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<SEC-DOCUMENT>/in/edgar/work/0001032210-00-001961/0001032210-00-001961.txt : 20000930
<SEC-HEADER>0001032210-00-001961.hdr.sgml : 20000930
ACCESSION NUMBER: 0001032210-00-001961
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20000630
FILED AS OF DATE: 20000928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MICROSOFT CORP
CENTRAL INDEX KEY: 0000789019
STANDARD INDUSTRIAL CLASSIFICATION: [7372
] IRS NUMBER: 911144442
STATE OF INCORPORATION: WA
FISCAL YEAR END: 0630
</COMPANY-DATA>
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-14278
FILM NUMBER: 731256
</FILING-VALUES>
BUSINESS ADDRESS:
STREET 1: ONE MICROSOFT WAY #BLDG 8
STREET 2: NORTH OFFICE 2211
CITY: REDMOND
STATE: WA
ZIP: 98052
BUSINESS PHONE: 4258828080
</BUSINESS-ADDRESS>
MAIL ADDRESS:
STREET 1: ONE MICROSOFT WAY - BLDG 8
STREET 2: NORTH OFFICE 2211
CITY: REDMOND
STATE: WA
ZIP: 98052-6399
</MAIL-ADDRESS>
</FILER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 2000
[_] 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 91-1144442
(State of incorporation) (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 September 8, 2000 was $302,326,027,351.
The number of shares outstanding of the registrant's common stock as of
September 8, 2000 was 5,355,376,816.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2000 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV. Portions of the definitive Proxy Statement
dated September 8, 2000 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held November 9, 2000 are incorporated by
reference into Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MICROSOFT CORPORATION
FORM 10-K
For The Fiscal Year Ended June 30, 2000
INDEX
Part I
<TABLE>
<C> <S> <C>
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 13
Item 3. Legal Proceedings.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Executive Officers of the Registrant........................... 14
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters....................................................... 18
Item 6. Selected Financial Data........................................ 18
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition....................................... 18
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..... 18
Item 8. Financial Statements and Supplementary Data.................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures......................................... 18
Part III
Item 10. Directors of the Registrant.................................... 19
Item 11. Executive Compensation......................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 19
Item 13. Certain Relationships and Related Transactions................. 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 20
Signatures..................................................... 22
</TABLE>
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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 for a
multitude of computing devices. Microsoft software includes scalable operating
systems for servers, personal computers (PCs), and intelligent devices; server
applications for client/server environments; knowledge worker productivity
applications; and software development tools. The Company's online efforts
include the MSN(TM) network of Internet products and services and alliances
with companies involved with broadband access and various forms of digital
interactivity. Microsoft also licenses consumer software programs; sells
hardware devices; provides consulting services; trains and certifies system
integrators; 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 information technology (IT) professionals, knowledge
workers, developers, and consumers, marketed through multiple channels of
distribution. The Company is divided into three main areas: the Business
Divisions, the Sales, Marketing, and Support Group, and the Operations Group.
The Business Divisions work in close partnership in order to create powerful
software services and solutions built around the Internet, Windows, and new
devices. Each division is responsible for the product planning, development,
strategy, and in some cases, marketing strategies for their respective
customer segments. The product segments, based on these business divisions,
are the Windows(R) Platforms segment, the Business Productivity Applications
and Developer segment, and the Consumer and Other segment.
The Windows Platforms segment contains the Windows Division and the Windows
Digital Media Division. The Windows Division develops PC and server platforms
required to run applications and services and to deliver the connectivity,
management services and infrastructure for all types of users. The Windows
Division builds platforms for enterprise, dotcoms, small businesses, and
consumers. The Windows Digital Media Division develops digital media
technology and services for Windows platforms available across all types of
devices, networks, and services.
The Productivity Applications and Developer segment has two primary
divisions, the Business Productivity Group and the Developer Group. The
Business Productivity Group creates desktop and server software applications
and solutions for the knowledge workers and small businesses. The Developer
Group builds architecture and development of our tools and related platform
technologies for software developers.
The Consumer and Other segment includes the Consumer Group. The Consumer
Group provides Internet services and creates and markets productivity
programs, learning and entertainment products, and hardware peripherals for
consumers. For financial reporting, revenue from Microsoft Press, consulting,
and certification of system integrators is included in this segment.
See notes to financial statements for financial information regarding
segment reporting.
Microsoft has a research lab dedicated to creating new technology and
converting problems into tangible solutions that Microsoft developers can
incorporate into products to meet customers' needs.
The Sales, Marketing, and Support Group is responsible for building long-
term business relationships with original equipment manufacturers (OEMs),
enterprises, small- and medium-sized businesses, application developers,
educational institutions, and consumers. Enterprises are offered tailored
license programs, enterprise-wide support, consulting services, and other
specialized services. The group contains the Marketing Division, which is
responsible for domestic execution of integrated marketing campaigns and
similar worldwide initiatives;
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and developing expertise in public relations, advertising, customer loyalty,
research, and events. The group also 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 Americas; Europe, Middle East, and Africa; and Asia. The Sales,
Marketing, and Support group supports the Company's products with technical
support for end users, developers, and IT departments in 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.
Products
Windows Platforms
The Windows Platforms segment is responsible for the development of PC and
server platforms, including the Microsoft Windows and Windows 2000 operating
systems. The segment is also responsible for developing the Microsoft Internet
Explorer browsing software and Microsoft Windows Media(TM) Technologies. 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 platform for building and
deploying distributed applications for networked PCs. The Windows Platforms
segment also provides products for developing, running, and managing Internet
and intranet applications and content.
Windows Millennium Edition. The latest version of the Windows operating
system, Windows Millennium Edition (Me) operating system is designed
specifically for home users to manage digital photos and music, work with
video, create a home network, and communicate with other consumers. Windows Me
was released in September 2000.
Windows 98. The successor to Windows 95, Windows 98 is a personal computer
operating system that provides a Web-oriented user interface, 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). Windows 98 was released in June 1998.
Windows 2000 Professional. The successor to Windows NT Workstation, Windows
2000 Professional operating system combined 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
integrated the strengths of Windows NT Workstation including standards-based
security, manageability, and reliability. Windows 2000 Professional was
released in February 2000.
Windows NT Workstation. A fully integrated, multitasking 32-bit PC operating
system, Windows NT Workstation provides security, robustness, and portability.
Windows NT Workstation is designed for mission-critical computing and provides
the same features and applications programming interfaces (APIs) for Intel and
Alpha AXP microprocessors. Microsoft 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 2000 Server, Advanced Server, and Datacenter Server. Windows 2000
Server family builds on the Windows NT technology, integrating standards-based
directory, Web, application, communications, file and print services with high
reliability, efficient management, and support for networking hardware to
provide the foundation for integrating with the Internet. 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 SMP and extended memory
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support. Windows Datacenter Server operating system is built for large-scale
line-of-business and enterprise dotcom backend usage and supports server
consolidation and enhanced scalability. Windows 2000 Server and Advanced
Server were released in February 2000 and Windows Datacenter Server was
released in September 2000.
Windows NT Server. Windows NT Server is an operating system foundation for
both server applications and file and print sharing, with 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 electronic mail (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, offers the application support of the Windows operating system
platform with the centrally managed environment of the mainframe with
terminal. Windows NT Server Enterprise Edition provides the means for building
and deploying large-scale distributed applications for large and mission-
critical servers featuring comprehensive clustering for scalability and
availability.
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 helps centrally manages
the distributed environment with integrated features, including hardware
inventory, software inventory and metering, software distribution and
installation, and remote troubleshooting tools.
Windows Media Technologies. Microsoft Windows Media Technologies provide the
ability to create, deliver, and play streaming media files for applications
ranging from news and entertainment to e-commerce and corporate training
available across all types of devices, networks, and services. Windows Media
Technologies components include the Windows Media Tools, Windows Media
Services streaming server, and Windows Media Player.
Productivity Applications and Developer
The Productivity Applications and Developer segment develops desktop
applications, server applications, developer tools, Web authoring tools, and
solutions to businesses by providing software and services to conduct commerce
on the Internet.
Business Productivity
The Business Productivity Division delivers integrated business productivity
solutions for the knowledge worker, including the Office family of products,
other desktop applications, server applications, and the Windows CE operating
system for productivity appliances.
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, and available for
the Windows and Macintosh operating systems. Microsoft Office 2000 integrates
core productivity tools with the Web to simplify publishing Office documents
to an intranet or Internet site, simplifies information system support with a
self-repairing installation, and has enhanced usability with customizable
menus based on IntelliSense(R) technology rules. Products offered in the
various versions include the word processor Microsoft Word, Microsoft Excel
spreadsheet, Microsoft Outlook(TM) messaging and collaboration client,
Microsoft PowerPoint(R) presentation graphics program, Microsoft Access
database management application, and others. Microsoft Word is a word-
processing program designed to easily create professional-looking documents
for the Web, e-mail, and print. Microsoft Excel creates data-rich spreadsheets
for universal viewing on the Internet and for collaboration, allows users to
analyze data with charts, and incorporates Microsoft PivotTable(R) views and
graphs. Microsoft Outlook messaging and collaboration client provides a single
location for organizing and managing day-to-day information, including e-mail,
calendars,
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business contacts, and task lists. Microsoft PowerPoint presentation graphics
program is a complete set of tools for creating professional presentations.
Microsoft Access database management application allows for easy access and
retrieval of information and includes pre-packaged solutions to create
databases quickly. Microsoft FrontPage is a Web site creation and management
tool for Web sites on the Internet or intranets. Microsoft PhotoDraw(TM)
business graphics software is a program for creating custom business graphics
by editing illustrations and photos.
Other Desktop Application Products. The Company also offers other stand-
alone desktop application products. Microsoft Project is a critical path
project scheduling and resource allocation program. Microsoft Visio(R) enables
you to communicate effectively with easy-to-assemble drawings and diagrams;
create organizational charts and flowcharts; draw technical schematics and
annotate CAD drawings; build Web site maps; and manually or automatically work
on network, software, and database design. Microsoft Publisher is an easy-to-
use, entry-level desktop publishing program. Most of the applications included
in the various productivity suites are also licensed separately.
Server Applications. The Microsoft BackOffice(R) family of server
applications is an integrated suite of software products based on Windows NT
Server that includes file and print services, applications, database,
messaging, groupware, desktop management, Internet access, transaction
processing, and host connectivity. The BackOffice suite enables organizations
to share information, collaborate, and manage and deploy business-critical
applications and includes BackOffice Server, Exchange Server, Proxy Server,
Site Server, SQL Server(TM) and others. Microsoft 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 Site Server allows a
comprehensive management of sophisticated Web sites and their content.
Microsoft Site Server Commerce helps businesses engage customers and partners
with creating cost-effective commerce sites and applications, targeted online
advertising and marketing, and personalized promotion.
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 as part of the core server architecture. It also includes tools to
create collaboration applications.
Windows CE. The Company delivers software and platform technologies for a
broad range of productivity appliances. Microsoft develops and markets Windows
CE, a scaleable Windows platform for 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. Windows CE
allows productivity appliances to communicate with each other, share
information with Windows-based PCs, and connect to the Internet. Microsoft
teams up with hardware companies that build Windows CE-based devices.
bCentral. Microsoft's small businesses portal, bCentral, allows companies to
leverage the Internet to drive their business forward. Microsoft bCentral Site
Manager is 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. Microsoft bCentral LinkExchange,
which the Company acquired in November 1998, 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.
Developer
The Developer Group provides software development tools and distributed
application platforms to developers of Windows-based applications and Internet
applications. These products and services empower independent software
developers, corporate developers, solutions developers, and Webmasters to
create a broad spectrum of applications. Microsoft Windows Distributed
interNet Applications (DNA) Architecture is the application development model
for the Windows platform. Windows DNA specifies how to develop robust,
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scalable, distributed applications using the Windows platform; extend existing
data and external applications to support the Internet; and support a wide
range of client devices. Windows DNA provides for the integration of Web and
client/server application development models through the Component Object
Model (COM). COM underlies a large majority of the 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.
Developer Tools. 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) development system 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. The Microsoft Visual InterDev(TM) Web
development system includes integrated, team-based development tools for
building Web-based 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. Microsoft Visual Studio(R) development system for Windows-based
development is a suite of developer tools enabling developers to build
components and applications using Visual Basic, Visual C++, Microsoft Visual
FoxPro(R) database development system, Visual InterDev, and Visual J++.
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.
Microsoft SQL Server. Microsoft SQL Server(TM) is a scalable, high-
performance database management system designed specifically for distributed
client/server computing. SQL Server has built-in data replication, management
tools, Internet integration, and online analytical processing (OLAP) to aid in
the analysis of information for reporting and data modeling. Its open system
architecture provides a Windows NT-based platform for delivering cost-
effective information solutions.
Consumer
The Consumer Group supplies services and content to consumers over the
Internet including MSN Internet Access; WebTV(R) Internet Service; MSN Portal
and vertical properties; and develops software and hardware products that are
designed to meet the needs of consumers in the home environment. Most software
and hardware products are licensed and sold to and through retail channels to
consumers. Major product categories include learning, productivity,
entertainment, and hardware peripherals.
The Microsoft Network. MSN Internet Access is a Web-based online service.
MSN provides easy and inexpensive access for users to a wide range of
graphically rich online content. MSN Internet Access provides dial-up Internet
access, free Web-based e-mail through MSN Hotmail, and Microsoft MSN Messenger
Service. MSN Hotmail, one of the largest e-mail services with 40 million
members, provides members with an e-mail account they can access from any PC
with Internet access and has localized versions in French, German, and
Japanese. MSN Messenger Service is a free Internet messaging service that
enables users to see when other users are online to exchange instant messages.
WebTV. WebTV Networks is 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.
MSN Portal. The MSN Portal business provides services on the Internet,
encompassing the home page as well as the vertical services. The vertical
services provide an online decision support infrastructure for end users
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in many fields such as automobiles, travel, finance, and home purchasing.
Microsoft CarPoint(TM) online automotive service provides objective
information for new car purchases, including test-drive reviews, dealer
invoices, surround videos, and interactive classified advertisements for used
car purchasing. Microsoft HomeAdvisor(TM) 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. Expedia, Inc., a majority owned
subsidiary of Microsoft, is a provider of branded online travel services for
leisure and small business travelers operating its own website with localized
versions in the United Kingdom, Germany, and Canada and certain other websites
in the United States and Europe. Expedia offers one-stop travel shopping and
reservation services, providing reliable, real-time access to schedule,
pricing and availability information. Expedia acquired Travelscape.com, Inc.
and VacationSpot.com, Inc. in March 2000. MSN MoneyCentral(TM) personal
finance online service is a free interactive personal finance resource to
track securities by providing company and mutual fund research, an investment
finder, daily editorial and market summaries, e-mail notifications and alerts,
and access to online trading through leading financial services firms. MSNBC
is an Internet news service that complements the MSNBC Cable Network,
providing in-depth reporting and information on a wide range of news topics,
from local to national to international news. Microsoft Passport is a platform
technology that makes it safer and easier for consumers to access information
and buy products and services online. Microsoft Passport allows consumers to
create a single sign-in, registration, and electronic wallet that can be
shared between all of the sites that support Microsoft Passport. TransPoint is
an end-to-end system for Internet bill delivery and payment. TransPoint's
service, using existing payment systems, allows consumers to access and pay
their bills through the branded home banking services of participating
financial institutions and other consumer service providers.
Learning. Learning titles include Microsoft Encarta(R) multimedia
encyclopedia and Microsoft Bookshelf CD-ROM reference library. The Encarta
family of products includes a multimedia encyclopedia database with
interactive information, an interactive world atlas with three-dimensional
maps, a world English dictionary, and an online version with monthly updates.
Microsoft Bookshelf is a multimedia reference library that integrates a
dictionary, world atlas, world almanac, thesaurus, concise encyclopedia, and
two books of quotations. Titles for children include My Personal Tutor, a
comprehensive, grade-based learning suite with TutorAssist(TM) learning
technology that identifies a child's specific learning needs and offers
instruction, and a series of products based on the popular children's book and
television series, Scholastic's The Magic School Bus(TM).
Productivity and Finance. 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 Money is a
financial organization product that allows users to computerize their finances
and provides online home-banking services with numerous different banks in the
United States. The Works Suite provides a comprehensive collection of
software, including Microsoft Works, Microsoft Word, Microsoft Money,
Microsoft Encarta encyclopedia, Microsoft Graphics Studio Greetings, and
Microsoft Expedia Streets.
Entertainment. The Company offers a line of entertainment products from
classical software games to online games, simulations, sport products, and
strategy games. Microsoft Flight Simulator is a popular aircraft flight
simulation product. Other games include Combat Flight Simulator, Age of
Empires(R), Monster Truck Madness(R) racing simulation, Microsoft Baseball,
Microsoft Links, and other sports and action titles. The Microsoft Internet
Gaming Zone 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.
Hardware Peripherals. The Company develops and markets several PC input
devices including the Microsoft Mouse, a hand-held pointing device that
facilitates using the PC. The Microsoft IntelliMouse(R) pointing device with
an electronic eye that tracks movements over surfaces, and works for left- and
right-handed users. The Company also markets several types of keyboards
including the Microsoft Natural(R) Keyboard, an ergonomically designed
keyboard. Microsoft sells various Microsoft SideWinder(R) game controllers and
force feedback joysticks with realistic performance technology to use with PC
games.
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 MSNBC Cable L.L.C., a 24-hour cable
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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 Transpoint L.L.C., a joint venture between Microsoft, First Data
Corporation, and Citibank. Microsoft owns a 49 percent of Avanade, a joint
venture with Andersen Consulting which offers solutions and services based on
Windows 2000.
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(R) books are authored by professional and technical writers, both by
Microsoft employees and independent authors.
Microsoft Press contracts with an independent commercial printer for the
printing 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 books. Books are marketed by independent sales
representatives and by Microsoft Press sales personnel. Internationally,
Microsoft Press has numerous 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, Latin 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.
Customer Groups
The enterprise and partner sales group (EPG) has responsibility for
providing strategic leadership and creating programs for enterprise customers
and partners, assisting the field organization. The organization is
responsible for coordinating the enterprise strategy by industry, market,
partner and customer segment. EPG focuses on enterprise solutions including
large and medium organizations enterprise strategy, industry solutions,
integrated small organization strategy, anti-piracy, sales processes and
readiness; sales and support systems; partner strategy and programs including
global partner management; enterprise services; executive and technical sales
including corporate account technical marketing, industry evangelism and
executive sales events; and global account management. The group also creates
an integrated end-to-end service continuum for enterprise customers.
The industry solutions group includes full-service practices for financial
services, telecommunications, federal and state and local government, and the
educational market .
The network solutions customer group is responsible for introducing the
Company's products and technologies to public infrastructure owners and
Internet Content Providers. The customer group 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.
The consumer customer group has responsibility for activities that target
end users that make individual buying decisions for home PCs. Most sales and
marketing activities aimed at end-user customers are performed by this group,
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
group's sub-segments include direct marketing resellers and retailers.
Product Development
The software industry is characterized by extremely rapid technological
change, which requires constant attention to computing technology trends, and
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.
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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 computing devices. 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
intelligent devices, PCs, servers, 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. Before releasing new software platforms, Microsoft
provides to software vendors a range of development, training, testing
resources, and guidelines for developing applications to software vendors.
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.
During fiscal years 1998, 1999, and 2000, the Company spent $2.60 billion,
$2.97 billion, and $3.78 billion, respectively, on product research and
development activities. Those amounts represented 17.0%, 15.0%, and 16.4%,
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.
In fiscal 2000, Microsoft announced its most significant software research
and development initiative, Microsoft .NET. The fundamental strategy behind
Microsoft .NET is to focus on the shift from individual Web sites or devices
connected to the Internet, to constellations of computers, devices, and
services that work together to deliver broader, richer solutions. Microsoft's
.NET strategy includes the delivery of software as a service, built on the XML
standard; a new user experience that is accessible across and optimized for a
wide range of devices; and the creation of new opportunities for developers to
build Internet services and business more easily. Microsoft .NET builds on
Microsoft's core businesses, including Windows desktop and server operating
systems, enterprise server applications, Microsoft Office, and MSN. Microsoft
will offer a range of .NET products and services including Windows.NET--the
next generation Windows platform designed with customized applications and
services to allow user to control their digital information; MSN.NET--an
integrated consumer experience built on the .NET platform to deliver a more
integrated and personalized experience; subscription services--a set of
consumer-oriented services on the .NET platform that will build on existing
Microsoft entertainment, gaming, education, and productivity products;
Office.NET-- advanced communications and productivity tools; bCentral.NET--
subscription-based services and tools for small and growing businesses
including hosted messaging, commerce services, and customer relationship
management services; and Visual Studio.NET--XML-based programming model and
tools, fully supported by MSDN and Windows DNA 2000 servers.
Manufacturing
Microsoft contracts out most of its manufacturing activity to third parties.
Outside manufacturers produce various retail software packaged products and
hardware peripherals. There are other custom manufacturers Microsoft could use
in the event outsourced manufacturing becomes unavailable from current
vendors.
The Company's remaining manufacturing facilities are located in Puerto Rico
and Ireland. The Irish facility and the Puerto Rico facilities manufacture CD-
ROMs. Microsoft outsources its manufacturing of packaged
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products. Quality control tests are performed on purchased parts, CD-ROMs, and
other products. The chief materials and components used in Microsoft products
include 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.
The Company's sales mix has shifted to OEM and organizational licenses from
packaged products. Also, online distribution of software is increasing.
Operations
Microsoft manages all product fulfillment, licensing, and logistics
services. The Company has regional operations centers in Ireland, Singapore,
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,
the center in Singapore supports the Asia Pacific region, and the center in
the Greater Seattle area supports North and South America. The Company
established Microsoft Licensing Incorporated (MSLI) in Reno, Nevada, a wholly
owned subsidiary, which manages the Company's OEM and certain organizational
licensing operations.
Marketing and Distribution
The Company's sales and marketing group seeks to build long-term
relationships with customers of Microsoft products. The OEM sales group
includes the sales force that works with original equipment manufacturers that
preinstall Microsoft software on their PCs. In addition to the OEM channel,
Microsoft has three major geographic sales and marketing organizations: the
South Pacific and Americas; Europe, Middle East, and Africa; and Asia.
Finished Goods Channels
Distributors and Resellers. The Company licenses and sells its products in
the finished goods channels primarily to and through independent non-exclusive
distributors and resellers. Distributors include Inacom, Ingram Micro,
SoftBank, 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.
Enterprise 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. 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 increase customer
satisfaction by simplifying license administration, payment terms, and the
contract process.
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 system
integrators, value-added resellers (VARs), consultants, custom application
developers, solution developers, Internet service and hosting organizations,
independent content providers, and site builders (companies that build Web
sites for other companies), as well as technical support and training
organizations. Under this business collaboration strategy,
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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 work with Microsoft through the
Microsoft Direct Access program online, quarterly briefings, training, and
action packs.
Certified Professionals. 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. To become an MCP, a candidate must pass a certification
exam that provides a valid and reliable measure of technical proficiency and
expertise. MCP exams are developed with the input of professionals in the
industry and reflect how Microsoft products are used in organizations
throughout the world. The exams are administered by independent organizations
at more than 1,400 testing centers around the world. MCPs receive access to
technical and product information through an MCP Web site, MSDN Online
Certified Membership, and invitations to conferences, technical training
sessions, and special events. Candidates may pass additional Microsoft
certification exams to further qualify their skills with Microsoft BackOffice
products, development tools, and desktop applications.
Consulting Services. Microsoft Consulting Service 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.
Microsoft Consulting Services also works with technology solutions providers
to enable them to offer a wide range of Microsoft product-related services
backed by high levels of technical skill and knowledge.
International Sales Sites. The Company has established marketing and/or
support subsidiaries in more than 70 countries. Product is generally delivered
by the Company's owned or outsourced manufacturing operations, which are
located in the geographical region in which the product was sold. By
organizing geographically, the Company is able to provide service to
international channel customers and access to Microsoft professionals located
in the same region to serve their specific needs. Subsidiaries have the
responsibility for selling products to customers, managing licensing programs,
and providing support to all types of customers based in international
countries. 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.
Product Support
The Company provides product support coverage options aligned to the
customer segments, partner segments, and communities. 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. Support offerings
include the Alliance program, tailored for large enterprises running mission-
critical applications on Microsoft platforms; the Premier program for
enterprises and technical account managers needing regular managed support;
the Authorized Premier Support for all types of businesses who work jointly
with Microsoft and Microsoft Certified Support Center (MCSC) providers; and
the Professional program for small organizations, developers and OEMs. The
Personal program for home users, which provides free online self-help
resources and paid assisted phone support. Users have access to
troubleshooting "wizards" and Microsoft's KnowledgeBase, an online library of
thousands of technical articles that is updated regularly with useful
information regarding Microsoft products. Additionally, several support
offerings include Microsoft TechNet and Microsoft Developer Network
information subscription services.
Support personnel are located in various sites in the United States and
around the world. Certain support is also supplied by qualified third-party
support organizations.
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As a supplement or alternative to direct support, the Company enhances the
third-party support channel by providing Microsoft Certified Solution
Providers with education, training, tools, and support. Microsoft Certified
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,
multi-vendor support, and integration services.
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 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, Compaq, Dell, eMachines,
Fujitsu, Fujitsu Siemens Computers, Gateway, Hewlett Packard, IBM, Micron,
NEC, Samsung, Sony, and Toshiba. A substantial amount of OEM business is also
conducted with system builders, which are low-volume customized PC vendors.
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 uses broad consumer
media (television, radio, the Internet, and business publications) and trade
publications. Microsoft has programs under which qualifying resellers and OEMs
are reimbursed for certain advertising expenditures. The company has also
formed an alliance with Best Buy to provide for joint marketing in Best Buy's
retail stores, online, and through other vehicles to demonstrate and sell MSN
Internet access and connectivity solutions.
Customers
The Company's customers include consumers, small and medium-sized
organizations, enterprises, dotcoms, educational institutions, ISPs,
application developers, and OEMs. Most consumers of Microsoft products are
individuals in businesses, government agencies, educational institutions, and
at home. The consumers and organizations obtain Microsoft products primarily
through resellers and OEMs, which include certain Microsoft products with
their computing hardware. Notes to Financial Statements (see Item 8) quantify
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.
Competition
The software business is intensely competitive and subject to extremely
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 platform. The Company continues to face
movements from PC-based applications to server-based applications or Web-based
application hosting services, from proprietary software to open source
software, and from PCs to Internet-based devices. A number of Microsoft's most
significant competitors, including IBM, Sun Microsystems, Oracle, and AOL, 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 also 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.
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Microsoft faces formidable competition in these new areas and in all areas
of its current business activity, including competition from many companies
much larger than Microsoft. 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. The Company also faces
relentless competition from software pirates who unlawfully copy and
distribute Microsoft's copyrighted software products, depriving the Company of
large amounts of revenue on an annual basis.
Operating Systems. Microsoft's 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 computers of their own manufacture. 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, 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.
With an increased attention toward open-source software, the Linux operating
system has gained increasing acceptance. Several computer manufacturers
preinstall Linux on PC Servers and many leading software developers have
written applications that run on Linux. Microsoft Windows operating systems
are also threatened by alternative platforms such as those based on Internet
browsing software and Java technology promoted by AOL and Sun Microsystems.
Business Solutions. 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, Hewlett-Packard, 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, that
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.), 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. Additionally, Web-based application
hosting services provide an alternative to PC-based applications such as
Microsoft Office.
Developer Tools. The Company's developer products compete against offerings
from Borland, Macromedia, Oracle, Sun Microsystems, Sybase, Symantec, and
other companies.
Consumer Platforms. A wide variety of companies develop operating systems
for information appliances, including Palm, Apple, Motorola, 3Com, Psion
Software, Sun Microsystems, Microworkz, Be, Inc., WindRiver, Symbian and
others. The Company's WebTV offerings and other multimedia consumer products
face competitors such as AOL, Oracle, Liberate Technologies, 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.
E-Commerce. Microsoft competes with many companies in the e-commerce
business and its major components, including business-to-consumer, business-
to-business, procurement, and supply chain integration. In the development and
marketing of Internet and intranet solutions, major commerce software
competitors
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provide many different ranges of products and solutions that compete with
Microsoft, including IBM, Oracle, AOL, Sun Microsystems, Broadvision, and many
others.
Online Services. Microsoft's online services network, MSN, faces formidable
competition from AOL (including its CompuServe unit), 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. In addition, the ease of entry into Internet services has allowed
numerous Web-based service companies to build significant businesses in areas
such as e-mail, electronic commerce, Web search engines, directories, and
information of numerous types. Competitors include AOL, Yahoo, Excite, Lycos,
Infoseek, AltaVista, and many others. 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, magazines and
broadcast TV.
Consumer Software and Hardware. The Company's Consumer Group faces smaller,
but focused and branded competitors, particularly in the areas of hardware,
learning, and entertainment. Consolidation in this area of software
development has made certain competitors even stronger. Competitors include
Intuit, Electronic Arts, Mattel (The Learning Company), Hasbro, Logitech,
Voyager, Cendant, and Dorling Kindersley. Still other competitors own branded
content, such as Disney and Lucas Arts.
Additionally, PC-based games and the Company's future Xbox compete and will
compete 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.
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 computing industry.
Employees
As of June 30, 2000, the Company employed approximately 39,100 people on a
full-time basis, 27,000 in the United States and 12,100 internationally. Of
the total, 16,000 were in product research and development, 18,200 in sales,
marketing, and support, 1,500 in manufacturing and distribution, and 3,400 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 is 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 6.8 million square
feet of office building space located in King County, Washington situated on
two sites that total approximately 306 acres of land. The Company recently
completed the construction of an office building comprising approximately
145,000 square feet of space and is constructing two buildings with
approximately 495,000 square feet of space that will be occupied in the winter
of 2002. The Company owns 4.8 million square feet of its corporate campus and
leases many buildings in the Puget Sound Region. The Company has leased
several buildings totaling approximately 710,000 square feet of space that
will be occupied by the fall of 2000. To accommodate expansion needs the
Company has an option to purchase 150 acres of land in Issaquah, Washington.
The Company leases many sites domestically totaling approximately 2.4
million square feet of office building space. The construction of a 575,000
square foot campus in the San Francisco, California area was recently
completed.
The Company leases many sites internationally totaling approximately 3.7
million square feet. The Company's European operations center and localization
division consist of a 345,000 square foot campus situated on 17 acres
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in Dublin, Ireland. The Ireland facilities are partially owned by the Company.
The Company leases a 45,000 square-foot disk duplication facility in Humacao,
Puerto Rico and leases a 36,000 square-foot facility in Singapore for its Asia
Pacific operations center. The Company has large office building space leased
in 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
The information set forth in Notes to Financial Statements--Contingencies on
pages 39-41 of the 2000 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 2000.
Executive Officers of the Registrant
The executive officers of Microsoft as of September 8, 2000 were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<C> <C> <S>
William H. Gates........ 44 Chairman of the Board; Chief Software Architect
Steven A. Ballmer....... 44 President; Chief Executive Officer
Robert J. Herbold....... 58 Executive Vice President; Chief Operating
Officer
William H. Neukom....... 58 Executive Vice President, Law and Corporate
Affairs; Secretary
James E. Allchin........ 48 Group Vice President, Platforms
Orlando Ayala Lozano.... 44 Group Vice President, Sales, Marketing and
Services
Richard E. Belluzzo..... 46 Group Vice President, Personal Services and
Devices
Paul A. Maritz.......... 45 Group Vice President, Platforms Strategy and
Developer
Robert L. Muglia........ 40 Group Vice President, .NET Services
Jeffrey S. Raikes....... 42 Group Vice President, Productivity and Business
Services
Robert J. Bach.......... 38 Senior Vice President, Home and Retail
Brad Chase.............. 40 Senior Vice President, MSN.com
David Cole.............. 38 Senior Vice President, Personal Services
Platform
John G. Connors......... 41 Senior Vice President, Finance and
Administration; Chief Financial Officer
Jean-Philippe Courtois.. 40 Senior Vice President; President, Microsoft
Europe, Middle East, and Africa
Jon DeVaan.............. 39 Senior Vice President, TV Service and Platform
Paul Flessner........... 41 Senior Vice President, .NET Enterprise Server
Paul H. Gross........... 39 Senior Vice President, Collaboration and
Mobility
Joachim Kempin.......... 58 Senior Vice President, OEM
Michel Lacombe.......... 49 Senior Vice President; Chairman, Microsoft
Europe, Middle East, and Africa
Brian MacDonald......... 38 Senior Vice President, Subscription Service
Craig Mundie............ 51 Senior Vice President, Consumer Strategy
Richard F. Rashid....... 48 Senior Vice President, Research
Steven J. Sinofsky...... 35 Senior Vice President, Office
Brian Valentine......... 40 Senior Vice President, Windows
David Vaskevitch........ 47 Senior Vice President, Business Applications
Bernard P. Vergnes...... 55 Senior Vice President; Chairman Emeritus,
Microsoft Europe, Middle East, and Africa
</TABLE>
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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 took on 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 has been President since July 1998, and prior to that, he
had served as Executive Vice President, Sales and Support since February 1992.
He was Senior Vice President, Systems Software from 1989 to 1992. 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. Neukom was named Executive Vice President, Law and Corporate Affairs in
October 1999. He had been Senior Vice President, Law and Corporate Affairs
since February 1994. He joined Microsoft in 1985 as Vice President, Law and
Corporate Affairs.
Mr. Allchin was named Group Vice President, Platforms 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,
Senior Vice President, Business Systems Division since November 1994, and had
been Vice President, Business Systems Division since July 1991. Mr. Allchin
joined Microsoft in 1991.
Mr. Ayala was named Group Vice President, Sales, Marketing and Services 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 May 1991
as Senior Director of the Latin America Region.
Mr. Belluzzo was named Group Vice President, Personal Services and Devices
in August 2000. He joined Microsoft as Group Vice President, Consumer and
Commence in September 1999. Mr. Belluzzo had been Chairman of the Board and
Chief Executive Officer, Silicon Graphics, Inc. since January 1998. Prior to
his employment at Silicon Graphics, Inc., Belluzzo was employed by the
Hewlett-Packard Company for 22 years, serving since 1995 as Executive Vice
President and General Manager of the computer organization.
Mr. Maritz was named Group Vice President, Platforms Strategy and Developer
in March 2000. He had been Group Vice President, Developer since March 1999.
He was previously Group Vice President, Platforms and Applications since
October 1996 and before holding that position was Group Vice President,
Platforms since May 1995. Mr. Maritz had been Senior Vice President, Product
and Technology Strategy since 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. On
September 13, 2000, Microsoft announced that Mr. Maritz is retiring from the
Company, but will continue to serve as a consultant to Microsoft on strategic
and business issues.
Mr. Muglia was named Group Vice President, .NET Services in 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 and was Vice President,
Developer Tools since 1995. He joined Microsoft in January 1988.
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
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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. Bach was named Senior Vice President, Home and Retail 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. Chase was named Senior Vice President, MSN.com in December 1999. He had
been Senior Vice President, Consumer and Commerce since September 1999. Mr.
Chase had been Vice President, Consumer and Commerce since March 1999. He was
Vice President, Developer Relations and Windows Marketing. Mr. Chase joined
Microsoft in July 1987.
Mr. Cole was named Senior Vice President, Personal Services Platform in
August 2000. He had been Senior Vice President, Consumer Services since
December 1999. Before holding that position, he had been Vice President,
Consumer Windows since March 1999. 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, Finance and Administration, 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 January 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 Service and Platform 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.
Mr. Flessner was named Senior Vice President, .NET Enterprise Server 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 assumed responsibility for
the engineering of Microsoft SQL Server in 1995. He joined Microsoft in 1994.
Mr. Gross was named Senior Vice President, Collaboration and Mobility in
March 2000. He had been Senior Vice President, Server Applications since
December 1999 and Vice President, Server Applications since March 1999. Before
holding that position, he had been Vice President, Developer Tools. Mr. Gross
joined Microsoft in September 1996. Before joining Microsoft, he was Senior
Vice President of Research and Development at Borland International Inc.
Mr. Kempin was named Senior Vice President, OEM in August 1993. He had been
Vice President, OEM Sales since 1987. Mr. Kempin joined Microsoft in 1983.
Mr. Lacombe is Chairman, Microsoft Europe, Middle East, and Africa. He was
named Senior Vice President, Europe, Middle East, and Africa 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. Mr.
Lacombe joined Microsoft in 1983.
Mr. MacDonald was named Senior Vice President, Subscription Service in
August 2000. He had been Vice President, New Application Technologies since
December 1999. Before holding that position, he started and led the team that
created the Microsoft Outlook messaging and collaboration client. He joined
Microsoft in 1989.
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Mr. Mundie is Senior Vice President, Consumer Strategy. He was named Senior
Vice President, Consumer Platforms 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. Rashid was named Senior Vice President, Research in May 2000. He had
been Vice President, Research since July 1994. He joined Microsoft in
September 1991.
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 July 1989.
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, 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.
Mr. Vergnes is a Senior Vice President and Chairman Emeritus, Microsoft
Europe, Middle East, and Africa. He was named President, Microsoft Europe in
April 1992. He had been Vice President, Europe since 1989. Mr. Vergnes joined
Microsoft in 1983.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The information set forth on page 43 of the 2000 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.1.
Reference is also made to the information on put warrants described in the
notes to financial statements incorporated herein by reference and filed
herewith as Exhibit 13.4. All such transactions are exempt from registration
under Section 4 (2) of the Securities Act of 1933. Each transaction was
privately negotiated and each offeree and purchaser was an accredited
investor/qualified institutional buyer. No public offering or public
solicitation was used by the registrant in the placement of these securities.
On June 2, 2000, the Company issued an aggregate of 37,530 of its common
shares pursuant to the acquisition by the Company of substantially all of the
assets of NetGames USA, Inc., a Kansas corporation ("NetGames") owned by
eleven shareholders. All of the Company common shares issued in this
transaction were issued in a non-public offering pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"1933 Act"), under Section 4(2) of the 1933 Act. This sale was made without
general solicitation or advertising. The Company has filed a Registration
Statement on form S-3 covering the resale of such securities. All net proceeds
from the sale of such securities will go to the selling shareholders who offer
and sell their shares. The Company has not received and will not receive any
proceeds from the sale of these common shares other than the assets and
liabilities of NetGames.
Item 6. Selected Financial Data
The information set forth on the inside front cover of the 2000 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 15-24 of the 2000 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 page 23 of the 2000 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 for the Company and independent auditors'
report set forth on pages 14, 25-42, and 45 of the 2000 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, 2000
. Cash Flows Statements for the three years ended June 30, 2000
. Balance Sheets as of June 30, 1999 and 2000
. Stockholders' Equity Statements for the three years ended June 30, 2000
. Notes to Financial Statements
. Independent Auditors' Report
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
18
<PAGE>
PART III
Item 10. Directors 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 8, 2000, for the Annual Meeting of
Shareholders to be held November 9, 2000 (the "Proxy Statement"). Such
information is incorporated herein by reference.
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 under the caption "Certain Relationships and
Related Transactions" on page 8 of the Proxy Statement is incorporated herein
by reference. The information in Notes to Financial Statements--Operational
Transactions on pages 38 through 39 of the 2000 Annual Report to Shareholders
is incorporated herein by reference and is filed herewith as Exhibit 13.4.
19
<PAGE>
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
The Company filed one report on Form 8-K during the quarter ended June
30, 2000. The Company disclosed that on June 7, 2000, the United States
District Court for the District of Columbia entered a Final Judgment and
Memorandum and Order in the case United States of America v. Microsoft
Corporation. Also, the Company disclosed that on June 13, 2000, it filed a
Notice of Appeal and Motion for a Stay of the Judgment Pending Appeal,
appealing to the United States Court of Appeals for the District of
Columbia Circuit the Final Judgment and the Findings of Fact and
Conclusions of Law entered on April 3, 2000 finding that Microsoft violated
the federal and state antitrust laws. In addition, the United States Court
of Appeals for the District of Columbia Circuit entered an Order on June
13, 2000 agreeing to hear the appeal by the court sitting en banc.
(c) Exhibit Listing
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of Microsoft Corporation (1)
3.2 Bylaws of Microsoft Corporation (1)
10.1 Microsoft Corporation 1991 Stock Option Plan (2)
10.2 Microsoft Corporation 1981 Stock Option Plan (3)
10.3 Microsoft Corporation 1999 Stock Option Plan for Non-Employee
Directors (4)
10.4 Microsoft Corporation Stock Option Plan for Consultants and
Advisors (5)
10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan
10.6 Microsoft Corporation Savings Plus Plan
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation
and First Interstate Bank of Washington (6)
10.8 Form of Indemnification Agreement (6)
11. Computation of Earnings Per Share (7)
13.1 Quarterly and Market Information Incorporated by Reference to Page
43 of 2000 Annual Report to Shareholders ("2000 Annual Report")
13.2 Selected Financial Data Incorporated by Reference to the inside
front cover of 2000 Annual Report
13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 15-24 of
2000 Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 14, 25-42,
and 45 of 2000 Annual Report
21. Subsidiaries of Registrant
23. Independent Auditors' Consent
27. Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1999.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended June 30, 1997.
20
<PAGE>
(3) Incorporated by reference to Registration Statement 33-37623 on Form S-8.
(4) Incorporated by reference to Registration Statement 333-91755 on Form S-8.
(5) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(6) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
(7) Incorporated by reference to Exhibit 13.4 filed herein.
21
<PAGE>
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 28, 2000.
MICROSOFT CORPORATION
/s/ John G. Connors
By __________________________________
John G. Connors
Senior Vice President, Finance
and
Administration; 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 Registrant
and in the capacities indicated on September 28, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Chairman of the Board of Directors and
______________________________________ Chief Software Architect
William H. Gates
/s/ Steven A. Ballmer President and Chief Executive Officer
______________________________________
Steven A. Ballmer
/s/ Paul G. Allen Director
______________________________________
Paul G. Allen
Director
______________________________________
Richard A. Hackborn
/s/ David F. Marquardt Director
______________________________________
David F. Marquardt
/s/ Ann McLaughlin Director
______________________________________
Ann McLaughlin
/s/ Wm. G. Reed, Jr. Director
______________________________________
Wm. G. Reed, Jr.
/s/ Jon A. Shirley Director
______________________________________
Jon A. Shirley
/s/ John G. Connors Senior Vice President, Finance and
______________________________________ Administration; Chief Financial Officer
John G. Connors
</TABLE>
22
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of Microsoft Corporation (1)
3.2 Bylaws of Microsoft Corporation (1)
10.1 Microsoft Corporation 1991 Stock Option Plan (2)
10.2 Microsoft Corporation 1981 Stock Option Plan (3)
10.3 Microsoft Corporation 1999 Stock Option Plan for Non-Employee
Directors (4)
10.4 Microsoft Corporation Stock Option Plan for Consultants and
Advisors (5)
10.5 Microsoft Corporation 1997 Employee Stock Purchase Plan
10.6 Microsoft Corporation Savings Plus Plan
10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation
and First Interstate Bank of Washington (6)
10.8 Form of Indemnification Agreement (6)
11. Computation of Earnings Per Share (7)
13.1 Quarterly and Market Information Incorporated by Reference to Page
43 of 2000 Annual Report to Shareholders ("2000 Annual Report")
13.2 Selected Financial Data Incorporated by Reference to the inside
front cover of 2000 Annual Report
13.3 Management's Discussion and Analysis of Results of Operations and
Financial Condition Incorporated by Reference to Pages 15-24 of
2000 Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 14, 25-42,
and 45 of 2000 Annual Report
21. Subsidiaries of Registrant
23. Independent Auditors' Consent
27. Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1999.
(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 Registration Statement 333-91755 on Form S-8.
(5) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1994.
(6) Incorporated by reference to Annual Report on Form 10-K For The Fiscal Year
Ended June 30, 1993.
(7) Incorporated by reference to Exhibit 13.4 filed herein.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>MICROSOFT'S 1997 EMPLOYEE STOCK PURCHASE PLAN
<TEXT>
<PAGE>
EXHIBIT 10.5
Microsoft Corporation
1997 Employee Stock Purchase Plan
As approved by the Board of Directors
on August 10, 1996 and the
Shareholders on November 12, 1996
<PAGE>
MICROSOFT CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
Microsoft Corporation (the "Company") does hereby establish its 1997
Employee Stock Purchase Plan as follows:
1. Purpose of the Plan. The purpose of this Plan is to provide eligible
-------------------
employees who wish to become shareholders in the Company a convenient method of
doing so. It is believed that employee participation in the ownership of the
business will be to the mutual benefit of both the employees and the Company.
2. Definitions.
-----------
2.1 "Base pay" means regular straight time earnings, plus review
cycle bonuses and overtime payments, payments for incentive compensation, and
other special payments except to the extent that any such item is specifically
excluded by the Board of Directors of the Company (the "Board").
2.2 "Account" shall mean the funds accumulated with respect to an
individual employee as a result of deductions from his paycheck for the purpose
of purchasing stock under this Plan. The funds allocated to an employee's
account shall remain the property of the respective employee at all times but
may be commingled with the general funds of the Company.
3. Employees Eligible to Participate. Any employee of the Company or any
---------------------------------
of its subsidiaries who is in the employ of the Company or subsidiary on an
offering commencement date is eligible to participate in that offering, except
(a) employees whose customary employment is less than 20 hours per week, (b)
employees whose customary employment is for not more than five months in any
calendar year, and (c) employees of a subsidiary that offers its employees the
opportunity to participate in an employee stock purchase plan covering such
subsidiary's common stock.
4. Offerings. There will be twelve separate consecutive six-month
---------
offerings pursuant to the Plan. The first offering shall commence on January 1,
1997. Thereafter, offerings shall commence on each subsequent July 1 and January
1, and the final offering under this Plan shall commence on July 1, 2002 and
terminate on December 31, 2002. In order to become eligible to purchase shares,
an employee must sign an Enrollment Agreement, and any other necessary papers on
or before the commencement date (January 1 or July 1) of the particular offering
in which he wishes to participate. Participation in one offering under the Plan
shall neither limit, nor require, participation in any other offering.
5. Price. The purchase price per share shall be the lesser of (1) 85% of
-----
the fair market value of the stock on the offering date; or (2) 85% of the fair
market value of the stock on the last business day of the offering. Fair market
value shall mean the closing bid price as reported on the National Association
of Securities Dealers Automated Quotation System or, if the stock is traded on a
stock exchange, the closing price for the stock on the principal such exchange.
6. Offering Date. The "offering date" as used in this Plan shall be the
-------------
commencement date of the offering, if such date is a regular business day, or
the first regular business day following such commencement date. A different
date may be set by resolution of the Board.
7. Number of Shares to be Offered. The maximum number of shares that
------------------------------
will be offered under the Plan is 80,000,000 shares. The shares to be sold to
participants under the Plan will be common stock of the Company. If the total
number of shares for which options are to be granted on any date in accordance
with Section 10 exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available in as nearly a uniform manner as shall be practicable and as
it shall determine to be equitable. In such event, the payroll deductions to be
made pursuant to the
2
<PAGE>
authorizations therefor shall be reduced accordingly and the Company shall give
written notice of such reduction to each employee affected thereby.
8. Participation.
-------------
8.1 An eligible employee may become a participant by completing an
Enrollment Agreement provided by the Company and filing it with Shareholder
Services prior to the Commencement of the offering to which it relates.
8.2 Payroll deductions for a participant shall commence on the
offering date, and shall end on the termination date of such offering unless
earlier terminated by the employee as provided in Paragraph 14.
8.3 Payroll deduction shall be the sole means of accumulating funds
in a participant's account, except in foreign countries where payroll deductions
are not allowed, in which case the Company may authorize alternative payment
methods.
9. Payroll Deductions.
------------------
9.1 At the time a participant files his authorization for a payroll
deduction, he shall elect to have deductions made from his pay on each payday
during the time he is a participant in an offering at any non-fractional
percentage rate between 1% and 10%.
9.2 All payroll deductions made for a participant shall be credited
to his account under the Plan. A participant may not make any separate cash
payment into such account nor may payment for shares be made other than by
payroll deduction.
9.3 A participant may discontinue his participation in the Plan as
provided in Section 14, but no other change can be made during an offering and,
specifically, a participant may not alter the rate of his payroll deductions for
that offering.
10. Granting of Option. On the offering date, this Plan shall be deemed
------------------
to have granted to the participant an option for as many full shares as he will
be able to purchase with the payroll deductions credited to his account during
his participation in that offering. Notwithstanding the foregoing, no
participant may purchase more than 8,000 shares of stock during any single
offering.
11. Exercise of Option. Each employee who continues to be a participant
------------------
in an offering on the last business day of that offering shall be deemed to have
exercised his option on such date and shall be deemed to have purchased from the
Company such number of full shares of common stock reserved for the purpose of
the Plan as his accumulated payroll deductions on such date will pay for at the
option price.
12. Employee's Rights as a Shareholder. No participating employee shall
----------------------------------
have any right as a shareholder with respect to any shares until the shares have
been purchased in accordance with Section 11 above and the stock has been issued
by the Company.
13. Evidence of Stock Ownership.
---------------------------
13.1 Promptly following the end of each offering, the number of
shares of common stock purchased by each participant shall be deposited into an
account established in the participant's name at a stock brokerage or other
financial services firm designated by the Company (the "ESPP Broker").
13.2 The participant may direct, by written notice to the Company at
the time of his enrollment in the Plan, that his ESPP Broker account be
established in the names of the participant and
3
<PAGE>
one other person designated by the participant, as joint tenants with right of
survivorship, tenants in common, or community property, to the extent and in the
manner permitted by applicable law.
13.3 A participant shall be free to undertake a disposition (as that
term is defined in Section 424(c) of the Code) of the shares in his account at
any time, whether by sale, exchange, gift, or other transfer of legal title, but
in the absence of such a disposition of the shares, the shares must remain in
the participant's account at the ESPP Broker until the holding period set forth
in Section 423(a) of the Code has been satisfied. With respect to shares for
which the Section 423(a) holding period has been satisfied, the participant may
move those shares to another brokerage account of participant's choosing or
request that a stock certificate be issued and delivered to him.
13.4 A participant who is not subject to payment of U.S. income taxes
may move his shares to another brokerage account of his choosing or request that
a stock certificate be issued and delivered to him at any time, without regard
to the satisfaction of the Section 423(a) holding period.
14. Withdrawal.
----------
14.1 An employee may withdraw from an offering, in whole but not in
part, at any time prior to the last business day of such offering by delivering
a Withdrawal Notice to the Company, in which event the Company will refund the
entire balance of his deductions as soon as practicable thereafter.
14.2 To re-enter the Plan, an employee who has previously withdrawn
must file a new Enrollment Agreement in accordance with Section 8.1. The
employee's re-entry into the Plan will not become effective before the beginning
of the next offering following his withdrawal, and if the withdrawing employee
is an officer of the Company within the meaning of Section 16 of the Securities
Exchange Act of 1934 he may not re-enter the Plan before the beginning of the
second offering following his withdrawal.
15. Carryover of Account. At the termination of each offering the Company
--------------------
shall automatically re-enroll the employee in the next offering, and the balance
in the employee's account shall be used for option exercises in the new
offering, unless the employee has advised the Company otherwise. Upon
termination of the Plan, the balance of each employee's account shall be
refunded to him.
16. Interest. No interest will be paid or allowed on any money in the
--------
accounts of participating employees.
17. Rights Not Transferable. No employee shall be permitted to sell,
-----------------------
assign, transfer, pledge, or otherwise dispose of or encumber either the payroll
deductions credited to his account or any rights with regard to the exercise of
an option or to receive shares under the Plan other than by will or the laws of
descent and distribution, and such right and interest shall not be liable for,
or subject to, the debts, contracts, or liabilities of the employee. If any
such action is taken by the employee, or any claim is asserted by any other
party in respect of such right and interest whether by garnishment, levy,
attachment or otherwise, such action or claim will be treated as an election to
withdraw funds in accordance with Section 14.
18. Termination of Employment. Upon termination of employment for any
-------------------------
reason whatsoever, including but not limited to death or retirement, the balance
in the account of a participating employee shall be paid to the employee or his
estate.
19. Amendment or Discontinuance of the Plan. The Board shall have the
---------------------------------------
right at any time and without notice to amend, modify or terminate the Plan, and
to authorize by resolution changes to the application of eligibility criteria in
Section 3 to employees of the Company's subsidiaries outside the United States
when the Board deems such changes to be necessary and appropriate according to
laws applicable to such non-U.S. subsidiaries; provided, that no employee's
existing rights under any offering already made under Section 4 hereof may be
adversely affected thereby, and provided further that no
4
<PAGE>
such amendment of the Plan shall, except as provided in Section 20, increase
above 80,000,000 shares the total number of shares to be offered unless
shareholder approval is obtained therefor.
20. Changes in Capitalization. In the event of reorganization,
-------------------------
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, offerings of rights, or any other change in the structure of the
common shares of the Company, the Board may make such adjustment, if any, as it
may deem appropriate in the number, kind, and the price of shares available for
purchase under the Plan, and in the number of shares which an employee is
entitled to purchase.
21. Share Ownership. Notwithstanding anything herein to the contrary, no
---------------
employee shall be permitted to subscribe for any shares under the Plan if such
employee, immediately after such subscription, owns shares (including all shares
which may be purchased under outstanding subscriptions under the Plan)
possessing 5% or more of the total combined voting power or value of all classes
of shares of the Company or of its parent or subsidiary corporations. For the
foregoing purposes the rules of Section 425(d) of the Internal Revenue Code of
1986 shall apply in determining share ownership. In addition, no employee shall
be allowed to subscribe for any shares under the Plan which permits his rights
to purchase shares under all "employee stock purchase plans" of the Company and
its subsidiary corporations to accrue at a rate which exceeds $25,000 of the
fair market value of such shares (determined at the time such right to subscribe
is granted) for each calendar year in which such right to subscribe is
outstanding at any time.
22. Administration. The Plan shall be administered by the Board. The
--------------
Board may delegate any or all of its authority hereunder to such committee of
the Board or officer of the Company as it may designate. The administrator
shall be vested with full authority to make, administer, and interpret such
rules and regulations as it deems necessary to administer the Plan, and any
determination, decision, or action of the administrator in connection with the
construction, interpretation, administration, or application of the Plan shall
be final, conclusive, and binding upon all participants and any and all persons
claiming under or through any participant.
23. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received by Shareholder Services of the Company or when received in
the form specified by the Company at the location, or by the person, designated
by the Company for the receipt thereof.
24. Termination of the Plan. This Plan shall terminate at the earliest of
-----------------------
the following:
24.1 December 31, 2002;
24.2 The date of the filing of a Statement of Intent to Dissolve by
the Company or the effective date of a merger or consolidation wherein the
Company is not to be the surviving corporation, which merger or consolidation is
not between or among corporations related to the Company. Prior to the
occurrence of either of such events, on such date as the Company may determine,
the Company may permit a participating employee to exercise the option to
purchase shares for as many full shares as the balance of his account will allow
at the price set forth in accordance with Section 5. If the employee elects to
purchase shares, the remaining balance of his account will be refunded to him
after such purchase.
24.3 The date the Board acts to terminate the Plan in accordance with
Section 19 above.
24.4 The date when all shares reserved under the Plan have been
purchased.
25. Limitations on Sale of Stock Purchased Under the Plan. The Plan is
-----------------------------------------------------
intended to provide common stock for investment and not for resale. The Company
does not, however, intend to restrict or influence any employee in the conduct
of his own affairs. An employee, therefore, may sell stock purchased under the
Plan at any time he chooses, subject to compliance with any applicable Federal
or state securities laws. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET
FLUCTUATIONS IN THE PRICE OF THE STOCK.
5
<PAGE>
26. Governmental Regulation. The Company's obligation to sell and deliver
-----------------------
shares of the Company's common stock under this Plan is subject to the approval
of any governmental authority required in connection with the authorization,
issuance, or sale of such shares.
[The number of shares in Sections 7, 10, and 19 have been increased to reflect
the 2-for-1 stock splits in December 1996, February 1998, and March 1999.]
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>MICROSOFT CORPORATION SAVINGS PLUS PLAN
<TEXT>
<PAGE>
EXHIBIT 10.6
MICROSOFT CORPORATION
SAVINGS PLUS 401(k) PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS.................................................................................................. 2
1.1 BENEFICIARY.................................................................................................... 2
1.2 CODE........................................................................................................... 2
1.3 COMPENSATION................................................................................................... 2
1.4 EMPLOYEE....................................................................................................... 2
1.5 ELIGIBLE EMPLOYEE.............................................................................................. 2
1.6 EMPLOYER....................................................................................................... 5
1.7 ERISA.......................................................................................................... 6
1.8 PARTICIPANT.................................................................................................... 6
1.9 PLAN........................................................................................................... 6
1.10 PLAN ADMINISTRATOR............................................................................................. 6
1.11 PLAN YEAR...................................................................................................... 6
1.12 TRUST FUND..................................................................................................... 6
1.13 TRUSTEE........................................................................................................ 6
ARTICLE II ELIGIBILITY TO PARTICIPATE IN PLAN.......................................................................... 7
2.1 ELIGIBILITY AND ENTRY DATE..................................................................................... 7
2.2 REEMPLOYMENT................................................................................................... 7
2.3 ELECTION AGAINST PARTICIPATION................................................................................. 7
2.4 ENTRY DATES.................................................................................................... 7
ARTICLE III EMPLOYEE CONTRIBUTIONS..................................................................................... 8
3.1 ELECTION TO DEFER.............................................................................................. 8
3.2 DEFERRAL ELECTION DATES........................................................................................ 8
3.3 TERMINATING AN ELECTION TO DEFER............................................................................... 9
3.4 DISTRIBUTION OF EXCESS DEFERRALS............................................................................... 9
ARTICLE IV EMPLOYER MATCHING CONTRIBUTIONS AND FORFEITURES............................................................. 11
4.1 EMPLOYER MATCHING CONTRIBUTIONS................................................................................ 11
4.2 ALLOCATION OF FORFEITURES...................................................................................... 12
ARTICLE V VESTING - YEARS OF SERVICE................................................................................... 14
5.1 EMPLOYEE CONTRIBUTIONS......................................................................................... 14
5.2 EMPLOYER CONTRIBUTIONS......................................................................................... 14
5.3 YEARS OF SERVICE............................................................................................... 15
5.4 HOUR OF SERVICE................................................................................................ 16
5.5 PERIOD OF SEVERANCE............................................................................................ 16
5.6 FORFEITURES.................................................................................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI PARTICIPANTS' ACCOUNTS AND INVESTMENTS...................................................................... 18
6.1 INDIVIDUAL ACCOUNTS............................................................................................. 18
6.2 INVESTMENT FUNDS................................................................................................ 18
6.3 CHANGING ACCOUNT INVESTMENTS.................................................................................... 19
6.4 PROCEDURES...................................................................................................... 19
6.5 VALUATION OF ACCOUNTS........................................................................................... 19
ARTICLE VII PAYMENT OF ACCOUNT BALANCES UPON TERMINATION, DEATH, DISABILITY, QUALIFIED DOMESTIC RELATIONS ORDERS,
DIRECT ROLLOVERS, SALE OF TRADE OR BUSINESS................................................................ 21
7.1 TERMINATION OF EMPLOYMENT....................................................................................... 21
7.2 PAYMENT AT 59-1/2............................................................................................... 21
7.3 PAYMENT OF ACCOUNT BALANCES UPON DEATH.......................................................................... 22
7.4 PAYMENT OF ACCOUNT BALANCES UPON DISABILITY..................................................................... 23
7.5 EARLY RETIREMENT................................................................................................ 23
7.6 DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS......................................................... 23
7.7 SALE OF TRADE OR BUSINESS....................................................................................... 25
7.8 NOTICE OF RIGHT TO DEFER PAYMENT................................................................................ 26
7.9 DIRECT ROLLOVER DISTRIBUTIONS................................................................................... 27
ARTICLE VIII HARDSHIP WITHDRAWALS...................................................................................... 29
ARTICLE IX LIMITATIONS ON EMPLOYEE AND EMPLOYER CONTRIBUTIONS.......................................................... 32
9.1 LIMITATIONS ON TOTAL CONTRIBUTIONS TO ACCOUNTS.................................................................. 32
9.2 AVERAGE ACTUAL DEFERRAL PERCENTAGE TESTS........................................................................ 32
9.3 ELECTIVE DEFERRALS OR QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS UNDER TWO OR MORE PLANS OR ARRANGEMENTS......... 33
9.4 ELECTIVE DEFERRALS, QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS, AND COMPENSATION OF FAMILY MEMBERS............... 33
9.5 ACTIONS AVAILABLE WHEN TESTS UNSATISFIED........................................................................ 34
9.6 DISTRIBUTION OF EXCESS CONTRIBUTIONS............................................................................ 34
9.7 AVERAGE CONTRIBUTIONS PERCENTAGE TESTS.......................................................................... 35
9.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.................................................................. 36
9.9 DEFINITIONS APPLICABLE TO DISCRIMINATION TESTS.................................................................. 36
ARTICLE X ROLLOVER CONTRIBUTIONS....................................................................................... 40
10.1 PERMITTED ROLLOVERS............................................................................................. 40
10.2 VESTING AND ACCOUNTING.......................................................................................... 40
10.3 DISTRIBUTION UPON TERMINATION................................................................................... 40
ARTICLE XI ADMINISTRATION.............................................................................................. 41
11.1 NAMED FIDUCIARY................................................................................................. 41
</TABLE>
ii
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<TABLE>
<S> <C>
11.2 PLAN ADMINISTRATOR.............................................................................................. 41
11.3 FACILITY OF PAYMENTS............................................................................................ 42
11.4 APPOINTMENT OF INVESTMENT MANAGER............................................................................... 42
11.5 INVESTMENT MANAGER AND TRUSTEE.................................................................................. 43
11.6 DELEGATION OF AUTHORITY AND DUTIES BY PLAN ADMINISTRATOR........................................................ 43
ARTICLE XII CLAIMS PROCEDURE........................................................................................... 45
12.1 DENIAL OF CLAIMS................................................................................................ 45
12.2 ARBITRATION..................................................................................................... 45
ARTICLE XIII NONALIENATION PROVISION................................................................................... 46
ARTICLE XIV TERMINATION................................................................................................ 47
14.1 PLAN TERMINATION................................................................................................ 47
14.2 NO REVERSION TO EMPLOYER -- ACCRUED RIGHTS NONFORFEITABLE....................................................... 47
14.3 DISTRIBUTION UPON TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS................................................ 47
ARTICLE XV MERGER OR CONSOLIDATION..................................................................................... 48
ARTICLE XVI AMENDMENTS................................................................................................. 49
ARTICLE XVII RIGHTS RESERVED........................................................................................... 50
ARTICLE XVIII TOP-HEAVY PROVISIONS..................................................................................... 51
ARTICLE XIX LOANS...................................................................................................... 52
ARTICLE XX ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND BENEFICIARIES..................................................... 53
20.1 APPLICABILITY................................................................................................... 53
20.2 DEFINITIONS..................................................................................................... 53
20.3 DISTRIBUTION IN THE FORM OF A JOINT AND SURVIVOR ANNUITY........................................................ 54
20.4 DISTRIBUTION IN THE FORM OF A PRERETIREMENT SURVIVOR ANNUITY.................................................... 55
20.5 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY.......................................................... 55
20.6 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY................................................................ 56
20.7 NOTICE REQUIREMENTS............................................................................................. 56
</TABLE>
iii
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<TABLE>
<S> <C>
20.8 DISTRIBUTION OF ACCOUNTS OF LESS THAN $5,000.................................................................... 57
20.9 PROVISION OF ANNUITIES.......................................................................................... 57
ARTICLE XXI VOLUNTARY AFTER-TAX CONTRIBUTIONS.......................................................................... 58
21.1 ELECTION TO MAKE VOLUNTARY AFTER-TAX CONTRIBUTIONS.............................................................. 58
21.2 VESTING OF VOLUNTARY AFTER-TAX CONTRIBUTIONS.................................................................... 58
21.3 ESTABLISHMENT OF VOLUNTARY AFTER-TAX CONTRIBUTIONS ACCOUNTS..................................................... 58
21.4 LIMITATIONS ON VOLUNTARY AFTER-TAX CONTRIBUTIONS................................................................ 58
21.5 DEFINITION OF COMPENSATION...................................................................................... 59
21.6 PLAN TERMS APPLICABLE TO VOLUNTARY AFTER-TAX CONTRIBUTIONS...................................................... 59
</TABLE>
iv
<PAGE>
MICROSOFT CORPORATION
SAVINGS PLUS 401(k) PLAN
MICROSOFT CORPORATION has adopted the Microsoft Corporation Savings Plus
401(k) Plan effective January 1, 1987, for the exclusive benefit of its
employees. The Microsoft Corporation Savings Plus 401(k) Plan is restated by
this document to incorporate prior amendments since the last restatement,
effective March 25, 1999.
[Note: As explained in the preceding sentence, the last restatement of the
Plan was as of March 25, 1999. This document is an updated restatement, and
incorporates the amendments to the Plan that were adopted by Microsoft
Corporation between March 25, 1999 and July 1, 2000.]
1
<PAGE>
ARTICLE I
DEFINITIONS
-----------
The following words shall have the following meanings unless the context
clearly indicates otherwise.
1.1 BENEFICIARY means a person designated by a participant, or by this
-----------
Plan if there is no effective designation, to receive benefits payable under
this Plan in the event of the participant's death.
1.2 CODE means the Internal Revenue Code of 1986, as amended.
----
1.3 COMPENSATION is defined and limited as set forth in Appendix I,
------------
attached hereto and incorporated herein.
1.4 EMPLOYEE means any common law employee of the employer who receives
--------
remuneration for personal services rendered to the employer, and any "leased
employee" as defined in Code (S) 414(n)(2). For purposes of this Section 1.4, a
"`leased employee' as defined in Code (S) 414(n)(2)" means any person who is not
an employee of the employer (as defined in Plan Section 1.6, "recipient") and
who provides services to such recipient if (i) such services are provided
pursuant to an agreement between the recipient and any other person ("leasing
organization"), (ii) such person has performed such services for the recipient
(or for the recipient and related persons) on a substantially full-time basis
for a period of at least 1 year, and (iii) such services are performed under
primary direction or control by the recipient. The definition in the preceding
sentence shall be interpreted by applying the definition of "leased employee"
under Code (S) 414(n)(2) and any Treasury Regulations thereunder.
1.5 ELIGIBLE EMPLOYEE means a regular employee of the employer who
-----------------
satisfies the eligibility requirements of section 2.1. For purposes of this
Plan, a "regular employee" of the
2
<PAGE>
employer is an employee who is in an approved headcount "regular" employment
position with the employer and on the employer's U.S. payroll. An approved
headcount "regular" employment position is one that is (1) authorized in writing
during the annual or out-of-cycle budgeting process as a "regular" employment
position and approved by an officer of Microsoft (or by a Regional Director for
positions in subsidiaries of Microsoft) and (2) reflected on the official human
resources database of Microsoft or one of its subsidiaries as a "regular"
employment position (e.g., "hourly regular" or "salaried regular"). For example,
a worker who is reflected on the human resources database as "contingent" or an
"agency temp" is not in an approved headcount "regular" employment position even
though the contingent or agency temp position was authorized as part of
Microsoft's budgeting process. An employee is on an employer's U.S. payroll if
the employee is paid from a payroll department of the employer where such
payroll department is located within the United States of America, and the
employer withholds U.S. employment taxes (e.g., income tax, FICA) from the
employee's pay. Under no circumstances are the payroll departments of the
employer's foreign branches and subsidiaries treated as U.S. payroll departments
of the employer for purposes of this Plan.
Notwithstanding the foregoing, the following persons are not eligible employees
and are not eligible to participate in this Plan even if they meet the
definition of regular employee of the employer:
a. interns and visiting researchers;
b. cooperatives;
c. apprentices;
d. nonresident aliens with no U.S. source income;
3
<PAGE>
e. employees covered by a collective bargaining agreement resulting
from negotiations in which retirement benefits were the subject
of good faith bargaining and participation in this Plan was not
provided for;
f. leased employees. For purposes of this Section 1.5(f), a leased
employee includes any person who provides services to the
employer (as defined in Plan Section 1.6, which in the rest of
this Section 1.5 may also be referred to as "recipient" or
"recipient employer") pursuant to an agreement between such
recipient and any other person ("leasing organization"),
regardless of (i) the length of time the person has performed
such services for the recipient (or for the recipient and related
persons), (ii) whether or not the person is an employee of the
recipient, (iii) whether or not the person has performed such
services for the recipient (or for the recipient and related
persons) on a part-time or full-time basis, and (iv) whether or
not the person performed services under the primary direction or
control by the recipient. This definition of leased employee
includes, without limitation, "leased employees" as defined in
Code (S) 414(n)(2) and any Treasury Regulations thereunder.
g. temporary workers engaged through or employed by temporary or
leasing agencies, irrespective of the length of time that the
workers perform or are expected to perform services at or for the
recipient employer, and even if the workers are, or may be
reclassified by the courts, the Internal Revenue Service ("IRS")
or the U.S. Department of Labor ("DOL") as, employees of the
recipient employer;
4
<PAGE>
h. temporary employees of the employer. For purposes of this Plan, a
temporary employee of the employer is an employee of the employer
who is hired by the employer to work on a specific project or
series of projects which in the aggregate is not expected to
exceed six (6) months; and
i. workers who hold themselves out to the recipient employer as
being independent contractors, or as being employed by another
company while providing services to the recipient employer, even
if the workers are, or may be reclassified by the courts, the IRS
or the DOL as, employees of the recipient employer.
1.6 EMPLOYER means MICROSOFT CORPORATION and any subsidiary or affiliate
-------- ---------------------
of Microsoft Corporation which, with MICROSOFT CORPORATION's approval, elects to
adopt the Plan for its employees. Employers maintaining the Plan are listed in
Appendix II, attached hereto and incorporated herein. No participating employers
(other than Microsoft Corporation and its delegates) shall have discretionary
authority over the Plan, including, without limitation, the authority to amend
the Plan and appoint fiduciaries. The Plan Administrator (and his or her
delegates) has discretionary authority under the Plan as provided elsewhere in
this Plan. For purposes of applying to this Plan Code (S)(S) 401, 410, 411, 414,
415 and 416, which sections relate to tax-qualified plans generally, to minimum
participation standards, to minimum vesting standards, to compensation, to
limitations on benefits and contributions, and to top-heavy requirements under
qualified retirement plans, all employees of businesses under common control, as
defined in Code (S)(S) 414(b) and (c), employees of affiliated service groups
under Code (S) 414(m), and employees of any group of employers who must be
aggregated and treated as one employer pursuant to Code (S) 414(o), shall be
considered to be employed by the employer.
5
<PAGE>
1.7 ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended.
1.8 PARTICIPANT means an employee who meets the eligibility requirements
-----------
of Article II and who has entered the Plan. An employee shall be considered a
participant as long as one or more accounts are maintained under this Plan on
his or her behalf.
1.9 PLAN means the MICROSOFT CORPORATION SAVINGS PLUS 401(k) PLAN.
----
1.10 PLAN ADMINISTRATOR means the 401(k) Administrative Committee, which
------------------
shall consist of the following three positions at Microsoft Corporation:
Vice President, Human Resources
Deputy Chief Financial Officer
Tax and Audit Vice President
Any references in this Plan to the Plan Administrator as "he", "she", "him" or
"her" or references to "his" or "her" with respect to the Plan Administrator
shall be deemed to refer to the 401(k) Administrative Committee or a member of
the 401(k) Administrative Committee, as appropriate under the circumstances.
1.11 PLAN YEAR means the twelve month period beginning January 1 and
---------
ending December 31.
1.12 TRUST FUND means the assets of the trust established and maintained
----------
according to the provisions of this Plan.
1.13 TRUSTEE means any individual, life insurance company, bank or trust
-------
company or a combination of the foregoing, which the employer has designated to
manage and invest the assets of the Plan.
6
<PAGE>
ARTICLE II
ELIGIBILITY TO PARTICIPATE IN PLAN
----------------------------------
2.1 ELIGIBILITY AND ENTRY DATE. Each eligible employee who is 18 years of
--------------------------
age or older shall be eligible to participate in this Plan except as provided in
this Article II. The eligible employee shall be eligible to elect to defer a
percentage of his or her compensation on the first entry date occurring after
the date the eligibility requirements (e.g., meeting the definition of an
eligible employee in Section 1.5 and being at least 18 years of age) are met.
The participant's salary deferrals shall commence with the payroll period
beginning on the first day of the month that falls after the participant has
properly completed and submitted an enrollment application and such application
has been processed by the Plan Administrator and the employer's payroll
department. It may take several days after an employee becomes an eligible
employee before the employee will be able to enroll in the Plan. The Plan
Administrator shall establish the enrollment procedures (e.g., require on-line
enrollment) from time to time in its sole discretion.
2.2 REEMPLOYMENT. If a former plan participant is reemployed as an
------------
eligible employee, that person shall immediately renew participation in the plan
as of his or her date of rehire.
2.3 ELECTION AGAINST PARTICIPATION. Any eligible employee may elect not
------------------------------
to participate in the Plan at any time for any reason in writing signed by the
eligible employee, a copy of which is delivered to the employer.
2.4 ENTRY DATES. Plan entry dates shall be the first day of each month.
-----------
7
<PAGE>
ARTICLE III
EMPLOYEE CONTRIBUTIONS
----------------------
3.1 ELECTION TO DEFER. Each participant may elect, in the manner provided
-----------------
by the Plan Administrator, to contribute from 1% to 15% of each of his or her
compensation payments to a salary deferral account under the Plan, except that
the aggregate of such contributions shall not for the plan year exceed the
annual limitation on elective deferrals under Code (S) 402(g) in any taxable
year, which limitation is increased as permitted by Internal Revenue Service
publication to reflect cost-of-living adjustments ($9,500 for 1997). The
employer may, from time to time, change the percentage of salary that may be
deferred. Except as authorized by the Plan Administrator, all such contributions
shall be by payroll reduction. Contributions shall be transferred to the trust
fund on the earliest date by which they can reasonably be segregated from the
employer's general assets, but in no event later than the 15th business day of
the month following the month in which the employer receives or withholds the
employee contributions. For purposes of determining the amount which may be
deferred, only compensation earned while the participant is an eligible employee
and making salary deferral contributions to the plan shall be considered. A
participant may not defer more than 15% of any paycheck or other compensation
payment. The 15% maximum limit on deferrals is applied per pay period not to the
participant's annual compensation nor his or her total compensation earned while
making salary deferral contributions to the Plan.
3.2 DEFERRAL ELECTION DATES. Upon reemployment, an employee may elect to
-----------------------
contribute as of the day he or she is eligible to enter the Plan. All other
employees or participants, including employees entering the plan initially, may
elect to contribute effective as of the first day of the month that falls after
the employee or participant has properly completed
8
<PAGE>
and submitted an enrollment application and such application has been processed
by the Plan Administrator and the employer's payroll department. It may take
several days after an employee becomes an eligible employee before the employee
will be able to enroll in the Plan. The Plan Administrator shall establish the
enrollment procedures (e.g., require on-line enrollment) from time to time in
its sole discretion. Participants may change their contribution percentage
effective as of the first day of any month subsequent to the date they request
the change, provided, however, that the first month in which the change may
apply shall not be earlier than the first month in which the change to the
participant's payroll withholding can reasonably be made. An election to
contribute may be made on any date prior to the effective date of the election,
in the manner provided by the Plan Administrator.
3.3 TERMINATING AN ELECTION TO DEFER. A participant may terminate an
--------------------------------
election to contribute as of the first day of any month, provided notice of
termination has been given by the fifteenth day of the previous month in the
manner provided by the Plan Administrator. If an employee terminates an
election to contribute, he or she must wait until the next entry date before
being eligible again to elect to contribute to the Plan.
3.4 DISTRIBUTION OF EXCESS DEFERRALS. Notwithstanding any other provision
--------------------------------
of the Plan, excess deferrals (amounts in excess of the annual limitation on
elective deferrals under Code (S) 402(g), as increased by a cost of living
factor) and income allocable thereto may be distributed no later than April 15
to participants who claim for the preceding calendar year such excess deferrals
under two or more plans or to participants who have such excess deferrals under
this Plan. A participant may allocate excess deferrals to this Plan by
submitting to the Plan Administrator no later than March 1 a statement
specifying the excess deferral amount for the preceding calendar year and
stating that, if such amount is not
9
<PAGE>
distributed, such excess deferral, when added to amounts deferred under other
plans, exceeds the applicable annual limit. The excess deferrals distributed to
a participant with respect to a calendar year shall be adjusted for income and,
if there is a loss allocable to the excess deferral, shall in no event be less
than the lesser of the participant's account under the Plan or the participant's
elective deferrals for the calendar year.
10
<PAGE>
ARTICLE IV
EMPLOYER MATCHING CONTRIBUTIONS AND FORFEITURES
-----------------------------------------------
4.1 EMPLOYER MATCHING CONTRIBUTIONS. The employer shall contribute funds
-------------------------------
to the Plan, from its current or retained profits, and use forfeitures to match
a portion of each of a participant's salary deferral contributions. The employer
contribution shall match 50% of each of a participant's salary deferral
contributions up to six percent of the participant's compensation for the pay
period for which the participant's salary deferral is made, for a maximum
employer matching contribution of three percent of the compensation paid to the
participant for such pay period. The matching contribution shall be allocated to
the participant's employer contribution account. The employer may from time to
time change the amount of the employer matching contribution, provided any
decrease in the matching contribution formula must be effective only for
matching elective deferrals after the date of change. Total employer
contributions for any plan year shall not exceed the maximum amount which is
deductible by the employer for federal income tax purposes. The employer
contribution shall be transferred to the trust fund at such times as the
employer determines, but such contributions shall in no event be transferred to
the trust fund later than the time prescribed by law for the employer to obtain
a federal income tax deduction for the plan year for which the contribution is
made. Employer contributions shall be credited to participants' employer
contribution accounts as of the date of receipt by the plan. For purposes of
determining the amount of matching contributions a participant will receive,
only compensation earned while the participant is an eligible employee and
making salary deferral contributions to the Plan shall be considered. The 3%
limit on employer matching contributions is applied to each paycheck given or
other compensation payment made to the participant. The 3% limit on matching
contributions is applied per pay
11
<PAGE>
period, and not to the participant's annual compensation nor his or her total
compensation earned while making salary deferral contributions to the Plan.
Notwithstanding the foregoing, any participant whose salary deferrals cease
because the Code Section 402(g) limit is reached, and not because the
Participant terminated his or her election to defer, shall have his or her
compensation earned after the Code Section 402(g) limit was reached considered
when determining the maximum amount of matching contributions to be allocated to
his or her account. Matching contributions will continue to be made to such
participant's account until the match equals the lesser of 50% of his or her
deferrals or 3% of the participant's compensation earned while the participant's
salary deferral election was in effect (including compensation earned after
deferrals reached the applicable 402(g) limit). The amount of the matching
contributions made for pay periods occurring after the participant's salary
deferral amount reached the 402(g) limit shall be calculated by multiplying the
lesser of (i) 3% or (ii) one half of the participant's salary deferral election
which was in effect when the 402(g) limit was reached, by his or her
compensation for each pay period occurring after the limit was reached.
4.2 ALLOCATION OF FORFEITURES. As of the end of each plan year,
-------------------------
forfeitures which have become available for allocation during such year because
of the completion of benefit distributions to terminated participants or
terminated participants' completion of a one-year period of severance pursuant
to Section 5.6 shall be used first to restore previously forfeited amounts to
the employer contribution accounts of former employees who are reemployed before
sustaining five consecutive one-year periods of severance. Any remaining
forfeiture amounts shall be used to reduce the employer matching contribution
for the subsequent plan year. While this Plan is a multiple employer plan (as
described in Code (S)413(c)), forfeitures with respect to employees who
terminate employment with one employer (as defined in Treasury Regulation
12
<PAGE>
(S)1.413-2(a)(2)) shall be used first to restore previously forfeited amounts to
the employer contribution accounts of former employees of such employer who are
reemployed before sustaining five consecutive one-year periods of severance.
Any remaining amounts from such forfeitures shall be used to reduce the employer
matching contribution for the employees of such employer for the subsequent plan
year and, if any forfeitures remain after the employer matching contributions
for that employer are made for such plan year, such remaining forfeitures shall
be used to reduce the employer matching contributions of other employers in the
Plan.
13
<PAGE>
ARTICLE V
VESTING - YEARS OF SERVICE
--------------------------
5.1 EMPLOYEE CONTRIBUTIONS. Each participant shall be 100% vested in all
----------------------
amounts in his or her salary deferral account.
5.2 EMPLOYER CONTRIBUTIONS. A participant whose employment is terminated
----------------------
on or after reaching age 65, whose employment is terminated because of a total
and permanent disability, or who dies while employed, shall be 100% vested in
all amounts in his or her employer contribution account. All other participants
who terminate shall be entitled to the vested percentage of their employer
contribution account determined in accordance with the following schedule:
Years of Service Vested Percentage Forfeited Percentage
---------------- ----------------- --------------------
Less than 2 0% 100%
2 or more years 100% 0%
In computing years of service, all of an employee's years of service shall be
taken into account, except that if an employee has five or more consecutive one-
year periods of severance, years of service after such period of severance shall
not be taken into account for purposes of determining the nonforfeitable
percentage of the employee's accrued benefit derived from employer contributions
which accrued before the period of severance. Preparticipation service with
certain companies as set forth in Appendix II, attached hereto and incorporated
herein, shall be counted toward vesting.
Effective July 8, 1997, an employee who (i) first becomes employed by
Microsoft Corporation ("Microsoft") or one of its affiliates (within the meaning
of Code Sections 414(b), (c), (m) or (o)) on or after July 8, 1997, and (ii) was
previously employed by a company (or a trade or business thereof, hereinafter
"Former Employer") which was acquired by or merged with
14
<PAGE>
Microsoft (or an affiliate of Microsoft), shall receive credit for his or her
period of service with such Former Employer towards satisfying the vesting
service requirements of this Plan, provided, however, that the credit shall only
be given to those employees whose employment with Microsoft or one of its
affiliates is connected with Microsoft's (or its affiliate's) acquisition of or
merger with such Former Employer. This vesting service credit shall be granted
effective as of the effective date of the closure of the acquisition of the
Former Employer by, or the merger of the Former Employer with, Microsoft (or its
affiliate). For informational purposes, the list of Former Employers for which
vesting service credit is granted after July 8, 1997 shall be added to Appendix
II from time to time, but pursuant to this Section 5.2, the grant of such
service credit shall be effective regardless of whether or when the name of the
Former Employer is added to Appendix II. In the event a plan of the Former
Employer is merged into this Plan, any service credit shall be as specified in
Appendix V hereto. Notwithstanding the foregoing, no vesting service credit
shall be granted under this paragraph for service with any Former Employer to
the extent that this Plan is amended, prior to the closure of the acquisition of
or merger with such Former Employer, to expressly deny service credit with
respect to service with such Former Employer. Notwithstanding the foregoing,
each participant with a positive employer contribution account balance in the
Plan on or after March 2, 2000 shall be 100% vested in all amounts that are in
his or her employer contribution account on or after March 2, 2000.
5.3 YEARS OF SERVICE. An employee's years of service at any date shall
----------------
equal the number of years, including fractional portions of years, which have
elapsed between the date the employee first performed an hour of service, or
first performed an hour of service upon reemployment, and the date a period of
severance begins. If a period of severance is less than twelve months, the
period of severance shall be included in determining years of service.
15
<PAGE>
5.4 HOUR OF SERVICE. An hour of service means each hour for which an
---------------
employee is paid or entitled to payment for the performance of duties for the
employer.
5.5 PERIOD OF SEVERANCE. A period of severance is a period which begins
-------------------
on the earlier of (i) the date the employee quits, is discharged, retires, dies;
or (ii) the first anniversary of the date the employee is absent from service
for any other reason, such as disability leave, vacation, or leave of absence;
and which ends when the employee performs an hour of service upon reemployment.
However, if an employee is absent from employment for maternity or paternity
reasons, the period of severance shall begin on the second anniversary of the
first date of such absence. The period between the first and second
anniversaries of the first date of absence from work is neither a year or
fractional year of service, nor a period of severance. An absence for maternity
or paternity reasons includes an absence because of the following: pregnancy of
the individual, birth of a child of the individual, placement of a child with
the individual in connection with the adoption of such child by such individual
or caring for such child for a period beginning immediately following such birth
or placement.
5.6 FORFEITURES. If, prior to incurring a one-year period of severance,
-----------
a participant who is zero percent vested in his or her employer contribution
account receives a distribution of his or her entire vested interest in the Plan
(e.g., salary deferrals, rollovers) on or due to his or her termination of
participation in the Plan, the participant's entire employer contribution
account shall be forfeited as of the date of such distribution. If a terminated
participant who is zero percent vested in his or her employer contribution
account does not receive a distribution of his or her entire vested interest in
the Plan prior to incurring a one-year period of severance, his or her entire
employer contribution account shall be forfeited as of a date chosen by the Plan
Administrator which is on or after the date the participant completes a one-
16
<PAGE>
year period of severance. Forfeited amounts shall be transferred to a separate
forfeiture suspense account and made available for allocation as set forth in
Article IV. If a terminated participant whose employer contribution account has
been forfeited due to either the receipt of a distribution or the occurrence of
a one-year period of severance is reemployed before sustaining five consecutive
one-year periods of severance, any amount forfeited shall be restored to his or
her employer contribution account, unadjusted by any gains or losses. If a
reemployed participant's forfeiture was due to receipt of a distribution, the
participant shall have neither the right nor obligation to repay the distributed
amount to the Plan. Restorations of accounts shall be funded first from
forfeitures held in the suspense account, and if such forfeiture amounts in the
suspense account are not sufficient to restore the accounts, then from
additional Company contributions. While this Plan is a multiple employer plan,
the employer with the primary responsibility to make any Company contributions
that are required to restore a rehired employee's account shall be the employer
from which the employee terminated prior to being rehired. Upon the complete
termination of the Plan, any terminated participant who, prior to the Plan's
date of termination, had not (i) incurred five consecutive one-year periods of
severance, nor (ii) received a distribution of his or her entire vested interest
in the Plan, shall have any amount which was forfeited due to the prior
occurrence of a one-year period of severance restored, unadjusted by any gains
or losses, and such restored amount shall be nonforfeitable.
17
<PAGE>
ARTICLE VI
PARTICIPANTS' ACCOUNTS AND INVESTMENTS
--------------------------------------
6.1 INDIVIDUAL ACCOUNTS. The trustee shall maintain records to show
-------------------
the interest in the Plan of each participant and former participant. Such
records shall be in the form of individual accounts. When appropriate, a
participant shall have two accounts, a salary deferral account and an employer
contribution account. The maintenance of individual accounts is only for
accounting purposes, and a segregation of the assets of the trust fund to each
account shall not be required. Notwithstanding the foregoing, to the extent
provided in a written loan policy, a loan made to a participant will be treated
as a participant direction of investment. The participant alone shares in any
principal and interest paid on the loan, and he or she alone bears any expense
or loss incurred in connection with the loan. The Trustee will reflect the
participant's loan on his or her account. Distributions and withdrawals made
from an account shall be charged to the account as of the date paid. Each
participant and former participant shall be advised from time to time, but at
least once a year, as to the status of his or her account or accounts.
6.2 INVESTMENT FUNDS. The trust fund shall consist of the following
----------------
investment funds: common stock funds, bond funds, income funds, money market
funds, the Microsoft Corporation stock fund, and any other funds or investment
vehicles selected by the employer, including without limitation participant
directed brokerage accounts. The employer may change the investment funds from
time to time. Each participant and former participant shall direct the trustee
as to what portion of his or her accounts shall be deposited in each fund (or,
in the case of a Participant loan pursuant to Article XIX, what portion of his
or her account shall be loaned). If a participant or former participant wishes
to utilize more than one investment fund, he or she shall designate the
percentage of his or her account balances to be invested in each fund, and the
18
<PAGE>
percentages designated shall be in 1% increments. The trust fund may hold
qualified employer securities and qualified employer real estate in any amount.
The Plan is intended to constitute a plan described in ERISA (S) 404(c), and the
fiduciaries of the Plan may be relieved in accordance with ERISA (S) 404(c) of
liability for any losses which are the direct and necessary result of investment
instructions given by a participant or former participant.
6.3 CHANGING ACCOUNT INVESTMENTS. Up to six times in any plan year, a
----------------------------
participant may change his or her direction as to the funds into which his or
her account will be invested. The Plan Administrator may change the number of
times that changes may be made, and the procedures for making changes in
investment elections, at any time and from time to time.
6.4 PROCEDURES. The Plan Administrator shall adopt such rules and
----------
procedures as it deems advisable with respect to the direction of Plan
investments by participants, including without limitation the procedure for
allocating and charging fees, expenses or other charges connected with certain
investment funds to the accounts of those participants who choose to invest in
such funds. Any such rules and procedures shall be applied in a
nondiscriminatory manner.
6.5 VALUATION OF ACCOUNTS. As often as directed by the employer, the
---------------------
trustee shall value the trust fund assets at fair market value and the Plan
Administrator shall adjust the net credit balances in the accounts of
participants and former participants, upward or downward, to reflect the
allocation to the participant's or former participant's account of investment
earnings, gains and losses, expenses paid out of the trust fund, and
contributions made and allocated to and distributions and withdrawals from the
participant's or former participant's account. In addition, as of the end of
the fiscal quarter of each plan year and at such
19
<PAGE>
other times as the Plan Administrator shall reasonably determine, the Plan
Administrator shall adjust the net credit balances in the accounts of
participants and former participants in the trust fund, upward or downward, pro
rata, so that the aggregate of such net credit balances will equal the net worth
of each investment fund of the trust fund, using fair market values as
determined by the trustee and after such net worth for the appropriate
investment fund has been reduced by any expenses (to the extent not paid
directly by the employer), withdrawals, distributions and transfers chargeable
to that investment fund which have been incurred but not yet paid. All
determinations made by the trustee with respect to fair market values and net
worth shall be made in accordance with generally accepted principles of trust
accounting, and such determinations when so made by the trustee shall be
conclusive and binding upon all persons having an interest under the Plan.
20
<PAGE>
ARTICLE VII
PAYMENT OF ACCOUNT BALANCES UPON TERMINATION, DEATH, DISABILITY,
----------------------------------------------------------------
QUALIFIED DOMESTIC RELATIONS ORDERS,
------------------------------------
SALE OF TRADE OR BUSINESS
-------------------------
7.1 TERMINATION OF EMPLOYMENT. Upon termination of employment for any
-------------------------
reason other than death or disability, the participant shall elect to receive
his or her balances upon termination or upon reaching age 65, or on any date
between termination and age 65 at the participant's election, except that if the
value of the participant's accounts does not exceed $5,000 (and did not exceed
$5,000 at the time of any prior distribution), payment shall be made as soon as
practicable after termination. Account balances shall be valued as of the most
recent valuation date prior to date of payment and shall be paid in a single
cash payment, except that the participant or former participant may elect to
receive any or all of the shares allocated to him or her in the Microsoft
Corporation stock fund. Account balances shall be distributed no later than 60
days after the latest of (i) the plan year in which the participant terminates
or (ii) the plan year in which the participant reaches age 65. Notwithstanding
the foregoing, a person's entire interest must be distributed, or must begin to
be distributed, no later than the first day of April following the calendar year
in which the participant reaches age 70-1/2. Furthermore, benefit payments will
not be made to a participant who has a vested account balance greater than
$5,000, prior to the participant attaining age 70 1/2 unless and until the
participant files a proper claim for benefits with the Plan Administrator.
7.2 PAYMENT AT 59-1/2. A participant may elect to receive a distribution
-----------------
of all or a portion of his or her vested account balance or balances under this
Plan upon or after reaching age 59-1/2. Payment shall be made in a single cash
payment, except that the participant may
21
<PAGE>
elect to receive any or all of the shares allocated to him or her in the
Microsoft Corporation stock fund.
7.3 PAYMENT OF ACCOUNT BALANCES UPON DEATH. If a participant dies while
--------------------------------------
employed, his or her employer contribution account shall be 100% vested. Each
participant shall designate a beneficiary or beneficiaries to receive all
amounts credited to his or her accounts in the event of the participant's death.
The accounts shall be valued as of the most recent valuation date prior to
payment and shall be paid to the designated beneficiary or beneficiaries as soon
as feasible after the death. Payment shall be made in a single cash payment,
except that the beneficiary or beneficiaries may elect to receive any or all of
the shares allocated to him or her in the Microsoft Corporation stock fund.
Notwithstanding the foregoing, if the deceased participant's vested account
balance exceeds $5,000 and the designated beneficiary is the participant's
spouse, the spouse may elect to delay distribution of the lump sum amount until
any date on or before the date the Participant would have been age 65. If the
deceased participant's vested account balance exceeds $5,000 and the beneficiary
is a designated beneficiary who is not the participant's spouse, the beneficiary
may elect to delay distribution of the lump sum amount until any date on or
before the end of the calendar year in which the fifth anniversary of the
participant's date of death occurs. Beneficiaries who are not designated
beneficiaries may not delay distribution of the death benefit. If a participant
is married, the participant may not designate a beneficiary other than his or
her spouse without the spouse's written consent which has been witnessed by a
plan representative or a notary public. If a participant fails to designate a
beneficiary, or the participant has no surviving beneficiary, the amounts
payable to a married participant shall be distributed to his or her spouse and
the benefits of a single participant shall be distributed to his or her estate.
22
<PAGE>
7.4 PAYMENT OF ACCOUNT BALANCES UPON DISABILITY. If a participant's
-------------------------------------------
employment is terminated prior to retirement because of a total and permanent
disability, the employer contribution account shall be 100% vested and payment
of the participant's account balances shall be made as soon as practicable. A
participant shall be deemed to be totally and permanently disabled if the
participant meets the definition of having a total disability under the
employer-provided long-term disability plan. The participant's accounts shall be
valued as of the most recent valuation date prior to payment and shall be paid
in a single cash payment within sixty (60) days after the disability has been
established under this section, except that the participant may elect to receive
any or all of the shares allocated to him or her in the Microsoft Corporation
stock fund. Notwithstanding the foregoing, if the value of the disabled
participant's accounts exceeds $5,000 (or exceeded $5,000 at the time of a prior
distribution), the participant may elect to delay receipt of the balance of his
or her accounts until reaching age 65. Notwithstanding the foregoing, benefit
payments will not be made to a participant who has a vested account balance
greater then $5,000, prior to the participant attaining age 70 1/2 unless and
until the participant files a proper claim for benefits.
7.5 EARLY RETIREMENT. Upon reaching age 55, a participant may elect early
----------------
retirement and terminate employment. Each such participant shall receive the
value of his or her salary deferral account and the vested portion of his or her
employer contribution account, which shall be paid in the time and manner
described in Section 7.1.
7.6 DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS. Distribution
-------------------------------------------------------
to an alternate payee under a qualified domestic relations order as defined in
Code (S) 414(p) may be made at any time, including prior to the participant's
attainment of earliest retirement age if the court order specifies distribution
at an earlier time or permits an agreement
23
<PAGE>
between the Plan and the alternate payee to authorize an earlier distribution
and the alternate payee consents to the distribution.
7.6.1 Qualified Status of Order. The Plan Administrator shall
-------------------------
establish reasonable procedures to determine the qualified status of a domestic
relations order. Upon receiving a domestic relations order, the Plan
Administrator shall promptly notify the participant and any alternate payee
named in the order in writing of the receipt of the order and the Plan's
procedures for determining the qualified status of the order. Within a
reasonable period of time after receiving the domestic relations order, the Plan
Administrator shall determine the qualified status of the order and shall notify
the participant and each alternate payee in writing of its determination. The
Plan Administrator shall provide notice under this paragraph by mailing to the
individual's address specified in the domestic relations order, or in a manner
consistent with Department of Labor regulations.
7.6.2 Amounts Payable During Determination Process. If any portion of
--------------------------------------------
the participant's nonforfeitable accrued benefit is payable during the period
the Plan Administrator is making its determination of the qualified status of
the domestic relations order, the Trustee shall make a separate accounting of
the amounts payable. If the Plan Administrator determines the order is a
qualified domestic relations order within 18 months of the date amounts first
are payable following receipt of the order, the amounts shall be payable in
accordance with the order. If the Plan Administrator does not make its
determination of the qualified status of the order within the 18 month
determination period, the amounts shall be payable in the manner in which they
would be distributed if the order did not exist. The order shall be applied
prospectively if the Plan Administrator determines after the 18 month period
that the order is a qualified domestic relations order.
24
<PAGE>
7.6.3 Investment of Amounts Payable. To the extent it is not
-----------------------------
inconsistent with the provisions of the qualified domestic relations order, any
partitioned funds payable to the alternate payee(s) may be invested in a
segregated subaccount and may be invested in fixed income investments or, at the
direction of the alternate payee(s), in any investment funds available to
participants. If an order specifies that the alternate payee is entitled to any
portion of the account of a participant who has an outstanding Plan loan, the
loan will continue to be held in the participant's account and will not be
transferred to an account for the alternate payee. A segregated subaccount
shall remain a part of the Trust, but it alone shall share in any income it
earns, and it alone shall bear any expense or loss it incurs. The Trustee shall
make any payments or distributions to the alternate payee(s) by separate benefit
checks or other separate distribution.
7.7 SALE OF TRADE OR BUSINESS. Distributions may also be made in the event
--------------------------
of termination of the Plan, or any part thereof, as described in Code (S)
401(k)(a)(A)(i) and the regulations thereunder, or a disposition of the assets
of a trade or business or the stock of a subsidiary with respect to employees
who continue employment with the acquiring corporation or subsidiary as
described in Code (S) 401(k)(10)(A)(ii) and (iii) and the regulations
thereunder. In no event may amounts attributable to 401(k) elective deferrals be
distributed earlier than upon one of the following events:
(a) Retirement, death, disability or separation from service (see
Code (S) 401(k)(10)(A)(i));
(b) Termination of this Plan without establishment of a successor
plan (see Code (S) 401(k)(10)(A)(i));
(c) The employee's attainment of age 59-1/2;
25
<PAGE>
(d) The sale or other disposition by a corporation to an unrelated
corporation, which does not maintain this Plan, of substantially all of the
assets used in a trade or business, but only with respect to employees who
continue employment with the acquiring corporation (see Code (S)
401(k)(10)(A)(ii));
(e) The sale or other disposition by a corporation of its interest in
a subsidiary to any unrelated entity which does not maintain this Plan, but only
with respect to employees who continue employment with the subsidiary (see Code
(S) 401(k)(10)(A)(iii)).
7.8 NOTICE OF RIGHT TO DEFER PAYMENT. A participant whose total account
---------------------------------
balances exceed (or have exceeded at the time of a prior distribution) $5,000
shall be given an explanation of the optional forms of benefit available, and of
his or her right to defer receipt of distribution. If a participant fails to
consent to an immediate distribution, it shall be deemed an election to defer
the commencement of payment of any benefit. However, any election to defer the
receipt of benefits shall not apply with respect to distributions which are
required under Code (S) 401(a)(9). Notice of the rights specified under this
Section 7.8 shall be provided no less than 30 days and no more than 90 days
before the "Annuity Starting Date." The "Annuity Starting Date" is the first day
on which all events have occurred which entitle the participant to receive a
distribution (e.g., termination of employment, consent to distribution).
Distribution may commence less than 30 days after the notice required under
Section 1.411(a)-11(c) of the Income Tax Regulations is given if:
(A) the plan administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and
26
<PAGE>
(B) the participant, after receiving the notice, affirmatively elects
a distribution.
Written consent of the participant to the distribution must not be made before
the participant receives the notice and must not be made more than 90 days
before the Annuity Starting Date. No consent shall be valid if a significant
detriment is imposed under the plan on any participant who does not consent to
the distribution. Consent to an immediate distribution is not required after
the participant has reached age 65 or has died.
7.9 DIRECT ROLLOVER DISTRIBUTIONS. Notwithstanding any provision of the
-----------------------------
Plan to the contrary and subject to the following limitations, a distributee may
elect, at the time and in the manner prescribed by the Plan Administrator, to
have any portion of an eligible rollover distribution paid directly to an
eligible retirement plan. Direct rollovers may not be divided among several
plans. A participant may elect to receive a distribution partly as a direct
rollover and partly in a direct payment to the participant only if the direct
rollover amount equals or exceeds $500.
The following definitions shall apply to this section 7.9:
(a) Eligible Rollover Distribution. An eligible rollover distribution
------------------------------
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not include:
(i) any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated beneficiary,
or for a specified period of ten years or more;
27
<PAGE>
(ii) any mandatory minimum distribution at age 70 1/2 under Code
(S) 401(a)(9); and
(iii) the portion of any distribution that is not includible in
gross income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(b) Eligible Retirement Plan. An eligible retirement plan is an
------------------------
individual retirement account described in Code (S) 408(a), an individual
retirement annuity described in Code (S) 408(b) (other than an endowment
contract), an annuity plan described in Code (S) 403(a), or a qualified trust
described in Code (S) 401(a) of a defined contribution plan, that accepts the
distributee's eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual retirement annuity.
(c) Distributee. A distributee includes an employee or former
-----------
employee. In addition, the employee's or former employee's surviving spouse and
the employee's or former employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in Code (S) 414(p),
are distributees with regard to the interest of the spouse or former spouse.
28
<PAGE>
ARTICLE VIII
HARDSHIP WITHDRAWALS
--------------------
If a participant has a financial hardship, the participant may withdraw so
much of the following amount as is necessary to meet the hardship:
(a) his or her salary deferral contributions plus net investment gains and
earnings on such deferrals as of December 31, 1988, plus
(b) his or her salary deferral contributions made after December 31, 1988,
minus
(c) any prior withdrawals, distributions, assignments via qualified
domestic relations orders, expenses and net investment losses made or
incurred with respect to the amounts described in (a) or (b) above.
The salary deferral contributions will be valued as of the valuation date
on or immediately before the withdrawal. Hardship withdrawals may not be
made from net investment gains and earnings which have accrued after
December 31, 1988 on salary deferral contributions. Notwithstanding the
foregoing, a participant who has an outstanding loan from the Plan (or must
take such a loan prior to the hardship distribution pursuant to this
Article VIII) may not take a hardship distribution in an amount which
exceeds 40% of his or her vested account balance.
A hardship withdrawal shall be available for any of the following
reasons:
(a) Medical expenses incurred by the participant, the participant's
spouse, or any dependents of the participant or expenses necessary for
those persons to obtain medical care;
(b) Purchase (excluding mortgage payments) of a principal residence for
the participant;
29
<PAGE>
(c) Payment of tuition, related educational fees, and room and board
expenses, for the next 12 months of post-secondary education for the
participant, his or her spouse, children or dependents;
(d) Preventing the eviction of the participant from his or her principal
residence or foreclosure on the mortgage of the participant's
principal residence; or
(e) Need due to critical financial emergencies, defined as circumstances
of sufficient severity that a participant is confronted by present or
impending financial ruin. The need shall be based on the
participant's net worth statement, which shall form an objective
criterion for determining hardship.
A participant who receives a hardship distribution
(a) shall not receive a distribution in excess of the participant's
immediate and heavy financial need;
(b) shall, prior to the distribution, have exercised all vested stock
options and received all other distributions and loans available under
all plans maintained by the employer;
(c) shall not make elective contributions or have nonelective participant
contributions made to this Plan or any other retirement plan, stock
purchase plan, stock option or similar plan of the employer, until the
first January 1 or July 1 following the one-year anniversary of the
date the hardship distribution is made; and
(d) shall not make contributions to any plan of the employer, including
this Plan, for his or her tax year immediately following the tax year
in which the hardship distribution was received, in excess of (i) the
annual limit applicable under Code (S) 402(g) ($9,500 for 1997), as
increased by a cost of living factor, minus
30
<PAGE>
(ii) the amount of participant contributions in the tax year of the
hardship distribution.
Hardship withdrawals may not be taken from a Participant's employer contribution
account, rollover account, or acquisition rollover account. Amounts transferred
from the plans of other employers pursuant to a plan merger (e.g., see Appendix
V to this Plan) or plan-to-plan transfer of plan assets may in some cases by
held in the acquisition rollover account, and therefore be unavailable for
hardship withdrawals.
31
<PAGE>
ARTICLE IX
LIMITATIONS ON EMPLOYEE AND EMPLOYER CONTRIBUTIONS
--------------------------------------------------
9.1 LIMITATIONS ON TOTAL CONTRIBUTIONS TO ACCOUNTS. Notwithstanding
----------------------------------------------
anything in this Plan to the contrary, the total of employee and employer
contributions and forfeitures allocated to a participant's accounts under this
and any other employer sponsored defined contribution plan for any year shall
not exceed the applicable limits described in Code (S) 415 (e.g., the lesser of
(i) 25% of the participant's compensation (as defined in Section 9.9), or (ii)
$30,000). Effective March 31, 1988, the year used to determine the limits on
annual additions shall be the calendar year. If such additions exceed the
limitation, the Plan shall distribute to the participant the participant's
elective deferrals to this Plan (within the meaning of Code (S) 402(g)(3)) and
any gains attributable thereto to the extent that the distribution would reduce
the excess amounts in the participant's account (see Treasury Regulations (S)
1.415-6(b)(6)(iv)). Any remaining excess annual additions to the participant's
account for the year shall be used to reduce future employer contributions
pursuant to Treasury Regulation (S) 1.415-6(b)(6)(ii).
9.2 AVERAGE ACTUAL DEFERRAL PERCENTAGE TESTS. With respect to participant
----------------------------------------
contributions in a plan year, the actual deferral percentage shall satisfy one
of the tests described in (a) or (b) below. (Definitions of words used in the
tests are given in Section 9.9.)
(a) The average actual deferral percentage for eligible participants
who are highly compensated employees for the plan year shall not exceed the
average actual deferral percentage for eligible participants who are non-highly
compensated employees for the plan year multiplied by 1.25;
32
<PAGE>
(b) the average actual deferral percentage for eligible participants
who are highly compensated employees for the plan year shall not exceed the
average actual deferral percentage for eligible participants who are non-highly
compensated employees for the plan year multiplied by 2, provided that the
average actual deferral percentage for eligible participants who are highly
compensated employees does not exceed the average actual deferral percentage for
eligible participants who are non-highly compensated employees by more than two
(2) percentage points or such lesser amount as the Secretary of the Treasury
shall prescribe to prevent the multiple use of this alternative limitation with
respect to any highly compensated employee.
9.3 ELECTIVE DEFERRALS OR QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS UNDER
---------------------------------------------------------------------
TWO OR MORE PLANS OR ARRANGEMENTS. The actual deferral percentage for any
- ---------------------------------
eligible participant who is a highly compensated employee for the plan year and
who is eligible to have elective deferrals or qualified employer deferral
contributions allocated to his account under two or more plans or arrangements
described in Code (S) 401(k) that are maintained by the employer or an
affiliated employer shall be determined as if all such elective deferrals and
qualified employer deferral contributions were made under a single arrangement.
9.4 ELECTIVE DEFERRALS, QUALIFIED EMPLOYER DEFERRAL CONTRIBUTIONS, AND
------------------------------------------------------------------
COMPENSATION OF FAMILY MEMBERS. For purposes of determining the actual deferral
- ------------------------------
percentage of a participant who is a highly compensated employee subject to the
family aggregation rules of Code (S) 414(q)(6), the elective deferrals,
qualified employer deferral contributions and compensation of such participant
shall include the elective deferrals, qualified employer deferral contributions
and compensation of family
33
<PAGE>
members, and such family members shall be disregarded in determining the actual
deferral percentage for participants who are non-highly compensated employees.
The determination and treatment of the elective deferrals, qualified
nonelective contributions and actual deferral percentage of any participant
shall satisfy such other requirements as may be prescribed by the Secretary of
the Treasury.
9.5 ACTIONS AVAILABLE WHEN TESTS UNSATISFIED. In the event that the Plan
----------------------------------------
Administrator shall at any time have reasonable cause to conclude that neither
of the tests will be satisfied for a plan year, then the Plan Administrator
shall take such actions as the Plan Administrator deems necessary in accordance
with Appendix III, attached hereto and incorporated herein.
9.6 DISTRIBUTION OF EXCESS CONTRIBUTIONS. Excess contributions and income
------------------------------------
allocable thereto shall be distributed no later than the last day of each plan
year to participants on whose behalf such excess contributions were made for the
preceding plan year. "Excess contributions" shall mean the difference between
the participant contributions made by highly compensated employees and the
maximum amount of allowable participant contributions for those employees. The
income allocable to excess contributions shall be determined by multiplying
income allocable to the participant's elective deferrals and qualified employer
deferral contributions for the plan year by a fraction, the numerator of which
is the excess contribution on behalf of the participant for the preceding plan
year and the denominator of which is the sum of the participant's account
balances attributable to elective deferrals and qualified employer deferral
contributions on the last day of the preceding plan year. The excess
contributions which would otherwise be distributed to the participant shall be
adjusted for income; shall be reduced, in accordance with regulations, by the
amount of excess deferrals
34
<PAGE>
distributed to the participant; shall, if there is a loss allocable to the
excess contributions, in no event be less than the lesser of the participant's
account under the Plan or the participant's elective deferrals and qualified
employer deferral contributions for the plan year. Amounts distributed under
this section shall be treated as distributions from the participant's elective
deferral account and shall be treated as distributed from the participant's
qualified employer deferral contribution account only to the extent such excess
contributions exceed the balance in the participant's elective deferral account.
9.7 AVERAGE CONTRIBUTIONS PERCENTAGE TESTS. With respect to participant
--------------------------------------
contributions and employer matching contributions, the average contribution
percentage shall satisfy one of the tests described in, (a) or (b) below
(definitions of words used in the tests are given in Section 9.9).
(a) The average contribution percentage for eligible participants who
are highly compensated employees for the plan year shall not exceed the average
contribution percentage for eligible participants who are non-highly compensated
employees for the plan year multiplied by 1.25;
(b) the average contribution percentage for eligible participants who
are highly compensated employees for the plan year shall not exceed the average
contribution percentage for eligible participants who are non-highly compensated
employees for the plan year multiplied by 2, provided that the average
contribution percentage for eligible participants who are highly compensated
employees does not exceed the average contribution percentage for eligible
participants who are non-highly compensated employees by more than two (2)
percentage points or such lesser amount as the Secretary of the Treasury shall
prescribe to
35
<PAGE>
prevent the multiple use of this alternative limitation with respect to any
highly compensated employee.
9.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Excess aggregate
----------------------------------------------
contributions and income allocable thereto shall be distributed no later than
the last day of each plan year to participants to whose accounts employee
contributions or matching contributions were allocated for the preceding plan
year. "Excess aggregate contributions" shall mean the amount described in Code
(S) 401(m)(6)(B). The income allocable to excess aggregate contributions shall
be determined by multiplying the income allocable to the participant's employee
contributions and matching employer contributions for the plan year by a
fraction, the numerator of which is the excess aggregate contributions on behalf
of the participant of the preceding plan year and the denominator of which is
the sum of the participant's account balances attributable to employee
contributions and matching employer contributions on the last day of the
preceding plan year. The excess aggregate contributions to be distributed to a
participant shall be adjusted for income, and, if there is a loss allocable to
the excess aggregate contribution, shall in no event be less than the lesser of
the participant's account under the Plan or the participant's employee
contributions and matching contributions for the plan year. Excess aggregate
contributions shall be distributed from the participant's matching contribution
account in proportion to the participant's employee contributions and matching
contributions for the plan year.
9.9 DEFINITIONS APPLICABLE TO DISCRIMINATION TESTS. For purposes of this
----------------------------------------------
Article, the following definitions shall be used:
36
<PAGE>
Actual deferral percentage shall mean the ratio (expressed as a percentage)
--------------------------
of effective deferrals and qualified employer deferral contributions on behalf
of the eligible participant for the plan year to the eligible participant's
compensation for the plan year.
Average actual deferral percentage shall mean the average (expressed as a
----------------------------------
percentage) of the actual deferral percentages of the eligible participants in a
group.
Compensation shall mean wages within the meaning of Code (S) 3401(a) and
------------
all other payments of compensation to an employee by his employer (in the course
of the employer's trade or business) for which the employer is required to
furnish the employee a written statement under Code (S)(S) 6041(d), 6051(a)(3),
and 6052. Compensation excludes amounts paid or reimbursed by the employer for
moving expenses incurred by an employee, but only to the extent that at the time
of the payment it is reasonable to believe that these amounts are deductible by
the employee under Code (S) 217. Compensation shall be determined without regard
to any rules under Code (S) 3401(a) that limit the remuneration included in
wages based on the nature or location of the employment or the services
performed (such as the exception for agricultural labor in Code (S) 3401(a)(2)).
For purposes of performing the average actual deferral percentage test and the
average contributions percentage test, the annual compensation of each employee
taken into account shall not exceed the limitation under Code (S) 401(a)(17),
which is the OBRA '93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000 ($160,000 in 1997), as adjusted by the
Commissioner for increases in the cost of living in accordance with Code (S)
401(a)(17)(B). In addition, in performing the average actual deferral percentage
test and the average contributions percentage test for any year, Microsoft
Corporation may elect to include in the definition of compensation for all
employees the elective contributions that are made by the
37
<PAGE>
employer on behalf of its employees that are not includible in gross income
under Code (S) 125 (cafeteria plan) or Code (S) 402(e)(3) (cash or deferred
arrangement).
Elective deferrals shall mean contributions made to the Plan during the
------------------
plan year by the employer, at the election of the participant, in lieu of cash
compensation and shall include contributions made pursuant to a salary reduction
agreement.
Eligible participant shall mean any employee of the employer who is
--------------------
otherwise authorized under the terms of the Plan to have elective deferrals or
qualified employer deferral contributions allocated to his or her account for
the plan year.
Family Member shall mean an individual described in Code (S) 414(q)(6)(B).
-------------
Highly Compensated Employee shall mean an individual described in Code (S)
---------------------------
414(q).
Inactive Participant shall mean any employee or former employee who has
--------------------
ceased to be an eligible employee and on whose behalf an account is maintained
under the Plan.
Matching contribution shall mean any contribution to the Plan made by the
---------------------
employer for the plan year and allocated to a participant's account by reason of
the participant's employee contributions or elective deferrals.
Non-highly compensated employee shall mean an employee of the employer who
-------------------------------
is neither a highly compensated employee nor a family member.
Participant shall mean any employee of the employer who has met the
-----------
eligibility and participation requirements of the Plan.
Qualified employer deferral contributions shall mean qualified nonelective
-----------------------------------------
contributions taken into account under the terms of the Plan in determining the
actual deferral percentage.
Qualified nonelective contributions shall mean contributions (other than
-----------------------------------
matching contributions) made by the employer and allocated to participants'
accounts that the participant
38
<PAGE>
may not elect to receive in cash until distributed from the Plan; that are 100
percent vested and nonforfeitable when made; and that are not distributable
under the terms of the Plan to participants or their beneficiaries except in
events upon which elective deferrals may be distributed as described in Section
7.7(a) through (e) of this Plan.
39
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ARTICLE X
ROLLOVER CONTRIBUTIONS
----------------------
10.1 PERMITTED ROLLOVERS. Subject to terms and conditions established by
-------------------
the Plan Administrator, an employee, whether or not a participant, may transfer
rollover or direct rollover amounts to the trust from other eligible retirement
plans as permitted under, and pursuant to the provisions of, Code (S)(S) 402(c)
and 401(a)(31), respectively. The Plan Administrator shall require written
certification that the contribution qualifies under Code (S)(S) 402(c) or
401(a)(31), respectively.
10.2 VESTING AND ACCOUNTING. Rollover contributions and earnings shall be
----------------------
100% vested and shall be accounted for separately in a rollover account. All
rollover contributions shall be invested and reinvested along with the assets of
the Plan and treated in all respects as other assets of the Plan.
10.3 DISTRIBUTION UPON TERMINATION. The rollover account shall be
-----------------------------
distributed at the same time and in the same manner as the employee's other
accounts. If an employee terminates with no other amounts payable from this
Plan, the rollover account shall be valued as of the valuation date coinciding
with or preceding the date of termination and shall be paid in a single sum
within 60 days after the end of the plan year.
40
<PAGE>
ARTICLE XI
ADMINISTRATION
--------------
11.1 NAMED FIDUCIARY. The employer and the Plan Administrator are named
---------------
fiduciaries for purposes of ERISA. The Plan Administrator is the named fiduciary
with the authority to control and manage the operation and administration of the
Plan, and is the "administrator" of the Plan within the meaning of ERISA Section
3(16)(A).
11.2 PLAN ADMINISTRATOR. The Plan Administrator may from time to time
------------------
employ agents to aid in the administration of the Plan. The Plan Administrator
shall have the sole power and discretion to interpret and construe the
provisions of this Plan and to determine all questions, including both
interpretive and factual questions arising in connection with the
administration, interpretation and application of the Plan, and shall supply any
omission or reconcile any inconsistency in the Plan. The Plan Administrator's
authority includes, without limitation, the sole authority to interpret and
construe the Plan and determine a participant's eligibility to participate in
the Plan and to receive benefits, and amount of benefits, if any. Any such
action shall be final and conclusive upon all persons. The Plan Administrator
shall decide any disputes which may arise under this Plan relative to the rights
of employees, past and present, and their beneficiaries. Further, the Plan
Administrator shall adopt such rules as it deems necessary, and give
instructions and directions to the trustee as necessary and, in general, shall
direct the administration of the Plan. The Plan Administrator's authority
includes, but is not limited to, the following:
a. to compute, certify, and direct the trustee with respect to the
amount and the kind of benefits to which any participant shall be
entitled hereunder;
41
<PAGE>
b. to authorize and direct the trustee with respect to all
nondiscretionary or otherwise directed disbursements from the
trust;
c. to compute and certify to the employer and to the trustee from
time to time the sums of money necessary or desirable to be
contributed to the Plan;
d. to consult with the employer and the trustee regarding the short
and long-term liquidity needs of the Plan in order that the
trustee can exercise any investment discretion in a manner
designed to accomplish specific objectives; and
e. to prepare and implement a procedure to notify eligible employees
that they may elect to have a portion of their compensation
deferred or paid to them in cash.
11.3 FACILITY OF PAYMENTS. Whenever, in the Plan Administrator's opinion,
--------------------
a person who is entitled to receive any payment of a benefit or installment
thereof is under a legal disability or is incapacitated in any way so as to be
unable to manage his or her financial affairs, the Plan Administrator may direct
the trustee to make payments to such person or to the participant's legal
representative or to a relative or friend of the participant for his or her
benefit. Any payment of a benefit or installment thereof made in accordance with
the provisions of this section shall be a complete discharge of any liability
for the making of such payment under this Plan.
11.4 APPOINTMENT OF INVESTMENT MANAGER. The employer shall have the
---------------------------------
authority described in ERISA (S) 402(c)(3) to appoint one or more investment
managers and contract with each for management of any part of the trust fund for
a reasonable fee. Selection and retention of an investment manager shall be in
the trustee's discretion. Each investment
42
<PAGE>
manager shall have the power to manage, acquire, and dispose of the part of the
trust fund designated by the employer. The investment manager shall have no
responsibility for plan operation or administration.
11.5 INVESTMENT MANAGER AND TRUSTEE. If an investment manager is
------------------------------
appointed:
(a) The trustee shall segregate the trust fund or any part thereof
into one or more investment accounts. The trustee shall appoint an investment
manager for each account and designate the part of the trust fund to be managed
by each investment manager.
(b) The trustee may terminate at any time the authority of an
investment manager to manage an account. In such event or upon resignation of an
investment manager, the trustee may appoint a successor investment manager for
the account.
(c) Each investment manager to whom any fiduciary responsibility
with respect to the Plan or the trust funds allocated is delegated, shall
discharge such responsibility in accordance with the standards set forth in
ERISA 404(a) and shall acknowledge such responsibility in writing.
11.6 DELEGATION OF AUTHORITY AND DUTIES BY PLAN ADMINISTRATOR. The 401(k)
--------------------------------------------------------
Administrative Committee may allocate to a specific 401(k) Administrative
Committee member or members the authority and duty to carry out some or all of
the Plan Administrator's fiduciary responsibilities under the Plan. In addition,
the 401(k) Administrative Committee (or a 401(k) Administrative Committee member
who has been allocated authority and duties pursuant to the preceding sentence)
may designate one or more persons, positions, committees or entities either
within or outside of Microsoft Corporation to carry out some or all of the Plan
Administrator's fiduciary responsibilities under the Plan. Any
43
<PAGE>
such designee and any 401(k) Administrative Committee member who has been
allocated authority shall have the same authority and discretion as would the
401(k) Administrative Committee in performing the delegated or allocated
responsibilities. The 401(k) Administrative Committee's allocation or delegation
described in this Section 11.6 may include, without limitation, its fiduciary
authority and duties under Articles XI and XII, including authority, power and
discretion that is assigned solely to the Plan Administrator. The Plan
Administrator's allocation or delegation may be made either orally or in
writing, and shall be effective only after the person receiving the allocation
or delegation agrees to accept the authority and duties allocated or delegated.
44
<PAGE>
ARTICLE XII
CLAIMS PROCEDURE
----------------
12.1 DENIAL OF CLAIMS. Any denial of a claim for benefits under the trust
----------------
by a participant or beneficiary shall be stated in writing and delivered or
mailed to the participant or beneficiary. Such notice shall set forth the
specific reasons for the denial in a manner that may be understood without legal
or actuarial counsel. Any denial of a claim may be appealed to the Plan
Administrator by sending to the Plan Administrator a written request for review
within 90 days after receiving notice of denial. The Plan Administrator shall
give the applicant an opportunity to review pertinent documents in preparing the
applicant's request for review. The request shall set forth all grounds on which
it is based, supporting facts and other matters which the applicant deems
pertinent. The Plan Administrator may require the applicant to submit such
additional facts, documents or other material as it deems necessary or advisable
in making its review and shall act upon such request within 60 days after the
receipt thereof, unless special circumstances require further time. If the Plan
Administrator confirms the denial in whole or in part, the Plan Administrator
shall notify the applicant, setting forth in a manner calculated to be
understood by the applicant, specific reasons for denial and specific references
to Plan provisions on which the decision was based.
12.2 ARBITRATION. Any controversy or claim arising out of or relating to
-----------
this Plan, which is asserted by any person as an employee, former employee,
participant, or beneficiary, shall be settled by arbitration in accordance with
the Commercial Rules of the American Arbitration Association. Judgment upon the
award rendered by the arbitrator shall be entered in a court having jurisdiction
thereof. All such arbitration cases shall be heard by an attorney licensed in
the jurisdiction where the arbitration hearing is to occur.
45
<PAGE>
ARTICLE XIII
NONALIENATION PROVISION
-----------------------
No participant shall have the right or power to alienate, anticipate,
commute, pledge, encumber, or assign any of the funds allocated to the
participant under the terms of this Plan, and such funds shall not be subject to
seizure by any creditor of the participant under any writ or proceedings at law
or in equity; provided, that the terms of this Article shall not prohibit the
creation, assignment or recognition of a right to any benefit payable with
respect to a participant if such creation, assignment or recognition of a right
is made under a qualified domestic relations order defined under Code (S)
414(p).
46
<PAGE>
ARTICLE XIV
TERMINATION
-----------
14.1 PLAN TERMINATION. The employer shall have the right to terminate the
----------------
Plan at any time as to its employees by action of its board of directors or by
action of any committee or officer to whom such board of directors has delegated
the right to terminate the Plan. In addition, Microsoft Corporation reserves the
right to terminate the Plan in its entirety at any time by action of the Board
of Directors of Microsoft Corporation or by action of any committee or officer
to whom the Board of Directors has delegated such authority to terminate the
Plan, and the Plan shall terminate in its entirety unless Microsoft Corporation
permits employers wishing to continue the Plan as to their respective employees
to arrange a spin-off of Plan assets attributable to accounts of their
employees.
14.2 NO REVERSION TO EMPLOYER -- ACCRUED RIGHTS NONFORFEITABLE. No
---------------------------------------------------------
termination shall have the effect of vesting in the employer any part of the
principal or income of the plan funds. In the case of a termination, partial
termination, or complete discontinuance of contributions, the rights of all
affected employees accrued to the date of such termination or partial
termination, to the extent funded as of such date, shall be nonforfeitable. See
Section 5.6 of this Plan for the treatment of certain forfeitures upon complete
termination of the Plan.
14.3 DISTRIBUTION UPON TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS.
----------------------------------------------------------------
Upon termination of the Plan or a complete discontinuance of contributions to
the Plan the interests of all participants shall fully vest and distribution
shall be made to each participant in the form and manner determined by the Plan
Administrator and as permitted by the Code and ERISA. See Section 7.7 of this
Plan.
47
<PAGE>
ARTICLE XV
MERGER OR CONSOLIDATION
-----------------------
In the case of any merger or consolidation with, or transfer of, assets or
liabilities to any other retirement Plan, the termination benefits of
participants, former participants and beneficiaries immediately subsequent to
the merger, consolidation or transfer shall be equal to or greater than the
termination benefits immediately prior to such merger, consolidation, or
transfer. In the case of any plan which has merged into this Plan or any assets
and liabilities which have been transferred to this Plan from another plan, see
Appendix V (as added pursuant to this amendment) of this Plan for (i) special
provisions which apply to any accounts which were transferred to this Plan or
established in connection with such transfer or merger and (ii) special
provisions which apply to participants who formerly participated in the
transferor or nonsurviving plan.
48
<PAGE>
ARTICLE XVI
AMENDMENTS
----------
Microsoft Corporation reserves the right, from time to time, to make any
amendment or amendments to this Plan by resolution of its Board of Directors, or
by action of any committee, person(s) or job position(s) to whom the Board of
Directors has delegated authority to amend the Plan, which amendment or
amendments shall not cause any part of the plan funds to be used for, or
directed to, any purposes other than the exclusive benefit of participants,
former participants or their beneficiaries, nor shall any such amendment reduce
the amount of accrued benefit of any participant or beneficiary within the
meaning of Code (S) 411(d)(6) except to the extent permitted by Code (S)
411(d)(6) or the Treasury Regulations thereunder.
49
<PAGE>
ARTICLE XVII
RIGHTS RESERVED
---------------
The establishment of the Plan as evidenced hereby or as hereafter modified,
the creation of any funds or accounts or the payment of any benefit hereunder
shall not be construed as giving any participant, or any other person, any legal
or equitable right against the employer, the trustee, or the Plan Administrator,
unless the same shall be specifically provided for in this document or conferred
by affirmative action of the employer in accordance with the terms and
provisions of this Plan or as giving any employee or participant the right to be
retained in the service of the employer. All employees shall remain subject to
discharge by the employer to the same extent as if this Plan had never been
executed.
50
<PAGE>
ARTICLE XVIII
TOP-HEAVY PROVISIONS
--------------------
If the Plan is top-heavy in any plan year, the provisions of Appendix IV,
attached hereto and incorporated herein, shall supersede any conflicting
provisions in the Plan.
51
<PAGE>
ARTICLE XIX
LOANS
-----
A participant may borrow from his or her account in accordance with a non-
discriminatory written loan policy, which is incorporated herein by reference.
52
<PAGE>
ARTICLE XX
ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND BENEFICIARIES
-------------------------------------------------------
20.1 APPLICABILITY. The provisions of this Article XX shall apply only to
-------------
the participants who (1) had accounts transferred to this Plan from a plan which
provided the option of receiving distributions in the form of an annuity (as
shown in Appendix V), and (2) have chosen to receive their distribution upon
death, disability, or termination of employment in the form of a life annuity.
This Article XX applies only to those accounts described in Appendix V that were
transferred from the prior plan in a plan merger, plan-to-plan asset transfer or
other transfer for which the annuity distribution option is required by law to
be preserved with respect to the transferred accounts. Thus, for example, this
Article XX does not apply to regular rollovers.
20.2 DEFINITIONS.
------------
(a) ANNUITY STARTING DATE means the first day of the first period for
---------------------
which an amount is paid as an annuity.
(b) ELECTION PERIOD means the period beginning on the first day of the
---------------
plan year in which a participant attains 35 and ending on the date of the
participant's death. If a participant separates from service before the first
day of the plan year in which he reaches age 35, the election period with
respect to his or her account balance as of the date of separation shall begin
on the date of separation. A participant who will not attain age 35 as of the
end of a plan year may make a valid waiver election to waive the qualified
preretirement survivor annuity for the period beginning on the date of the
election and ending on first day of the plan year in which the participant will
attain age 35. Qualified preretirement survivor annuity coverage will be
53
<PAGE>
automatically reinstated as of the first day of the plan year in which a
participant attains age 35. Any new waiver on or after that date shall be
subject to the full requirements of this Article XX.
(c) QUALIFIED JOINT AND SURVIVOR ANNUITY means an immediate annuity
------------------------------------
purchasable with the participant's vested account balance which provides a life
annuity for the participant and a survivor annuity payable for the remaining
life of the participant's surviving spouse equal to at least 50% and not more
than 100% of the amount of the annuity payable during the life of the
participant.
(d) PRERETIREMENT SURVIVOR ANNUITY means an annuity which is purchasable
------------------------------
with 100% of the participant's vested account balance (as determined on the date
of the participant's death) and which is payable for the life of the
participant's surviving spouse.
(e) SPOUSE means the current spouse or surviving spouse of a participant
------
except that a former spouse will be treated as a spouse or surviving spouse (and
a current spouse will not be treated as the spouse or surviving spouse) to the
extent provided under a qualified domestic relations order.
20.3 DISTRIBUTION IN THE FORM OF A JOINT AND SURVIVOR ANNUITY.
--------------------------------------------------------
A participant who is married shall receive his or her vested account balance in
the form of a joint and survivor annuity unless the participant completes a
valid waiver election within the 90-day period ending on the annuity starting
date. The participant's waiver election will not be required to meet the spousal
consent requirements if: (1) the participant does not have a spouse; (2) the
Plan is unable to locate the participant's spouse; (3) the participant is
legally separated or has been abandoned (within the meaning of state law) and
the participant has a court order to that effect; or (4) other circumstances
exist under which the Secretary of the Treasury will excuse the
54
<PAGE>
consent requirement. If the participant's spouse is legally incompetent to give
consent, the spouse's legal guardian (even if the legal guardian is the
participant) may give consent.
20.4 DISTRIBUTION IN THE FORM OF A PRERETIREMENT SURVIVOR ANNUITY. If a
------------------------------------------------------------
married participant dies prior to his or her annuity starting date, the
participant's surviving spouse shall receive a portion of the participant's
vested account balance in the form of a preretirement survivor annuity, unless
the participant had a valid waiver election in effect, or unless the participant
and his or her spouse were not married through a one year period ending on the
date of the participant's death.
20.5 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY.
------------------------------------------------------
During the 90-day period prior to the participant's annuity starting date, a
participant may waive the requirement to receive his or her benefit under the
Plan in the form of a joint and survivor annuity. In order to waive the
election, the participant must have received a written explanation of the terms
and conditions of the qualified joint and survivor annuity as described in
Section 20.7.
A married participant's waiver election shall not be valid unless the
participant's spouse: (1) has consented in writing to the election waiver and a
notary public or the plan administrator (or his or her representative) witnesses
the spouse's consent; (2) the spouse consents to the alternate form of payment
designated by the participant or to any change in the designated form of
payment; and (3) unless the spouse is the participant's sole beneficiary, the
spouse consents to the participant's beneficiary designation or to any change in
the participant's beneficiary designation.
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<PAGE>
20.6 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. A participant's
------------------------------------------------
waiver election of the preretirement survivor annuity is not valid unless: (1)
the participant makes the waiver election during the election period as defined
in this section; and (2) the participant's spouse (to whom the preretirement
survivor annuity is payable) satisfies the consent requirements described in
Section 20.5, except that the spouse need not consent to the form of benefit
payable to the designated beneficiary. The spouse's consent to the waiver of the
preretirement survivor annuity is irrevocable, unless the participant revokes
the waiver election. A waiver election described in this paragraph is not valid
unless made after the participant has received the written explanation described
in Section 20.7.
20.7 NOTICE REQUIREMENTS. In the case of a qualified joint and survivor
-------------------
annuity, no less than 30 days and no more than 90 days before a participant's
annuity starting date the plan administrator shall provide to the participant a
written explanation of: (1) the terms and conditions of a qualified joint and
survivor annuity; (2) the participant's right to make, and the effect of, an
election to waive the qualified joint and survivor annuity form of benefit; (3)
the rights of the participant's spouse; and (4) the right to make, and the
effect of, a revocation of a previous election to waive the qualified joint and
survivor annuity. The Plan may provide the written explanation described above
after the annuity starting date, provided that the distribution begins at least
30 days after the date on which such explanation is provided. Notwithstanding
the foregoing, the Plan may permit a participant to elect to waive the
requirement that the written explanation be provided at least 30 days before the
annuity starting date. Such a waiver is allowed only if the distribution
commences more than 7 days after the written explanation is provided.
56
<PAGE>
In the case of a qualified preretirement annuity, the plan administrator
shall provide to the participant a written explanation of the qualified
preretirement survivor annuity, in terms and manner comparable to the
requirements applicable to the explanation of a qualified joint and survivor
annuity as described in the preceding paragraph. The explanation shall be
provided by the latest of the following periods: (1) the period beginning with
the first day of the plan year in which the participant attains age 32 and
ending with the close of the plan year preceding the plan year in which the
participant attains age 35; (2) a reasonable period ending after an individual
becomes a participant; or (3) a reasonable period ending after this Article XX
first applies to the participant. Notwithstanding the foregoing, in the case of
a participant who separates from service before attaining age 35, notice must be
provided within a reasonable time ending after his separation from service.
A reasonable period of time shall be the end of a two-year period beginning
one year before the date the applicable event occurs, and ending one year after
that date. In the case of a participant who separates from service before the
plan year in which he reaches age 35, notice shall be provided within the two-
year period beginning one year before the separation and ending one year after
the separation. If such a participant thereafter returns to employment with the
employer, the applicable period for the participant shall be redetermined.
20.8 DISTRIBUTION OF ACCOUNTS OF LESS THAN $5,000. Notwithstanding any
--------------------------------------------
provision of this Article XX to the contrary, if a participant's vested account
balance does not exceed $5,000 on the date of distribution (and has never
exceeded $5,000 at the time of a prior distribution), the participant's benefit
shall be distributed in the form of a lump sum.
20.9 PROVISION OF ANNUITIES. All annuities provided under this Plan
----------------------
shall be purchased from an insurance company selected by Microsoft Corporation.
57
<PAGE>
ARTICLE XXI
VOLUNTARY AFTER-TAX CONTRIBUTIONS
---------------------------------
21.1 ELECTION TO MAKE VOLUNTARY AFTER-TAX CONTRIBUTIONS. In the same
--------------------------------------------------
manner as described in Article III for employee salary deferrals, a participant
may elect to contribute on an after-tax basis from 1% to 7% of each of his or
her compensation payments to an employee after-tax contribution account under
the Plan, provided, however, that the contributions shall be subject to the
limitations of Code (S)415 (as described in Section 9.1 of the Plan) and Code
(S)401(m) (as described in Section 9.7 and Appendix III.9.5.C. of the Plan).
21.2 VESTING OF VOLUNTARY AFTER-TAX CONTRIBUTIONS. A participant's
--------------------------------------------
voluntary after-tax contributions made to the Plan in accordance with Section
21.1 shall be fully vested at all times.
21.3 ESTABLISHMENT OF VOLUNTARY AFTER-TAX CONTRIBUTIONS ACCOUNTS. For
-----------------------------------------------------------
participants who elect to make a contribution under this Article XXI, the
employer shall establish a separate account for the participant. These accounts
shall be labeled employee after-tax contribution accounts.
21.4 LIMITATIONS ON VOLUNTARY AFTER-TAX CONTRIBUTIONS. A participant's
------------------------------------------------
voluntary after-tax contributions shall be subject to the limitations on total
account contributions under Section 9.1 of the Plan. If a participant who has
made voluntary after-tax contributions during the plan year exceeds the
limitation under Section 9.1, the after-tax contributions shall be distributed
to the participant before any distribution from the participant's salary
deferral account is made.
A participant's voluntary after-tax contributions shall also be subject to
the average contributions percentage test as described in Section 9.7 and
Appendix III.9.5.C. of the Plan. For
58
<PAGE>
purposes of such test and calculating a participant's contribution percentage,
an employee's voluntary after-tax contributions shall be added to the employer
matching contributions, the sum of which shall then be divided by the
participant's compensation. If a participant who has made voluntary after-tax
contributions during the plan year exceeds the limitations under Section 9.7 and
Appendix III.9.5.C. of the Plan, the after-tax contributions shall be
distributed to the participant before any distribution from the participant's
employer contribution account is made.
21.5 DEFINITION OF COMPENSATION. Any employee voluntary after-tax
--------------------------
contributions made by a participant during the plan year shall be included in
the definition of compensation in Appendix I of the Plan.
21.6 PLAN TERMS APPLICABLE TO VOLUNTARY AFTER-TAX CONTRIBUTIONS. The
----------------------------------------------------------
provisions of Article III applicable to the method of making an election to
contribute a portion of compensation, the provisions of Article VI regarding
participant's accounts and investments, the provisions of Article VII regarding
the payment of account balances upon termination, age 59 1/2 , death,
disability, qualified domestic relations orders, or the sale of the trade or
business, the provisions of Article VIII regarding hardship distributions, and
the provisions of Article XIX (which incorporates by reference the loan policy
of the Plan) and the loan policy shall all apply to participant voluntary after-
tax contributions. For purposes of these sections, except to the extent
provided otherwise under this Article, voluntary after-tax contributions shall
be treated in the same manner as participant salary deferral contributions. In
addition, the general provisions of the Plan found in Article XI Administration,
Article XII Claims Procedure, Article XIII Nonalienation Provision, Article XIV
Termination, Article XV Merger or Consolidation, Article XVI Amendments, Article
XVII Rights Reserved,
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Article XVIII Top-Heavy Provisions and similar articles or appendices shall
apply to the voluntary after-tax contributions to the Plan.
60
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APPENDIX I
DEFINITION OF COMPENSATION
Section 1.3
I.1.3.A. Compensation:
------------
Compensation means an employee's wages, salaries, fees for professional
services, and other amounts received (without regard to whether or not an amount
is paid in cash) for personal services actually rendered in the course of
employment with the employer maintaining the plan to the extent that the amounts
are includible in gross income (including, but not limited to, bonuses,
commissions, and overtime pay). Compensation includes the employee's elective
salary reduction contributions not includible in gross income under Code (S) 125
(cafeteria plans) or (S) 402(e)(3) (401(k) plans); and compensation includes
foreign earned income (as defined in Code (S) 911(b)), whether or not excludable
from gross income under Code (S) 911. Compensation shall not include:
(a) (even if includible in gross income) reimbursements or other
expense allowances, fringe benefits (cash and noncash), moving expenses,
deferred compensation, welfare benefits, and bonuses and expense allowances
which are not based upon the participant's performance as an employee (examples
of non-performance based compensation include signing, relocation, press, and
patent bonuses, tax and foreign currency equalization payments, and anniversary
stock awards);
(b) employer contributions to a simplified employee pension
described in Code (S) 408(k), distributions from a plan of deferred compensation
(regardless of whether such amounts are includible in the gross income of the
employee when distributed);
I-1
<PAGE>
(c) amounts realized from the exercise of a nonqualified stock
option, or when restricted stock (or property) held by an employee either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture;
(d) amounts realized by the employee from the sale, exchange or
other disposition of stock acquired under a qualified stock option; and
(e) other amounts which receive special tax benefits, such as
premiums for group-term life insurance.
I.1.3.B. Compensation for Employees of Controlled Group
----------------------------------------------
In the case of an employee of an employer which is a member of a controlled
group of corporations (as defined in Code (S) 414(b) as modified by Code (S)
415(h)), the term "compensation" for such employee includes compensation from
all employers that are members of the group, regardless of whether the
employee's particular employer has a qualified plan. This rule is also
applicable to an employee of two or more trades or businesses (whether or not
incorporated) that are under common control (as defined in Code (S) 414(c) as
modified by Code (S) 415(h)), to an employee of two or more members of an
affiliated service group as defined in Code (S) 414(m), and to an employee of
two or more members of any group of employers who must be aggregated and treated
as one employer pursuant to Code (S) 414(o).
I.1.3.C. Limitations on Compensation
---------------------------
(a) In addition to the applicable limitations set forth in the
Plan, and notwithstanding any other provisions of the Plan to the contrary the
annual compensation of each employee taken into account under the Plan shall not
exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation
limit is $150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with Code (S) 401(a)(17)(B) (e.g., $160,000 in
I-2
<PAGE>
1997). The cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding 12 months, over which compensation is determined (the
"determination period") beginning in such calendar year. If a determination
period consists of fewer than 12 months, the OBRA '93 annual compensation limit
will be multiplied by a fraction, the numerator of which is the number of months
in the determination period, and the denominator of which is 12.
Any reference in this Plan to the limitation under Code (S) 401(a)(17)
shall mean the OBRA '93 annual compensation limit set forth in this provision.
For purposes of determining the maximum dollar amount referred to in this
provision, the compensation of any participant who is either a 5% owner (as
defined in Code (S) 416(i)) or one of the ten most highly paid highly
compensated employees during the Plan year shall be aggregated with: (i) the
compensation of any lineal descendant who has not attained the age of 19, and
(ii) the compensation of a participant who is his or her spouse.
I-3
<PAGE>
APPENDIX II
Sections 1.6, 2.1 and 5.2
EMPLOYERS MAINTAINING THE PLAN
Employer Effective Date
- ------------------------------------------- --------------------------
Microsoft Corporation January 1, 1987
Technology Resources Management Corporation November 23, 1992
Vermeer Technologies, Inc. April 1, 1996 - March 13, 1998
Microsoft Licensing, Inc. August 1, 1997
WebTV Networks, Inc. January 1, 1998
Hotmail Corporation April 1, 1998
Microsoft - Health, LLC September 21, 1998
MSNBC Interactive News L.L.C. January 1, 1999
Expedia, Inc. November 1 - December 31, 1999
Visio Corporation March 1, 2000
EMPLOYEES' PREPARTICIPATION SERVICE WITH THESE COMPANIES
IS COUNTED FOR ELIGIBILITY AND VESTING
Company Effective Date Credit is Granted
- ------------------------------------------- --------------------------------
Microsoft Corporation January 1, 1987
Technology Resources Management Corporation November 23, 1992
Fox Software, Inc. July 1, 1992
SOFTIMAGE, Inc. June 27, 1994
Bauer Group, Inc. July 1, 1989
Forethought, Inc. August 1, 1987
Altamira Software Corporation September 16, 1994
NextBase, Ltd. October 31, 1994
Automap, Inc. October 31, 1994
One Tree Software, Inc. November 10, 1994
Natural Language Inc. February 22, 1995
Network Managers Ltd. August 28, 1995
II-1
<PAGE>
<TABLE>
<CAPTION>
Company Effective Date Credit is Granted
- ---------------------------------------------------- --------------------------------
<S> <C>
Blue Ribbon SoundWorks October 13, 1995
Netwise October 28, 1995
Bruce Artwick Organization December 1, 1995
Vermeer Technologies, Inc. January 12, 1996
(Note: service credit is as described in Appendix
V)
Colusa Software, Inc. February 9, 1996
Aspect Software Engineering, Inc. March 22, 1996
Aha! software corp. March 27, 1996
EXOS, Inc. April 12, 1996
EShop Inc. June 20, 1996
(Note: service credit is as described in Appendix
V)
ResNova Software, Inc. November 14, 1996
Panorama Software Systems Ltd. January 2, 1997
</TABLE>
EMPLOYEES' PREPARTICIPATION SERVICE WITH THESE COMPANIES
IS COUNTED FOR VESTING
<TABLE>
<CAPTION>
Company Effective Date Credit is Granted
- ---------------------------------------------------- ---------------------------------
<S> <C>
NetCarta Corporation January 31, 1997
Interse` Corporation February 25, 1997
Dimension X May 13, 1997
Cooper & Peters, Inc. June 11, 1997
LinkAge Software (1997) Inc. June 27, 1997
(and its predecessor, LinkAge Software Inc.)
VXtreme, Inc. July 31, 1997
WebTV Networks, Inc. August 1, 1997
(Note: service credit is as described in Appendix
V)
Hotmail Corporation December 30, 1997
Firefly Network, Inc. April 15, 1998
The Mesa Group, Inc. April 24, 1998
Valence Research August 7, 1998
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Company Effective Date Credit is Granted
---------------------------------------------------- --------------------------------
<S> <C>
LinkExchange Inc. November 4, 1998
Virtual World Entertainment Group, Inc. January 11, 1999
FASA Interactive Technology, Inc. January 11, 1999
Compare Net, Inc. March 4, 1999
Access Software Incorporated April 29, 1999
Jump Networks, Inc. April 30, 1999
Intrinsa Corporation June 29, 1999
Entropic Research Laboratory, Inc. November 4, 1999
Visio Corporation January 7, 2000
</TABLE>
In order to receive preparticipation service credit for service with any of
the foregoing companies except Microsoft Corporation ("Microsoft"), Technology
Resources Management Corporation ("TRMC"), Vermeer Technologies, Inc. ("VTI")
and eShop Inc. (each of the foregoing is hereinafter referred to as a "Former
Employer"), the employee must be employed by Microsoft, TRMC, VTI or a company
which is affiliated (within the meaning of Code Sections 414(b), (c), (m) or
(o)) with Microsoft, TRMC or VTI, in connection with Microsoft's (or its
affiliate's) acquisition of or merger with such Former Employer (or a trade or
business thereof). Any employee who has previously worked for one of the Former
Employers and whose employment with Microsoft, TRMC, VTI or one of its
affiliates is not connected with Microsoft's (or its affiliate's) acquisition of
or merger with such Former Employer (or a trade or business thereof) will not
receive credit for his or her prior service with the Former Employer.
Preparticipation service credit is counted for eligibility and vesting
purposes for an employee's service with the following companies despite the fact
that neither Microsoft nor an affiliate of Microsoft acquired or merged with
such company (or a trade or business thereof). Notwithstanding the foregoing,
service with the following companies will only be counted for
II-3
<PAGE>
those employees who are employed with Microsoft (or an affiliate of Microsoft)
on the effective date set forth below on which service credit is granted for
service with such company.
EMPLOYEES' PREPARTICIPATION SERVICE WITH THESE COMPANIES
IS COUNTED FOR ELIGIBILITY AND VESTING
(NOTE: These Companies were not Acquired)
Company Effective Date Credit is Granted
- -------------------------------------- ------------------------------------
Charles View Software, Inc. June 1, 1996
Prior service with MSNBC Interactive News L.L.C. and, for employees of MSNBC
Interactive News L.L.C., service with National Broadcast Company, shall also be
counted towards vesting. See Appendix V.G. regarding calculation of such
vesting service credit.
II-4
<PAGE>
APPENDIX III
CODE (S) 401(k) LIMITATIONS OF COMPENSATION DEFERRALS AND CODE (S) 401(m)
LIMITATIONS ON COMPENSATION DEFERRALS
III.9.5.A. Definition of Highly Compensated Employee.
-----------------------------------------
"Highly compensated employee" shall mean:
(a) Any employee who performs services for the employer during the
"determination year" and who, during the "determination year" (1) was a 5% owner
of the employer; (2) received compensation from the employer in excess of
$75,000 (as adjusted for increases in cost of living as reported in IRS
publications); (3) received compensation from the employer in excess of $50,000
(as adjusted for increases in cost of living as reported in IRS publications)
and was a member of the "top-paid group" for such year; or (4) was an officer of
the employer and received compensation during such year that is greater than 50%
of the dollar limitation in effect under Code (S) 415(c)(1(A);
(b) Any employee who separated from service (or was deemed to have
separated) prior to the determination year, and met the description in (a) above
for either the separation year or any determination year ending on or after the
employee's 55th birthday.
(c) If no officer of the employer has compensation in excess of 50%
of the dollar limitation in effect under Code (S) 415(b)(1)(A) during a
determination year, the highest paid officer for such year shall be treated as a
highly compensated employee.
(d) If an employee is, during a determination year, a "family
member" of either a 5% owner who is an employee or of a highly compensated
employee in the group consisting of the 10 most highly compensated employees
ranked on the basis of compensation paid by the employer during such year, then
the family member and 5% owner or top-ten highly
III-1
<PAGE>
compensated employee shall be treated as a single employee, and their
compensation and contributions or benefits under this Plan shall be aggregated.
Except as otherwise provided under Code (S) 401(a)(17), "family member" includes
the spouse, lineal ascendants and descendants of the employee or former
employee, and the spouses of such lineal ascendants and descendants.
(e) The "determination year" shall be the plan year for which
compliance is being tested, and the "look-back year" shall be the calendar year
ending at the end of the determination year (see the calendar year calculation
election pursuant to Temporary Treasury Regulation 1.414(q)-IT, Q&A-14(b)).
Because the look-back year is the same as the determination year, the look-back
year shall be referred to herein as the determination year.
(f) The "top-paid group" for a determination year shall consist of
the top 20% of employees ranked on the basis of compensation received during the
year excluding employees described in Code (S) 414(q)(8) and Treasury
regulations thereunder. The number of employees treated as officers shall be
limited to 50 (or, if less, the greater of 3 employees or 10% of the employees).
For purposes of this definition of "highly compensated employee", "compensation"
means compensation within the meaning of Code (S) 415(c)(3), but including
elective or salary reduction contributions to a cafeteria plan, cash or deferred
arrangement, or tax-sheltered annuity.
(g) Notwithstanding the foregoing, for any year that the requirements
set forth in Code Section 414(q)(12) and any regulations thereunder are
satisfied, (a)(2) above shall be applied by substituting "$50,000" for
"$75,000", and (a)(3) above shall not apply.
III-2
<PAGE>
III.9.5.B. Code (S) 401(k) Limitations on Compensation Deferrals.
-----------------------------------------------------
(a) The Plan Administrator will estimate as soon as practicable
before the close of the plan year and at such other times as the Plan
Administrator in its discretion determines, the extent, if any, to which any
participant or class of participants will have to reduce contributions under
this Plan.
(b) For each plan year, an actual deferral percentage will be
determined for each participant equal to the ratio of the total amount of the
participant's salary deferrals under section 3.1 for the plan year divided by
the participant's compensation in the plan year. In the case of family members
treated as a single highly compensated employee under the definition of "highly
compensated employee", in accordance with the family aggregation rules of Code
(S) 414(q)(6), the actual deferral percentage shall be the greater of the (1)
the actual deferral percentage determined by combining the compensation
deferrals and compensation of all eligible family members who are highly
compensated employees without regard to family aggregation, and (2) the actual
deferral percentage determined by combining the salary deferrals and
compensation of all eligible family members. Except to the extent taken into
account in the preceding sentence, the deferrals and compensation of such family
members shall be disregarded for purposes of this section. Except as otherwise
provided in this paragraph (b), with respect to participants who have made no
salary deferrals under this plan, such actual deferral percentage will be zero.
(c) The average of the actual deferral percentages for highly
compensated employees ("high average") when compared with the average of the
actual deferral percentages for non-highly compensated employees ("low average")
must meet one of the following requirements:
III-3
<PAGE>
(1) The high average is no greater than 1.25 times the low
average; or
(2) The high average is no greater than two times the low
average and the high average is no greater than the low average plus two
percentage points.
(d) If, pursuant to the estimates by the Plan Administrator under (a)
and (b) above, a participant or class of participants is not eligible for salary
deferral treatment for any or all of the amounts deferred, then the Plan
Administrator may elect, at its discretion, to pursue any of the following
courses of action or any combination thereof:
(1) Excess salary deferrals, and any earnings attributable
thereto through the date of distribution, may be returned to the employer
employing the participant, solely for the purpose of enabling the employer to
withhold any federal, state, or local taxes due on such amounts. The employer
will pay all remaining amounts to the participant within the 2-1/2 month period
following the close of the plan year to which the excess salary deferrals relate
to the extent feasible. but in all events no later than 12 months after the
close of such plan year.
(2) The Plan Administrator may authorize a suspension or
reduction of salary deferrals.
(3) The company, in its discretion, may make a contribution to
the Plan, which will be allocated as a fixed dollar amount among the accounts of
non-highly compensated employees who have met the requirements of section 2.1
(e) The amount of the excess salary deferrals will be determined by
the Plan Administrator by reducing the actual deferral percentage of the highly
compensated employee(s) with the highest actual deferral percentage to the
extent required to enable the plan to meet the limits in (c) above or to cause
the actual deferral percentage of such employee(s) to equal the actual deferral
percentage of the highly compensated employee(s) with the next-highest actual
III-4
<PAGE>
deferral percentage. The process in the preceding sentence shall be repeated
until the Plan satisfies the limits in (c) above. In the case of family members
subject to the family aggregation rules of Code (S) 414(q)(6), excess salary
deferrals will be allocated among family members in proportion to the salary
deferrals of each family member that have been combined under section
III.9.5.B.(b) above. Where the actual deferral percentage is determined under
section III.9.5.B.(b)(1) above, however, excess salary deferrals will be
allocated first among the eligible highly compensated employee family members in
proportion to the salary deferrals of each such highly compensated employee
family member until the actual deferral percentage of the eligible highly
compensated employee family members has been reduced to the actual deferral
percentage of the eligible non-highly compensated employee family members. If
reduction of the actual deferral percentage below that of the eligible non-
highly compensated employee family members is required under section
III.9.5.B.(b)(1) to enable the plan to meet the limits in section III.9.5.B.(c)
above, such further reduction shall take into account the salary deferrals of
all eligible family members and shall be allocated among all such family members
in proportion to their salary deferrals. The earnings attributable to excess
salary deferrals will be determined in accordance with Treasury Regulations.
(f) In the discretion of the Plan Administrator, the tests described
in this section may be applied by aggregating the Plan with any other defined
contribution plans permitted under the Code.
III.9.5.C. Code (S) 401(m) Limitations on Employer Matching Contributions.
--------------------------------------------------------------
(a) For each plan year, a contribution percentage will be determined
for each participant equal to the ratio of the total amount of the participant's
employer matching contributions under section 4.1 for the plan year divided by
the participant's compensation for the
III-5
<PAGE>
plan year. Any employer matching contributions or employer contributions treated
as salary deferrals under section III.9.5.B.(b) shall not be used to satisfy the
requirements of this Section III.9.5.B.(a), except as otherwise permitted by the
Code or Treasury Regulations. In the case of family members treated as a single
highly compensated employee under the definition of "highly compensated
employee" in accordance with the family aggregation rules of Code (S) 414(q)(6),
the contribution percentage shall be the greater of (1) the contribution
percentage determined by combining the employer matching contributions and
compensation of all eligible family members who are highly compensated employees
without regard to family aggregation, and (2) the actual contribution percentage
determined by combining the employer matching contributions and compensation of
all eligible family members. Except to the extent taken into account in the
preceding sentence, the employer matching contributions, compensation and all
amounts treated as employer matching contributions of such family members shall
be disregarded for purposes of this section III.9.5.C. Except as otherwise
provided in this Section III.9.5.C.(b), with respect to participants and for
whom there were no employer matching contributions under this plan, such
contribution percentage will be zero.
(b) The average of the contribution percentages for highly
compensated employees ("high average") when compared with the average of the
contribution percentages for non-highly compensated employees ("low average")
does not exceed the greater of:
(1) 1.25 times the low average; or
(2) The lesser of two times the low average, or the low average
plus two percentage points.
(c) If the contribution percentage for any plan year for highly
compensated employees exceeds the limits established in (b), the excess
contributions for such plan year (and
III-6
<PAGE>
the earnings attributable to such excess contributions through the date of
distribution) shall be distributed to the highly compensated employees so that
the contribution percentage of the highly compensated employee(s) with the
highest contribution percentage is reduced to the extent required to enable the
plan to meet the limits in (b) above or to cause the contribution percentage of
such employee(s) to equal the contribution percentage of the highly compensated
employee(s) with the next-highest contribution percentage. The process in the
preceding sentence shall be repeated until the plan satisfies the limits in (b)
above. In the case of family members subject to the family aggregation rules of
Code (S) 414(q)(6), excess contributions will be allocated among family members
in proportion to the employer matching contributions of each family member that
have been combined under section III.9.5.C.(a) above. Where the contribution
percentage is determined under section III.9.5.C.(a)(1) above, however, excess
employer matching contributions will be allocated first among the eligible
highly compensated employee family members in proportion to the employer
matching contributions of each such highly compensated employee family member
until the contribution percentage of the eligible highly compensated employee
family members has been reduced to the contribution percentage of the eligible
non-highly compensated employee family members. If reduction of the contribution
percentage below that of the eligible non-highly compensated employee family
members is required under section III.9.5.C.(a)(1) to enable the plan to meet
the limits in section A.3(b) above, such further reduction shall take into
account the employer matching contributions of all eligible family members in
proportion to their employer matching contributions. The earnings attributable
to excess contributions will be determined in accordance with Treasury
Regulations.
III-7
<PAGE>
(d) The tests of sections III.9.5.B.(c) and III.9.5.C.(b) shall be
met in accordance with the prohibition against the multiple use of the
alternative limitation under Code (S) 401(m)(9).
III-8
<PAGE>
APPENDIX IV
IV.18.A. TOP-HEAVY DEFINITIONS. The definitions relating to top-heavy
---------------------
plan provisions are as follows:
(a) Key Employee shall mean any employee or former employee (and the
------------
beneficiaries of such employee) who, in the plan year containing the
determination date, or any of the four preceding plan years is:
(i) An officer of the employer having an annual compensation
from the employer greater than 50 percent of the amount in effect under Code (S)
415(b)(1)(A) for any such plan year. Not more than fifty employees (or, if
fewer, the greater of three employees or ten percent of the employees),
including those employees included under subparagraph (ii), (iii) and (iv)
below, shall be considered as officers for purposes of this subparagraph.
(ii) One of the ten employees having an annual compensation
from the employer of more than the amount in effect under Code (S) 415(c)(1)(A)
in the plan year and owning (or considered as owning within the meaning of Code
(S) 318) the largest interests in the employer.
(iii) A five-percent owner of the employer.
(iv) A one-percent owner of the employer having an annual
compensation (within the meaning of Code (S) 414(q)(7)) from the employer of
more than $150,000 for a plan year.
Whether an employee is a five-percent owner or a one-percent owner shall be
determined in accordance with Code (S) 416(i). If any individual has not
performed services for the employer at any time during the five-year period
ending on the determination date, any accrued benefit for such individual shall
not be taken into account.
IV-1
<PAGE>
(b) Top-Heavy Plan shall mean that this Plan is considered top-heavy
--------------
for any plan year if any of the following conditions exists:
(i) If the top-heavy ratio for this Plan exceeds 60% and this
Plan is not part of any required aggregation group or permissive aggregation
group of plans.
(ii) If this Plan is a part of a required aggregation group of
plans but not part of a permissive aggregation group and the top-heavy ratio for
the group of plans exceeds 60%.
(iii) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group of plans and the top-heavy ratio for the
permissive aggregation group exceeds 60%.
(c) Top-Heavy Ratios shall mean the ratios calculated as follows:
----------------
(i) If the employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the employer has not
maintained any defined benefit plan which during the 5-year period ending on the
determination date(s) has or has had accrued benefits, the top-heavy ratio for
this Plan alone or for the required or permissive aggregation group as
appropriate is a fraction, the numerator of which is the sum of the account
balances of all key employees as of the determination date(s) (including any
part of any account balance distributed in the 5-year period ending on the
determination date(s)), and the denominator of which is the sum of all account
balances (including any part of any account balance distributed in the 5-year
period ending on the determination date(s)), both computed in accordance with
Code (S) 416 and the regulations thereunder. Both the numerator and denominator
of the top-heavy ratio are adjusted to reflect any contribution not actually
made as
IV-2
<PAGE>
of the determination date, but which is required to be taken into account on
that date under Code (S) 416 and the regulations thereunder.
(ii) If the employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the employer
maintains or has maintained one or more defined benefit plans which during the
5-year period ending on the determination date(s) has or has had any accrued
benefits, the top-heavy ratio for any required or permissive aggregation group
as appropriate is a fraction, the numerator of which is the sum of account
balances under the aggregated defined contribution plan or plans for all key
employees, determined in accordance with (i) above, and the present value of
accrued benefits under the aggregated defined benefit plan or plans for all key
employees as of the determination date(s), and the denominator of which is the
sum of the account balances under the aggregated defined contribution plan or
plans for all participants, determined in accordance with (i) above, and the
present value of accrued benefits under the defined benefit plan or plans for
all participants as of the determination date(s), all determined in accordance
with Code (S) 416 and the regulations thereunder. The accrued benefits under a
defined benefit plan in both the numerator and denominator of the top-heavy
ratio are adjusted for any distribution of an accrued benefit made in the five-
year period ending on the determination date.
(iii) For purposes of (i) and (ii) above the value of account
balances and the present value of accrued benefits will be determined as of the
most recent valuation date that falls within or ends with the 12-month period
ending on the determination date, except as provided in Code (S) 416 and the
regulations thereunder for the first and second plan years of a defined benefit
plan. The account balances and accrued benefits of a participant (1) who is not
a key employee but who was a key employee in a prior year, or (2) who has not
been credited with
IV-3
<PAGE>
at least one hour of service with any employer maintaining the Plan at any time
during the 5-year period ending on the determination date will be disregarded.
The calculation of the top-heavy ratio, and the extent to which distributions,
rollovers, and transfers are taken into account will be made in accordance with
Code (S) 416 and the regulations thereunder. Deductible employee contributions
will not be taken into account for purposes of computing the top-heavy ratio.
When aggregating plans the value of account balances and accrued benefits will
be calculated with reference to the determination dates that fall within the
same calendar year.
(d) Permissive Aggregation Group shall mean the required aggregation
----------------------------
group of plans plus any other plan or plans of the employer which, when
considered as a group with the required aggregation group, would continue to
satisfy the requirements of Code (S)(S) 401(a) (4) and 410.
(e) Required Aggregation Group shall mean each qualified plan of the
--------------------------
employer in which at least one key employee participates or participated at any
time during the determination period (regardless of whether the plan has
terminated), and any other qualified plan of the employer which enables such a
plan to ,meet the requirements of Code (S) 401(a)(4) or (S) 410.
(f) Determination Date shall mean for any plan year subsequent to the
------------------
first plan year, the last day of the preceding plan year; for the first plan
year of the Plan, the last day of that year.
(g) Valuation Date shall mean the date as of which account balances
---------
or accrued benefits are valued for purposes of calculating the top-heavy ratio.
(h) Present value shall be based only on the interest and mortality
-------
rates specified in the adoption agreement.
IV-4
<PAGE>
IV.18.B. MINIMUM ALLOCATION.
------------------
The employer contributions and forfeitures allocated on behalf of any
participant employed on the last day of the plan year, who is not a key
employee, shall not be less than the lesser of three percent of such
participant's compensation or in the case where the employer has no defined
benefit plan which designates this plan to satisfy Code (S) 401, the largest
percentage of employer contributions and forfeitures, as a percentage of the
first $160,000 (or the adjusted limitation under Code (S) 401(a)(17)) of the key
employee's compensation, allocated on behalf of any key employee for that year.
If the highest rate allocated to a key employee for a year in which the Plan is
top heavy is less than 3%, amounts contributed as a result of a salary deferral
agreement shall be included in determining contributions made on behalf of key
employees. The minimum allocation is determined without regard to any Social
Security contribution. This minimum allocation shall be made even though, under
other plan provisions, the participant would not otherwise be entitled to
receive an allocation, or would have received a lesser allocation for the year
because of (1) the participant's failure to complete 1,000 hours of service (or
any equivalent provided in the Plan), or (2) the participant's failure to make
mandatory employee contributions to the Plan, or (3) compensation less than a
stated amount. An allocation under this section shall not be made if the
participant is covered under any other plan or plans of the employer and the
minimum allocation or benefit requirement applicable to top-heavy plans will be
met in the other plan or plans. The definition of compensation in section 1.3 of
the Plan shall be the definition for determining minimum allocations under this
section. This definition shall be used for all top-heavy purposes, including
determining whether an employee is a key employee.
IV-5
<PAGE>
APPENDIX V
SPECIAL PROVISIONS FOR ACCOUNTS OR PARTICIPANTS TRANSFERRED
FROM OTHER PLANS IN CONNECTION WITH PLAN
MERGERS OR TRUST-TO-TRUST TRANSFERS
A. Former Accounts and Participants of the Vermeer Technologies 401(k) Plan
1. History of Corporate Merger. On January 12, 1996, Vermeer
---------------------------
Technologies, Inc. merged with a wholly-owned subsidiary of Microsoft
Corporation, and the merged entity remained a wholly-owned subsidiary of
Microsoft. On February 21, 1996 the name of the subsidiary (i.e., the merged
entity) was changed from Vermeer Technologies, Inc. to Microsoft Web Authoring
Product Unit, Inc. ("MWAPUI"). On March 26, 1996 the name of the subsidiary was
changed back to Vermeer Technologies, Inc. ("VTI"). At the time of the merger,
VTI was the plan sponsor of the Vermeer Technologies 401(k) Plan ("V-Plan").
After the merger, VTI employees continued to actively participate in the V-Plan.
2. Plan Merger. Effective April 1, 1996, the V-Plan is merged into the
-----------
Microsoft Corporation Savings Plus 401(k) Plan ("Plan"), and this plan document
for the plan, as amended previously and by this Amendment, is the surviving plan
document.
Only employee 401(k) salary deferrals and rollovers have been contributed
to the V-Plan; no employer matching or discretionary profit sharing
contributions have ever been made to the V-Plan. The only accounts which
participants have in the V-Plan are 401(k) salary deferral and rollover accounts
("V-Accounts"), both of which are and always have been nonforfeitable. The V-
Accounts are transferred to the Plan without alteration and shall be kept
separate from other accounts held in the Plan by former V-Plan participants. The
V-Accounts shall only contain amounts transferred from the V-Plan, and shall
always be kept separate from the salary deferral,
V-1
<PAGE>
matching and rollover accounts that former V-Plan participants have after April
1, 1996. However, each former V-Plan participant's V-Plan salary deferral and
rollover account (if any) may be consolidated into one V-Account at the Plan
Administrator's discretion if the accounts have identical rights, features,
conditions, and limits.
3. Eligibility. The age 18 minimum age requirement set forth in Plan
-----------
Section 2.1 shall not apply to any person who was ever employed by MWAPUI or VTI
on or before April 1, 1996. Every employee of VTI who on April 1, 1996 is an
eligible employee (as defined in Section 1.5 of the Plan) shall immediately
begin active participation in the Plan without having to satisfy the age 18
minimum age requirement set forth in Plan Section 2.1. Any participant in the V-
Plan on April 1, 1996 who is not an eligible employee as defined in Plan Section
1.5 shall be an inactive participant in the Plan and shall actively participate
in the Plan only if and when they become an eligible employee. Any person who is
employed by VTI on April 1, 1996 but is neither a participant in the V-Plan nor
an eligible employee as defined in Plan Section 1.5 shall become a participant
in the Plan if and when they become an eligible employee. Any person employed by
VTI after April 1, 1996 who was not employed by VTI or MWAPUI at any time on or
before April 1, 1996 shall be required to satisfy all of the eligibility
conditions of Plan Sections 1.5 and 2.1, including the age 18 minimum age
requirement.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their V-Accounts which are transferred to the Plan effective April 1, 1996. For
purposes of determining their vested percentage in their employer matching
contribution account in this Plan, participants shall be credited with the whole
years of vesting service credited to them under the V-Plan as of December 31,
1995. Beginning with the 1996 plan year (commencing January 1, 1996), the
participant shall begin to earn vesting service credit under the elapsed time
method as
V-2
<PAGE>
set forth in Article V of the Plan. In addition, if a participant worked at
least 1,000 hours between January 1, 1996 and March 31, 1996, the participant
shall be credited with one year of service for 1996 even if they do not work
every day in 1996. Notwithstanding anything in this Subsection 4 to the
contrary, a participant who is described in the previous sentence shall not
begin to earn credit under the elapsed time method of Article V until the 1997
plan year (commencing January 1, 1997).
5. Special Provisions Applicable to the V-Accounts. The following special
-----------------------------------------------
provisions apply only to the V-Accounts. With respect to the V-Accounts, the
following special provisions shall supersede any other provisions of this Plan
which are inconsistent with the following provisions.
6. Form of Benefit Payments. The participant may elect to have his or her
------------------------
V-Accounts distributed in a single lump sum payment or in installments, and in
cash or in kind. If the participant elects an in-kind distribution, the
participant's interest in the investments of his or her V-Accounts shall be
distributed in-kind. For example, if a participant's V-Account were invested 50%
in the Microsoft Stock Fund and 50% in the Magellan Fund and the participant
requested an in-kind distribution, the participant would receive half of her
account in the form of Microsoft stock and the other half of her account in
units of interest in the Magellan mutual fund (less any applicable tax
withholding). Participants may elect to have their V-Accounts distributed in
installments over a period not to exceed the participant's life expectancy or
the joint life expectancies of the participant and the participant's designated
beneficiary. The participant may elect to have the installments paid monthly,
quarterly, semi-annually or annually. If at the time of distribution to a
participant or beneficiary the participant's total vested account balance in the
Plan (including V-Accounts and other accounts) does not exceed $5,000 (and never
exceeded
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$5,000 at the time of a prior distribution), then the V-Account balance will be
distributed in an immediate lump sum and installment payments will not be a
payment option.
7. Timing of Benefit Payments. Upon a participant's termination of
--------------------------
employment for reasons other than death, the participant's V-Account shall be
distributed as soon as possible after the account is valued. The distribution
shall be in cash or in kind, as elected by the participant. If a participant's
total vested account balance in the Plan (including V-Accounts and other
accounts) exceeds $5,000 at the time of distribution (or ever exceeded $5,000 at
the time of a prior distribution), then the participant may elect to delay
receipt or commencement of his or her V-Account until any date on or before the
date the participant reaches age 70 1/2. Any delayed distribution must comply
with the requirements of Code Section 401(a)(9) and the regulations thereunder
(including without limitation the incidental death benefit requirements). If the
participant with total vested plan account balance in excess of $5,000 does not
select a distribution date, the participant's V-Account shall be distributed as
soon as practicable after the participant reaches age 65 or terminates
employment, whichever occurs last.
The timing of the distribution of the V-Account upon a participant's death
shall depend upon whether the participant died before or after the commencement
of his or her benefit payments, and whether the participant was survived by a
beneficiary who was designated by the participant. If a participant dies prior
to the commencement of the distribution of his or her V-Account and is survived
by a designated beneficiary who is not his or her spouse, the distribution must
be made by December 31 of the calendar year in which the fifth anniversary of
the participant's death occurs unless the beneficiary elects to have installment
payments commence by the end of the first calendar year after the participant's
death. If the designated beneficiary is the participant's spouse, then the same
distribution rules described in the previous sentence apply,
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<PAGE>
except that the spouse may elect to delay distribution or commencement of
installment payments until the end of the calendar year in which the participant
would have attained age 70 1/2. Notwithstanding the foregoing, if the
participant dies before benefit payments from the Plan have commenced to the
participant and his or her vested account balance in the Plan does not exceed
$5,000 (and have never exceeded $5,000 at the time of a prior distribution),
distribution to the beneficiary shall be made in an immediate lump sum payment
in cash or in kind, as elected by the beneficiary. If the participant dies
before benefit payments have commenced, the participant's total vested account
balance in the Plan (including V-Accounts and other accounts) exceeds $5,000 (or
exceeded $5,000 at the time of a prior distribution), and the death beneficiary
is not a designated beneficiary, distribution of the participant's V-Account
balance will be made in a lump sum or installment payments (e.g., installment
payments over four years) as elected by the beneficiary provided, however, that
the total V-Account balance must be distributed no later than December 31 of the
calendar year in which the fifth anniversary of the participant's death occurs.
If the participant died while he was receiving installment payments of his
V-Account, the remaining portion of the V-Account shall be distributed at least
as rapidly as under the length and frequency of installment payments which the
participant had selected.
Distributions to beneficiaries may be made in cash or in kind, at the
election of the beneficiary.
Notwithstanding the foregoing, upon the death or termination of employment
of a participant with a vested total account balance in the Plan in excess of
$5,000, neither the participant nor his or her surviving spouse death
beneficiary may delay distribution beyond the date the participant attains (or
would have attained) age 65. Any references to age 70 1/2 in this
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Subsection 7 shall be replaced with a reference to age 65. This paragraph shall
not be effective unless and until the Plan receives a favorable determination
letter from the Internal Revenue Service stating that this Amendment will not
adversely affect the tax-qualified status of the Plan.
8. Plan Loans. Any loans to a participant which are outstanding on April
----------
1, 1996 shall be transferred in kind along with the rest of the participant's
V-Accounts. A participant with such a loan outstanding shall have all of the
rights and be subject to all of the conditions of his or her loan as set forth
in his or her V-Plan loan documents.
B. Former Accounts and Participants of the eShop Inc. 401(k) Savings Plan
1. History of Corporate Merger. On June 20, 1996, eShop Inc. was merged
---------------------------
into Microsoft Corporation, with Microsoft Corporation being the surviving
corporation. After the corporate merger, certain former employees of eShop Inc.
became employees of Microsoft Corporation. As a result of the corporate merger,
Microsoft Corporation became the plan sponsor and administrator of the eShop
Inc. 401(k) Savings Plan ("E-Plan"), a tax-qualified profit sharing plan which
has a 401(k) feature. Although the E-Plan provides for discretionary employer
contributions (e.g., profit sharing and matching contributions), only employee
salary deferral contributions and rollover contributions have been made to the
E-Plan. The E-Plan was frozen as of June 20, 1996, and former eShop Inc.
employees stopped making salary deferral contributions to the E-Plan effective
June 20, 1996. The former eShop Inc. employees will begin making salary deferral
contributions to the Microsoft Corporation Savings Plus Plan ("Plan") effective
August 1, 1996.
2. Plan Merger. Effective November 1, 1996, the E-Plan is merged into the
-----------
Plan, and this plan document for the Plan, as amended previously and by this
Amendment, is the surviving plan document. Although the E-Plan provides for
discretionary employer
V-6
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contributions (e.g., profit sharing and matching contributions), only employee
salary deferral contributions and rollover contributions have been made to the
E-Plan; no employer matching or discretionary profit sharing contributions have
ever been made to the E-Plan. The only accounts ("E-Accounts") which
participants have in the E-Plan are a 401(k) salary deferral account ("Deferral
E-Account") and a rollover contribution account ("Rollover E-Account")
containing amounts which the participant had rolled into the E-Plan from another
plan or IRA. The E-Accounts are and always have been nonforfeitable. The E-
Accounts are transferred to the Plan without alteration. The Rollover E-Account
shall only contain amounts transferred from the E-Plan and shall always be kept
separate from the salary deferral, matching and rollover accounts that former E-
Plan participants have in this Plan after August 1, 1996. The Deferral E-Account
shall be merged with the former E-Plan participant's new salary deferral account
in the Plan which will hold deferrals which are made from salary earned on or
after August 1, 1996.
3. Eligibility. The age 18 minimum age requirement set forth in Plan
-----------
Section 2.1 shall not apply to any person who was ever employed by eShop Inc.
(previously known as Ink Development Corporation). Every former employee of
eShop Inc. or Ink Development Corporation who on or after August 1, 1996 is an
eligible employee (as defined in Section 1.5 of the Plan) shall immediately
begin active participation in the Plan without having to satisfy the age 18
minimum age requirement set forth in Plan Section 2.1. Any participant in the E-
Plan on November 1, 1996 who is not an eligible employee as defined in Plan
Section 1.5 shall be an inactive participant in the Plan and shall actively
participate in the Plan only if and when they become an eligible employee. Any
person who is employed on November 1, 1996 but is neither a participant in the
E-Plan nor an eligible employee as defined in Plan Section 1.5 shall become a
participant in the Plan if and when they become an eligible employee.
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<PAGE>
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their E-Accounts which are transferred to the Plan effective November 1, 1996.
For purposes of determining their vested percentage in their employer matching
contribution account in this Plan, participants shall be credited with the whole
years of vesting service credited to them under the E-Plan as of December 31,
1995. Beginning with the 1996 plan year (commencing January 1, 1996), the
participant shall begin to earn vesting service credit under the elapsed time
method as set forth in Article V of the Plan. In addition, if a participant
worked at least 1,000 hours between January 1, 1996 and October 31, 1996, the
participant shall be credited with one year of service for 1996 even if they do
not work every day in 1996. Notwithstanding anything in this Subsection 4 to the
contrary, a participant who is described in the previous sentence shall not
begin to earn credit under the elapsed time method of Article V until the 1997
plan year (commencing January 1, 1997).
5. Special Provision Applicable to the Rollover E-Account. A participant
------------------------------------------------------
may elect to withdraw from the Rollover E-Account once during each plan year,
any amount up to 100% of the value of the Rollover E-Account. The participant
shall notify the plan administrator of his election to make a withdrawal under
this Section. The distribution will be made as soon as reasonably practicable
after such notice is given.
6. Plan Loans. Any loans from the E-Plan to an E-Plan participant which
----------
are outstanding on November 1, 1996 shall be transferred to the Plan in kind as
an asset allocated to the participant's E-Accounts. A participant with such a
loan outstanding shall have all of the rights and be subject to all of the
conditions of his or her loan as set forth in his or her E-Plan loan documents.
V-8
<PAGE>
C. Former Accounts and Participants of Dimension X 401(k) Plan
1. History of Corporate Merger. On May 14, 1997, Dimension X was merged
---------------------------
with DX Acquisition Inc., a wholly-owned subsidiary of Microsoft Corporation,
with Dimension X being the surviving corporation and becoming a wholly-owned
subsidiary of Microsoft Corporation. Over several months after the corporate
merger, the employees of Dimension X became employees of Microsoft Corporation.
At the time of the merger with DX Acquisition Inc., Dimension X was the sponsor
of the Dimension X 401(k) Plan ("D-Plan"). The plan remained in existence after
Dimension X was merged into the DX Acquisition Inc.
2. Plan Merger. Effective January 1, 1998, the D-Plan is merged into the
-----------
Plan, and the plan document for the Plan, as amended previously and by this
amendment, is the surviving plan document.
The D-Plan contains employee salary deferral contributions, and employer
discretionary matching contributions. No employee after-tax contributions were
made, nor were any employer discretionary contributions made. As of January 1,
1998, there were no roll-over accounts maintained in the D-Plan. The salary
deferral contributions have always been nonforfeitable. The employer matching
contributions are 100% vested pursuant to the amendment to the Dimension X
401(k) Plan effective April 1, 1997. The employer matching D-accounts and the
salary deferral D-accounts are transferred to the Plan without alteration. At
the discretion of the Plan Administrator, these D-accounts may be consolidated
with other accounts made to the Plan by former D-Plan participants after the
date of the plan merger.
3. Eligibility. Any participant in the Dimension X 401(k) Plan on May 14,
-----------
1997 who on January 1, 1998 is an eligible employee (as defined in Section 1.5
of the Plan) and who has not previously entered the Plan shall begin active
participation in the Plan on January 1,
V-9
<PAGE>
1998, the date of the merger of the plans. Such participant shall not be
required to satisfy the age 18 minimum age requirement set forth in Plan Section
1.5 nor be required to be employed through an entry date. A participant for
these purposes shall include a person who maintained an account balance in the
Dimension X 401(k) Plan or who was eligible to make deferrals under the
Dimension X 401(k) Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their D-accounts which are transferred to the Plan effective January 1, 1998.
For purposes of determining their vested percentage in their employer matching
contribution account in this Plan (i.e., matching contributions made by
Microsoft Corporation after January 1, 1998), participants shall be credited
with the whole years of service credited to them under the D-Plan as of their
last computation date prior to January 1, 1998. For the period of time from the
last computation date prior to January 1, 1998 until the next computation date
following January 1, 1998, the participant shall be credited with the greater
of: (1) the period of service that would be credited to the employee under the
elapsed time method as set forth in Article V of the Plan for his service during
the 12 month period following the participant's last computation date which is
prior to January 1, 1998; or (2) a year of service if the participant worked at
least 1,000 hours between his/her last computation date before January 1, 1998
and January 1, 1998. For these purposes, a computation date shall be the
anniversary date of a participant's first date of employment with Dimension X.
Beginning on the last day of the period described in (1) or (2) of the third
sentence of this subsection 4, whichever is applicable, a participant shall earn
vesting credit under the elapsed time method set forth in Article V of the Plan.
5. Special Provisions Applicable. There are no special provisions
-----------------------------
applicable to D-accounts.
V-10
<PAGE>
6. Plan Loans. Any loans from the D-Plan to a D-Plan participant which
----------
are outstanding on January 1, 1998 shall be transferred to the Plan in kind as
an asset allocated to the participant's D-Plan account. A participant with such
a loan outstanding shall have all of the rights and be subject to all of the
conditions of his or her loan as set forth in his or her D-Plan loan documents.
D. Former Accounts and Participants of VXtreme, Inc. 401(k) Retirement Plan
1. History of Corporate Merger. On July 30, 1997, VXtreme, Inc.
---------------------------
("VXtreme") was merged with Microsoft Investments Washington Parent, Inc., a
wholly owned subsidiary of Microsoft Corporation with VXtreme being the
surviving corporation and becoming a wholly-owned subsidiary of Microsoft
Corporation. At the time of the merger, VXtreme sponsored a profit sharing plan
with a 401(k) component, the VXtreme, Inc. 401(k) Retirement Plan ("VX-Plan").
Although the VX-Plan continued in existence after the corporate merger, most of
the employees of VXtreme after the merger became employees of Microsoft
Corporation.
2. Plan Merger. Effective January 1, 1998, the VX-Plan is merged into the
-----------
Plan, and the plan document for the Plan, as amended previously and by this
amendment, is the surviving plan document.
The VX-Plan contains only salary deferral contributions, and roll-over
contributions ("VX-Accounts"). The VX-Plan does not provide for employer
contributions nor employee after-tax contributions, nor has it ever provided for
such contributions in the past. The salary deferral contributions and the roll-
over contributions to the VX-Plan have always been nonforfeitable. The salary
deferral VX-Accounts and the roll-over VX-Accounts are transferred to the Plan
without alteration. The salary deferral VX-Accounts and the roll-over VX-
Accounts shall be consolidated with each other (hereinafter collectively
referred to as VX-Accounts),
V-11
<PAGE>
however, they will be kept separate from any contributions made to the Plan by
or on behalf of former VX-Plan participants after January 1, 1998.
3. Eligibility. Any employee of VXtreme on January 1, 1998 who is an
-----------
eligible employee (as defined in Section 1.5 of the Plan) shall begin active
participation in the Plan on January 1, 1998, the date of the merger of the
plans. Any participant of the VX-Plan on January 1, 1998 who is not an eligible
employee as defined in Plan Section 1.5 (e.g., an intern) shall be an inactive
participant in the Plan and shall actively participate in the Plan only if and
when they become an eligible employee as defined in Plan section 1.5. Such
former participant in the VX-Plan shall not be required to be employed through
an entry date before he/she can become a participant under the Plan. Any person
employed by VXtreme after January 1, 1998 who was not employed by VXtreme at any
time on or before January 1, 1998 shall be required to satisfy all of the
eligibility conditions of Plan Sections 1.5 and 2.1, and must be employed
through an entry date before he/she will become a participant under the Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their VX-Accounts which are transferred to the Plan effective January 1, 1998.
For purposes of determining their vested percentage in their employer matching
contribution account in this Plan (i.e., matching contributions made by
Microsoft Corporation after January 1, 1998), participants shall be credited
with vesting service under the elapsed time method as set forth in Article V of
the Plan for their service at VXtreme.
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the VX-Accounts. With respect to the VX-Accounts, the following special
provisions shall supersede any other provisions of this Plan which are
inconsistent with the following provisions. However, to the extent the Plan is
amended subsequent to this amendment in a way which gives
V-12
<PAGE>
participants greater benefits or additional options not provided in this
section, participants with a VX-Account shall be eligible for those additional
benefits or options without violating this section.
6. Form of Benefit Payments. Unless the participant makes an election
------------------------
otherwise, the participant (or beneficiary) shall receive the distribution of
his or her VX-Account in the form of a lump-sum. The participant may however,
elect to receive distributions from his or her VX-Account in the form of an
annuity. There are five different annuity options that a participant may
choose. These are: (1) a straight life annuity; (2) a single life annuity with
a certain period of 5, 10, or 15 years; (3) a single life annuity with an
installment refund; (4) a joint and survivor annuity with an installment refund
and survivor percentages of 50, 66 and 2/3, or 100; or (5) a fixed period
annuity for any period of whole months which is not less than 60 and does not
exceed the joint life expectancies of the participant and the named beneficiary.
If a participant chooses a life annuity form of distribution, the provisions of
Article XX of the Plan shall apply. If at the time of distribution to a
participant or beneficiary the participant's total vested account balance in the
Plan (including VX-Account and other accounts) does not exceed $5,000 (and never
exceeded $5,000 at the time of a prior distribution), the VX-Account balance
will be distributed in an immediate lump-sum cash payment.
7. Plan Loans. Any loans from the VX-Plan to a VX-Plan participant which
----------
are outstanding on January 1, 1998 shall be transferred to the Plan in kind as
an asset allocated to the participant's VX-Plan account. A participant with such
a loan outstanding shall have all of the rights and be subject to all of the
conditions of his or her loan as set forth in his or her VX-Plan loan documents.
If a participant in the VX-Plan requests a loan after January 1, 1998 of a
portion
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<PAGE>
of his or her VX-Account, spousal consent will not be required unless the
participant has selected a life annuity form of distribution with respect to his
or her VX-Account balance.
E. Former Accounts and Participants of WebTV 401(k) Plan
1. History of Corporate Merger. On August 1, 1997, Microsoft Corporation
---------------------------
purchased a controlling interest in WebTV Networks, Inc. ("WebTV"). Through a
recapitalization, WebTV became a controlled subsidiary of Microsoft Corporation.
WebTV remained in existence after the recapitalization and WebTV employees
continued to be employed by WebTV. At the time of the recapitalization, WebTV
sponsored the WebTV 401(k) Plan (the "W-Plan"). The W-Plan continued in
existence after the recapitalization of WebTV and employees of WebTV continued
to participate in the W-Plan.
2. Plan Merger. Effective March 1, 1998, the W-Plan is merged into the
-----------
Plan, and the plan document for the Plan, as amended previously and by this
amendment, is the surviving plan document.
The W-Plan contains only employee salary deferral contributions, and roll-
over contributions ("W-Accounts"). No employee after-tax, employer matching, or
employer discretionary contributions were ever made to the W-Plan. The salary
deferral contributions and the roll-over contributions to the W-Plan have always
been nonforfeitable. The salary deferral W-Accounts and the roll-over W-Accounts
are transferred to the Plan without alteration. The salary deferral W-Accounts
and the roll-over W-Accounts shall be consolidated with each other, however,
they will be kept separate from any contributions made to the Plan by or on
behalf of former W-Plan participants after March 1, 1998.
3. Eligibility. Any employee of WebTV on March 1, 1998 who is an eligible
-----------
employee (as defined in Section 1.5 of the Plan) and who has not previously
entered the Plan
V-14
<PAGE>
shall begin active participation in the Plan on March 1, 1998, the date of the
merger of the plans. Any participant of the W-Plan on March 1, 1998 who is not
an eligible employee as defined in Plan Section 1.5 (e.g., an intern) shall be
an inactive participant in the Plan and shall actively participate in the Plan
only if and when they become an eligible employee as defined in Plan section
1.5. Such former participant in the W-Plan shall not be required to be employed
through an entry date before he/she can become a participant in the Plan. Any
person employed by WebTV after March 1, 1998 who was not employed by WebTV at
any time on or before March 1, 1998 shall be required to satisfy all of the
eligibility conditions of Plan Sections 1.5 and 2.1, and must be employed
through an entry date before he/she will become a participant under the Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their W-Accounts which are transferred to the Plan effective March 1, 1998. For
purposes of determining their vested percentage in their employer matching
contribution account in this Plan (i.e., matching contributions made after March
1, 1998), participants shall be credited with the whole years of service
credited to them under the W-Plan as of March 31, 1997. For the 12-month period
of time commencing on April 1, 1997, the participant shall be credited with the
greater of: (1) the period of service that would be credited to the employee
under the elapsed time method as set forth in Article V of the Plan for his
service during the 12 month period ending March 31, 1998; or (2) a year of
service if the participant worked at least 1,000 hours between April 1, 1997 and
March 1, 1998 even if they did not work every day during this period. Beginning
March 31, 1998, participants shall earn vesting credit under the elapsed time
method set forth in Article V of the Plan.
V-15
<PAGE>
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the W-Accounts. With respect to the W-Accounts, the following special
provisions shall supersede any other provisions of this Plan which are
inconsistent with the following provisions. However, to the extent the Plan is
amended subsequent to this amendment in a way which gives participants greater
benefits or additional options not provided in this section, participants with a
W-Account shall be eligible for those additional benefits or options without
violating this section.
6. Form of Benefit Payments. The participant may elect to have his or her
------------------------
W-Account distributed in a single lump sum payment or in installments, in cash
or in kind or in a combination of both. Participants may elect to have their W-
Accounts distributed in substantially equal installments over a period which is
no longer than the participant's life expectancy or the joint life expectancy of
the participant and the participant's designated beneficiary. If at the time of
distribution to a participant or beneficiary the participant's total vested
account balance in the Plan (including the W-Account and other accounts) does
not exceed $5,000 (and never exceeded $5,000 at the time of a prior
distribution), then the W-Account balance will be distributed in an immediate
lump sum payment, in cash or in kind or a combination of both, as elected by the
participant or beneficiary.
7. Plan Loans. Any loans from the W-Plan to a W-Plan participant which
----------
are outstanding on March 1, 1998 shall be transferred to the Plan in kind as an
asset allocated to the participant's W-Plan account. A participant with such a
loan outstanding shall have all of the rights and be subject to all of the
conditions of his or her loan as set forth in his or her W-Plan loan documents.
V-16
<PAGE>
F. Former Accounts and Participants of Hotmail Corporation 401(k) Plan
1. History of Corporate Merger. On December 30, 1997 Hotmail Corporation
---------------------------
was merged with Micro HM Inc., a wholly-owned subsidiary of Microsoft
Corporation, with Hotmail Corporation being the surviving corporation and
becoming a wholly-owned subsidiary of Microsoft Corporation. At the time of the
merger with Micro HM Inc., Hotmail Corporation was the sponsor of the Hotmail
Corporation 401(k) Plan ("H-Plan"). The plan remained in existence after Hotmail
Corporation was merged into Micro HM Inc.
2. Plan Merger. Effective April 1, 1998, the H-Plan is merged into the
-----------
Plan, and the plan document for the Plan, as amended previously and by this
amendment, is the surviving plan document.
The H-Plan contains employee salary deferral contributions and rollover
contributions only ("H-Accounts"). No employee after-tax contributions were
made, nor were any employer matching or discretionary contributions made. The
salary deferral accounts and the rollover accounts have always been
nonforfeitable. The salary deferral accounts and the rollover accounts are
transferred to the Plan without alteration. At the discretion of the Plan
Administrator, these H-Accounts (the salary deferral accounts and the rollover
accounts) may be consolidated with each other, however, they will be kept
separate from any contributions made to the Plan by or on behalf of former H-
Plan participants after April 1, 1998.
3. Eligibility. Any employee of Hotmail Corporation who on April 1, 1998
-----------
is a participant in the Hotmail Corporation 401(k) Plan and is an eligible
employee (as defined in Section 1.5 of the Plan) shall begin active
participation in the Plan on April 1, 1998, the date of the merger of the plans.
Such participant shall not be required to be employed through an entry date as
set forth in Plan Section 2.4. A participant for these purposes shall include a
person who
V-17
<PAGE>
maintained an account balance in the Hotmail Corporation 401(k) Plan or who was
eligible to make deferrals under the Hotmail Corporation 401(k) Plan. Any
participant of the H-Plan on April 1, 1998 who is not an eligible employee as
defined in Plan Section 1.5 (e.g., an intern) shall be an inactive participant
in the Plan and shall actively participate in the Plan only if and when they
become an eligible employee as defined in Plan Section 1.5. Such former
participant in the H-Plan shall not be required to be employed through an entry
date before he/she can become a participant in the Plan. Any person employed by
Hotmail Corporation after April 1, 1998 who was not employed by Hotmail
Corporation at any time on or before April 1, 1998 shall be required to satisfy
all of the eligibility conditions of Plan Sections 1.5 and 2.1, and must be
employed through an entry date before he/she will become a participant under the
Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their H-Accounts which are transferred to the Plan effective April 1, 1998. For
purposes of determining their vested percentage in their employer matching
contribution account in this Plan (i.e., matching contributions made by
Microsoft Corporation after April 1, 1998), participants shall be credited with
vesting service under the elapsed time method as set forth in Article V of the
Plan for their service at Hotmail Corporation. The H-Plan did not calculate
vesting service because all contributions were 100% vested when made.
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the H-Accounts. With respect to the H-Accounts, the following special
provisions shall supersede any other provisions of this plan which are
inconsistent with the following provisions. However, to the extent the Plan is
amended subsequent to this amendment in a way which gives participants greater
benefits or additional options not provided in this section, participants with
V-18
<PAGE>
an H-Account shall be eligible for those additional benefits or options without
violating this section.
6. Form of Benefit Payments. Unless the participant makes an election
------------------------
otherwise, the participant (or beneficiary) shall receive the distribution of
his or her H-Account in the form of a lump-sum, either in cash or in kind or in
a combination of both. The participant may, however, elect to receive
distributions from his or her H-Accounts in the form of installments payable in
cash or in kind, or part in cash and part in kind over a period not in excess of
that required to comply with Code (S)401(a)(9). If at the time of distribution
to the participant or beneficiary the participant's total vested account balance
in the Plan (including H-Accounts and all other accounts) does not exceed $5,000
(and never exceeded $5,000 at the time of a prior distribution), then the H-
Account balance will be distributed in an immediate lump sum payment, in cash or
in kind or a combination of both, as elected by the participant or beneficiary.
7. Plan Loans. Any loans from the H-Plan to an H-Plan participant which
----------
are outstanding on April 1, 1998 shall be transferred to the Plan in kind as an
asset allocated to the participant's H-Plan account. A participant with such a
loan outstanding shall have all of the rights and be subject to all of the
conditions of his or her loan as set forth in his or her H-Plan loan documents.
G. Former Accounts and Participants of MSNBC Interactive News 401(k) Plan
1. History of Establishment of MSNBC Interactive News L.L.C. MSNBC
--------------------------------------------------------
Interactive News L.L.C. was established in 1996 as a joint venture between
Microsoft Corporation (and certain of its affiliates) and National Broadcast
Company (and certain of its affiliates). MSNBC Interactive News L.L.C. sponsors
the MSNBC Interactive News 401(k) Plan
V-19
<PAGE>
("MSNBC Plan"), and such plan provides service credit for vesting purposes to
former employees of National Broadcast Company.
2. Plan Merger. Effective January 1, 1999, the MSNBC Plan is merged into
-----------
the Plan, and the plan document for the Plan, as amended previously and by this
amendment, is the surviving plan document.
The MSNBC Plan contains employee salary deferral contributions, employer
matching contributions, employee after-tax contributions, and rollover
contributions ("MSNBC-Accounts"). The MSNBC-Accounts are hereby made 100%
vested, and are transferred without alteration and shall be kept separate from
the other Plan accounts. However, the Plan Administrator may, in his
discretion, combine certain portions of the MSNBC-Accounts with the other Plan
accounts (e.g., MSNBC salary deferrals with Plan salary deferrals, MSNBC after-
tax contributions with Plan after-tax contributions) to the extent such
combinations comply with the terms of the Plan and applicable laws. Except to
the extent permitted by tax regulations (including Treasury Regulation
(S)1.411(d)-4), amounts transferred from the MSNBC Plan that are attributable to
elective contributions (as defined in Treasury Regulation (S)1.401(k)-1(g)(3)),
including amounts treated as elective contributions, shall be subject to the
distribution limitations provided for in Treasury Regulation (S)1.401(k)-1(d).
3. Eligibility. Any employee of the MSNBC Interactive News L.L.C. who on
-----------
December 31, 1998 is a participant in the MSNBC Plan and who on January 1 or 2,
1999 is an eligible employee (as defined in Section 1.5 of the Plan) shall begin
active participation in the Plan on January 1, 1999. A participant for these
purposes shall include a person who maintained an account balance in the MSNBC
Plan or who was eligible to make deferrals under the MSNBC Plan. Any participant
of the MSNBC Plan who on January 1 or 2, 1999 is not an eligible
V-20
<PAGE>
employee as defined in Plan Section 1.5 (e.g., a temporary employee, an intern)
shall be an inactive participant in the Plan and shall actively participate in
the Plan only if and when they become an eligible employee as defined in Plan
Section 1.5. Such former participant in the MSNBC Plan shall not be required to
be employed through an entry date before he/she can become a participant in the
Plan. Any person employed by the MSNBC Interactive News L.L.C. after January 2,
1999, who was not employed by MSNBC Interactive News L.L.C. at any time on or
before January 2, 1999 shall be required to satisfy all of the eligibility
conditions of Plan Sections 1.5 and 2.1, and must be employed through an entry
date before he/she will become eligible to participate in the Plan.
4. Vesting and Vesting Service Credit. Participants in the MSNBC Plan on
----------------------------------
December 31, 1998 are 100% vested in their MSNBC-Accounts that are transferred
to the Plan effective January 1, 1999, and are 100% vested in their employer
matching contribution accounts in the Plan going forward. For purposes of
determining the vested percentage in the employer matching contribution account
in this Plan (i.e., matching contributions made by MSNBC after January 1, 1999)
for employees who are not participants in the MSNBC Plan on December 31, 1998
(e.g., those hired by MSNBC Interactive News L.L.C. after December 31, 1998),
such employees shall be credited with vesting service under the elapsed time
method as set forth in Article V of the Plan for their service at MSNBC
Interactive News L.L.C. and, for employees of MSNBC Interactive News L.L.C.,
service with National Broadcast Company. Service with National Broadcast
Company shall not be counted for those employed by Microsoft Corporation or
other affiliates thereof unless the employee worked for MSNBC Interactive News
L.L.C. between working for National Broadcast Company and Microsoft Corporation
or its affiliates.
5. Special Provisions Applicable. There are no special provisions
-----------------------------
applicable to the MSNBC-Accounts.
V-21
<PAGE>
H. Former Accounts and Participants of Virtual World Entertainment Group, Inc.
Employees 401(k) Plan
1. History of Corporate Merger. On January 11, 1999, Virtual World
---------------------------
Entertainment Group, Inc. ("VWEG") was merged with a wholly-owned subsidiary of
Microsoft Corporation, and VWEG was the surviving corporation. FASA Interactive
Technology, Inc. ("FASA") remained a wholly-owned subsidiary of VWEG. Since the
corporate merger, neither VWEG nor FASA have had any employees. At the time of
the merger, VWEG was the sponsor of the Virtual World Entertainment Group, Inc.
Employees 401(k) Plan ("VWEG Plan"), and FASA was a participating employer in
the VWEG Plan. The VWEG Plan remained in existence after the corporate merger.
2. Plan Merger and Asset Transfer. Effective July 1, 1999, the VWEG-Plan
------------------------------
is merged into the Plan, and the plan document for the Plan, as amended
previously and by this amendment, is the surviving plan document. Upon the Plan
Administrator's receipt of satisfactory evidence that (i) Virtual World
Entertainment, LLC ("VWE") has established a defined contribution plan that is
tax-qualified under Code Section 401(a), (ii) VWE wants its plan to receive a
plan-to-plan transfer, and (iii) VWE's plan has been drafted to receive a plan-
to-plan transfer in compliance with Code Sections 414(l) and 411(d)(6) and the
treasury regulations thereunder, any assets and liabilities with respect to the
VWEG-Accounts of persons currently employed by VWE shall be transferred to VWE's
plan.
The VWEG-Plan contains employee salary deferral contributions, employer
matching contributions and rollover contributions only ("VWEG-Accounts").
Employee after-tax contributions were not permitted. The salary deferral
accounts and the rollover accounts have always been nonforfeitable. The employer
matching account has been subject to a vesting
V-22
<PAGE>
schedule. Effective July 1, 1999, all assets in the Plan as of such date are
hereby made 100% vested. The salary deferral and employer match accounts are
transferred to the Plan without alteration. At the discretion of the Plan
Administrator, these VWEG-Accounts (the salary deferral and match accounts) may
be consolidated with the respective Microsoft salary deferral and match
accounts. The rollover accounts shall be kept in a separate acquisition rollover
account.
3. Eligibility. Any participant of the VWEG-Plan on July 1, 1999 who is not
-----------
an eligible employee as defined in Plan Section 1.5 (e.g., an intern) shall be
an inactive participant in the Plan and shall actively participate in the Plan
only if and when they become an eligible employee as defined in Plan Section
1.5. Such former participant in the VWEG-Plan shall not be required to be
employed through an entry date before he/she can become a participant in the
Plan.
4. Vesting. Participants are 100% vested in their VWEG-Accounts which are
-------
transferred to the Plan effective July 1, 1999. In addition, Participants with
such VWEG-Accounts shall be 100% vested in future employer matching
contributions made to this Plan (the Microsoft Plan).
5. Special Provisions Applicable. The following special provision applies
-----------------------------
only to the rollover accounts in the VWEG Plan that are transferred to this Plan
as part of the VWEG-Accounts. A Participant may request an inservice withdrawal
(i.e., withdrawal while still employed) from such rollover accounts once per
Plan Year. This special withdrawal provision shall not apply to rollovers made
to the Plan after July 1, 1999.
6. Plan Loans. Any loans from the VWEG-Plan to a VWEG-Plan participant which
----------
are outstanding on July 1, 1999 shall be transferred to the Plan in kind as an
asset allocated to the
V-23
<PAGE>
participant's VWEG-Plan account. A participant with such a loan outstanding
shall have all of the rights and be subject to all of the conditions of his or
her loan as set forth in his or her VWEG-Plan loan documents.
I. Former Accounts and Participants of Compare Net 401(k) Plan
1. History of Corporate Merger. On March 4, 1999, Compare Net, Inc. was
---------------------------
merged with MS-Jupiter, Inc., a wholly-owned subsidiary of Microsoft
Corporation, with Compare Net, Inc. being the surviving corporation and becoming
a wholly-owned subsidiary of Microsoft Corporation. At the time of the merger
with MS-Jupiter, Inc., Compare Net, Inc. was the sponsor of the Compare Net
401(k) Plan ("CN-Plan"). The plan remained in existence after Compare Net, Inc.
was merged with MS-Jupiter, Inc.
2. Plan Merger. Effective September 1, 1999, the CN-Plan is merged
-----------
into the Plan, and the plan document for the Plan, as amended previously and by
this amendment, is the surviving plan document. The Plan consists only of
employee pre-tax deferrals, and rollovers made from prior plans or IRAs ("CN-
Accounts"). The CN-Accounts are transferred to the Plan without alteration and
shall be kept separate from other accounts held in the Plan by former CN-Plan
participants. No discretionary employer contributions were made. Because any
prior rollovers are subject to immediate withdrawal, they will be kept in a
separate acquisition rollover account from the employee pre-tax deferrals.
3. Eligibility. All former employees of Compare Net, Inc. were
-----------
terminated from Compare Net, Inc. prior to July 1, 1999. Those employed by
Microsoft Corporation as an eligible employee (as defined in Section 1.5 of the
Plan) prior to July 1, 1999 entered the Plan on July 1, 1999. Any former
participant in the CN-Plan who is not an eligible employee (as defined in
Section 1.5 of the Plan) shall enter the Plan immediately upon becoming an
eligible employee,
V-24
<PAGE>
and shall not be required to be employed through an entry date before he/she
will become a participant under the Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their CN-Accounts which are transferred from the CN-Plan effective September 1,
1999. For purposes of determining their vested percentage in their employer
matching contribution account in this Plan (i.e., matching contributions made by
Microsoft Corporation after July 1, 1999), participants shall be credited with
vesting service under the elapsed time method as set forth in Article V of the
Plan for their service at Compare Net, Inc.
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the CN-Accounts. With respect to the CN-Accounts, the following special
provisions shall supersede any other provisions of this Plan which are
inconsistent with the following provisions. For example, in-kind distributions
of Microsoft stock are permitted on lump sum distributions to the extent a CN-
Account is invested in Microsoft stock at the time of the distribution, because
such distributions are permitted with respect to other Plan accounts and would
not be inconsistent with the following special provisions. In addition, to the
extent the Plan is amended subsequent to this amendment in a way which gives
participants greater benefits or additional options not provided in this
section, participants with a CN-Account shall be eligible for those additional
benefits or options without violating this section.
6. Form of Benefit Payments. Unless the participant makes an election
------------------------
otherwise, the participant (or beneficiary) shall receive the distribution of
his or her CN-Account in the form of a cash lump sum. Participants with vested
account balances in excess of $5,000 may elect to receive their distribution in
the form of monthly cash installments over a period certain which
V-25
<PAGE>
may not exceed the life expectancy of the participant or the joint life
expectancy of the participant and his or her designated beneficiary.
7. Inservice Withdrawals of Prior Rollovers. Participants who rolled
----------------------------------------
amounts into the CN-Plan from another plan or IRA may withdraw such amounts and
the earnings thereon at any time.
8. Plan Loans. Any loans from the CN-Plan to a CN-Plan participant
----------
which are outstanding on September 1, 1999 shall be transferred to the Plan in
kind as an asset allocated to the participant's CN-Account. A participant with
such a loan outstanding shall have all of the rights and be subject to all of
the conditions of his or her loan as set forth in his or her CN-Plan loan
documents.
J. Former Accounts and Participants of Visio Corporation
1. History of Corporate Merger. On January 7, 2000, Visio Corporation
---------------------------
became a wholly-owned subsidiary of Microsoft Corporation as a result of a
merger between Visio Corporation and a subsidiary of Microsoft Corporation. At
the time of the merger with the subsidiary of Microsoft Corporation, Visio
Corporation was the sponsor of the Visio 401(k) Plan ("VC-Plan"). The VC-Plan
was frozen as of February 1, 2000, and Visio employees stopped making salary
deferral contributions to the VC-Plan effective February 1, 2000. The Visio
employees will be eligible to enter the Microsoft Savings Plus 401(k) Plan
("Plan") effective March 1, 2000.
2. Plan Merger. Effective July 1, 2000, the VC-Plan is merged into the
-----------
Plan and this plan document for the Plan, as amended previously and by this
Amendment, is the surviving plan document.
V-26
<PAGE>
The VC-Plan contains employee salary deferral contributions, employer
matching contributions, and rollover contributions ("VC-Accounts"). Employee
after-tax contributions were not permitted and discretionary employer
contributions were never made. The salary deferral accounts and the rollover
accounts have always been nonforfeitable. The employer matching account has
been subject to a vesting schedule. Effective February 1, 2000, all accounts in
the VC-Plan as of such date were made 100% vested. The salary deferral and
employer match accounts are transferred to the Plan without alteration. The
rollover accounts containing rollovers that were made to the VC-Plan shall be
kept in a separate acquisition rollover account ("Rollover VC-Account").
3. Eligibility. Any participant of the VC-Plan on July 1, 2000, who is
-----------
not an eligible employee as defined in Plan Section 1.5 (e.g., an intern) shall
be an inactive participant in the Plan and shall actively participate in the
Plan only if and when they become an eligible employee as defined in Plan
Section 1.5. Such former participant in the VC-Plan shall renew active
participation in the Plan immediately upon becoming an eligible employee as
defined in Plan Section 1.5 and attaining age 18. Any person employed by Visio
Corporation after July 1, 2000 who was not a participant in the VC-Plan on or
before July 1, 2000 shall be required to satisfy all of the eligibility
conditions of Plan Section 1.5 and 2.1, and must be employed through an entry
date before he/she will become a participant under the Plan.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their VC-Accounts which are transferred to the Plan. For purposes of determining
their vested percentage in their employer matching contribution account in this
Plan (e.g., matching contributions made by Microsoft Corporation after March 1,
2000), participants shall be credited with vesting service under the elapsed
time method as set forth in Article V of the Plan for their service at Visio
V-27
<PAGE>
Corporation. Notwithstanding the preceding sentence, employees who are employed
by Visio Corporation on any date between March 1, 2000 and July 1, 2000
(inclusive) and who enter the Plan as participants between March 1, 2000 and
July 1, 2000 (inclusive) shall be 100% vested in their employer matching
contribution accounts in the Plan.
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the VC-Accounts. With respect to the VC-Accounts, the following special
provisions shall supersede any other provisions of this plan which are
inconsistent with the following provisions. However, to the extent the Plan is
amended subsequent to this amendment in a way which gives participants greater
benefits or additional options not provided in this section, participants with a
VC-Account shall be eligible for those additional benefits or options without
violating this section.
6. Rollover VC-Account. A participant may elect to withdraw from the
-------------------
Rollover VC-Account at any time, any amount up to 100% of the value of the
Rollover VC-Account. The participant shall notify the plan administrator of his
election to make a withdrawal under this Section. The distribution will be made
as soon as reasonably practicable after such notice is given.
7. Form of Benefit Payments. The participant may elect to have his or
------------------------
her VC-Accounts distributed in a single lump sum payment, in cash or in kind.
8. Plan Loans. All loans from the VC-Plan to a VC-Plan participant
----------
which are outstanding on July 1, 2000 shall be transferred to the Plan in kind
as an asset allocated to the participant's VC-Plan account. A participant with
such a loan outstanding shall have all of the rights and be subject to all of
the conditions of his or her loan as set forth in his or her VC-Plan loan
documents.
V-28
<PAGE>
K. Former Accounts and Participants of Entropic Research Laboratory, Inc.
Savings and Investment Plan
1. History of Corporate Merger. On November 4, 1999, Entropic Research
---------------------------
Laboratory, Inc. ("Entropic") became a wholly-owned subsidiary of Microsoft
Corporation as a result of a merger between Entropic and a subsidiary of
Microsoft Corporation. At the time of the merger with the subsidiary of
Microsoft Corporation, Entropic was the sponsor of the Entropic Research
Laboratory, Inc. Savings & Investment Plan ("ERL-Plan"). Participants in the
ERL-Plan who became Microsoft employees on or before March 1, 2000 will be
eligible to enter the Microsoft Savings Plus 401(k) Plan ("Plan") effective
March 1, 2000.
2. Plan Merger. Effective March 1, 2000, the ERL-Plan is merged into the
-----------
Plan and this plan document for the Plan, as amended previously and by this
Amendment, is the surviving plan document.
The ERL-Plan contains employee salary deferral contributions and rollover
contributions ("ERL-Accounts"). Employee after-tax contributions were not
permitted and discretionary employer contributions were never made. The salary
deferral accounts and the rollover accounts have always been nonforfeitable.
The salary deferral accounts are transferred to the Plan without alteration. The
rollover accounts containing rollovers that were made to the ERL-Plan shall be
kept in a separate acquisition rollover account ("Rollover ERL-Account").
3. Eligibility. Any participant of the ERL-Plan on March 1, 2000, who
-----------
is not an eligible employee as defined in Plan Section 1.5 (e.g., an intern)
shall be an inactive participant in the Plan and shall actively participate in
the Plan only if and when they become an eligible employee as defined in Plan
Section 1.5. Such former participant in the ERL-Plan shall renew active
V-29
<PAGE>
participation in the Plan immediately upon becoming an eligible employee as
defined in Plan Section 1.5 and attaining age 18.
4. Vesting and Vesting Service Credit. Participants are 100% vested in
----------------------------------
their ERL-Accounts which are transferred to the Plan. For purposes of
determining their vested percentage in their employer matching contribution
account in this Plan (e.g., matching contributions made by Microsoft
Corporation), participants shall be credited with vesting service under the
elapsed time method as set forth in Article V of the Plan for their service at
Entropic.
5. Special Provisions Applicable. The following special provisions apply
-----------------------------
only to the ERL-Accounts. With respect to the ERL-Accounts, the following
special provisions shall supersede any other provisions of this Plan which are
inconsistent with the following provisions. However, to the extent the Plan is
amended subsequent to this amendment in a way which gives participants greater
benefits or additional options not provided in this section, participants with a
ERL-Account shall be eligible for those additional benefits or options without
violating this section.
6. Rollover ERL-Account. A participant may elect to withdraw from the
--------------------
Rollover ERL-Account as of a valuation date following such election, any amount
up to 100% of the value of the Rollover ERL-Account as of such valuation date.
The participant shall notify the plan administrator of his election to make a
withdrawal under this Section. The distribution will be made as soon as
reasonably practicable after such notice is given.
7. Form of Benefit Payments. The participant may elect to have his or
------------------------
her ERL-Accounts distributed in a single lump sum payment, in cash or in kind or
in a combination of both. Participants may also elect to have their ERL-Accounts
distributed in installments payable in cash or in kind, or in a combination of
both over a period not to exceed the participant's life
V-30
<PAGE>
expectancy or the joint life expectancy of the participant and spouse. If at the
time of distribution to a participant or beneficiary the participant's total
vested account balance in the Plan (including ERL-Accounts and other accounts)
does not exceed $5,000 (and never exceeded $5,000 at the time of a prior
distribution), then the ERL-Account balance will be distributed in an immediate
lump sum payment, in cash or in kind or in a combination of both, as elected by
the participant or beneficiary, and installment payments will not be a payment
option.
8. Timing of Death Benefit Payments. Upon a participant's death, the
--------------------------------
distribution of the participant's ERL-Account shall be made or commence at the
times specified in Section 7.3 of the Plan. The distribution shall be in cash
or in kind, or in a combination of both, or in installments payable in cash or
in kind, or in a combination of both over a period not to exceed the
participant's life expectancy or the joint life expectancy of the participant
and spouse, as elected by the participant or beneficiary. Notwithstanding the
foregoing, if the participant's total vested account balance in the Plan
(including ERL-Accounts and other accounts) does not exceed $5,000, distribution
to the beneficiary shall be made in an immediate lump sum payment in cash or in
kind, or in a combination of both, as elected by the beneficiary.
If a participant dies prior to the commencement of the distribution of his
or her ERL-Account and is survived by a designated beneficiary who is not his or
her spouse, the distribution must be made by December 31 of the calendar year in
which the fifth anniversary of the participant's death occurs unless the
beneficiary elects to have installment payments commence by the end of the first
calendar year after the participant's death. If the designated beneficiary is
the participant's spouse, the spouse may elect to delay distribution or
commencement of installment payments until the end of the calendar year in which
the participant would have attained age 65. If the participant dies prior to
commencement of the distribution of his or her
V-31
<PAGE>
ERL-Account and is not survived by a designated beneficiary, distribution shall
be made in an immediate lump sum payment in cash or in kind, or in a combination
of both, as elected by the beneficiary.
If the participant died while he was receiving installment payments of his
ERL-Account, the remaining portion of the ERL-Account shall be distributed at
least as rapidly as under the length and frequency of installment payments which
the participant had selected.
9. Plan Loans. All loans from the ERL-Plan to a ERL-Plan participant
----------
which are outstanding on March 1, 2000 shall be transferred to the Plan in kind
as an asset allocated to the participant's ERL-Plan account. A participant with
such a loan outstanding shall have all of the rights and be subject to all of
the conditions of his or her loan as set forth in his or her ERL-Plan loan
documents.
V-32
<PAGE>
APPENDIX VI
Section 2.5
EARLY ENTRY FOR CERTAIN EMPLOYEES OF ACQUIRED COMPANIES
Any eligible employee who immediately following one of the relevant acquisition
dates listed below was employed by Microsoft Corporation (or any company which
is affiliated with Microsoft, within the meaning of Code Sections 414(b), (c),
(m), or (o)), and on the date immediately preceding the relevant acquisition
date was employed by the relevant company listed below, shall enter the Plan on
the later of (i) the relevant entry dates listed below, or (ii) the first
payroll period immediately after becoming an eligible employee and attaining age
18.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Company Acquisition Date Plan Entry Date
------- ---------------- ---------------
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NetCarta Corporation January 31, 1997 March 1, 1997
- ------------------------------------------------------------------------------------------------
Interse' Corporation February 25, 1997 April 1, 1997
- ------------------------------------------------------------------------------------------------
Visio Corporation January 7, 2000 March 1, 2000
- ------------------------------------------------------------------------------------------------
</TABLE>
VI-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>QUARTERLY AND MARKET OF 2000 ANNUAL REPORT
<TEXT>
<PAGE>
Exhibit 13.1
Quarterly Information
(In millions, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenue $ 3,334 $ 3,792 $ 3,984 $4,152 $15,262
Gross profit 2,800 3,179 3,344 3,479 12,802
Net income 663 1,133 1,337 1,357 4,490
Basic earnings per share 0.14 0.24 0.27 0.27 0.92
Diluted earnings per share 0.13 0.21 0.25 0.25 0.84
Common stock price per share:
High 37.69 36.66 45.47 54.28 54.28
Low 30.82 29.50 31.10 40.94 29.50
- -------------------------------------------------------------------------------------------------------
1999
Revenue $ 4,193 $ 5,195 $ 4,595 $5,764 $19,747
Gross profit 3,544 4,407 3,887 5,095 16,933
Net income 1,683 1,983 1,917 2,202 7,785
Basic earnings per share 0.34 0.40 0.38 0.43 1.54
Diluted earnings per share 0.31 0.36 0.35 0.40 1.42
Common stock price per share:
High 59.81 72.00 94.63 95.63 95.63
Low 47.25 43.88 68.00 75.50 43.88
- -------------------------------------------------------------------------------------------------------
2000
Revenue $ 5,384 $ 6,112 $ 5,656 $5,804 $22,956
Gross profit 4,672 5,356 4,904 5,022 19,954
Net income 2,191 2,436 2,385 2,409 9,421
Basic earnings per share 0.43 0.47 0.46 0.46 1.81
Diluted earnings per share 0.40 0.44 0.43 0.44 1.70
Common stock price per share:
High 100.75 119.94 118.63 96.50 119.94
Low 81.63 84.38 88.13 60.38 60.38
=======================================================================================================
</TABLE>
The Company's common stock is traded on The Nasdaq Stock Market under the symbol
MSFT. On July 31, 2000, there were 107,824 registered holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.2
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>SELECTED FINANCIAL HIGHLIGHTS OF 2000 A/R
<TEXT>
<PAGE>
Exhibit 13.2
Financial Highlights
(In millions, except earnings per share)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended June 30 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 9,050 $11,936 $15,262 $19,747 $22,956
Net income 2,195 3,454 4,490 7,785 9,421
Diluted earnings per share 0.43 0.66 0.84 1.42 1.70
Cash and short-term investments 6,940 8,966 13,927 17,236 23,798
Total assets 10,093 14,387 22,357 38,625 52,150
Stockholders' equity 6,908 10,777 16,627 28,438 41,368
- ------------------------------------------------------------------------------------------------------
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.3
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>MANAGEMENT'S DISCUSSION AND ANALYSIS OF 2000 A/R
<TEXT>
<PAGE>
Exhibit 13.3
Management's Discussion and Analysis
Results of Operations for 1998, 1999, and 2000
- --------------------------------------------------------------------------------
Microsoft develops, manufactures, licenses, and supports a wide range of
software products for a multitude of computing devices. Microsoft software
includes scalable operating systems for servers, personal computers (PCs), and
intelligent devices; server applications for client/server environments;
knowledge worker productivity applications; and software development tools. 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 also licenses consumer software
programs; sells hardware devices; provides consulting services; trains and
certifies system integrators and developers; and researches and develops
advanced technologies for future software products.
This Management's Discussion and Analysis contains statements that are forward-
looking. These statements are based on current expectations that are subject to
risks and uncertainties. Actual results will vary because of factors discussed
below under "Issues and Uncertainties."
Revenue
- --------------------------------------------------------------------------------
The Company's revenue growth rate was 28% in fiscal 1998, 29% in fiscal 1999,
and 16% in fiscal 2000. Revenue growth in fiscal 2000 was driven by strong
licensing of the Microsoft suite of products including Microsoft Windows NT(R)
Workstation, Windows 2000 Professional, Windows NT Server, Windows 2000 Server,
Microsoft Office 2000, and SQL Server 7.0. Windows 2000, released during fiscal
2000, is the next version of the Windows NT operating system. Consumer revenue,
including Internet access, the online properties, entertainment software, and
hardware peripherals also grew strongly. Partially offsetting those items was
slower growth from Windows operating systems sold through the original equipment
manufacturer (OEM) channel due to slow demand for business PCs throughout a
significant portion of fiscal 2000. Revenue growth in fiscal 1998 and 1999
reflected the continued adoption of Windows operating systems and Microsoft
Office. Software organizational license increases in 1998, 1999, and 2000 have
been a significant factor in the Company's revenue growth. The average selling
price per license has decreased, primarily because of general shifts in the
sales mix from retail packaged products to licensing programs, from new products
to product upgrades, and from stand-alone desktop applications to integrated
product suites. Average revenue per license from OEM licenses and
organizational license programs is lower than average revenue per license from
retail versions. Likewise, product upgrades have lower prices than new
products. See accompanying notes to financial statements.
The Company's business model continues to evolve from retailing packaged
products to licensing organizational licenses and subscriptions. The Company's
products are generally delivered to end users through a multi-tiered channel of
distributors and resellers, but the distribution model is also changing for
selected retail products that are now being shipped straight to resellers and
other selected products that are now being shipped straight to end users. Due
to these changes in channel mechanics and the business model, the risk of
returns of product from distributors and resellers has declined. Accordingly,
the estimate for future product returns was reduced by $250 million in the
fourth quarter of fiscal 1999.
In fiscal 1999, Microsoft made two changes related to the ratable recognition of
revenue for a portion of its revenue for certain products. American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions, requires companies to use the average sales price of each
undelivered element of software arrangements to unbundle revenue. Prior
authoritative guidance allowed a comparison of the total price differential
between a licensed product sold through different channels of distribution to
derive the value of undelivered elements offered to customers acquiring product
from one channel but not the other. Upon adoption of this new rule in the
fourth quarter of fiscal 1999, the percentages of the total arrangement treated
as unearned decreased. This change reduced the amount of Microsoft Windows and
Microsoft Office sales treated as unearned and increased the amount of revenue
recognized upon shipment. Additionally, as part of the Company's long range
planning process and a review of product shipment cycles, it was determined that
the life cycle of Windows should be extended from two years to three years.
1
<PAGE>
Business Divisions
Microsoft has three major segments: Productivity Applications and Developer;
Windows Platforms; and Consumer and Other.
Productivity Applications and Developer
Productivity Applications and Developer revenue was $7.04 billion, $8.82
billion, and $10.47 billion in 1998, 1999, and 2000. Productivity Applications
and Developer products include desktop applications such as Microsoft Office,
server applications such as Microsoft SQL Server and Microsoft Exchange Server,
and software developer tools.
In fiscal 2000, revenue growth from Microsoft Office integrated suites,
including the Premium, Professional, Small Business, and Standard Editions was
very solid. Revenue from server applications grew strongly compared to fiscal
1999, largely due to the strong success of SQL Server 7.0. Software developer
tools revenue declined, due to increased suite licensing versus stand-alone
licenses, and the lack of a release upgrade of the Visual Studio(R)
development system.
In fiscal 1999, revenue growth from Microsoft Office integrated suites was
strong. Revenue from server applications also grew strongly, reflecting, in
part, the release of SQL Server 7.0. The Visual Studio 6.0 development system
drove healthy software developer tools revenue growth. In fiscal 1998, revenue
from the various Microsoft Office integrated suites increased strongly, while
revenue from stand-alone versions of Microsoft Excel, Microsoft Word, Microsoft
Access, and Microsoft PowerPoint(R) presentation graphics program decreased.
Windows Platforms
Windows Platforms revenue was $6.28 billion, $8.50 billion, and $9.38 billion in
1998, 1999, and 2000. Windows Platforms products include primarily Windows 98,
Windows 2000 Professional, Windows 2000 Server, Windows NT Workstation, and
Windows NT Server.
In fiscal 2000, Windows desktop operating systems revenue growth was modest due
to soft demand for business PCs during most of the year; a slowdown in shipments
in anticipation of the post mid-year availability of Windows 2000 operating
systems; and, as expected, a longer business migration cycle for the newest
Windows operating system offerings. In addition, Windows desktop operating
systems average earned revenue per licensed operating system decreased compared
to fiscal 1999. Windows Platform Server revenue growth over fiscal 1999 was
particularly strong led by increased adoption by customers of Windows NT Server
and Windows 2000 Server.
In fiscal 1999, Windows units licensed through the OEM channel, particularly
Windows NT Workstation, increased strongly over the prior year. Organizational
licensing of Windows NT Workstation and Windows 98 also contributed to the
growth. The revenue growth rate for Windows NT Server was healthy. In fiscal
1998, Windows units licensed through the OEM channel, including Windows 95,
Windows 98, and Windows NT Workstation, exhibited robust growth over the prior
year.
Consumer and Other
Consumer and Other revenue was $1.94 billion, $2.43 billion, and $3.11 billion
in 1998, 1999, and 2000. Consumer and Other products include Internet access
and online services; learning and entertainment software; hardware devices;
consulting services; and training and certification.
In fiscal 2000, online revenue growth was very strong and reflected higher
subscriber totals, offset by lower net prices for Internet access subscriptions
compared to the prior year. Additionally, the continued success of the
Company's new hardware device offerings and strong sell-through of entertainment
software produced robust revenue growth.
In fiscal 1999, online advertising revenue and consulting services rose
substantially and Internet access revenue increased moderately, while revenue
from hardware devices, consumer software, and Microsoft Press was relatively
flat. In fiscal 1998, online revenue increased due to higher Internet access
subscriber levels and hardware and learning and entertainment revenue increased.
Distribution Channels
Microsoft distributes its products primarily through OEM licenses,
organizational licenses, online properties, and retail packaged products. OEM
channel revenue represents license fees from original equipment manufacturers
who preinstall Microsoft products, primarily on PCs. Microsoft has three major
geographic sales and marketing organizations: the South Pacific and Americas
Region; the Europe, Middle East, and Africa Region; and the Asia Region. Sales
of organizational licenses and packaged products via these channels are
primarily to and through distributors and resellers.
2
<PAGE>
OEM revenue was $4.72 billion in 1998, $6.40 billion in 1999, and $7.01 billion
in 2000. The relatively low growth rate in fiscal 2000 was due to lower
business PC shipment growth percentages, especially as a result of the soft
demand for business PCs and component shortages for part of the year. These
issues combined with post mid-year availability of the newest business operating
system, Windows 2000 Professional, resulted in lower revenue growth. Average
earned revenue per license also declined compared to the prior year, due in part
to a mix shift to the lower-priced Windows 98 operating system reflecting the
softness in demand for business PCs and lower prices on operating systems
licensed through certain OEM channel sectors. In both fiscal 1999 and 1998, PC
shipment growth coupled with an increased penetration of higher value 32-bit
operating systems drove the OEM revenue increases.
South Pacific and Americas Region revenue was $5.57 billion, $7.25 billion, and
$8.33 billion in 1998, 1999, and 2000. In fiscal 2000, Office 2000 integrated
suites, Windows 2000 Server, online revenue, and SQL Server sales were the
primary drivers of the revenue growth. Strong retail sales of hardware devices
and consumer software also contributed to the growth over the prior year.
Revenue growth was particularly strong in Latin America and Australia, moderate
in Canada, and modest in the United States. In fiscal 1999, server
applications, Windows NT Server, Windows NT Workstation, and Microsoft Office
all exhibited solid year-over-year growth rates. Organizational licensing
activity was strong. Revenue growth was solid in the United States and moderate
in Latin America and the South Pacific. In fiscal 1998, revenue growth
reflected strong licensing of Microsoft Office.
Europe, Middle East, and Africa Region revenue was $3.50 billion, $4.33 billion,
and $5.02 billion in 1998, 1999, and 2000. In fiscal 2000, retail sales of
Windows operating systems and Office licensing produced moderate growth in the
region. Growth from SQL Server licensing, new hardware device offerings, and
entertainment software was exceptionally strong. Revenue growth, measured in
constant dollars, was very healthy in Germany and Italy, robust in the Middle
East, and low in the United Kingdom. In fiscal 1999, all major products grew
strongly over the prior year. Revenue growth was solid in the United Kingdom,
Germany, and France, and was particularly high in Sweden, the Netherlands, and
Spain. In fiscal 1998, organizational licensing of desktop applications and
business systems grew strongly. Revenue growth was particularly high in the
United Kingdom.
Asia Region revenue was $1.48 billion in 1998, $1.78 billion in 1999, and $2.60
billion in 2000. In fiscal 2000, the region's growth rate reflected strong
performance resulting from improved local economic conditions. Revenue growth
was also influenced by robust growth of localized versions of Microsoft Office
2000, especially the Office Personal Edition sold in Japan; Windows platform and
server licensing; and strong adoption of SQL Server. Revenue grew strongly in
nearly all countries in the Asia region. In fiscal 1999, Japan, Taiwan, China,
Hong Kong, and Southeast Asia had moderate revenue growth, while revenue grew
very strongly in Korea. In fiscal 1998, revenue was relatively flat in Japan
and Southeast Asia due to economic issues and weak currencies.
The Company's operating results are affected by foreign exchange rates.
Approximately 32%, 29%, and 30% of the Company's revenue was collected in
foreign currencies during 1998, 1999, and 2000. Since a portion of local
currency revenue is hedged and much of the Company's international manufacturing
costs and operating expenses are also incurred in local currencies, the impact
of exchange rates is partially mitigated.
Operating Expenses
- --------------------------------------------------------------------------------
Cost of Revenue
Cost of revenue as a percent of revenue was 16.1% in 1998, 14.3% in 1999, and
13.1% in 2000. Cost of revenue in fiscal 2000 reflected lower costs associated
with WebTV Networks' operations, partially offset by the growth in hardware
peripherals costs. The percentage decreases in fiscal 1999 and 1998 resulted
primarily from the trend in mix shift to OEM and organizational licenses. The
decreases were also due to the shifts in mix to CD-ROMs, which carry lower cost
of goods than floppy disks, and higher-margin Windows NT Server, other servers,
and client access licenses in the BackOffice(R) product family. Additionally,
cost of revenue in 1999 was positively impacted by a reduction in estimates of
obsolete inventory and other manufacturing costs of $67 million. As discussed
previously, the Company's business model continues to evolve toward licensing
from sales of packaged products through distribution channels. Consequently,
risks associated with manufacturing and holding physical product have declined.
Research and Development
Microsoft continued to invest heavily in the future by funding research and
development (R&D). The increase in fiscal 2000 was driven primarily by higher
headcount-related costs. The increase in fiscal 1999 reflected higher
development headcount-related costs offset by lower infrastructure and third-
party development costs. Fiscal 1998 expenses were driven primarily by higher
development headcount-related costs and third-party development costs.
3
<PAGE>
In fiscal 1998, the Company acquired WebTV Networks, Inc., an online service
that enables consumers to experience the Internet through their televisions via
set-top terminals. Microsoft paid $425 million in stock and cash. The
accompanying fiscal 1998 income statement reflects a one-time write-off of in-
process technologies under development by WebTV Networks of $296 million.
Sales and Marketing
In fiscal 2000, sales and marketing expenses as a percentage of revenue
increased due to higher relative marketing costs associated with new product
releases and online marketing. In fiscal 1999, sales and marketing expense as a
percentage of revenue decreased due to lower relative sales expenses and lower
relative marketing costs. In fiscal 1998, the sales and marketing expense as a
percent of revenue decreased due to lower relative sales expenses.
General and Administrative
Fiscal 2000 general and administrative expenses included a charge for the
settlement of a lawsuit with Caldera, Inc. and also reflected increased legal
fees and certain employee stock option-related expenses. The increase in fiscal
years 1999 and 1998 were attributable to higher legal fees, settlement costs,
and headcount-related costs necessary to support the Company's expanding
operations.
Other Expenses
Other expenses incorporate miscellaneous items, including certain gains;
recognition of Microsoft's share of joint venture activities for the MSNBC
entities, TransPoint, and other joint venture activities; and charitable
contributions and miscellaneous taxes.
Investment Income, Gain on Sales, and Income Taxes
- --------------------------------------------------------------------------------
Investment income increased primarily as a result of a larger investment
portfolio generated by cash from operations in 1998, 1999, and 2000, coupled
with realized gains from the sale of securities in 1999 and 2000.
In fiscal 2000, Microsoft sold the entertainment city guide portion of MSN
Sidewalk to Ticketmaster Online-CitySearch, Inc. (TMCS) for a combination of
TMCS stock and warrants with a value of $223 million. The transaction also
included a distribution arrangement. Microsoft recognized a gain of $156
million on the sale and will recognize revenue amounts related to the
distribution arrangement over the terms of the agreement. In fiscal 1999,
Microsoft sold its Softimage, Inc. subsidiary to Avid Technology, Inc. for a
pretax gain of $160 million.
The effective tax rate for fiscal 2000 was 34.0%. Excluding the impact of the
gain on the sale of Softimage, Inc., the effective tax rate for fiscal 1999 was
35.0%. The effective income tax rate for fiscal 1998 was 36.9%, reflecting the
nondeductible write-off of WebTV in-process technologies.
Financial Condition
- --------------------------------------------------------------------------------
The Company's cash and short-term investment portfolio totaled $23.80 billion at
June 30, 2000. The portfolio consists primarily of fixed-income securities,
diversified among industries and individual issuers. Microsoft's investments
are generally liquid and investment grade. The portfolio is invested
predominantly in U.S. dollar denominated securities, but also includes foreign
currency positions in order to diversify financial risk. The portfolio is
primarily invested in short-term securities to minimize interest rate risk and
facilitate rapid deployment in the event of immediate cash needs.
Microsoft works with many technology companies and often provides investment
funding as part of these alliances. During fiscal 2000, the Company purchased
approximately $400 million of Rogers Communications Inc. convertible preferred
securities and $200 million of Best Buy Co., Inc. common stock. Also,
subsequent to fiscal year-end, Microsoft acquired an additional shareholding in
Telewest Communications plc for approximately $2.6 billion. During fiscal 1999,
the Company purchased $5.0 billion of AT&T convertible preferred securities and
warrants, $600 million of Nextel Communications, Inc. common stock, $500 million
of NTL, Inc. convertible preferred stock, $330 million of United Pan-Europe
Communications common stock, and $200 million of Qwest Communications
International Inc. common stock.
Microsoft and National Broadcasting Company (NBC) operate two MSNBC joint
ventures: a 24-hour cable news and information channel, and an online news
service. Microsoft is paying $220 million over a five-year period that ends in
2001 for its interest in the cable venture and one-half of the operational
funding of both joint ventures. Microsoft guarantees a portion of MSNBC debt.
4
<PAGE>
Microsoft has no material long-term debt and has $164 million of standby
multicurrency lines of credit to support foreign currency hedging and cash
management. Stockholders' equity at June 30, 2000 was $41.37 billion.
Microsoft will continue to invest in sales, marketing, and product support
infrastructure. Additionally, research and development activities will include
investments in existing and advanced areas of technology, including using cash
to acquire technology. Additions to property and equipment will continue,
including new facilities and computer systems for R&D, sales and marketing,
support, and administrative staff. Commitments for constructing new buildings
were $299 million on June 30, 2000. Cash will also be used to fund ventures and
other strategic opportunities.
Since fiscal 1990, Microsoft has repurchased 765 million common shares while
1.99 billion shares were issued under the Company's employee stock option and
purchase plans. Microsoft enhanced its repurchase program by selling put
warrants. In January 2000, the Company terminated its stock buyback program.
Subsequent to fiscal year-end 2000, the Company announced a share repurchase
program which will provide shares for issuance to employees under the Company's
stock option and stock purchase programs. The market value of all outstanding
stock options was $67 billion as of June 30, 2000. During December 1996,
Microsoft issued 12.5 million shares of 2.75% convertible exchangeable preferred
stock. Net proceeds of $980 million were used to repurchase common shares. The
Company's convertible preferred stock matured on December 15, 1999. Each
preferred share was converted into 1.1273 common shares.
Management believes existing cash and short-term investments together with funds
generated from operations will be sufficient to meet operating requirements.
The Company's cash and short-term investments are available for strategic
investments, mergers and acquisitions, and other potential large-scale cash
needs that may arise. Microsoft has not paid cash dividends on its common
stock.
Recently Issued Accounting Standards
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, is effective for the
Company as of July 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of these new accounting standards will result in
cumulative after-tax reductions in net income of approximately $350 million and
other comprehensive income of approximately $50 million in the first quarter of
fiscal 2001. The adoption will also impact assets and liabilities recorded on
the balance sheet.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 44, Accounting for Certain Transactions involving Stock
Compensation, which clarifies the application of APB 25 for certain issues. The
interpretation is effective July 1, 2000, except for the provisions that relate
to modifications that directly or indirectly reduce the exercise price of an
award and the definition of an employee, which are effective after December 15,
1998. The Company does not believe that adoption of FIN 44 will have a material
impact on its financial statements.
Issues and Uncertainties
- --------------------------------------------------------------------------------
While Microsoft management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its growth outlook.
Rapid Technological Change and Competition
Rapid change, uncertainty due to new and emerging technologies, and fierce
competition characterize the software industry, which means that Microsoft's
market position is always at risk. Microsoft's ability to maintain its current
5
<PAGE>
success is dependent upon the Company's ability to develop and introduce new
products and enhance existing products to satisfy consumer demand for new
computer technologies. This process is challenging because the pace of change
continues to accelerate, creating new opportunities for competitors and
subjecting business planning to substantial uncertainty. Competitors, working
with new technology, may arrive at a technology that creates a new market
altogether and renders the Company's product offerings obsolete. "Open source"
software, new computing devices, new microprocessor architectures, the Internet,
and Web-based computing models are current examples of the rapid pace of change
and intensifying competition. If Microsoft does not successfully identify new
product opportunities and develop and bring new products to market in a timely
and efficient manner, the Company's business growth will suffer and demand for
its products will decrease. Competing operating systems, platforms, and products
may gain popularity with customers, computer manufacturers, and developers,
reducing Microsoft's future revenue.
Future Initiatives
The Company plans to continue significant investments in software research and
development including Microsoft .NET, wireless technologies, digital devices,
games, television, and small business. Microsoft is also making significant
investments in strategic relationships with third parties, and in online
products and services such as MSN, CarPoint(TM) online automotive service, and
HomeAdvisor(TM) online real estate service, where the Company has the
opportunity to establish leadership in new businesses. It is anticipated that
these investments in research and development will increase over historical
spending levels without corresponding growth in revenue in the near future.
Significant revenue from these product opportunities may not be achieved for a
number of years, if at all.
PC Growth Rates
The nature of the PC marketplace is changing in ways that may reduce Microsoft's
software sales and revenue growth. Recently, manufacturers have sought to reach
more consumers by developing and producing lower cost PCs - PCs that come
without pre-installed software or contain software with reduced functionality.
In addition to the influx of low-cost PCs, a market for handheld computing and
communication devices has developed. While these devices are not as powerful or
versatile as PCs, they threaten to erode sales growth in the market for PCs with
pre-installed software. This may affect Microsoft's revenue growth because
manufacturers may choose not to install Microsoft software in these low-cost PCs
or consumers may purchase alternative intelligent devices that do not utilize
Microsoft software. These lower-priced devices require Microsoft to provide
lower-priced software with a subset of the original functionality. As a result,
the Company may generate less revenue from the sale of software produced for
these devices than from the sale of software for PCs.
Product Ship Schedules
The PC software industry is inherently complex. New products and product
enhancements can require long development and testing periods. Significant
delays in new product releases or significant problems in creating new products
could damage Microsoft's business.
Saturation
Product upgrades, which enable users to upgrade from earlier versions of the
Company's products or from competitors' products, have lower prices and margins
than new products. Also, penetration of the Company's desktop applications into
large organizations is becoming saturated. These factors are likely to depress
future desktop applications revenue growth.
Prices
The competitive factors described above may require Microsoft to lower product
prices to meet competition, reducing the Company's net income.
Earnings Process
An increasingly higher percentage of the Company's revenue is subject to ratable
recognition, which impacts the timing of revenue and earnings recognition. This
policy may be required for additional products, depending on specific license
terms and conditions. Also, maintenance and new subscription programs such as
the application service provider (ASP) model are increasing in popularity.
Employee Compensation
Microsoft employees currently receive salaries, incentive bonuses, other
benefits, and stock options. New government regulations, poor stock price
performance, or other factors could diminish the value of the option program to
current and prospective employees and force the Company into more of a cash
compensation model.
6
<PAGE>
International Operations
Microsoft develops and sells products throughout the world. The prices of the
Company's products in countries outside of the United States are generally
higher than the Company's prices in the United States because of the costs
incurred in localizing software for non-U.S. markets. The costs of producing
and selling the Company's products in these countries are also higher. Pressure
to globalize Microsoft's pricing structure might require that the Company reduce
the sales price of its software in other countries, even though the costs of the
software continue to be higher than in the United States. Negative changes in
software "piracy" trade protection laws, policies and measures and other
regulatory requirements affecting trade and investment; unexpected changes in
regulatory requirements for software; social, political, labor or economic
conditions in a specific country or region; difficulties in staffing and
managing foreign operations; and potential adverse foreign tax consequences;
among other factors, could also have an impact on the Company's business and
results of operations outside of the United States.
Market Risk
The Company is exposed to foreign currency, interest rate, and securities price
risks. A portion of these risks is hedged, but fluctuations could impact the
Company's results of operations and financial position. The Company hedges the
exposure of accounts receivable and a portion of anticipated revenue to foreign
currency fluctuations, primarily with option contracts. The Company monitors
its foreign currency exposures daily to maximize the overall effectiveness of
its foreign currency hedge positions. Principal currencies hedged include the
Euro, Japanese yen, British pound, and Canadian dollar. Fixed income securities
are subject to interest rate risk. The portfolio is diversified and consists
primarily of investment grade securities to minimize credit risk. The Company
routinely uses options to hedge its exposure to interest rate risk in the event
of a catastrophic increase in interest rates. Many securities held in the
Company's equity and other investments portfolio are subject to price risk. The
Company uses options to hedge its price risk on certain highly volatile equity
securities.
The Company uses a value-at-risk (VAR) model to estimate and quantify its market
risks. The VAR model is not intended to represent actual losses in fair value,
but is used as a risk estimation and management tool. Assumptions applied to
the VAR model at June 30, 1999 and 2000 include the following: normal market
conditions; Monte Carlo modeling with 10,000 simulated market price paths; a
97.5% confidence interval; and a 20-day estimated loss in fair value for each
market risk category. Accordingly, 97.5% of the time the estimated 20-day loss
in fair value would be nominal for foreign currency denominated investments and
accounts receivable at June 30, 1999 and 2000, and would not exceed $95 million
and $211 million at June 30, 1999 and 2000 for interest-sensitive investments or
$1.38 billion or $1.02 billion at June 30, 1999 and 2000 for equity securities.
Intellectual Property Rights
Microsoft diligently defends its intellectual property rights, but unlicensed
copying of software represents a loss of revenue to the Company. While this
adversely affects U.S. revenue, revenue loss is even more significant outside of
the United States, particularly in countries where laws are less protective of
intellectual property rights. Throughout the world, Microsoft actively educates
consumers on the benefits of licensing genuine products and educates lawmakers
on the advantages of a business climate where intellectual property rights are
protected. However, continued efforts may not affect revenue positively.
Litigation
Litigation regarding intellectual property rights, patents, and copyrights
occurs in the PC software industry. In addition, there are government
regulation and investigation risks along with other general corporate legal
risks. The Company is a defendant in a lawsuit filed by the Antitrust Division
of the U.S. Department of Justice and a group of nineteen state Attorneys
General alleging violations of the Sherman Act and various state antitrust laws.
After the trial, the District Court entered Findings of Fact and Conclusions of
Law stating that Microsoft had violated sections of the Sherman Act and various
state antitrust laws. A Judgment was entered on June 7, 2000 ordering, among
other things, the breakup of Microsoft into two companies. On June 20, 2000,
the District Court entered an order staying the Judgment of June 7, 2000 in its
entirety until the appeal therefrom is heard and decided, unless the stay is
earlier vacated by an appellate court. Although Microsoft believes it will
obtain ultimate relief from the Judgment, the Company cannot predict with
certainty when or the extent to which such relief will be obtained. The failure
to obtain relief from certain provisions of the Judgment through the appeal
would likely have a material adverse effect on the Company. A large number of
antitrust class action lawsuits have been initiated against Microsoft. These
cases allege that Microsoft has competed unfairly and unlawfully monopolized
alleged markets for operating systems and certain software applications and seek
to recover alleged overcharges that the complaints contend Microsoft charged for
these products. Although Microsoft believes the claims are without merit and is
vigorously defending the cases, the Company cannot predict with certainty the
outcome of these lawsuits.
Future Growth Rate
The revenue growth rate in 2001 may not approach the level attained in prior
years. As discussed previously, certain operating expenses are expected to
increase in 2001. Because of the fixed nature of a significant portion of
operating expenses, coupled with the possibility of slower revenue growth,
operating margins in 2001 may decrease from those in 2000.
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.4
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>FINANCIAL STATEMENTS OF 2000 ANNUAL REPORT
<TEXT>
<PAGE>
Exhibit 13.4
Microsoft Corporation
Financial Statements
Income Statements for the three years ended June 30, 2000
Cash Flows Statements for the three years ended June 30, 2000
Balance Sheets as of June 30, 1999 and 2000
Stockholders' Equity Statements for the three years ended June 30, 2000
Notes to Financial Statements
Independent Auditors' Report
1
<PAGE>
Income Statements
(In millions, except earnings per share)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended June 30 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $15,262 $19,747 $22,956
Operating expenses:
Cost of revenue 2,460 2,814 3,002
Research and development 2,601 2,970 3,775
Acquired in-process technology 296 -- --
Sales and marketing 2,828 3,231 4,141
General and administrative 433 689 1,009
Other expenses 230 115 92
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 8,848 9,819 12,019
- -------------------------------------------------------------------------------------------------------------
Operating income 6,414 9,928 10,937
Investment income 703 1,803 3,182
Gain on sales -- 160 156
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 7,117 11,891 14,275
Provision for income taxes 2,627 4,106 4,854
- -------------------------------------------------------------------------------------------------------------
Net income $ 4,490 $ 7,785 $ 9,421
=============================================================================================================
Earnings per share:
Basic $ 0.92 $ 1.54 $ 1.81
=============================================================================================================
Diluted $ 0.84 $ 1.42 $ 1.70
=============================================================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Cash Flows Statements
(In millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended June 30 1998 1999 2000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Net income $ 4,490 $ 7,785 $ 9,421
Depreciation, amortization, and other noncash items 1,024 926 748
Write-off of acquired in-process technology 296 -- --
Gain on sales -- (160) (156)
Stock option income tax benefits 1,553 3,107 5,535
Unearned revenue 3,268 5,877 6,177
Recognition of unearned revenue from prior periods (1,798) (4,526) (5,600)
Other current liabilities 208 1,050 (445)
Accounts receivable (520) (687) (944)
Other current assets (88) (235) (775)
- ---------------------------------------------------------------------------------------------------------
Net cash from operations 8,433 13,137 13,961
- ---------------------------------------------------------------------------------------------------------
Financing
Common stock issued 959 1,350 2,245
Common stock repurchased (2,468) (2,950) (4,896)
Put warrant proceeds 538 766 472
Preferred stock dividends (28) (28) (13)
- ---------------------------------------------------------------------------------------------------------
Net cash used for financing (999) (862) (2,192)
- ---------------------------------------------------------------------------------------------------------
Investing
Additions to property and equipment (656) (583) (879)
Cash portion of WebTV purchase price (190) -- --
Cash proceeds from sale of Softimage, Inc. -- 79 --
Purchases of investments (19,114) (36,441) (43,158)
Maturities of investments 1,890 4,674 4,025
Sales of investments 10,798 21,080 28,085
- ---------------------------------------------------------------------------------------------------------
Net cash used for investing (7,272) (11,191) (11,927)
- ---------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 162 1,084 (158)
Effect of exchange rates on cash and equivalents (29) 52 29
Cash and equivalents, beginning of year 3,706 3,839 4,975
- ---------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 3,839 $ 4,975 $ 4,846
=========================================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Balance Sheets
(In millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
June 30 1999 2000
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 4,975 $ 4,846
Short-term investments 12,261 18,952
- -------------------------------------------------------------------------------------------------------
Total cash and short-term investments 17,236 23,798
Accounts receivable 2,245 3,250
Deferred income taxes 1,469 1,708
Other 752 1,552
- -------------------------------------------------------------------------------------------------------
Total current assets 21,702 30,308
Property and equipment, net 1,611 1,903
Equity and other investments 14,372 17,726
Other assets 940 2,213
- -------------------------------------------------------------------------------------------------------
Total assets $38,625 $52,150
=======================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 874 $ 1,083
Accrued compensation 396 557
Income taxes 1,691 585
Unearned revenue 4,239 4,816
Other 1,602 2,714
- -------------------------------------------------------------------------------------------------------
Total current liabilities 8,802 9,755
- -------------------------------------------------------------------------------------------------------
Deferred income taxes 1,385 1,027
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock--shares authorized 100;
shares issued and outstanding 13 and 0 980 --
Common stock and paid-in capital--shares authorized 12,000;
shares issued and outstanding 5,109 and 5,283 13,844 23,195
Retained earnings, including other comprehensive income
of $1,787 and $1,527 13,614 18,173
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,438 41,368
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $38,625 $52,150
=======================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Stockholders' Equity Statements
(In millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended June 30 1998 1999 2000
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible preferred stock
Balance, beginning of year $ 980 $ 980 $ 980
Conversion of preferred to common stock -- -- (980)
- ------------------------------------------------------------------------------------------------------
Balance, end of year 980 980 --
- ------------------------------------------------------------------------------------------------------
Common stock and paid-in capital
Balance, beginning of year 4,509 8,025 13,844
Common stock issued 1,262 2,338 3,554
Common stock repurchased (165) (64) (210)
Structured repurchases price differential 328 (328) --
Proceeds from sale of put warrants 538 766 472
Stock option income tax benefits 1,553 3,107 5,535
- ------------------------------------------------------------------------------------------------------
Balance, end of year 8,025 13,844 23,195
- ------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 5,288 7,622 13,614
- ------------------------------------------------------------------------------------------------------
Net income 4,490 7,785 9,421
Other comprehensive income:
Net unrealized investment gains/(losses) 627 1,052 (283)
Translation adjustments and other (124) 69 23
- ------------------------------------------------------------------------------------------------------
Comprehensive income 4,993 8,906 9,161
Preferred stock dividends (28) (28) (13)
Immaterial pooling of interests -- -- 97
Common stock repurchased (2,631) (2,886) (4,686)
- ------------------------------------------------------------------------------------------------------
Balance, end of year 7,622 13,614 18,173
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity $16,627 $28,438 $41,368
======================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Financial Statements
Accounting Policies
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States.
Principles of Consolidation
The financial statements include the accounts of Microsoft and its subsidiaries.
Significant intercompany transactions and balances have been eliminated.
Investments in unconsolidated joint ventures are accounted for using the equity
method; the Company's share of joint ventures' activities is reflected in other
expenses.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Examples include provisions for returns, concessions and bad
debts, and the length of product life cycles and buildings' lives. Actual
results may differ from these estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenue and
expenses are translated at average rates of exchange prevailing during the year.
Gains and losses on foreign currency transactions are included in other
expenses.
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. Revenue attributable to undelivered elements, including
technical support and Internet browser technologies, is based on the average
sales price of those elements and is recognized ratably on a straight-line basis
over the product's life cycle. When the revenue recognition criteria required
for distributor and reseller arrangements are not met, revenue is recognized as
payments are received. Costs related to insignificant obligations, which
include telephone support for certain products, are accrued. Provisions are
recorded for returns, concessions and bad debts.
Cost of Revenue
Cost of revenue includes direct costs to produce and distribute product and
direct costs to provide online services, consulting, product support, and
training and certification of system integrators.
Research and Development
Research and development costs are expensed as incurred. Statement of Financial
Accounting Standards (SFAS) 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed, does not materially affect the Company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $732
million in 1998, $804 million in 1999, and $1.1 billion in 2000.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the
provision for U.S. taxes on undistributed earnings of international
subsidiaries. Certain items of income and expense are not reported in tax
returns and financial statements in the same year. The tax effect of this
difference is reported as deferred income taxes.
Financial Instruments
The Company considers all liquid interest-earning investments with a maturity of
three months or less at the date of purchase to be cash equivalents. Short-term
investments generally mature between three months and six years from the
purchase date. All cash and short-term investments are classified as available
for sale and are recorded at market
6
<PAGE>
using the specific identification method; unrealized gains and losses are
reflected in other comprehensive income. Cost approximates market for all
classifications of cash and short-term investments; realized and unrealized
gains and losses were not material.
Equity and other investments include debt and equity instruments. Debt
securities and publicly traded equity securities are classified as available for
sale and are recorded at market using the specific identification method.
Unrealized gains and losses are reflected in other comprehensive income. All
other investments, excluding joint venture arrangements, are recorded at cost.
Derivative financial instruments are used to hedge certain investments,
international revenue, accounts receivable, and interest rate risks, and are,
therefore, held primarily for purposes other than trading. These instruments
may involve elements of credit and market risk in excess of the amounts
recognized in the financial statements. The Company monitors its positions and
the credit quality of counter parties, consisting primarily of major financial
institutions, and does not anticipate nonperformance by any counter-party.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for the Company as of July 1, 2000. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities
measured at fair value. The accounting for changes in the fair value of a
derivative depends on the use of the derivative. Adoption of these new
accounting standards will result in cumulative after-tax reductions in net
income of approximately $350 million and other comprehensive income of
approximately $50 million in the first quarter of fiscal 2001. The adoption
will also impact assets and liabilities recorded on the balance sheet.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method over the shorter of the estimated life of the asset or the lease term,
ranging from one to 15 years. As required by SOP 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use, Microsoft began
capitalizing certain computer software developed or obtained for internal use in
fiscal 2000. Capitalized computer software is depreciated using the straight-
line method over the shorter of the estimated life of the software or three
years.
Reclassifications
As required by Emerging Issues Task Force (EITF) Issue 00-15, Classification in
the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon
Exercise of a Nonqualified Employee Stock Option, stock option income tax
benefits are classified as cash from operations in the cash flows statement.
Prior period cash flows statements have been restated to conform with this
presentation. Certain other reclassifications have been made for consistent
presentation.
Unearned Revenue
A portion of Microsoft's revenue is earned ratably over the product life cycle
or, in the case of subscriptions, over the period of the license agreement.
End users receive certain elements of the Company's products over a period of
time. These elements include items such as browser technologies and technical
support. Consequently, Microsoft's earned revenue reflects the recognition of
the fair value of these elements over the product's life cycle. Upon adoption
of SOP 98-9 during the fourth quarter of fiscal 1999, the Company was required
to change the methodology of attributing the fair value to undelivered elements.
The percentages of undelivered elements in relation to the total arrangement
decreased, reducing the amount of Windows and Office revenue treated as
unearned, and increasing the amount of revenue recognized upon shipment. The
percentage of revenue recognized ratably decreased from a range of 20% to 35% to
a range of approximately 15% to 25% of Windows desktop operating systems. For
desktop applications, the percentage decreased from approximately 20% to a range
of approximately 10% to 20%. The ranges depend on the terms and conditions of
the license and prices of the elements. In addition, in the fourth quarter of
fiscal 1999, the Company extended the life cycle of Windows from two to three
years based upon management's review of product shipment cycles. Product life
cycles are currently estimated at 18 months for desktop applications. The
Company also sells subscriptions to certain products via maintenance and certain
organizational license agreements. At June 30, 1999 and 2000, Windows Platforms
products unearned revenue was $2.17 billion and $2.61 billion and unearned
revenue associated with Productivity Applications and Developer products totaled
$1.96 billion and $1.99 billion. Unearned revenue for other miscellaneous
programs totaled $116 million and $210 million at June 30, 1999 and 2000.
7
<PAGE>
Financial Risks
The Company's cash and short-term investment portfolio is diversified and
consists primarily of investment grade securities. Investments are held with
high-quality financial institutions, government and government agencies, and
corporations, thereby reducing credit risk concentrations. Interest rate
fluctuations impact the carrying value of the portfolio. The Company routinely
hedges the portfolio with options in the event of a catastrophic increase in
interest rates. The notional amount of the options outstanding was $4.0 billion
and $3.6 billion at June 30, 1999 and 2000. The fair value and premiums paid for
the options were not material. Much of the Company's equity security portfolio
is highly volatile, so certain positions are hedged.
Finished goods sales to international customers in Europe, Japan, Canada, and
Australia are primarily billed in local currencies. Payment cycles are
relatively short, generally less than 90 days. Certain international
manufacturing and operational costs are incurred in local currencies. Local
currency cash balances in excess of short-term operating needs are generally
converted into U.S. dollar cash and short-term investments on receipt. Although
foreign exchange rate fluctuations generally do not create a risk of material
balance sheet gains or losses, the Company hedges a portion of accounts
receivable balances denominated in local currencies, primarily with purchased
options. The notional amount of options outstanding was $662 million and $1.46
billion at June 30, 1999 and 2000. The fair value and premiums paid for the
options were not material.
Foreign exchange rates affect the translated results of operations of the
Company's foreign subsidiaries. The Company hedges a portion of planned
international revenue with purchased options. The notional amount of the
options outstanding was $2.25 billion and $2.08 billion at June 30, 1999 and
2000. The fair value and premiums paid for the options were not material.
At June 30, 1999 and 2000, approximately 50% and 42% of accounts receivable
represented amounts due from 10 customers. A single customer accounted for
approximately 8%, 11%, and 9% of revenue in 1998, 1999, and 2000.
Microsoft lends certain fixed income and equity securities to enhance investment
income. Collateral and/or security interest is determined based upon the
underlying security and the credit worthiness of the borrower.
Cash and Short-Term Investments
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
June 30 1999 2000
- ---------------------------------------------------------------
<S> <C> <C>
Cash and equivalents:
Cash $ 635 $ 849
Commercial paper 3,805 1,986
Certificates of deposit 522 1,017
U.S. government and agency securities -- 729
Corporate notes and bonds -- 265
Money market preferreds 13 --
- ---------------------------------------------------------------
Cash and equivalents 4,975 4,846
- ---------------------------------------------------------------
Short-term investments:
Commercial paper 1,026 612
U.S. government and agency securities 3,592 7,104
Corporate notes and bonds 6,996 9,473
Municipal securities 247 1,113
Certificates of deposit 400 650
- ---------------------------------------------------------------
Short-term investments 12,261 18,952
- ---------------------------------------------------------------
Cash and short-term investments $17,236 $23,798
===============================================================
</TABLE>
8
<PAGE>
Property and Equipment
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
June 30 1999 2000
- ----------------------------------------------------------------
<S> <C> <C>
Land $ 158 $ 176
Buildings 1,347 1,387
Computer equipment and software 1,433 1,909
Other 578 842
- ----------------------------------------------------------------
Property and equipment--at cost 3,516 4,314
Accumulated depreciation (1,905) (2,411)
- ----------------------------------------------------------------
Property and equipment--net $ 1,611 $ 1,903
================================================================
</TABLE>
During 1998, 1999, and 2000, depreciation expense, of which the majority related
to computer equipment, was $528 million, $483 million, and $668 million;
disposals were not material.
Equity and Other Investments
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Cost Unrealized Unrealized Recorded
June 30, 1999 Basis Gains Losses Basis
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities recorded at market, maturing:
Within one year $ 682 $ 8 $ -- $ 690
Between 10 and 15 years 533 30 (33) 530
Beyond 15 years 4,731 347 -- 5,078
- ---------------------------------------------------------------------------------------------------------------
Debt securities recorded at market 5,946 385 (33) 6,298
- ---------------------------------------------------------------------------------------------------------------
Common stock and warrants 3,029 3,598 (799) 5,828
Preferred stock 2,179 -- -- 2,179
Other investments 67 -- -- 67
- ---------------------------------------------------------------------------------------------------------------
Equity and other investments $11,221 $3,983 $(832) $14,372
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Cost Unrealized Unrealized Recorded
June 30, 2000 Basis Gains Losses Basis
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities recorded at market, maturing:
Within one year $ 498 $ 27 $ -- $ 525
Between 2 and 10 years 388 11 (3) 396
Between 10 and 15 years 775 14 (93) 696
Beyond 15 years 4,745 -- (933) 3,812
- ---------------------------------------------------------------------------------------------------------------
Debt securities recorded at market 6,406 52 (1,029) 5,429
- ---------------------------------------------------------------------------------------------------------------
Common stock and warrants 5,815 5,655 (1,697) 9,773
Preferred stock 2,319 -- -- 2,319
Other investments 205 -- -- 205
- ---------------------------------------------------------------------------------------------------------------
Equity and other investments $14,745 $5,707 $(2,726) $17,726
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Debt securities include corporate and government notes and bonds and derivative
securities. Debt securities maturing beyond 15 years are composed entirely of
AT&T 5% convertible preferred debt with a contractual maturity of 30 years. The
debt is convertible into AT&T common stock on or after December 1, 2000, or may
be redeemed by AT&T upon satisfaction of certain conditions on or after June 1,
2002. Equity securities that are restricted for more than one year or not
publicly traded are recorded at cost. At June 30, 1999 and 2000, the estimated
fair value of these investments in excess of their recorded basis was $2.3
billion and $2.7 billion, based on publicly available market information or
other estimates determined by management. The Company hedges the risk of
significant market declines on certain highly volatile equity securities with
options. The options are recorded at market, consistent with the underlying
equity securities. At June 30, 1999 and 2000, the notional amount of the
options outstanding was $2.1 billion and $4.0 billion; the fair value represents
obligations of $1.0 billion and $1.7 billion; and premiums paid for the options
were not material. Realized gains and losses of equity and other investments in
1998 were not material; realized gains were $623 million and $1.7 billion in
1999 and 2000 and losses were not material in 1999 and 2000.
9
<PAGE>
Income Taxes
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1999 2000
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
U.S. and state $2,518 $4,027 $4,744
International 526 281 535
- -----------------------------------------------------------------------
Current taxes 3,044 4,308 5,279
Deferred taxes (417) (202) (425)
- -----------------------------------------------------------------------
Provision for income taxes $2,627 $4,106 $4,854
=======================================================================
</TABLE>
U.S. and international components of income before income taxes were:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1999 2000
- ------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $5,072 $10,649 $11,860
International 2,045 1,242 2,415
- ------------------------------------------------------------------
Income before income taxes $7,117 $11,891 $14,275
==================================================================
</TABLE>
The effective income tax rate increased to 36.9% in 1998 due to the
nondeductible write-off of WebTV in-process technologies. In 1999, the
effective tax rate was 35.0%, excluding the impact of the gain on the sale of
Softimage, Inc. In 2000, the effective tax rate was 34.0%, and included the
effect of a 2.5% reduction from the U.S. statutory rate for tax credits and a
1.5% increase for other items. The components of the differences between the
U.S. statutory tax rate and the Company's effective tax rate in 1998 and 1999
were not significant.
Deferred income taxes as of June 30 were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1999 2000
- ------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Revenue items $ 1,145 $ 1,320
Expense items 648 2,122
- ------------------------------------------------------------------
Deferred income tax assets 1,793 3,442
- ------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized gain on investments (1,046) (874)
International earnings (647) (1,766)
Other (16) (121)
- ------------------------------------------------------------------
Deferred income tax liabilities $(1,709) $(2,761)
==================================================================
</TABLE>
The Internal Revenue Service (IRS) has assessed taxes for 1990 and 1991, which
the Company is contesting in U.S. Tax Court. Income taxes, except for taxes
related to the 1990 and 1991 assessments, have been settled with the IRS for all
years through 1994. The IRS is examining the Company's U.S. income tax returns
for 1995 and 1996. Management believes any related adjustments that might be
required will not be material to the financial statements. Income taxes paid
were $1.1 billion in 1998, $874 million in 1999, and $800 million in 2000.
Convertible Preferred Stock
During 1996, Microsoft issued 12.5 million shares of 2.75% convertible
exchangeable principal-protected preferred stock. Net proceeds of $980 million
were used to repurchase common shares. The Company's convertible preferred
stock matured on December 15, 1999. Each preferred share was converted into
1.1273 common shares.
10
<PAGE>
Common Stock
Shares of common stock outstanding were as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1999 2000
- -------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year 4,816 4,940 5,109
Issued 202 213 229
Repurchased (78) (44) (55)
- -------------------------------------------------------------------
Balanced, end of year 4,940 5,109 5,283
===================================================================
</TABLE>
Repurchase Program
In January 2000, the Company terminated its stock buyback program. Prior to
this termination, the Company periodically repurchased its common shares in the
open market to provide shares for issuance to employees under stock option and
stock purchase plans. During 1998, the Company executed two forward settlement
structured repurchase agreements with an independent third party totaling 42
million shares of stock and paid cash for a portion of the purchase price. In
1999, the Company settled the agreements by returning 28 million shares of
stock, based upon the stock price on the date of settlement. The timing and
method of settlement were at the discretion of the Company. The differential
between the cash paid and the price of Microsoft common stock on the date of the
agreement was originally reflected in common stock and paid-in capital.
Put Warrants
Prior to the termination of the stock buyback program, Microsoft enhanced the
program by selling put warrants to independent third parties. These put
warrants entitle the holders to sell shares of Microsoft common stock to the
Company on certain dates at specified prices. On June 30, 2000, warrants to put
157 million shares were outstanding with strike prices ranging from $70 to $78
per share. The put warrants expire between September 2000 and December 2002.
The outstanding put warrants permit a net-share settlement at the Company's
option and do not result in a put warrant liability on the balance sheet.
Other Comprehensive Income
The changes in the components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized investment gains/(losses):
Unrealized holding gains, net of tax effect of $355 in 1998,
$772 in 1999, and $248 in 2000 $ 660 $1,432 $ 531
Reclassification adjustment for gains included in
net income, net of tax effect of $(18) in 1998,
$(205) in 1999, and $(420) in 2000 (33) (380) (814)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized investment gains/(losses) 627 1,052 (283)
Translation adjustments and other (124) 69 23
- -----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income/(loss) $ 503 $1,121 $(260)
=============================================================================================================================
</TABLE>
Employee Stock and Savings Plans
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees.
Under the plan, shares of the Company's common stock may be purchased at six-
month intervals at 85% of the lower of the fair market value on the first or the
last day of each six-month period. Employees may purchase shares having a value
not exceeding 10% of their gross compensation during an offering period. During
1998, 1999, and 2000, employees purchased 4.4 million, 2.7 million, and 2.5
million shares at average prices of $27.21, $52.59, and $72.38 per share. At
June 30, 2000, 68.4 million shares were reserved for future issuance.
Savings Plan
The Company has a savings plan, which qualifies under Section 401(k) of the
Internal Revenue Code. Participating employees may contribute up to 15% of
their pretax salary, but not more than statutory limits. The Company
contributes fifty cents for each dollar a participant contributes, with a
maximum contribution of 3% of a
11
<PAGE>
participant's earnings. Matching contributions were $39 million, $49 million,
and $65 million in 1998, 1999, and 2000.
Stock Option Plans
The Company has stock option plans for directors, officers, and employees, which
provide for nonqualified and incentive stock options. Options granted prior to
1995 generally vest over four and one-half years and expire 10 years from the
date of grant. Options granted during and after 1995 generally vest over four
and one-half years and expire seven years from the date of grant, while certain
options vest either over four and one-half years or over seven and one-half
years and expire after 10 years. At June 30, 2000, options for 341 million
shares were vested and 734 million shares were available for future grants under
the plans.
Stock options outstanding were as follows:
<TABLE>
<CAPTION>
Price per Share
-------------------------------
Weighted
Shares Range Average
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1997 956 $ 0.56 - $ 29.80 $ 7.86
Granted 138 16.56 - 43.63 31.28
Exercised (176) 0.56 - 31.24 4.64
Canceled (25) 4.25 - 41.94 14.69
----
Balance, June 30, 1998 893 0.56 - 43.63 11.94
Granted 78 45.59 - 83.28 54.62
Exercised (175) 0.56 - 53.63 6.29
Canceled (30) 4.25 - 74.28 21.06
----
Balance, June 30, 1999 766 0.56 - 83.28 23.87
Granted 304 65.56 - 119.13 79.87
Exercised (198) 0.56 - 82.94 9.54
Canceled (40) 4.63 - 116.56 36.50
----
Balance, June 30, 2000 832 0.56 - 119.13 41.23
=========================================================================
</TABLE>
For various price ranges, weighted average characteristics of outstanding stock
options at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------------------------------------------------
Range of Remaining Weighted Average Weighted Average
Exercise Prices Shares Life (Years) Price Shares Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.56-$5.97 133 2.1 $ 4.57 127 $ 4.53
5.98-13.62 104 3.0 10.89 84 10.83
13.63-29.80 135 3.7 14.99 77 14.83
29.81-43.62 96 4.5 32.08 39 31.98
43.63-83.28 198 7.3 63.19 14 54.64
83.29-119.13 166 8.6 89.91 -- --
=================================================================================================
</TABLE>
12
<PAGE>
The Company follows Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, to account for stock option and employee stock purchase
plans. An alternative method of accounting for stock options is SFAS 123,
Accounting for Stock-Based Compensation. Under SFAS 123, employee stock options
are valued at grant date using the Black-Scholes valuation model, and this
compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Company's stock option and employee stock purchase
plans been determined as prescribed by SFAS 123, pro forma income statements for
1998, 1999, and 2000 would have been as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1999 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Reported Pro Forma Reported Pro Forma Reported Pro Forma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $15,262 $15,262 $19,747 $19,747 $22,956 $22,956
Operating expenses:
Cost of revenue 2,460 2,603 2,814 3,013 3,002 3,277
Research and development 2,601 2,963 2,970 3,479 3,775 4,817
Acquired in-process technology 296 296 -- -- -- --
Sales and marketing 2,828 2,977 3,231 3,438 4,141 4,483
General and administrative 433 508 689 815 1,009 1,243
Other expenses 230 230 115 115 92 92
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,848 9,577 9,819 10,860 12,019 13,912
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 6,414 5,685 9,928 8,887 10,937 9,044
Investment income 703 703 1,803 1,803 3,182 3,182
Gain on sales -- -- 160 160 156 156
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,117 6,388 11,891 10,850 14,275 12,382
Provision for income taxes 2,627 2,369 4,106 3,741 4,854 4,210
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,490 $ 4,019 $ 7,785 $ 7,109 $ 9,421 $ 8,172
==================================================================================================================================
Diluted earnings per share $ 0.84 $ 0.75 $ 1.42 $ 1.30 $ 1.70 $ 1.48
==================================================================================================================================
</TABLE>
The weighted average Black-Scholes value of options granted under the stock
option plans during 1998, 1999, and 2000 was $11.81, $20.90, and $36.67. Value
was estimated using a weighted average expected life of 5.3 years in 1998, 5.0
years in 1999, and 6.2 years in 2000, no dividends, volatility of .32 in 1998
and 1999 and .33 in 2000, and risk-free interest rates of 5.7%, 4.9%, and 6.2%
in 1998, 1999, and 2000.
13
<PAGE>
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method, assumed
net-share settlement of common stock structured repurchases, and outstanding
stock options using the "treasury stock" method.
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended June 30 1998 1999 2000
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $4,490 $7,785 $9,421
Preferred stock dividends 28 28 13
- ------------------------------------------------------------------------------------------
Net income available for common shareholders $4,462 $7,757 $9,408
==========================================================================================
Weighted average outstanding shares of common stock 4,864 5,028 5,189
Dilutive effect of:
Common stock under structured repurchases 6 13 --
Put warrants -- -- 2
Preferred stock 34 16 7
Employee stock options 458 425 338
- ------------------------------------------------------------------------------------------
Common stock and common stock equivalents 5,362 5,482 5,536
==========================================================================================
Earnings per share:
Basic $ 0.92 $ 1.54 $ 1.81
==========================================================================================
Diluted $ 0.84 $ 1.42 $ 1.70
==========================================================================================
</TABLE>
Operational Transactions
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 proprietary technologies. A director of the Company
owned 10% of WebTV. Microsoft paid $425 million in stock and cash for WebTV.
The Company recorded an in-process technologies write-off of $296 million in the
first quarter of fiscal 1998.
In August 1998, the Company sold a wholly-owned subsidiary, Softimage, Inc. to
Avid Technology, Inc. and recorded a pretax gain of $160 million. As part of a
transitional service agreement, Microsoft agreed to make certain development
tools and management systems available to Avid for use in the Softimage
business.
In November 1998, Microsoft acquired LinkExchange, Inc., a leading provider of
online marketing services to Web site owners and small and medium-sized
businesses. Microsoft paid $265 million in stock.
In September 1999, the Company sold the entertainment city guide portion of MSN
Sidewalk to Ticketmaster Online-CitySearch, Inc. (TMCS) for a combination of
TMCS stock and warrants with a value of $223 million. The transaction also
included a distribution agreement. Microsoft recognized a gain of $156 million
on the sale and will recognize revenue amounts related to the distribution
arrangement over the term of the agreement.
In November 1999, Expedia, Inc. completed an initial public offering of its
common stock. Expedia, which is majority-owned by Microsoft, is a leading
provider of branded online travel services for leisure and small business
travelers. Expedia's financial results and financial condition are consolidated
with the operations of Microsoft.
In January 2000, the Company merged with Visio Corporation in a transaction that
was accounted for as a pooling of interests. Microsoft issued 14 million shares
in the exchange for the outstanding stock of Visio. Visio's assets and
liabilities, which were nominal, are included with those of Microsoft as of the
merger. Operating results for Visio from periods prior to the merger were not
material to the combined results of the two companies. Accordingly, the
financial statements for such periods have not been restated.
During fiscal 1999 and 2000, Microsoft also acquired several other entities
primarily providing online technologies and services. The Company did not
record significant in-process technology write-offs in connection with these
transactions.
14
<PAGE>
Commitments
The Company has operating leases for most U.S. and international sales and
support offices and certain equipment. Rental expense for operating leases was
$95 million, $135 million, and $201 million in 1998, 1999, and 2000. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 2001, $178; 2002, $172; 2003, $160; 2004, $151; 2005, $139; and thereafter,
$437.
Microsoft has committed $299 million for constructing new buildings and $200
million for the manufacturing of products. During 1996, Microsoft and National
Broadcasting Company (NBC) established two MSNBC joint ventures: a 24-hour cable
news and information channel and an interactive online news service. Microsoft
agreed to pay $220 million over a five-year period for its interest in the cable
venture, to pay one-half of operational funding of both joint ventures for a
multiyear period, and to guarantee a portion of MSNBC debt.
Contingencies
On October 7, 1997, Sun Microsystems, Inc. ("Sun") brought suit against
Microsoft in the U.S. District Court for the Northern District of California.
Sun's complaint alleges several claims against Microsoft, all related to the
parties' relationship under a March 11, 1996 Technology License and Distribution
Agreement (Agreement) concerning certain Java programming language technology.
On March 24, 1998, the Court entered an order enjoining Microsoft from using the
Java Compatibility logo on Internet Explorer 4.0 and the Microsoft Software
Developers Kit (SDK) for Java 2.0. Microsoft has taken steps to fully comply
with the order.
On November 17, 1998, the Court entered an order granting Sun's request for a
preliminary injunction, holding that Sun had established a likelihood of success
on its copyright infringement claims, because Microsoft's use of Sun's
technology in its products was beyond the scope of the parties' license
agreement. The Court ordered Microsoft to make certain changes in its products
that include Sun's Java technology and to make certain changes in its Java
software development tools. The Court also enjoined Microsoft from entering
into any licensing agreements that were conditioned on exclusive use of
Microsoft's Java Virtual Machine. Microsoft appealed that ruling to the 9th
Circuit Court of Appeals on December 16, 1998.
On August 23, 1999 the 9th Circuit Court of Appeals vacated the November 1998
preliminary injunction and remanded the case to the District Court for further
proceedings. Sun immediately filed two motions to reinstate and expand the
scope of the earlier injunction on the basis of copyright infringement and
unfair competition. On January 25, 2000, the Court issued rulings on the two
motions, denying Sun's motion to reinstate the preliminary injunction on the
basis of copyright infringement and granting, in part, Sun's motion to reinstate
the preliminary injunction based on unfair competition. Microsoft is in
compliance with the terms of the partially reinstated preliminary injunction and
will not need to undertake any further action to comply with the terms of the
injunction. No other hearing or trial dates have been set.
The parties have filed multiple summary judgment motions on the interpretation
of the Agreement and on Sun's copyright and trademark infringement claims. On
February 25, 2000, the Court entered an order denying both parties' motions for
summary judgment as to whether the Agreement authorizes Microsoft to distribute
independently developed Java Technology. On April 5, 2000, the Trial Court
entered an order denying Sun's motion for summary judgment regarding the
interpretation of Section 2.7(a), which sets forth certain requirements that Sun
must meet when they deliver Java Technology to Microsoft. On May 9, 2000, the
Court entered an order granting Microsoft's motion to dismiss Sun's copyright
infringement claim and on May 25, 2000, the Court issued a tentative order
granting Microsoft's motion to dismiss Sun's claim that it is entitled to
liquidated damages based on the alleged improper posting of its source code by
Microsoft. The Court has indicated its intention to set a hearing on the
remaining motions in September 2000.
On May 18, 1998, the Antitrust Division of the U.S. Department of Justice (DOJ)
and a group of state Attorneys General filed two antitrust cases against
Microsoft in the U.S. District Court for the District of Columbia. The DOJ
complaint alleges violations of Sections 1 and 2 of the Sherman Act. The DOJ
complaint seeks declaratory relief as to the violations it asserts and
preliminary and permanent injunctive relief regarding: the inclusion of Internet
browsing software (or other software products) as part of Windows; the terms of
agreements regarding non-
15
<PAGE>
Microsoft Internet browsing software (or other software products); taking or
threatening "action adverse" in consequence of a person's failure to license or
distribute Microsoft Internet browsing software (or other software product) or
distributing competing products or cooperating with the government; and
restrictions on the screens, boot-up sequence, or functions of Microsoft's
operating system products. The state Attorneys General allege largely the same
claims and various pendent state claims. The states seek declaratory relief and
preliminary and permanent injunctive relief similar to that sought by the DOJ,
together with statutory penalties under the state law claims. The foregoing
description is qualified in its entirety by reference to the full text of the
complaints and other papers on file in those actions, case numbers 98-1232 and
98-1233.
On May 22, 1998, Judge Jackson consolidated the two actions. The judge granted
Microsoft's motion for summary judgment as to the states' monopoly leverage
claim and permitted the remaining claims to proceed to trial. Trial began on
October 19, 1998 and ended with closing arguments on September 21, 1999. On
November 5, 1999, Judge Jackson issued his Findings of Fact. On April 3, 2000
the Court entered its Conclusions of Law, determining that Microsoft "tied"
Internet Explorer and Windows 95/98 in violation of Section 1 of the Sherman
Act, that Microsoft violated Section 2 of the Sherman Act by taking actions to
maintain its monopoly in the desktop-PC operating system market, and that
Microsoft attempted to monopolize the Internet browser market in violation of
Section 2 of the Sherman Act. The Court also held that Microsoft did not
violate Section 1 of the Sherman Act by entering into a number of contracts
challenged by the government. The Court established a schedule for
consideration of the remedy to be imposed in a final judgment. On April 28,
2000, the plaintiffs submitted a joint proposed remedy that included a proposed
break-up of Microsoft into two companies, an operating systems company, and a
company that would own all of Microsoft's other products and businesses.
Microsoft submitted its proposed remedy and its proposal for further remedy
proceedings on May 10, 2000. On June 7, 2000, Judge Jackson entered the
government's proposed order nearly verbatim as his final judgment in the case.
That judgment orders a divestiture that will create two separate companies, an
"Operating Systems Business" and an "Applications Business," to be implemented
one year following a final decision on appeal. It also provides for a broad
range of "conduct" remedies that would have gone into effect in 90 days, absent
a stay. On June 13, 2000, Microsoft appealed to the United States Court of
Appeals. The Court of Appeals immediately entered an order notifying the parties
that the Court would hear all matters related to this appeal en banc. The
government then asked Judge Jackson to enter an order certifying the case for
direct appeal to the Supreme Court. On June 20, 2000, Judge Jackson certified
the case for direct appeal to the Supreme Court and simultaneously granted
Microsoft's request to stay the entire remedy pending final appeal. The
certification divests the Court of Appeals of jurisdiction over the case until
the Supreme Court decides whether or not to accept jurisdiction of the case,
which is entirely discretionary. The parties have agreed to a briefing schedule
on this issue, according to which Microsoft filed its Jurisdictional Statement
on July 26, 2000, the government responded on August 15, 2000, and Microsoft
replied on August 22, 2000. If the Supreme Court declines to accept
jurisdiction, the appeal will return to the Court of Appeals. If the Supreme
Court accepts jurisdiction, a schedule will be established for briefing and oral
argument on the merits of our appeal.
In other ongoing investigations, the DOJ and several state Attorneys General
have requested information from Microsoft concerning various issues. In
addition, the European Commission has instituted proceedings in which it alleges
that Microsoft has failed to disclose information that Sun claims it needs to
interoperate fully with Windows 2000 clients and has engaged in discriminatory
licensing of such technology. The remedies sought, though not fully defined,
include mandatory disclosure of Microsoft intellectual property concerning
Windows operating systems and imposition of fines. Microsoft denies the
Commission's allegations and intends to contest the proceedings vigorously.
A large number of antitrust class action lawsuits have been initiated against
Microsoft. These cases allege that Microsoft has competed unfairly and
unlawfully monopolized alleged markets for operating systems and certain
software applications and seek to recover alleged overcharges that the
complaints contend Microsoft charged for these products. Microsoft believes the
claims are without merit and is vigorously defending the cases.
The Securities and Exchange Commission is conducting a non-public investigation
into the Company's accounting reserve practices. Microsoft is also subject to
various legal proceedings and claims that arise in the ordinary course of
business.
16
<PAGE>
Management currently believes that resolving these matters will not have a
material adverse impact on the Company's financial position or its results of
operations.
Segment Information
Year Ended June 30
<TABLE>
<CAPTION>
Productivity
Windows Applications Consumer and Reconciling
Platforms and Developer Other Amounts Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenue $6,236 $ 7,458 $ 1,765 $ (197) $15,262
Operating income 3,661 4,824 (1,050) (1,021) 6,414
=========================================================================================================================
1999
Revenue $8,570 $ 8,636 $ 1,854 $ 687 $19,747
Operating income 5,476 4,950 (1,241) 743 9,928
=========================================================================================================================
2000
Revenue $9,265 $10,089 $ 2,718 $ 884 $22,956
Operating income 5,813 4,935 (1,455) 1,644 10,937
=========================================================================================================================
</TABLE>
The Company's organizational structure and fundamental approach to business
reflect the needs of its customers. As such, Microsoft has three major
segments: Windows Platforms; Productivity Applications and Developer; and
Consumer and Other. Windows Platforms includes the Windows Division, which is
primarily responsible for developing and marketing Windows NT Workstation,
Windows 2000 Professional, Windows 98, Windows 95, Windows NT Server, and
Windows 2000 Server. Productivity Applications and Developer includes the
Business Productivity Division, which is responsible for developing and
marketing desktop applications, server applications, and developer tools.
Consumer and Other products and services include primarily learning,
entertainment, and PC input device products; WebTV and PC online access; and
portal and vertical properties. Assets of the segment groups are not relevant
for management of the businesses nor for disclosure.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including internal profit and
loss statements (P&Ls) prepared on a basis not consistent with generally
accepted accounting principles. Reconciling items include certain elements of
unearned revenue, the treatment of certain channel inventory amounts and
estimates, and the classification of revenue from product support and
consulting. Additionally, the internal P&Ls use accelerated methods of
depreciation and amortization. In fiscal 2000, the Company's internal P&Ls
included the Black-Scholes value of employee stock option grants, amortized over
the remaining months of the fiscal year of the grant, as well as minor changes
to the segments' composition due to various internal reorganizations during the
year. Fiscal 1999 disclosures have been restated for consistent presentation.
It is not practicable to restate fiscal 1998 for these changes.
Revenue attributable to U.S. operations includes shipments to customers in the
United States, licensing to OEMs and certain multinational organizations, and
exports of finished goods, primarily to Asia, Latin America, and Canada.
Revenue from U.S operations totaled $10.1 billion, $13.7 billion, and $15.7
billion in 1998, 1999, and 2000. Revenue from outside the United States,
excluding licensing to OEMs and certain multinational organizations and U.S.
exports, totaled $5.2 billion, $6.0 billion, and $7.3 billion in 1998, 1999, and
2000.
Long-lived assets totaled $1.5 billion and $1.8 billion in the United States in
1999 and 2000 and $154 million and $126 million in other countries in 1999 and
2000.
17
<PAGE>
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, 1999 and 2000, and the related
consolidated statements of income, cash flows, and stockholders' equity for each
of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company'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, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000 in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Seattle, Washington
July 18, 2000
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>SUBSIDIARIES OF REGISTRANT
<TEXT>
<PAGE>
Exhibit 21
Subsidiaries
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Microsoft FSC Corporation. (U.S. VIRGIN ISLANDS)
Microsoft Investments, Inc. (NEVADA)
Microsoft Ireland Operations Limited (IRELAND)
Microsoft Licensing, Inc. (NEVADA)
MSLI, GP (NEVADA)
Microsoft Operations Pte Ltd. (SINGAPORE)
Microsoft Regional Sales Corporation (NEVADA-SINGAPORE BRANCH)
Microsoft Puerto Rico, Inc. (DELAWARE)
The Microsoft Network L.L.C. (DELAWARE)
Microsoft Treasury, Inc (NEVADA)
GraceMac Corporation (NEVADA)
Microsoft de Argentina S.A.
Microsoft Pty. Limited (AUSTRALIA)
Microsoft Gesellschaft m.b.H. (AUSTRIA)
Microsoft B.V.B.A. (BELGIUM)
Microsoft Bolivia S.R.L.
Microsoft Informatica Limitada (BRAZIL)
Microsoft Bulgaria EOOD
Microsoft Canada Co.
Microsoft Chile S.A.
Microsoft Colombia Inc. (DELAWARE)
Microsoft de Centroamerica S.A. (COSTA RICA)
Microsoft Hrvatska d.o.o. (CROATIA)
Microsoft s.r.o. (CZECH REPUBLIC)
Microsoft Danmark ApS (DENMARK)
Microsoft Dominicana, S.A. (DOMINICAN REPUBLIC)
Microsoft Del Ecuador S.A.
Microsoft El Salvador S.A. de C.V.
Microsoft Egypt L.L.C.
Microsoft Oy (FINLAND)
Microsoft France S.A.R.L.
Microsoft G.m.b.H. (GERMANY)
Microsoft Hellas S.A. (GREECE)
Microsoft de Guatemala, S.A.
Microsoft Hong Kong Limited
Microsoft Hungary Kft.
Microsoft Corporation (India) Private Limited
Microsoft India (R&D) Private Limited
PT. Microsoft Indonesia
Microsoft Israel Ltd.
Microsoft SRL (ITALY)
Microsoft Cote d'Ivoire SARL (IVORY COAST)
Microsoft Jamaica, Inc.
Microsoft Company, Limited (JAPAN)
Microsoft Asia Ltd (NEVADA-JAPAN BRANCH)
Microsoft Product Development Ltd. (NEVADA-JAPAN BRANCH)
East Africa Software Limited (KENYA)
Microsoft CH (KOREA)
Microsoft Kuwait Representative Office
SIA Microsoft Latvija
Microsoft Corporation Lebanon Representative Office
Microsoft (Malaysia) Sdn. Bhd.
Microsoft Mexico, S.A. de C.V.
Microsoft Indian Ocean Islands Limited (MAURITIUS)
<PAGE>
Microsoft Maroc S.A.R.L. (MOROCCO)
Microsoft B.V. (THE NETHERLANDS)
Microsoft Manufacturing B.V. (THE NETHERLANDS)
Microsoft International B.V. (THE NETHERLANDS)
Microsoft New Zealand Limited
Microsoft Nigeria Limited
Microsoft Norge AS (NORWAY)
Microsoft Corporation-Pakistan Liaison Office
Microsoft de Panama, S.A.
Microsoft (China) Company Limited (THE PEOPLE'S REPUBLIC OF CHINA)
Microsoft Peru, S.R.L.
Microsoft Philippines, Inc.
Microsoft sp. z.o.o. (POLAND)
MSFT-Software Para Microcomputadores, LDA (PORTUGAL)
Microsoft Caribbean, Inc. (DELAWARE)
Microsoft Romania SRL
Microsoft ZAO (RUSSIA)
Moscow Microsoft Ireland Operations Limited (Representative Office)(RUSSIA)
Microsoft Arabia Limited (SAUDI ARABIA, 60% owned)
Microsoft Singapore Pte Ltd.
Microsoft Slovakia s.r.o.
Microsoft d.o.o., Ljubljana (SLOVENIA)
Microsoft (S.A.) (Proprietary) Limited (SOUTH AFRICA)
Microsoft Iberica S.R.L. (SPAIN)
Microsoft Aktiebolag (SWEDEN)
Microsoft AG (SWITZERLAND)
Microsoft Taiwan Corporation
Microsoft (Thailand) Limited
Microsoft Trinidad & Tobago Limited
Microsoft Tunisie, S.A.R.L. (TUNISIA)
Microsoft Bilgisayar Yazilim Hizmetleri Limited Sirketi (TURKEY)
Microsoft Corporation (UNITED ARAB EMIRATES)
Microsoft Limited (UNITED KINGDOM)
Microsoft Research Limited (UNITED KINGDOM)
Microsoft Uruguay, S.A.
Microsoft Venezuela, S.A.
The Resident Representative Office of MICROSOFT Corporation in Hanoi (VIETNAM)
Microsoft Corporation, Zimbabwe Liaison Office
Microsoft HomeAdvisor, LLC (NEVADA)
WebTV Networks, Inc. (CALIFORNIA)
Expedia, Inc. (WASHINGTON, 75% owned)
Travelscape.com, Inc. (DELAWARE, owned by Expedia, Inc.)
VacationSpot.com, Inc. (DELAWARE, owned by Expedia, Inc.)
CarPoint.com, LLC (DELAWARE, 75% owned)
MSNBC Cable, L.L.C. (DELAWARE, 50% owned)
MSNBC Interactive News, L.L.C. (DELAWARE, 50% owned)
T1-MSN, Inc. (DELAWARE, 50% owned)
Wireless Knowledge L.L.C. (DELAWARE, 50% owned)
Ninemsn Pty. Limited (AUSTRALIA, 50% owned)
WebTV Networks K.K. (JAPAN, 75% owned)
Mobimagic Co. Ltd. (JAPAN, 50% owned)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>9
<FILENAME>0009.txt
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
<PAGE>
Exhibit 23
Independent Auditors' Consent
Microsoft Corporation:
We consent to the incorporation by reference in Registration Statement Numbers
33-06335, 33-18381, 33-25575, 33-33695, and 33-37623 (Microsoft Corporation 1981
Stock Option Plan), 33-44302, 33-51583, and 333-06298 (Microsoft Corporation
1991 Stock Option Plan), 33-37622 (Microsoft Corporation 1991 Employee Stock
Purchase Plan), 33-10732 (Microsoft Corporation Savings Plus Plan), 33-36498
(Microsoft Corporation Stock Option Plan for Non-Employee Directors), 33-45617
(Microsoft Corporation Stock Option Plan for Consultants and Advisors), 333-
16665 (Microsoft Corporation 1997 Employee Stock Purchase Plan), 333-61729
(Microsoft Corporation 1998 Special Stock Award Program), 333-75243 (Microsoft
Corporation Savings Plus 401(k) Plan), 333-91755 (Microsoft Corporation 1999
Stock Option Plan for Non-Employee Directors) and 33-06298 of Microsoft
Corporation on Forms S-8 and 33-29823, 33-34794, 33-36347, 33-46958, 33-49496,
33-56039, 33-57277, 33-57899, 33-58867, 33-62725, 33-63471, 33-64870, 333-00857,
333-01177, 333-02759, 333-05961, 333-8081, 333-12441, 333-17143, 333-18055, 333-
18195, 333-23621, 333-31803, 333-37841, 333-41387, 333-43449, 333-45989, 333-
52377, 333-61507, 333-65813, 333-69027, 333-75389, 333-79461, 333-89793, 333-
94499, 333-38694, 333-40998, and 333-83873 of Microsoft Corporation on Forms S-
3, and 333-26411 and 333-90119 of Microsoft Corporation on Form S-4 of our
report dated July 18, 2000 appearing in and incorporated by reference in this
Annual Report on Form 10-K of Microsoft Corporation for the year ended June 30,
2000.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
September 27, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>10
<FILENAME>0010.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-2000
<CASH> 4,846
<SECURITIES> 18,952
<RECEIVABLES> 3,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,308
<PP&E> 4,314
<DEPRECIATION> 2,411
<TOTAL-ASSETS> 52,150
<CURRENT-LIABILITIES> 9,755
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 23,195
<OTHER-SE> 18,173
<TOTAL-LIABILITY-AND-EQUITY> 52,150
<SALES> 22,956
<TOTAL-REVENUES> 22,956
<CGS> 3,002
<TOTAL-COSTS> 3,002
<OTHER-EXPENSES> 9,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,275
<INCOME-TAX> 4,854
<INCOME-CONTINUING> 9,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,421
<EPS-BASIC> 1.81
<EPS-DILUTED> 1.70
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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