FISH RICHARDSONP.C. 1425 K STREET,N.W. .. IITH FLOOR WASHINGTON,DC 20005
Iiederick P. Fish Telephone 202 783-5070 1855-1930 W.K. Richaidson Facsimile 1859-1951 202 783-2331 June 21,2002 Web Site www.fr.com The Honorable Marilyn R. Abbott Secretary
U.S. International Trade Commission .3 I 500 E Street, S.W. Nc-5 Washington, DC 20436 r . 5 Re: Certain Video Game Systems, Accessories, and Components Th&o f ’I
A Dear Secretary Abbott: J -a :Ll BOSTON Enclosed for filing on behalf of Microsoft Corporation (“Microsoft”) are tlfe DALLAS following documents in support of Microsoft’s request that the Commissiz DELAWARE r”. commence an investigation pursuant to the provision of Section 337 of the Tariff Act CL NEW YORK of 1930, as amended. Please note that Confidential Exhibit 22 to the Complaint 5 SAN DIEGO contains confidential business information. Pursuant to the Commission’s Rules of ,= SILICON VALLEY Practice and Procedure, a request for confidential treatment of these documents is i.4 concurrently transmitted along with this filing. Accordingly, Microsoft submits the N TWIN CITIES following: WASHINGTON, DC 1. an original and fourteen (14) copies of Microsoft’s verified Complaint and accompanying exhibits (confidential versions) (confidential information segregated from other material submitted) (original and one copy unbound, without tabs) (Rules 201.6(c), 210.4(f)(3)(i), and 2 10.8 (a));
2. four (4) copies of the public version of Microsoft’s verified Complaint and accompanying exhibits (two copies unbound, without tabs) (Rules 20 1.6( c), 2 10.4( f)( 3)( i) , and 2 10.8 (a));
3. one (1) additional copy of both the public and confidential versions of the Complaint and accompanying exhibits, for service upon the proposed Respondent (Rules 210.4(f)(3)(i), 210.8(a) and 210.1 l(a));
4. a certified copy of United States Patent No. D452,282 (“the ‘282 patent”) (Rule 210.12(a)(g)(i));
5. a certified copy of the assignment of the ‘282 patent (Rule 210.12(a)(g)(ii)); FISH8r RICHARDSONP.C.
The Honorable Marilyn R. Abbott June 21,2002 Page 2
6. four (4) copies of the prosecution history of the ‘282 patent (a certified copy of the prosecution history of the ‘282 patent will be submitted once received from the U.S. Patent and Trademark Office)(Rule 2 10.12(c)(2));
7. four (4) copies of each reference document mentioned in the prosecution history of the ‘282 patent (Rule 210.12(~)(3));
8. a certified copy of United States Patent No. D452,534 (“the ‘534 patent”) (Rule 210.12(a)(9)(i));
9. a certified copy of the assignment of the ‘534 patent (Rule 2 lO.l2(a)(9)(ii));
10. four (4) copies of the prosecution history of the ‘534 patent (a certified copy of the prosecution history of the ‘534 patent will be submitted once received from the U.S. Patent and Trademark Office)(Rule 2 10.12(c)(2));
11. four (4) copies of each reference document mentioned in the prosecution history of the ‘534 patent (Rule 220.12(~)(3));
12. a sample of Microsoft’s XBOXTMvideo game console, a sample of Respondent’s X-Selector product, and a sample of Respondent’s X- Connection product; and
13. a letter and certification pursuant to Commission Rules 210.6(b) and 2 10.5(d) requesting confidential treatment of Confidential Exhibit 22 filed with the Complaint.
Thank you for your attention to this matter,
Respectfully submitted,
Brian T. Racilla Counsel for Complainant Microsoft Corporation
Enclosures tz P.C. FISH RICHARDSON 1425 K STREET, N.W. IITH FLOOR WASIIINGTON,DC 20005
Frederick P. Fish Telephone 1851-1930 202 783-5070 W.K.Richardson Facsimile 1859-1951 202 783-2331
Web Site www. fr .co m June 21,2002
The Honorable Marilyn R. Abbott Secretary U.S. International Trade Commission 500 E Street, S.W. Washington, D.C. 20436
Re: Certain Video Game Systems, Accessories, and Components Thereof
BOSTON Dear Secretary Abbott: DALLAS
DELAWARE I am counsel for Microsoft Corporation ("Microsoft"). In accordance with
NEW YORK Commission Rules 201.6 and 210.5, Microsoft requests confidential treatment of the
SAN DlEGO confidential business information contained in Confidential Exhibit 22 to the Complaint. SILICON VALLEY TWIN CITIES The information for which confidential treatment is sought is a summary of certain WASHINGTON, DC criteria evidencing a domestic industry in connection with U.S. Patent Nos. D452,282 and D452,534 (Confidential Exhibit 22).
The information described above qualifies as confidential business information pursuant to Rule 201.6(a) in that:
(a) it is not available to the public;
(b) unauthorized disclosure of such information could cause substantial harm to the competitive position oiMicrosoft; and FISH& RICHARDSONP.C.
The Honorable Marilyn R. Abbott June 2 1, 2002 Page 2
(c) the disclosure of which could impair the Commission’s ability to obtain information necessary to perform its statutory functions.
Respectfully submitted,
Brian T. Racilla Counsel for Complainant Microsoft Corporation
.-.I &-- Subscribed and sworn to before me this d/ day of June, 2002.
Notary Public I,
BARBARA A BEE NOTARY PUBUC OF DISTRICT OF COLUMBIA MY COMMISSION EXPIRES MARCH 31,2005 UNITED STATES INTERNATIONAL TRADE COMMISSION WASHINGTON, D.C. 20436
In the Matter of )
CERTAIN VIDEO GAME SYSTEMS, ) Investigation No. 337-TA-- ACCESSORIES, AND COMPONENTS ) THEREOF 1
COMPLAINT UNDER SECTION 337 OF THE TARIFF ACT OF 1930, AS AMENDED
Complainant: Proposed Respondent:
Microsoft Corporation Ultimate Game Club Ltd. One Microsoft Way 1491 Boston Post Road Redmond, Washington 98052 Old Saybrook, Connecticut 06475 Telephone: (425) 882-8080
Counsel for Complainant:
Ruffin B. Cordell Michael J. McKeon Brian T. Racilla Fish & Richardson P.C. 1425 K Street, N.W. Washington, D.C. 20005 Telephone: (202) 783-5070
John E. Gartman Fish & Richardson P.C. 4350 La Jolla Village Drive, Suite 500 San Diego, California Telephone: (858) 678-5070
Steven McGrath Microsoft Corporation One Microsoft Way Redmond, Washington 98052 Telephone: (425) 882-8080 TABLE OF CONTENTS
TABLE OF CONTENTS ...... i ... LIST OF EXHIBITS AND APPENDICES ...... 111
I . INTRODUCTION ...... 1
I1. COMPLAINANT ...... 2
I11 . RESPONDENT ...... 3
IV . THE PRODUCTS AT ISSUE ...... 4
V . THE MICROSOFT PATENTS ...... 6
A . The ‘282 Patent ...... 6
1. Identification of the Patent and Ownership ...... 6
2 . Non-Technical Description of the ‘282 Patented Design ...... 7
3. Foreign Counterparts ...... 7
B . The ‘534 Patent ...... 8
1. Identification of the Patent and Ownership ...... 8
2 . Non-Technical Description of the ‘534 Patented Design ...... 8
3 . Foreign Counterparts ...... 9
VI . UNFAIR ACTS OF THE RESPONDENT - PATENT INFRINGEMENT ...... 9
VI1. SPECIFIC INSTANCES OF UNFAIR IMPORTATION AND SALE ...... 12
VI11 . LICENSES ...... 13
IX . DOMESTIC NUSTRY...... 14
A . Microsoft’s Domestic Products...... 14
B . Microsoft’s Domestic Industry Activities...... 14
i X . RELATED LITIGATION ...... 15
XI . REQUESTED RELIEF ...... 15
.. 11 EXHIBITS
Exhibil Description No.
1 Certified copy of U.S. Patent No. D452,282 (“the ‘282 patent”)
2 Certified copy of Assignment of the ‘282 Patent to Microsoft Corporation
3 Certified copy of US. Patent No. D452,534 (“the ‘534 patent”)
4 Certified copy of Assignment of the ‘534 Patent to Microsoft Corporation
5 Microsoft 2001 Online Annual Report
6 Instruction Manual for XBOXTMvideo game console
7 Photographs of the housing of Complainant’s XBOXTM console
8 Certificate of Incorporation and 2002 Dun & Bradstreet Report for Respondent Ultimate Game Club Ltd.
9 Copy of correspondence between UGC and the United States Patent and Trademark Office
10 Copy of Electronic Boutique of America’s online product offerings at EBgames.com
11 Photocopies of the retail packaging of Respondent’s X- Selector product
12 Photographs of the housing of Respondent’s X-Selector product
13 Photocopies of the retail packaging of Respondent’s X-Connection product
14 Photographs of the housing of Respondent’s X-Connection product
... 111 Exhibit Description No.
15 Copy of EBgames.com webpage depicting Respondent’s X-Selector product
16 Declaration of John P. Schnurer
17 Copy of EBgames.com webpage depicting Respondent’s X-Connection product
18 Copy of Gamestop.com webpage depicting Respondent’s X-Connection product
19 Receipt of purchase for Respondent’s X-Selector product from EBgames.com website
20 Receipt of purchase for Respondent’s X-Connection product from EBgames.com website
21 Receipt of purchase for Respondent’s X-Connection product from GameStop.com website
22 CONFIDENTIAL - Information concerning Microsoft’s domestic industry
iv PHYSICAL EXHIBITS Physical Exhibit Description No.
1 A sample of Microsoft’s XBOXTMvideo game console
2 A sample of Respondent’s X-Selector product
3 A sample of Respondent’s X-Connection product
V I. INTRODUCTION
1.1 Complainant Microsoft Corporation (“Microsoft”) requests that the United
States International Trade Commission commence an investigation pursuant to section
337 of the Tariff Act of 1930, as amended, 19 U.S.C. $0 1337(a)(l)(B) (“Section 337”), to remedy the unlawful importation into the United States, the sale for importation into the United States, and/or the sale within the United States after importation by the owner, importer, or consignee of articles covered by valid and enforceable United States Design
Patents owned by Complainant.
1.2 The proposed Respondent, Ultimate Game Club Ltd. (“UGC”), has engaged in unfair acts in violation of Section 337 through the unlicensed importation into the United States, sale for importation into the United States, and/or sale within the
United States after importation of certain video game accessories and components thereof that infringe United States Patent Nos. D452,282 (“the ‘282 patent”) and D452,534 (“the
‘534 patent”) (collectively “the Microsoft patents”)..
1.3 A certified copy of the ‘282 patent accompanics this complaint as Exhibit
1. Microsoft owns by assignment the entire right, title, and interest in this patent. A certified copy of the recorded assignment accompanies this complaint as Exhibit 2.
1.4 A certified copy of the ’534 patent accompanies this complaint as Exhibit
3. Microsoft owns by assignment the entire right, title, and interest in this patent. A certified copy of the recorded assignment accompanies this complaint as Exhibit 4.
1.5 An industry as required by Section 337(a)(2) and defined by Section
337(a)(3) exists in the United States relating to video game systems, and components thereof, that are protected by the ‘282 and ‘534 patents. The designs claimed in the ‘282
1 and ‘534 patents are used in Microsoft’s XBOXTMvideo game system, an innovative and cutting-edge video game system sold throughout the United States. The domestic industry for the ‘282 and ‘534 patents includes Microsoft’s substantial United States investment and expenditures in the engineering, research, development, marketing, and sales relating to products that use the designs claimed in the Microsoft patents.
1.6 Complainant seeks an order pursuant to section 337(d) permanently excluding from entry into the United States all imported video game accessories and components thereof that infringe the ‘282 and ‘534 patents. Complainant further seeks a cease-and-desist order pursuant to section 337(f) directing Respondent to immediately discontinue the importation into the United States, or the sale within the United States after importation of all infringing articles.
11. COMPLAINANT
2.1 Complainant Microsoft is a corporation organized and existing under the laws of the state of Washington, with its corporate headquarters at One Microsoft Way,
Redmond, Washington 98052. Microsoft is a global technology company that develops, manufactures, and supports a wide range of software and hardware products for a variety of different applications. Additional information concerning Microsoft can be obtained from Microsoft’s most recent annual report attached as Exhibit 5.
2.2 In late 2001, Microsoft revolutionized the video gameplay experience with the introduction of its XBOXTMvideo game system which provides high quality graphics and game creation that blur the lines between fantasy and reality, and which provides a platform that will in the future enable gameplay over the Internet. Microsoft sells and markets throughout the United States the XBOXTMvideo game system and related
2 XBOXTM video games and accessories. Despite its relatively short period of availability, the XBOXTMvideo game system has earned remarkable success in the marketplace and is now one of the leading video game systems available. The XBOXTMvideo game system is shown and described in an Instruction Manual attached as Exhibit 6 and may be further understood with reference to a Microsoft website at www.xbox.com. The console housing of the XBOXTMvideo game system is further depicted in the photographs attached as Exhibit 7. A sample of the XBOXTMconsole housing for the XBOXTMvideo game system has also been filed as Physical Exhibit 1. Microsoft is the owner of the
‘282 and ‘534 patents, which each claim designs used in Microsoft’s innovative
XBOXTMvideo game system.
111. RESPONDENT
3.1 The success of Microsoft’s XBOXTMvideo game system has not gone unnoticed by others who seek to gain from Microsoft’s investment, ingenuity, and goodwill. Respondent UGC is in the business of manufacturing, importing, distributing and/or selling video game accessories including the “X-Selector” and the “X-
Connection” that evidence a clear motive to misappropriate Microsoft’s patented designs in addition to Microsoft’s valuable brand awareness.
3.2 Respondent UGC is a corporation organized and existing under the laws of the state of Connecticut, having a principal place of business at 1491 Boston Post
Road, Old Saybrook, Connecticut 06475. UGC’s Certificate of Incorporation and a copy of a corporate report from Dun & Bradstreet, Inc. relating to UGC are attached as
Exhibit 8. Upon information and belief, Respondent UGC and various unincorporated
3 divisions of UGC including “Innovation Technologies” and “Future Tech,” were formed and are operated by Mr. Keith J. Taruski.
3.3 Upon information and belief, “Iwovation” is a trade name for an unincorporated division of Respondent UGC that has been described by Respondent as follows:
Innovation is the trademark for Innovation Technologies which is Ultimate Game Club, Ltd. ’s desigdmanufacturing division which manufactures video game cartridges, video output games, video game joysticks, and other video game accessories.
UGC made this representation during the prosecution of the “Innovation” trademark application in the United States Patent and Trademark Office, See Exhibit 9. Moreover, the retail packaging of each accused product contains the text “Innovation is a trademark of UGC Ltd.,” examples of which can be seen at Exhibits 11 and 13.
3.4 Upon information and belief, “Future Tech” (including at least one alternate spelling thereof (e.g., “Futureteck”)) is a trade name of an unincorporated division of Respondent UGC and is a trade name by which UGC does business. Upon information and belief, Future Tech is a division of UGC that is responsible for the sales and delivery of video game accessories purchased from a website sponsored by
Respondent (www.innovation1 .corn). This relationship is indicated on the shipping label that accompanied a delivery of video game accessories ordered from Respondent. A copy of the shipping label has been attached as Exhibit E to Exhibit 16.
IV. THE PRODUCTS AT ISSUE
4.1 The articles involved in this investigation are video game systems, accessories, and components thereof.
4 4.2 Microsoft’s XBOXTMvideo game system includes an XBOXTMvideo game console, an XBOXTMvideo game controller, an AC adapter and a standard A/V cable in addition to many other accessories that may be purchased to further enhance the gameplaying experience. An instruction manual that shows and describes the XBOXTM video game system is attached as Exhibit 6. The XBOXTMconsole includes a housing that encases the hardware components and assemblies of the video game system.
Photographs of the XBOXTM video game console are attached as Exhibit 7. The
XBOXTM console incorporates the designs claimed in the ‘282 and ‘534 patents.
4.3 Microsoft sells its X130XTM video game system through a variety of retailers including Electronic Boutique of America which offcrs the XBOXTMfor sale in its many retail locations as well as online at www.EBgames.com. A copy of online offerings from Electronic Boutique’s website is attached as Exhibit 10. As shown, the website offers a variety of different products and has pages devoted to the XBOXTM including “accessories” and “hardware.” Since its introduction in 2001, total sales of the
XBOXTMvideo game console system have been in the hundreds of millions of dollars.
4.4 Respondent’s X-Selector is a video game accessory that includes an electronic housing and that serves to interface between a TV or monitor and up to four video game systems, including Microsoft’s XBOXTMvideo game system. Features of the
X-Selector are described on the packaging of the product, photocopies of which are attached as Exhibit 11. Photographs that depict the housing of the X-Selector are attached as Exhibit 12. Each of the X-Selectors purchased from Respondent UGC,
EBGames.com, and GameStop.com are assembled with the same housing photographed in Exhibit 12.
5 4.5 Respondent’s X-Connection is a video game accessory that includes an electronic housing and that serves to interface between Microsoft’s XBOXTM console and
Sony’s PlayStationB controllers, Features of the X-Connection are described on the packaging of the product, photocopies of which are attached as Exhibit 13. Photographs that depict the housing of X-Connection products purchased from EBGames.com and
GameStop.com are attached as Exhibit 14.
V. THE MICROSOFT PATENTS
A. The ‘282 Patent
1. Identification of the Patent and Ownership
5.1 U.S. Patent No. D452’282 entitled “Portion of an Electronic Housing” issued to Microsoft on December 18,2001 and names as inventors James R. Stewart and
Hok-Sum Horace Luke. A certified copy of the ‘282 patent accompanies this Complaint as Exhibit 1. The named inventors assigned the ‘282 patent to Microsoft as indicated on the face of the ‘282 patent. A certified copy of the assignment also accompanies this
Complaint as Exhibit 2.
5.2 Pursuant to Rule 210.12(c) of the Commission’s Rules of Practice and
Procedure, this Complaint is accompanied by: (1) four copies of the prosecution history of the ‘282 patent (Appendix A) and (2) four copies of each reference document mentioned in the prosecution history (Appendix B).
6 2. Non-Technical Description of the ‘282 Patented Design
5.3 The design claimed in the ‘282 patent covers a novel, ornamental design for a portion of an electronic housing, which is used in the console of the XBOXTMvideo game system. The following figure is from the ‘282 patent and shows the novel, ornamental design:
At the time this design was conceived, no prior art existed with a dominant “X” configuration integrated as part of a geometric box shape having integrally formed vertical fins. This unique ornamental design of an electronic housing captures qualities of high power, high fidelity, and high energy bounded within a geometrically shaped housing.
3. Foreign Counterparts
5.4 Microsoft has filed applications corresponding to the ‘282 patent in France and Canada. The corresponding French collective was registcred on January 29,2001 as
French Reg. No. 10529 01 0529. The corresponding Canadian application was registered
7 on April 19,2002 as Canadian Reg. No. 2001-0153. Other than the identified counterparts, there are no foreign patents or patent applications corresponding to the ‘282 patent that have been issued, abandoned, denied, or remain pending.
B. The ‘534 Patent
1. Identification of the Patent and Ownership
5.5 U.S. Patent No. D452,534 entitled “Portion of an Electronic Housing” issued to Microsoft on December 25,2001 and names as inventors James R. Stewart and
Hok-Sum Horace Luke, A certified copy of the ‘534 patent accompanies this Complaint as Exhibit 3. The named inventors assigned the ‘534 patent to Microsoft as indicated on the face of the ‘534 patent. A certified copy of the assignment accompanies this
Complaint as Exhibit 4.
5.6 Pursuant to Rule 2 10.12(c) of the Commission’s Rules of Practice and
Procedure, this Complaint is accompanied by: (1) four copies of the prosecution history of the ‘534 patent (Appendix C) and (2) four copies of each reference document mentioned in the prosecution history (Appendix D).
2. Non-Technical Description of the ‘534 Patented Design
5.7 The design claimed in the ‘534 patent covers a novel, ornamental design for a portion of an electronic housing, which is used in the console of the XBOXTM video game system.
8 At the time this design was conceived, no prior art existed with the dominant “X” configuration integrated as part of a geometric box shape. Like the ‘282 patent, the unique ornamental design of the ‘534 captures qualities of high power, high fidelity, and high energy bounded within a geometrically shaped housing.
3. Foreign Counterparts
5.8 Microsoft has filed applications corresponding to the ‘534 patent in France and Canada. The corresponding French collective was registcred on January 29,2001 as
French Reg. No. 10529 01 0529. The corresponding Canadian application was registered on April 19,2002 as Canadian Reg. No. 2001-0150. Other than the identified counterparts, there are no foreign patents or patent applications corresponding to the ‘534 patent that have been issued, abandoned, denied, or remain pending.
VI. UNFAIR ACTS OF RESPONDENT - PATENT INFRINGEMENT
6.1 Respondent UGC is making, using, selling, importing and/or offering to sell video game accessories that infringe the ‘282 and ‘534 patents. For example,
Respondent UGC is making, using, selling, importing and/or offering to sell the X-
9 Selector and the X-Connection that each clearly infringe on the designs claimed in the
‘282 and ‘534 patents. Microsoft reserves the right to include other infringing products based on further analysis and discovery.
6.2 Respondent’s X-Selector is available in the United States through various online marketers. For example, the X-Selector may be purchased through Electronic
Boutique’s website at www.EBgames.com at a price of $19.99 per unit. A printout of a web page from that website showing the X-Selector is attached as Exhibit 15. As shown, the X-Selector is included within the “accessories” category for Microsoft’s XBOXTM video game system. In addition, the X-Selector may be purchased directly from
Respondent through the Internet as described in the Declaration of John P. Schnurer attached as Exhibit 16.
6.3 Photographs of the X-Selector are attached as Exhibit 12. The photographs of Exhibit 12 depict the housing of the X-Selector products purchased from the EBGames.com website and directly from Respondent. The X-Selector is also shown and described on its packaging, photographs of which are attached as Exhibit 11. Also filed as Physical Exhibit 2 is a sample of the infringing X-Selector article (including its packaging) that was purchased from Respondent. As the photographs and sample clearly indicate, the X-Selector infringes the design of the ‘282 patent. The X-Selector includes an electronic housing that is the same or substantially the same to the eye of the ordinary observer as the electronic housing shown and described in the ‘282 patent. Similarly, as the photographs and sample clearly indicate, the X-Selector infringes the design of the
‘534 patent. The X-Selector includes an electronic housing that is the same or
10 substantially the same to the eye of the ordinary observer as the electronic housing shown and described in the ‘534 patent.
6.4 Respondent’s X-Connection is available in the United States through various online marketers. For example, the X-Connection may be purchased through
Electronic Boutique’s website at www.EBgames.com at a price of $24.99 per unit and
Barnes & Noble’s affiliated website at www.Gamestop.com at a price of $24.99 per unit.
A printout of the Electronic Boutique website showing the X-Connection is attached as
Exhibit 17 and printout of the affiliated Barnes & Noble website showing the X-
Connection is attached as Exhibit 18. As shown in Exhibit 17, the X-Connection is included within the “accessories” category for the XBOXTMvideo game console system.
6.5 Photographs of the X-Connection are attached as Exhibit 14. The photographs of Exhibit 14 depict the housing of X-Connection products purchased from the EBGames.com and GameStop.com websites. The X-Connection is also shown and described on its packaging, photocopies of which are attached as Exhibit 13. Also filed a
Physical Exhibit 3 is a sample of the infringing X-Connection article (including its packaging) purchased from EBGames.com. As the photographs and sample clearly indicate, the X-Connection infringes the design of the ‘282 patent. The X-Connection includes an electronic housing that is the same or substantially the same to the eye of the ordinary observer as the electronic housing shown and described in the ‘282 patent.
Similarly, as the photographs and sample clearly indicate, the X-Connection infringes the design of the ‘534 patent. The X-Connection includes an electronic housing that is the same or substantially the same to the eye of the ordinary observer as the electronic housing shown and described in the ‘534 patent.
11 VII. SPECIFIC INSTANCES OF UNFAIR IMPORTATION AND SALE
7.1 Upon information and belief, the infringing X-Selector is not manufactured in the United States, but rather is manufactured in the People’s Republic of
China. The retail packaging of each purchased X-Selector states that the product was
“Made in China.” A copy of the retail packaging is attached as Exhibit 11. In addition, the housing of each purchased X-Selector contains a “Made in China” mark as can be seen in a photograph of the X-Selector attached as Exhibit 12. The packaging of each purchased X-Selector further indicates:
Innovation is a trademark of UGC Ltd. This product is manufactured by Innovation and is not related, sponsored, endorsed or manufactured by any other company.
Exhibit 11.
7.2 Upon information and belief, the infringing X-Selector is imported into the United States and sold within the United States after importation. For example, the
X-Selector can be observed being offered for sale by Electronic Boutique at its website www.EBgames.com. A printout of that website showing the X-Selector is attached as
Exhibit 15. On March 25, 2002, Respondent’s X-Selector was purchased in the United
States through the EBgames.com website. A copy of the purchase receipt is attached as
Exhibit 19. Photographs of an X-Selector that was purchased are attached as Exhibit 12.
7.3 In addition, as noted above, the X-Selector may be purchased directly from Respondent through the Internet as described in the Declaration of John P. Schnurer attached as Exhibit 16. On March 26,2002, the X-Selector was purchased directly from
Respondent. A copy of the shipping receipt is attached as an exhibit to the Declaration of
John P. Schnurer attached as Exhibit 16.
12 7.4 Upon information and belief, the infringing X-Connection is not manufactured in the United States, but rather is manufactured in the People’s Republic of
China. The retail packaging of the X-Connection states that the product was “Made in
China.” A copy of the retail packaging is attached as Exhibit 13. In addition, the housing of the X-Connection contains a “Made in China” mark as can be seen in a photograph of the X-Connection attached as Exhibit 14.
7.5 Upon information and belief, the X-Connection is imported into the
United States and sold within the United States after importation. For example, the X-
Connection can be observed being offered for sale by Electronic Boutique at its website www.EBgames.com. A printout of that website showing the X-Connection is attached as
Exhibit 17. On March 15,2002, Respondent’s X-Connection was purchased in the
United States through the EBgames.com website. A copy of the purchase receipt is attached as Exhibit 20. Respondent’s X-Connection may also be observed being offered for sale at Barnes & Noble’s affiliated website www.GameStop.com. A printout of the
Barnes & Noble website showing the X-Connection is attached as Exhibit 18. On March
28,2002, Respondent’s X-Connection was purchased in the United States through the
GameStop.com website. A copy of the purchase receipt is attached as Exhibit 21.
7.6 The infringing articles are believed to fall within at least the following classifications of the Harmonized Tariff Schedules of the United States: Nos. 9504.10.00 and 9504.90.40.
VIII. LICENSES
8.1 Microsoft has not granted any licenses under the ‘282 and ‘534 patents.
13 IX. DOMESTIC INDUSTRY
9.1 An industry as required by Section 337(a)(2) and defined by Section
337(a)(3) exists in the United States relating to products madc by Microsoft covered by the ‘282 and ‘534 patents including (A) significant United States investment in plant and equipment, (B) significant employment of labor and capital in the United States, and (C) substantial investment in exploitation of the ‘282 and ‘534 patents, including engineering and research and development related to products covered by the Microsoft patents. With respect to the requirements of Section 337(a)(2), Microsoft relies primarily on its substantial investment in the exploitation of the ‘282 and ‘534 patents within the meaning of Section 337(a)(3).
A. Microsoft’s Domestic Products
9.2 Microsoft’s domestic activities relate to its XBOXTMvideo game system which includes the XBOXTMconsole. The XBOXTMvideo game system is shown and described in a product manual attached as Exhibit 6. The XBOXTMconsole is further depicted in the photographs attached as Exhibit 7. Also, a sample of the XBOXTM console housing for the XBOXTMvideo game system has been filed as Physical Exhibit
1. The XBOXTMvideo game system incorporates designs that are protected by the ‘234 and ‘534 patents. The console of the XBOXTM video game system includes an electronic housing that is the same or substantially the same to the eye of the ordinary observer as the electronic housing shown and described in the ‘282 and ‘534 patents.
B. Microsoft’s Domestic Industry Activities
9.3 Although Microsoft’s XBOXTMvideo game system is not manufactured in the United States, there are substantial activities relating to the XBOXTM video game
14 system that are conducted in the United States. These activities include Microsoft’s significant investment in plant and equipment, significant employment of labor and capital, and substantial investment in the exploitation of the Microsoft patents, including engineering, research and development activities relating to the XBOXTMvideo game console system. Detailed information concerning Microsoft’s investment in plant and equipment, employment of labor and capital, and investment in the exploitation of the
Microsoft patents is contained in Confidential Exhibit 22.
X. RELATED LITIGATION
10.1 Microsoft is filing concurrently with the filing of this Complaint in the
United States International Trade Commission, a complaint in the United States District
Court for the District of Connecticut alleging inter alia infringement by Respondent of the ‘282 and ‘534 patents.
XI. REQUESTED RELIEF
11.1. WHEREFORE, by reason of the foregoing, Complainant requests that the
United States International Trade Commission:
a) Institute an immediate investigation pursuant to Section 337 of the
Tariff Act of 1930, as amended, 19 U.S.C. 0 1337, into the unlawful importation
into the United States, the sale for importation into the United States or the sale
within the United States after importation by the proposed Respondent and others
of video game systems, accessories, and components thereof that infringe United
States Patent Nos. D452,282 and D452,534.
b) Determine that there has been a violation of Section 337;
15 c) Issue a permanent exclusion order pursuant to Section 337(d) of the Tariff Act of 1930, as amended, excluding from entry into and sale within the
United States all video game systems, accessories, and components thereof that are manufactured, imported, or sold by or on behalf of Respondent, its affiliates, subsidiaries, successors, executives, directors, employees, or assigns that infringe
United States Patent Nos. D452,282 and D452,534.
d) Issue a permanent cease-and-desist order pursuant to Section
337(f) of the Tariff Act of 1930, as amended, prohibiting Respondent, its affiliates, subsidiaries, successors, executives, directors, employees, or assigns, from marketing, demonstrating, distributing, offering for sale, selling, or otherwise transferring, including the movement or shipment of inventory, in the
United States any video game systems, accessories, and components thereof that infringe United States Patent Nos. D452,282 and D452,534; and
e) Issue such other and further relief as the Commission deems just and proper based on the facts determined by the investigation and the authority of the Commission.
16 Respectfully submitted,
Fish & Richardson P.C. 1425 K Street, N.W. Washington, D.C. 20005 Telephone: (202) 783-5070
John E. Gartman Fish & Richardson P.C. 4350 La Jolla Village Drive, Suite 500 San Diego, California Telephone: (858) 678-5070
Steven McGrath Microsoft Corporation One Microsoft Way Redrnond, Washington 9 80 52 Telephone: (425) 882-8080
Attorneys for Complainant Microsoft Corporation
Dated: June 13,2002
17 EXHIBIT 1 UNITED STATES DEPARTMENT OF COMMERCE United States Patent and Trademark Office
March 27,2002
THIS IS TO CERTIFY THAT ANNEXED HERETO IS A TRUE COPY FROM THE RECORDS OF THIS OFFICE OF:
U.S. PATENT: 0452,282 ISSUE DATE: December 18,2001 Ill Ill 1 l11ll11lllllll 11111 111111111111111USOOD452282BlIll11 ll1ll11111 I1 1lll HI1 1111
(IO) (12) United States Design Patent Patent NO.: US D452,282 S Stewart et al. (45) Date of Patent: Dec 18,2001
(54) PORTION OF AN ELECTRONIC HOUSING Color pictures of Garnecubc video game system by Nin- tendo, from various internet web pages, 3 pages, (date (75) Inventors: James R. Stewart, Woodinville; unknown but prior to Jan. 11,2001). Hok-Sum Horace Luke, Mercer Island, Color pictures of Playstation 2 video game system by Sony, both of WA (US) from various internet web pages, 3 pages, (date unknown but prior to Jan. 11,2001). (73) Assignee: Microsoft Corporation, Redmond, WA (US) * cited by examiner (") Tern: 14Years Primary Exuminer4%abhakar Deshmukh (21) Appl. No.: 29/135,335 (74) Anorney, Agent, or Firm-Banncr & Witcoff, Ltd. (22) Filed: Jan. ll, 2001 (57) CLAIM (51) LOC (7) CI...... 21-01 The ornamental design for a portion of an electronic hous- (52) U.S. CI...... D2ln33 ing, 8s Shorn and described. (58) Field of Search ...... D21/324, 328-333; D141400. 401, 435,495; 2731148 B; 46311. DESCRIPTION 29-359 469 47 FIG. 1 is a perspective view of a poriion of ao electronic our (56) - References Cited housing shokg new design; FIG. 2 is a tup plan view thereof; U.S. PATENT DOCUMENTS FIG. 3 is a front view thereof; D. 362,869 * 1011995 Oikawa ...... D21032 FIG. 4 is rear view thereof; D. 376,822 * la1996 Oslerhout ...... D21/329 D. 412,940 811999 Kaio et ai. . FIG. 5 is right side view thereof; and, D. 433,076 * ionom H~~ ...... ~21,333 FIG. 6 is a left side view thereof. D. 435,272 * l2/2W Swaason et al...... D21B28 D.435,871 * lnWl Yu ...... D21D33 The broken line showing of the circle within Ihc claimed 5,192@2 * 3/1993 Inoue et al...... 4-53/46 design and the remainder of the electronic housing is for 5,976,018 * 1111999 Dmckman ...... 463146 illustrative piirposes only and form no part of the claimed 6,254,477 7DW1 &ski el al...... 463147 design. The unshaded regions including the region inside of the unclaimed circle, and the bottom of the electronic OTHER PUBLICA7lONS housing form no part of the claimed design. www.Amazan.com, Color Pictures of Outdoor Trekker product by V-Tech, 2 pages, (date unknown but prior to Jan. 11,2001). 1 Claim, 3 Drawlng Sheets
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FIG. 5 EXHIBIT 2 UNITED STATES DEPARTMENT OF COMMERCE United States Patent and Trademark Office
March 29,2002
THIS IS TO CERTIFY THAT ANNEXED IS A TRUE COPY FROM THE RECORDS OF THIS OFFICE OF A DOCUMENT RECORDED ON January 11,2001 Address (Ilne 2) I I AW*J Addmri (line 3) ] Redrnond I (WA 1 I 98052 1 ulv SUtdCantry npced. Domestic Representative Name and Address Enkr tor tho htR&ng Parhlonly. Name I I r 1 Address (llnti 1) Address (lino 2) I c_ Address (Ilnu 3) L 5 1 AddfDSS (Ih3 4) . \ rRte-wm* FOR OFFICE USE ONLY
ADDRESS Mall documante lo k merd.d wkh mqulnd COVOI .hod(*) lnbnnalon to: Commlamlonar of Palmta and 'Tm~afk4.Box ASs.lpnrmnt8, Warhlngton, D.C. 20251
PATENT ' REEL: 011496 FRAME: 0860 Eorrebpondent Name and Addresb Area Code and Telephone Number I 20u508~9100 I Neme 1Robert S. Ketz 1 Address (IlnO 1) I Banner 8 Witcoff, Ltd. 1 Address (Ilnu 2) I 1001 G. Street, N.W.,Suite 1100 I
Addresr (IM)3) [ Washington, D.C. 20001 I Address (llnu 4) 1 Pages Of Entrr the total numbor of pager tho altachod convryanco documont Includlng any rttach~nlr I I
Appllcatlon Nurnbsr(s)or Patent Nurnber(r) 0 Mark If addilional numben stbched M. Enter &her PafedApphcsfkm Number or the Phnr Nudm(Do NOT ENTER BOTH nvnknfortho aum prop.cty). - Patent Appllcatlon Number(.) no-Patont Numbor(r) r7-m n-m nun r3-m -on If lhlr doarmen1 I6 belng flied logelher wtlh amPaleni Applhstlgn. enter plo dale lho prtml Dpplhlkn ma hy ’”’ ilgned by (he nml named execvflng itwenlor. [ 01 08 2001 ] Patent Cooperation Treaty (PCT) EnterPCTappllcrtlonnumbor PCT 71PCT 1-1 PCT dfla U.3. Appllcatlon PCT Nutnbor as not bwn arrlgned. -1 PCT -1 KT [-A Number of Propertler - Enter the total numbrr of pmpmrtkr Involved. # I 1
Fee Amount FOI Amount for Pr~pottloaLlrtad (37 CFR 3.41): S w--L Mrthod of Paymrnt: Enclosod 0 D-lt Account [81 Drporlt Account be Enler Is payment by &poll! acQwnl of If edWloMl toor an ch.rgsd b Wia -1 1 I Oeporlt Account Numbor:
Authorlullon to cturgo Dddllbnd he.:
and Slgnaturs Statement . To the bdof my hnowlodgo Jnd bcllof, thfcK.0olng Inforno Hon ID twm and eorrwt aid ry atiachd copy /a J mecopy of tho orig/na/#o~urnon~ Chpa to depoan amount M6rrChuW11, n IndkJhd hWln.
Robert S. Kab Name of Person Slgnlng
PATlllNX REEL: 011491 FRAMW Obl9 Ms # 163031.1 i 13797.Oo042 ASSIGNMENT
WHEREAS, we, James R Stewart and Hok-Sum Horace Luke @creinaAer referred to 8s ASSIGNORS), having post office addresses of 19422 229* Avenue NE, Woodinville, WA 98072 and Mcrcer Island, WA 98040, an the joint an 3763 77* Place S.E., AN rcspcctivtly, inventors of invention entitled “PORTION OF ELZCTRONIC HOUSING,” M described and claimed in the patcnt specification forming part of an application for United Statea lcttcn, executed htrewilh;
WI-IEREAS, Microsoft Corporation @a- rcfdto as ASSIGNEE), a corporation of the State of Washington having a place of business at One Microdoft Way, Redmond, WA 98052, is desirous of acquiring the entire right, title and interest in and to the invention and in and to any lettcrs patent that may be granted therefor in the United Statca and in any and all foreign countries;
NOW, THEBEFORE, in exchange for good and valuable consideration, the receipt of which is hereby acknowledged, ASSIGNORS hereby sell, assign and transfer unto Said ASSIGNEE, the entire right, title and interest in and to said invention, said application and any and dl le- be granted for 8ajd invention the Uaited SUks of America and its thtol-jalpossessi~ and in my and all foreign c~~mtnes,and in any and all divisions, rciasuea and continuatiom, and continuadon-in- part thereof, including the right to file foreign applications diractly in the name of ASSIGNEiE and to claim priority rights deriving hmsaid United States application to which said foreign applications are entitled by virtue of international convention, trcaty or othenvise, said invention, application and all letters patent on said invention to be held and cnjoyd by ASSIGNEE and its SUGCWSO~Sand assigns for their use and benefit and of their SUCCCSSO~~and assigns as fully and eatiraly as the same would have been held and enjoyed by ASSIGNORS had this assignment, transfer and denot been made. ASSIGNORS hcrcby authorize and request tbe Commission of Patents and Trademarks to issue all letters patentnquirtd on said invention to ASSIGNEE. ASSIGNORS apeto oxtcuto all inatnuncsta and documents for the &g and prosecution of applications for United states and foreign kttu’~ Datent on said Invention, for litigation regarding said letter patent, or for the purpose of protwthg title to said invention or letter p-nt thercfbr.
InVCIltoC
1
PATENT REEL: 011496 FRAME: 0862 2
PATENT RECORDED: 0111112001 REEL: 01 1496 FRAME: 0863 EXHIBIT 3 UNITED STATES DEPARTMENT OF COMMERCE United States Patent and Trademark Office
- March 27,2002
THIS IS TO CERTIFY THAT ANNEXED HERETO IS A TRUE COPY FROM THE RECORDS OF THIS OFFICE OF: f Ill11 Ill IIIII I 11111111 lull 1111ll11llUSOOD452534Bl 11111 11lll11111111111111111111 Ill1 1111
(12) United States Design Patent (10) Patent NO.: US D452,534 S al. Stewart et (45) Date of Patent: w Dec 25,2001
PORTION OF Ah' ELECTRONIC HOUSING Color picturcs of Gamccubc vidco game system by Nin- tendo, from various internet web pages, 3 pages, (date Inventors: James R. Stewart, Woodinville; unknown but prior to Jan. 11, 2001). Hok-Sum Luke, Homce Mercer Island, Color picNres of Playstation 2 video game system by Sony, both of WA (US) from various internel web pages, 3 pages, (date unlmown but prior to Jan. 11, 2001). Assignee: Microsnfl Corporation, Redmond, WA (US) cited by examiner Term: 14Years Primary Exam'ner-Prabhakar Dcshmukh Appl. No.: 291135,334 (74) Anorney, Agent, or Firdanner & Wiicoff, Ltd. Filed: Jan. ll, 2001 (57) CULM LOC (7) c1...... 21.01 The ornamental design for a portion of an electronic hous- U.S. C1...... D21/333 ing, as shown and described. Field of Search ...... D21B24-328, D21/333; D141400, 401, 435, 495; 2731148 B; DESCRIPTION 46311, 29-35,46,47 FIG. 1 is a perspective view of a portion of an electronic References Cited housing showing our new design; U.S. PATENT DOCUMENTS FIG. 2 is a top plan vicw thcreof; 3 is a front view thereof; 362,869 1011995 Oikawa ...... DZlt332 FIG. 376,822 12/19% Ostcrhout ...... D21/329 PIG. 4 is a rear view thereot D. 412,940 8/1999 Kalo el al. . 5 D. 433,076 * lOL?.OOO Hayes ...... D21D33 FIG. is a right si& view thereof; and, D. 435,272 * 12/2oOO Swanson et al...... D>21/328 FIG. 6 is a left side view thereof. D. 435,871 1,2001 DZlD33 YU ...... of 5,192,082 3/1993 lnoue el al...... 463146 The broken line showing the circle within the claimed 5,976,018 1111959 Dmckman ...... 463/46 design and thc remainder of the electronic housing is for 6,254,477 * 7/2001 &ski el al...... 463147 illustrative purposes only and form no pan of the claimed design. Tbe unshaded region inside of the circle, and the OTHER PUBLlCATlONS bottom of tbc housing form no pan of the claimed design. www.Amazon.com, Color Pictures of Outdoor Trekker product by V-Tech, 2 pages, (date unknown but prior to Jan. 11,2001). 1 Claim, 3 Drawing Sheets U.S. Patent D= 25,2001 Sheet 1 of 3 US D452,534 S
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FIG. 6 EXHIBIT 4 UNITED STATES DEPARTMENT OF COMMERCE United States Patent and Trademark Office
March 29,2002
THIS IS TO CERTIFY THAT ANWEXED IS A TRUE COPY FROM THE RECORDS OF THIS OFFICE OF A DOCUMENT RECORDED ON January 11,2001 I FORM PTO-1619A 02-09-2001 Lapins W30/?9 nMRt-tA
I Second Party
Name (line 2) I 1 L 1 3ocelvlng Party 0 M8rk I addi%oMln8mI of mcdvlng p.lties mttnched Name (line I) [ Mlcroson Corporation nIfbmrllW8llbb.~ - h b M .ulpnrmnl md Name (line 2) -Mnop.rtyhnol h 1 bnkkd UN MdSub*. M.ppdn(mn(o(~bomrS(fc Addreso We 1) I One MicroeoA Way npnr.ntrthr b am.drd. 1 ~murlbra Up.nh-m Address (line 2) -) (WA i Address (line 3) Redmond I (980521 CJty StBtUCOWllrv upcod. 2omertlc Representative Name and Address Entw tor the fint RewMng Pa* only. Name b.1 I Addresr (Ilne 1) [ 1 Addreso (line 2) I Addreus (Ilne 3) 1 I Addrerr (line 4) I FOR OFFICE USE ONLY t 08/2001 00000111190733 2913533
PATENT REEL: 011494 FRAME: 0662 'CORM PTO-16198 Page 2 bpim Ww99 OMB0651-0027
:orrespondent Name and Address Area code and Tebphone Numbr I 202/50&B100 J Name I Robert S. Katz 1 Address (line 1) [ Banner 8 Witcoff, Ltd. I Addre66 (ltne2) I 1001 G. Street, N.W., Sub 1100 I D.C. Address (line 3) [ Washington, 20001 1 Address (line 4) 1 1
Patant Appllutlon Numbor(#) Patont Number(.) om- nnn om- on0 UU~000
Jatent Cooporatlon Treaty (PCT) PCT Enter PCT appllcrtkn numkr PCT PCT [I MaU.S. Appikallon 1-1 1-1 Numbrr am not krnaarlgnod. PCT 11pm 7) pc~[I Yumber of Propertles Enlrr Ihm lob1 numhr of prop.rllam lnvokod. # 1 1 I
Fee Amount Fee Amount for Proportlor LIsIed (37 CFR 3.41): $ I 40.00
Aulhorlutlon to ChJt'QO addlUorul ham: Y..B Moo
Statement and Slgnaturo To Ihe besf of my knowlrdgo end bellel, the b*olng InFormetlon Ir bur and mmct and any attechd copy 18 a &VO Copy of Ihm OrlQlnrl CfOCUmbnL Chargu lo chporn JCCOUfIf ~rmauthdzed, a8 lndlcrhd tmrrln.
Robed S. K8Lz Data Name of Parson Signlng I L I
PATENT REEL: 0111494 FRAME: 0683 MS # 163030.1 13797.0004 1
ASSIGNMENT
WKEWAS, WC, 3-B R Stewart ad Hok-Sum Horace Luke nfdto a~ ASSIGNORS), having post office addresses of 19422 229* Avenue NE, Woodinville, WA 98072 and 3763 77* Place S.E., Merctr Island, WA 98040, respcctivtly, arc the joint mventorn of an invention AN entitled "PORTION OF ELECI'ROMC HOUSING," a desaibcd end daimcd in the specification forming part of an application for United Statca letters patent executed hemwith; WHEREAS, Microsoft Corporation (hacinaftet refdto aa ASSIGNEE), a corporation of the State of Washington having a place of business at One Miemsoft Way, Redmond, WA 98022, is desirous of acquiring the entire right, title and interest in and to the invention and m and to any letters patent that may be granted therefor in the United States and in any and all fmign countrjcs;
PATENT REEL: 011494 FRAM&:01164 2
PATENT RECORDED: 01/11/2001 REEL: 011494 FRAME: Ob6U EXHIBIT 5 Microsoft 2001 Online Annual report At Microsoft, we see no limits to the human imagination.
Our purpose is not simply to unlock the potential of today's new technologies. Our goal is to unleash the creativity in every person, every family, and every business. Because we believe the real measure of our success is not the power of our software but the power it unleashes in you.
2 Creating possibilities: We believe in the value of software.
Over the years, software has helped transform the way we work and live. But it is just the beginning. What can only be imagined today will be commonplace tomorrow. At Microsoft, we continually research and develop new technologies that help realize the potential that resides within us all. To make connections where none existed before. To lead to new understanding and discoveries. To inspire, entertain, and inform. Our new products and services will help you experience your world in entirely new ways, It's why we're so passionate about the power of software. And all the possibilities it holds in store for you. Energizing the PC: Software that works the way you work.
We learn from you. Your expectations. Your way of working. The users of Office and Windows@ benefit because we combine what we learn from our customers with our strengths in research and development, The results are new breakthroughs for Microsoft and for computer users around the world. Software that recognizes your handwriting and your speech. Software that collaborates, remembers, and reminds you. Software developed by people who know reliability and performance are important to you. Microsoft@ Office XP and Microsoft Windows XP give PC users what they want: more capabilities, more productivity, and more ways to experience the digital world.
Microsoft Office XP Launched on May 31, Microsoft Office XP empowers customers to achieve more and unleashes the next wave of productivity gains. More specifically, Office XP revolutionizes the way people collaborate with one another, access important information, and accomplish their tasks. Thanks to innovative technologies such as smart tags, Task Panes, speech/handwriting recognition, and SharePointTMTeam Services, Office XP offers customers new experiences and capabilities that redefine productivity.
Microsoft Windows XP Our latest operating system will enable inspiring new experiences that help people unlock the full possibilities of their PCs from advanced communication, collaboration, and remote access to digital photos, music, video, and building home networks. When Microsoft Windows XP launches in fall 2001, it will strive to establish a new standard in reliability and performance, offering customers the freedom to create, connect, and communicate in ways that weren't possible before.
Tablet PC The Tablet PC is an exciting new evolution of the laptop that combines the power of the PC with the simplicity of pen and paper. It is a full-featured, highly mobile PC that runs Windows XP Professional and supports all current Windows-based applications. When it. launches in fall 2002, there will be many innovative applications that will leverage the Tablet PCs pen and speech capabilities, wireless support, long battery life, and best-of-breed portability.
4 Delivering business agility: Helping companies make the right connections.
The Microsoft .NET platform redefines and expands the idea of a connected business, delivering the ability to quickly respond to challenges and oppbrtunities. With .NET technology, barriers to doing business are down and the limits of time and distance are drastically reduced. Real time information is no longer a dream, but the reality that drives the free flow of information and ideas within an enterprise and on to vendors, partners, and customers. This brings every aspect of the business closer together: people with questions are connected to people with answers. Supply is connected directly to demand. Ideas are connected to action. And your business is connected to success.
Microsoft .NET Enterprise Sewers Over the last 12 months, Microsoft has released a dozen new server applications that enable customers to rapidly build and run flexible Web-based solutions that integrate with their existing systems. From new releases of our messaging, database, e-commerce, and management products to offerings in mobile information access and Web content management, the Microsoft@ .NET Enterprise Server family provides the scalability, reliability, and manageability that today’s agile businesses need.
Microsoft Windows .NET Microsoft’s latest server operating system addresses the emerging business challenge of managing complex business computing across multiple interconnected applications and services. The Windows@ .NET Server platform will provide the infrastructure necessary to deploy, manage, and orchestrate XML Web services, connecting businesses and allowing customers to quickly develop and deploy business-to- business and electronic commerce applications, content management, messaging and collaboration tools.
Windows 2000 Windows 2000 Server is the multipurpose network operating system for businesses of all sizes. The newest version of this bestselling server operating system, Windows 2000 Server lets you share files and printers reliably and securely, choose from thousands of business applications compatible to run today on Windows 2000 Server, and build Web applications and connect to the Internet. This combination and flexibility delivers a strong business value proposition for today’s IT customer. bCentral The Microsoft bCentralTMportal provides online subscription services to help small businesses get online for B2C and 828 opportunities without making an investmE.;lt in their own large-scale IT infrastructure. bCentral helps improve marketing effectiveness, increase sales, and provide better customer service. With more than 1.6 million registered users, bCentral is a key part of Microsoft’s overall .NET strategy to deliver software as a service to consumers and businesses of all sizes.
1 Great Plains Software With 140,000 customers in 132 countries, Microsoft@ Great Plains@ provides e-business applications that help small and mid-sized companies compete and win in today’s interconnected economy. Great Plains delivers the capability to automate financial and operational processes, build collaboration throughout an organization, deploy Customer Relationship Management technology and Supply Chain Management, and allow companies to extend specific information and procedures securely via the Internet to employees, customers, suppliers and partners.
5 .NET Enterprise products
Application Center
B"nTalkrM Server
Commerce Server
: Content Management Server
Exchange Server
Host Integration Server
Internet Security and Acceleration Server
Mobile Information Server
Share Point Portal Server
Microsoft SQL ServerTM
Windows 2000 Server
Windows 2000 Advanced Server
Windows 2000 Datacenter Server
6 Delighting consumers: A new world of services and devices.
We believe that the PC is one of the most flexible, valuable tools ever invented. And we’re taking everything we know about the PC and applying it to smart, mobile devices, to the Internet, and to gaming. So that what the PC has done for your working life can be brought to every other aspect of your life. From your PC to your lV and everything in between, Microsoft is delivering a new level of technology that will keep you in touch, informed, entertained, and connected, all on your own terms. It‘s a watershed year for new ideas: the latest version of MSNO, and the upcoming releases of XboxTM, Pocket PC, and Smart Phone will expand your idea of what’s possible.
Microsoft .NET My Services Microsoft .NET My Services puts users in control of their own data and information and allows access at anytime from any device. .NET My Services are oriented around people, instead cf around a specific device, application, service, or network. They also protect personal information by allowing the user to control who can have access to their information and providing a new level of ease of use and personalization. .NET My Services, available in 2002, are just the first set of the XML Web services being built by Microsoft.
MSN MSN is now one of the most popular destinations on the Internet. And with the launch of the newest version of MSN in the fall of 2001, the momentum continues. This latest offering will include a new home page design, improved performance, and several updates to he[p users better communicate and enjoy digital media. It will also provide fast and reliable Internet access in the United States with the new MSN Broadband service.
Xbox Xbox is Microsoft’s future-generation video game system that gives game players experiences they have yet to imagine. With a built-in hard disk drive, Xbox delivers much richer game worlds. And with Dolby Digital 5.1 sound, garners will actually feel whats happening. When Xbox goes online, it will take games to the next level. It’s the only system designed to enable players to compete or collaborate with other players around the world through broadband online gaming. Microsoft@ TV Microsoft@ TV is a complete family of software products for the television industry that makes television more useful, fun, and engaging for consumers the world over-today and in the future. Microsoft lV software powers a range of current digital and next generation TV devices-from advanced set-top boxes and digital video recorders, to integrated TVs and combination devices.
Pocket PC I Because of its ease-of-use and power, the Pocket PC is quickly becoming the PDA of choice for mobile professionals. Customers can take their personal and business information with them on the road or take advantage of the Pocket PCs flexibility by adding wireless options to access business or Internet information. Available in fall 2001, the next-generation Pocket PC will deliver a new user interface, powerful new features, and support for integrated wireless connectivity.
Smart Phone Technology
7 Available in the first half of 2002, smart phones powered by Microsoft Windows will deliver a dramatic leap in phone capability and experience. Though the primary purpose of the Smart Phone is to make and receive voice calls, it will also enable customers to browse Web sites, read e-mail, update their contacts, manage their calendar, and stay connected with relevant information while mobile.
8 Unleashing developer creativity: New tools, new ideas, and new opportunities.
There needs to be a way to fulfill the distinct software application needs of every business. A highly customized way to integrate systems, access data and unleash the potential embedded in the information of companies everywhere. Nearly 6 million independent developers know the way. They work with businesses every day, all over the world, to develop applications for every conceivable business need. And they do it with tools developed by Microsoft. With Visual Studio@ 6.0, and the upcoming release of Visual Studio .NET, developers have all they need to create exciting new opportunities for themselves, and for their customers.
Visual Studio .NET The biggest challenge developers face is moving their products to the new services-based architecture of the Internet. With the release of Microsoft Visual Studio .NET, developers will have access to a world- class tool set and support for over 20 of the most popular programming languages, mission-critical tools, and a complete development suite that will allow them to bring their application development expertise and experience seamlessly to the Internet. As a result, it will be much easier to build today's applications and next-generation XML Web services.
Visual Studio 6.0 To succeed in today's business environment, applications must be more scalable, reliable, and flexible than ever before. At the same time, the fast pace of business change means that developers must design and launch enterprise applications in days or weeks rather than months or years. Working in languages they already know, Microsoft Visual Studio version 6.0 is a complete enterprise-class development system that helps developers meet those demands by providing the tools to create powerful, mission- critical applications quickly and efficiently.
Customer Case Studies
Continental Airlines By developing a new mobile travel-planning application with the Microsoft .NET Framework and Visual Studio .NET, Continental Airlines is significantly reducing deployment time, eliminating the overhead of tightly coupled remote-procedure-call implementation, ensuring rapid and flexible scalability, and providing transparent interoperability with host systems. Moreover, with the .NET Framework and Visual Studio .NET, developers envision an entirely new approach to creating and updating applications in the future.
CyberWatcher Seeking more powerful integration and communications capabilities, CyberWatcher, the top European provider of Web-based tools for internal, and external data mining and monitoring, is implementing a new release of its software using the Microsoft .NET Framework and Visual Studio .NET. As a result, the
9 company has managed to double its developer productivity, integrate its solution with portals and other customers four times faster, and streamline debugging and low-level database access.
Comedy Central Comedy Central, a cable TV network, provides comedy programming to 46 million viewers around the United States. With 250 employees throughout the U.S., keeping people up-to-date on day-to-day and timely information demanded the creation of a dynamic and effective corporate intranet.
Comedy Central chose Microsoft Visual Studio and Microsoft Internet Information Server (11s) and Microsoft SQL Server as its database core.
As Comedy Central continues to grow, Microsoft technology will make it easy to scale systems and applications to meet higher demands, all without extensive re-development. Maintenance is easy and integration with Comedy Central's other Microsoft technologies, including SQL Server and Microsoft Access, is seamless. So, the Comedy Central intranet will connect employees more closely to their company, making work more efficient, more effective, and probably more fun. Inventing tomorrow: Making technology even more human.
Technology carries the promise of tomorrow. To continue fulfilling that promise, Microsoft's investment in research will approach $5 billion over the next- fiscal year, so that we can tackle some of the toughest problems in computer technology. More than 600 people are at work on projects to make computers easier to use, and to achieve the dream of computers that really do see, listen, and learn. These innovations are all geared to creating a greater sense of connection with the technologies you use every day, and to make your computing experience more personal, more productive, and more fulfilling.
' Microsoft Research Truly international in scope, Microsoft Research is focused on a broad array of new technology challenges and issues. You'll find our researchers in software labs on three continents, at work in over 40 areas of computer science. We're building Microelectrical Mechanical Systems creating machipes smaller than the width of a human hair. We're developing the technology that will allow your computer to recognize not just your speech, but the shades of meaning imparted by inflection. We're even writing the code for the latest generation of video games. All together, it shows that Microsof? Research plays a central role in bringing advanced technology to businesses, organizations, and individuals.
During the past ten years, Microsoft Research has established a highly successful track record in technology transfer. Our research applies to virtually every product Microsoft ships, from Windows 95 up to the latest .NET products. These practical benefits are the result of an orientation that keeps us focused on the seemingly limitless possibilities of technology to make our lives, and our world, a better place. Today, were doing the research that will help you in the near and distant future. With discoveries that will make work easier and more productive, leisure more fulfilling. Discoveries that demonstrate software is one of the greatest tools in our effort to realize human potential.
-ResearchProjects
Ring Camera Microsoft is developing new imaging cameras like the RingCam in order to develop software of the future to facilitate meeting recording and teleconferencing, as well 3s other applications in computer vision.
Notif ica t io n Platform Imagine having the freedom and the peace of mind to go to a movie, have dinner with friends, and know that critical information will get through to you ye) you wont be interrupted by irrelevant messages. That's the idea behind the new notification and communications technology developed at Microsoft that can serve as a virtual secretary technology. Your virtual secretary will be working for you all the time and will actually be able to learn about your interests, needs, and priorities. It can read your e-mail, update your schedule and filter messages by importance.
Face Mapping
11 Microsoft Research has developed a system that cpnstructs textured 3D facial models and videos with minimal user interaction. In the future, a user, with a PC and an ordinary camera, can use this system to generate his or her facial model in just minutes, then input the image for use in online games, conference call systems, or e-commerce.
Vision Technology Vision-based research aims to find simpler, more 'intuitive interfaces with computers by using live video input. The project looks at endowing computer d with the potential to see and understand a user's physical actions. There are a number of consumer benefits and applications with technology that tracks users, reads lips, recognizes faces, understands expressions, interprets gestures. etc.
12 Improving people’s lives: We believe software can make a difference.
The benefits of technology belong to all of us. Benefits that create new opportunities and open doors to a better life. To keep those doors open, Microsoft began one of the first formal giving programs in the high-tech industry. Today no other technology company contributes more to those in need. Last year alone Microsoft and its employees gave over $215 million in cash and software to organizations that reach under-served populations and help bridge the “digital divide.” As a result, more than 5,000 nonprofit organizations were empowered to better deliver their services and fulfill their missions to people and communities around the world. Being a responsible leader is something we take quite seriously. Because at Microsoft, we don’t simply believe in making great software. We also believe in making a difference.
Expanding Access to Technology Not everyone has been able to take advantage of the digital revolution. To help improve access to technology for children and young adults, Microsoft has contributed $100 million in cash and software to “technology-enable” every Boys & Girls Club over the next five years. More than 3 million Club kids will be given the resources to create, explore, and discover the world around them through technology. To further expand access, Microsoft has awarded 166 Connected Learning Community Grants to organizations that provide those in underserved populations with technology tools to help them achieve their ambitions.
But our commitment does not end there. Microsoft is determined to make technology more accessible to the elderly and disabled. We‘re working on innovations to the user interface as well as creating software that functions more like a personal assistant. Because of these advances, the benefits of technology will be more available to all. By helping people stay connected to their friends, their family and the world around them, we help people not just to better manage their lives, but to better live them.
Providing Resources to Nonprofits Smaller nonprofit organizations often don’t have the resources to realize the full possibility of technology to help them serve others. The Microsoft & NPower National Partnership will strengthen thousands of nonprofits through the increased efficiency and productivity that result from an effective use of technology. Microsoft has committed $25 million in financial and software support to create NPower programs in 12 major cities across the United States. In addition, Microsoft’s Technology Leadership Grants provide large, national nonprofit organizations with substantial software donations to enhance their efficiency.
Contributing to a Diverse Technology Workforce Microsoft is committed to taking a leadership role in expanding opportunities for all communities. Our Working Connections program has networked 63 ,community colleges across the country with one another and with local businesses to provide technology training programs to diverse and underserved populations. In alliance with the National Business & Disability Council, we have created the Able to Work consortium, which is dedicated to increasing employment opportunities for millions of physically challenged individuals. As a result of these efforts, a wider range of people are participating in the opportunities of today’s digital workplace.
Strengthening Communities Around the World
13 Microsoft supports both immediate relief and long term community development programs. Microsoft has supported disaster relief efforts at home and around the world, in places such as New York, Kosovo, Taiwan, India, and Venezuela. When catastrophe strikes, we not only supply cash to meet emergencies, but also look for ways to use technology to improve the capabilities of relief organizations. Internationally, Microsoft has also worked with local governments, other companies, and nonprofit agencies to create Digital Villages. As part of that program, Microsoft has opened eight centers with trained staff and multimedia, Internet-connected PCs. More than 2,000 people have benefited from the Digital Villages in South Africa alone. In the US., the Technology Enriched Communities program allows Microsoft's regional field offices to work closely with community-based nonprofit organizations to develop grant requests for technology resources and assistance.
A 'Tradition of Giving Microsoft is committed to helping people in many ways. For a deeper look at the way we give our support to individuals, organizations, and communities, please visit http://www.microsoft.com/giving.
14 To Shareholders, customers, partners and employees
Twenty years ago, the MS-DOSO-based IBM PC had a tiny processor, a minuscule amount of memory, an even smaller amount of storage, and sold for $1,595 - equivalent to more than $3,000 in today's dollars. Even so, it was a remarkable advance in technology. Today, a PC that is thousands of times more powerful sells for less than $800. But it's not just the power and the price that have changed so dramatically over the last two decades. What's most remarkable is how software advances have made the PC an increasingly indispensable and versatile tool in the workplace, at home and at school.
TV Other electronic advances of this century, like the radio, the and the fax machine - while breakthroughs to be sure - have but one use. Software makes the PC, by comparison, a multi-talented workhorse. Software powers the operations of the world's largest businesses. It enables people to shop for cars, books, music or just about anything else from the convenience of their home. Software facilitates instantaneous communication between people living in Sydney and S6o Paulo. And it helps junior high school students in New York do research for their classes.
Even more amazing are the opportunities ahead. As software grows increasingly dynamic, flexible and responsive, the PC is becoming the hub of an expanding universe of software-connected devices that will enable businesses and people to realize their potential.
2001
Fiscal 2001 was a year of solid customer enthusiasm for Microsoft products and services - all the more significant considering the challenging economic climate and turbulence in the technology industry. Revenues increased by $2.34 billion to $25.3 billion, and operating income increased by $710 million to $11.72 billion.
The Windows family of products turned in a strong performance, led by brisk sales of Windows 2000 Professional. Microsoft SQL ServerfM 2000 and Exchange 2000 Server drove record revenues for Microsoft's rapidly growing enterprise server business. Our productivity and business-services offerings expanded significantly with the launch of Office XP - the newest version of Microsoft's business productivity suite - and the acquisition of Great Plains Software, Inc., a leading supplier of mid-market business applications. Microsoft's consumer software and services business, led by MSN momentum, grew at an impressive 20 percent rate, despite a rugged environment in the online space.
2002
Building on Microsoft .NET - the company's platform for next-generation software and services - fiscal 2002 promises to be a year of continued growth for plicrosoft in five key areas:
Expanding on the power and flexibility of the personal computer and taking the PC experience to the next level of opportunity for customers and the IT industry;
15 Meeting the needs of business customers - from the enterprise to medium and small businesses - with a new generation of mission-critical servers and business applications;
Taking advantage of key market opportunities in the consumer space with emerging businesses such as MSN, devices and games;
Partnering with developers around the globe to create next-generation XML-based softflare applications, solutions and experiences;
Capitalizing on the enormous potential of services delivered over the Internet and across an expanding range of devices.
Major product developments in Fiscal 2002 will include the launch of Windows XP - the most significant new desktop operating system product since Windows 95, and Xbox, Microsoft's future-generation videogame system. We will extend and advance the range and abilities of Microsoft's Windows .NET Server operating systems and .NET Enterprise Server applications, and deploy new solution offerings that help businesses connect with customers, integrate seamlessly with partners, enable employees and extend into new business opportunities. We will see continued adoption of our flagship Office XP suite for knowledge workers, and expansion of our Great Plains@ business applications. The developer community is eagerly anticipating the release of Visual Studio@ .NET, Microsoft's rapid application-development tool for building next-generation Web applications and XML Web services. And we will continue to see significant growth in MSN Internet access and network services.
Microsoft .NET and XML Web Services
In addition to these major new product launches, Microsoft is laying a solid framework for the future with a projected investment of approximately $5 billion in research and development in fiscal 2002. At the center of our R&D efforts is Microsoft .NET, an innovative effort as significant in the development of computing as the graphical user interface and the introduction of the Internet. .NET is Microsoft's platform for a new computing model built around XML Web -;ervices. Just as the Web revolutionized how users interact with content, XML is revolutionizing how applications communicate with data and how computers and devices communicate - by providing a universal data format that lets information be easily shared, adapted or transformed. .NET will create new opportunities for Microsoft and for thousands of developers and industry partners by enabling constellations of PCs, servers, smart devices and Internet-based services to collaborate seamlessly. Businesses will be able to integrate their processes, share data and join forces to offer customers much more dynamic, personalized and productive experiences - across the PC and an expanding universe of devices - than are available today.
In 1995, Microsoft's primary business and revenue stream was from our desktop products - Windows and Office. In 2002, desktop products will still provide the majority of our revenue, although our server and enterprise business is a rapidly growing contributor to our overall revenues, and MSN, Xbox and other emerging businesses continue to expand our foundation for the future. Over the next five years, as
16 we infuse XML Web Services into all our businesses, we see the opportunities for growth continuing. This transformation is key to expanding our revenue stream moving forward.
People
As we expect to grow this year to more than 50,OOa employees, we will continue to put a high priority on developing our next generation of business leaders, and ensuring that we have the appropriate management initiatives and tools to enable and empower a creative work environment. Our attrition rate - at 8 percent annually - is less than half the average of the overall software and IT-services industry. Meanwhile, we continue to explore new ways to foster a progressive work environmer?t that attracts and inspires bright, passionate people who are committed to continuously improving our products, and to creating a collaborative work environment where individual excellence and teamwork is rewarded. Facilitating a diverse workforce at Microsoft and within our industry continues to be an important priority.
The Antitrust Lawsuit
Microsoft is committed to continuing to deliver innovations to customers and new opportunities for partners and the technology industry as a whole. The U.S. Court of Appeals ruling in the antitrust lawsuit significantly narrowed a lower court ruling that threatened to stifle industry innovation. We are continuing to work vigorously to resolve the remaining issues in the case in a manner that will provide clarity to Microsoft and the marketplace while enabling Microsoft to meet the needs of consumers and the industry.
Industry Leadership
As a successful company, we understand that we have a responsibility to provide leadership in the broader industry. Particularly given the difficult economic times, it's important that our industry work together to build on the technological advances that have fueled productivity and growth over the last decade. Our work on .NET, XML Web Services and open industry standards are examples of the deep industry engagement to which Microsoft is dedicated. While vigorous competition will always be a healthy hallmark of our industry, we are also committed to building relationships - with partners and even competitors.
Two years ago, we outlined a set of values that have evolved since Microsoft's founding and which capture the spirit of our business practices (microsoft.com/mscorp/values.htm).As we look to the future, the cultural assets that have been such an important part of Microsoft's success over the past 25 years will continue to evolve. One of the most fundamental of these cultural attributes is our commitment to accountability. Accountability to customers by continuing to improve product satisfaction. Accountability to partners, including smaller businesses and start-ups, who share the vision of affordable, connected computing. Accountability to the technical community through support of resources that enable software developers to create the next generation of products and grow successful businesses. Accountability to shareholders by continuing to invest in growth opportunities for the future, while staying focused on managing our business today.
The Digital Decade
17 Over the past 20 years the personal computer has transformed the way people work, communicate, learn and play. It has stimulated productivity and collaboration in the workplace, connected people around the world, and become a powerful and affordable tool for learning and entertainment.
Yet even greater technological advances are just ahead. XML Web Services will open up new possibilities in e-commerce, business planning, and customer service. Document and workflow management will become simpler and more comprehensive. Technologies such as the advanced speech and handwriting- recognition capabilities of the next-generation Tablet PC will transform the workplace for knowledge workers. Inexpensive, high-capacity disk drives, powerful audio and video capabilities and easy-to-use digital cameras will make the PC an entertainment and information hub for the home.
More than 500 million PCs are already in use around the world, and another 130 million or more will be purchased in calendar 2001 - more than the number of TVs that will likely be purchased this year. Increasingly, the PC is moving to the center of an ever-expanding network of smart, connected devices - from mobile phones to televisions and handheld devices, even household appliances. There has never been a more exciting time in the history of our industry.
The coming digital decade will be a time of enormous opportunity: for consumers, for the technology industry, and for Microsoft as we realize the vision of empowering people through great software - any time, any place and on any device.
Bill Gates Steven A. Ballmer Chairman and Chief Software Architect Chief Executive Officer
18 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30,2001
0 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 0-14238 MICROSOFT CORPORATION Washington 91-1144442 (State of incorporation) (I.R.S. ID)
One Microsoft Wag, Redmond, Washington 98052-6399 (425) 882-8080
Securities registered pursuant to Section 12(b) of the Act: Nane Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports requircd 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 tile such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesm No 0 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 containcd, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10-K or any amendment to this Form I O-K. 0 IO, The aggregate market value of common stock held by non-affiliates ofthe registrant as of Septcmber 2001 was 15258,033.100,664. The number of shares outstanding of the registrant’s common stock as of September IO, 200 1 was 5,401,944,951. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated September 10, 2001 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held November 7, 2001 are incorporated by reference into Part 111.
19 .-._. .
MICROSOFT CORPORATION
FORM 10-K
For The Fiscal Year Ended June 30. 2001 INDEX
Part I Item 1. Business ...... 1
Item 2. Properties ...... 12 Item 3 . Legal Proceedings ...... 12
Item 4 . Submission of Matters to a Vote of Security Holders ...... 12 Executive Officers of the Registrant ...... 13 Part I1 Item 5 . Market for Registrant's Common Stock and Related Stockholder Matters ...... 16 Item 6 . Selected Financial Data ...... ,...... 17 Item 7 . Management's Discussion and Analysis of Results of Operations and Financial Condition ...... 18 Item 7a . Quantitative and Qualitative Disclosures about Market Risk ...... 26 Item 8. Financial Statements and Supplementary Data ...... 27 Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ...... 47 Part 111 Item 10 . Directors of the Registrant ...... 47 Item 11. Executive Compensation ...... :...... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ...... 47 Item 13. Certain Relationships and Related Transactions ...... 47 Part IV Item 14. Exhibits. Financial Statement Schedules. and Reports on Form 8-K ...... 48 Signatures ...... 49 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 system for servers, personal computers (PCs), and intelligent devices; server applications for clienb‘server environments; knowledge worker productivity applications; and software development tools. The Company’s online efforts include the MSNQJnetwork 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 hture 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 structured around the following core groups: the Business Groups; the Worldwide Sales, Marketing, and Services Group; Microsoft Research; and the Operations Group. The Company’s product segments, which are based on the Business Groups, are Desktop and Enterprise Software and Services, Consumer Software, Services, and Devices, Consumer Commerce Investments, and Other. The Desktop and Enterprise Software and Services segment includes the Platforms Group and the Productivity and Business Services Group. The Platforms Group has responsibility for continuing to evolve the Windows platform. In addition, the division includes the .NET Enterprise Server Group, the Developer Tools Division, and the Windows Digital Media Division. The Productivity and Business Services Group drives Microsoft’s broad vision for productivity and business process applications and services. Ths group includes the Office Division, the Emerging Technologies Group, the Business Tools Division, and the Business Applications Group, which includes bCentralTM and Microsoft Great Plains@. The Consumer Software, Services, and Devices segment contains the MSN Business Group; the Personal Services Business Group; and the Home and Retail Division. MSN Business group^ runs the network programming, business development, and worldwide sales and marketing for MSN and Microsoft’s other services efforts, including MSN eShop, the MSNBC venture, Slate@, and MSNTV. The Personal Services Group (PSG) focuses on making it easier for consumers and businesses to connect online and to deliver software as a service on a variety of devices. PSG encompasses Microsoft’s Personal .NET initiative, the Services Platform Division, the Mobility Group, the MSN Internet Access, Consumer Devices Group, and the User Interface Flatform Division. The Home and Retail Division develops and markets learning and entertainment software and the future Xbox game console. The Consumer Commerce Investment segment includes Expedia, Inc., the HomeAdvisorTMonline real estate service, and the MSN CarPointB online automotive service. For financial reporting, revenue from Microsoft Press@ and Hardware is included in the Other segment. The Worldwide Sales, Marketing, and Services Group integrates the activities of Microsoft’s sales and service partners with the needs of Microsoft customers around the world. In addition, the group includes Microsoft Product Support Services, the Network Solutions Group, the Enterprise Partner Group, the Central Marketing Organization, and all three of Microsoft’s major business-sales regions wbrldwide. Microsoft Research works on devising innovative solutions to computer science problems, such as making computers easier to use, designing software for the next ‘generation of hardware, improving the software design process, and investigating the mathematical underpinnings of computer science. The Operations Group is responsible for managing business operations and overall business planning. This includes corporate functions such as finance, administration, human resources, and information technology. PRODUCTS Microsof? has four product segments: Desktop and Enterprise SofMare and Services; Consumer Software. Services. and Devices; Consumer Commerce Investments; and Other. See Notes to Financial Statements for financial information regarding segment reporting.
Desktop and Entermise Software and Services
~~ ~~~~~ ~ ~ ~~ Desktop and Enterprise Software and Services includes Desktop Applications; Desktop Platforms; and Enterprise Software and Services. For segment reporting purposes, Desktop Applications includes revenue from Microsoft Office, Microsoft Project, Microsoft VisioB, Microsoft Great Plains, bCentral; and client access licenses for Windows NT@ Server and Windows 2000 Server, Exchange, and BackOficeB. Desktop Platforms includes revenue from Windows 2000 Professional, Windows NT Workstation, Windows Millennium Edition, Windows 98. and other desktop operating systems. Enterprise Software and Services includes Enterprise Platforms, Server Applications, Developer Tools and Services, and Enterprise Services. Desktop Applications Microsofr OfBce. 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 XP helps users complete common business tasks, including word processing, electronic mail (e-mail), presentations, and data management, with features like smart tags, task panes, integrated e-mail, document recovery, and send for review. Products offered in the various versions include the word processor Microsoft Word, Microsoft Excel spreadsheet, Microsoft Outlook@ personal information management and communication client, Microsoft PowerPointB presentation graphics program, Microsoft Access database management application, and others. Microsoft: Word is a word-processing program designed to create documents such as reports, letters, business plans, and more. 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@ views and graphs. Microsoft Outlook personal information management and communication client provides a single, integrated solution for organizing and managing digital communication tools such as e-mail and instant messaging, along with day-to-day information, including calendars, contacts, task lists, and notes. 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 Publisher business desktop publishing is a program for creating professional-looking marketing and business materials. Other Desktop Application Products. The Company also offers other stand-alone desktop application products. Microsoft Project is a project management program for scheduling, organizing, and analyzing tasks, deadlines, and resources. Microsoft Visio is a diagramming program that helps people visualize and communicate ideas, information, and systems. Most of the applications included in the srious software program suites are also licensed separately. Microsofr Great Plains. Microsoft Great Plains offers a range of integrated business and accounting products, including Dynamics, Solomon, and ehterprise, which deliver broad and deep functionality. Dynamics provides Internet-ready accounting and business management capabilities for small- to mid-sized companies. Solomon offers a full range of e-business and accounting applications for omall- to mid-sized companies. eEnterprise supports mid- sized to larger companies by providing a collaborative environment for information management and sharing. 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 managerncnt 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 LinkExchangeTM 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. Client Access Licenses. A client access license gives a client computer the legal right to access a computer running a Microsoft server product and the services supported by the server. Desktop Platforms Windows XP. Windows XP is the next major version of the Windows operating system and is scheduled for widespread availability in October 2001. Windows. XP extends the personal computing experience by uniting PCs, devices, and services, and brings the solid foundation of Windows 2000 to home PC users, enhancing reliability, security, and performance. Windows XP Home Edition is designed for individuals or families at home and includes experiences for digital media, home networking, and communications. Windows XP Professional is for businesses of all sizes and for people who demand the most out of their computing experience. Windows XP Professional adds remote access, security, performance, manageability, and multilingual features to help users improve productivity and connectivity. Windows 2000 Professional. The successor to Windows NT Workstation, Windows 2000 Professional operating system combines features to create a mainstream operating system for desktop and notebook computing in all organizations. Windows 2000 Professional contains the enhanced business features of Windows 98 such as Plug and Play, easy-to-use user interface, and power management and integrates the strengths of Windows NT Workstation including standards-based security, manageability, and reliability. Windows NT Workstation. A fully integrated, multitasking 32-bit PC operating system, Windows NT Workstation provides security, robustness, and portability. Windows NT Workstation combines the Windows 98 operating system interface and usability features with the reliability and security of Windows NT for the business environment. Windows Millennium Edition. Windows Millennium Edition (Me) operating systern 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 98. The successor to Windows 95, Windows 98 is a personal computer operating system that provides a Web-oriented user interface and better system performance along with easier system diagnostics and maintenance. Windows 98 supports graphcs, sound, and multimedia technologies and provides the ability to easily add and remove peripheral devices and support for Universal Serial Bus (USB). Enterprise Software and Services Windows 2000 Server, Advanced Server, and Datacenter Server. Windows 2000 Server 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 symmetric multiprocessing (SMP) and extended memory support. Windows Datacenter Server operating system is built for large-scale line-of-business and enterprise backend usage and supports server consolidation and enhanced scalability. 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 e-mail servers. The operating system integr;tes Web services such as Microsoft Internet Information Server, a service used to manage intranet and Internet functionality, and Microsoft FrontPage 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. I Microsoft .NET Enterprise Servers. Microsoft .NET Enterprise Servers include Microsoft SQL ServerTM, Exchange Server, Application Center, BizTalkTMServer, Commerce Server, Content Management Server, Host Integration Server, Internet Security and Acceleration Server, Mobile Information Server, and SharePointTMPortal Server. SQL Server is a filly Web-enabled database and data analysis product, providing core support for Extensible Markup Language (XML) and the ability to query across the Internet and beyond the firewall. Exchange Server is a messaging and collaboration server which provides e-mail, group scheduling, task management, and document routing capabilities. Application Center 'is Microsoft's, deployment and management tool for high- availability Web applications built on the Microsoft Windows 2000 operatmg system. BizTalk Server enables companies to rapidly build and deploy integrated business processes within their organizations and with partners. Commerce Server provides a comprehensive set of features for building scalable, user-centric, business-to-consumer. and business-to-business e-commerce sites. Content Management Server is the enterprise Web content management system that enables companies to quickly and efficiently build, deploy, and maintain highly dynamic Internet. intranet, and extranet Web sites. Host Integration Server extends Microsoft Windows to other systems by providing application, data, and network integration. Internet Security and Acceleration Server provides secure, fast, and manageable Internet connectivity. It integrates an extewible, multilayer enterprise firewall and a scalable high- performance Web cache. Mobile Information Server mobile-enables the enterprise, extending the reach of Microsoft
.NET Enterprise applications, enterprise data, and intranet content to the mobile user. ' SharePoint Portal Server extends the capabilities of Microsoft Windows and Microsoft Office by offering knowledge workers 3 powerfd new way to easily organize, find, and share information. It combines the ability to easily create corporate Web portals with document management, content searching, and team collaboration features. Other Servers. Designed for the branch office, department, and medium-sized business, Backoffice Server provides a wide range of infrastructure and application services including directory, networking, Web application, database, messaging and collaboration, Internet proxy and firewall, host integration, and Windows desktop management. Proxy Server is an extensible firewall and Web cache server that provides Internet security while improving network response time and efficiency. Site Server is the powerhl intranet server, optimized for Microsoft Windows NT Server with Internet Information Server, for publishng and finding information easier and faster. Site Server Commerce is a comprehensive Internet commerce server that organizatioiis can use to build and monitor dynamic and cost-effective business sites that take full advantage of the Web. Small Business Server is the flexible network solution designed to help small businesses with up to 50 computers. SNA Server provides connectivity to host data and applications. Systems Management Server helps centrally manage the distributed environment with integrated features, including hardware inventory, software inventory and metering, software distribution and installation, and remote troubleshooting tools. Developer Tools and Services. Software development tools and computer languages allow software developers to write programs in a particular computer language and translate program into a binary machine-readable set of commands that activate and instruct various hardware devices. The Company develops and markets a number of software development environments and language compilers. Microsoft Visual C++@ is the Company's development system for Windows-based application development. The Microsoft Visual Basic@ development system provides easy access to a wide variety of data sources by integrating the Microsoft Access database engine and the ability to take advantage of investments in commercial applications. The Microsoft Visual InterDevO 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++ 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 platfoms. Microsoft Visual Studio@ 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@ database development system, Visual InterDev, and Visual J++. Developers can subscribe to the Microsoft Developer Network (MSDNO) information service and receive periodic updates via CD-ROMs, magazines, and several online information services. In addition, Microsoft receives certification fees through the Microsoft Certified Professional (MCP) program, a program that provides credentials for those who have demonstrated in-depth knowledge of at least one Microsoft product. Enterprise Services. Microsoft Enterprise Services assist organizations with every stage of technology planning, building, deployment, and support. Specializing in real-life IT solutions for the enterprise, Microsoft offers a full range of consulting services for advance technology requirements, including custom solutions services, enterprise application planning, architecture and design services, ind proof-of-concept services. The Company provides product support services aligned to the customer segments, partner segments, and communities. Support offerings include the Alliance program, tailored for large enterprises running mission-critical applications on Microsoft platforms; the Premier program for enterprises; the Authorized Premier Support for all types of businesses who work jointly with Microsoft and Microsoft Gold Certified Partners; the Professional program for IT professionals, developers, and OEMs; and the Personal program for home users, which provides free online self-help resources and paid assisted phone support. Consumer Software. Services. and Devices
Consumer Software, Services, and Devices includes MSN Internet access, MSN network services, PC and online games, Box, learning and productivity software, mobility and embedded systems. MSN Internet Access. 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 includes MSN Explorer, the Internet software from Microsoft that makes it easier to get more from the Web. MSN Internet access subscribers can access their account fiom multiple sources, including a computer, television, Internet appliances, and Personal Data Assistants. MSN Network Services. MSN network service provides services on the Internet, encompassing MSN properties such as Homepage and Search, as well as other services. MSN Hotmail@ is the world’s leading fiee Web-based e- mail service. MSN Messenger Service is a free Internet messaging service that enables users to see when others are online and exchange instant messages with them, WCon MSN Money, located exclusively on MSN. is a complete online personal financial service that combines the award-winning finance tools and content from Microsoft with exclusive investment news and analysis from CNBC. MSN Music provides consumers with one place online to find old favorites, as well as discover new music, and delivers a hgh quality listening experience. MSN eShop is a one-stop online shopping resource. PC and Online Games. The Company offers a line of entertainment products from classic software games to online games, simulations, sport products, and strategy games. Microsoft Flight Simulator is a popular aircraft flight simulation product. Other games include Combat Flight Simulator, Age of Empires@, MechWarriorTM,Microsoft Links@, and other sports and action titles. Zone.com is a gaming community on the Internet allowing multiplayer gaming competitions of Microsoft’s popular CD-ROM games and classic card, board, and puzzle games. Xbox. Microsoft %oxTM, scheduled for North America release in November 2001, is Microsoft’s future-generation video game console system that delivers hgh quality graphics and audio gameplay experiences and will ultimately enable new online gaming scenarios. Learning and Productivity Sofiware. Learning titles include Microsoft EncartaB multimedia encyclopedia and Microsoft Bookshelf33 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 gives users fast, easy access to reference resources. Titles for children include My Personal Tutor, a comprehensive, grade-based learning suite with TutorAssist 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@. 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. Micro:-oft Money offers leading tools and resources to conduct a wide range of financial activities. The Works Suite provides B comprehensive collection of software, including Microsoft Works, Microsoft Word, Microsoft Money, Microsoft Encarta encyclopedia, Microsoft Picture It!@ Publishing, and Microsoft Streets & Trips.
MobiZity and Embedded Systems. Microsoft develops a number of software platforms for mobile computing form factors. Products such as Pocket PC, Microsoft Mobile Explorer, and Microsoft Smartphone platform (currently codenamed Stinger) are designed to enable a variety of mobile scenarios. Microsoft’s embedded offerings include two embedded operating systems, Microsoft Windows CE and Microsoft Windows NT Embedded, as well as device specific solutions. Microsoft Windows CE, a robust real-time embedded operating system, is targeted at small footprint, mobile 32-bit devices. Microsoft Windows NT Embedded, based on the desktop and server versions of Microsoft’s operating systems, is targeted at higher-end embedded products and devices. Both embedded operating systems offer integrated tool sets to enable embedded system developers to quickly create sophisticated embedded device and application solutions. Microsoft Mobile Explorer enables secure mobile access to corporate or personal e-mail, corporate networks, and the Internet when connected to a wireless network. Microsoft Mobile Information Server is a scalable and reliable mobile applications server that provides enterprise customers and mobile operators with a rich platform for extending .NET Enterprise application and securely delivering real-time, wireless data to mobile devices. Consumer Commerce In vestments Consumer Commerce Investments include Expedia, Inc., the HomeAdvisor online real estate service, and the CarPoint online automotive service. Expedia, Inc. Expedia, Inc. operates Expedia.com a leading online travel service in the United States with localized versions in Canada, Germany, and the United Kingdom. Expedia.com provides air, car, and hotel booking, vacation package and cruise offerings, destination information, and mapping. On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a controlling interest in Expedia through the purchase of up to 37.5 million shares, approximately 75% of the current outstanding shilres. If holders of more than 37.5 million Expedia shares elect to sell their shares to USA, there will be a pro rata reduction among all electing shareholders. Microsoft has agreed to transfer all of its 33.7 million shares and warrants, subject to pro-ration. It is expected thai the transaction will close by December 3 1,2001. HomeAdvisor online real estate service. The HomeAdvisor online real estate service is a complete guide to the home-buying process and provides comprehensive tools for finding homes and loans on the Internet. HomeAdvisor provides users with the information and knowledge needed to take control of the home-buying process. This includes customized search features, worksheets and calculators, and editorial content and home-buying advice. CarPoint online automotive service. The CarPoint online automotive service is the leading online automotive marketplace, visited by more than 7 million consumers each month. With details on more than 10,000 car models and 100,000 used vehcles, users can research and compare cars of virtually every make and model, identify local dealers, and receive instructions for post-purchase service and maintenance.
Other Hardware. The Company develops and markets several PC input devices including the Microsoft IntelliMouse@ family of hand-held pointing devices that facilitate using the PC. The Company also markets several types of keyboards including the Microsoft Natural@ Keyboard, an ergonomically designed keyboard. Microsoft sells various Microsoft Sidewinder@ game controllers and force feedback joysticks with realistic performance technology to use with PC games. Microsoft Press. Microsoft Press offers comprehensive learning and tralning resources to help new users, power users, and professionals get the most from Microsoft technology through books, CDs, self-paced training kits, and videos that are created to accommodate different learning styles and preferences. Microsoft Press books are authored by professional and technical writers, both by Microsoft employees and independent authors.
EQUITYINVESTMENTS 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 news and infomiation 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 1 entures. Microsoft owns 49 percent of Avanade Inc., a joint venture with Accenture Ltd, which offers solutions and services based on Windows 2000. PRODUCTDEVELOPMENT
The software industry is characterized by rapid technological change, whch 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. Most of the Company’s software products are developed internally. The Company also purchases technology, licenses intellectual property rights, and oversees thd-party development and localization of certain products. Internal development enables Microsoft to maintain closer technical control over its products and gives the Company the freedom to designate which modifications and enhancements are most important and when they should be . implemented. The Company has created a substantial body of proprietary development tools an? 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 internaliy. 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 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 1999, 2000, and 2001, the Company spent $2.97 billion, $3.77 billion, and $4.38 billion, respectively, on product research and development activities excluding f‘unding of joint venture activity. Those amounts represented 15.0%, 16.4%, and 17.3%, respectively, of revenue in each of those years. The Company is committed to continue high expenditures for research and product development. Microsoft .NET is Microsoft’s platform for XML Web services. XML Web services allow applications to communicate and share data over the Internet, regardless of operating system or programming language. The Microsoft .NET platform includes a comprehensive family of products, built on XML and Internet industry standards, which provide for each aspect of developing, managing, using, and experiencing XML Web services. There are five areas where Microsoft is building the .NET platform today: Tools, Servers, XML Web Services, Clients, and .NET Experiences. In the Tools area, Visual Studio .NET and the Microsoft .NET framework supply a complete solution for developers to build, deploy, and run XML Web services. They maximize the performance, reliability, and security of XML Web services. The .NET Enterprjse Servers, including the Windows 2000 Server family, make up Microsoft .NET’S server infrastructure for deploying, managing, and orchestrating XML Web services. Designed with mission-critical performance in mind, they provide enterprises with the agility they need to integrate their systems, applications, and partners through XML Web services, and the flexibility to adapt to changing business requirements. In addition to developers creating XML Web services, Microsoft is creating a core set of building block services that perform routine tasks and act as the backbone for developers to build upon. The first set of XML Web services being built, codenamed “Hailstorm”, is a group of user-centric services oriented around people, rather than specific devices, networks, or applications. Hailstorm is based upon the Microsoft Passport user authentication system. With Hailstorm, users receive relevant information, as they need it, delivered to the devices they are using, and based on preferences they have established. Clients are PCs, laptops, workstations, phones, handheld computers, Tablet PCs, game consoles, and other smart devices. These smart clients and devices use software that supports XML Web services, which enable users to access their data regardless of the location, type, and number of clients used. Smart clients and devices leverage XML Web services to create .NETexperiences that allow users to access information across the Internet and from stand-alone applications in an integrated way. Some of the products that Microsoft is transitioning into .NET experiences are Office, MSN, bCentral, .and Visual Studio .NE.T. MANUFACTURING
Microsoft contracts out most of its manufacturing activity to third parties. Outside manufacturers produce various retail software packaged products and hardware. There are other custom manufacturers Microsoft could use in the event outsourced manufacturing becomes unavailable from current vendors. The Company’s CD-ROM manufacturing facilities are located in Puerto Rico. The Company has multiple sources for raw materials, supplies, and components and is often able to acquire component parts and materials on a volume discount basis. Quality control tests are performed on purchased parts, CD-ROMs, and other products.
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. Microsoft Licensing Incorporated (MSLI), a wholly-owned subsidiary in Reno, Nevada, manages the Company’s original equipment manufacturer (OEM) and certain organizational licensing operations.
MARKETINGAND DISTRIBUTION The Company’s sales and marketing group seeks to build long-term relationships with customers of Microsoft. 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 and resellers include Ingram Micro, Tech Data, Software Spectrum, Corporate Software & Technology, SOFTBANK, Software House International, ASAP Software Express, and Tech Pacific Group. 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 multinatiimal 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-sized 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. CertijZed Parfners. Microsoft Certified Partners are ind,ependent companies that offer their clients leading-edge technology through consulting, deployment, remote and on-site maintenance, helpdesk support, packaged software applications, hosting services, training, and more. Microsoft Certified Partners encompass a broad range of expertise and vendor affiliations and have experience ranging from networking, e-commerce, collaboration, business intelligence, and other,leading edge disciplines. International Sales Sites. The Company has established marketing and/or support subsidiaries in more than 80 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 m international countries. 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.
OEM Channel
Microsoft operating systems are licensed primarily to OEMs under agreements that grant the OEh3 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, eMachnes, Fujitsu, Fujitsu Siemens Computers, Gateway, Hewlett-Packard, IBM, Micron, NEC, Samsung, Sony, and Toshba. 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.
COSTOMERS The Company’s customers include consumers, small- and medium-sized organizations, enterprises, 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. The 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 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 Time Warner, are collaborating with one another on various initiatives directed at competing with Microsoft. These initiatives relate in part to efforts to move software from individual PCs to centrally managed servers, which would present significant challenges to the Company’s historical business model. Other competitive collaborative efforts include the development of new platform technologies that are intended to replicate much of the value of Microsoft Windows operating systems. New computing form factors, including non-PC information devices, are gaining popularity and competing with PCs running Microsoft’s software products.
Microsoft faces formidable competition in these new areas and in all areas of its current business 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 c’reates 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. The Company’s competitive position may be adversely affected by one or more of the following factors in the future, particularly in view of the fast pace of technological change in the computing industry.
Desktop and Enterprise Software and Services The Company’s competitors include many software application vendors, such as IBM (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. Sun Microsystems’ Star Office is also very aggressive with its pricing, offering a free download from the Web or nominal charge for a CD. Additionally, Web-based application hosting services provide an alternative to PC-based applications such as Microsoft Office.
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 their own computers. Many of these operating system software products are also licensed to third-party OEMs for preinstallation on their computers. Microsoft’s operating system products compete with UNIX-based operating systems from a wide range of companies, including IBM, Hewleff-Packard, Sun Microsystems, and others. Variants of UNIX run on a wide variety of computer platforms and have gained increasing acceptance as desktop operating systems. With increased attention toward open source software, the Linux operating system has gained increasing acceptance as well. Several computer manufacturers preinstall Linux on PC servers and many leading sohvare 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 Time Warner and Sun Microsystems.
The Company competes in the business of providing enterprise-wide computing solutions with several competitors who enjoy a larger share of sales and larger installed bases. Many companies offer operating system software for mainframes and midrange computers, including IBM, 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 clienuserver environments include Oracle, IBM, Computer Associates, Sybase, and Informix. There are also several software vendors who offer connectivity servers. As mentioned above, there are numerous companies and organizations that offer Internet and intranet server software, which compete against the Company’s bcsiness systems. Additionally, IBM has a large installed base of Lotus Notes and cc:Mail, both of which compete with the Company’s collaboration and e-mail products.
The Company’s developer products compete against offerings from Borland, Macromedia, Oracle, Sun Microsystems, Sybase, Symantec, and other companies.
Consumer Sofmare, Services. and Devices Microsoft’s online services network, MSN, faces fomidable competition from AOL Time Warner (including its CompuServe unit), Yahoo!, and a vast array of Web sitks 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 Time Warner, Yahoo!, Excite, Lycos, Infoseek, AltaVista, and many others. . The Company’s MSNBC joint ventures face considerable 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. The Company’s Consumer Group continues to see consQlidation across the various entertainment and productivity segments in whch Microsoft competes. Competitors include Vivendi (Havas), Intuit, Electronic Arts, The Learning Company, Infogrammes, and Logitech. Still other competitors own branded content, such as Disney and LucasArts.
Additionally, PC-based games and the Company’s hture Xbox compete and will compete head-to-head against games created for proprietary systems such as the Nintendo GameCube and the Sony Playstation. Game developers like Electronic Arts, Namco, Midway, Activision, Konami, THQ,to name a few, are both partners and competitors in the games software development segment.
Microsoft faces many competitors in the Mobile Devices space, including Palm, Symbian, Nokia, and Openwave. The embedded operating system market is hghly fragmented with many competitive offerings. Key competitors include Wind River and versions of embeddable Linux from commercial Linux vendors such as Red Hat, Lineo. and Monta Vista. The largest competitor remains in-house operating systems developed by device manufacturers. However, this is changing as more device builders opt for commercial offerings as connectivity and richer features are required in devices.
Consumer Commerce Investments In the United States, Expedia, Inc. competes with traditional travel distribution channels and online travel services such as Travelocity.com, Hotel Reservations Network, Priceline.com, CheapTickets.com, Biztravel.com, Worldres.com, and Trip.com. Expedia also competes with supplier-owned sites such as United.com, Delta.com, and Marriott.com. In addition, two new competitors owned by various airlines, Orbitz and Hotwire, emerged in fiscal year 2001. Internationally, Expedia competes with a different set of participants in each market. Microsoft faces many competitors in the online real estate service space, including AOL’s Ilouse and Home channel and Homestore. The Company also faces many competitors in the online automotive service space, including Autobytel, CarsDirect, AOL autos, and Yahoo! autos. -Other PC input devices face substantial competition from computer manufacturers, since computers are typically sold with a keyboard and mouse, and other manufacturers of these devices. Microsoft Press competes in the retail book and eLearning markets with publishers that also create content on Microsoft technologies. A few of the retail competitors are Pearson, WROX, Sybex, and Wiley. The major eLearning competitors are Smartforce and NetG.
EMPLOYEES As of June 30, 2001, the Company employed approximately 47,600 people on a full-time basis. 33,000 in the United States and 14,600 internationally. Of the total, 19,400 were in product research and development, 22,500 in sales, marketing, and support, 1,900 in manufacturing and distribution, and 3,800 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 coi-tinue 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 7.9 The Company’s corporate offices consist of approximately million square feet of office building space located in King County, Washington. The Company is constructing three buildings with approximately 720,000 square feet of space that will be occupied in the Fall of 2001. The Company owns 4.8 million square feet of corporate campus space situated on slightly more than 300 acres of land and leases approximately 3.1 million square feet around the Puget Sound region. To accommodate expansion needs the Company has an option to purchase 150 acres of land in Issaquah, Washington, which can accommodate 2.95 million square feet of additional office space. The Company leases many sites domestically totaling approximately 3.0 mllion square feet of office building space. This includes the recent acquisition of the Great Plains facilities whch totaled 425,000 square feet. The Company leases many sites internationally totaling approximately 4.1 million square feet. The Company’s European operations center and localization division leases a 382,000 square-foot campus in Dublin, Ireland. 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 office building space leased in the following locations: Tokyo, Japan 343,000 square feet; Unterschleissheixn, Germany 253,000 square feet; United Kingdom campus 242,000 square feet; Les Ulis, France 229,000 square feet; and Beijing, China 115,000 square feet.
The Company’s facilities are fully used for current operations of all segments and suitable additional space is available to accommodate expansion needs. item 3. Legal Proceedings See Notes to Financial Statementeontingencies (Item 8) for information regarding legal proceedings. Item 4. Submission of Matters to a Vote of Securit), Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001. Executive Oflicers of the Registrant The executive officers of Microsoft as of September 10, 2001 were as follows:
Name Age Position with the Company William H. Gates, I11 45 Chairman of the Board; Chief Software Archtect Steven A. Ballmer 45 Chief Executive Officer Richard E. Belluzzo 47 President; Chief Operating Officer James E. Allchin 49 Group Vice President, Platforms Orlando Ayala 45 Group Vice President, Worldwide Sales, Marketing, and Services Robert J. (Robbie) Bach 39 Senior Vice President, Games Douglas J. Burgum 45 Senior Vice President, Business Solutions; President, Great Plains Division David W. Cole 39 Senior Vice President, Services Platform Division John G. Connors 42 Senior Vice President; Chef Financial Officer Jean-Philippe Courtois 41 Senior Vice President; President, Microsoft Europe, Middle East, and Africa Jon Stephan DeVaan 40 Senior Vice President, TV Division Richard P. Emerson 39 Senior Vice President, Corporate Development and Strategy Paul Flessner 42 Senior Vice President, .NET Enterprise Servers Kevin R. Johnson 40 Senior Vice President, US.Sales. Marketing, and Services Robert L. Muglia 41 Group Vice President, Personal Services Group Craig J. Mundie 52 Senior Vice President; Chief Technical Officer, Advanced Strategies and Policy William H. Neukom 59 Executive Vice President, Law and Corporate Affairs; Secretary Jeffrey S. Raikes 43 Group Vice President, Productivity and Business Services Richard F. Rashid 49 Senior Vice President, Research Steven J. Sinofsky 36 Senior Vice President. Office Brian Valentine 41 Senior Vice President, Windows David Vaskevitch 48 Senior Vice President; Chief Technical Officer, Business Platforni Deborah N. Willingham 45 Senior Vice President, Human Resources Mr. Gates co-founded Microsoft in 1975 and served as its Chiel' Executive Officer from the time the original partnership was incorporated in 198 1 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates has served as Chairman of the Board since the Company's incorporation. Mr. Ballmer was named Chief Executive Officer and a director of the Company in January 2000. He had been President from July 1998 to February 2001. Previously, 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. Belluzzo was named President and Chief Operating Officer in February 2001. He had been Group Vice President, Personal Services and Devices since August 2000. He joined Microsoft as Group Vice President, Consumer and Commerce 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., Mr. 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. 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, Worldwide 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. Bach was named Senior Vice President, Games in March 2000. He had been Vice President, Home and Retail since March 1999. Before holding that position, he had been Vice President, Leaining, Entertainment and Productivity since 1996. Mr. Bach joined Microsoft in 1988. Mr. Burgum joined the Company upon Microsoft’s acquisition of Great Plains Software, Inc. in April 2001. Mr. Burgum became Great Plains’ first outside investor in March 1983. He was named President of Great Plains in 1984 and subsequently named Chairman and Chief Executive Officer. Mr. Cole was named Senior Vice President, Services Platform Division 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. Previously, he was Vice President, Web Client and Consumer Experience and Vice President, Internet Client and Collaboration. Mr. Cole joined Microsoft in 1986. Mr. Connors was named Senior Vice President and Chief Financial Officer in December 1999. He had been Vice President, Enterprise since March 1999. Mr. Connors had been Vice President, Information Technology, and Chief Information Officer since July 1996. He joined Microsoft in 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 Division in December 1!)99. 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. Emerson joined Microsoft in November 2000 as Senior Vice President, Corporate Development and Strategy. Prior to joining Microsoft, he was Managing Director and co-head of Technology and Telecommunications Advisory Services at international investment bank Lazard Freres & Co. LLC. He spent 12 years in San Francisco and New York with Lazard and Morgan Stanley, specializing in advising clients in the technology and telecommunications sectors on mergers, acquisitions, and strategic partnerships. Mr. Flessner was named Senior Vice President, .NET Enterprise Servers in December 1999. He had been Vice President, Database and Data Access. Since joining the Company, Mr. Flessner’s primary responsibilities have been the development of Microsoft’s database business. He assumed responsibility for the engineering of Microsoft SQL Server in 1995. He joined Microsoft in 1994. Mr. Johnson was named Senior Vice President, U.S. Sales, Marketing, and Services in August 2001. He had been Vice President, U.S. Sales, Marketing and Services. Mr. Johnson was named Vice President, Product Support Services in July 1998. He joined Microsoft in 1992. Mr. Muglia was named Group Vice President, Personal SFrvices Group 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. Mundie was named Senior Vice President and Chief Technical Officer, Advanced Strategies and Policy in August 2001. He was named Senior Vice President, Consumer Platforms in February 1996. He was named Senior Vice President, Consumer Systems in May 1995 and had been Vice President, Advanced Consumer Technology since July 1993. He joined Microsoft as General Manager, Advanced Consumer Technology in December 1992. Mr. Neukom was named 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. Raikes was named Group Vice President, Productivity and Business Services in August 2000. He had been Group Vice President, Sales and Support since July 1998. Before holding that position, he had been Group Vice President, Sales and Marketing since July 1996. 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 198 1. Mr. Rashd 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 hs responsibility with each subsequent release of the desktop suite. He joined Microsoft in July 1989. Mr. Valentine was named Senior Vice President, Windows in Decembcr 1999. He had been Vice President, Business and Enterprise since March 1999. He had been Vice President, Windows since December 1998. Before managing the Windows group, Mr. Valentine managed the server applications division and had been responsible for the Exchange product unit. He joined Microsoft in 1987. Mr. Vaskevitch was named Senior Vice President and Chief Technical Officer, Business Platform in August 2001. He was named Senior Vice President, Business Applications in March 2000. He had been Senior Vice President, Developer since December 1999. Before holding that position, he had been Vice President, Distributed Applications Platform. He joined Microsoft in 1986.
Ms. Willingham was named Senior Vice President, Human Resources in February 2001. She had been Vice President, Human Resources since April 2000. Ms. Willingham had been Vice President, Business and Enterprise Division Marketing and was responsible for Windows operating system client and server marketing strategy and training, as well as for providing centralized marketing services for the Consumer Windows Marketing and Streaming Media Marketing teams. She joined Microsoft in 1993. PART II
Item 5. Market for Registrant S Common Stock and Related Stockholder Matters The Company’s common stock is traded on The Nasdaq Stock Market under the symbol MSFT. On July 3 1, 2001, there were 112,001 registered holders of record of the Company’s common stock. The Company has not paid cash dividends on its common stock. The hgh and low common stock prices per share were as follows:
Quarter Ended Sept. 30 Dec. 31 Mar. 31 June 30 Year 2000 Common stock price per share: High $100.75 $119.94 $118.63 $96.50 $119.94 Low 8 1.63 84.38 88.13 60.38 60.38
~ 2001 Common stock price per share: High $82.00 $70.88 $64.69 $73.68 $82.00 Low 60.31 41.50 43.38 51.94 41.50
On April 11, 2001, the Company closed the acquisition of substantially ‘all of the assets of icommunicate Holding, Inc., a Delaware corporation (‘Wommunicate”). Promptly thereafter, the Company issued an aggregate of 272,093 of its common shares to iCommunicate, which were subsequently distributed to iCommunicate’s eleven shareholders in the liquidation of icommunicate. All of the 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. On May 4, 2001, the Company issued an aggregate of 926,077 of its common shares pursuant to the merger of a subsidiary of the Company with Ensemble Studios Corporation, a Delaware corporation (“Ensemble”), owned by 45 shareholders. All of the shares issued in this transaction were issued in a non-public offering pursuant to an exemption from the registration requirements of the 1933 Act, under Section 4(2) of the 1933 Act. The above described sales were made without general solicitation or advertising. The Company has filed a Registration Statement on Form S-3 covering the resale of such securities issued pursuant to such acquisitions. 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 certain liabilities of icommunicate and in connection with the merger with Ensemble. Item 6. Selected Financial Data
FiNANCiAL HiGHLiGHTS (In millions, except earnings per share)
Year Ended June 30 1997 1998 1999 2000 2001(11 Revenue $11,936 $15.262 $19,747 $22.956 $25.296 Income before accounting change 3,454 4,490 7,785 9,42 1 7,721 Net income 3,454 4,490 7,785 9,42 1 7,346 Diluted earnings per share before accounting change 0.66 0.84 1.42 1.70 1.38 Diluted earnings per share 0.66 0.84 1.42 1.70 1.32 Cash and short-term investments 8,966 13,927 17,236 23,798 31,600 Total assets 14,387 22,357 38,625 52,150 59,257 Stockholders’ equity 10,777 16,627 28.438 41,368 47,289
(1) Fiscal year 2001 includes an unfavorable cumulative effect of accounting change of $375 million or $0.06 per diluted share and $3.92 billion (pre-tax) in impairments ofcertain investments, primarily cable and telecommunication investments. Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
RESULTSOF OPERATIONS FOR 1999, 2000, A@ 2001 Microsoft develops, manufactures, licenses, and suppoqs 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 clienVserver 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. Management’s Discussion and Analysis contains statements that ate forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed below under “Issues and Uncertainties.”
Revenue The Company’s revenue growth rate was 29% in fiscal 1999, 16% in fiscal 2000, and 10% in fiscal 2001. Revenue growth in fiscal 2001 was driven primarily by licensing of Microsoft Windows 2000 Professional, Microsoft SQL Server, and the other .NET Enterprise Servers. Consumer Software, Services, and Devices revenue also grew strongly. Partially offsetting those items was flat revenue growth from Windows Millennium Edition (Windows Me) and Windows 98 operating systems, reflecting the slowdown in consumer PC shipments and a higher mix of Windows 2000 Professional and Windows NT Workstatibn. Revenue growth in fiscal 2000 was driven by strong licensing of Microsoft Windows NT Workstation, Windoys 2000 Professional, Windows NT Server, Windows 2000 Server, Microsoft Office 2000, and SQL Server. Consdmer Software, Services, and Devices revenue 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 1999 reflected the continued adoption of Windows operating systems and Microsoft Office. In addition, the Company’s estimate for future product returns was reduced by $250 million in 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 Trclnsnctions. requires companies to use the average sales price of each undelivered element of software arrangements to unbundle revenue. Prior authoritative accounting 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 Lycle of Windows should be extended from two years to three years.
Product Revenue Microsoft has four segments: Desktop and Enterprise Software and Services; Consumer Software, Services, and Devices; Consumer Commerce Investments: and Other. The Management Discussion and Analysis presentation of revenue differs from that reported under the Company’s Gegnient Information appearing in the Notes to Financial Statements because reconciling items are allocated to those segments. Desktop and Enterprise Sofiare and Services Desktop and Enterprise Software and Services revenue was $17.84 billion, $20.40 billion, and $22.41 billion in 1999, 2000, and 2001. Desktop and Enterprise Software and Services includes Desktop Applications; Desktop Platforms; and Enterprise Software and Services. .
Desktop Applications revenue was $7.77 billion, $9.30 billion, and $9.54 billion in 1999, 2000, and 2001. Desktop Applications includes revenue from Microsoft Office; Microsoft Project; Visio; client access licenses (CALs) for Windows NT Server and Windows 2000 Server, Exchange, and Backoffice; Microsoft Great Plains; and bCentral. In fiscal 2001, revenue from client access licenses increased 14% reflecting strong licensing growth of Windows NT Server and Windows 2000 Server CALs. Office revenue growth was flat during the year. In fiscal 2000 and 1999, revenue growth from Microsoft Office integrated suites, including the Premium, Professional, Small Business, and Standard Editions were very solid.
Desktop Platforms revenue was $6.74 billion, $7.02 billion, and $8.04 billion in 1999, 2000, and 2001. Desktop Platforms includes revenue from Windows 2000 Professional, Windows NT Workstation, Windows Me, Windows 98, and other desktop operating systems. Fiscal 2001 revenue growth reflected the strong adoption of Windows 2000 Professional, partially offset by flat revenue growth from Windows Me and Windows 98 operating systems, reflecting the slowdown in consumer PC shipments and a hgher mix of Windows 2000 Professional and Windows NT Workstation. In fiscal 2000, Desktop Platforms 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 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.
Enterprise Software and Services revenue was $3.33 billion, $4.08 billion, and $4.83 billion in 1999, 2000, and 200 1. Enterprise Software and Services includes Enterprise Platforms, Server Applications, Developer Tools and Services, and Enterprise Services. As a result of the continued adoption of Microsoft’s .NET Enterprise Server offerings in fiscal 2001, Server Applications revenue increased 3 1% versus the prior year. Enterprise Services revenue, representing consulting and product support services, was up 34% compared to fiscal 2000. Enterprise Platforms, whch includes Windows 2000 Server and Windows NT Server operating systems, increased 10% while revenue from Developer Tools and Services was flat with the prior year. In fiscal 2000, Enterprise Platforms revenue growth was particularly strong led by increased adoption by customers of Windows NT Server and Windows 2000 Server. Revenue from Server Applications grew strongly, largely due to the strong success of SQL Server 7.0. Software Developer Tools and Services revenue declined, due to increased suite licensing versus stand- alone licenses, and the lack of a release upgrade of the Visual Studio development system. In fiscal 1999, the revenue growth rate for Windows NT Server was healthy. Revenue from Server Applications grew strongly, reflecting, in part, the release of SQL Server 7.0. The Visual Studio 6.0 development system drove healthy Developer Tools and Services revenue growth. Consulting services revenue rose substantially.
Consumer Sofmare, Services, and Devices Consumer Software, Services, and Devices revenue was $1.19 billioa, $1.63 billion, and $1.95 billion in 1999, 2000, and 2001. Consumer Software, Services, and Devices includes MSN Internet access; MSN network service; WebTV Internet access and services; PC and online games; learning and productivity software; mobile and wireless devices; and embedded systems. In fiscal 2001, revenue from MSN network services grew strongly in light of the decline in the online advertising market. MSN Internet access revenue also gr :w solidly as a result of an increased subscriber base, partially offset by a decline in the average revenue per subscriber due to a larger mix of subscribers contracted under rebate programs. Revenue from embedded systems grew strongly from the prior year, while learning and productivity software revenue and PC and online games revenue declined, reflecting sofmess in the overall consumer market. 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, strong sell-through of entertainment software produced robust revenue growth. IQ fiscal 1999, online advertising revenue rose substantially and Internet access revenue increased moderately. Consumer Commerce Investments Consumer Commerce Investments revenue was $62 million, $182 million, and $299 million in 1999. 2000. and 2001. Consumer Commerce Investments include Expedia, Inc., the HomeAdvisor online real estate service, and the CarPoint online automotive service. Acquisitions of Travelscape.com and VacationSpot.com by Expedia, Inc.. and increased product offerings from Expedia led to the strong revenue growth in fiscal 2001. The increased overall reach of all properties led to the strong revenue growth in fiscal 2000 and 1999.
On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a controlling interest in Expedia through the purchase of up to 37.5 million shares, approximately 75% of the current outstanding shares. If holders of more than 37.5 million Expedia shares elect to sell their shares to USA, there will be a pro rata reduction among all electing shareholders. Microsoft has agreed to transfer all of its 33.7 million shares and warrants, subject to pro- ration. It is expected that the transaction will close by December 3 1,2001.
Other Other revenue was $653 million, $754 million, and $630 million in 1999, 2000, and 2001. Other primarily includes Hardware and Microsoft Press. Lower sales of gaming devices and other hardware peripherals as a result of weakness in the consumer market caused the decline in revenue in fiscal 2001. Continued success of the Company’s new hardware device offerings led to the revenue growth in fiscal 2000. Revenue from hardware devices and Microsoft Press was relatively flat in fiscal 1999.
Distribution Channels Microsoft distributes its products primarily through OEM licenses, organizational licenses, online services and products, 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 regions: 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.
OEM revenue was $6.40 billion in 1999, $7.01 billion in 2000, and $7.86 billion in 2001. Although total licenses were impacted by a slowdown in PC shpments in fiscal 2001, the mix of the higher priced Windows 2000 Professional and Windows NT Workstation in the OEM channel increased substantially resulting in higher average revenue per license. The relatively low growth rate in fiscal 2000 was due to lower business PC shipment growth, 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 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 fiscal 1999, PC shipment growth coupled with an increased penetration of hgher value 32-bitoperating systems drove the OEM revenue increases. South Pacific and Americas Region revenue was $7.25 billion, $8.33 billion, and $9.52 billion in 1999, 2000, and 2001. In fiscal 2001, revenue growth, principally in the United States, was led by strong licensing of Windows 2000 Professional and the family of .NETEnterprise Servers, particularlv SQL Server 2000 and Exchange 2000 Server. Revenue from Enterprise services and MSN subscription and services grew strongly. 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 P merica 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.
Europe, Middle East, and Africa Region revenue was $4.33 billion. $5.02 billion, and $4.86 billion in 1999, 2000, and 2001. In fiscal 2001, weakening local currencies negatively impacted translated revenue compared to the prior year. Revenue in the region would have increased 6% if foreign exchange rates were constant with those of the prior year. Revenue from Windows 2000 Professional and the .NET Enterprise Server family of products was very healthy. 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 especially strong. Revenue grswth, 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. Asia Region revenue was $1.78 billion in 1999, $2.60 billion in 2000, and $3.06 billion in 2001. In fiscal 2001, the region’s growth rate reflected strong revenue from localized versions of Microsoft Ofice 2000 and Microsoft Office XP, especially the Office Personal suite. The growth was also attributable to Windows 2000 Professional and .NET Server applications licensing. Revenue growth was particularly strong in Korea and the greater China region. resulting from advantageous economic conditions as well as successful anti-piracy efforts. 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, whle revenue grew very strongly in Korea. The Company’s operating results are affected by foreign exchange rates. Approximately 29%, 30%, arld 27% of the Company’s revenue was collected in foreign currencies during 1999, 2000, and 2001. 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 rate‘s is partially mitigated.
Operating Expenses Cost of Revenue Cost of revenue as a percent of revenue was 14.3% in 1999, 13.1% in 2000, and 13.7% in 2001. In fiscal 2001, higher support and service costs associated with the MSN Internet access and MSN network services were partially offset by the lower relative costs associated with organizational licensing and the drop in the mix of packaged product versus the prior year. Cost of revenue in fiscal 2000 reflected lower costs associated with WebTV Networks’ operations, partially offset by the growth in hardware peripherals costs. Cost of revenue as a percentage of revenue decreased in fiscal 1999 primarily due to the trend in mix shift to OEM and organizational licenses. Additionally, cost of revenue in 1999 was positively impacted by a reduction in estimates of obsolete inventory and other manufacturing costs of $67 million.
Research and Development Microsoft continued to invest heavily in the future by funding research and development (R&D). In fiscal 2001, the increase in R&D expense was the result of higher headcomt-related costs and investments in new product initiatives. 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.
Sales and Marketing In fiscal 2001, sales and marketing expenses as a percentage of revenue increased due to higher relative headcount- related costs, higher marketing and sales expenses associated with MSN, the Microsoft Agility advertising campaign, and other new sales initiatives. 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.
General and Administrative In fiscal 2001, general and administrative costs decreased due to a charge related to the settlement of the lawsuit with Caldera, Inc. recorded in fiscal 2000. Excluding this charge, genrral and administrative expenses in fiscal 2001 increased from the prior year due to higher headcount-related costs and legal fees. For fiscal 2000, besides the settlement of the lawsuit, general and administrative expenses also reflected increased legal fees and certain employee stock option-related expenses. The increase in fiscal year 1999 was attributable to higher legal fees, settlement costs, and headcount-related costs necessary to support the Company’s expanding operations.
Non-operating Items, Investment Income/(Loss), and Income Taxes Losses on equity investees and other incorporates Microsoft’s share of income or loss from the MSNBC entities, Avanade, Wireless Knowledge, StarBand Communications, and other investments accounted for using the equity method. The increase in losses on equity investees and other in fiscal 2001 reflects an increase in the number of such investments during the year. In fiscal 2000 and 1999, losses on equity investees decreased reflecting smaller losses from the MSNBC entities.
In fiscal 2001, the Company reported an investment loss of $36 million, a decrease in investment income of $3.36 billion versus fiscal 2000. Net recognized losses were $2.22 billion in fiscal 2001, reflecting $4.80 billion in impairments of certain investments, primarily in the cable and telecommunication industries, and $592 million of net losses attributable to derivative instruments. These losses were partially offset by higher net gains from the sales of investments, including a gain from Microsoft’s investment in Titus Communications (which was merged with Jupiter Telecommunications) and the closing of the sale of .Transpoint to CheckFree Holdings Corp. Interest and dividend income increased $591 million from the prior year, reflecting a larger investment portfolio. In fiscal years 2000 and 1999, investment income increased primarily as a result of a larger investment portfolio generated by cash from operations coupled with realized gains from the sale of securities.
The effective tax rate for fiscal 2001 was 33%. The effective tax rate for fiscal 2000 was 34%. Excluding the impact of the gain on the sale of Softimage, Inc., the effective tax rate for fiscal 1999 was 35%.
Accounting Change
Effective July 1, 2000, Microsoft adopted Statement of Financial Accounting Standards (SFAS) 133, Accountiizg for Derivative instruments and Hedging Activities, whch establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationshps or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings.
The adoption of SFAS 133 resulted in a cumulative pre-tax reduction to income of $560 million ($375 million after- tax) and a cumulative pre-tax reduction to OCI of $1 12 million ($75 million after-tax). The reduction to income was mostly attributable to a loss of approximately $300 million reclassified from OCI for the time‘value of options and a loss of approximately $250 million reclassified ftom OCI for derivatives not designated as hedging instruments. The reduction to OCI was mostly attributable to losses of approximately $670 million on cash flow hedges offset by the reclassifications out of OCI of the approximately $300 million loss for the time value of options and the approximately $250 million loss for derivative instruments not designated as hedging instruments.
FINANCIAL CONDITION The Company’s cash and short-term investment portfolio totaled $3 1.60 billion at June 30, 2001. 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 for immediate cash needs.
Cash flow from operations was $13.42 billion in fiscal 2001, an increase of $2.00 billion from the prior year. The increase was primarily attributable to the growth in revenue and other changes in working capital, partially offset by the decrease in the stock option income tax benefit, reflecting decreased stock option exercises by employees. Cash used for financing was $5.59 billion in fiscal 2001, an increase of T3.39 billion from the prior year. The increase primarily reflects the repurchase of put warrants in fiscal 2001, compared to the sale of put warrants in the prior fiscal year, as well as an increase in common stock repurchased. All outstanding put warrants were either retired or exercised during fiscal 2001. During fiscal 2001, the Company repurchased 89.0 million shares. Cash used for investing was $8.71 billion in fiscal 2001, a decrease of $658 million from the prior year.
In fiscal 2000, cash flow from operations was $1 1.43 billion, a decrease of $720 million from the prior year, reflecting working capital changes partially offset by the increase in the stock option income tax benefit. Cash used for financing was $2.19 billion in fiscal 2000, an increase of $1.33 billion from the prior year, reflecting an increase in common stock repurchased versus the prior year. During fiscal 2000, the Company repurchased 55.2 million shares. Cash used for investing was $9.39 billion in fiscal 2000, a decrease of $808 million from the prior year. In fiscal 1999, cash flow from operations was $12.15 billion, an increase of $3.78 billion from the prior year, reflecting the growth in revenue and the increase in the stock option income tax benefit. Cash used for financing was $862 million in fiscal 1999, a decrease of $137 million from the prior year. During fiscal 1999, the Company repurchased 44.9 million shares. Cash used for investing was $10.20 billion in fiscal 1909, an increase of $3.00 billion from the prior year, reflecting the growth in the investment portfolio. Microsoft has no material long-term debt. Stockholders’ equity at June 30, 2001 was $47.29 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 $181 million on June 30, 2001. Cash will also be used for strategic opportunities.
In addition, cash will be used to repurchase common stock to provide shares for employee stock option and purchase plans. Since fiscal 1990, Microsoft has repurchased 854 million common shares while 2.12 billion shares were issued under the Company’s employee stock option and burchase plans. The market value of all outstanding stock options was $66 billion as of June 30,2001. During December 1996, Microsoft issued 12.5 inillion rhares of 2.75% convertible exchangeable preferred stock. 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 should 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 needs and to fund the share repurchase program. Microsoft has not paid cash dividends on its common stock.
RECENTLYISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued SFAS 141, Business Combinations, and SFAS 142. Goodwill and Other intangible Assets.- SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company plans to early adopt SFAS 142 in fiscal 2002 and does not expect any impairment of goodwill upon adoption. Goodwill amortization was approximately $300 million in fiscal 200 1 and approximately $225 million in fiscal 2000. lSSUES 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 market share may depend upon the Company’s ability to satisfy customer requirements, enhance existing products, develop and introduce new products and achieve market acceptance of such products. Ths process grows more challenging as the pace of change continues to accelerate. Open source software, new. computing devices, new microprocessor architectures, the Internet, and Web-based computing models are among the competitive challenges the Company must meet. If Microsoft does not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-efficient manner, the Company’s business growth will suffer and demand for its products will decrease.
Future fniriatives The Company plans to continue to make significant investments in software research and development including Microsoft .NET, “HailStorm”, %ox, wireless technologies, digital devices, television, and small business. It is anticipated that these investments in research and development will increase over historical spending levels. 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 add revenue growth. Overall market demand for PCs can significantly impact Microsoft’s 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 use 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 Development The 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. The Company anticipates that Windows XP and Xbox will be released in fiscal 2002. Delays in either product may adversely affect revenue and net income.
Prices The competitive factors described above may require Microsoft ‘to lower product prices to meet competition, reducing the Company’s revenue and net income.
Earnings Process An increasingly higher percentage of the Company’s revenue is suaject to ratable recognition, which impacts the timing of revenue and earnings recognition. Ratable revenue recognition may be required for additional products, depending on specific license terms and conditions. Also, maintenance and new subscription programs 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 require the Company to pay higher salaries and other cash compensation. 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 cost 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 priclng 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. Unfavorable 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; difliculties 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.
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 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 eighteen 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 1 and 2 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. The Judgment was stayed pending an appeal. On June 28, 2001, the U.S. Court of Appeals for the District of Columbia Circuit affiled in part, reversed in part, and vacated the Judgment in its entirety and remanded the case to the District Court for a new trial on one Section 1 claim and for entry of a new judgment consistent with its ruling. In its ruling, the Court of Appeals substantially narrowed the bases of liability found by the District Court, but affirmed some of the District Court’s conclusions that Microsoft had violated Section 2. On September 6, 2001, the plaintiffs announced that on remand they will not ask the Court to break Microsoft up, that they will seek imposition of conduct remedies, and that they will not retry the one Section 1 claim returned to the District Court by the Court of Appeals. On August 7, 2001, Microsoft petitioned the Supreme Court for a writ of certiorari to review the appellate court’s ruling concerning its disqualification of the District Court judge. Microsoft may petition the Supreme Court to review other aspects of the appellate court’s decision after final judgment is entered. In response to the Court of Appeal’s decision, Microsoft has modified the terms of its agreements with computer manufacturers to permit them to remove Internet Explorer icons from Windows when the manufacturer wants to promote an alternative browser, and modifying other provisions of the agreements. While the Company cannot predict with certainty the final outcome of this matter, its resolution may result in additional changes to the Company’s business practices and could affect how the Company develops and markets new products and services. In addition, while the Court of Appeals ruling vacated the remedies portion of the Judgment in its entirety, it is possible the District Court could enter a new judgment providing for certain remedies that would have a material adverse effect on the Company if the Company cannot obtain relief from such provisions on appeal. A large number of antitrust class action lawsuits have been initiated against Microsoft. These cases allege that Microsoft has competed unfairly and unlawfully monopdized alleged markets for operating system 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 2002 may not approach the level attained in prior years. Because of the fixed nature of a significant portion of operating expenses, coupled with the possibility of slower revenue growth, operating margins in 2002 may decrease from those in 2001. In addition, with the anticipated introduction of Xbox in fiscal 2001. cost of revenue as a percentage of revenue may increase versus prior years.
Item 7a. Quantitative and Qualitative Disclosures about 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. Tlle 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 catsstrophc 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, 2000 and June 30, 2001 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 denwninated investments and accounts receivable at June 30, 2000 and June 30, 2001, and would not exceed $21 1 million and $363 million at June 30, 2000 and June 30, 2001 for interest-sensitive investments or $1.02 billion and $520 million at June 30, 2000 and June 30, 2001 for equity securities. Item 8. Financial Statements and Supplementan, Data INCOMESTATEMENTS (In millions, except earnings per share)
Year Ended June 30 1999 2000 2001 Revenue $19,747 $22,956 $25,296 Operating expenses: Cost of revenue 2,814 3,002 3,455 Research and development 2,970 3,772 - 4,379 Sales and marketing 3,238 4,126 4,885 General and administrative 715 1,050 857 Total operating expenses 9,737 11,950 13,576 Operating income 10,010 11,006 11,720 Losses on equity investees and other (70) (57) (159) Investment income/(loss) 1,951 3,326 (36) Income before income taxes 11,891 14,275 11,525 Provision for income taxes 4,106 4,854 3,804 Income before accounting change 7,785 9,42 1 7,721 Cumulative effect of accounting change (net of income taxes of $185) - - (375) Net income $ 7,785 $ 9,421 $ 7,346
Basic earnings per share: Before accounting change S; 1.54 $ 1.81 $ 1.45 Cumulative effect of accounting change - - (0.07) $ 1.54 $ 1.81 $ 1.38
Diluted earnings per share: Before accounting change $ 1.42 $ 1.70 $ 1.38 Cumulative effect of accounting change - - (0.06) $ 1.42 S 1.70 $ 1.32
Weighted average shares outstanding: Basic 5,028 5,189 .5,341 Diluted I 5,482 5,536 5.574
See accompanying notes. BALANCESHEETS (In millions) June 30 2000 2001 Assets Current assets: Cash and equivalents $ 4,846 $ 3,922 Short-term investments 18,952 27,678 Total cash and short-term investments 23,798 31.600 Accounts receivable 3.250 3,671 Deferred income taxes 1,708 1,949 Other 1,552 2,417
~ Total current assets 30.308 39,637 Property and equipment, net 1,903 2,309 Equity and other investments 17,726 14,141 Other assets 2,213 3,170 Total assets $52,150 $59,257
Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,083 $ 1,188 Accrued compensation 557 742 Income taxes 585 1,468 Unearned revenue 4,816 5,614 Other 2,714 2,120 Total current liabilities 9.755 11,132 Deferred income taxes 1.027 836 Commitments and contingencies Stockholders’ equity: Common stock and paid-in capital-shares authorized 12,000; shares issued and outstanding 5,283 and 5,383 23,195 28,390 Retained earnings, including accumulated other comprehensive income of $1,527 and $587 18,173 18,899 Total stockholders’ eauity 4 1.368 47.289 Total liabilities and stockholders’ equity $52,150 $59.251
See accompanying notes. CASHFLOWS STATEMENTS (In millions)
Year Ended June 30 1999 2000 2001 Operations Net income $ 7,785 $ 9,421 $ 7,346 Cumulative effect of accounting change, net of tax - - 375
Depreciation, amortization, and other noncash items 926 1,250 ' 1,536 Net recognized (gains)/losses on investments (803) (1,732) 2,221 Stock option income tax benefits 3,107 5,535 2,066
' Deferred income taxes (650) (425) (420) Unearned revenue 5,877 6,177 6,970 Recognition of unearned revenue (4,526) (5,600) (6,369) Accounts receivable (687) (944) (418j Other current assets (235) (775) (482)
Other long-term assets (117) (864) (330) I Other current liabilities 1,469 (617) 92 7 Net cash from operations 12,146 11,426 13,422 Financing Common stock issued 1,350 2,245 1,620 Common stock repurchased (2,950) (4,896) (6,074) Sales/(repurchases) of put warrants 766 472 (1,367) Preferred stock dividends (28) (13) - Other, net - - 235 Net cash used for financing (862) (2,192) (5,586) Investing Additions to property and equipment (583) (879) (1,103) Purchases of investments (34,686) (42.290) (66,346) Maturities of investments 3,063 4,025 5,867 Sales of investments 2 1,006 29.752 52,848
Net cash used for investing (10 200) (9,392) (8,734) Net change in cash and equivalents 1,084 (158) (898) Effect of exchange rates on cash and equivalents 52 29 (26) Cash and equivalents, beginning of year 3,839 4.975 4,846 Cash and equivalents, end of year !$ 4,975 $ 4.846 fi 3,922
See accompanying notes. STOCKHOLDERS'EQUITY STATEMENTS (in millions)
Year Ended June 30 1999 2000 2001 Convertible preferred stock Balance, beginning of year $ 980 $ 980 !3 - (980) Conversion of preferred to common stock - - Balance, end of year 980 Common stock and paid-in capital Balance, beginning ofyear 8,025 13,844 23,195 Common stock issued 2,338 3,554 5,154 Common stock repurchased (64) (210) (394) Sales/(repurchases) ofput warrants 766 472 (1,367) Stock option income tax benefits 3,107 5,535 2,066 Other, net (328) - (264) Balance, end ofyear 13,844 23,195 28,390 Retained earnings Balance, beginning ofyear 7,622 13,614 18,173 Net income 7,785 9,42 1 7,346 Other comprehensive income: Cumulative effect of accounting change - - (75) Net gains on derivative instruments - - 634 Net unrealized investment gains/(losses) 1,052 (283) (1,460)
Translation adjustments and other 69 23 ' (39) Comprehensive income 8,906 9,161 6,406 Preferred stock dividends (28) (13) - Immaterial pooling of interests - 97 - Common stock repurchased (2,886) (4,686) (5,680) Balance, end of year 13,614 18.173 18,899 Total stockholders' equity $28,438 $41,368 $47.289
~ ~~
See accompanying notes.
I NOTESTO FINANCIALSTATEMENTS
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. Intercompany transactions and balances have been eliminated. Equity investments in whch Microsoft owns at least 20% of the voting securities are accounted for using the equity method, except for investments in which the Company is not able to exercise significant influence over the investee, in which case, the cost method of accounting is used. Issuances of shares by a subsidiary are accounted for as capital transactions.
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 fiom 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.
Revenue Recognition 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. Statemeit of Financial Accounting Standards (SFAS) 86, Accounting for the Costs of Computer Sofhvare to Be Sold, Leased. or Othenvise Marketed, does not materially affect the Company.
Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $804 million in 1999, $1.23 billion in 2000, and $1.36 billion in 2001.
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 value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income (OCI). 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 (excluding other-than-temporary losses) are reflected in other comprehensive income. All other investments, excluding those accounted for usmg the equity method, are recorded at cost.
Microsoft lends certain fixed income and equity securities to enhance investment income. Collateral andior security interest is determined based upon the underlying security and the creditworthmess of the borrower. The fair value of collateral that Microsoft is permitted to sell or repledge was $499 million at June 30, 2001. There was no collateral that Microsoft was permitted to sell or repledge at June 30,2000.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments. In the event that the cost of an investment exceeds its fair value, the Company evaluates, among other factors, the duration and extent to which the fair value is less than cost; the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and the Company’s intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. In 2001, the Company recognized $4.80 billion in impairments of certain investments, primarily in the cable and telecommunication industries.
The Company uses derivative instruments to manage exposures to foreign currency, security price, and interest rate risks. The Company’s objectives for holding derivatives are to minimize these risks using the most effective methods to eliminate or reduce the impact of these exposures.
Foreign Currency Risk Certain forecasted transactions and assets are exposed to foreign currency risk. 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. Options used to hedge a portion of forecasted international revenue for up to three years in the future are designated as cash flow hedging instruments. Options and forwards not designated as hedging instruments under SFAS 133 are also used to hedge the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies.
Securities Price Risk Strategic equity investments are subject to market price risk. From time to time, the Company uses.and designates options to hedge fair values and cash flows on certain equity securities. The security, or forecasted sale thereof, selected for hedging is determined ’ by market conditions, up-front costs, and other relevant factors. Once established, the hedges are not dynamically managed or traded, and are generally not removed until maturity.
Interest Rate Risk Fixed-income securities are subject to interest rate risk. The fixed-income portfolio is diversified and consists primarily of investment grade securities to minimize credit risk. The. Company routinely uses options, not designated as hedging instruments, to hedge its exposure to interest rate risk in the event of a catastrophic increase in interest rates.
Other Derivatives In addition, the Company may invest in warrants to purchase securities of other companies as a strategic investment. Warrants that can be net share settled are deemed derivative financial insmiments and are not designated as hedging instruments.
For options designated either as fair value or cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. I 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. Computer software developed or obtained for internal use is depreciated using the straight-line method over the shorter of the estimated life of the software or three years.
Intangible Assets Goodwill and other intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from three to seven years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of usefbl lives or that indicate that an impairment exists.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company plans to early adopt SFAS 142 in fiscal 2002 and does not expect any impairment of goodwill upon adoption. Goodwill amortization was approximately $300 million in fiscal 2001 and approximately $225 million in fiscal 2000.
Reclassifications Certain reclassifications have been made for consistent presentation. Accounting Change Effective July 1, 2000, the Company adopted SFAS 133, Accounting for Derivative Instluments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS 133 on July 1, 2000, resulted in a cumulative pre-tax reduction to income of $560 million ($375 million after-tax) and a cumulative pre-tax reduction to OCI of $1 12 million ($75 million after-tax). The reduction to income was mostly attributable to a loss of approximately $300 million reclassified from OCI for the time value of options and a loss of approximately $250 million reclassified from OCI for derivatives not designated as hedging instruments. The reduction to OCI was mostly attributable to losses of approximately $670 million on cash flow hedges offset by reclassifications out of OCI of the approximately $300 million loss for the time value of options and the approximately $250 million loss for derivative instruments not designated as hedging instruments. The net derivative losses included in OCI as of July 1, 2000 were reclassified into earnings during the twelve months ended June 30,2001.
The change in accounting from the adoption of SFAS 133 did not materially affect net income in 2001
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 American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-9, Modification ofSUP 97-2. With Respect to’ Certain Transactions, 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 tw~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, 2000 and 2001, Desktop Applications unearned revenue was $1.84 billion and $2.19 billion. Desktop Platforms unearned revenue was $2.34 billion and $2.59 billion. Enterprise Software and Services unearned revenue was $433 million and $413 million. Unearned revenue associated with Consumer Software, Services, and Devices, and Other was $200 million and $427 million at June 30,2000 and 2001.
Cash and Short-Term Investments In Millions / June 30 2000 2001 Cash and equivalents: Cash $ 849 $1,145 Commercial paper 1,986 894 Certificates of deposit 1,017 286 U.S. government and agency securities 729 400 Corporate notes and bonds 265 1,130 Municipal securities - 67 Cash and equivalents 4,846 3,922 Short-term investments: Commercial paper 612 638 U.S. government and agency securities 7,104 7,322 Corporate notes and bonds 9,473 17,321 Municipal securities 1,113 1,703 Certificates of deposit 650 694 Short-term investments 18,952 27,678 Cash and short-term investments $23,798 $31,600
As of June 30, 2000 and 2001, cost approximated market for all ciassifications of cash and short-terni investments. Realized gains and (losses) from cash and short-term investments were $150 million and $(131) million in 1999, $80 million and $(226) million in 2000, and $541 million and $(369) million in 2001.
Property and Equipment In Millions / June 30 2000 2001 Land $ 176 $ 185 Buildings 1,387 1,584 Computer equipment and software 1,909 2,431 Other 842 1,075 Property and equipment-at cost 4,314 5,275 Accumulated depreciation (2,411) (2.966) Property and equipment-net $ 1,903 $2.309 During 1999, 2000, and 2001, depreciation expense, of which the majority related to computer equipment, was $483 rmllion, $668 rmllion, and $764 rmllion. Equity and Other Investments
Cost Unrealized Unrealized Recorded In Millions / June 30,2000 Basis Gains Losses Basis Debt securities recorded at market, maturing: Within one year $ 498 $27 $ - $ 525 Between 2 and 10 years 388 11 (31 396 Between 10 and 15 years 775 14 (93) 696 Beyond 15 years 4,745 - (933) 3.8 12 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
Cost Unrealized Unrealized Recorded In Millions /June 30,2001 Basis Cains Losses Basis Debt securities recorded at market, maturing: Within one year $ 500 $- $- $ 500 Between 2 and 10 years 643 12 (3) 652 Between 10 and 15 years 513 - (9) 504 Beyond 15 years 4,754 - (829) 3.925 Debt securities recorded at market 6,410 12 (841) 5.581 Common stock and warrants 5,555 2,030 (285) 7,300 Preferred stock 881 - - 881 Other investments 379 - - 379 Equity and other investments $13,225 $2,042 $(1.126) $14,141 Debt securities include corporate and govemment 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, 2000 and 2001, the estimated fair value of these investments in excess of their recorded basis was $2.70 billion and $161 million, based on publicly available market information or other estimates determined by management. Realized gains and (losses) from equity and other investments (excluding impairments discussed previously) were $786 million and $(2) mllion in 1999, $1.94 billion and $( 10) million in 2000, and $3.03 billion and $(23) million in 2001.
Derivatives For the twelve months ended June 30, 2001, investment income ixluded a net unrealized loss of $592 million, comprised of a $214 million gain for changes in the time vglue of options for fair value hedges, $21 1 million loss for changes in the time value of options for cash flow hedges, and $595 nillion loss for changes in the fair value of derivative instruments not designated as hedging instruments.
Derivative gains and losses included in OCI are reclassified into earnings at the time forecasted revenue or the sale of an equity investment is recognized. During the twelve months ended June 30, 2001, $214 million of derivative gains were reclassified to revenue and $4 16 million of derivative losses were reclassified to investment income/(loss). The derivative losses reclassified to investment incomei(1oss) were offset by gains on the item being hedged. The Company estimates that $144 million of net derivative gains included in other comprehensive income will be reclassified into earnings within the next twelve months.
For instruments designated as hedges, hedge ineffectiveness, determined in accordance with SFAS 133, had no impact on earnings for the twelve months ended June 30, 2001. No fair value hedges or cash flow hedges were derecognized or discontinued for the twelve months ended June 30,2001. Investment Income/(Loss) The components of investment income/(loss) are as follows:
In Millions / Year Ended June 30 1999 2000 2001 Dividends $ 118 $ 363 $ 377 Interest 1,030 1,23 1 1,808 Net recognized gains/(losses) on investments 803 1,732 (2.22 1) Investment income/( loss) $1,951 $3,326 $ (36)
Income Taxes The provision for income taxes consisted of:
In Millions / Year Ended June 30 1999 2000 2001 Current taxes: U.S. and state $4,027 $4,744 $3,243 International 28 1 535 51 4 Current taxes 4,308 5,279 3,757 Deferred taxes (202) (425) 47 Provision for income taxes $4.106 $4,854 $3.804 U.S. and international components of income before income taxes were:
In Millions / Year Ended June 30 1999 2000 2001 U.S. $10,649 $11,860 $9,189 International 1,242 2,415 2,336 Income before income taxes $11,891 $14,275 $11,525 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. In 2001, the effective tax rate was 33.0%, and included the effect of a 3.1% reduction from the U.S. statutory rate for tax credits and a 1.1% increase for other Items. The components of the differences between the U.S. statutory tax rate and the Company’s effective tax rate in 1999 were not significant. Deferred income taxes were:
In Millions / June 30 2000 2001 Deferred income tax assets: Revenue items $ 1,320 $ 1,469 Expense items 2,122 1,761 Deferred income tax assets 3,442 3,230 Deferred income tax liabilities: Unrealized gain on investments (874) (395) International earnings (1,766) (1,667) Other (121) 8 (55) Deferred income tax liabilities $(2,761) $(2,117)
During fiscal 2001, the U.S. Tax Court issued an adverse ruling which is being appealed to the gthCircuit Court of Appeals for taxes assessed in 1990 and 1991. Income taxes, except for 1990 and 1991 assessments, have been settled with the Internal Revenue Service (IRS) for all years through 1994. The IRS is exanlining the Company’s 1995 and 1996 U.S. income tax returns. Management believes any adjushnents which may be required will not be material to the financial statements. Income taxes paid were $874 million in 1999, $800 million in 2000, and $1.3 billion in 200 1. Convertible Preferred Stock During 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred stock. The Company’s convertible preferred stock matured on December 15, 1999. Each preferred share was converted into 1.1273 common shares.
Common Stock Shares of common stock outstanding were as follows:
In Millions / Year Ended June 30 1999 2000 2001 Balance, beginning of year 4,940 5,109 5,283 Issued 213 229 189 Repurchased (44) (55) (89) Balance, end of year 5,109 5,283 5,383
Repurchase Program The Company repurchases 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 tiwg 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. In 2001, the Company entered into a structured stock repurchase transaction giving it the right to acquire 5.1 million of its shares (2.55 million shares in October 2001 and 2.55 million shares in June 2002) in exchange for an up-front net payment of $264 million.
Put Warrants To enhance its stock repurchase program, Microsoft sold put warrants to independent third parties. These put warrants entitled the holders to sell shares of Microsoft common stock to the Company on certain dates at specified prices. In the third quarter of fiscal 2001, the Company issued 2.8 million shares to settle a portion of the outstanding put warrants. During fiscal 2001, all the remaining outstanding put warrants were either retired or exercised. Other Comprehensive Income The changes in the components of other comprehensive income were as follows: In Millions / Year Ended June 30 1999 2000 2001 Cumulative effect of accounting change, net of tax effect of $(37) $- $- $ (75) Net gain on derivative instruments: Unrealized gains, net of tax effect of $246 - - 499 Reclassification adjustment for losses included in net income, net of tax effect of $67 - - 135 Net gain on derivative instruments - - 634 Net unrealized investment gains/(losses): Unrealized holding gains/(losses), net of tax effect of $772 in 1996, $248 in 2000, and $(351) in 2001 1,432 53 1 (1.200) Reclassification adjustment for gains included in net income, net of tax effect of $(205) in 1999, $(420) in 2000, and $( 128) in 2001 (380) (814) (260) Net unrealized investment gains/( losses) 1,052 (283) (1,460) Translation adjustments and other 69 23 (39) Other comprehensive income/( loss) $1,121 $(260) S(940)
The components of accumulated other comprehensive were: In Millions / June 30 2000 2001 Net gains on derivative instruments $- $ 177 Net unrealized investment gains 1,676 598 Translation adjustments and other (149) (1 88) Accumulated other ComDrehensive income $1.527 $ 587
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 1.999, 2000, and 2001, employees purchased 2.7 million, 2.5 million, and 5.7 million shares at average prices of $52.59, $72.38. and $36.87 per share. At June 30, 2001, 62.7 million shares were reserved for hture 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 participant’s earnings. Matching contributions were $49 million, $65 million, and $86 million in 1999, 2000, and 2001.
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 between 1995 and 2000 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. Options granted during 2001vest over four and one-half years and expire 10 years from the date of grant. At June 30, 2001, options for 331 million shares were vested and 550 million shares were available for fiture grants under the plans. Stock options outstanding were as follows: In Millions, Except Per Share Amounts Price per Share Weighted Shares Range Average 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 4 1.23 Granted 224 41.50- 80.00 60.84 Exercised (123) 0.59- 85.81 11.13 Canceled (35) 13.83 - 119.13 63.57 Balance, June 30,2001 898 0.56 - 119.13 49.54
For various price ranges, weighted average characteristics of outstanding stock options at June 30, 2001 were as follows: In Millions, Except Per Share Amounts Outstanding Options Exercisable Options
Range of Remaining Weighted Weighted Average Exercise Prices Shares Life (Years) Average Price Shares Price $0.56- $5.97 73 1.6 $4.75 67 $4.71 5.98- 13.62 75 1.3 11.01 72 11.02 13.63- 29.80 110 3.0 15.06 92 14.92 29.81- 43.62 84 3.6 32.20 52 32.08 43.63- 60.00 191 7.8 55.82 25 53.17 60.01- 83.28 210 6.1 68.28 11 69.20 83.29-119.13 155 5.5 89.91 12 87.39 The Company follows Accounting Principles Board Opinion 25, Accounting for Stock issued to Emplovees. to An account for stock option and employee stock purchase plans. 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 1999, 2000, and 2001 would have been as follows:
In Millions, Except Per Share Amounts Year Ended June 30 1999 2000 2001
Reported Pro Forma Reported Pro Forma Reported Pro Forma Revenue $19,747. $19,747 $22,956 $22,956 $25,296 $25,296 Operating expenses: Cost of revenue 2,814 3,013 3,002 3.277 3,455 3,775 Research and development 2,970 3,479 3,772 4,814 4,379 6,106 Sales and marketing 3,238 3,445 4,126 4,468 4,885 5,888 General and admmistrative 715 84 1 1,050 1,284 857 1,184 Total operating expenses 9,737 10,778 11,950 13,843 13,576 16,953 Operating income 10,010 8,969 11,006 9,113 11,720 8,343 Losses on equity investees and other (70) (70) (57) (57) (159) (1 59) Investment income/(loss) 1,951 1,95 1 3,326 3,326 (36) (36) Income before income taxes 11,891 10,850 14,275 12,382 11,525 8,148 Provision for income taxes 4,106 3,741 4,854 4.2 10 3,804 2,689 Income before accounting change 7,785 7,109 9,42 1 8,172 7,72 1 5,459 + - - - Cumulative effect of accounting change (375) (375) Net income $7.785 $ 7.109 S 9.421 $ 8.172 Si 7.346 !% 5.084 Basic earnings per share $ 1.54 $ 1.41 $ 1.81 $ 1.57 $ 1.38 $ 0.95 Diluted earnings per share $ 1.42 S 1.30 $ 1.70 $ 1.48 $ 1.32 $ 0.91
The weighted average Black-Scholes value of options granted under the stock option plans during 1999, 2000, and 2001 was $20.90, $36.67, and $29.31. Value was estimated using weighted average expected life of 5.0 years in 1999, 6.2 years in 2000, and 6.4 years in 2001, no dividends, volatility of .32 in 1999, .33 in 2000. and .39 in 2001, and risk-free interest rates of 4.9%, 6.2%, and 5.3% in 1999, 2000, and 200 1. 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-convened” method, assumed net-share settlement of common stock structured repurchases, outstanding put warrants using the “reverse treasury stock” method, and outstanding stock options using the “treasury stock” method. The components of basic and diluted earnings per share were as follows: In Millions, Except Per Share Amounts Year Ended June 30 1999 2000 2001 Income before accounting change $7,785 $9,421 $7,721 Preferred stock dividends 28 13 - Net income available for common shareholders $7,757 $9,408 $7,721
Weighted average outstanding shares of common stock 5,028 5,189 5,341 Dilutive effect of: Common stock under structured repurchases 13 - - Put warrants - 2 21 Preferred stock 16 7 - Employee stock options 425 338 212 Common stock and common stock equivalents 5.482 5,536 5.574
Earnings per share before accounting change: Basic $1.54 $1.81 $1.45 Diluted $1.42 $1.70 $1.38
Operational Transactions 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 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. In July 2000, the Company acquired an interest in Telewest Corn inications plc for approximately $2.6 billion in stock. Telewest is a leading broadband cable communications operator in the United Kingdom. In April 2001, the Company acquired Great Plains Software, Inc. for approximately $1.1 billion in stock. Great Plains is a leading supplier of mid-market business applications. The acquisition was accounted for by the purchase method and operating results for Great Plains subsequent to the date of acquisition are included with those of Microsoft. ‘Thepro forma impact of Great Plains’ operating results prior to the date of acquisition was not material. Commitments The Company has operating leases for most US. and international sales and support offices and certain equipment. Rental expense for operating leases was $135 million, $201 million, and $281 million in 1999, 2000, and 2001. Future minimum rental commitments under noncancellable leases, in millions of dollars, are: 2002, $218; 2003, $210; 2004, $185; 2005, $162; 2006, $140; and thereafter, $430. Microsoft has committed $181 million for constructing new buildings and $46 million for the manufacturing of products. In addition, the Company has. guaranteed $420 million in debt of its equity investees. Contingencies On January 23, 2001, Microsoft and Sun Microsystems, Inc. (“Sun”) entered into a Settlement Agreement. Under the terms of the public agreement, the parties agreed to a dismissal with prejudice of all pending claims in the suit brought by Sun against Microsoft on October 7, 1997 in the U.S. District Court for the Northern District of California. Sun also granted to Microsoft a non-exclusive license to continue distribution of certain Sun technology for a seyen year period. Microsoft further agreed to pay Sun $20 million. The Company is a defendant in US.v. Microsof, a lawsuit filed by the Antitrust Division of the U.S.Department of . Justice (DOJ) and a group of eighteen 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 1 and 2 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. The Judgment was stayed pending an appeal. On June 28, 2001, the US. Court of Appeals for the District of Columbia Circuit affirmed in part, reversed in part, and vacated the Judgment in its entirety and remanded the case to the District Court for a new trial on one Section 1claim and for entry of a new judgment consistent with its ruling. In its ruling, the Court of Appeals substantially narrowed the bases of liability found by the District Court, but affirmed some of the District Court’s conclusions that Microsoft had violated Section 2. On September 6, 2001. the plaintiffs announced that on remand they will not ask the Court to break Microsoft up, that they will seek imposition of conduct remedies, and that they will not retry the one Section 1claim returned to the District Court by the Court of Appeals. On August 7, 2001, Microsoft petitioned the Supreme Court for a writ of certiorari to review the appellate court’s ruling concerning its disqualification of the District Court judge. Microsoft may petition the Supreme Court to review other aspects of the appellate court’s decision after final judgment is entered.
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 Microsoft conipetitors claim they need to interoperate filly with Windows 2000 clients and servers and has engaged in discriminatory licensing of such technology. The remedies sought, though not fully defined, include mandatory disclosure of Microsoft Windows operating system technology and imposition of fines. Microsoft denies the European Commission’s allegations and intends to contest the proceedings vigorously.
A large number of overcharge class action lawsuits have been initiated against Microsoft. These cases allege that Microsoft has competed unfairly and unlawfklly 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. To date, Microsoft has won dismissals of all claims for damages by indirect purchasers under Federal law and in 15 separate state court proceedings. Claims on behalf of foreign purchasers have also been dismissed. Plaintiffs have appealed most of these rulings. Whle no trials or other proceedings have been held concerning any liability issues, courts in several states have ruled that these cases may proceed as class actiom, while one court has denied class certification status to the claims in that state proceeding. Two purported class action employment discrimination cases are pending against Microsoft, Donaldson v. Microsoji, a class case consolidating three separately filed class action complaints filed in October 2000 and February 2001 in Federal court in Seattle, Washington, and Jackson v. Microsofi, an amendment to an existing case alleging class claims filed on January 3, 2001 in Federal court in Washington, D.C. Microsoft’s motion to transfer the Jackson case to Federal court in Seattle was granted on May 3, ‘2001. The Donnlson plaintiffs purport to represent a nationwide class of current and former African American and female Microsoft employees and seek injunctive relief, an unspecified amount of compensatory and punitive damages, and attorneys’ fees. The Jackson plaintiffs purport to represent a nationwide class of current and former African American Microsoft employees and seeks injunctive relief, $5 billion in compensatory and punitive damages, and attorneys’ fees. Both cases allege that Microsoft’s compensation, evaluation, and promotion policies are discriminatory with respect to the plaintiffs in violation of Title VI1 of the 1964 Civil Rights Act and 42 U.S.C. 4 1981. Microsoft denies the allegations and is vigorously defending both 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. 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 In Millions / Year Ended June 30 Desktop and Consumer Enterprise Software, Consumer Software and Services, and Commerce Reconciling Services Devices Investments Other Amounts Consolidated 1999 Revenue $17,810 $1,148 $62 $593 $134 $19.747 2000 Revenue $20,410 $1,654 $182 $691 $19 $22,956 Operating income/( loss) 13,210 ( 1:090) (60) 86 (1.140) 11,006 2001 Revenue $22,720 $1,961 $522 $652 $(559) $25,296 Operating incomel(1oss) 14,261 (1,446) (222) 97 (750) 11,720
Desktop and Enterprise Software and Services Revenue:
In Millions / Year Ended June 30 1999 2000 2001 Desktop Applications $ 7,590 $ 9.013 $ 9,580 Desktop Piatforms 6,932 7,383 8,265 Desktop Software 14,522 16.396 17,845 Enterprise Software and Services 3,288 4,014 4,875 Total Desktop and Enterprise Software and Services $17.810 $20.4 10 $22,720
In 2001, Microsoft changed the composition of its segments to reflect the internal reorganization around Microsoft .NET, the Company’s vision for the next-generation of Internet-based products and services. Except for 1999 operating income/(loss), prior year disclosures have been restated for consistent presentation. It is not practicable to discern operating income for 1999 for the current segments due to previous internal reorganizations. Microsoft has four segments: Desktop and Enterprise Software and Services;. Consumer Software, Services, and Devices: Consumer Commerce Investments; and Other. Desktop and Enterprise Software and Services operating segment includes Desktop Applications, Desktop Platforms, and Enterprise Software and Services. Desktop Applications include Microsoft Office; Project; Visio; client access licenses for Windows 2000 Server, Windows NT Server, Exchange, and Backoffice; Microsoft Great Plains; and bCentra,. Desktop Platforms include Windows 2000 Professional, Windows NT Workstation, Windows Millennium Edition (Windows Me), Windows 98, and other desktop operating systems. Enterprise Software and Services includes Windows NT Server and Windows 2000 Server operating systems, SQL Server and client access licenses, Exchange Server, developer tools, consulting services, product support services, and training and certification. Consumer Software, Services, and Devices operating segment includes MSN Internet access, MSN network services. WebTV Internet access and services, gaming, learning and productivity software, mobile and wireless devices, and embedded systems. Consumer Commerce Investments operating segment includes Expedia, Inc., the HomeAdvisor online real estate service, and the CarPoint online automotive service. Other includes Hardware and Press.
Segment information is presented in accordance with SFAS 13 1, Disclosures about Segments of an Enterprise and Related Inforntation. 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. Assets are not allocated to segments for internal.reporting purposes. Reconciling items for revenue include certain elements of unearned revenue and the treatment of certain channel inventory amounts and estimates. In addition to the reconciling items for revenue, reconciling items for operating income/(loss) include general and admuusnative e.xpenses ($1,050 million in 2000 and $857 million in 2001). certain research expenses ($141 million in 2000 and $154 million in 2001), and other corporate level adjustments. The internal P&Ls use accelerated methods of depreciation and amortization. Additionally, losses on equity investees and minority interest are classified in operating income for internal reporting presentations.
Revenue attributable to U.S. operations includes shpments 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 $13.7 billion, $15.7 billion, and $17.8 billion in 1999, 2000, and 2001. Revenue from outside the United States, excluding licensing to OEMs and certain multinational organizations and U.S. exports, totaled $6.0 billion, $7.3 billion, and $7.5 billion in 1999, 2000, and 2001. A single customer accounted for approximately 1 I%, 9%, and 8% of revenue in 1999,2000, and 2001.
Long-lived assets totaled $1.8 billion and $2.2 billion in the United States in 2000 and 2001 and $126 million and $154 million in other countries in 2000 and 200 1.
Subsequent Event On July 16, 2001, USA Networks, Inc. (USA) announced an agreement to acquire a controlling interest in Expedia. Inc. through the purchase of up to 37.5 million shares, approximately 75% of the current outstanding shares. If holders of more than 37.5 million Expedia shares elect to sell their shares to USA, there will be a pro rata reduction among all of those electing shareholders. Microsoft has agreed to transfer all of its 33.7 million shares and warrants, subject to pro-ration. It is expected that the transaction will close by December 3 1,2001. QUARTERLY INFORMATION (In millions, except per share amounts) (Unaudited) Quarter Ended Sept. 30 Dec. 31 Mar. 31 June 30 Year 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 0.3 1 0.36 0.35 0.40 1.42 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 9,42 1 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 2001
Revenue (1) $5,766 $ 6,550 $ 6,403 $6,577 $25,296 Gross profit 4,941 5,686 5,504 5,710 21,841 Net income (2)(3) 2,206 2,624 2.451 65 7,346 Basic earnings per share (2)(3) 0.42 0.49 0.46 0.01 1.38 Diluted earnings per share (2)(3) 0.40 0.47 0.44 0.01 1.32
(1) For the first three quarters of 2001, revenue and cost of revenue have been reclassified to report Expedia merchant revenue on a net basis, which represents the amount charged to the customer less the amount paid to the supplier. (2) First quarter of 2001 includes an unfavorable cumulative effect of accounting change of $375 million or $0.07 per basic share and $0.06 per diluted share. (3) Fourth quarter of 2001 includes $3.92 billion (pre-tax) in impairments of certain investments, primarily cable and telecommunication investments. ‘9 INDEPENDENTAUDITORS’ REPORT To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying consolidated balance sheets of Microsof? Corporation and subsidiaries as of June 30, 2000 and 2001, and the related consolidated statements of income, cash flows, and stockholders’ equity for each of the three years in the period ended June 30, 2001. These fmancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fmancial 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 fmancial 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 fmancial statements present fairly, in all material respects, the financial position of Microsoft Corporation and subsidiaries as of June 30, 2000 and 2001, anti the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in the notes to the financial statements, the Company was required to adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments aid Hedging Activities, effective July 1, 2000.
Deloitte & Touche LLP Seattle, Washington July 19,2001 (September 6,2001 as to the second paragraph of Contingencies note) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. . PART 111 item IO. Directors of the Registrant Information with respect to Directors may be found under the caption “Election of Directors and Management Information” of the Company’s Proxy Statement dated September 10, 2001, for the Annual Meeting of Shareholders to be held November 7, 2001 (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” and “Information Regarding the Board and its Committees” is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Managemelit The information set forth under the caption “Information Regarding Beneficial Ownership of Principal Shareholders, Directors, and Management” of the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the captions “Certain Relationships and Related Transactions” and “Indebtedness of Executive Officers” of the Proxy Statement is incorporated herein by reference. PART IV
Item 14. Exhibits, Financial Statement Scliedules, and Reports 011 Form 8-K (a) Financial Statements and Schedules The financial statements are set forth under Item 8 of this report on Form 10-K 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 no reports on Form 8-K during the quarter ended June 30.2001. (c) Exhibit Listing Exhibit Number Description 3.1 Restated Articles of Incorporation of Microsoft Corporation (1) 3.2 Bylaws of Microsoft Corporation 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 (6) 10.7 Trust Agreement dated June 1, 1993 between Microsoft Corporation and First Interstate Bank of Washington (7) 10.8 Form of Indemnification Agreement (7) 21. Subsidiaries of Registrant 23. Independent Auditors’ Consent
(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 Fomi 10-K For The Fiscal Year Ended June 30. 2000. (7) Incorporated by reference to Annual Report on Fomi 10-K For The Fiscal Year Ended June 30, 1993. SIGNA TURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dul!. caused this report to be signed on its behalf by the undersigned; thereunto duly authorized. in the City of Redmond. State of Washmgton, on September 17,2001.
MICROSOFT CORPORATION
By lsl John G. Connors John G. Connors Senior Vice President; Chief Firiancial OJ~CLJI.
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 17,2001.
Signature Title
/s/ William H. Gates, 111 William H. Gates, 111 Chairman of the Board of Directors and Chief Software Archtect
Is/ Steven A. Ballmer Steven A. Ballmer Chief Executive Officer
/SI James I. Cash. Jr. James I. Cash, Jr. Director
/SIRaymond V. Gilrnartin Raymond V. Gilmartin Director
/s/ Ann McLaughlin Korologos Ann McLaughlin Korologos Director
/SI David F. Marquardt David F. Marquardt Director
/siWm. G. Reed. Jr. Wm. G. Reed, Jr. Di rcctor
Is/ Jon A. Shirley Jon A. Shirley Director
/SIJohn G. Connors John G. Connors 1 Senior VICCPrcsidcnt. Chicf Financial Officer (Principal Financial and Accounting Officcr) EXHIBIT 6 IN5TRUCTION mRNURL mRNURL IIE IN5TRUECIUNES mRNUEL D'IN5TRUCTION5
F23-00061 You can play Xbox games and audio CDs with the XboxTnvideo game system from Microsoft. Make sure you have received all of the fotlowing components of the Xbox video game system in this package: Power'cord Xbox console
.* Xbox Controller -%/ Xbox Standard AV Cable Xbox Console
Standard AV cable Power cord Instruction Manual and other printed materials
Please keep these instructions. If you have questions about this product, see http:/ /www.xbox.com or call
United States and Canada: 1-800-4MY-XBOX. TTY users: 1-866-740-XB Xbox Controller Documentation set OX. (including this manual) Mexico: 001 866 745 83 12. TTY users: 001 866 251 26 21.
The following Xbox peripherals are sold'separately: For customers in the USA: KO4-00001 Xbox Controller - gamepad This equipment has been tested and found to comply with the limits for a Class B digital device, pursuant to Part 15 of the K02-00001 Xbox Memory Unit - portable storage FCC rules. These limits are designed to provide reasonable expansion device protection against harmful interference in a residential instal- lation. This equipment generates, uses, and can radiate radio KOB-00001 Xbox System Link Cable - cable to frequency energy and, if not installed and used in accordance connect two Xbox consoles for head-to- witti the instructions, may cause harmful interference to radio head multiplayer games communications.
K01-00004 Xbox DVD Movie Playback Kit - remote However, there is no guarantee that interference will not OC- control and receiver for playing DVD cur in a particular installation. If this equipment does cause harmful interference to radio or television reception, which movies can be determined by turning the equipment offand on, the user is encouraged to try to correct the interference by one or Xbox Standard AV Cable composite AV K06-00001 - more of the following measures: adapter Reorient or relocate the receiving antenna. K05-00001 Xbox Advanced AV Pack - S-video and digital audio adapter Increase the separation between the equipment and receiver. K03-00001 Xbox High Definition AV Pack - component video and digital audio adapter Connect the equipment into an outlet on a circuit different from that to which the receiver is connected. K07-00001 Xbox RF Adapter - antenna [coaxial cable] adapter Consult the dealer or an experienced radio/TV techni- cian for help. K09-00001 Xbox Communicator [available in 2002) - voice chat and command headset expan- Note Any changes or modifications made on the system not sion device expressly approved by the manufacturer could void the user's authority to operate the equipment.
http: f f www.xbox.com The Xbox Video Game System ...... 2 Xbox Peripherals ...... 2 Important Safety Information ...... 4 Important Health Warnings ...... 6 Selecting a Location for the Xbox Console ...... 7 TV Connecting to a ...... 8 Connecting Xbox Controllers ...... 9 Using Xbox Controllers ...... 9 Turning on the Xbox Console ...... 10 Initial Setup ...... 11 Audio, Video, and Olher Settings ...... I1 .. Playing Games and Music ...... 12 Soundtracks ...... 13 Parental Control ...... 13 Managing Memory ...... 14 MultipWayer Games ...... 15 Cleaning the Xbox Video Game System ...... 15 Troubleshooting ...... 16 Specifications ...... 17 Warranty ...... 18
The following symbols are used on labels on the Xbox video Declaration of Conformity game system.Jrom Microsoft:
Trade Name: Microsoft Corp. This symbol is intended to alert the user to Responsible Party: Microsoft Corporation the presence of important safety, operating, Address: Xbox Customer Care and maintenance instructions in the literature accompdnying the console. One Microsoft Way A Redmond, WA, 98052 U.S.A. Telephone No.: 1-800-4MY-XBOX This symbol is intended to alert the user to the presence of uninsulated "dangerous volt- This device complies with Part 15 of the FCC Rules. age" within the product's enclosure that may Operation is subject to the following two conditions: be of sufficient magnitude to constitute a risk This device may not cause harmful interference, and (11 of electric shock to persons, (21 this device must accept any interference received, including interference that may cause undesired opera ti o n . Warning: To reduce the risk of fire or electric shock, do For Customers in Canada: not expose this apparatus to rain or moisture. This Class B digital apparatus complies with Canadian ICES-003.
http:/ /www.xbox.com This manual Contains important information about how to D~ not push or insert anything into ventilation safely and properly set up, use, and care for the Xbox video game system. openings. Voltage is present within the Xbox video game system when the console is connected to power, whether it is turned on or off. To eliminate all voltage to the Xbox console, first turn off the Xbox console, and then disconnect the power cord from the power outlet.
Failure to properly set up, use, and care for the Xbox Take precautions to keep children from putting video game system can increase the risk of electric anything, especially metal objects, inside the Xbox shock or fire. It can also increase the risk of the Xbox console. console falling and possibly hitting someone. To re- Do not insert objects into ventilation openings when duce the risk of serious injury or death, or damage to cleaning the Xbox console. the Xbox video game system:
Read these instructions. - Keep these instructions. Take Precautions to Keep the Xbox Con- Heed alt warnings. sole from Falling
Foiiow all instructions. If the Xbox console falls and hits someone, especially a small child, it could cause serious injury. To reduce the risk of such injuries or damage to the Xbox console, properly set up and use the Xbox video game system according to the instructions Stay Away from Dangerous in Selecting a Location for the Xbox Console on page 7 and in Inllne Release on page 9. Voltage Inside the Xbox Console Contact with energized Darts inside the Xbox console can cause serious injury or death from electric shock. It can also lead to fire and/or damage to the Xbox console.
Do not take the Xbox console apart.
! Do not attempt to service or repair the Xbox console yourself. Refer all servicing to qualified service personnel. Servicing is required when the apparatus has been damaged in any way, such as:
Power-supply cord or plug is damaged. Liquid has been spilled or objects have fallen into the apparatus.
The apparatus has been exposed to rain or moisture, does not operate normally, or has been dropped.
Do not attempt to modify the Xbox console in any way.
http://www.xbox.com General Electrical Precautions Clean the outside of the Xbox console properly. As with many other electrical devices, failure to Clean only with a dry cloth. For more information, see Clean- take the following precautions can result in seri- ing the Xbox Video Game System on page 15.
ous injury or death from electric shock or fire, or I damage to the Xbox video game system. Unplug this apparatus during lightning storms or when unused for long periods of time. Avoid damaging the power cord. Also, do not leave the Xbox video game system unattended Protect the power cord from being walked on or with the power on for extended periods. pinched particularly at plugs, convenience receptacles, and the point where they exit from the apparatus. ! .d Do not jerk, knot, sharply bend, or otherwise abuse the Only use attachmentslperipherals specified by the 4- power cord. manufacturer. Do not expose the power cord to sources of heat. Keep children and pets away from the power cord and do not allpw them to bite or chew on it. Prevent the Xbox Console from When disconnecting the power cord from the Xbox Ovetheating console or a power outlet, pull on the plug-do not Do not block any ventilation openings. Install in accordance pull on the cord. with the manufacturer's instructions. For more information, see Selecting a Location for the Xbox Console on page 7. If the power cord becomes damaged in any way, stop using it immediately and call the Microsoft Xbox Customer Support Do not install near any heat sources, such as radiators, number on page 2. heat registers, stoves, or other apparatus [including amplifi- ers) that produce heat.
Do not overload an extension cord, wall outlet, or other type of receptacle. The Xbox video game system can consume up to 100 watts. Do not exceed the stated ratings of cords or receptacles.
Use the type of power source indicated on the Xbox console. If you are not sure of the type of power supply to your home, consuk a qualified electrician.
Do not expose the Xbox video game system to liquids or moisture. Do not use this apparatus near water (for example, sinks, tubs, pools) or expose it to rain, moisture, or dripping or splashing liquids. Do not place objects filled with liquids, such as beverages or vases, on or near the Xbox console. Do not clean the Xbox console with water, liquid cleaners, solvents, or aerosols.
http:/ /www.xbox.com About Photosensitive Seizures About Musculoskeletal Disorders A very small percentage of people may experience a seizure Use of game controllers, keyboards, mice, or other electronic when exposed to certain visual images, including flashing'lights input devices may be linked to serious injuries or disorders. or patterns that may appear in video games. Even people who When playing video games, as with many activities, you may have no history of seizures or epilepsy may have an undiag- experience occasional discomfort in your hands, arms, shoul- nosed condition that can cause these "photosensitive epilep- ders, neck, or other parts of your body. However, if you expe- tic seizures'' while watching video games. rience symptoms such as persistent or recurring discomfort, These seizures may have a variety of symptoms, including pain, throbbing, aching, tingling, numbness, burning sensa- lightheadedness, altered vision, eye or face twitching, jerking tion, or stiffness, DO NOT IGNORE THESE WARNING SIGNS. or shaking of arms or legs, disorientation, confusion, or mo- PROMPTLY SEE A QUALIFIED HEALTH PROFESSIONAL, even if mentary loss of awareness. Seizures may'also cause loss of symptoms occur when you are not playing a video game. Symp- consciousness or convulsions that can lead to injury from fall- toms such as these can be associated with painful and some- ing down or striking nearby objects. times permanently disabling injuries or disorders of the nerves, muscles, tendons, blood vessels, and other parts of the body. Immediately stop playing and consult a doctor if you expe- These musculoskeletal disorders [MSDs] include carpal tun- rience any of these symptoms. Parents should watch for or nel syndrome, tendonitis, tenosynovitis, vibration syndromes, ask their children about the above symptoms-children and and other conditions. teenagers are more likely than adults to experience these seizures. While researchers are not yet able to answer many questions about MSDs, there is general agreement that many factors The risk of photosensitive epileptic seizures may be reduced may be linked to their occurrence, including medical and physi- by taking the following precautions: cal conditions, stress and how one copes with it, overall health, Sit farther from the television screen and how a person positions and uses their body during work and other activities [including playing a video game]. Some Use a smaller television screen studies suggest that the amount of time a person performs an activity may also be a factor. ' Play in a well-lit room Some guidelines that may help you work and play more com- Do not play when you are drowsy or fatigued fortably and possibly reduce your risk of experiencing an MSD If you or any of your relatives have a history of seizures or can be found in the Healthy Gaming Guide [available at epilepsy, consult a doctor before playing. http:/ /www.xbox.com]. These guidelines address topics such as:
n, Positioning yourself to use comfortable, not awkward postures. Keeping your hands, fingers, and other body parts . relaxed.
Taking breaks. Developing a healthy lifestyle.
If you have questions about how your own lifestyle, activities, or medical or physical condition may be related to MSDs, see a qualified health professional.
http:/ /www.xbox.com Select a Safe Location Avoiding Damage to Your Television or When selecting a location for the Xbox video game system, Other Av Equipment consider the following topics and the Important Safety In- 4. DO not use with certain televisions. Some televisions, espe- formation on page cially front- or rear-projection types, can be damaged if any video games, including Xbox games, are played on them. Static Prevent the Xbox Console from Falling images piesented during the normal course of gameplay may "burn" into the screen, causing a permanent shadow of the If the Xbox console falls and hits someone, especially a small static image appear at times, even when video games child, it could cause serious injury. To reduce the risk of such are not being ptayed, Similar damage may occur from static injuries and damage to the Xbox place the Xbox images created when placing a video game on hold or pause, console on a surface that: Consult your tetevision owner's manuat to determine if video is flat and level. games can be played safely on your set. If you are unable to find this information in the owner's manual, contact your teLe- is stable and not tikely to tip over. vision dealer or the manufacturer to determine if video games can be played safely on your set. atlows all four feet of the Xbox console to be in contact with the surface. Before connecting or disconnecting any AV device [for example, television or VCRI, make sure that the power to the Xbox is clean and free of dust or debris. console and to the AV device is turned off.This will reduce the is not likely to allow the Xbox console to stip or risk af electrical damage to the equipment. slide off. To avoid damage to AV equipment or to the Xbox console, do not touch AV cord terminals or the Xbox AV port with your fingers or allow metal parts to touch them. Take Precautions with Cables and Cords
Arrange all cables and cords so that people and pets are not likely to trip over or accidentally pull on them as they move around or walk through the area.
When the Xbox console is not in use, you may need to dis- connect all cables and cords in the front and rear of the Xbox console to prevent children from pulling on them. Do not allow children to play with cables or cords.
Prevent the Xbox Console from Overheating
Do not block any ventilation openings. Do not place the Xbox console on a bed, sofa, or other soft surface that may block ventilation openings.
Do not place the Xbox console in a confined space, such as a bookcase, rack, or stereo cabinet, unless the space is well ventilated.
Do not install the Xbox console near any heat sources, such as radiators, heat registers, stoves, or other devices (includ- ing amplifiers) that produce heat.
http://www.xbox.com I\ /I
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TV VCR VCR Connecting Using the Xbox Standard If your is connected to a and the has composite AV AV Cable [integrated] video input, you can use the standard cable to connect to the VCR. If your TV has composite video input, use the standard AV cable included with the Xbox video game system. To connect to a VCR AV AV To connect to a N 1. Connect the Xbox connector to the port on the Xbox console. 1. Connect the Xbox AV connector to the AV port on the Xbox console. 2. Connect the color-coded connectors to the correspond- ing jack on the VCR: yellow to yetlow (video), red to 2. Connect the color-coded connectors to the corre- red (right audio), and white to white [left audio]. sponding jacks on the TV: yellow to yellow [video), red to red (right audio), and white to white [left audio). Note For monaural VCRs, connect either the right or TV. Jacks may be on the front or back of the left audio connector to the audio jack.
Note :For monaural NS,which have only one audio jack, 3. Do not change the existing connection between the connect either the right or left audio connector to the VCR and TV. audio jack. 4. Select VCR for the TV/VCR setting of the VCR. 3. Select the appropriate video input on your TV. For I 5. Select the appropriate video input on your VCR. For more information, see No Picture under Troubie- more information, see No Picture under Trouble- shooting on page 16. shooting on page 16. You may not be able to connect to your TV using the standard AV cable. If you have antenna, S-video or component video input, or digital audio input, use the appropriate Xbox AV pack or adapter. For more information, see http://www.xbox.com or Xbox Peripherals on page 2.
http:/ /ww.xbox.com Connecting and Disconnecting Xbox Cont ro Ilers To connect an Xbox Controller, insert the Xbox Controller con- ' necter into any controller port on the front of the Xbox console. '
To disconnect, unplug the Xbox Controller connector from the Xbox Controller port. When disconnecting, pull on the con- troller connector, not the cable or inline release.
Do not touch Xbox Controller cord terminals or the Xbox Con- troller ports with your fingers or allow metal parts to touch them. Doing so may damage the Xbox Controller or the Xbox console.
Using the Xbox Controller in Games For information about Osing the Xbox Controller with a game, see your game manual.
lnline Release Each Xbox Controller cord has an inline release. This is a safety feature designed to reduce the chance of the Xbox console falling when the cord is pulled. If the Xbox console falls and hits someone, especially a small child, it could cause serious To Console injury. To reduce the risk of such injuries or of damage to the
Xbox console, it is important to properly use the Xbox Con- 1 trollers and the inline release.
Use the Xbox Controller connector, not the inline release, to routinely connect and disconnect the Xbox Controller. If an inline release disconnects, simply reconnect it by aligning the t grooved indentations on the two parts of the inline release A and pressing the two parts completely together. The Xbox Controller will not work unless the inline release is properly connected.
WARNING! Never tape, glue, or otherwise prevent an inline release from pulling apart. To Controller The inline release reduces, but does not eliminate, the risk of the Xbox console being pulled off its surface. To further re- c duce the risk:
Do not allow anyone to pull on the Xbox ControUers or Read and follow the instructions in Selecting a controller cords in a way that causes the Xbox console Location for the Xbox Console on page 7. to move. Do not allow Xbox Controller cords to become crossed or tangled with one another,
http://www.xbox.com Using Xbox Controller Expansion Slots The Xbox Controller has two expansion slots that allow you to connect expansion devices to the Xbox Controller. For example, you can add portable storage to the Xbox video game system by connecting an Xbox Memory Uliit [shown] [part number K02-00001,sold separately). For more information, see Xbox Peripherals on page 2 or the instruction manual for your Xbox expansion device.
Plug the power cord into the Xbox consote, and then fully insert the plug into the power outlet. See General Electrical yrecautions on page 5 for more information.
Turn on the Xbox console by pressing the power button. The status indicator light will light up.
(urn off the Xbox console by pressing the power button. To elimi- nate all voltage inside the Xbox console, turn off the Xbox con- sole, and then unplug the power cord from the power outlet.
http:/ /www.xbox.com The first time you turn on your Xbox video game system, you must set the default language and the clock before playing a game or audio CD. Once these settings are specified, you don’t have to set them again if you leave the Xbox console con- nected to power.
To move the selection focus on the screen, press the direc- tional pad of the Xbox Controller. To select, press A. To cancel, press B.
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In addition to the initial language and clock settings, you can specify other settings for the Xbox video game system. To choose settings for your system, turn on the Xbox video game system without a disc in the disc tray.
To chooise audio or video settings 1. Select Settings, and then select Audio or Video.
2. SeLect appropriate options for your system.
You can configure the Xbox console to automatically turn off if left unattended for six hours.
To choose Auto Off 1. Select Settings, and then select Auto Off.
2. Select Yes to have the Xbox console turn off automati- cally, or No [the default).
http://www.xbox.com \ .,
Eject button
Disc tray Powerlreset button
Playing Games Playing Music The Xbox video game system can play only game The Xbox video game system can play discs licensed by Microsoft for the Xbox video game audio CDs that have this logo: system. Licensed games have this logo: To play audio CDs To start a game 1. Press the eject button to open the disc tray. 1. Press the eject button to open the disc tray. 2. Place the audio CD on the, disc tray with the label 2. Place the Xbox game disc on the disc tray with the facing up. label facing up. '' 3. Press the eject button to close the disc tray. The audio 3. Press the eject button to close the disc tray. The game CD will play. will play.
To switch to another game 1. Press the eject button to open the disc tray. Playing DVD Movie Discs 2. Remove the game disc. To play DVD movies on the Xbox video game system, you need the Xbox DVD Movie Playback Kit (part number KO1-00004, 3. Place a new Xbox game disc on the disc tray. sold separately). For more information about playing DVD mov- 4. Press the eject button to close the disc tray. The new ies, see the Instruction Manual for the Xbox DVD Movie Play- game will play. back Kit.
To end a game Avoiding Damage to Discs or to the DVD Drive 1. Press the eject button and the disc tray will open. Do not leave a disc in the Xbox console for extended periods when not in use. 2. Remove the Xbox game disc. Do not move the Xbox console while the power is on 3. Press the eject button again to close the disc tray. and a disc is inserted. Do not apply labek, stickers, or other foreign objects to discs.
http: / / www.xbox.com You can copy tracks from audio CDs using the Xbox video game system. Then you can arrange these tracks into soundtracks and play them from the Xbox video game system without inserting the original CD audio disc. You can play your soundtracks while playing Xbox games.
To copy tracks 1. Play an audio CD.
2. Select Back from the music player.
3. Select Copy to display tracks.
4. Select the tracks you want to copy. You can selyct one track, multiple tracks, or all tracks.
5. Select Copy to begin copying the tracks.
6. Select an existing soundtrack, or create a new soundtrack to store the copied tracks. If you create a new soundtrack, enter a name using the virtual To play soundtracks keyboard. 1. Turn on the Xbox console with no disc in the disc tray.
2. Select Music, and then select a soundtrack rather than Audio CD. 3. Select Play to begin playing
You can limit the type of content played on the Xbox video game system based on the ESRB rating level. By default, the Xbox video game system is set to play all content. You can select separate parental control levels for games and DVD movies. To play DVD movies on the Xbox video game system, you need the Xbox DVD Movie Playback Kit (part number KO1- 0000.1, sold separately].
To change the level of content that can be played 1. Turn on the Xbox console with no disc in the disc tray.
2. Select Settings, then select Parental Control, and then select Games.
3. Select the new level: All, M (Mature], T [Teen], E [Everyone], K-A [Kids to Adults], EC [Early Childhood), or None.
The Xbox video game system will play games and DVD movies that are rated at or below the selected level. For example, if the selected level is T, games rated T, E, K-A, and EC can play. If you choose any level other than All, you must select a pass code.
If you lose or forget your pass code, call the Xbox Customer Support number on page 2.
http:/ /www.xbox.com The Xbox video game system includes an internal hard dlisk for saving game information and soundtracks. For information about saving games, see your Xbox game manual. For information about saving soundtracks, see Soundtracks on page 13.
To manage or free space on the Xbox hard disk, you can re- move all stored information and saved games for a given Xbox game, or copy or delete specific saved games.
To remove all information about a game 1. Turn on the Xbox console with no disc in the disk tray.
2. Select Memory, and then select Xbox Hard Disk.
3. Select a game.
4. Select Remove Game to delete the selected game, including all its saved games, from the Xbox hard disk, Select Yes when prompted, "Are you sure you want to permanently remove this title?"
To copy or delete a saved game 1. Turn on the Xbox console with no disc in the disk tray.
2. Select.Memory, and then select Xbox Hard Disk.
3. Select an individual saved game name in the collection of saved games.
4. Setect Copy to move that saved game to an Xbox Memory Unit (part number K02-00001, sold sepa- rately) or Delete to remove the selected game from the Xbox hard disk. When deleting, select Yes when prompted, "Are you sure you want to permanently remove this saved game?"
http:/ /www.xbox.com Connect up to four Xbox controllers to the Xbox console for games that allow multiple players. Not all Xbox games will allow multiple players. To determine if the game allows mul- tiple players, see your game manual.
Some games can be played using the Xbox System Link Cable [part number K08-00001, sold separately), which connects two Xbox consoles for head-to-head gameplay. For more informa- tion, see the instruction manual for the Xbox System Link Cable. Do not connect a telephone line to the Ethernet connector on the back of the Xbox console. Broadband capability is sched- uled to go live in the summer of 2002. For more information, visit http://www.xbox.eorn.
Cleaning the Xbox Console To clean Xbox game discs or audio CDs It is important to keep the rubber feet on the bottom of the Hold discs by the edges: do not touch disc surface with Xbox console clean and free of dust and debris to reduce fingers. ’ the risk of the Xbox console falling and possibly hitting Clean discs using a soft cloth, lightly wiping from the someone. center outwards. If the rubber feet ever become dirty or dusty, wipe them off with a dry cloth. Do not use solvents such as benzene, which can damage the disc. * Keep the surface on which the Xbox.console rests . clean by wiping with a dry cloth.
If you clean the Xbox console: Unplug the Xbox console from the power outlet.
Clean the outside of the Xbox console only. Make sure that no objects are inserted into ventilation openings.
Use a dry cloth-do not use abrasive pads, detergents, scouring powders, solvents (for example, alcohol, gasoline, paint thinner, or benzene), or other liquid or aerosol cleaners.
http:/ /www.xbox.com Game Does Not Start Play only licensed Xbox game discs [see Playing Games and Music on page 12).
Insert the disc with the label up and close the disc tray (see To reduce the risk of serious injury or death from elec- Playing Games and Music on page 121. tric shock or fire, do not attempt to service or repair the Xbox console. Do not attempt to take apart the Clean the disc (see Cleaning the Xbox Video Game System Xbox console or modify it in any way. Refer all servic- on page 151. ing to qualified service personnel. No Picture Connect the appropriate AV cable [see Connecting to a TV on page 81. Please follow these steps to troubleshoot difficulties with the Turn on the TV Xbox video game system: - Select the video input on the TV [or VCR, if connected to a No Power VCR] that displays the Xbox game. Common names for video input are Input Select, AUX, Line In, Line, In, Input, Source, Connect the power cord [see Turning On the Xbox Console or EXT, depending upon your TV or VCR type. For more infor- on page 10). mation, see your TV or VCR manual.
Play only supported types of discs [Xbox games, audio CDs; see Playing Games and Music on page 12). Status Indicator Light Flashes Continually The status indicator light should be green while the Xbox video Poor-Quality Picture game system is on, or flash green when you press the eject Clean the disc [see Cleaning the Xbox Video Game System button. If the status indicator light flashes continually during on page 151. operation, the #box video game system has an internal prob- lem: No Sound Continual orange flashing: The Xbox console is too hot Properly connect the AV cable [see Connecting to a TV on and will not play games until cooled. Place the Xbox console in a well-ventilated area away from other heat page 81. sources. Once the console cools, the flashing will stop Check the volume on the TV and turn off TV mute [see your and the Xbox video game system can be played. For TV manual]. more information, see Selecting a Location for the Xbox Console on page 7. Select the correct audio output [see Connecting to a TV on page 81. Continual green and orange flashing: The AV cable IS not connected property. Connect according to the Play only supported types of discs [Xbox games, audio CDs; instructions in Connecting to a TV on page 8. see Playing Games and Music on page 121. All other patterns: Internal problem requires service. Contact Xbox Customer Support according to the Poor-Quality Sound instructions in If You Need Help... on page 17. Clean the disc (see Cleaning the Xbox Video Game System on page 15).
Disc Tray Does Not Open Play Dolby@ Digital audio only to speakers that support Dolby Connect the power cord [see Turning On the Xbox Console Digital. on page 101. Select the audio output that is supported by your system or TV Turn on the Xbox console by pressing the power button (see [Stereo or Dolby@ Surround for stereo speakers, Mono for monaural Turning On the Xbox Console on page 1D). speaken]. [See Audio, Video, and Other Settings on page 111. If sound is coming from only one speaker, check that all audio cables are connected correctly.
http:/ /www.xbox.com Xbox Controller or Peripheral Does Not General Work Power requirements: 120 V AC, 60 Hz Connect the Xbox Controller to any controller port [see Con- Power consumption: 100 W necting Xbox Controllers on page 9). Dimensions [approximate): 300 x 80 x 180 mm; Make sure the controller connectors, including the inline re- 12 x 4 x 0 inches (w/h/d] lease, are connected securely [see Using Xbox Controllers on page. 91. Mass [approximate): 4 kg (8 lb 13 021 xec)><'" [41 "F Use only Xbox-compatible peripher- Operating temperature: 5 "C to 35 "C to 95 OF) als that have this logo: Laser diode properties: Material e GaAIAs, Wavelength l = 650 nm I For a list of Microsoft's Xbox peripheral products, see Xbox Peripherals on page 2. In pu tsloutputs
Make sure the Xbox game supports any optional peripherals Controller ports (4) connected to the Xbox video game system. If a peripheral is Ethernet port (11 not supported by the specific game, the game may not play. AV port (11
Cannot Save Game AC IN power port [I] The Xbox hard disk or memory unit must have enough free blocks to save the game. For information on how to free space, Supplied Peripherals see Managing Memory on page 14. See The Xbox Video Game System on page 2. If You Need Help ... Optional Peripherals Should problems persist, do not attempt to take apart, ser- vice, or modify the Xbox console in any way. Doing so could See Xbox Peripherals on page 2. present the risk of serious injury or death from electric shock or fire, and it will void .your warranty. Please see Design and specifications are subject to change without notice. http:/ /www.xbox.com or call the Xbox Customer Support number:
United States and Canada: 1-800-4MY-XBOX. TTY users: 1-666-740-XBOX. Mexico: 001 866 745 83 12. TTY users: 001 866 251 26 21. Do not take your Xbox video game system or peripheral to your retailer for repair or service, unless instructed to do so by an Xbox Customer Support representative.
http:/ /www.xbox.com PLEAS€ READ THIS LIMITED WARRANTY CAREFULLY TO UN- C. EXCLUSIVE REMEDY. During the Warranty Period and DERSTAND YOUR RIGHTS AND OBLIGATIONS! subject to applicable law, Microsoft will, at its option and as your exclusive remedy for breach of this Limited Warranty or LIMITED WARRANTY any implied warranties: The term "Xbox Product" means the Microsoft Xbox Video Game 1 Repair or replace a.defective Xbox Product, or System console including [when considered as a whole) the Microsoft software stored on the hard disk and embedded in 2 Following return of your Xbox Product, make payment to microprocessors within the Xbox console, and Xbox-compatible you for the allowable damages that you incur in reasonable hardware manufactured by or for Microsoft, whether included reliance but only up to the amount of the purchase price that with the Xbox Video Game System or purchased separately. you paid for your Xbox Product. This refund may include a deduction for depreciation based on your actual use. A. WARRANTIES 3 Any replacement parts or Xbox Product will be new or 1 90-Day Express Warranty. Subject to the terms and con- refurbished or serviceably used, comparable in function and ditions, of this Limited Warranty, Microsoft warrants to you performance to the original part or Xbox Product and war- only [the original purchaser), that under normal use and ser- ranted for the remainder of the original Warranty Period or 30 vice the Xbox Product will substantially conform with the ac- days from the date of shipment of the Xbox Product back to companying printed user instruction materials for a period of you, whichever is longer. 90 days starting as of the date of your sales receipt [the "Warranty Period"). 4 Microsoft may, at its sole option, elect to replace the 2 hard disk contained in your Xbox Product even If this Implied Warranty. You may also have an implied warranty causes a loss of data. YOU AGREE THAT MICROSOFT IS and/or condition under the laws of some jurisdictions, which NOT LIABLE TO YOU FOR ANY LOSS OF YOUR DATA. is hereby limited to the duration of the Warranty Period. Some jurisdictions do not allow limitations on how long an implied 5 After the Warranty Period has expired, Microsoft may charge warranty or condition lasts, so the foregoing limitation may you a fee for its efforts to diagnose and service any Xbox not apply to you. Product-related problems. As to any defects discovered after the Warranty Period, there 6 Microsoft will use commercially reasonable efforts to diag- is no warranty or condition of any kind, nose and attempt to correct, or suggest solutions for, Xbox Product defects that are covered by this Limited Warranty. 8. OBTAINING WARRANTY SERVICE. To receive instruc- MICROSOFT DOES NOT PROVIDE ANY WARRANTIES RE- tions for obtaining repair or replacement warranty services GARDING ITS WARRANTY SERVICES AND, EXCEPT FOR THE' you must call: PRECEEDING SENTENCE, DISCLAIMS ALL DUTIES (IF ANY] OF WORKMANLIKE EFFORT OR OF LACK OF NEGLIGENCE. Within the U.S., U.S. Territories and Canada: 1-800-4MYXBOX. TTY users: 1-866-740-XBOX. D. NO OTHER WARRANTIES. The express warranty stated in Section A above is the only express warranty made to you Within Mexico: 001 866 745 83 12. and is provided lieu of a\\ other express or implied warran- TTY users: 001 866 251 26 21. in ties and conditions (if any) including any created by any other You must also: 'I documentation or packaging. No other warranties or condi- tions are made with respect to the Xbox Product or the war- 1 Submit proof of purchase in the form of a bona fide, dated ranty services by any person, including but not limited to bill of sale, receipt, or invoice [or a copy) evidencing that your Microsoft and its suppliers. No information (oral or written) request for service is made within the Warranty Period. .or suggestions given by Microsoft, its agents or suppliers 2 or its or their employees, shall create a warranty or con- Follow Microsoft's instructions if it determines that all or dition or expand the scope of this Limited Warranty. Also, part of your Xbox Product requires return for repair or re- there is no warranty or condition of title, quiet enjoyment, or placement. Microsoft will arrange for shipping your Xbox Prod- noninfringement in the Xbox Product. You may have greater uct to Microsoft or its authorized repair centers at Microsoft's rights existing under legislation in your jurisdiction. Where expense, or instruct you where to take the Xbox Product in any term of this Limited Warranty is prohibited by such laws, your area'. it shall be null and void, but the remainder of the Limited Warranty shall remain in full force and effect. 3 Delete or remove any files or data you consider private or confidential prior to sending the Xbox Product to Microsoft. E. EXCLUSIONS FROM LIMITED WARRANTY. This Limited Warranty shall not apply and Microsoft has no liability under 4 Return the Xbox Product in the packaging materials pro- this Limited Warranty if the Xbox Product: vided to you by Microsoft, using the labels and addresses pro- vided in the return authorization kit. Failure to use these ma- 1 is used with products not sold or licensed by Microsoft terials may result in delays. (including, but not limited to, non-licensed games and game enhancement devices, adaptors and power supply sources) or Failure to follow the above instructions may result ih de- which are otherwise not compatible; lays, cause you to incur additional charges, or may void your warranty.
http:/ /www.xbox.com 2 is used for commercia( purposes (including rental or lease); 4 This 'Limited Warranty applies to the original purchaser only and may not be assigned or transferred. However, some juris- 3 is modified or tampered with: dictions extend the protection of imptied warranties to subse- 4 is damaged by Acts of God, power surge, misuse, abuse, neg- quent consumers and therefore this limitation may not apply ligence, accident, wear and tear, mishandling, misapplication, or to you. other causes unretated to defective materials or workrnanship; H. GOVERNING LAW. This Limited Warranty is valid onlyIf in 5 serial number is defaced, akered or removed; the United States of America, and Canada and Mexico. you acquired the Product in the United States, the laws of the of 6.is damaged by programs, data, viruses, or files, or during State Washington, U.S.A.,will apply to this Limited Warranty. shipments; If you acquired the Product in Canada, except where expressly 7 is not used in accordance with the accompanying documen- prohibited by local law, the laws in force in the Province of tation and use instructions; or Ontario, Canada will apply. 8 is repaired, modified or altered by other than Microsoft If you acquired the Product in Mexico, then the Laws of Mexico authorized repair centers. will apply. This Limited Warranty does not cover your data, any separate I. QUESTIONS? Please call l-EO0-4MYXBOX software or Xbox game? whether or not packaged or inctuded (TTY users: 1-866-740-XBOX) within the U.S., U.S. Territories with the Xbox Product, or any Xbox accessories or peripheral and Canada, and within Mexico Cali 001 866 745 83 12 devices that are not manufactured by or for Microsoft. [TTY users: 001 866 251 26 21). F. EXCLlJSION OF CONSEQUENTIAL,INCIDENTAL AND CER- This Limited Warranty gives you specific legal rights, and you TAIN OTHER DAMAGES a,nd LIMITATION OF LIABILITY may also have other rights which vary from jurisdiction to jurisdiction. TO THE FULL EXTENT ALLOWED BY LAW, MICROSOFT IS NOT LIABLE FOR ANY: Microsoft Corporation, One Microsoft Way, Redrnond, WA 98052 U.S.A. [il CONSEQUENTIAL OR INCIDENTAL DAMAGES; [ii) DAMAGES OR LOSS OF ANY NATURE WHATSOEVER RELATING TO LOST PROFITS, LOSS OF DATA OR PRIVACY OR CONFIDENTIALITY, ANY INABILITY TO USE ALL OR PART OF THE XBOX PROD- UCT, PERSONAL INJURY, OR ANY FAILURE TO MEET ANY DUTY [INCLUDING BUT NOT LIMITED TO ANY LACK OF NEGLIGENCE OR OF WORKMANLIKE EFFORT); OR [iiil INDIRECT, SPECIAL, OR PUNITIVE DAMAGES; ARISING OUT OF RELATING IN ANY WAY TO THE XBOX PRODUCT. THE FOREGOING APPLIES EVEN IF MICROSOFT OR ANY SUP- PLIER Ofl AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES; EVEN IN THE EVENT OF FAULT, TORT [INCLUDING NEGLIGENCE), STRICT OR PRODUCT LI- ABILITY, MISREPRESENTATION OR OTHER REASON;AND EVEN IF ANY REMEDY FAILS OF ITS ESSENTIAL PURPOSE. Some jurisdictions do not allow the exclusion or limitation of inci- dental or consequential damages, so the above limitations or exclusions may not apply to you. G. ADDITIONAL CONDITIONS 1 The software included in the Xbox Product is licensed to you, not sotd. You are licensed to use such software only in your Xbox Product and you may not reverse engineer it, ex- cept as expressly permitted by applicable law notwithstand- ing this limitation. 2 Your Xbox Product and its internal components are new pursuant to industry standards, unless otherwise indicated on the Xbox Product retail packaging as "Refurbished". 3 You agree to comply with all applicable export laws and regulations if you export the Product outside of the United States, Canada or Mexico.
http:/ /www.xbox.com Information in this document, including URL and other Internet Web site references, is Subject to change without notice. Unless otherwise noted. the example companies, organizations. products, domain names, e-mail addresses, logos. peopte, places and events depicted herein are fictitious. and no association with any real company, organization, product, domain name, eimail address, logo, person, place or event is intended or should be inferred. Complying with all applicable copyright laws is the responsibility Of the user. Without limiting the rights under copyright. no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise], or for any purpose, without the express written permission of Microsoh Corporation. . Microsoft may have patents, patent applications. trademarks, copyrights, or other intellectual property rights covering subject matter in this document. Except as expressly provided in any written license agreement from Microsoft, the furnishing of this document does not give you any license to these patents, tradernarks. copyrights. or other intellectual property. (c) 2001 Microsoft Corporation. All rights reserved Microsoft, Xbox and the Xbox logos are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries. This product incorporates copyright protection technology that is protected by method claims of certain US.patents and other intellectual property rights owned by Macrovision Corporation and other rights owners. Use of this copyright protection technology must be authorized by Macrovision Corporation, and is intended for home and other limited viewing uses only unless otherwise authorized by Macrovision Corporation. Reverse engineering or disassembly is prohibited. Manufactured under license from Dolby Laboratories. "Dolby" and the double4 symbol are tradernarks of Dolby Laboratories. Conridential unpublished works. Copyright 1999-2001 Dolby Laboratories. All rights reserved. The names of actual companies and products mentioned herein may be the trademarks of their respective owners.
La information contenida en este documento, como direcciones URL y otras reterencias a sitios Web de Internet. est6 sujeta a cambios sin previo aviso. A no ser que se indique lo contrario, 10s nombres de cornpabias. organizaciones, productos, dominios, direcciones de correo electronico, logotipos, personas, sitios y eventos de ejemplo mencionados son ficticios, y no debe deducirse ninguna asociacion entre los mismos y nombres de compaiiias, organizaciones, productos, dominios. direcciones de correo electronico, logotipos. personas. tupares o eventos reales. El cumplimento de todas \as leyes de derechos de autor aplicables es responsabilidad del usuario. Sin limitar los derechos especificados en los derechos d> autor, queda prohibida la reproduccion, almacenamiento o ingreso en algfin'tipo de sistema de recuperacion, o transmision de cualquier parte de este documento de ninguna forma ni por ningbn medio (electronico, mecbnico. fotocopiado, grabado, etc.1, ni con ninguna finalidad. sin el consentimiento explicit0 por escrito de Microsoft Corporation. Microsoft puede tener patentes, aplicaciones de patentes, marcas comerciales, derechos de autor u otros derechos de propiedad intelectual aplicables a los asuntos mencionados en este documento. Exceptuando lo explicitamente provisto en cualquier acuerdo de licencia por escrito de Microsoft, la entrega de este documento no Le otorga ninguna licencia sobre dichas patentes, marcas comercidles, derechos de autor u otros derechos de propiedad intelectual. IC) 2001 Microsoft Corporation. Reservados todos los derechos. Microsoft, Xbox y el logotipo de Xbox son marcas registradas o marcas comerciales de Microsoft Corporation en Estados Unidos yfo en otros paises. Este product0 incorpora tecnologia de proteccion de copyright mediante determinadas patentes de EE.UU. y otros derechos de la propiedad intelectual propiedad de Macrovision Corporation y otros. El us0 de esta tecnologia protegida por copyright debe ser autorizado por Macrovision Corporation y es para us0 domestic0 y solo para otros USOS de visualizacion limitados autorizados por Macrovision Corporation. Se prohibe el desmontaje del aparato y La ingenieria inversa. Fabricado bajo licencia de Dolby Laboratories. "Dolby" y et simbolo de la doble D son marcas cornerciates de Dolby Laboratories. Trabajo confidencial no publicado. Copyright 1999-2001 Dolby Laboratories. Todos los derechos reservados. Los nombres de los productos y compariias reales mencionados en el presente documento serin marcas comerciales de sus respectivos propietarios.
Les informations contenues dans le present document, p compris les URL et les autres references a des sites Web, peuvent faire l'objet de modifications sans preavis. Sauf indication contraire, les entreprises. organismes. prodults, noms de domaine, adresses electroniques. logos. personnes, lieux et evenements figurant dans ce manuel sont fictifs et sans quelconque rapport, intentionnel ou implicite, avec une entreprise. un organisme, un produit, un nom de domaine, une adresse eiectronique, un logo, une personne. un lieu ou un evenernent reels. Cutilisateur est tenu d'observer la reglementation relative aux droits d'auteur, applicable dans son pays. Sans limitation des droits d'auteur. aucune partie de ce document ne peut Etre reproduite, stockee ni introduite dans un systPme de restitution, ou transmise b quelque fin, par quelque moyen que ce soit [electronique, mecanique, photocopie, enregistrement ou autre] ou dans un but quelconque. sans la permission expresse et ecrite de Microsoft Corporation. Microsoft peut detenir des brevets, avoir depose des demandes d'enregistrement de brevets ou Ptre titulaire de marques, droits d'auteur ou autres droits de propriete intellectuelle portant sur L'ensemble ou une partie des elements qui font l'objet du present document. Sauf stipulation expresse contraire d'un contrat de licence ecrit de Microsoft, la fourniture de ce document n'a pas pour effet de vous conceder une licence sur ces brevets, marques, droits d'auteur ou autres droits de propriete intellectuelle. (c) 2001 Microsoft Corporation. Tous droits reserves. Microsoft, Xbox et les logos Xbox sont des marques de commerce ou des marques deposees de Microsoft Corporation aux Etats-Unis et/ou dans d'autres pays. Ce produit integre une technologie de protection du copyright qui est protegee par des revendications de rnethode inherentes b certains brevets americains et autres droits de propriete intellectuelle detenus par Macrovision Corporation et d'autres detenteurs de droits. Cutilisation de cette technologie de protection du copyright doit Stre approuvee par Macrovision Corporation et est reservee a un usage prive et limite, sauf mention contraire par Macrovision Corporation. Cingenierie inverse ou le desassemblage est interdit.
Fabrique sous licence de Dolby Laboratories. Le terme e Dolby N et le sigle double D sont des marques commerciales de Dolby Laboratories. Euvres inedites confidentielles. Droits d'auteur, 1999-2001 Dolby Laboratories. Tous droits reserves. Les noms de societes et de produits reels mentionnes dans ce manuel peuvent Etre des marques de commerce de leurs proprietaires respectifs.
0901 Part Number: XO8-52583 Printed in Mexico Microsoft* UUVDoLsv] DIGITAL EXHIBIT 7
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EXHIBIT 8 STAT€ OF CONNECTICUT
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MAY 1 0 1990 , ,'.(,.., ...... -.-'. - -I.--..- - .
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'I * Tille * hnintrAddmr t t t * t Keith 3. Ta-wski ., President .1491 Boston Poa Treasurer u Old Saybrook, (. Director 8 1. e 8 t e t 8
Carol A. Fiorillo I ' Vice President * 1431 Boston Pose S'fidor Ct U.r: * Secretary * Road 'Old Sapbrook;' 4 t Director 'Old Saybrook, Cf 06475 t t 1 mtcIssued Shns .
ylb.rlsswd Aaant rryubl. <,a- W? subs Qu andoutrtmdim Nuher in Tma- uvm if irot runYD) 34 8 t * * . \*. -0 N/A '&me 1,000 ' -0- a Fblly Paid q$i;
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. - .._ . .. I BUSINESS ABSTRACT
D&B Completed Analysis:11-21-2001 Database Last Updated:12-19-2001 Source:Copyright (c) 2002 by Dun & Bradstreet, Inc. Current Date:03/28/2002
COMPANY INFORMATION
DUNS:84-239-6822
Name:ULTIMATE GAME CLUB Registered Address:605 W MAIN ST BRANFORD, CT 06405-3421 Country :USA North America
Telephone:203-483-6936
BUSINESS DESCRIPTION
Line of Business:MISC RTL STRS NEC
Primary SIC: 5999Ret misc merchandise
FINANCIAL INFORMATION
Net Worth (US):$Not Available Net Worth (Local):$Not Available Profit (US) : $Not Available Prof it (Local): $Not Available Currency:U.S. Dollar
SALES INFORMATION
Annual Sales (US):$160,000-Estimated Annual Sales (Local):$Not Available
EMPLOYEE INFORMA!'ION
Total Employees:3 Employees Here:3
' COMPANY HISTORY/OPERATIONS/RELATIONSHIPS & OTHER INFORMATION
This Company's Specifics:
DUNS:84-239-6822 Located 1n:County: NEW HAVEN Ownership 1s:Privately Owned Business Is A:Single Location END OF DOCUMENT
Copr. 0 West 2002 No Claim to Orig. U.S. Govt. Works BUSINESS ABSTRACT
D&B completed ~nalysis:11-21-2001 Database Last Updated:12-19-2001 S0urce:Copyright (c) 2002 by Dun & Bradstreet, Inc. Current Date:03/28/2002
COMPANY INFORMATION
DUNS:79-700-3878
Name:ULTIMATE GAME CLUB Registered Address:120 RIVERVIEW CTR MIDDLETOWN, CT 06457-3585 Country:USA North America
Telephone:860-346-5071
BUSINESS DESCRIPTION
Line of Business:MISC RTL STRS NEC
Primary SIC: 5999Ret misc merchandise
FINANCIAL INFORMATION
Net Worth (US):$Not Available Net Worth (Local):$Not Available Profit (US):$Not Available Profit (Local):$Not Available Currency:U.S. Dollar
SALES INFORMATION
Annual Sales (US):$160,000-Estimated Annual Sales (Local):$Not Available
EMPLOYEE INFORMAT ION
Total Employees:3 Employees Here:3
COMPANY HISTORY/OPERATIONS/RELATIONSHIPS & OTHER INFORMATION
This Company's Specifics:
DUNS:79-700-3878 Located 1n:County: MIDDLES EX Ownership 1s:Privately Owned Business Is A:Single Location END OF DOCUMENT
Copr. 0 West 2002 No Claim to Orig. US.Govt. Works EXHIBIT 9 TU€ JAH--26--9I 16: le
1491 Boston Post Road, Old Saybrook, CT 06475 FAX Phone (203)395-3093 (203)388-0084 i FAX Cover Sheet
To: Kathleen Cooney taw Office 8
From: Stephen Schofield 20 3-395-3093
Number of pages Cover Sheet) (including .. . L -.. , --- .I. ! If there are any errors in transmission contact sender immediatelg 1 votes:1
iI
I
I I I ! Page 1 of 3 -91 TUE 16,:ll
(Ultimata Game Club) 1491 Boston Post Road, Old Saybrook, CT 06475 Phone (203)395-3093 FAX (203)388-0084
To: Commissioner Of Patents And Trademarks : Box5 Washington, D.C. 20231
Attn: Kathleen Cooney Law Ofke 8
re: Serial Number: 74B036.46 Mar& lnnovalion Mark Type: Trademark Drawing or Type: Stylized words, letters, numbers Dear Ms. Cooney, Here the identification clarification you requested: I -- )---c ' "Innovation is the trademark for Innovation Technologies which is Ultimate Game Club, Ltd.3 deslgdmanufacturlng division which manufactures I video game cartridges, video output games, video game joysticks, and other video game accessories" - / - In reference to the other parties names appearing on specimen A(enclos8d) Sega Of America, Inc. is a subsidiary of Sega Entereises, Ltd. which manufactures the "Game Gear" handheld video game system for which we have designed and manufacture accessories, ie "Master Link"wh1ch is a product of Innovation TechnOlOQisS, our designlmanufacturlng division. If you have any questions or need any further clarification, please don't hesitate to call me at any time. Thank you for your help. 1
Spedal Projects Director
Page 2 of 3 JFlI-4-26-93 16:ll
J. EXHIBIT 10 ~ __~
EBgames.com - Electronics Boutique Page 1 of 2
click here to lou-in! Jedi Knight II -NOW Shipping1 Kyle Katarn returns for intense first-person action with his Iightsaber, a full arsenal of weapons and The Force! Gamespot calls it "a worthy successor to the venerable Jedi !!! 1 Knight." Save $10 00 with mail-in rebate coupon1 Jedi Knighu - $49.99 - Collector's Edition - $59 99
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Gunvalkyte XBX
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IReturning shoppers, 111 Accessories department of XBox click- here to ioq-in! Yrwi J:;D gt$&I*C;-T 1 -20Of37 Next 17 Results
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6 All Products Gamina Series DSS-900 5.1 Diaital Speaker r XBOX Svstem Usually Ships Within Hours Advanced Search 24 Price: $99.99 Sign up for Category: XBox ESRB: N/A our Newsletter -E> ';<$."?&& Freestvler Board for Xbox Welcome Pre-Order, Ships on 4/11/2002 Playstation 2 PlayStation Price: $79.99 Category: XBox Xbox ESRB: N/A Accessories Adventure Family - NASCAR Pro Victory.R_acia Wheel Fighting Usually Ships Within 24 Hours Hardware Platform Price: $59.99 Preowned Category: XBox Racing ESRB: N/A RPG Shooters Simulation MC2 Racing Wheel And Pedals Sports Usually Ships Within 24 Hours Strategy Game Boy Adv. 1 Price: $59.99 Category: XBox Game Boy ESRB: N/A GameCube Dreamcast PC Games Monster GameLink 4mX Component Video PC Hardware with Analog Audio Ships Within Hours Preowned Usually 24 Action Figures Price: $59.99 DVD Movies Category: XBox ESRB: N/A Nintendo 64
- ~~ I ~;~x~Q~;R:II~+::rjb2,1;a BLACK THUNDER WHEEL XBOX PC Home Pre-Order, Ships on 4/16/2002 PC Education Price: $47.99 PC Office Category: XBox N/A Tax Shop ESRB: Toys The Sirnpsons Lord of Rings Monster Gameunk 300 X S-Video AV Cable Usually Ships Within 24 Hours McFarlane Toys
Price: $44.99 http://www.ebgames.com/ebx/categories/products/deptpage.asp?web-dept=zXBox&web-sub-dept=Acces ... 3/28/2002 EBgames.com: 'XBox-Accessories' Page 2 of 3
Category: XBox %E:l8g.&% %2qji&p. Corporate Info Store Locator Store Rebates Catalog Request Contact Us , Price: $39.99 1 Affiliate Program Privacy Statement
J Xbox Controller S Pre-Order, Ships on 4/29/2002
Price: $39.99 Category: XBox ESRB: N/A
Fox 2 Pro Fliaht Stick Pre-Order, Ships on 4/11/2002
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Price: $34.99 Category: XBox ESRB: N/A
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Xbox Racina Wheel Pre-Order, Ships on 4/11/2002
Price: $29.99 Category: XBox ESRB: N/A
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Where to search. All Products ~-___PowerPad GarnePad Usually Ships Within 24 Hours r XBQX Advanced Search Price: $24.99 Category:N/A XBox ESRB: Sign up for our Newsletter PowerPad Color GamePad E. Usually Ships Within 24 Hours
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EXHIBIT 12
...
EXHIBIT 13
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EBgames.com - X-Selector Video Game System Selector Page 1 of 2
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http://www.ebgames.com/ebx/categories/products/product.asp?pf~id=21 3973 3/28/2002 EXHIBIT 16 DECLARATION OF JOHN P. SCHNURER
I, John P. Schnurer, do hereby declare and state as follows:
1. I am an attorney with the law firm of Fish & Richardson P.C., counsel for Microsoft Corporation (“Microsoft”). I make this declaration in support of Microsoft’s complaint for filing in the United States International Trade Commission. I make this declaration of my own knowledge and could and would competently testify as to the matters set forth herein. 2. On or about March 13,2002, I visited the website at wwwhnovation 1.corn and printed a copy of the website, a copy of which is attached as Exhibit A. On or about March 15,2002, I sent an e-mail to the e-mail address listed on the website for inquiries, which was [email protected]. I requested information about %oxTM accessories that Innovations Technologies may have for sale. I received an e-mail the same day from [email protected] providing me the information I requested as an attached file. A copy of the e-mail string is attached as Exhibit B. A copy of the attached file, a product catalog, is attached as Exhibit C.
3. On or about March 26, I sent an e-mail to [email protected] requesting an X-Selector for $20 and an X-Connection for $25. I received an e-mail from ktinnovation@,hotmail.com the same day indicating the price for the X-Selector and X- Connection. A file was also attached to the e-mail, which provided instructions for payment. The instructions indicated that payment was to be made by money order, Paypal or Bidpay. Payment was to be sent to the e-mail address [email protected] if Paypal or Bidpay was used. A copy of the e-mail string is attached as Exhibit D. 4. On or about March 26,2002, I opened an account at Paypal and sent $50.00 to kt@,cyberzone.net as instructed. On or about March 26,2002, I received an e- mail from Ict@,cyberzone.net which indicated that my purchase would be shipped the next day.
1 5. On or about April 11,2002, I received my purchase, i.e., one X-Selector and one X-Connection, which was sent through the United States Postal Service. A copy of the shipping label is attached as Exhibit E. The X-Selector I received had the same ornamental design as the X-Selector offered for sale on www.EBgames.com, but the X-
Connection had an ornamental design that was different from the ornamental design of an
X-Connection that I had previously ordered fiom www.EBgames.com as reflected in an invoice attached as Exhibit F. I declare under penalty of perjury that the foregoing is true and correct.
Dated: April 24,2002 By: ohP. Schnurer
2 EXHIBIT A Innovation Technologies Page 1of 1
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http ://www.innovation 1. codnavbar. htm 3/13/2002 EXHIBIT B
, Hotmail Message Page 1 of 1
Calenda Previous Next I Close Hotmail From : "ktinnovation"
Dear customer service,
I like your inventory for game consoles, but Ialready have a playstation2. I'm interested in an X- box. DO you sell any. Also, I'm interested in any accessories available for the x-box. Thanks.
John
I Send and receive Hotmail on your mobile device: Click Here Notice: Attachments are automatically scanned for viruses using ma
Previous Next I Close I MSNHome I MyMSN 1 Hotmail 1 Search I Shopping I Money I People&Chat 0 2002 Microsoft Corporation. All rights reserved. TERMS OF USE Advertise TRUSTe Approved Privacy Statement GetNetWise
http://lwl4fd.law 14.hotmail.msn.com/cgi-bin/getmsg?curmbox=FOO00000O1&a=d87f633 f2a 4/23/2002 EXHIBIT C no, n9 tft F
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EXHIBIT D Hotmail Message Page 1 of2
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[email protected] Calenda ~ _cll"""-l - - 7-.-l ; -", Block Previous Next I Close Hotmail Save Address(es) 1 Free New From : "ktinnovation"
Dear Customer Service:
I'd like to purchase 1 x-selector and 1x-connection. What do you require? Can I fax in the order request.
Thanks,
John
>From: "Minnovation" >To: "John Schnurer" >Subject: Re: X-boxes >Date: Fri, 15 Mar 2002 20:05:28 -0500 > >here is a list of xbox stuff we have. >Futureteck > 1491 boston post road >old saybrook,Cr 06475 >fax 860-388-0084 >www.innovationl.com > ----- Original Message ----- > From: John Schnurer > To: [email protected] > Sent: Friday, March 15, 2002 7:30 PM > Subject: X-boxes >
http://lw 14fd.law14.hotmail.msn.com/cgi-bin/getmsg?curmbox=FOOO0000O 1 &a=d87f633Qa 4/23/2002 Hotmail Message Page 2 of 2
> > Dear customer service, > > I X-box.like your inventory for game consoles, but Ialready have a playstation2. I'm interested in an DO you sell any. Also, I'm interested in any accessories available for the x-box. Thanks. > > John > > > >------> Send and receive Hotmail on your mobile device: Click Here > ><< Gamecube-xbox-ps2-retail.xls >> viruses Noti ; Attachments are automatically scanned for using
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MSN Home I MyMSN Hotmail I Search I Shopping I Money . PeopleSChat rights1 1 0 2002 Microsoft Corporation. All reserved. TERMS OF USE Advertise TRUSTe Approved Privacy Statement GetNetWise
http://lw 14fd.lawl4. hotmail.msn.com/cgi-bin/getmsg?curmbox=F0OOOOOOO 1&a=d87f633 f2a 4/23/2002 EXHIBIT E *.!A . . -.e
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KEITH TFlRUSKI 2 LBS 1 OF 1 RD 1491 BOSTON POST . OLD SWBROOK CT 06475-1716 Ir. ?, 9 '!; SHIP TO: f i JOHN SCHHUREN ni? 16319 SRLIDR DEL SOL CA 92065
$1 cCA 92065 I EXHIBIT F Ordered By: Shipped To: 7545 Group #: 172478Pull #:022681 JOHN SCHNURER JOHN SCHNURER PO BOX 24 4350 LA JOLLA VILLAGE DR Have a question about your order? POWAY, CA 920 74 SUITE 500 Visit: www.ebworld.com/rnyaccountUSA FISH & RICHARDSON Call: toll-free (877) 432-9675 SAN DIEGO, CA 92122 E-Mail: help Q ebworld.com - USA UNIT TOTAL UAMlTl IESCRIPTION -;HIPPED PRICE PRICE 1 SYSTEM SELECTOR INNOVATIO 213973-738012666128 19.99 19.99 1 Order Date: 3/15/02 Order ID:002056465-40874831 Subtotal 44.98 FRT 8.99 Tax .oo Thank you for shopping at EBWorld.com. Total 53.97 RETURN LABEL 4 0874 83 1 EB Product Fulfillment Matlack 931 South PA Street West Chester, 19382 EXHIBIT 17 EBgames.com - X-Connection Page 1 of 2 5eturning shoppers, a ;": X-Connection Find it! 1 Advanced Search m.. . . .s Sign up for our Newsletter - ';f>:>,y,&P, Welcome Playstation 2 Playstation Xbox The X-Connection allows you to play Xbox console games with Accessories TV, Adventure Playstation controllers. Simply connect the Xbox console to the Family pop in your favorite game, switch on the power, and plug the I Fighting Hardware convertor into the Xbox. Then, plug the Playstation controller into Platform the X-Connection and you're ready to go. 9 Preowned Racing RPG Shooters Simulation Sports Pu b1isher:INNOVATION Strategy TECHNOLOGIES Game Boy Adv. Category: XBox Game Boy Back to top GameCube 'd Dreamcast PC Games PC Hardware Preow ned Overall customer rating: * * * .k Action Figures "Does Not Work Properly" DVD Movies "Doesn"t work with all aameg Nintendo 64 "has its uses_; Read all reviews ,%hqy>;? 2.: p&:rL$l& -Write your own review PC Home Back to top PC Education PC Office Tax Shop 'rays 'The Simpsons Lord of Rings McFarlane Toys http://www.ebgames.conllebxlcategories/products/product.asp ?p f- id=217352 3/28/2002 EBgames.com - X-Connection Page 2 of 2 Store Rebates Contact Us Affiliate Program Privacy Statement Welcome I Playstation 2 I Playstation Xbox I Game Bov Adva- GameCube Dreamcast PC Games I PC Hardware I Preowned I Action Fiaures I Movies Copyright 0 1996-2002 EBWorld com, Inc All rights reserved Ergs Privacv Statement All prices appearing on this site are in U S Dollars For information on joining our Affiliates Program, c;lick here. http://www.ebgames.com/ebx/categories/products/product.asp?pf~id=217352 3/28/2002 EXHIBIT 18 Gamestop.com - Home Page 1of 2 rs shooter that will blow you tireat rjamestop utters! th awesome weapons and Hurry1 When the clock" runs down or supplies are gone. the sale is over! Vision Tek G4 128MB Video Ca--' I Freedom Force FRE" Preowned GTAAM,. Dungeon Siege - $47.99 Ships April 4thl Dungeon Siege b plunges you into a continuous 3D fantasy world where you face off against an anyof evil that has been unleashed! Sybex's Strategies & Secrets Also try: Neverwinter Nights. ~ Resident Evil - $49.99 GC - Ships 5/14 An entirely new Neon Genesis Evangelion 4/09 ence on 2 discs! Be Collection IDVDI I airaio ... be very afraid ... (XBOX) Check out this and ISpiderman I I E Blood Omen 2 - $49.99 NFL Blitz 2002 (Xbox) 3/19 - are Vampire I, Yu-gi-oh1 Dark Duel Stories $47.99 . the most evil figure 3,18 Dungeon I (GB) Siege ce a video game. Sony PS2 Memorq1 Card $39.99 Yu-gi-oh1 Forbidden 3/18 innovation XBox tension Memories (PSX) X $7.99 Cable Freedom Force with Bonus $39.99 r c)~- I I IC JCI ICD LI 111 I~diKninht II IPAI Outcast $49.99 1 [Spawn Series 12 Figures I http://www.gamestop:coml 3/28/2002 Ganiestop.com - Home Page 2 of 2 PC - Even Sims could use ignited the 3D fighting Preowned PS2 System with $249,9s a break once in a while! genre has returned! FREE Zone of the Endersl Take them skiing, to the Jedi Knight Jedi Outcast 11. $59,99 beech or more! _Collector's Edition Yu-gi-oh! Dark Duel Stories $29.99 Yu-gt-oh' Card Booster Pack $2.99 Sega Dreamcast System with Playstation 2 System with SSX Harvest Moon Save the Homeland Crazy Taxi Free - $69.99 Free - $249.99 PS2 Purchase a preowned Sega Dreamcast Receive SSX FREE when you purchase - New Price S34 99 Old Price $49 99 System andFREE! receive Crazy Taxi a Preowned Playstation 2 System in our absolutely exclusive bundle! Baseball Mogul 2002 - PC New Piice $19 99 Old Price $29 99 Dre3mcmLRumhke Pa~k-: Nintendo 8:BBCo_ntr_oller - Driven - GBA sE!9 84.99 New Price $1 9 99 Old Price $29 99 Now you can fully experience your Do you need to play rnultiplayer Powerpuff Girls Chemical X- Dreamcast games in all their games on your NES? Of course! Get Traction - N64 action-packed glory! another controller! NES AC Adanter New Price $29 99 Old Price $39 99 onkey Kong? Can ch out Pikachu? 4 Contact Us I Newsletter Sian-Up I Affiliate Proqram- sm Be& to Top Investor Relations I Employment I Corporate Information I Disclaimer Back to Top 153 http://www.gamestop.coml 3/28/2002 _I -- Garriestop.com - Innovation XBox X-Connection Playstation 2 Dual Shock Converter Page 1 of 2 GameStotm ~~~~E~~~~~EMY A Company- HOME I VIEW CART I ORDER TRACKlNG I ACCOUNT I STORE LOCATOR I HELP Innovation XBox X-Connection ACCESSORIES[ Playstation 2 Dual Shock Innovation XBox Xtension Cable Converter Publisher: Innovation Technologies Add to Cart Developer: Innovation Technologies $7.99 Platform: XBOX Category: Accessories, Cables & Adapters Innovation presents the XBox Xtension Cable which adds 6 feet of cable to the original Microsoft Xbox controller. The Xtension Cable features an inline ...[More] Back Ordered $24.99 ALS XBox Carry Case $29.99 Add to Cart Add to Cart Interact Universal S- $14.99 Add to Cart AV Cable =mRE AtlAJhABIbPTY ZIP Code: Distance: @ Interact XBox AV/S- $7.99 Add to Cart - Video Cable InteractRFU $7.99 Add to Cart Ad a Rte r MadCatz UnLveEe $14,99 Addto CaIt AV Cable $7.99 Add to Cart The X-Connection allows you to play Xbox console games with Playstation Cable controllers. Simply connect the Xbox console to the W, pop in your favorite game, switch on the power, and plug the convertor into the Xbox. Mlcrosoft $14.99 Add to Cart Cab le Then, plug the Playstation controller into the X-Connection and you're ready to go. Monster $29.99 Add to Cart Cable Monster XBox GarneLink 100 Fiber $29.99 Add to Cart Optic Monster XBox GarneLink 4-00 $49.99 Add-to Cart Corn ponent Monster XBox GarneLink 300 S-Video $34.99 Add to Cart AV Microsoft XBOm $14.99 Add to cart C& Pelican XBOX $7.99 Add to Cart Extension Cable Intec XBOX Extension $7.99 Add to Cart Cable http://www .gamestop .codproduct.asp?product_id=8 0 13 82 312812002 2 Gamestop.com - Innovation XBox X-Connection Playstation 2 Dual Shock Converter Page of3 Join the legendary Jedi Knight Obi-Wan Kenobi as he takes on the worst scum and villainy the galaxy has to offer in level after level of fast- paced action. ... [More] Batman Venqeance $49.99 Add to Cart NBA Live 2002 $49.99 Add to Cart New Legends $49.99 Add to Cart Jet Set RadioFuNre $49.99 Add to Ca-rt Eider Scrolls 111: $49.99 Add to Cart Morrowind NFL 2K2 $49.99 Addtocart Genma. Onimusha $49.99 Add to Cart Contact Us I Newsletter Sign-Up I Affiliate Proqm Back to Top'd 'Back to Top __Investor_ Relations I Employment I Corporate Information I Disclaimer 154 http://www.gamestop:com/product.asp?product-id=SO1 382 3/28/2002 EXHIBIT 19 Ordered By: Shipped To: 7687 Group #: 174892Pull #: 022856 MELODY HABECKER MELODY HABECKER 2222 Q ST. N.W. APT. 1 2222 Q ST. N.W. APT. 1 Have a question about your order? WASHINGTON, JJC 2 00 0 8 WASHINGTON, DC 20008 www.ebworld.com/myaccount~~~ Visit: USA Call: toll-free(877) 432-9675 E-Mail: [email protected] ~ UANTITY UNIT TOTAL )ESCRIPTION ;HIPPED FRICE PRICE 2 YSTEM SELECTOR INNOVATIO 213973-738012666128 19.99 39.98 Order Date: 3/25/02 Order ID:002066347-40894700 Subtotal : 39.98 PRT : 8.99 Tax : .oo Thank you for shopping at EBWorld.com. Total : 48.97 RETURN LABEL ,r 40894700 EB Product Fulfillment 931 South Matlack Street West Chester, PA 19382 EXHIBIT 20 Ordered By: Shipped To: 7545 Group #: 172478Pull #:022681 JOHN SCHNURER JOHN SCHNURER PO BOX 24 4350 LA JOLLA VILLAGE DR Have a question about your order? POWAY, CA 92 0 74 SUITE 500 Visit: www.ebworld.com/myaccountUSA FISH & RICHARDSON Call: toll-free (877) 432-9675 SAN DIEGO, CA 92122 E-Mail: [email protected] USA UNIT TOTAL "Aw'nlRDERED SHIPPED I DESCRIPTION PRICE PRICE 1 1 SYSTEM SELECTOR INNOVATIO 213973-738012666128 19.99 19.99 1 1 XBOX X-CONNECTION XB 217352-738012123379 24.99 24.99 Order Date: 3/15/02 Order ID:002056465-40874831 Subtotal 44.98 FRT 8.99 Tax .oo Thank you for shopping at EBWorld.com. Total 53.97 RETURN LABEL /- i 40874831 EB Product Fulfillment 931 South Matlack Street West Chester, PA 19382 I Illll lllllllllllllllllllllMI1779330 llllllllllllnl111/ Ill1 EXHIBIT 21 Shipping Method :FedEx Standard Overnight 1 of 1 Game Wave No : 8744 www. arnestop.com Bin No : 15 2250 illiam D. Tate Avenue Filler No :1 Grapevine, Texas 7605 1 Packed By :LF Order Number: 4020327085729102 00004020327085729102 Shipping Mode: FedEx Standard Overnight 2201 L Street, NW Store Number: 400000 Apartment 7 12 Ship Date: 0312812002 Washington, DC 20037 Payment: Visa 9189 (202)223-2799 Shipment No: 1 Wave No: 8744 'L I PACKING LIST 1 01382 aOXX Connection (Innovation) JPN t4.99 p; 1 1 aOXX Connection (Innovation) 1 JPN t4.99 0 For International Customers: Order Value for 0 Country of Origin is the 0 Any additional customs duties, import fees and Customs =Subtotal. US unless otherwise stated. taxes are the responsibility of the recipient. SubTotal : 49.98 Shipping and Handling : 7.99 Total Charges : 57.97 I Return Label Gamestop.com c/o Babbage's Etc. 2250 William D. Tate Avenue Grapevine, TX 76051 Order # RMA # .. GAMESTOP.6: M RETURN POLICY Defective Items Defective products may be returned up to 30 days past the shipment date of your order. If you want to return a defective product, please follow these instructions: 1 Contact us to obtain a Return Authorization Number (RMA#). Please do not ship merchandise back to us without first obtaining an RMA # as this may sianificantlV delaV the process of crediting your order or replacinq Vour defective item. 2. Using the return label on the front of this page, mail the defective merchandise back to us. We suggest that you insure your package so you can track it. 3. We will mail out a replacement product to you at ne extra charge. Non-Defective Items Non-defective products may be returned up to 30 days past the shipment date of your order. If you want to return non-defective merchandise to us, please follow these instructions: 1. Contact us to obtain a Returri Authorization Number (RMA#). Please do not ship merchandise back to us without first obtaining an RMA# as this may siqnificantly delay the process of creditinq Vour order. 2. Using the return label on the front of this page, mail the merchandise back to us. We suggest that you insure your package so you can track it. 3. Upon the receipt of the returned merchandise, we will credit your account. Customer Service Bepat-lment-- You may contact our customer sewice department via phone or email: e PHONE:EMAIL: [email protected] * 1-817-424-2200. open Our customer service department is from Monday through Friday from 8 am to 7 pm Central Standard Time. Please allow up to 48 hours for us to process your request. EXHIBIT 22