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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended December 31, 2002
 
OR
 
¨  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
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
 
 
One Microsoft Way, Redmond, Washington    98052-6399
                  (Address of principal executive office)                          (Zip Code)
 
 
Registrant’s telephone number, including area code:  (425) 882-8080
 
 
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x    No  ¨
 
The number of shares outstanding of the registrant’s common stock as of December 31, 2002 was 5,350,692,651.
 

Table of Contents
 
MICROSOFT CORPORATION
 
FORM 10-Q
 
For the Quarter Ended December 31, 2002
 
INDEX
 
Part I.    Financial Information
 
                Item 1.    Financial Statements
 
   
Page
 
   
a)       Income Statements
         for the Three and Six Months Ended December 31, 2001 and 2002
 
   
1
 
   
b)       Balance Sheets
         as of June 30, 2002 and December 31, 2002
 
   
2
 
   
c)       Cash Flows Statements
         for the Six Months Ended December 31, 2001 and 2002
 
   
3
 
   
         for the Three and Six Months Ended December 31, 2001 and  2002
 
   
4
 
   
 
   
5
 
   
 
   
14
 
 
   
15
 
                Item 3.     Quantitative and Qualitative Disclosures About Market Risk
   
24
 
                Item 4.     Controls and Procedures
   
25
 
Part II.    Other Information
 
     
                Item 1.     Legal Proceedings
   
26
 
                Item 4.     Submission of Matters to a Vote of Security Holders
   
26
 
                Item 6.     Exhibits and Reports on Form 8-K
   
27
 
      
28
 
      
29

Table of Contents
 
Part I.    Financial Information
 
Item 1.    Financial Statements
 
MICROSOFT CORPORATION
 
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
 
      
Three Months Ended
Dec. 31
       
Six Months Ended
Dec. 31
  
      
2001
       
2002
       
2001
       
2002
  
Revenue
     
$
7,741
 
     
$
8,541
 
     
$
13,867
 
     
$
16,287
 
Operating expenses:
                                            
Cost of revenue
     
 
1,544
 
     
 
2,034
 
     
 
2,428
 
     
 
3,233
 
Research and development
     
 
1,044
 
     
 
1,118
 
     
 
2,057
 
     
 
2,212
 
Sales and marketing
     
 
1,479
 
     
 
1,703
 
     
 
2,624
 
     
 
2,923
 
General and administrative
     
 
833
 
     
 
427
 
     
 
1,020
 
     
 
610
 
 
Total operating expenses
     
 
4,900
 
     
 
5,282
 
     
 
8,129
 
     
 
8,978
 
Operating income
     
 
2,841
 
     
 
3,259
 
     
 
5,738
 
     
 
7,309
 
Losses on equity investees and other
     
 
(37
)
     
 
(12
)
     
 
(67
)
     
 
(34
)
Investment income/(loss)
     
 
553
 
     
 
375
 
     
 
(427
)
     
 
416
 
Income before income taxes
     
 
3,357
 
     
 
3,622
 
     
 
5,244
 
     
 
7,691
 
Provision for income taxes
     
 
1,074
 
     
 
1,070
 
     
 
1,678
 
     
 
2,413
 
Net income
     
$
2,283
 
     
$
2,552
 
     
$
3,566
 
     
$
5,278
 
Earnings per share:
                                            
Basic
     
$
0.42
 
     
$
0.48
 
     
$
0.66
 
     
$
0.99
 
Diluted
     
$
0.41
 
     
$
0.47
 
     
$
0.64
 
     
$
0.97
 
Weighted average shares outstanding:
                                            
Basic
     
 
5,395
 
     
 
5,351
 
     
 
5,396
 
     
 
5,356
 
Diluted
     
 
5,556
 
     
 
5,441
 
     
 
5,561
 
     
 
5,445
 
Pro Forma Earnings per share (1):
                                            
Basic
     
$
0.21
 
     
$
0.24
 
     
$
0.33
 
     
$
0.49
 
Diluted
     
$
0.21
 
     
$
0.23
 
     
$
0.32
 
     
$
0.48
 
 
(1)
 
Proforma earnings per share for the three and six months ended December 31, 2001 and 2002 have been presented to reflect a two-for-one stock split approved on January 16, 2003, payable to shareholders of record on January 27, 2003.

 
See accompanying notes.
 

1

Table of Contents
MICROSOFT CORPORATION
 
BALANCE SHEETS
(In millions)(Unaudited)
 
    
June 30
   
Dec. 31
    
2002(1)
   
2002
Assets
              
Current assets:
              
Cash and equivalents
   
$
3,016
   
$
5,552
Short-term investments
   
 
35,636
   
 
37,872
Total cash and short-term investments
   
 
38,652
   
 
43,424
Accounts receivable, net of allowance for doubtful
accounts of $209 and $254
   
 
5,129
   
 
4,894
Inventories
   
 
673
   
 
650
Deferred income taxes
   
 
2,112
   
 
2,347
Other
   
 
2,010
   
 
1,616
Total current assets
   
 
48,576
   
 
52,931
Property and equipment, net
   
 
2,268
   
 
2,257
Equity and other investments
   
 
14,191
   
 
12,647
Goodwill
   
 
1,426
   
 
2,757
Intangible assets, net
   
 
243
   
 
607
Deferred income taxes
   
 
-
   
 
265
Other long-term assets
   
 
942
   
 
895
Total assets
   
$
67,646
   
$
72,359
Liabilities and stockholders’ equity
              
Current liabilities:
              
Accounts payable
   
$
1,208
   
$
1,342
Accrued compensation
   
 
1,145
   
 
1,060
Income taxes
   
 
2,022
   
 
2,954
Short-term unearned revenue
   
 
5,920
   
 
6,810
Other
   
 
2,449
   
 
1,451
Total current liabilities
   
 
12,744
   
 
13,617
Long-term unearned revenue
   
 
1,823
   
 
2,026
Deferred income taxes
   
 
398
   
 
-
Other long-term liabilities
   
 
501
   
 
904
Commitments and contingencies
              
Stockholders’ equity:
              
Common stock and paid-in capital -
shares authorized 12,000; outstanding 5,359 and 5,351
   
 
31,647
   
 
33,605
Retained earnings, including accumulated other comprehensive
income of $583 and $520
   
 
20,533
   
 
22,207
Total stockholders’ equity
   
 
52,180
   
 
55,812
Total liabilities and stockholders’ equity
   
$
67,646
   
$
72,359
 
(1)
 
June 30, 2002 balances were obtained from audited financial statements.

 
See accompanying notes.
 

2

Table of Contents
 
MICROSOFT CORPORATION
 
CASH FLOWS STATEMENTS
(In millions)(Unaudited)
 
    
Six Months Ended
Dec. 31
  
    
2001
     
2002
  
Operations
                  
Net income
   
$
3,566
 
   
$
5,278
 
Depreciation, amortization, and other noncash items
   
 
577
 
   
 
592
 
Net recognized losses on investments
   
 
1,462
 
   
 
615
 
Stock option income tax benefits
   
 
751
 
   
 
672
 
Deferred income taxes
   
 
(861
)
   
 
(852
)
Unearned revenue
   
 
4,790
 
   
 
6,593
 
Recognition of unearned revenue
   
 
(3,828
)
   
 
(5,538
)
Accounts receivable
   
 
(1,399
)
   
 
402
 
Other current assets
   
 
97
 
   
 
367
 
Other long-term assets
   
 
(25
)
   
 
(22
)
Other current liabilities
   
 
1,602
 
   
 
422
 
Other long-term liabilities
   
 
222
 
   
 
410
 
Net cash from operations
   
 
6,954
 
   
 
8,939
 
Financing
                  
Common stock issued
   
 
786
 
   
 
904
 
Common stock repurchased
   
 
(1,266
)
   
 
(4,433
)
Net cash used for financing
   
 
(480
)
   
 
(3,529
)
Investing
                  
Additions to property and equipment
   
 
(322
)
   
 
(436
)
Acquisition of companies, net of cash acquired
   
 
-
 
   
 
(879
)
Purchases of investments
   
 
(32,439
)
   
 
(46,091
)
Maturities of investments
   
 
2,290
 
   
 
6,532
 
Sales of investments
   
 
25,322
 
   
 
37,958
 
Net cash used for investing
   
 
(5,149
)
   
 
(2,916
)
Net change in cash and equivalents
   
 
1,325
 
   
 
2,494
 
Effect of exchange rates on cash and equivalents
   
 
9
 
   
 
42
 
Cash and equivalents, beginning of period
   
 
3,922
 
   
 
3,016
 
Cash and equivalents, end of period
   
$
5,256
 
   
$
5,552
 

 
See accompanying notes.
 

3

Table of Contents
 
MICROSOFT CORPORATION
 
STOCKHOLDERS’ EQUITY STATEMENTS
(In millions)(Unaudited)
 
    
Three Months Ended
Dec. 31
       
Six Months Ended
Dec. 31
  
    
2001
       
2002
       
2001
       
2002