ITEM 8.     Financial Statements and Supplementary Data

 

INCOME STATEMENTS

 

 

 

 

(In millions, except earnings per share)

  

   

 

   

 

   

Year Ended June 30

  

2001

 

2002

 

2003

 

 

 

 

Revenue

  

$25,296 

 

$28,365 

 

$32,187 

Operating expenses:

  

     

 

     

 

     

Cost of revenue

  

  3,455 

 

  5,191 

 

  5,686 

Research and development

  

  4,379 

 

  4,307 

 

  4,659 

Sales and marketing

  

  4,885 

 

  5,407 

 

  6,521 

General and administrative

  

  857 

 

  1,550 

 

  2,104 

Total operating expenses

  

 13,576 

 

16,455 

 

 18,970 

Operating income

  

 11,720 

 

11,910 

 

 13,217 

Losses on equity investees and other

  

  (159)

 

  (92)

 

  (68)

Investment income/(loss)

  

  (36)

 

  (305)

 

  1,577 

Income before income taxes

  

 11,525 

 

11,513 

 

 14,726 

Provision for income taxes

  

  3,804 

 

  3,684 

 

  4,733 

Income before accounting change

  

  7,721 

 

  7,829 

 

  9,993 

Cumulative effect of accounting change (net of income taxes of $185)

  

  (375)

 

  - 

 

  - 

Net income

  

$ 7,346 

 

$  7,829 

 

$  9,993 

 

 

 

 

Basic earnings per share(1):

  

     

 

     

 

     

Before accounting change

  

$    0.72 

 

$    0.72 

 

$    0.93 

Cumulative effect of accounting change

  

  (0.03)

 

  - 

 

  - 

 

  

$    0.69 

 

$    0.72 

 

$    0.93 

 

 

 

 

Diluted earnings per share(1):

  

     

 

     

 

     

Before accounting change

  

$    0.69 

 

$    0.70 

 

$    0.92 

Cumulative effect of accounting change

  

  (0.03)

 

  - 

 

  - 

 

  

$    0.66 

 

$    0.70 

 

$    0.92 

 

 

 

 

Weighted average shares outstanding(1):

  

     

 

     

 

     

Basic

  

 10,683 

 

10,811 

 

 10,723 

Diluted

  

 11,148 

 

11,106 

 

 10,882 

 

(1)   Earnings per share and weighted average shares outstanding have been restated to reflect a two-for-one stock split in February 2003.

 

See accompanying notes.

 

 

BALANCE SHEETS

(In millions)

 

 

  

 

June 30

 

2002

  

2003

 

 

 

Assets

 

   

  

   

Current assets:

 

   

  

   

Cash and equivalents

 

$  3,016

  

$  6,438

Short-term investments

 

 35,636

  

 42,610

Total cash and short-term investments

 

 38,652

  

 49,048

Accounts receivable, net

 

  5,129

  

  5,196

Inventories

 

  673

  

  640

Deferred income taxes

 

  2,112

  

  2,506

Other

 

  2,010

  

  1,583

Total current assets

 

 48,576

  

 58,973

Property and equipment, net

 

  2,268

  

  2,223

Equity and other investments

 

 14,191

  

 13,692

Goodwill

 

  1,426

  

  3,128

Intangible assets, net

 

  243

  

  384

Other long-term assets

 

  942

  

  1,171

Total assets

 

$67,646

  

$79,571

 

 

 

Liabilities and stockholders' equity

 

   

  

   

Current liabilities:

 

   

  

   

Accounts payable

 

$  1,208

  

$  1,573

Accrued compensation

 

  1,145

  

  1,416

Income taxes

 

  2,022

  

  2,044

Short-term unearned revenue

 

  5,920

  

  7,225

Other

 

  2,449

  

  1,716

Total current liabilities

 

 12,744

  

 13,974

Long-term unearned revenue

 

  1,823

  

  1,790

Deferred income taxes

 

  398

  

  1,731

Other long-term liabilities

 

  501

  

  1,056

Commitments and contingencies

 

   

  

   

Stockholders' equity:

 

   

  

   

Common stock and paid-in capital - shares authorized 24,000; Shares issued and outstanding 10,718 and 10,771

 

 31,647

  

 35,344

Retained earnings, including accumulated other comprehensive income of $583 and $1,840

 

 20,533

  

 25,676

Total stockholders' equity

 

 52,180

  

 61,020

Total liabilities and stockholders' equity

 

$67,646

  

$79,571

 

See accompanying notes.

 

CASH FLOWS STATEMENTS

 

 

 

 

(In millions)

 

   

 

   

 

   

Year Ended June 30

 

2001

 

2002

 

2003

 

 

 

 

Operations

 

     

 

     

 

     

Net income

 

$   7,346 

 

$   7,829 

 

$   9,993 

Cumulative effect of accounting change, net of tax

 

  375 

 

  - 

 

  - 

Depreciation, amortization, and other noncash items

 

  1,536 

 

  1,084 

 

  1,439 

Net recognized losses on investments

 

  2,221 

 

  2,424 

 

  380 

Stock option income tax benefits

 

  2,066 

 

  1,596 

 

  1,376 

Deferred income taxes

 

  (420)

 

  (416)

 

  336 

Unearned revenue

 

  6,970 

 

  11,152 

 

  12,519 

Recognition of unearned revenue

 

  (6,369)

 

  (8,929)

 

 (11,292)

Accounts receivable

 

  (418)

 

  (1,623)

 

  187 

Other current assets

 

  (482)

 

  (264)

 

  412 

Other long-term assets

 

  (330)

 

  (9)

 

  (28)

Other current liabilities

 

  774 

 

  1,449 

 

  35 

Other long-term liabilities

 

  153 

 

  216 

 

  440 

Net cash from operations

 

  13,422 

 

  14,509 

 

  15,797 

 

 

 

 

Financing

 

     

 

     

 

     

Common stock issued

 

  1,620 

 

  1,497 

 

  2,120 

Common stock repurchased

 

  (6,074)

 

  (6,069)

 

  (6,486)

Repurchases of put warrants

 

  (1,367)

 

  - 

 

  - 

Common stock dividends

 

  - 

 

  - 

 

  (857)

Other, net

 

  235 

 

  - 

 

  - 

Net cash used for financing

 

  (5,586)

 

  (4,572)

 

  (5,223)

 

 

 

 

Investing

 

     

 

     

 

     

Additions to property and equipment

 

  (1,103)

 

  (770)

 

  (891)

Acquisitions of companies, net of cash acquired

 

  -  

 

  -  

 

  (1,063)

Purchases of investments

 

 (66,346)

 

  (89,386)

 

 (89,621)

Maturities of investments

 

  5,867 

 

  8,654 

 

  9,205 

Sales of investments

 

  52,848 

 

  70,657 

 

  75,157 

Net cash used for investing

 

  (8,734)

 

  (10,845)

 

  (7,213)

Net change in cash and equivalents

 

  (898)

 

  (908)

 

  3,361 

Effect of exchange rates on cash and equivalents

 

  (26)

 

  2 

 

  61 

Cash and equivalents, beginning of year

 

  4,846 

 

  3,922 

 

  3,016 

Cash and equivalents, end of year

 

$   3,922 

 

$    3,016 

 

$   6,438 

 

See accompanying notes.

 

 

STOCKHOLDERS' EQUITY STATEMENTS

 

 

 

 

(In millions)

 

   

 

   

 

   

Year Ended June 30

 

2001

 

2002

 

2003

 

 

 

 

Common stock and paid-in capital

 

     

 

     

 

     

Balance, beginning of year

 

$23,195 

 

$28,390 

 

$31,647 

Common stock issued

 

  5,154 

 

  1,801 

 

  3,012 

Common stock repurchased

 

  (394)

 

  (676)

 

  (691)

Repurchases of put warrants

 

 (1,367)

 

  - 

 

  - 

Stock option income tax benefits

 

  2,066 

 

  1,596 

 

  1,376 

Other, net

 

  (264)

 

  536 

 

  - 

Balance, end of year

 

 28,390 

 

 31,647 

 

 35,344 

 

 

 

 

Retained earnings

 

     

 

     

 

     

Balance, beginning of year

 

 18,173 

 

 18,899 

 

 20,533 

Net income

 

  7,346 

 

  7,829 

 

  9,993 

Other comprehensive income:

 

     

 

     

 

     

Cumulative effect of accounting change

 

  (75)

 

  - 

 

  -  

Net gains/(losses) on derivative instruments

 

  634 

 

  (91)

 

  (102)

Net unrealized investment gains/(losses)

 

  (1,460)

 

  5 

 

  1,243 

Translation adjustments and other

 

  (39)

 

  82 

 

  116 

Comprehensive income

 

  6,406 

 

  7,825 

 

 11,250 

Common stock repurchased

 

 (5,680)

 

  (6,191)

 

  (5,250)

Common stock dividends

 

  -  

 

  - 

 

  (857)

Balance, end of year

 

 18,899 

 

 20,533 

 

 25,676 

Total stockholders' equity

 

$47,289 

 

$52,180 

 

$61,020 

 

See accompanying notes.

 

 

QUARTERLY INFORMATION

 

(In millions, except earnings per share) (Unaudited)

Quarter Ended

 

Sept. 30

 

Dec. 31

 

Mar. 31

 

June 30

 

Year

Fiscal 2001

     

 

   

  

     

 

     

 

   

Revenue

$      5,766

 

$      6,550

  

$      6,403

 

$      6,577

 

$      25,296

Gross profit

4,941

 

5,686

  

5,504

 

5,710

 

21,841

Net income

2,206(2)

 

2,624

  

2,451

 

65(3)

 

7,346

Basic earnings per share(1)

0.21(2)

 

0.25

  

0.23

 

0.01

 

0.69

Diluted earnings per share(1)

0.20(2)

 

0.24

  

0.22

 

0.01

 

0.66

Fiscal 2002

 

 

 

  

 

 

 

 

 

Revenue

$      6,126

 

$      7,741

  

$      7,245

 

$      7,253

 

$      28,365

Gross profit

5,242

 

6,197

  

5,850

 

5,885

 

23,174

Net income

1,283(4)

 

2,283

  

2,738(5)

 

1,525(6)

 

7,829

Basic earnings per share(1)

0.12

 

0.21

  

0.25

 

0.14

 

0.72

Diluted earnings per share(1)

0.12

 

0.21

  

0.25

 

0.14

 

0.70

Fiscal 2003

 

 

 

  

 

 

 

 

 

Revenue

$      7,746

 

$      8,541

  

$      7,835

 

$      8,065

 

$      32,187

Gross profit

6,547

 

6,507

  

6,620

 

6,827

 

26,501

Net income

2,726

 

2,552

  

2,794

 

1,921

 

9,993

Basic earnings per share

0.25

 

0.24

  

0.26

 

0.18

 

0.93

Diluted earnings per share

0.25

 

0.23

  

0.26

 

0.18

 

0.92

 

(1)   Earnings per share have been restated to reflect a two-for-one stock split in February 2003.  

(2)   Includes an unfavorable cumulative effect of accounting change of $375 million or $0.03 per basic share and diluted share, reflecting the adoption of SFAS No. 133. 

(3)   Includes $3.92 billion (pre-tax) in impairments of certain investments.

(4)   Includes $1.82 billion (pre-tax) in impairments of certain investments.

(5)   Includes $1.25 billion (pre-tax) gain on the sale of Expedia, Inc. and $1.19 billion (pre-tax) in impairments of certain investments. 

(6)   Includes $1.19 billion (pre-tax) in impairments of certain investments.

 

INDEPENDENT AUDITORS' REPORT

 

To the Board of Directors and Stockholders of Microsoft Corporation:

 

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries as of June 30, 2002 and 2003, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Microsoft Corporation and subsidiaries as of June 30, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America.

As described in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective July 1, 2000, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective July 1, 2001.

 

/s/    DELOITTE & TOUCHE LLP

 

Deloitte & Touche LLP

Seattle, Washington

July 17, 2003 (September 3, 2003 as to certain information in Note 20)