queries on the Web. MSN Messenger is a free Internet messaging service that enables users to see when others are online and exchange instant messages
with them. MSN eShop is a one-stop online shopping resource. MSN Hotmail is the world’s leading free Web-based e-mail service. MSN Money is a complete online personal financial service that combines finance tools and content from Microsoft with
exclusive investment news and analysis from CNBC. MSN Music provides consumers with one place online to find old favorites, as well as discover new music, and delivers a high quality listening experience.
PC and Online Games. The Company offers a line of entertainment products from classic software games to online games, simulations, sport
products, and strategy games. Microsoft Flight Simulator is a popular aircraft flight simulation product. Other games include Age of Empires, Dungeon Siege, MechWarrior, Microsoft Links, Train Simulator, Zoo Tycoon, and other action and sports
titles. Zone.com is a gaming community on the Internet allowing multiplayer gaming competitions of Microsoft’s popular CD-ROM games and classic card, board, and puzzle games.
Learning and Productivity Software. Learning titles include Microsoft Encarta Reference Library, a complete research and reference source with a multimedia encyclopedia database
with interactive information, an interactive world atlas with three-dimensional maps, a world English dictionary, Encarta Africana, Researcher, and an online version with monthly updates. Titles for children include a series of products based
on the popular children’s book and television series, Scholastic’s The Magic School Bus. Microsoft’s productivity offerings include Microsoft Works, an integrated software program that contains basic word processing, spreadsheet, and
database capabilities that allows the easy exchange of information from one tool to another. Microsoft Picture It! brand of products includes Picture It! Photo, with photo editing tools and wizards to easily capture, correct and create photos, and
Picture It! Publishing, used to create greeting cards and other print and Web based products. Microsoft Money offers leading tools and resources to conduct a wide range of financial activities. The
Part I
Item 1
Works Suite provides a comprehensive collection of software, including Microsoft Works, Microsoft Word, Microsoft Money, Microsoft Encarta encyclopedia, Microsoft Picture It! Photo, and Microsoft
Streets & Trips.
Mobility and Embedded Systems. Microsoft develops a number of software platforms for mobile
computing. Products such as Pocket PC, Pocket PC Phone Edition, and Microsoft Windows Powered Smartphone are designed to enable a variety of mobile scenarios. Microsoft’s embedded offerings include two embedded operating systems, Microsoft
Windows CE and Microsoft Windows NT Embedded, as well as device specific solutions. Microsoft Windows CE, a robust real-time embedded operating system, is targeted at mobile 32-bit devices. Microsoft Windows NT Embedded, based on the desktop and
server versions of Microsoft’s operating systems, is targeted at higher-end embedded products and devices. Both embedded operating systems offer integrated tool sets to enable embedded system developers to quickly create sophisticated embedded
device and application solutions. Microsoft Mobile Information Server is a scalable and reliable mobile applications server that provides enterprise customers and mobile operators with a rich platform for extending .NET Enterprise application and
securely delivering real-time, wireless data to mobile devices.
CONSUMER COMMERCE INVESTMENTS
Consumer Commerce Investments include the HomeAdvisor online real estate service and the CarPoint online automotive service.
HomeAdvisor online real estate service. The HomeAdvisor online real estate service is a complete guide to the home-buying process and
provides comprehensive tools for finding homes and loans on the Internet. The service includes customized search features, worksheets and calculators, and editorial content and home-buying advice.
CarPoint online automotive service. The CarPoint online automotive service is the leading online automotive marketplace, visited by more than
7 million consumers each month. With details on more than 10,000 car models and 100,000 used vehicles, users can research and compare cars of virtually every make and model, identify local dealers, and receive instructions for post-purchase service
and maintenance.
Expedia, Inc. Expedia was included in the Consumer Commerce Investments segment until Microsoft
sold its interest in Expedia to USA Networks, Inc. in February 2002. Expedia, Inc. operates Expedia.com, a leading online travel service. Expedia.com provides air, car, and hotel booking, vacation package and cruise offerings, destination
information, and mapping.
OTHER
Hardware. The Hardware Group develops and markets several PC accessories including the Microsoft IntelliMouse family of hand-held pointing devices using the IntelliEye optical technology. Hardware also
markets several types of keyboards including the Microsoft Natural Keyboard, an ergonomically designed keyboard, the Internet Keyboard featuring two USB ports and Internet hot keys, and a new Wireless Desktop product including wireless keyboard and
mouse. Also included in the Hardware Group’s portfolio of devices are SideWinder game controllers and force feedback joysticks with realistic performance technology to use with PC games.
Microsoft Press. Microsoft Press offers comprehensive learning and training resources to help new users, power users, and professionals get the most from Microsoft
technology through books, CDs, self-paced training kits, and videos that are created to accommodate different learning styles and preferences. Microsoft Press books are authored by professional and technical writers, both by Microsoft employees and
independent authors.
SEGMENT REPORTING
In fiscal 2003, the Company will begin reporting the following operating segments: Client; Information Worker; MSN; Home and Entertainment; CE Mobility; Server and Tools; and Business Solutions. These changes are designed to
provide a comprehensive end-to-end financial view of Microsoft’s key businesses; promote better alignment of strategies and objectives between development, sales, marketing, and services organizations; provide for more timely and rational
allocation of development, sales, and marketing resources within businesses; and focus strategic planning efforts on key objectives and initiatives and give business owners more autonomy in detailed planning.
EQUITY METHOD INVESTMENTS
The Company has
entered into joint venture arrangements to take advantage of creative talent and content from other organizations. For example, Microsoft owns 50 percent of MSNBC Cable L.L.C., a 24-hour cable news and information channel, and 50 percent of MSNBC
Interactive News L.L.C., an interactive online news service. National Broadcasting Company (NBC) owns the remaining 50 percent of these two joint ventures.
Part I
Item 1
PRODUCT DEVELOPMENT
During fiscal years 2000, 2001, and 2002, research and development expense was $3.77 billion, $4.38 billion, and $4.31 billion, respectively. Those amounts represented 16.4%, 17.3%, and 15.2%,
respectively, of revenue in each of those years. In accordance with Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, the amortization of goodwill was discontinued in fiscal 2002. The amount of
goodwill amortization included in research and development expense in fiscal years 2000 and 2001 was $232 million and $272 million, respectively. The Company plans to continue significant expenditures for research and product development.
Most of the Company’s software products are developed internally. The Company also purchases technology, licenses intellectual property rights, and oversees
third-party development and localization of certain products. Internal development allows Microsoft to maintain closer technical control over its products and gives the Company the freedom to designate which modifications and enhancements are most
important and when they should be implemented. Microsoft works on devising innovative solutions to computer science problems, such as making computers easier to use, designing software for the next generation of hardware, improving the software
design process, and investigating the mathematical underpinnings of computer science. The Company has created a substantial body of proprietary development tools and has evolved development methodologies for creating and enhancing its products.
These tools and methodologies are also designed to simplify a product’s portability among different operating systems, microprocessors, or computing devices. Product documentation is generally created internally. The Company strives to become
informed at the earliest possible time about changing usage patterns and hardware advances that may affect software design. Before releasing new software platforms, Microsoft provides to software vendors a range of development, training, testing
resources, and guidelines for developing applications.
The software industry is characterized by rapid technological change, which requires constant attention to
computing technology trends, shifting consumer demand, and rapid product innovation. The pace of change is accelerating as the computing needs of our customers move beyond the PC toward intelligent devices and appliances, such as the Tablet PC.
Tablet PCs extend the power of laptop computers running Windows XP with enhanced capabilities such as handwriting and speech input.
The Company believes that
making its products trustworthy is critical to their success and has launched a company-wide effort called Trustworthy Computing. Trustworthy Computing has four pillars: reliability, security, privacy, and business integrity. Reliability means that
a computer system is dependable, is available when needed, and performs as expected and at appropriate levels. Security means that a system is resilient to attack, and that the confidentiality, integrity and availability of both the system and its
data are protected. Privacy means that individuals have the ability to control data about themselves and that those using such data faithfully adhere to fair information principles. Business integrity, in this context, is about being responsible to
customers and helping them find appropriate solutions for their business issues, addressing problems with products or services, and being open in interactions with customers. While the Company is continuing to invest significantly in delivering new
capabilities that customers ask for, Microsoft is making security improvements a high priority.
Microsoft .NET is Microsoft’s platform for XML Web services.
XML Web services allow applications to communicate and share data over the Internet or an intranet, regardless of operating system or programming language. The Microsoft .NET platform includes a comprehensive family of products, built on XML and
other Internet industry standards, which provide for each aspect of developing, managing, using, and experiencing XML Web services. There are five areas where Microsoft is building the .NET platform today: Tools, Servers, XML Web Services,
Clients, and .NET Experiences. In the Tools area, Visual Studio .NET and the Microsoft .NET framework supply a complete solution for developers to build, deploy, and run XML Web services. They maximize the performance, reliability, and security of
XML Web services. The .NET Enterprise Servers, including the Windows 2000 Server family, make up Microsoft .NET’s server infrastructure for deploying, managing, and orchestrating XML Web services. Designed with mission-critical performance in
mind, they provide enterprises with the agility they need to integrate their systems, applications, and partners through XML Web services, and the flexibility to adapt to changing business requirements. Clients are PCs, laptops, workstations,
phones, handheld computers, Tablet PCs, game consoles, and other smart devices. These smart devices use software that supports XML Web services, which enable users to access their data regardless of the location, type, and number of clients used.
Smart clients and devices leverage XML Web services to create .NET experiences that allow users to access information across the Internet and from stand-alone applications in an integrated way.
To best serve the needs of users around the world, Microsoft “localizes” many of its products to reflect local languages and conventions and to improve the quality and usability of the product in
international markets. Localizing a product might require modifying the user interface, altering dialog boxes, and translating text. In Japanese versions, for example, all user messages and documentation are in Japanese with monetary references in
the Japanese yen. Various Microsoft products have been localized into more than 30 languages.
MANUFACTURING
Microsoft contracts out most of its manufacturing activities to third parties. Outside manufacturers produce the Xbox, various retail software packaged
products, and hardware. There are other custom manufacturers Microsoft could use in the event outsourced manufacturing becomes unavailable from current vendors. The Company generally has multiple sources for raw materials, supplies, and components
and is often able to acquire component parts and materials on a volume discount basis. The graphics processing unit (GPU) for the Xbox was custom designed and is produced by NVIDIA Corporation. Quality control tests are performed on purchased parts,
CD-ROMs, and other products.
Part I
Item 1
OPERATIONS
The Company has regional operations centers in Ireland, Singapore, and the Greater Seattle area. The regional centers support all operations, including information processing, vendor management and logistics by
geographical regions. The regional center in Dublin, Ireland supports the European, African, and Middle East regions, the center in Singapore supports the Asia Pacific region, and the center in the Greater Seattle area supports North and South
America. Microsoft Licensing, Inc. (MSLI), a wholly-owned subsidiary in Reno, Nevada, manages the Company’s original equipment manufacturer (OEM) and certain organizational licensing operations.
DISTRIBUTION, SALES AND MARKETING
Microsoft
distributes its products primarily through the following channels: OEM; volume licensing; online services and products; and distributors and retailers. In fiscal 2002, Microsoft had three major geographic sales and marketing regions: the South
Pacific and Americas Region; the Europe, Middle East, and Africa Region; and the Asia Region. Beginning with fiscal 2003, the Company’s geographic sales and marketing organization was modified to remove the South Pacific region from the
Americas organization, and combine it with Asia. Sales of volume licenses and packaged software products via these channels are primarily to distributors and resellers.
OEM. Microsoft operating systems are licensed primarily to OEMs under agreements that grant the OEMs the right to distribute copies of the Company’s products with their computing devices,
principally PCs. The Company also markets and licenses certain server operating systems, desktop applications, hardware devices, and consumer software programs to OEMs under similar arrangements. In almost all cases, the products are distributed
under Microsoft trademarks. The Company has OEM agreements covering one or more of its products with virtually all of the major PC OEMs, including Acer, Actebis, Dell, eMachines, Fujitsu, Fujitsu Siemens Computers, Gateway, HP, IBM, NEC, Samsung,
Sony, and Toshiba. A substantial amount of OEM business is also conducted with system builders, which are low-volume customized PC vendors.
Volume Licensing. The Microsoft Enterprise Agreement program is a licensing program designed to provide a flexible licensing and service solution tailored to customers making a long-term licensing
commitment. The agreements are designed to simplify license administration, payment terms, and the contract process. The Microsoft Select program offers flexible software acquisition, licensing, and maintenance options specially customized to meet
the needs of large multinational organizations. Marketing efforts and fulfillment are generally coordinated with large account resellers. The Microsoft Open program is a licensing program that is targeted for small- and medium-sized
organizations. It is available through the reseller channel and offers discounts based on initial purchase volumes. The Microsoft Enterprise Agreement and Software Assurance under the Select and Open programs provide customers the right to
install any new release of products covered in the licensing agreement during the term of their coverage.
Network Service
Providers. Microsoft Network Service Providers (NSP) work with a variety of companies worldwide to help them develop and deploy end-to-end network solutions based on Microsoft platforms. NSPs focus on key network service
industries including telecommunications and wireless companies and hosts.
Online Services and Products. Microsoft
distributes online content and services through MSN Access, MSN Network Services, bCentral small business portal, and other online services. MSN Access delivers simple, personalized Internet access, useful content, services and tools using MSN
Internet Explorer. MSN Network Services delivers advertising and other services including online search, shopping, and messaging capabilities to Internet users. bCentral provides the tools and expertise for small-business owners to build, market and
manage their businesses online. Other services delivered online include MSDN subscription content and updates, periodic product updates, and online technical and practice readiness resources to support Microsoft partners in developing and selling
Microsoft products and solutions.
Distributors and Resellers. The Company distributes products in the finished goods
channels primarily to independent non-exclusive distributors and resellers. Distributors and resellers include Ingram Micro, Tech Data, Level 3 Communications, SOFTBANK, Software House International, ASAP Software Express, and Happinet
Corporation. Microsoft has a network of field sales representatives and field support personnel who solicit orders from distributors and resellers and provide product training and sales support.
CUSTOMERS
The Company’s customers include individual consumers, small-
and medium-sized organizations, enterprises, educational institutions, Internet Service Providers (ISPs), application developers, and OEMs. Consumers and organizations obtain Microsoft products primarily through resellers and OEMs, which include
certain Microsoft products with their computing devices. No single customer accounted for 10% or more of revenue in 2000, 2001, or 2002.
Part I
Item 1
COMPETITION
The software business is intensely competitive and subject to rapid technological change. As the company pursues its largest strategic initiative, Microsoft .NET, the Company could experience more intense
competition during the transition from the traditional core businesses to its new products based on the .NET architecture. The Company continues to face movement from PC-based applications to server-based applications or Web-based application
hosting services, from proprietary software to open source software such as the Linux operating system, and from PCs to Internet-based devices. A number of Microsoft’s most significant competitors, including IBM, Sun Microsystems, Oracle,
and AOL-Time Warner, are collaborating with one another on various initiatives directed at competing with Microsoft. These initiatives relate in part to efforts to move software from individual PCs to centrally managed servers, which would present
significant challenges to the Company’s historical business model. Other competitive collaborative efforts include the development of new platform technologies that are intended to replicate much of the value of Microsoft Windows operating
systems. New computing form factors, including non-PC information devices, are gaining popularity and competing with PCs running Microsoft’s software products.
Microsoft faces formidable competition in these new areas and in all areas of its current business activities. The rapid pace of technological change, particularly in the area of Internet platforms and services, continually creates
new opportunities for existing competitors and start-ups and can quickly render existing technologies less valuable. Global software piracy—the unlawful copying and distribution of Microsoft’s copyrighted software
products—deprives the Company of large amounts of revenue on an annual basis.
The Company’s competitive position may be adversely affected in the future
by one or more of the factors described in this section, particularly in view of the fast pace of technological change in the computing industry.
DESKTOP AND ENTERPRISE SOFTWARE AND SERVICES
The Company’s competitors include many software application vendors, such
as IBM, Oracle, Apple, Sun Microsystems, Corel, Qualcomm, and local application developers in Europe and Asia. IBM and Corel have large installed bases with their spreadsheet and word processor products, respectively, and both have aggressive
pricing strategies. Also, IBM and Apple preinstall certain of their application software products on various models of their PCs, competing directly with Microsoft’s desktop application software. Sun Microsystems’ Star Office is
aggressively priced. Additionally, Web-based application hosting services provide an alternative to PC-based applications such as Microsoft Office.
Microsoft’s PC and server operating system products face substantial competition from a wide variety of companies. Competitors such as IBM, Apple Computer, Sun Microsystems, and others are vertically integrated in both software
development and hardware manufacturing and have developed operating systems that they preinstall on their own computers. Many of these operating system software products are also licensed to third-party OEMs for preinstallation on their computers.
Microsoft’s operating system products compete with UNIX-based operating systems from a wide range of companies, including IBM, Hewlett-Packard, Sun Microsystems, and others. Variants of UNIX run on a wide variety of computer platforms and have
gained increasing acceptance as desktop operating systems. The Linux open source operating system has gained increasing acceptance as well. Several computer manufacturers preinstall Linux on PC servers and many leading software developers have
written applications that run on Linux. Microsoft Windows operating systems also face competition from alternative platforms such as those based on Internet browsing software and Java technology promoted by AOL-Time Warner and Sun
Microsystems.
The Company competes in the business of providing enterprise-wide computing solutions with several competitors who enjoy a larger share of
sales and larger installed bases. Many companies offer operating system software for mainframes and midrange computers, including IBM, HP, and Sun Microsystems. Since legacy business systems are typically support-intensive, these competitors also
offer substantial support services. Software developers that provide competing server applications for PC-based distributed client/server environments include Oracle, IBM, Computer Associates, Sybase, and Informix. There are also several software
vendors who offer connectivity servers. As mentioned above, there are numerous companies and organizations that offer Internet and intranet server software, which compete against the Company’s business systems. Additionally, IBM has a large
installed base of Lotus Notes and cc:Mail, both of which compete with the Company’s collaboration and e-mail products.
The Company’s developer products
compete against offerings from BEA Systems, Borland, IBM, Macromedia, Oracle, Sun Microsystems, Sybase, and other companies.
CONSUMER SOFTWARE, SERVICES, AND DEVICES
Microsoft’s online services network, MSN, faces formidable competition from
AOL-Time Warner, Yahoo!, and a vast array of Web sites and portals that offer content of all types and e-mail, instant messaging, calendaring, chat, and search and shopping services, among other things.
Xbox competes head-to-head against game systems from Nintendo and Sony, both of which have a large established base of game system users. Game developers like Activision, Capcom,
Electronic Arts, Sega, Tecmo, and THQ, to name a few, are both partners and competitors.
Microsoft faces many competitors in the mobile devices space,
including Palm, Symbian, Nokia, and Openwave. The embedded operating system market is highly fragmented with many competitive offerings. Key competitors include Wind River and versions of embeddable Linux from commercial Linux vendors such as Red
Hat, Lineo, and MontaVista.
Part I
Item 1, 2, 3, 4
CONSUMER COMMERCE INVESTMENTS
Microsoft faces many competitors in the online real estate and online automotive service spaces, including Homestore, AOL’s House and Home channel, Autobytel, AOL
autos, and Yahoo! autos.
OTHER
PC input devices face substantial competition from computer manufacturers, since computers are typically sold with a keyboard and mouse, and other manufacturers of these devices. Microsoft Press competes in the retail book and
eLearning markets with publishers that also create content on Microsoft technologies. A few of the retail competitors are Pearson, WROX, Sybex, and Wiley. The major eLearning competitors are Smartforce and NetG.
EMPLOYEES
As of June 30, 2002, the Company
employed approximately 50,500 people on a full-time basis, 34,600 in the United States and 15,900 internationally. Of the total, 20,800 were in product research and development, 23,500 in sales, marketing, and support, 2,200 in manufacturing and
distribution, and 4,000 in finance and administration. Microsoft’s success is highly dependent on its ability to attract and retain qualified employees. Competition for employees is intense in the software industry. 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 to be as successful in the future. None of the Company’s employees are subject to collective bargaining agreements.
The Company believes relations with its employees are excellent.
The Company’s corporate offices consist of approximately 8.4 million
square feet of office building space located in King County, Washington, of which 5.7 million square feet of corporate campus space situated on slightly more than 300 acres of land is owned and approximately 2.7 million square feet is leased. The
Company is constructing three buildings with approximately 392,000 square feet of space that will be occupied in the Fall of 2003. To accommodate expansion needs the Company purchased approximately 38 acres, and has an option to purchase
approximately 112 additional acres, of land in Issaquah, Washington, which can accommodate 2.95 million square feet of additional office space. The Company leases many sites domestically totaling approximately 3.0 million square feet of office
building space.
The Company leases many sites internationally totaling approximately 4.1 million square feet, including the Company’s European Operations
Center and localization division which leases a 382,000 square-foot campus in Dublin, Ireland, a 45,000 square-foot disk duplication facility in Humacao, Puerto Rico and a 36,000 square-foot facility in Singapore for the Company’s Asia Pacific
Operations Center. Leased office building space includes the following locations: Tokyo, Japan 343,000 square feet; Unterschleissheim, Germany 253,000 square feet; United Kingdom campus 242,000 square feet; Les Ulis, France 229,000 square feet; and
Beijing, China 115,000 square feet.
The Company’s facilities are fully used for current operations of all segments and suitable additional space is available
to accommodate expansion needs.
ITEM 3. LEGAL PROCEEDINGS
See Note 19—Contingencies of the Notes to Financial Statements (Item
8) for information regarding legal proceedings.
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 2002.
Part I
Item 4
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Microsoft as of July 31, 2002 were as follows:
| Name |
|
Age |
|
Position with the Company |
|
|
|
|
|
| |
| William H. Gates, III |
|
46 |
|
Chairman of the Board; Chief Software Architect |
| Steven A. Ballmer |
|
46 |
|
Chief Executive Officer |
| James E. Allchin |
|
50 |
|
Group Vice President, Platforms Group |
| Orlando Ayala |
|
46 |
|
Group Vice President, Worldwide Sales, Marketing, and Services Group |
| Robert J. (Robbie) Bach |
|
40 |
|
Senior Vice President, Games Division |
| Douglas J. Burgum |
|
46 |
|
Senior Vice President, Business Solutions |
| David W. Cole |
|
40 |
|
Senior Vice President, MSN and Personal Services Group |
| John G. Connors |
|
43 |
|
Senior Vice President; Chief Financial Officer |
| Jean-Philippe Courtois |
|
41 |
|
Senior Vice President; President, Microsoft Europe, Middle East, and Africa |
| Jon Stephan DeVaan |
|
41 |
|
Senior Vice President, TV Division |
| Richard P. Emerson |
|
40 |
|
Senior Vice President, Corporate Development and Strategy |
| Paul Flessner |
|
43 |
|
Senior Vice President, .NET Enterprise Servers |
| Kevin R. Johnson |
|
41 |
|
Senior Vice President, Microsoft Americas |
| Robert L. Muglia |
|
42 |
|
Senior Vice President, Enterprise Storage Division |
| Craig J. Mundie |
|
53 |
|
Senior Vice President; Chief Technical Officer, Advanced Strategies and Policy |
| Jeffrey S. Raikes |
|
44 |
|
Group Vice President, Productivity and Business Services |
| Richard F. Rashid |
|
50 |
|
Senior Vice President, Research |
| Eric D. Rudder |
|
35 |
|
Senior Vice President, Developer and Platform Evangelism |
| Steven J. Sinofsky |
|
36 |
|
Senior Vice President, Office |
| Bradford L. Smith |
|
43 |
|
Senior Vice President and General Counsel |
| Brian Valentine |
|
42 |
|
Senior Vice President, Windows |
| David Vaskevitch |
|
49 |
|
Senior Vice President; Chief Technical Officer, Business Platform |
| Deborah N. Willingham |
|
46 |
|
Senior Vice President, Human Resources |
Mr. Gates co-founded Microsoft in 1975 and served as its Chief Executive
Officer from the time the original partnership was incorporated in 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates has served as Chairman of the Board since the
Company’s incorporation.
Mr. Ballmer was named Chief Executive Officer and a director of the Company in January 2000. He served as President from July 1998 to
February 2001. Previously, he had served as Executive Vice President, Sales and Support since February 1992. He joined Microsoft in 1980.
Mr. Allchin was named
Group Vice President, Platforms Group in December 1999. He had been Senior Vice President, Platforms since March 1999. He was previously Senior Vice President, Personal and Business Systems since February 1996. Mr. Allchin joined Microsoft in 1990.
Mr. Ayala was named Group Vice President, Worldwide Sales, Marketing, and Services Group in August 2000. He had been Senior Vice President, South Pacific and
Americas since February 1998, and before holding that position, was Vice President of the developing markets of Africa, India, the Mediterranean and Middle East, Latin America, Southeast Asia and the South Pacific. He joined Microsoft in 1991 as
Senior Director of the Latin America Region.
Mr. Bach was named Senior Vice President, Games Division in March 2000. He had been Vice President, Home and Retail
since March 1999. Before holding that position, he had been Vice President, Learning, Entertainment and Productivity since 1996. Mr. Bach joined Microsoft in 1988.
Mr. Burgum joined the Company upon Microsoft’s acquisition of Great Plains Software, Inc. in April 2001. Mr. Burgum became Great Plains’ first outside investor in March 1983. He was named President of Great Plains in 1984
and subsequently named Chairman and Chief Executive Officer.
Mr. Cole was named Senior Vice President, MSN and Personal Services Group in November 2001. Before
holding that position, he had been Senior Vice President, Services Platform Division since August 2000. He had been Senior Vice President, Consumer Services since December 1999 and Vice President, Consumer Windows since March 1999. Previously, he
was Vice President, Web Client and Consumer Experience and Vice President, Internet Client and Collaboration. Mr. Cole joined Microsoft in 1986.
Mr. Connors was
named Senior Vice President and Chief Financial Officer in December 1999. He had been Vice President, Enterprise since March 1999. Mr. Connors had been Vice President, Information Technology, and Chief Information Officer since July 1996. He joined
Microsoft in 1989.
Mr. Courtois was named Senior Vice President and President, Microsoft Europe, Middle East, and Africa in July 2000. He had been Vice President,
Customer Marketing since July 1998. Before holding that position, he had been Vice President of Microsoft Europe since 1997 and General Manager for Microsoft France since 1994. Mr. Courtois joined Microsoft in 1984.
Mr. DeVaan was named Senior Vice President, TV Division in December 1999. He had been Senior Vice President, Consumer and Commerce since September 1999. Mr. DeVaan had been Vice
President, Consumer and Commerce since March 1999. He had been Vice President, Desktop Applications since 1995. Mr. DeVaan joined Microsoft in 1985.
Part I
Item 4
Mr. Emerson joined Microsoft in November 2000 as Senior Vice President, Corporate Development and Strategy. Prior
to joining Microsoft, he was Managing Director and co-head of Technology and Telecommunications Advisory Services at international investment bank Lazard Freres & Co. LLC. He spent 12 years in San Francisco and New York with Lazard and Morgan
Stanley, specializing in advising clients in the technology and telecommunications sectors on mergers, acquisitions, and strategic partnerships.
Mr. Flessner was
named Senior Vice President, .NET Enterprise Servers in December 1999. He had been Vice President, Database and Data Access. Since joining the Company, Mr. Flessner’s primary responsibilities have been the development of Microsoft’s
database business. He joined Microsoft in 1994.
Mr. Johnson was named Senior Vice President, Microsoft Americas in February 2002. He had been Senior Vice
President, U.S. Sales, Marketing, and Services since August 2001, and before that, Vice President, U.S. Sales, Marketing and Services. Mr. Johnson was named Vice President, Product Support Services in July 1998. He joined Microsoft in 1992.
Mr. Muglia was named Senior Vice President, Enterprise Storage Division in November 2001. Before holding that position, he had been Group Vice President, Personal
Services Group since August 2000. He had been Group Vice President, Business Productivity since December 1999. He was named Senior Vice President, Business Productivity in March 1999 and was named Senior Vice President, Applications and Tools
in February 1998. He had been Vice President, Server Applications since 1997. He joined Microsoft in 1988.
Mr. Mundie was named Senior Vice President and Chief
Technical Officer, Advanced Strategies and Policy in August 2001. He was named Senior Vice President, Consumer Platforms in February 1996. He joined Microsoft as General Manager, Advanced Consumer Technology in 1992.
Mr. Raikes was named Group Vice President, Productivity and Business Services in August 2000. He had been Group Vice President, Sales and Support since July 1998. Before holding that
position, he had been Group Vice President, Sales and Marketing since July 1996. Mr. Raikes joined Microsoft in 1981.
Mr. Rashid was named Senior Vice President,
Research in May 2000. He had been Vice President, Research since July 1994. He joined Microsoft in 1991.
Mr. Rudder was named Senior Vice President, Developer and
Platform Evangelism in October 2001. He had been Vice President, Technical Strategy. Mr. Rudder joined Microsoft in 1988 and has worked in several areas, including networking, operating systems and developer tools, where he previously served as
General Manager for the Visual Studio development system.
Mr. Sinofsky was named Senior Vice President, Office in December 1999. He had been Vice President, Office
since December 1998. Mr. Sinofsky joined the Office team in 1994, increasing his responsibility with each subsequent release of the desktop suite. He joined Microsoft in 1989.
Mr. Smith was named Senior Vice President and General Counsel in November 2001. He had been Deputy General Counsel for Worldwide Sales and previously was responsible for managing the Company’s European Law and Corporate Affairs
Group, based in Paris. He joined Microsoft in 1993.
Mr. Valentine was named Senior Vice President, Windows in December 1999. He had been Vice President, Business
and Enterprise since March 1999. He had been Vice President, Windows since December 1998. Before managing the Windows group, Mr. Valentine managed the server applications division and had been responsible for the Exchange product unit. He joined
Microsoft in 1987.
Mr. Vaskevitch was named Senior Vice President and Chief Technical Officer, Business Platform in August 2001. He was named Senior Vice
President, Business Applications in March 2000. He had been Senior Vice President, Developer since December 1999. Before holding that position, he had been Vice President, Distributed Applications Platform. He joined Microsoft in 1986.
Ms. Willingham was named Senior Vice President, Human Resources in February 2001. She had been Vice President, Human Resources since April 2000. Ms. Willingham had been Vice
President, Business and Enterprise Division Marketing and was responsible for Windows operating system client and server marketing strategy and training, as well as for providing centralized marketing services for the Consumer Windows Marketing and
Streaming Media Marketing teams. She joined Microsoft in 1993.
Part II
Item 5, 6
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company’s
common stock is traded on The Nasdaq Stock Market under the symbol MSFT. On June 30, 2002, there were 117,730 registered holders of record of the Company’s common stock. The Company has not paid cash dividends on its common stock. The
high and low common stock prices per share were as follows:
| Quarter Ended |
|
Sept. 30 |
|
Dec. 31 |
|
Mar. 31 |
|
June 30 |
|
Year |
| |
| Fiscal 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock price per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| High |
|
$ |
82.00 |
|
$ |
70.88 |
|
$ |
64.69 |
|
$ |
73.68 |
|
$ |
82.00 |
| Low |
|
|
60.31 |
|
|
41.50 |
|
|
43.38 |
|
|
51.94 |
|
|
41.50 |
|
|
|
|
|
|
|
|
|
|
|
| |
| Fiscal 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock price per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| High |
|
$ |
72.57 |
|
$ |
69.49 |
|
$ |
69.86 |
|
$ |
60.38 |
|
$ |
72.57 |
| Low |
|
|
49.71 |
|
|
51.79 |
|
|
57.99 |
|
|
48.62 |
|
|
48.62 |
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
| In millions, except earnings per share |
|
|
|
|
|
|
|
|
|
</ |