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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
[_] 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
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MICROSOFT CORPORATION
WASHINGTON 91-1144442
(STATE OF INCORPORATION) (I.R.S. ID)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(425) 882-8080
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
2 3/4% CONVERTIBLE EXCHANGEABLE PRINCIPAL-PROTECTED PREFERRED STOCK
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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 September 11, 1998 was $176,181,694,460.
The number of shares outstanding of the registrant's common stock as of
September 11, 1998 was 2,484,635,670.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV. Portions of the definitive Proxy Statement
dated September 25, 1998 to be delivered to shareholders in connection with
the Annual Meeting of Shareholders to be held November 11, 1998 are
incorporated by reference into Part III.
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MICROSOFT CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
INDEX
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters......................................................... 14
Item 6. Selected Financial Data......................................... 14
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 14
Item 8. Financial Statements and Supplementary Data..................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures........................................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 15
Item 11. Executive Compensation.......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 16
Item 13. Certain Relationships and Related Transactions.................. 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 17
Signatures............................................................... 18
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PART I
ITEM 1. BUSINESS
GENERAL
Microsoft Corporation (the "Company" or "Microsoft") was founded as a
partnership in 1975 and incorporated in 1981. Microsoft develops,
manufactures, licenses, and supports a wide range of software products,
including scalable operating systems for intelligent devices, personal
computers (PCs) and servers; server applications for client/server
environments; business and consumer productivity applications; software
development tools; and Internet and intranet software and technologies. The
Company's interactive efforts include entertainment and information software
programs, MSN(TM), the Microsoft Network online service; Internet-based
services; and alliances with companies involved with other forms of digital
interactivity. Microsoft also sells personal computer input devices and books,
and researches and develops advanced technologies for future software
products.
Microsoft's business strategy emphasizes the development of a broad line of
software products for business and personal use, marketed through multiple
channels of distribution. The Company is divided into three main areas: the
Product Group, the Sales and Support Group, and the Operations Group.
The Platforms and Applications Product Group is comprised of three primary
divisions, each responsible for a particular area of platform software
development and marketing. The Platforms Group develops PC and server
operating systems. The Applications and Tools Group creates server and desktop
productivity applications and software development products. The Consumer
Platforms Group develops system software for intelligent devices.
The Interactive Media Product Group creates and markets productivity
programs, interactive entertainment and information products, desktop finance
products, and hardware peripherals. Interactive Media offerings include
children's titles, games, reference sources, online informational services,
and MSN. The Desktop Finance Division develops personal finance products. The
Hardware Division develops PC peripherals such as the keyboard and mouse.
Microsoft has a research lab dedicated to creating new technology in support
of the Company's vision for the evolution of personal computing.
The Sales and Support Group is responsible for building long-term business
relationships with customers. This group is organized to serve various
customer types, including original equipment manufacturers (OEMs), end-users,
organizations, enterprises, application developers, Internet content providers
(ICPs) and infrastructure owners. Large enterprises are offered tailored
license programs, enterprise-wide support, consulting services, and other
specialized services. The group manages the channels that serve customers by
working with OEMs, distributors, and resellers. In addition to the OEM
channel, Microsoft has three major geographic sales organizations: the South
Pacific and the Americas; Europe, the Middle East and Africa; and Asia. The
group also supports the Company's products with technical support for end-
users, developers, and organizations.
The Operations Group is responsible for managing business operations and
overall business planning. This includes the process of manufacturing and
delivering finished goods and licenses; corporate functions such as finance,
administration, human resources, and legal; and the publishing efforts of
Microsoft Press.
PRODUCTS
PLATFORMS
The Platforms Group is responsible for development of the Microsoft(R)
Windows(R) and Windows NT(R) operating systems including Microsoft Internet
Explorer browsing software. PC operating systems perform a variety of
functions, such as allocating computer memory, scheduling applications
software execution, managing information and communication flow among the
various PC components, and enabling end-users to access files and information
from a variety of sources. The Windows NT operating system for servers is an
enterprise-wide
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platform for building and deploying distributed applications for networked
PCs. It also provides products for developing, running, and managing Internet
and intranet applications and content. Component Object Model (COM) underlies
a large majority of the new code developed for Windows and Windows NT
operating systems. COM+, an extension of COM, builds on COM's integrated
services and features, making it easier for developers to create and use
software components in any language, using any tool.
Windows PC Platforms
Windows 98. The successor to Windows 95, Windows 98 is a personal computer
operating system which provides a Web-oriented user interface, better system
performance along with easier system diagnostics and maintenance. Windows 98
supports current graphics, sound, and multimedia technologies, provides the
ability to easily add and remove peripheral devices with support for Universal
Serial Bus (USB), and also enables the convergence of the PC and television.
Windows 98 was released in June 1998.
Windows 95. The successor to MS-DOS(R) and Windows 3.1, Windows 95 was
released in August 1995; periodic service releases, system updates, and new
device drivers have been made available to PC OEMs and end-users via the
Internet on the Company's web site, http://www.microsoft.com. Windows 95 is a
fully integrated, multitasking 32-bit operating system, designed to be
compatible with Intel microprocessor-based PCs, most hardware devices, and
applications for Windows 3.x and MS-DOS.
Windows 3.x. Microsoft Windows 3.1 provides a graphical user interface and
other enhancements for MS-DOS, a single-user, single-tasking operating system.
Windows 3.1 supports 16-bit Windows-based applications, and offers ease of
use, aesthetic appeal, and straightforward integration into corporate
computing environments. Windows for Workgroups 3.11 integrates network and
workgroup functionality directly into the Windows operating system.
Windows NT Platforms
Windows NT Workstation. A fully integrated, multitasking 32-bit PC operating
system, Windows NT Workstation provides superior security, robustness, and
portability. Windows NT Workstation is a multithreaded operating system for
mission critical computing which provides the same features and applications
programming interfaces (APIs) for Intel and Alpha AXP microprocessors.
Microsoft Windows NT Workstation 4.0 features the Windows 95 interface and
combines the ease of use of the Windows 95 operating system with the
reliability and security of Windows NT.
Windows NT Server. Windows NT Server is a powerful operating system
foundation for both server applications and file and print sharing, with
extensive network management features, administration tools, security, and
high availability. Windows NT Server provides a scalable platform for business
critical applications and databases, connectivity, system management, and e-
mail servers. The operating system integrates Web services such as Microsoft
Internet Information Server, a service used to manage intranet and Internet
functionality and Microsoft FrontPage(R) Web site creation and management
tool. Windows NT Server, Terminal Server Edition, an extension to the Windows
NT Server product line, offers the application support of the Windows
operating system platform with the existing low cost, centrally managed
environment of the mainframe with terminal. Windows NT Server also includes
Microsoft Transaction Server, a component-based transaction processing system
for developing, deploying, and managing scalable enterprise, Internet and
intranet server applications.
APPLICATIONS AND TOOLS
The Applications and Tools Group is responsible for desktop applications,
application oriented server applications, developer tools, and web authoring
tools.
Desktop Applications
The Desktop Applications Division develops applications software, which
provides the PC with instructions for the performance of productivity tasks
such as manipulating text, numbers, or graphics. The Company's
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desktop applications software is designed for use by a broad class of end-
users, regardless of business, industry, or market segment. Primary examples
of desktop applications software are word processing, spreadsheet, and
presentation graphics programs. The Company's desktop applications programs
are developed principally for Windows and Macintosh operating systems.
Microsoft Office. Microsoft Office is a suite of software programs featuring
seamless integration of the most commonly used desktop applications. Microsoft
Office is based upon a document-centric concept, with common commands and
extensive use of cross-application capabilities. Microsoft Office is available
in several versions, with certain combinations of products available for the
various operating system platforms. The most recent version for Windows,
Microsoft Office 97, has enhanced Internet features such as integration with
Microsoft Internet Explorer, a Web toolbar, the ability to save as an HTML
format, connectivity to other Office documents or web sites via hyperlinks,
and support for ActiveX(R) controls. Products offered in the various versions
include the word processor Microsoft Word, Microsoft Excel spreadsheet,
Microsoft PowerPoint(R) presentation graphics program, Microsoft Outlook(TM)
messaging and collaboration client, Microsoft Access database, Microsoft
Bookshelf(R) CD-ROM reference library, and others. The Microsoft Home
Essentials(R) suite is marketed primarily toward users in the home.
Microsoft Word. The Company's principal word processing program is Microsoft
Word. Versions of Microsoft Word provide graphical word processing features,
plus the ability to handle graphics, tables, spreadsheet data, charts, and
images imported from other software programs.
Microsoft Excel. The Company's spreadsheet program is Microsoft Excel. It is
an integrated spreadsheet with PivotTable(R) dynamic views, database, and
business graphics capabilities. Microsoft Excel allows full linking and
embedding of objects that permits users to view and edit graphics or charts
from other programs in the worksheet in which the object is stored. Microsoft
Excel graphics capabilities can be linked to its spreadsheets to allow
simultaneous changes to charts as changes are made to the spreadsheets.
Microsoft PowerPoint. Microsoft PowerPoint is a presentation graphics
program for producing transparencies, slides, overheads, and prints.
Microsoft Access. Microsoft Access is a relational database management
application that provides access to structured business data. Database
products control the maintenance and utilization of structured data organized
into a set of records or files.
Microsoft Outlook. The Company's premier collaboration and messaging client
is Microsoft Outlook. Outlook combines support for Internet standards-based
messaging systems--including Microsoft Exchange Server--with integrated
calendar, contact, and task-management features.
Microsoft Project. Microsoft Project is a critical path project scheduling
and resource 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 other productivity
products. Microsoft Publisher is an easy-to-use, entry-level desktop
publishing program. Microsoft FrontPage is a Web site creation and management
tool for Web sites on the Internet or intranets.
Server Applications
Based on Windows NT Server, the Microsoft BackOffice(R) family of server
applications is an integrated suite of software products that include file and
print services, applications, database, messaging, groupware, desktop
management, Internet access, transaction processing, and host connectivity.
BackOffice enables organizations to share information, collaborate, and manage
and deploy business-critical applications. Microsoft
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BackOffice Small Business Server is designed for smaller companies of 25 users
or less as an integrated solution for sharing files, databases, printers,
electronic mail, fax services, applications, and other resources.
Microsoft Exchange Server. The Company's messaging and collaboration server
is Microsoft Exchange Server, which provides e-mail, group scheduling, task
management, and document routing capabilities. Exchange Server offers a
scalable, reliable, and secure environment for multiple clients and Internet
protocols are part of the core server architecture. It also includes tools to
create rich collaboration applications.
Microsoft SQL Server. Microsoft SQL Server(TM) version is a scalable, high-
performance database management system designed specifically for distributed
client/server computing. Its built-in data replication, management tools,
Internet integration, and open system architecture provide a Windows NT-based
platform for delivering cost-effective information solutions.
Other Servers. Microsoft Proxy Server creates a single, secure gateway to
the Internet; Microsoft SNA Server provides connectivity to host data and
applications; and Microsoft Systems Management Server centrally manages this
distributed environment. Microsoft Site Server allows a comprehensive
management of sophisticated Web sites and their content. Microsoft Site Server
Commerce helps businesses engage customers and partners with the creation of
cost-effective commerce sites and applications, targeted online advertising
and marketing, and personalized promotion.
Developer Tools
The Developer Tools Division provides software development tools and
technical information to Internet applications developers and developers for
Windows. These products and services empower independent software developers,
corporate developers, solutions developers, and Webmasters to create a broad
spectrum of applications, primarily for Windows 32-bit operating systems, but
also for the platform-independent Internet and intranets.
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 PC
hardware. The Company develops and markets a number of software development
environments, and language compilers. Microsoft Visual C++(R) is the Company's
development system for Windows-based application development. The Microsoft
Visual Basic(R) 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 through
ActiveX controls. The Visual InterDev(TM) Web Development System includes
integrated, team-based development tools for building data-driven Web
applications based on HTML, Script, and components written in any language.
Microsoft Visual J++(TM) development system for Java contains a high
productivity Integrated Development Environment and a collection of integrated
components to create, test, tune, and deploy Java code on multiple platforms
using ActiveX controls. Microsoft Visual Studio(R) development system is a
suite of developer tools enabling developers to build components and
applications using Visual Basic, Visual C++, Visual FoxPro(R) database
development system, Visual InterDev, and Visual J++.
The Company provides third-party software developers with a wide range of
technical and support information that assists them in developing software
products intended to run on Windows operating systems, taking advantage of key
technologies such as ActiveX controls and Windows 32-bit APIs. Developers can
subscribe to the Microsoft Developer Network (MSDN(TM)) information service
and receive periodic updates via CD-ROMs, magazines, and several on-line
information services.
CONSUMER PLATFORMS
The Consumer Platforms Group delivers software and platform technologies
that extend the benefits of Windows and Windows-compatible solutions for a
broad range of intelligent business and consumer devices, including handheld
PCs, Palm-sized PCs, wireless-communication devices such as digital
information pagers and cellular smart phones, next-generation entertainment
and multimedia consoles including game players, and purpose-built Internet
access devices such as Internet TVs, digital set-top boxes and Internet "Web
phones."
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The Consumer Platforms Group also is responsible for systems integration of
products and technologies that public network operators and corporate
customers need for a variety of Internet and intranet-based applications.
Windows CE. Microsoft develops Windows CE, a scaleable Windows platform for
a broad range of communications, entertainment, and mobile computing devices.
The Windows CE operating system is built around an API that is consistent with
other 32-bit Windows-based operating systems, which allows developers and
programmers to use the same development tools and communication protocols to
create applications for Windows CE-powered devices. Windows CE allows
information appliances to communicate with each other, share information with
Windows-based PCs, and connect to the Internet. Windows CE is developed for PC
companions, including handheld PCs, palm-size PCs, and auto PCs, vertical
market devices, and home products. Microsoft teams up with hardware companies
that build Windows CE-based devices and who understand the needs of vertical
markets such as automotive, retail, manufacturing, education, healthcare,
telecommunications, or broadcast.
WebTV. In August 1997, Microsoft acquired WebTV Networks, Inc., an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals based on WebTV(TM) technologies. WebTV
operates the WebTV Network Service and develops the WebTV Internet Terminal
and WebTV Plus Receiver, which are available through the company's licensees.
Future versions of the set-top terminals will use the Windows CE operating
system.
INTERACTIVE MEDIA
The Interactive Media Group develops and markets interactive entertainment
and information products across a variety of media, including the Internet,
MSN, the Microsoft Network, and CD-ROM.
Learning, Entertainment and Productivity. Reference titles include Microsoft
Encarta(R) and Microsoft Bookshelf. The Encarta multimedia encyclopedia
database blends text in articles with innovative, interactive information
presented through animations, videos, maps, charts, sounds, and pictures.
Bookshelf is a multimedia reference library that integrates a dictionary,
world atlas, world almanac, thesaurus, concise encyclopedia, and two books of
quotations. The Expedia(R) travel series product line offers global
positioning system (GPS)-compatible maps and travel planning in an easy-to-use
format.
Titles for children include My Personal Tutor, a comprehensive three CD-ROM
learning suite, and a series of products based on the popular children's book
and television series, Scholastic's The Magic School Bus(TM).
The Company offers a line of entertainment products. Microsoft Flight
Simulator is a popular aircraft flight simulation product available for
Windows, MS-DOS, and Macintosh operating systems. Other games include Age of
Empires(R), Monster Truck Madness(TM), Microsoft Golf, and other sports and
action titles. Most games are available for the Windows 32-bit environment.
The Microsoft Internet Gaming Zone is a gaming community on the Internet
allowing multiplayer gaming competitions of popular CD-ROM games and classic
card, board, and puzzle games.
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. Home Essentials, an integrated software program, allows
consumers to complete home PC tasks using Microsoft Word, Microsoft Encarta,
Microsoft Money, Microsoft Works, Microsoft Greetings Workshop, Microsoft
Internet Explorer, and the Microsoft Entertainment Pack-The Puzzle Collection.
Interactive Service Media. The Company is developing an online decision
support infrastructure for end-users in such fields as automobiles, retail,
entertainment, and travel. Microsoft CarPoint(TM) online automotive service
provides current and objective information for new car purchases, including
test drive reviews, dealer invoices, and surround videos. Additionally,
CarPoint features interactive classifieds for used car purchasing and a new
car buying service. Comprised of a national network of dealers, this service
refers customers to nearby dealers. Microsoft Sidewalk(TM) online city guide
is a personalized city guide to local entertainment. The Sidewalk
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editorial team provides previews, reviews and even customized suggestions
about entertainment events in Seattle, New York, Boston, Minneapolis/St. Paul,
Washington, D.C., San Diego, Denver, Houston, San Francisco, and Sydney,
Australia, with city guides scheduled to launch in additional cities.
Microsoft Expedia(TM) travel service is a free service on the Web and MSN,
which enables users to find low fares, book flights, make hotel reservations,
and rent cars. Expedia also offers a comprehensive source of information for
more than 330 destinations including photos, historical information, and local
details. Microsoft 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. With HomeAdvisor(R), users can find a home, qualify
and apply for a loan online, calculate financing options, and gain real estate
industry knowledge.
The Microsoft Network. MSN is a Web-based interactive online service. MSN
provides easy and inexpensive access for users to a wide range of graphically
rich online content. The online service provides access to the Internet, a
free Web-based electronic mail account through Hotmail, bulletin boards, and a
myriad of additional services offered by Microsoft and by ICPs.
Joint Ventures. The Company has entered into joint venture arrangements to
take advantage of creative talent and content from other organizations.
Microsoft owns 50 percent of DreamWorks Interactive L.L.C., a software company
that develops interactive and multimedia products. DreamWorks SKG owns the
remaining 50 percent. 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. Microsoft is
an investor in MSFDC L.L.C., a joint venture between Microsoft and First Data
Corp. MSFDC has announced that it is changing its name to TransPoint and
Citibank will make an equity investment in the venture. The venture is
developing an Internet bill delivery and payment service called TransPoint E-
Bills.
Desktop Finance. Desktop Finance develops and markets consumer finance
products and manages relationships with financial institutions to develop
online deliver systems for customers. Microsoft Money is a financial
organization product that allows users to computerize their household
finances. Microsoft Money is available for systems running Microsoft Windows
32-bit operating systems and provides online home-banking services with
numerous different banks in the U.S.
Microsoft Investor is an online investing site that provides a comprehensive
offering of information and services designed to help personal investors make
investment decisions, track their securities and understand the market. A
blend of free and subscription-based services, Investor provides portfolio
tracking and analysis, company and mutual fund research, an investment finder,
daily editorial and market summaries, electronic mail notifications and
alerts, and access to online trading through leading financial services firms.
Hardware Peripherals. The Company's major PC input device is the Microsoft
Mouse, a hand-held pointing device that facilitates use of a PC. The Microsoft
IntelliMouse(R) pointing device is a mouse with a center positioned wheel
which provides transfer zooming, scrolling and data zooming in Microsoft
Windows 32-bit operating systems, Microsoft Internet Explorer, and Microsoft
Office 97. Microsoft also offers a mouse designed for the home and a mouse for
young children. The Company also markets the Microsoft Natural(R) Keyboard, an
ergonomically designed keyboard. Additionally, Microsoft sells various
Microsoft Sidewinder(R) Game Controllers and Force Feedback joysticks with
realistic performance technology for use with PC games. ActiMates(TM)
Interactive Barney is a two-way interactive, talking and moving, wireless
plush character peripheral for young children that operates via programming
from CD-ROM (PC mode) or a VHS (TV mode) and on-board ROM chip (Standalone
mode).
MICROSOFT PRESS
Microsoft Press publishes books about software products from Microsoft and
other software developers and about current developments in the industry.
Books published by Microsoft Press typically are written and copyrighted by
independent authors who submit their manuscripts to the Company for
publication and who receive royalties based on revenue generated by the book.
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Microsoft Press contracts with an independent commercial printer for the
manufacturing of its books. Publisher's Resources, Inc. acts as the Company's
main fulfillment house in the United States, maintaining the majority of the
inventory of Microsoft Press(R) books. Books are marketed by independent sales
representatives 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
in England the right to distribute English language versions of its books in
all countries except the United States, Canada, Central and South America, and
certain Asian countries. In most cases, Microsoft Press provides each
publisher with a book's manuscript, and the publisher arranges for its
translation and the printing, marketing, and distribution of the translated
version.
PRODUCT DEVELOPMENT
The PC software industry is characterized by extremely rapid technological
change, which requires constant attention to software technology trends and
shifting consumer demand, and rapid product innovation. The pace of change has
recently become even greater due to the surge of interest in the Internet,
other forms of online services, PC server-based networking, and new
programming languages, such as Java.
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 enables Microsoft to maintain closer technical control
over the products and gives the Company the freedom to designate which
modifications and enhancements are most important and when they should be
implemented. 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 computers. Product documentation is generally created
internally.
The Company believes that a crucial factor in the success of a new product
is getting 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 informed at the earliest possible time
about changing usage patterns and hardware advances that may affect software
design.
In order to best serve the needs of users around the world, Microsoft
"localizes" many of its products to reflect local languages and conventions.
In French versions, for example, all user messages and documentation are in
French with monetary references in French francs. Various Microsoft products
have been localized into more than 30 languages.
During fiscal years 1996, 1997, and 1998, the Company spent $1.43 billion,
$1.93 billion, and $2.50 billion, respectively, on product research and
development activities. Those amounts represented 16.5%, 16.9%, and 17.3%,
respectively, of revenue in each of those years, excluding funding of joint
venture activity. The Company is committed to continue high expenditures for
research and product development.
MANUFACTURING
Microsoft contracts most of its manufacturing activity with third parties.
Outside manufacturers produce various retail software packaged products 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.
The Company's manufacturing facilities are located in Puerto Rico and
Ireland. The Irish facility and the Puerto Rico facilities replicate disks.
Microsoft outsources its manufacturing of packaged products. Quality control
tests are performed on purchased parts, finished disks and CD-ROMs, and other
products. The chief materials and components used in Microsoft products
include disks or CD-ROMs, books, and multicolor printed materials. The Company
is often able to acquire component parts and materials on a volume discount
basis. The Company has multiple sources for raw materials, supplies, and
components.
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In recent years the Company's sales mix has shifted to OEM and
organizational licenses from packaged products. Also, online distribution of
software may increase in the future.
OPERATIONS
Microsoft manages all product fulfillment, licensing, and logistic services.
The company has regional operation centers in Ireland and the Greater Seattle
area. The regional centers support all operations activities, including
information processing, vendor management, logistics, and related supporting
functions by geographical regions. The regional center in Dublin, Ireland
supports the European, African and Middle East regions, and the center in the
Greater Seattle area supports North and South America. The company is
establishing a regional operations center in Singapore for the Asia Pacific
region and plans to consolidate its sales operation. The company established
Microsoft Licensing Incorporated (MSLI) in Reno, Nevada, a wholly owned
subsidiary, which manages the company's OEM licensing operations.
MARKETING AND DISTRIBUTION
Microsoft aligns its sales and marketing staff with several customer types,
including OEMs, end-users, organizations, enterprises, applications
developers, educators, and Internet content providers (ICPs) and
infrastructure owners. The Company's sales and marketing group seeks to build
long-term relationships with customers of Microsoft products. In addition to
the OEM channel, Microsoft has three major geographic sales and marketing
organizations: the South Pacific and the Americas; Europe, the Middle East and
Africa; and Asia.
The OEM customer unit includes the sales force that works with original
equipment manufacturers that preinstall Microsoft software on their PCs.
The end-user customer unit has responsibility for activities that target
end-users that make individual buying decisions for the PCs they use at work
or home. Most sales and marketing activities aimed at end-user customers are
performed by this unit, including developing and administering reseller
relationships; reseller sales terms and conditions; channel marketing and
promotions; end-user marketing programs; and seminars, events, and sales
training for resellers. The customer unit's sub-segments include direct
marketing resellers and retailers. The key products marketed by the end-user
customer unit are the Company's PC operating systems, desktop applications,
and interactive media products.
The organization customer unit has responsibility for activities that target
groups of users in small and medium organizations. The unit works with channel
partners such as distributors, aggregators, value-added resellers, and
Solution Providers to provide complete business solutions to this customer
segment. The unit's sales and marketing activities include managing technical
training programs for Solution Providers (described below) and channel
resellers; and supporting and providing seminars, events, and sales training
for channel partners. The Company works with the partners to provide software
and support to a broad range of small and medium size organizations. The
organization customer unit also runs the Microsoft Certified Professional
program, which ensures the quality of Microsoft training for individuals and
corporations.
The enterprise customer unit has responsibility for sales and marketing
activities that target large organizations. The unit works directly with these
organizations, and through large account resellers, to create and support
enterprise-wide, mission critical solutions for business computing needs. The
enterprise customer unit also provides seminars and forums to familiarize
enterprises with technology issues and solutions.
The application developers customer unit targets corporate developers and
independent software vendors (ISVs) who build business applications with a
development platform based on Microsoft Windows and BackOffice architecture.
The unit's sales and marketing activities include providing industry specific
technical training, seminars, and events for ISVs. The application developers
customer unit also focuses on vertical and horizontal industries and their
associated software applications. A key focus of the group is Microsoft
Developer Tools.
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The education customer unit works with key education groups and other
industry partners to provide programs and technology tools that help them
expand and enhance learning opportunities for students. The education customer
unit has three primary areas, including higher education, K-12, and management
of the education channel and resellers.
The Internet customer unit is responsible for introducing the Company's
products and technologies to the public infrastructure owners and ICPs. The
customer unit also focuses on embedded and dedicated systems. Infrastructure
owners include network operators (telephone companies, cable companies,
Internet service providers, etc.) who build, own, and operate the public
networks and ICPs who provide content for the Web.
FINISHED GOODS CHANNELS
Distributors and Resellers. The Company markets its products in the finished
goods channels primarily through independent non-exclusive distributors and
resellers. Distributors include CHS Electronics, Computer 2000, Inacom, Ingram
Micro, Soft Bank, Tech Data, and Merisel. Resellers include Software Spectrum,
Corporate Software & Technology, CompUSA, Software House International,
Softmart, ASAP Software Express, and Best Buy. 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.
Large Accounts. The Microsoft Select program offers flexible software
acquisition, licensing, and maintenance options specially customized to meet
the needs of large multinational organizations. Targeted audiences include
technology specialists and influential end-users in large enterprises.
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 size organizations. It is available through the reseller
channel and offers discounts based on initial purchase volumes.
Solution Providers. Microsoft's Solution Providers program is a
comprehensive support relationship with independent organizations that provide
network and system integration, custom development, training, and technical
support for business computing solutions. The program supports value-added
resellers (VARs), system integrators, consultants, custom application
developers, solution developers, Internet service and hosting organizations,
independent content providers, and sitebuilders (companies that build Web
sites for other companies), as well as technical support and training
organizations. Under this business partnership strategy, the Company provides
sales and product information, development services, early access to Microsoft
products, and customer support tools including priority telephone support,
education, and business development support. To ensure high-quality technical
services for the Company's products, Microsoft Solution Providers are required
to have Microsoft-certified professionals on staff. Microsoft Direct Access is
a comprehensive and open program that allows independent technology providers
to actively engage with Microsoft through the Microsoft Direct Access program
online, quarterly briefings, training, and action packs.
Consulting Services. The Company's Consulting Services Division assists
customers in deploying and using the Company's computer operating systems,
applications, and communications products. The group works with Solution
Providers and helps create enterprise-wide computing solutions for large
corporate accounts.
International Sales Sites. The Company has established marketing and/or
support subsidiaries in more than 60 countries. Product is generally delivered
by the Company's owned or outsourced manufacturing operations. They also spend
a significant portion of their time working with partners to help them become
more proficient at providing these technical services. Notes to Financial
Statements--(see Item 8) describe foreign operations and export sales.
The Company's international operations, both OEM and finished goods, are
subject to certain risks common to foreign operations in general, such as
governmental regulations, import restrictions, and foreign exchange rate
fluctuations. Microsoft hedges a portion of its foreign exchange risk.
9
OEM CHANNEL
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 computers. The Company also markets and licenses certain desktop
applications, hardware, and interactive media 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, Compaq,
Dell, Fujitsu/ICL, Gateway 2000, Hewlett-Packard, IBM, NEC Packard Bell,
Samsung, Siemens, Toshiba, and Vobis.
ADVERTISING
The Company works closely with large advertising and direct marketing firms.
Advertising, direct marketing, worldwide packaging, and marketing materials
are targeted to various end-user segments. The Company utilizes broad consumer
media (television, radio, and business publications) and trade publications.
Microsoft has programs under which qualifying resellers and OEMs are
reimbursed for certain advertising expenditures. The Company maintains a broad
advertising campaign emphasizing the Microsoft brand identity.
CUSTOMERS
The Company's customers include end-users, organizations, enterprises, ISPs,
application developers, and OEMs. Most end-users of Microsoft products are
individuals in businesses, government agencies, educational institutions, and
at home. The end-users and organizations obtain Microsoft products primarily
through resellers and OEMs, which include certain Microsoft products with
their hardware. Notes to Financial Statements (see Item 8) describe customers
that represent more than 10% of the Company's revenue. The Company's practice
is to ship its products promptly 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
users of Microsoft products. Support personnel are located in various sites in
the U.S. and around the world. Certain support is also supplied by qualified
third-party support organizations. The Company hires individuals with product
expertise and provides them with productivity tools, continuous product
education and training, and consistent processes to deliver quality support
for Microsoft products. Coverage options range from standard no-charge toll
telephone support to fee-based offerings providing unlimited 800 number
telephone and electronic technical support for all Microsoft products 24 hours
per day, 7 days per week.
Users have access to troubleshooting "wizards" and Microsoft's
KnowledgeBase, a library of thousands of technical articles that is updated
regularly with useful information regarding Microsoft products. Microsoft
provides access to KnowledgeBase via MSN, America Online, Prodigy, and the
Internet. Additionally, several support offerings include Microsoft TechNet
and Microsoft Developer Network information subscription services.
As a supplement or alternative to direct support, the Company enhances the
third-party support channel by providing Microsoft Solution Providers with
education, training, tools, and support. Microsoft Solution Providers include
Authorized Training Centers, which offer advanced product education and
certification on Microsoft products; and Authorized Support Centers, which
provide a wide spectrum of multinational support, multivendor support, and
integration services.
COMPETITION
The PC software business is intensely competitive and subject to extremely
rapid technological change. Microsoft faces formidable competition in all
areas of its business activity, including competition from many
10
companies much larger than Microsoft. The rapid pace of technological change
continually creates new opportunities for existing competitors and start-ups
and can quickly render existing technologies less valuable. The Company also
faces constant competition from software pirates who unlawfully copy and
distribute Microsoft's copyrighted software products.
Operating systems. Microsoft's operating system products face substantial
competition from a wide variety of companies. Major competitors such as IBM,
Apple Computer, Compaq (Digital Equipment Corporation), Hewlett-Packard, Sun
Microsystems and others are vertically integrated in both software development
and hardware manufacturing and have developed operating systems that they
preinstall on computers of their own manufacture. Many of these operating
system software products are also licensed to third-party OEMs for
preinstallation on their machines. Microsoft's operating system products
compete with UNIX-based operating 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 gained increasing acceptance as desktop operating systems.
Over the past year the Linux operating system has gained increasing
acceptance, and leading software developers such as Oracle and Corel have
announced that they will develop applications that run on Linux. As PC
technology increasingly moves toward connectivity and communications,
Microsoft's operating system products will face increased competition from
network server operating systems such as Novell's NetWare, Banyan's Vines, the
many variants of UNIX, IBM's OS/2, "middleware" products such as IBM's Lotus
Notes, and intranet servers from Netscape, IBM, Sun Microsystems, and others.
Business systems. The Company is a fairly recent entrant into the business
of providing enterprise-wide computing solutions. Several competitors enjoy a
larger share of sales and larger installed bases. Many companies offer
operating system software for mainframes and midrange computers, including
IBM, Hewlett-Packard, and Sun Microsystems. Since legacy business systems are
typically support-intensive, these competitors also offer substantive 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.
Desktop applications. The Company's competitors include many software
application vendors, such as IBM (Lotus), Oracle, Apple (Filemaker, Inc.),
Corel, and local application developers in Europe and the Far East. 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 software products on various models of
their PCs, competing directly with Microsoft desktop application software.
Developer tools. The Company's developer products compete against offerings
from Borland, Macromedia, Oracle, Sun Microsystems, Sybase, Symantec, and
other companies.
News services. The Company's MSNBC joint ventures face formidable
competition from other 24-hour cable and Internet news organizations such as
CNN, CNN Headline News, and Fox News Network. MSNBC also competes with
traditional news media such as newspapers and broadcast TV and Internet news
services.
Consumer platforms. A wide variety of companies develop operating systems
for information appliances, including Apple, Motorola, 3Com, Psion Software,
and others. The Company's nascent WebTV offerings and other multimedia
consumer products face competitors such as Sun Microsystems, Oracle,
NetChannel, and others. An enormous range of companies, including media
conglomerates, telephone companies, cable companies, retailers, hardware
manufacturers, and software developers, are competing to make interactive
services widely available to the home.
Internet platforms and services. The advent of the Internet as a computing,
communication, and collaboration platform as well as a low cost and efficient
distribution vehicle increases competition and creates uncertainty as to
future technology directions. The Company faces intense competition in the
development and
11
marketing of Internet (and intranet) software from a wide variety of companies
and organizations including IBM, Netscape, Novell, Oracle, Real Networks, Sun
Microsystems', and many others. In addition, the very low barriers to entry on
the Internet have allowed numerous Web-based service companies to build
significant businesses in areas such as electronic mail, electronic commerce,
Web search engines, directories, and information of numerous types.
Competitors include Netscape, Lycos, Yahoo, Excite, Infoseek, CitySearch, and
many others.
Online services. Microsoft's online services network, MSN, faces formidable
competition from America Online and other traditional online services as well
as a vast array of sites on the World Wide Web that offer content of all types
and email, chat, search and shopping services, among other things.
Interactive media. The Company's Interactive Media division faces many
smaller but focused and branded competitors, particularly in the areas of
entertainment and education. Consolidation in this area of software
development has made certain competitors even stronger. Competitors include
Intuit, Electronic Arts, The Learning Company (including Softkey, MECC,
Broderbund, and Compton's), Voyager, Cendant (including Sierra On Line,
Knowledge Adventures, and Davidson Associates), and Dorling Kindersley. Still
other competitors own branded content, such as Disney and Lucas Arts.
Additionally, PC-based games are increasingly competing head-to-head against
games created for proprietary systems such as Nintendo, Sony PlayStation, and
Sega. Input devices face substantial competition from computer manufacturers,
since computers are typically sold with a keyboard and mouse, and other
manufacturers of these devices.
A number of Microsoft's most significant competitors, including IBM, Sun
Microsystems, Oracle, and Netscape, are collaborating with one another on
various initiatives directed at competition with Microsoft. These initiatives
relate in part to efforts to move software from individual PCs to centrally-
managed servers. While the likely technological and business success of such
"thin client" strategies is currently unknown, widespread adoption of such
computing systems would present significant challenges to the Company's
historical business model.
The Company's competitive position may be adversely affected by one or more
of these factors in the future, particularly in view of the fast pace of
technological change in the software industry.
EMPLOYEES
As of June 30, 1998, the Company employed 27,055 people on a full-time
basis, 18,425 in the U.S. and 8,630 internationally. Of the total, 10,019 were
in product research and development, 13,547 in sales, marketing, and support,
1,142 in manufacturing and distribution, and 2,347 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.
ITEM 2. PROPERTIES
The Company's corporate offices consist of approximately 5.2 million square
feet of office building space located in King County, Washington. There are
two sites that total approximately 300 acres of land. The Company recently
completed the construction of three office buildings comprising approximately
565,000 square feet of space and is constructing a set of office buildings
with approximately 418,000 square feet of space. This site will be occupied in
the winter of 1999. The Company owns all of its corporate campus.
The Company entered into a build to suit lease agreement in the San
Francisco, CA, Bay Area. This campus when complete will be approximately
515,000 square feet. It is scheduled to open in the spring of 1999.
12
The Company leases a 45,000 square foot disk duplication facility in
Humacao, Puerto Rico. The Puerto Rico facility, which began operation in April
1990, is leased under a 10-year lease, with an option to renew for an
additional 10 years. The Company's European manufacturing operation consists
of a 161,000 square foot facility situated on 12 acres in Dublin, Ireland. The
Ireland site also includes office buildings with 157,000 square feet for
international localization. The Ireland facilities are fully owned by the
Company. In Les Ulis, France, the Company owns a 199,000 square foot office
building on four acres of land. In the United Kingdom, the Company owns 3
building that total 230,000 square feet. The Company is going to execute a
sale lease back on this property during the next fiscal year.
In addition, the Company leases office space in numerous locations in the
United States and many other countries.
The Company's facilities are fully utilized for current operations and
suitable additional space is available to accommodate expansion needs.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in Notes to Financial Statements--Contingencies on
page 45-46 of the 1998 Annual Report to Shareholders is incorporated herein by
reference and is filed herewith as Exhibit 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 1998.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information set forth on page 48 of the 1998 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 1 of the 1998 Annual Report to Shareholders
is incorporated herein by reference and is filed herewith as Exhibit 13.2.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth on pages 27-33 of the 1998 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on pages 27-33 of the 1998 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplement data for the Company and
independent auditors' report set forth on pages 26 and 34-49 of the 1998 Annual
Report to Shareholders is incorporated herein by reference and is filed
herewith as Exhibit 13.4.
. Income Statements for the three years ended June 30, 1998
. Cash Flows Statements for the three years ended June 30, 1998
. Balance Sheets as of June 30, 1997 and 1998
. Stockholders' Equity Statements for the three years ended June 30, 1998
. Notes to Financial Statements
. Independent Auditors' Report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors may be found under the caption
"Election of Directors and Management Information" on pages 1 and 2 of the
Company's Proxy Statement dated September 25, 1998, for the Annual Meeting of
Shareholders to be held November 11, 1998 (the "Proxy Statement"). Such
information is incorporated herein by reference.
The executive officers of Microsoft as of September 11, 1998 were as
follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
William H. Gates............ 42 Chairman of the Board; Chief Executive
Officer
Steven A. Ballmer........... 42 President
Robert J. Herbold........... 56 Executive Vice President; Chief
Operating Officer
Frank M. (Pete) Higgins..... 40 Group Vice President, Interactive Media
Paul A. Maritz.............. 43 Group Vice President, Platforms and
Applications
Nathan P. Myhrvold.......... 39 Group Vice President, Chief Technology
Officer
Jeffrey S. Raikes........... 40 Group Vice President, Sales and Support
James E. Allchin............ 46 Senior Vice President, Personal and
Business Systems
Orlando Ayala Lozano........ 42 Senior Vice President, South Pacific
and Americas Region
Joachim Kempin.............. 56 Senior Vice President, OEM, Internet
Customer Unit, Embedded Systems
Michel Lacombe.............. 47 Senior Vice President, Europe, Middle
East, and Africa Region; President,
Microsoft Europe
Robert L. Muglia............ 38 Senior Vice President, Applications and
Tools Division
Craig Mundie................ 49 Senior Vice President, Consumer
Platforms Division
William H. Neukom........... 56 Senior Vice President, Law and
Corporate Affairs; Secretary
Bernard P. Vergnes.......... 53 Senior Vice President, Microsoft;
Chairman, Microsoft Europe
Gregory B. Maffei........... 38 Vice President, Finance; Chief
Financial Officer
Mr. Gates co-founded Microsoft in 1975 and has been its Chairman of the
Board and Chief Executive Officer since the original partnership was
incorporated in 1981.
Mr. Ballmer was named President in July 1998 and had been Executive Vice
President, Sales and Support since February 1992. He had been Senior Vice
President, Systems Software since 1989. From 1984 until 1989, Mr. Ballmer
served as Vice President, Systems Software. He joined Microsoft in 1980.
Mr. Herbold joined Microsoft as Executive Vice President and Chief Operating
Officer in November 1994. Mr. Herbold had been with The Procter & Gamble
Company since 1968, with experience in information services, advertising and
market research. Most recently, he was P&G's Senior Vice President,
Information Services and Advertising.
Mr. Higgins was named Group Vice President, Interactive Media Group in
October 1996. He was named Group Vice President, Applications and Content in
May 1995 and Senior Vice President, Desktop Applications Division in March
1993. He had been Vice President, Desktop Applications Division since 1992.
Mr. Higgins joined Microsoft in 1983.
Mr. Maritz was named Group Vice President, Platforms and Applications in
October 1996 and had been Group Vice President, Platforms since May 1995. He
had been Senior Vice President, Product and Technology Strategy in November
1994 and had been Senior Vice President, Systems Division since February 1992.
He had been Vice President, Advanced Operating Systems since 1989. Mr. Maritz
joined Microsoft in 1986.
Mr. Myhrvold was named Group Vice President and Chief Technology Officer in
October 1996. He was named Group Vice President, Applications and Content in
May 1995 and had been Senior Vice President,
15
Advanced Technology since July 1993. He had been Vice President, Advanced
Technology and Business Development since 1989. Mr. Myhrvold joined Microsoft
in 1986.
Mr. Raikes was named Group Vice President, Sales and Support in July 1998.
He had been Group Vice President, Sales and Marketing since July 1996. He was
named Senior Vice President, Microsoft North America in January 1992 and had
been Vice President, Office Systems since 1990. Mr. Raikes joined Microsoft in
1981.
Mr. Allchin was named Senior Vice President, Personal and Business Systems
in February 1996. He was named Senior Vice President, Business Systems
Division in November 1994 and had been Vice President, Business Systems
Division, since July 1991. Mr. Allchin joined Microsoft in 1991.
Mr. Ayala was named Senior Vice President of South Pacific and Americas
Region in February 1998. He had been 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 May 1991 as Senior Director
of the Latin America Region.
Mr. Kempin was named Senior Vice President, OEM, Internet Customer Unit,
Embedded Systems in February 1998. He had been Senior Vice President, OEM
Sales since August 1993. He had been Vice President, OEM Sales since 1987. Mr.
Kempin joined Microsoft in 1983.
Mr. Lacombe is President, Microsoft Europe. He was named Senior Vice
President, Europe, Middle East, and Africa Region in February 1998. He had
been President, Microsoft Europe and Senior Vice President, Microsoft since
July 1997. He had been Vice President, Europe since September 1995 and Vice
President, End User Customer Unit, Europe since April 1994. Mr. Lacombe had
been Regional Director of Southern Europe from May 1991. Mr. Lacombe joined
Microsoft in 1983.
Mr. Muglia was named Senior Vice President, Applications and Tools Division
in February 1998. He had been Vice President of the Server Applications
Division since 1997 and was Vice President of Developer Tools since 1995. He
joined Microsoft in January 1988.
Mr. Mundie was named Senior Vice President, Consumer Platforms Division in
February 1996. He was named Senior Vice President, Consumer Systems in May
1995 and had been Vice President, Advanced Consumer Technology since July
1993. He joined Microsoft as General Manager, Advanced Consumer Technology in
December 1992.
Mr. Neukom was named Senior Vice President, Law and Corporate Affairs in
February 1994. He joined Microsoft in 1985 as Vice President, Law and
Corporate Affairs.
Mr. Vergnes is a Senior Vice President and Chairman, Microsoft Europe. He
was named President, Microsoft Europe in April 1992. He had been Vice
President, Europe since 1989. Mr. Vergnes joined Microsoft in 1983.
Mr. Maffei was named Vice President, Finance and Chief Financial Officer in
July 1997. He was named Vice President, Corporate Development in July 1996 and
Treasurer in April 1994. He joined Microsoft in April 1993 as Director,
Business Development & Investments.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions
"Information Regarding Executive Officer Compensation" on pages 4 through 6
and "Information Regarding the Board and its Committees" on page 2 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information Regarding
Beneficial Ownership of Principal Shareholders, Directors, and Management" on
page 3 of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in Notes to Financial Statements -- Acquisition on
page 44 of the 1998 Annual Report to Shareholders is incorporated herein by
reference and is filed herewith as Exhibit 13.4.
16
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 not
required, 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 1998.
(c) Exhibit Listing
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Microsoft Corporation 1991 Stock Option Plan (2)
10.2 Microsoft Corporation 1981 Stock Option Plan (3)
10.3 Microsoft Corporation Stock Option Plan for Non-Employee Directors
(1)
10.4 Microsoft Corporation Stock Option Plan for Consultants and
Advisors (1)
10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan (2)
10.6 Microsoft Corporation Savings Plus Plan (1)
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation
and First Interstate Bank of Washington (4)
10.8 Form of Indemnification Agreement (4)
11. Computation of Earnings Per Share (5)
13.1 Quarterly and Market Information Incorporated by Reference to Page
48 of 1998 Annual Report to Shareholders ("1998 Annual Report")
13.2 Selected Financial Data Incorporated by Reference to Page 1 of
1998 Annual Report
13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 27-33 of
1998 Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 26 and 34-
49 of 1998 Annual Report
21. Subsidiaries of Registrant Incorporated by Reference to Page 50 of
1998 Annual Report
23. Independent Auditors' Consent
27. Financial Data Schedule
- --------
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1994.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1997.
(3) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(4) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1993.
(5) Incorporated by reference to Exhibit 13.4 filed herein.
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
REDMOND, STATE OF WASHINGTON, ON SEPTEMBER 23, 1998.
MICROSOFT CORPORATION
By /s/ Gregory B. Maffei
_____________________________________
Gregory B. Maffei
Vice President, Finance; Chief
Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON SEPTEMBER 23, 1998.
SIGNATURE TITLE
--------- -----
/s/ William H. Gates Chairman of the Board of Directors and
______________________________________ Chief Executive Officer
William H. Gates
/s/ Paul G. Allen Director
______________________________________
Paul G. Allen
/s/ Jill E. Barad Director
______________________________________
Jill E. Barad
/s/ Richard A. Hackborn Director
______________________________________
Richard A. Hackborn
/s/ David F. Marquardt Director
______________________________________
David F. Marquardt
/s/ Robert D. O'Brien Director
______________________________________
Robert D. O'Brien
/s/ Wm. G. Reed, Jr. Director
______________________________________
Wm. G. Reed, Jr.
/s/ Jon A. Shirley Director
______________________________________
Jon A. Shirley
/s/ Gregory B. Maffei Vice President, Finance; Chief
______________________________________ Financial Officer (Principal Financial
Gregory B. Maffei and Accounting Officer)
18
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Microsoft Corporation 1991 Stock Option Plan (2)
10.2 Microsoft Corporation 1981 Stock Option Plan (3)
10.3 Microsoft Corporation Stock Option Plan for Non-Employee Directors (1)
10.4 Microsoft Corporation Stock Option Plan for Consultants and Advisors
(1)
10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan (2)
10.6 Microsoft Corporation Savings Plus Plan (1)
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation and
First Interstate Bank of Washington (4)
10.8 Form of Indemnification Agreement (4)
11. Computation of Earnings Per Share (5)
13.1 Quarterly and Market Information Incorporated by Reference to Page 48
of 1998 Annual Report to Shareholders ("1998 Annual Report")
13.2 Selected Financial Data Incorporated by Reference to Page 1 of 1998
Annual Report
13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 27-33 of 1998
Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 26 and 34-49 of
1998 Annual Report
21. Subsidiaries of Registrant Incorporated by Reference to Page 50 of 1998
Annual Report
23. Independent Auditors' Consent
27. Financial Data Schedule
- --------
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1997.
(3) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(4) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
(5) Incorporated by reference to Exhibit 13.4 filed herein.