<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1995.
REGISTRATION NO. 33-57651.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICROSOFT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 7372 91-1144442
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
ONE MICROSOFT WAY
REDMOND, WASHINGTON 98052-6399
(206) 882-8080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT A. ESHELMAN, ESQ.
MICROSOFT CORPORATION
ONE MICROSOFT WAY
REDMOND, WASHINGTON 98052-6399
(206) 882-8080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<S> <C>
RICHARD B. DODD, ESQ. GORDON K. DAVIDSON, ESQ.
MARK R. BEATTY, ESQ. EDWIN N. LOWE, ESQ.
PRESTON GATES & ELLIS KENNETH A. LINHARES, ESQ.
5000 COLUMBIA CENTER FENWICK & WEST
701 FIFTH AVENUE TWO PALO ALTO SQUARE, STE. 800
SEATTLE, WA 98104-7078 PALO ALTO, CA 94306
</TABLE>
Approximate date of commencement of proposed sale of the securities to the
public: At the effective time of the merger of a wholly-owned subsidiary of the
registrant with and into Intuit Inc., which shall occur as soon as practicable
after the effective date of this registration statement and the satisfaction of
the conditions to the merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-4 CAPTION IN PROXY/PROSPECTUS
- -------------------------------------------------------- -------------------------------------
<S> <C> <C>
Item 1. Forepart of Registration Statement and
Outside Front Cover of Prospectus........... Outside Front Cover Page
Item 2. Inside Front Cover and Outside Back Cover
Pages of Prospectus......................... Inside Front Cover Page; AVAILABLE
INFORMATION;
Item 3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............... SUMMARY OF PROXY
STATEMENT/PROSPECTUS; SELECTED
FINANCIAL DATA; FINANCIAL ANALYSIS
Item 4. Terms of the Transaction.................... SUMMARY OF PROXY
STATEMENT/PROSPECTUS; THE MERGER AND
RELATED TRANSACTIONS; DESCRIPTION OF
CAPITAL STOCK; COMPARISON OF RIGHTS
OF SHAREHOLDERS OF INTUIT AND
MICROSOFT
Item 5. Pro Forma Financial Information............. Not Applicable
Item 6. Material Contacts with the Company being
Acquired.................................... THE MERGER AND RELATED
TRANSACTIONS -- Background of the
Merger
Item 7. Additional Information Required for
Reoffering by Persons and Parties Deemed
Underwriters................................ Not Applicable
Item 8. Interests of Named Experts and Counsel...... LEGAL MATTERS
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
Item 10. Information with Respect to S-3
Registrants................................. Not Applicable
Item 11. Incorporation of Certain Information by
Reference................................... Not Applicable
Item 12. Information with Respect to S-2 or S-3
Registrants................................. SUMMARY OF PROXY
STATEMENT/PROSPECTUS; SELECTED
FINANCIAL DATA -- Microsoft;
FINANCIAL ANALYSIS -- Microsoft
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; COMPARATIVE MARKET
PRICES; MICROSOFT'S BUSINESS;
DESCRIPTION OF CAPITAL STOCK;
FINANCIAL STATEMENTS
Item 13. Incorporation of Certain Information by
Reference................................... INCORPORATION OF DOCUMENTS BY
REFERENCE
Item 14. Information with Respect to Registrants
other than S-3 or S-2 Registrants........... Not Applicable
Item 15. Information with Respect to S-3 Companies... Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-4 CAPTION IN PROXY/PROSPECTUS
- -------------------------------------------------------- -------------------------------------
<S> <C> <C>
Item 16. Information with Respect to S-2 or S-3
Companies................................... SUMMARY OF PROXY
STATEMENT/PROSPECTUS; SELECTED
FINANCIAL DATA -- Intuit; FINANCIAL
ANALYSIS -- Intuit Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
COMPARATIVE MARKET PRICES; INTUIT'S
BUSINESS; THE INTUIT SPECIAL
STOCKHOLDERS MEETING; DESCRIPTION OF
CAPITAL STOCK; FINANCIAL STATEMENTS
Item 17. Information with Respect to Companies Other
than S-3 or S-2 Companies................... Not Applicable
Item 18. Information if Proxies, Consents or
Authorizations are to be Solicited.......... INCORPORATION OF DOCUMENTS BY
REFERENCE; SUMMARY OF PROXY
STATEMENT/ PROSPECTUS; THE INTUIT
SPECIAL STOCKHOLDERS MEETING; THE
MERGER AND RELATED TRANSACTIONS;
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF INTUIT AND MICROSOFT
Item 19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer........................... Not Applicable
</TABLE>
<PAGE> 4
(INTUIT LOGO)
155 LINFIELD AVENUE
MENLO PARK, CALIFORNIA 94025
FEBRUARY 17, 1995
Dear Intuit Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Intuit Inc. ("Intuit"), which will be held in the VMOVA Conference Room at 75
Willow Road, Menlo Park, California 94025, on Monday, April 10, 1995, commencing
at 8:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve and adopt the Agreement and Plan of Reorganization dated as
of October 13, 1994, as amended, (the "Reorganization Agreement") entered into
by Intuit, Microsoft Corporation ("Microsoft") and M/I Acquisition Corporation,
a wholly-owned subsidiary of Microsoft ("M/I"), a related Agreement of Merger
between Intuit and M/I (collectively with the Reorganization Agreement, the
"Merger Agreements") and the merger (the "Merger") of M/I with and into Intuit
pursuant to the Merger Agreements.
If the proposed Merger is approved and becomes effective, Intuit will
become a wholly-owned subsidiary of Microsoft, and (subject to the adjustment
formula described below) each share of Intuit Common Stock, $0.01 par value (an
"Intuit Share") that is outstanding at the time of the Merger will be converted
into 1.336 shares of Microsoft Common Stock, $0.00005 par value ("Microsoft
Shares"), and each then-outstanding option to purchase one Intuit Share will be
assumed by Microsoft and converted into an option to purchase 1.336 Microsoft
Shares. However, if the average closing price at which Microsoft Shares trade
during the ten trading days ending two days prior to the closing of the Merger
(the "Microsoft Average Closing Price") is less than $53.144 per share, then the
number of Microsoft Shares into which each Intuit Share will be converted in the
Merger (and the number of Microsoft Shares that will be purchasable upon the
conversion of each option to purchase one Intuit Share) will be increased from
1.336 to the number of Microsoft Shares obtained by dividing $71.00 by the
Microsoft Average Closing Price and rounding to the third decimal point. If the
Merger Agreements and the Merger are approved by Intuit's stockholders at the
Special Meeting, the Merger is expected to be consummated on or about April 11,
1995, or as soon thereafter as practicable after satisfaction of all necessary
closing conditions.
After the Merger occurs, I will serve as Microsoft's Executive Vice
President of Electronic Commerce, and William Campbell, Intuit's current Chief
Executive Officer, will continue to serve in that position and as a Senior Vice
President of Microsoft, and William H. Harris, Jr., an Intuit Executive Vice
President, will serve as a Vice President of Microsoft. Most of the members of
Intuit's current executive management team are expected to continue as officers
of Intuit following the Merger. The combination of Intuit with Microsoft will
enable Intuit to accelerate its efforts to fundamentally change the way that
individuals and small businesses handle their financial affairs.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreements, the Merger and the transactions provided for by
the Merger Agreements and has concluded that they are in the best interests of
Intuit and its stockholders. Your Board of Directors unanimously recommends a
vote in favor of the Merger.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the actions to
be taken by Intuit stockholders at the Special Meeting
<PAGE> 5
and a proxy. The Proxy Statement/Prospectus more fully describes the proposed
Merger and includes information about Intuit and Microsoft. Please read it
carefully.
We hope that you will be able to attend the Special Meeting in person.
However, whether or not you plan to attend the Special Meeting, please complete,
sign, date and return your proxy in the enclosed envelope. If you attend the
Special Meeting, you may vote in person if you wish, even though you have
previously returned your proxy. It is important that your shares be represented
and voted at the Special Meeting.
Sincerely,
/s/ SCOTT D. COOK
---------------------
Scott D. Cook
Chairman of the Board
<PAGE> 6
(INTUIT LOGO)
155 LINFIELD AVENUE
MENLO PARK, CALIFORNIA 94025
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Our Stockholders:
A Special Meeting of Stockholders of Intuit Inc., a Delaware corporation
("Intuit"), will be held at 8 a.m., local time, on Monday, April 10, 1995 at
Intuit's offices in the VMOVA Conference Room at 75 Willow Road, Menlo Park,
California 94025 (the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve: (a) the Agreement
and Plan of Reorganization dated October 13, 1994, as amended, (the
"Reorganization Agreement") entered into by Intuit, Microsoft Corporation,
a Washington corporation ("Microsoft"), and M/I Acquisition Corporation, a
Washington corporation that is a wholly-owned subsidiary of Microsoft
("M/I"), and the related Agreement of Merger (together with the
Reorganization Agreement, the "Merger Agreements") to be entered into
between Intuit and M/I, and (b) the merger (the "Merger") of M/I with and
into Intuit pursuant to the Merger Agreements, whereby, among other things,
Intuit will survive the Merger and become a wholly-owned subsidiary of
Microsoft, each outstanding share of Intuit Common Stock, $0.01 par value
(an "Intuit Share"), will be converted into no fewer than 1.336 shares of
Microsoft Common Stock, par value $0.00005 per share ("Microsoft Shares"),
and Microsoft will assume all outstanding options to purchase Intuit
Shares, which options will be converted into options to purchase Microsoft
Shares at the same conversion ratio at which Intuit Shares will be
converted into Microsoft Shares in the Merger.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The above proposal is more fully described in the Proxy
Statement/Prospectus accompanying this Notice.
Only holders of record of Intuit Shares at the close of business on
February 10, 1995 are entitled to notice of, and will be entitled to vote at,
the Special Meeting or any adjournment thereof. Approval of the Merger
Agreements and the Merger will require the affirmative vote of the holders of a
majority of the outstanding Intuit Shares entitled to vote thereon.
BY ORDER OF THE BOARD OF DIRECTORS
(facsimile signature)
William H. Lane III, Secretary
Menlo Park, California
February 17, 1995
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE
URGED TO COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOUR PROXY CAN BE REVOKED AND WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
<PAGE> 7
MICROSOFT CORPORATION
PROSPECTUS
------------------------
INTUIT INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MONDAY, APRIL 10, 1995
This Proxy Statement/Prospectus constitutes the proxy statement of Intuit
Inc. ("Intuit") relating to the solicitation of proxies for use at the Special
Meeting of Stockholders of Intuit (the "Special Meeting") scheduled to be held
at 8:00 a.m. on Monday, April 10, 1995, and any adjournment thereof and the
prospectus of Microsoft Corporation ("Microsoft") relating to shares of
Microsoft common stock, par value $.00005 per share (the "Microsoft Shares")
that will be issued in connection with the merger (the "Merger") of M/I
Acquisition Corporation, a wholly-owned subsidiary of Microsoft ("M/I"), with
and into Intuit. The Merger will be effected pursuant to an Agreement and Plan
of Reorganization, as amended, (the "Reorganization Agreement") dated as of
October 13, 1994 by and among Microsoft, M/I, and Intuit. Microsoft has filed a
registration statement with the Securities and Exchange Commission (the
"Commission") with respect to the issuance of the Microsoft Shares.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus in
connection with the solicitations of proxies or the offering of securities made
by this Proxy Statement/Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by Microsoft
or Intuit. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities made hereunder shall under any circumstances create
any implication that there has been no change in the information set forth
herein since the date of this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any securities, or the solicitation of a proxy, by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
NEITHER THE MERGER NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is February 17, 1995.
<PAGE> 8
AVAILABLE INFORMATION
Microsoft and Intuit are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Microsoft and Intuit with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such material
can also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The common
stocks of both Microsoft and Intuit are traded as "national market securities"
on The Nasdaq Stock Market. Material filed by Microsoft and Intuit can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
Microsoft has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the Microsoft Shares to be issued pursuant to or as contemplated
by this Proxy Statement/Prospectus. This Proxy Statement/Prospectus does not
contain all the information set forth or incorporated by reference in the
Registration Statement and the exhibits and schedules relating thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information, reference is made to the Registration
Statement and the exhibits filed or incorporated as a part thereof, which are on
file at the offices of the Commission and may be obtained upon payment of the
fee prescribed by the Commission, or may be examined without charge at the
offices of the Commission. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by either Microsoft or
Intuit pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus:
1. Microsoft's Annual Report on Form 10-K for the year ended June 30,
1994;
2. Microsoft's Proxy Statement dated September 27, 1994;
3. Microsoft's Quarterly Report on Form 10-Q, as amended by Form
10-Q/A, for the quarter ended September 30, 1994;
4. Microsoft's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994;
5. Intuit's Annual Report on Form 10-K, as amended by Amendment No. 1
thereto on Form 10-K/A, for the ten-month transition period ended July 31,
1994;
6. Intuit's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1994; and
7. Intuit's Report on Form 8-K dated September 27, 1994, as amended
by Amendment No. 1 thereto on Form 8-K/A dated December 8, 1994.
All documents and reports subsequently filed by Microsoft and Intuit
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Proxy Statement/Prospectus and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the date of filing of such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
ii
<PAGE> 9
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herein or delivered herewith. Such documents (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference herein) are available to any person, including any beneficial owner,
to whom this Proxy Statement/Prospectus is delivered, on written or oral
request, without charge, in the case of documents relating to Microsoft,
directed to Microsoft Corporation, One Microsoft Way, Redmond, WA 98052
(telephone number (206) 882-8080), Attention: David Corning; or in the case of
documents relating to Intuit, directed to Intuit Inc., 66 Willow Place, Menlo
Park, CA 94025 (telephone number (415) 329-3555), Attention: William H. Lane
III. In order to ensure timely delivery of the documents, any requests should be
made by March 27, 1995.
iii
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF PROXY STATEMENT/PROSPECTUS................................................. 1
SELECTED FINANCIAL DATA............................................................... 8
Microsoft........................................................................... 8
Intuit.............................................................................. 8
COMPARATIVE MARKET PRICES............................................................. 9
FINANCIAL ANALYSIS.................................................................... 9
Microsoft Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 9
Intuit Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 15
THE INTUIT SPECIAL STOCKHOLDERS MEETING............................................... 25
Date, Time and Place of Meeting..................................................... 25
Record Date and Outstanding Shares.................................................. 25
Voting of Proxies................................................................... 25
Vote Required and Voting Intentions of Certain Stockholders......................... 25
Solicitation of Proxies and Expenses................................................ 26
THE MERGER AND RELATED TRANSACTIONS................................................... 26
General............................................................................. 26
Background of the Merger............................................................ 27
Intuit's Reasons for the Merger..................................................... 29
Board Recommendation................................................................ 30
Opinion of Financial Advisor........................................................ 30
Interests of Certain Persons in the Merger.......................................... 34
Related Agreements.................................................................. 35
Representations and Covenants....................................................... 36
Conditions to the Merger............................................................ 37
Termination or Amendment............................................................ 38
Certain U.S. Federal Income Tax Matters............................................. 39
Accounting Treatment................................................................ 41
Regulatory Requirements............................................................. 41
Surrender of Certificates; Lost Certificates........................................ 42
Affiliates' Restrictions on Sale of Intuit Shares................................... 42
No Dissenters' Rights............................................................... 43
Merger Expenses and Fees............................................................ 43
MICROSOFT'S BUSINESS.................................................................. 43
General............................................................................. 43
Products............................................................................ 44
Localization........................................................................ 48
Marketing and Distribution.......................................................... 48
Finished Goods Channels............................................................. 48
Product Support..................................................................... 49
Customers........................................................................... 50
Product Development................................................................. 50
Competition......................................................................... 50
Product Protection.................................................................. 51
Manufacturing....................................................................... 51
Employees........................................................................... 51
Properties.......................................................................... 51
Legal Proceedings................................................................... 52
</TABLE>
iv
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTUIT'S BUSINESS..................................................................... 53
Background.......................................................................... 53
Products............................................................................ 54
Product Development and Marketing................................................... 57
Sales and Distribution.............................................................. 59
International....................................................................... 61
Customer Service and Technical Support.............................................. 61
Seasonality; Quarterly Fluctuations in Revenue...................................... 61
Competition......................................................................... 62
Proprietary Rights.................................................................. 64
Manufacturing and Shipping.......................................................... 64
Employees........................................................................... 64
Acquisition of Parsons Technology, Inc.............................................. 65
Management of Growth................................................................ 65
Properties.......................................................................... 65
Legal Proceedings................................................................... 66
DESCRIPTION OF CAPITAL STOCK.......................................................... 67
Microsoft........................................................................... 67
Intuit.............................................................................. 67
COMPARISON OF RIGHTS OF SHAREHOLDERS OF INTUIT AND MICROSOFT.......................... 68
Amendment to Certificate/Articles of Incorporation.................................. 68
Right to Call Special Meeting of Shareholders....................................... 68
Anti-Takeover Provisions and Interested Stockholder................................. 69
Mergers, Sales of Assets and Other Transactions..................................... 70
Transactions With Officers or Directors............................................. 71
Appraisal or Dissenters' Rights..................................................... 71
Dividends........................................................................... 72
Limitation of Liability and Indemnification of Officers and Directors............... 72
LEGAL MATTERS......................................................................... 73
EXPERTS............................................................................... 73
INDEX TO MICROSOFT FINANCIAL STATEMENTS............................................... F-1
INDEX TO INTUIT FINANCIAL STATEMENTS.................................................. F-16
</TABLE>
LIST OF ANNEXES
Annex A Agreement and Plan of Reorganization
Annex B Opinion of Morgan Stanley & Co. Incorporated
v
<PAGE> 12
INDEX OF SIGNIFICANT DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE DEFINED
- --------------------------------- ------------
<S> <C>
A/P.............................. 54
Acquiring Person................. 70
Acquisition Transaction.......... 37
Affiliates....................... 35
Affiliates Agreements............ 35
Best............................. 16
Certificate Transmittal Form..... 42
CheckFree........................ 57
ChipSoft......................... 15
Closing.......................... 35
Code............................. 39
Commission....................... ii
Consumer Software Comparables.... 32
Department of Justice............ 41
DGCL............................. 68
Effective Time................... 3
Exchange Act..................... ii
Exchange Agent................... 42
Exchange Ratio................... 3
FTC.............................. 41
HSR Act.......................... 41
Intuit........................... i
Intuit Option.................... 3
Intuit Shares.................... 2
M/I.............................. i
<CAPTION>
TERM PAGE DEFINED
- --------------------------------- ------------
<S> <C>
Merger........................... i
Merger Agreements................ 1
Microsoft........................ i
Microsoft Articles............... 68
Microsoft Average Closing
Price.......................... 3
Microsoft Preferred Shares....... 67
Microsoft Securities............. 67
Microsoft Shares................. i
Morgan Stanley................... 2
Novell........................... 4
NPC.............................. 16
OEM.............................. 10
Parsons.......................... 16
Personal Finance Software
Business....................... 38
Productivity Software
Comparables.................... 32
Record Date...................... 1
Registration Statement........... ii
Reorganization................... 40
Reorganization Agreement......... i
Securities Act................... 35
Special Meeting.................. 1
Stockholder Agreements........... 35
Tax Opinions..................... 40
WBCA............................. 67
</TABLE>
vi
<PAGE> 13
SUMMARY OF PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. This summary is not, and is not intended to
be, complete in itself. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained in this Proxy
Statement/ Prospectus and the attached Annexes, which stockholders of Intuit are
encouraged to review. Unless otherwise defined in this summary, capitalized
terms used in this summary are defined elsewhere in this Proxy
Statement/Prospectus.
INTRODUCTION............... The Board of Directors of Intuit has unanimously
approved and adopted the Reorganization Agreement,
pursuant to which M/I will be merged with and into
Intuit, if the stockholders of Intuit adopt the
Merger by the requisite vote and certain other
conditions are satisfied. Intuit will be the
surviving corporation in the Merger as a
wholly-owned subsidiary of Microsoft. A copy of the
Reorganization Agreement is attached hereto as
Annex A and incorporated herein by reference.
THE COMPANIES
Microsoft Corporation Microsoft develops, manufactures, markets,
One Microsoft Way licenses, and supports a wide range of software
Redmond, Washington 98052 products, including operating systems for personal
(206) 882-8080 computers (PCs), workstations, and servers;
business and consumer programs for productivity,
reference, education, and entertainment; and
software development tools. Microsoft also markets
personal computer books and hardware, and is
engaged in the research and potential development
of advanced technology software products. See
"MICROSOFT'S BUSINESS."
Intuit Inc. Intuit develops, manufactures, markets, and
155 Linfield Avenue supports software products that enable households
Menlo Park, CA 94025 and small businesses to automate commonly performed
(415) 329-2785 financial tasks, and markets and sells supplies
designed for use with Intuit's software products,
including checks, invoices and forms. See "INTUIT'S
BUSINESS."
M/I Acquisition Corporation M/I is a wholly-owned subsidiary of Microsoft
One Microsoft Way formed solely for the purpose of the Merger and has
Redmond, Washington 98052 conducted no business.
THE INTUIT SPECIAL
STOCKHOLDERS MEETING....... A special meeting of stockholders of Intuit (the
"Special Meeting") will be held on Monday, April
10, 1995, at 8:00 a.m. local time in the VMOVA
Conference Room at 75 Willow Road, Menlo Park,
California 94025. Stockholders of record of Intuit
at the close of business on February 10, 1995 (the
"Record Date") are entitled to notice of and to
vote at the Special Meeting. See "THE INTUIT
SPECIAL STOCKHOLDERS MEETING."
Purpose of the Meeting... At the Special Meeting, Intuit stockholders will
consider and vote upon a proposal to approve the
Reorganization Agreement, a related Agreement of
Merger between Intuit and M/I (collectively, with
the Reorganization Agreement, the "Merger
Agreements"), and the Merger. See "THE MERGER AND
RELATED TRANSACTIONS."
Vote Required............ Approval of the Merger Agreements and the Merger
will require the affirmative vote of the holders of
a majority of the outstanding Intuit common stock,
par value $.01 (each an "Intuit Share" and
collectively
1
<PAGE> 14
the "Intuit Shares"), entitled to vote. See "THE
INTUIT SPECIAL STOCKHOLDERS MEETING -- Vote
Required."
BACKGROUND AND REASONS FOR
THE MERGER; RECOMMENDATION
OF THE BOARD OF
DIRECTORS................ The Board of Directors of Intuit has unanimously
approved the Reorganization Agreement and the
Merger, and has determined that the Merger is fair
to and in the best interests of Intuit and its
stockholders. The Intuit Board of Directors
unanimously recommends approval of the
Reorganization Agreement and the Merger by the
Intuit stockholders. The primary factors considered
and relied upon by the Intuit Board of Directors in
reaching its recommendation are referred to in "THE
MERGER AND RELATED TRANSACTIONS -- Intuit's Reasons
for the Merger;" and "THE INTUIT SPECIAL
STOCKHOLDERS MEETING -- Vote Required and Voting
Intentions of Certain Stockholders."
INTEREST OF CERTAIN PERSONS
IN THE MERGER.............. As described below, certain Intuit management
personnel have entered into employment and
noncompetition agreements with Microsoft that will
become effective upon consummation of the Merger.
In addition, pursuant to the terms of a March 1994
employment agreement between Intuit and William V.
Campbell, Intuit's President and Chief Executive
Officer, 75,000 of Mr. Campbell's 300,000 Intuit
stock options will vest upon consummation of the
Merger. Pursuant to a September 1993 employment
agreement between Intuit and William H. Lane III,
Intuit's Chief Financial Officer, approximately
9,100 of Mr. Lane's 48,620 Intuit stock options
will vest upon consummation of the Merger. Mr. Lane
will also receive a $40,000 transition bonus from
Microsoft. Messrs. Campbell and Lane and other
officers of Intuit have entered into employment
agreements with Microsoft under which they will be
eligible to receive certain severance benefits in
the event of termination of their employment. See
"THE MERGER AND RELATED TRANSACTIONS -- Interests
of Certain Persons in the Merger" and "-- Related
Agreements -- Employment Agreements."
OPINION OF FINANCIAL
ADVISOR.................... Morgan Stanley & Co. Incorporated ("Morgan
Stanley") has rendered an opinion to the Intuit
Board that, as of the date of such opinion, the
consideration proposed to be received by Intuit
stockholders in the Merger is fair from a financial
point of view to the Intuit stockholders. See "THE
MERGER AND RELATED TRANSACTIONS -- Opinion of
Financial Advisor" and Annex B.
THE MERGER
Effects of the Merger.... The Merger will be consummated promptly after
Intuit stockholder approval and the satisfaction or
waiver of the other conditions to consummation of
the Merger. Upon consummation of the Merger, Intuit
will become a wholly-owned subsidiary of Microsoft.
The Board of Directors and executive officers of
Microsoft are not expected to change upon
consummation of the Merger, except that Scott D.
Cook, Intuit's Chairman, will become an Executive
Vice President of Microsoft responsible for the
development of Microsoft's products and strategic
development relating to Electronic Commerce,
Intuit's President and Chief Executive Officer,
William V. Campbell, will become a Senior
2
<PAGE> 15
Vice President of Microsoft, as well as continuing
as chief executive officer of Intuit and will be
responsible for Financial Products, a new division
of Microsoft which will include the business of
Intuit, and William H. Harris, Jr., an Executive
Vice President of Intuit, will become a Vice
President of Microsoft. Most of the executive
officers of Intuit are expected to continue as
officers of Intuit following the Merger. If the
Merger is approved and consummated, the
stockholders of Intuit will become shareholders of
Microsoft (as described below), and their rights
will be governed by Microsoft's Articles of
Incorporation and Bylaws. See "COMPARISON OF RIGHTS
OF SHAREHOLDERS OF INTUIT AND MICROSOFT."
Conversion of Shares..... Upon the consummation of the Merger (the "Effective
Time"), each Intuit Share then issued and
outstanding will cease to be outstanding and will
be automatically converted into 1.336 Microsoft
Shares (the "Exchange Ratio"), subject to a
potential upward adjustment, as described below.
Cash will be paid in lieu of issuing fractional
shares. However, if the average closing price at
which Microsoft Shares trade during the ten trading
days ending two trading days prior to the closing
of the Merger (the "Microsoft Average Closing
Price") is less than $53.144 per share, then the
Exchange Ratio will be increased from 1.336 to an
adjusted Exchange Ratio obtained by dividing $71.00
by the Microsoft Average Closing Price and rounding
to the third decimal point. Based upon the
capitalization of Intuit and Microsoft as of
February 7, 1995, and assuming each Intuit Share is
converted into 1.336 Microsoft Shares, stockholders
of Intuit will own Microsoft Shares representing
approximately 4.5% of the Microsoft Shares
outstanding immediately after consummation of the
Merger, exclusive of any options to purchase
Microsoft Shares. See "THE MERGER AND RELATED
TRANSACTIONS -- General."
Conversion of Intuit
Stock Options.......... Upon the consummation of the Merger, each then
outstanding option to purchase Intuit Shares (an
"Intuit Option") will be assumed by Microsoft and
will automatically be converted into an option to
purchase a number of Microsoft Shares determined by
multiplying the number of Intuit Shares subject to
the Intuit Option by 1.336 (or the adjusted
Exchange Ratio, if applicable), at an exercise
price equal to the exercise price of the Intuit
Option at the time of the Merger divided by 1.336
(or the adjusted Exchange Ratio, if applicable). To
avoid fractional shares, the number of Microsoft
Shares subject to a converted Intuit Option will be
rounded to the nearest whole share. The other terms
of the Intuit Options, including exercisability and
vesting schedules, will, to the extent permitted by
law and otherwise reasonably practicable, remain
unchanged. Microsoft Shares issued upon exercise of
the assumed Intuit Options will be registered with
the Commission.
As of February 7, 1995, 3,067,622 Intuit Shares
were subject to outstanding Intuit Options. After
assumption of such Intuit Options in the Merger,
4,098,343 Microsoft Shares will be subject to such
options (assuming the Exchange Ratio is 1.336).
Effective Time........... It is anticipated that the Merger will become
effective as promptly as practicable after the
requisite Intuit stockholder approval has been
3
<PAGE> 16
obtained and all other conditions to the Merger
have been satisfied or waived.
Exchange of
Certificates........... Promptly after the Effective Time, Intuit
stockholders will receive a transmittal form that
will contain instructions with respect to the
surrender of certificates representing Intuit
Shares to be exchanged for Microsoft Shares. INTUIT
STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO
INTUIT OR MICROSOFT AND SHOULD NOT BE RETURNED WITH
THE ENCLOSED PROXY. See "THE MERGER AND RELATED
TRANSACTIONS -- Surrender of Certificates; Lost
Certificates."
Stockholder Agreements... Certain stockholders of Intuit have agreed with
Microsoft that until the consummation of the Merger
or the termination of the Reorganization Agreement
in accordance with its terms, they will (i) vote
their Intuit Shares in favor of the Merger and
against any proposal made in opposition to or in
competition with the Merger; and (ii) not solicit
or encourage any offers competitive to the Merger.
These agreements were entered into by ten
stockholders of Intuit, including three directors,
who on the Record Date together owned beneficially
7,549,560 Intuit Shares (approximately 37% of the
Intuit Shares then outstanding). See "THE MERGER
AND RELATED TRANSACTIONS -- Related Agreements."
Employment Agreements.... Scott D. Cook, William V. Campbell, Mari Baker,
Eric C.W. Dunn, Mark R. Goines, William H. Harris,
Jr., James J. Heeger, William H. Lane III, John
Monson, Stephen D. Pelletier, William C. Shepard,
and William L. Strauss have entered into employment
and noncompetition agreements with Microsoft. See
"THE MERGER AND RELATED TRANSACTIONS -- Related
Agreements."
Affiliates Agreements.... Certain officers, directors and stockholders of
Intuit have entered into agreements with Microsoft
whereby they agreed not to sell, exchange,
transfer, or otherwise reduce their risk or
ownership of Intuit Shares during the time period
required by the pooling of interests method of
accounting and to limit their sales of Microsoft
Shares following the Merger in order to comply with
Rule 145 of the Commission. See "THE MERGER AND
RELATED TRANSACTIONS -- Related Agreements."
Agreement with Novell.... Microsoft has entered into an agreement (the "Money
Agreement") with Novell, Inc. ("Novell"), dated as
of October 12, 1994, pursuant to which, and subject
to the closing of the Reorganization Agreement,
Microsoft has agreed to sell, transfer, convey and
assign to Novell all right, title and interest in
and to its Microsoft Money software business,
including product code and documentation, related
technology, relevant trademarks and marketing
materials, together with various licenses and other
contracts related to that business.
Representations and
Covenants............. Under the Reorganization Agreement, Intuit and
Microsoft made a number of representations
regarding their respective capital structures,
their financial condition and other matters,
including their authority to enter into the
Reorganization Agreement and to consummate the
Merger. Intuit agreed that, until the consummation
of the Merger or the termination of the
Reorganization Agreement, it will maintain its
busi-
4
<PAGE> 17
ness, it will not take certain actions outside the
ordinary course without Microsoft's consent and it
will use its best efforts to consummate the Merger.
Intuit has agreed not to initiate, solicit, or
facilitate any proposals that compete with the
Merger, except that Intuit will not be prevented
from taking such actions if Intuit's directors
determine in good faith after consultation with
legal counsel that their fiduciary duties so
require. Microsoft has agreed to use its best
efforts to consummate the Merger and has made a
commitment to Intuit that, if the Merger is
consummated, benefits will be provided to Intuit
employees that are in the aggregate substantially
equivalent to the benefits provided to Microsoft
employees and credit will be given for prior
service as if such Intuit employees had been
employed by Microsoft for the period for which they
were employed by Intuit. Microsoft has agreed that
it will use its best efforts to maintain Intuit's
operations in the general areas of Menlo Park and
San Diego, California for a period of approximately
two years and has agreed to provide certain
severance payments to any Intuit employee whose
employment is terminated without cause within one
year of the Merger. Microsoft also has agreed, if
the Merger is consummated, that all rights to
indemnification (including advancement of expenses)
of present or former officers and directors of
Intuit regarding actions taken prior to
consummation of the Merger as provided in Intuit's
Certificate of Incorporation or Bylaws and
indemnification agreements will survive the Merger
and remain in effect for six years and will be
guaranteed by Microsoft. See "THE MERGER AND
RELATED TRANSACTIONS -- Representations and
Covenants."
Conditions............... The obligations of Microsoft and Intuit to
consummate the Merger are subject to the
satisfaction of certain conditions, any or all of
which may be waived, including (i) the approval of
Intuit's stockholders; (ii) obtaining of all
required government consents, including expiration
or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"); (iii) the
absence of any statute, rule, regulation, order,
decree or injunction prohibiting the Merger; (iv)
the absence of any governmental legal action
challenging or seeking to restrain the Merger,
seeking any material damages, or seeking to
prohibit or impose any material limitations on the
ownership or operation of, or compel the
disposition of, Microsoft's or Intuit's personal
finance software business. Other conditions include
the accuracy of the other party's representations,
the other party's performance of its covenants, and
favorable legal opinions (including an opinion to
the effect that the Merger will be treated for
federal income tax purposes as a tax-free
reorganization). See "THE MERGER AND RELATED
TRANSACTIONS -- Conditions to the Merger" and
"INTUIT'S BUSINESS -- Legal Proceedings."
Termination.............. The Reorganization Agreement may be terminated by
the mutual agreement of the parties or by either
party (i) as a result of a breach of a
representation, warranty, covenant or agreement by
the other party which has a material adverse effect
on the business of Intuit or Microsoft and such
breach has not been cured, or best efforts are not
being employed to cure such breach, within 10 days
after notice of such breach is given; (ii) if the
Merger has not been consummated before May 30,
1995, subject to extension until August 29, 1995 if
Intuit and Microsoft agree to pursue litigation
against any administrative or judicial action or
5
<PAGE> 18
proceeding challenging the Merger as violative of
any antitrust law; (iii) if Intuit stockholders
have voted on but not approved the Merger; or (iv)
if any permanent injunction preventing the Merger
shall have become final and non-appealable. See
"THE MERGER AND RELATED TRANSACTIONS -- Termination
or Amendment."
Termination Fee.......... The Reorganization Agreement also provides that, if
Microsoft is not then in material breach of the
Reorganization Agreement, Intuit shall pay
Microsoft a termination fee of $15 million if (i)
Intuit's Board of Directors shall have withdrawn or
modified, in a manner adverse to Microsoft, the
Board's approval or recommendation of the Merger;
(ii) Intuit or its affiliates breach Intuit's
covenant not to initiate, solicit or facilitate any
proposal that competes with the Merger other than
in the exercise of the fiduciary duties of the
Board of Directors of Intuit; (iii) Microsoft
terminates the Reorganization Agreement following a
material breach by Intuit of its representations,
warranties, covenants or agreements; or (iv) if
Intuit shall agree with any person other than
Microsoft to an agreement which results in a 50% or
more change in the voting power of beneficial
owners of Intuit before, or within six months
after, termination of the Reorganization Agreement.
See "THE MERGER AND RELATED TRANSACTIONS --
Termination or Amendment."
Amendment................ The Reorganization Agreement may be amended by
Microsoft and Intuit at any time before or after
approval of the Intuit stockholders, except that,
after stockholder approval, no amendment may be
made which by law requires the further approval of
the Intuit stockholders without obtaining such
approval. See "THE MERGER AND RELATED
TRANSACTIONS -- Termination or Amendment."
No Dissenters' or
Appraisal Rights....... Stockholders of Intuit who dissent from the Merger
will not be entitled to rights of appraisal under
Section 262 of the Delaware General Corporation
Law. See "THE MERGER AND RELATED TRANSACTIONS -- No
Dissenters' Rights;" and "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF INTUIT AND MICROSOFT -- Appraisal
or Dissenters' Rights."
Certain U.S. Federal
Income Tax Matters..... The Merger is expected to be a tax-free
reorganization for federal income tax purposes, so
that no gain or loss will be recognized by Intuit
stockholders on the exchange of Intuit Shares for
Microsoft Shares, except to the extent that Intuit
stockholders receive cash in the exchange (i.e.,
cash in lieu of fractional shares) as more fully
described in "THE MERGER AND RELATED
TRANSACTIONS -- Certain Federal Income Tax
Matters." Intuit stockholders are urged to consult
their own tax advisors regarding such tax
consequences.
Accounting Treatment..... The Merger is expected to be treated as a pooling
of interests for accounting purposes. It is a
condition to the obligation of Microsoft to
consummate the Merger that Microsoft receive a
letter from Intuit's independent auditor, Ernst &
Young LLP, addressed to Intuit, to the effect that
the Merger will qualify for pooling of interest
accounting treatment (without regard to any action
or conduct of Microsoft). See
6
<PAGE> 19
"THE MERGER AND RELATED
TRANSACTIONS -- Accounting Treatment."
EFFECT OF NONAPPROVAL...... If Intuit is unable to obtain approval by its
stockholders before May 30, 1995 (or August 29,
1995 if Microsoft and Intuit have mutually agreed
to pursue litigation against any action challenging
the Merger as violative of antitrust laws), either
Intuit or Microsoft may terminate the
Reorganization Agreement. See "THE MERGER AND
RELATED TRANSACTIONS -- Termination or Amendment."
MARKET PRICE DATA.......... At October 12, 1994, the last full trading day
before announcement of the Merger, the closing
prices of Microsoft and Intuit were $56.25 and
$47.00, respectively. On February 7, 1995, the
closing prices were $61.00 for Microsoft and $66.00
for Intuit. As of February 7, 1995, there were 670
stockholders of record who held Intuit Shares
(although Intuit has been informed that there are
in excess of 7,845 beneficial owners), as shown on
the records of Intuit's transfer agent for such
shares. Neither Intuit nor Microsoft has in the
past paid cash dividends on its stock. See
"COMPARATIVE MARKET PRICES."
7
<PAGE> 20
SELECTED FINANCIAL DATA
The following tables set forth selected financial data for Microsoft for
the five fiscal years ended June 30, 1994 and the six months ended December 31,
1993 and 1994 and for Intuit for the four fiscal years ended September 30, 1993,
the ten months ended July 31, 1994, and the three months ended October 31, 1993
and 1994. Effective August 1, 1994, Intuit changed its fiscal year end to July
31 from September 30. The selected financial data for Microsoft for the five
fiscal years ended June 30, 1994 have been derived from financial statements
audited by Deloitte & Touche LLP. The selected financial data for Intuit for the
four fiscal years ended September 30, 1993 and the ten months ended July 31,
1994 have been derived from Intuit's financial statements audited by Ernst &
Young LLP. The selected financial data for Microsoft for the six months ended
December 31, 1993 and 1994 have been derived from unaudited financial statements
of Microsoft and include, in the opinion of management of Microsoft, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the results for such periods. The selected financial data for Intuit for
the three months ended October 31, 1993 and 1994 have been derived from
unaudited financial statements of Intuit and include, in the opinion of
management of Intuit, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the results for such periods. The
selected financial data should be read in conjunction with the separate
financial statements and notes thereto of Microsoft and Intuit. See "FINANCIAL
STATEMENTS." This historical data are not necessarily indicative of the results
to be expected if the Merger is consummated.
MICROSOFT
(In millions, except earnings per share)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31(1)
-------------------------------------------------- -------------------
1990 1991 1992 1993 1994 1993 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................................. $1,183 $1,843 $2,759 $3,753 $4,649 $2,112 $2,729
Net income.................................... 279 463 708 953 1,146 528 689
Earnings per share............................ 0.52 0.82 1.20 1.57 1.88 0.87 1.10
Cash and short-term investments............... 449 686 1,345 2,290 3,614 -- 3,839
Total assets.................................. 1,105 1,644 2,640 3,805 5,363 -- 5,961
Stockholders' equity.......................... 919 1,351 2,193 3,242 4,450 -- 4,443
</TABLE>
- ---------------
(1) Unaudited.
INTUIT
(In millions, except earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS
TEN MONTHS ENDED
YEAR ENDED SEPTEMBER 30 ENDED OCTOBER 31(1)
----------------------------------- JULY 31 ----------------
1990 1991 1992 1993 1994 1993 1994
----- ----- ----- ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues...................................... $ 33 $ 45 $ 84 $ 121 $ 194 $ 47 $ 68
Charge for purchased research and development..... -- -- -- -- 151 -- 44
Net income (loss)................................. 4 4 5 8 (176) 7 (54)
Earnings (loss) per share......................... 0.36 0.42 0.50 0.74 (10.43) 0.61 (2.73)
Cash and short-term investments................... 4 7 9 40 84 -- 34
Total assets...................................... 13 19 32 83 245 -- 267
Stockholders' equity.............................. 8 12 17 49 186 -- 169
</TABLE>
- ---------------
(1) Unaudited.
8
<PAGE> 21
COMPARATIVE MARKET PRICES
The following table sets forth the high and low sales prices of Microsoft
and Intuit Shares, traded as "national market securities" on The Nasdaq Stock
Market under the symbols MSFT and INTU, respectively, for the periods indicated.
The quotations are as reported in published financial sources.
<TABLE>
<CAPTION>
MICROSOFT INTUIT
-------------------- -------------------
HIGH LOW HIGH LOW
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Calendar 1992
Third Quarter.................................... $ 41.00 $32.75 * *
Fourth Quarter................................... $ 47.50 $37.875 * *
Calendar 1993
First Quarter*................................... $ 47.125 $38.375 $31.75 $27.75
Second Quarter................................... $ 49.00 $39.875 $33.50 $24.25
Third Quarter.................................... $ 44.25 $35.125 $37.75 $28.25
Fourth Quarter................................... $ 43.25 $38.00 $46.00 $33.00
Calendar 1994
First Quarter.................................... $ 44.625 $39.00 $48.625 $36.375
Second Quarter................................... $ 54.625 $41.00 $36.50 $27.25
Third Quarter.................................... $ 59.25 $46.875 $44.25 $33.50
Fourth Quarter................................... $ 65.125 $53.875 $70.5625 $40.75
Calendar 1995
First Quarter (through February 7, 1995)......... $ 65.25 $58.25 $70.25 $65.00
</TABLE>
- ---------------
* Intuit Shares began trading on March 12, 1993, the date of Intuit's initial
public offering.
On October 12, 1994, the last full trading day before announcement of the
Merger, the closing prices of Microsoft and Intuit were $56.25 and $47.00,
respectively. On February 7, 1995, the closing prices were $61.00 for Microsoft
and $66.00 for Intuit. As of February 7, 1995, there were 670 stockholders of
record who held Intuit Shares (although Intuit has been informed that there are
in excess of 7,845 beneficial owners), as shown on the records of Intuit's
transfer agent for such shares. Neither Intuit nor Microsoft in the past has
paid cash dividends on its stock.
FINANCIAL ANALYSIS
MICROSOFT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED JUNE 30, 1992, 1993 AND
1994
Microsoft develops, manufactures, markets, licenses, and supports a wide
range of software products, including operating systems for personal computers
(PCs), workstations, and servers; business and consumer programs for
productivity, reference, education, and entertainment; and software development
tools. Microsoft also markets personal computer books and hardware, and is
engaged in the research and potential development of advanced technology
software products.
Net Revenues
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues................................... $2,759 36% $3,753 24% $4,649
</TABLE>
Software license volume (as opposed to price) increases have been the
principal factor in Microsoft's revenue growth. The average selling price per
license has decreased, primarily because of general shifts in sales mix from
retail packaged products to licensing programs, from new products to product
upgrades, and from stand-alone desktop applications programs to the Microsoft
Office(R) integrated suite. Average revenue per
9
<PAGE> 22
license from original equipment manufacturer ("OEM") licenses and corporate
license programs (such as Microsoft Select) is lower than average revenue per
license from retail versions. Likewise, product upgrades have lower prices than
new products. The price of Microsoft Office is less than the sum of the prices
for the individual application programs included in this product when such
programs are sold separately.
Product groups. Operating systems product group revenues were $1,104
million, $1,267 million, and $1,519 million in 1992, 1993, and 1994. The
MS-DOS(R) operating system is preinstalled on PCs by most OEMs, and revenues
from such licenses increased steadily in both 1993 and 1994. Revenues from
retail upgrade versions of MS-DOS decreased in 1994 after a strong increase in
1993. The MS-DOS 6 retail upgrade was released in 1993. No major upgrades of
MS-DOS were released in 1994. The Microsoft Windows(R) operating system was an
increasingly strong contributor to systems revenues as the number of new PCs
preinstalled with Windows increased rapidly during the three-year period.
Applications product group revenues were $1,401 million, $2,253 million,
and $2,927 million in 1992, 1993, and 1994. Increases in applications revenues
were led by strong sales of Microsoft Office. The Microsoft Office Standard
product includes Microsoft Excel, Microsoft Word, the Microsoft PowerPoint(R)
presentation graphics program, and a Microsoft Mail license, while the Microsoft
Office Professional product also includes Microsoft Access(R) database. Sales of
stand-alone versions of the Microsoft Excel spreadsheet and the Microsoft Word
word processor increased in 1993 but decreased in 1994 as the sales mix
continued to shift to integrated products.
Microsoft Home, a broad range of products in Microsoft's consumer
applications group, also showed continued growth. The Microsoft Home brand
includes CD-ROM multimedia library titles and products for children's
creativity, personal productivity, and entertainment.
Windows-based software programs represented approximately 85% of
applications revenues in 1994, up from 65% in 1992 and 75% in 1993.
Hardware product group revenues were $254 million, $233 million, and $203
million in 1992, 1993, and 1994. The hardware product group's principal products
are the Microsoft Mouse and BallPoint(R) Mouse pointing devices.
Sales channels. Microsoft has four major channels of distribution
including: finished goods sales in the U.S. and Canada, Europe, and Other
International; and OEM. Sales in the finished goods channels are primarily to
distributors and resellers. OEM channel revenues are license fees from original
equipment manufacturers.
U.S. and Canada channel revenues were $1,062 million, $1,371 million, and
$1,575 million in 1992, 1993, and 1994.
Revenues in Europe were $997 million, $1,259 million, and $1,363 million in
1992, 1993, and 1994. The 8% revenue growth rate in 1994 was lower than the 26%
increase in 1993 because of general economic slowness and a more dramatic shift
to corporate licensing programs in Europe than in other geographic areas.
Other international channel revenues were $223 million in 1992, $392
million in 1993, and $532 million in 1994. Growth rates continue to be strong
due to customer acceptance of newly localized products and early entrance into
emerging markets.
Microsoft's operating results are affected by foreign exchange rates.
Approximately 46%, 44%, and 40% of Microsoft's revenues were collected in
foreign currencies during 1992, 1993, and 1994. Since much of Microsoft's
international manufacturing costs and operating expenses are also incurred in
local currencies, the relative translation impact of exchange rates on net
income is less than on revenues.
Microsoft Select was introduced in 1993 and gained popularity in 1994.
Select is a corporate license program under which large accounts download a
contracted number of copies of specified software products. Average revenue per
license under Select is lower than the average revenue per retail copy of the
same product shipped through the finished goods channels, reflecting lower costs
of distribution.
10
<PAGE> 23
OEM revenues grew 61% from the prior year to $1,179 million. OEM revenues
were $477 million in 1992 and $731 million in 1993. The primary source of OEM
revenues is licenses of operating systems, particularly MS-DOS and Microsoft
Windows. During 1994, approximately 80% of Windows units were sold through the
OEM channel, up from approximately 50% in 1992 and 75% in 1993.
Cost of Revenues
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cost of revenues............................... $ 467 36% $ 633 21% $ 763
Percentage of net revenues..................... 16.9% 16.9% 16.4%
</TABLE>
Cost of revenues as a percentage of net revenues was 16.4% in 1994, down
from 16.9% in 1992 and 1993. The percentage decreased due to lower disk prices
from vendors and a greater percentage of sales of licenses to OEMs and
corporations, offset by increased sales of lower-margin Microsoft Office and
upgrade products.
Operating Expenses
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Research and development....................... $ 352 34% $ 470 30% $ 610
Percentage of net revenues..................... 12.8% 12.5% 13.1%
Sales and marketing............................ $ 854 41% $1,205 15% 1,384
Percentage of net revenues..................... 31.0% 32.1% 29.8%
General and administrative..................... $ 90 32% $ 119 39% $ 166
Percentage of net revenues..................... 3.3% 3.2% 3.6%
</TABLE>
Increases in research and development expenses resulted primarily from
planned additions to Microsoft's software development and advanced technology
staffs, as well as higher levels of third-party development costs.
In 1994, sales and marketing expenses increased at a slower rate than
revenues due to a concerted performance orientation at all sales sites with
particular emphasis on slower headcount (personnel) growth. The increases in the
absolute dollars of sales and marketing expenses in 1993 and 1994 were due to
increased marketing programs and advertising for the launch of new products,
planned hiring of marketing personnel, and continued development of Product
Support Services.
Increases in general and administrative expenses are primarily attributable
to higher legal costs and growth in the systems and people necessary to support
overall increases in the scope of Microsoft's operations.
Nonoperating Income
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonoperating income............................ $ 45 67% $ 75 15% $ 86
Litigation charge.............................. -- -- $ 90
</TABLE>
The primary component of nonoperating income is interest income, which was
$58 million, $83 million, and $104 million in 1992, 1993, and 1994. Increased
interest income is the result of a larger investment portfolio generated by cash
from operations, offset in both 1993 and 1994 by declining interest rates.
In the third quarter of 1994, Microsoft recorded a $120 million charge to
reflect the estimated impact of a jury verdict in the Stac Electronics patent
litigation and related expenses. In June 1994, Microsoft reached an agreement
with Stac to settle the litigation and adjusted its estimate accordingly,
resulting in a credit of $30 million in the fourth quarter and a net pretax
charge of $90 million for the year.
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<PAGE> 24
Provision for Income Taxes
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Provision for income taxes..................... $ 333 35% $ 448 29% $ 576
Effective tax rate............................. 32.0% 32.0% 33.5%
</TABLE>
The effective tax rate increased in 1994 primarily because of an increase
in the U.S. statutory income tax rate. The Notes to Financial Statements at Page
F-9 describe the differences between the U.S. statutory and effective income tax
rates.
Net Income and Earnings Per Share
<TABLE>
<CAPTION>
1992 CHANGE 1993 CHANGE 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income..................................... $ 708 35% $ 953 20% $1,146
Percentage of net revenues..................... 25.7% 25.4% 24.7%
Earnings per share............................. $ 1.20 31% $ 1.57 20% $ 1.88
</TABLE>
Net income as a percentage of net revenues decreased in 1994, primarily due
to the Stac Electronics patent litigation charge and increased research and
development expenses, offset by the lower relative level of sales and marketing
expenses. The slight percentage decrease in 1993 from 1992 was attributable to
higher relative sales and marketing expenditures.
Outlook: Issues and Risks
The following issues and risks, among others, should also be considered in
evaluating Microsoft's outlook.
Rapid technological change and intense competition. The highly volatile
personal computer software industry is characterized by rapid technological
change, intense competition, and uncertainty as to the widespread acceptance of
new products. See "MICROSOFT'S BUSINESS -- Competition."
Long-term investment cycle. Developing, manufacturing, and licensing
software is expensive and the investment in product development often involves a
long pay-back cycle. Microsoft began investing in the principal products that
are significant to its current revenues in the early 1980s. Microsoft's plans
for 1995 include significant investments in software research and development
and related product opportunities from which significant revenues are not
anticipated for a number of years. As discussed above, spending for research and
development increased during 1994 and 1993. Management expects total spending
for research and development in 1995 to increase over spending in 1994.
Product ship schedules. Delays in the release of new products can cause
operational inefficiencies that impact manufacturing capabilities, distribution
logistics, and telephone support staffing.
Microsoft Office. Revenues from Microsoft Office may increase as a
percentage of total revenues in 1995. The price of Microsoft Office is less than
the sum of the prices for the individual application programs included in this
product when such programs are sold separately.
Prices. Future prices Microsoft is able to obtain for its products may
decrease from historical levels depending upon market or other cost factors.
Saturation. Product upgrades, enabling users to upgrade from earlier
versions of Microsoft products or from competitors' products, have lower prices
than new products. As the desktop PC software market becomes saturated, the
sales mix shifts from standard products to upgrade products. This trend is
expected to continue in 1995.
Introductory pricing. Microsoft recently offered the Microsoft Access
database product at a low introductory price. This practice may continue with
other new product offerings.
Channel mix. Average revenue per license is lower from OEM licenses than
from retail versions, reflecting the relatively lower direct costs of operations
in the OEM channel. An increasingly higher percentage of revenues was achieved
through the OEM channel during 1993 and 1994.
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<PAGE> 25
Volume discounts. In 1994, unit sales increased under Microsoft Select, a
large account program designed to permit large organizations to license
Microsoft products. Average revenue per copy from Microsoft Select license
programs is lower than average revenue per copy from retail versions shipped
through the finished goods channels.
Foreign exchange. A large percentage of Microsoft sales are transacted in
local currencies. As a result, Microsoft revenues are subject to foreign
exchange rate fluctuations. See "MICROSOFT FINANCIAL STATEMENTS -- Notes to
Financial Statements."
Cost of revenues. Although cost of revenues as a percentage of net revenues
was relatively consistent in 1993 and 1994, it varies with channel mix and
product mix within channels. Changes in channel and product mix, as well as in
the cost of product components, may affect cost of revenues as a percentage of
net revenues in 1995.
Sales and marketing and support investments. Microsoft's plans for 1995
include continued investments in its sales and marketing and support groups.
Competitors may be able to enter the market without making investments of such
scale.
Accounting standards. Accounting standards promulgated by the Financial
Accounting Standards Board change periodically. Changes in such standards may
have a negative impact on Microsoft's future reported earnings.
Intellectual property rights. Microsoft diligently defends its intellectual
property rights, but unlicensed copying of software represents a loss of
revenues to Microsoft. While this adversely affects U.S. revenues, revenue loss
is more serious outside of the U.S., particularly in certain countries where
laws are less protective of intellectual property rights. Throughout the world,
Microsoft actively educates consumers on the benefits of purchasing genuine
products and educates lawmakers on the advantages of a business climate where
intellectual property is protected. There can be no assurance that continued
efforts will affect revenues positively. Further, Microsoft's products may from
time to time inadvertently infringe on intellectual property rights of others,
potentially requiring Microsoft to pay damages or license fees or incur
substantial costs to redesign its products.
Growth rates. Management believes Microsoft's recent revenue growth rates
are not sustainable. Operating expenses as a percentage of revenues may increase
in 1995 because of the above factors.
Litigation. Litigation regarding intellectual property rights, patents, and
copyrights is increasing in the PC software industry. In addition, there are
other general corporate legal risks. See "Notes To Financial Statements"
regarding contingencies related to government regulation and legal proceedings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND 1994
Net Revenues
Revenues for the first half of fiscal 1995 increased 29% over revenues for
the first half of fiscal 1994.
Product Groups
Systems product group revenues are primarily from licenses of personal
operating systems and business systems with client-server architectures. Systems
revenues were $963 million in the first six months of 1995, compared to $724
million recorded in the same period of 1994, an increase of 33%. Revenues
generated by both Microsoft MS-DOS and Microsoft Windows operating systems
increased from the prior year, primarily through the original equipment
manufacturer channel. During the first half of 1995, more than 80% of Windows
units were licensed through the OEM channel.
Applications product group revenues include licenses of desktop
productivity, consumer, and developer programs. Applications revenues were $1.64
billion in the first half of 1995, increasing 28% from $1.28 billion in the
first half of 1994. Increases in applications revenues were led by sales of
Microsoft Office. Additionally, during the first quarter of 1995, Microsoft
released new Macintosh-based versions of Microsoft Excel, Microsoft Word, and
Microsoft PowerPoint.
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<PAGE> 26
Hardware revenues were $123 million and $104 million in the first six
months of 1995 and 1994.
Sales Channels. OEM revenues (primarily personal operating systems) grew
40% to $733 million from the $523 million recorded in the comparable period of
the prior year. MS-DOS continues to be pre-installed on many PCs sold by
original equipment manufacturers. In addition, many major OEMs are also
preinstalling the Microsoft Windows operating system on PCs, leading to
increased revenues through the OEM channel.
Revenues in the U.S. and Canada were $914 million in the first half of 1995
compared to $751 million in 1994, an increase of 22%. The latest version of
Microsoft Office for Windows was introduced in the U.S. during the first half of
the prior year. Revenues in Europe were $688 million in the first half of 1995
compared to $598 million the prior year. Rates of growth for the European
channel have been lower than other retail channels of distribution due to
general economic slowness and a more dramatic shift to corporate licensing in
Europe. Other International channel revenues showed strong growth, increasing to
$394 million in the first six months of 1995 from $240 million in the first six
months of 1994. Growth rates continue to be strong due to customer acceptance of
newly localized products and early entrance into emerging markets.
Cost of Revenues, Operating Expenses, and Income Taxes
Cost of revenues as a percentage of revenues was 15.0% in the first half of
1995, compared to 16.3% in the first half of 1994. Contributing to the decrease
were lower disk prices and a shift to more revenues from OEM and corporate
license programs. While license programs carry lower per unit prices than retail
versions shipped through the finished goods channels, there is little cost of
revenues associated with such programs.
Research and development expenses increased 33% to $377 million, or 13.8%
of revenues in the first six months of 1995 from $284 million, or 13.4% of
revenues in the corresponding six months of 1994. The increase in research and
development expenses resulted primarily from planned hiring of software
developers and higher levels of third-party development costs.
Sales and marketing expenses increased 35% to $874 million from $649
million in the comparable six month period. As a percentage of revenues, sales
and marketing expenses were 32.0% and 30.7% in the respective first halves of
1995 and 1994. The increase in absolute amounts of sales and marketing expenses
was primarily due to increased marketing costs and headcount related expenses.
General and administrative expenses were 4.1% of revenues in the first half
of 1995 and 3.6% of revenues in the first half of 1994.
Net interest income increased as a result of a larger investment portfolio
generated by cash from operations combined with slightly higher interest rates.
The effective income tax rate was 33% in the first half of 1995, compared
to 34% in the same period of 1994.
Net Income
Net income for the first half of 1995 was $689 million. Net income as a
percentage of revenues was 25.2% in the first half of 1995, compared with 25.0%
in the first half of 1994. The slight increase was the result of lower cost of
revenues and higher interest income percentages offset by higher levels of
operating expenses.
FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $3.8 billion
at December 31, 1994 and represented 64% of total assets. The portfolio is
diversified among security types, industries, and individual issuers.
Microsoft's investments are investment grade and liquid. The portfolio, while
invested predominantly in U.S. dollar denominated securities, also includes
foreign currency positions in anticipation of continued international expansion.
Microsoft's portfolio is invested in short-term securities to minimize interest
rate risk and to facilitate rapid deployment in the event of immediate cash
needs.
Microsoft has no material long-term debt. The Company has available $70
million of standby multicurrency lines of credit. These lines support foreign
currency hedging and international cash management. Stockholders' equity at
December 31, 1994 exceeded $4 billion.
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<PAGE> 27
Cash generated from operations has been sufficient historically to fund
Microsoft's investment in research and development activities and facilities
expansion. As Microsoft grows, investments will continue in research and
development in existing and advanced areas of technology. Microsoft's cash will
be used to acquire technology or other businesses and to fund strategic
ventures. Additions to property, plant, and equipment are expected to continue,
including facilities and computer systems for research and development, sales
and marketing, product support, and administrative staff. On December 31, 1994,
commitments related to the construction of new buildings approximated $235
million. See "MICROSOFT'S BUSINESS -- Properties."
The exercise of stock options by employees provides additional cash. These
proceeds have been used in Microsoft's open market stock repurchase program
through which Microsoft provides shares for stock option and stock purchase
plans. This practice is continuing in 1995. Additionally, Microsoft enhanced its
stock repurchase program by selling put warrants during the first half of 1995.
See "MICROSOFT FINANCIAL STATEMENTS -- Notes to Financial Statements."
Management believes existing cash and short-term investments together with
funds generated from operations should be sufficient to meet Microsoft's
operating requirements for the next 12 months. Microsoft's cash and short-term
investments are also managed so as to be available for such other strategic
investment opportunities or other potential large-scale cash needs as might
arise in pursuit of Microsoft's long-term strategies. Additionally, on October
28, 1994, Microsoft shareholders authorized Microsoft to issue up to 100 million
shares of preferred stock, which may be used by Microsoft for any proper
corporate purpose.
WINDOWS 95 AVAILABILITY
Microsoft is developing a new personal operating system, designed to
replace MS-DOS, Windows, and Windows for Workgroups, as Microsoft's desktop
operating system offering. Microsoft has consistently cautioned that it will not
ship its new products until vigorous beta testing has been completed and
management believes the products are ready for customers. Recently, Microsoft
announced that Windows 95 may not be available in retail stores before August
1995. As a result, the majority of revenues associated with Windows 95 will
occur in Microsoft's fiscal 1996 and later years.
EFFECTS OF THE MERGER
If the Merger is approved, Intuit would become a wholly owned subsidiary of
Microsoft whose financial statements would be part of Microsoft's consolidated
financial statements. Microsoft's historical financial statements will be
restated and presented as if Microsoft and Intuit had been combined for all
periods presented. Microsoft's historical results of operations will not be
materially impacted by the restatement, except for the periods when Intuit
recorded one-time charges for purchased in-process research and development in
connection with the acquisitions of ChipSoft, Inc. and Parsons Technology, Inc.
When Intuit completed its acquisition of ChipSoft, Inc. in December 1993, Intuit
recorded a charge of $151 million. Such charge will reduce Microsoft's restated
earnings per share approximately $0.24 for the quarter ended December 31, 1993.
When Intuit completed its acquisition of Parsons Technology, Inc. in September
1994, Intuit recorded a charge of $44 million. Such charge will reduce
Microsoft's restated earnings per share approximately $0.07 for the quarter
ended September 30, 1994. For future periods, the near-term effect of the Merger
is expected to be slightly dilutive to Microsoft's earnings per share but is not
expected to have a material impact on Microsoft's liquidity or capital
resources.
INTUIT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE YEAR ENDED JULY 31, 1994 AND THE TWO YEARS ENDED SEPTEMBER 30, 1993
Proposed Merger with Microsoft Corporation
On October 13, 1994, Intuit entered into an agreement and plan of
reorganization with Microsoft pursuant to which Intuit would become a
wholly-owned subsidiary of Microsoft whose financial statements would be part of
Microsoft's consolidated financial statements, as described in this Proxy
Statement/Prospectus. See "THE MERGER AND RELATED TRANSACTIONS."
Acquisitions
On December 12, 1993, Intuit completed its merger with ChipSoft, Inc.
("ChipSoft"). The total purchase price of the merger was $306.4 million in
common stock, stock options and acquisition costs
15
<PAGE> 28
($255.3 million net of tangible assets acquired). The acquisition was treated as
a purchase for accounting purposes, and, accordingly, the assets and liabilities
were recorded based on their independently appraised fair values at the date of
the acquisition. Of the purchase price, $150.5 million was allocated to
in-process research and development, $33.5 million to intangible assets and
$82.3 million to goodwill, including approximately $11 million relating to the
tax effecting of identified intangibles. The amount of the purchase price
allocated to in-process research and development was charged to Intuit's
operations. To date, there have not been any significant variances between the
actual cash flows arising from the purchased in-process research and development
and the projected cash flow estimates used in determining the valuation that
were made at the date of acquisition. In addition to the in-process research and
development charge, Intuit incurred merger-related charges of approximately
$20.4 million during the ten months ended July 31, 1994, of which $13 million
related to the termination of Intuit's agreement to acquire Legal Knowledge
Systems, Inc. The remaining merger-related liabilities at July 31, 1994 include
provisions to complete the consolidation of facilities and elimination of
redundancies by integrating business functions, including customer service,
technical support and information systems. Results of operations in "SELECTED
FINANCIAL DATA -- INTUIT" and in Intuit's consolidated financial statements
appearing elsewhere in this Proxy Statement/Prospectus include ChipSoft from the
date of acquisition.
In April 1994, Intuit acquired certain assets of the professional tax
preparation business of Best Programs, Inc. ("Best") for an initial purchase
price of $6.5 million in cash. Up to two additional annual cash "earn out"
payments (not to exceed a total of $7.5 million) may become due to Best,
depending on the number of Best customers who purchase Intuit's professional tax
products during the two years following the acquisition. The acquisition was
treated as a purchase for accounting purposes, and, accordingly, the assets and
liabilities were recorded based on their fair values at the date of the
acquisition. Of the purchase price, $5.8 million was allocated to intangible
assets.
In July 1994, Intuit completed its acquisition of National Payment
Clearinghouse, Inc. ("NPC"), for consideration of $7.6 million in common stock
and cash. NPC provides electronic banking, bill payment and stock quote
retrieval services to consumers via their modems and personal computers. The
acquisition was treated as a purchase for accounting purposes and, accordingly,
the assets and liabilities were recorded based on their fair values at the date
of the acquisition. Of the purchase price, $1.4 million was allocated to in-
process research and development, $6.0 million to intangible assets and $2.1
million to goodwill. The amount of the purchase price allocated to in-process
research and development was charged to Intuit's operations in the ten months
ended July 31, 1994. Results of operations include NPC from the date of
acquisition.
On September 27, 1994, Intuit completed its acquisition of Parsons
Technology, Inc. ("Parsons"), a privately-held consumer software publisher,
pursuant to which Parsons became a wholly-owned subsidiary of Intuit. Under the
terms of the agreement, Intuit paid Parsons' shareholders approximately $28.8
million in cash and issued to Parsons' shareholders approximately 900,000 Intuit
Shares. The transaction, which was accounted for as a purchase, had an aggregate
purchase price of approximately $67.3 million, which in addition to the above
amounts, includes approximately $2.7 million in cash and 69,019 shares of Intuit
common stock that will be paid as deferred compensation for certain
non-competition agreements. Of the purchase price, approximately $44.0 million
was allocated to in-process research and development. The remaining purchase
price was allocated as follows, along with the corresponding attributed life:
goodwill of $9.9 million (3 years), purchased technology of $2.6 million (1
year), customer lists of $4.6 million (3 years), and other intangibles of $6.8
million (2-4 years). The amount allocated to in-process research and development
was written-off in the quarter ended October 31, 1994. Results of operations
include Parsons from the date of acquisition.
Consistent with Intuit's tests for internally developed software, Intuit
determined the amounts to be allocated to developed and in-process technology
based on whether technological feasibility had been achieved and whether there
was any alternative future use for the technology. Due to the absence of
detailed program designs, evidence of technological feasibility was established
through the existence of a completed working model at which point functions,
features and technical performance requirements can be demonstrated. As of the
date of the acquisition, Intuit concluded that the in-process technology had no
alternative future use after
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<PAGE> 29
taking into consideration the potential for usage of the software in different
products, resale of the software and internal usage.
The costs to complete the development of in-process technology acquired in
the Parsons' acquisition are anticipated to total approximately $1.7 million,
consisting of approximately 100,000 hours of development time. These costs are
expected to be incurred in fiscal 1995. In estimating these costs, Intuit
considered such factors as the number of developer days committed to the project
and the average fully burdened salary of employees involved in programming,
quality assurance, and publications/graphics required to complete product
development.
Merger-related costs reduced net income by $198.8 million for the ten
months ended July 31, 1994. Assuming no additional acquisitions other than those
discussed above and no impairment of value causing an acceleration of
amortization, the net income effect of future amortization is anticipated to be
approximately $41.7 million, $36.8 million, $17.4 million, $3.1 million, and
$1.2 million for the years ended July 31, 1995 through 1999, respectively. Given
the high levels of non-cash amortization expense arising from the various
acquisitions discussed above, Intuit may report significant net losses for
fiscal 1995 and fiscal 1996.
Although Intuit believes the above acquisitions were in the best interests
of Intuit and its stockholders, there are significant risks associated with
these transactions, including but not limited to: (i) potential difficulties in
continued integration of the companies; (ii) difficulties or delays in achieving
product integration benefits; and (iii) increased competition from tax software
competitors. Intuit will continue to look for similar acquisitions, investments
or strategic alliances which it believes will complement its overall business
strategy.
FISCAL YEAR CHANGE
Effective August 1, 1994, Intuit changed its fiscal year from September 30
to July 31 in order to better align its financial reporting cycle with the
business cycles of its tax and finance software products. Consequently, Intuit's
consolidated financial statements included in this Proxy Statement/Prospectus
reflect the ten month period ended July 31, 1994 and the two years ended
September 30, 1993 and 1992.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JULY 31, 1994 AND 1993
Management of Intuit believes that a comparison of the fiscal 1994
ten-month period to the fiscal 1993 twelve-month period is not meaningful
because of the difference in the length of reported periods. Therefore, this
discussion and analysis of results of operations compares the unaudited
twelve-month periods ended July 31, 1994 and 1993 to present periods that are of
comparable length and are consistent with future reporting periods. Due to the
favorable timing of the merger with ChipSoft, the results for the twelve months
ended July 31, 1994 include substantially all of ChipSoft's 1994 tax season
revenues. However, ChipSoft's seasonally low revenues and operating expenses for
the period prior to December 13, 1993 are not reflected in Intuit's reported
results, and thus the period is not representative of business results
anticipated for the combined companies for the entire twelve months.
Intuit's business is highly seasonal due to consumer buying patterns and
the nature of Intuit's products. Intuit has experienced, and expects to continue
to experience, significant fluctuations in its quarterly revenues and operating
income. In particular, Intuit realizes a large majority of its revenue in the
period from October through March due to product launch timing in the personal
and small business finance software products, and the calendar year-end holiday
and tax return preparation seasons. The ChipSoft acquisition heightened this
seasonality effect as substantially all tax-related revenue occurs during the
January and April quarters. As a result of this seasonality, Intuit may report
losses before merger-related costs and amortization in the July and October
quarters. A number of other factors, including consumer buying patterns, the
number and timing of new product introductions by Intuit and its competitors,
product shipments, product returns, marketing expenditures, (such as
discretionary television or direct mail advertising), support expenditures,
research and development expenditures and promotional programs, including rebate
offers, may also cause significant fluctuations in Intuit's quarterly revenues
and operating results.
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<PAGE> 30
Set forth below are certain consolidated statement of operations data
(unaudited) as a percentage of net revenue for the twelve months ended July 31,
1994 and 1993.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JULY 31
---------------------------------- PERCENT
1993 1994 CHANGE
-------------- --------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue:
Software........................................ $ 71.7 67% $ 180.2 81% 151%
Supplies........................................ 35.3 33 43.2 19 22
------ --- ------- ---
107.0 100 223.4 100 109
Costs and expenses:
Cost of goods sold:
Product...................................... 35.8 33 58.9 26 65
Amortization of purchased software and
other...................................... -- -- 18.6 8 --
Customer service and technical support.......... 21.6 20 39.2 18 81
Selling and marketing........................... 24.7 23 49.5 22 100
Research and development........................ 11.3 11 24.5 11 117
General and administrative...................... 4.0 4 12.5 6 213
Charge for purchased research and development... -- -- 151.9 68 --
Other merger costs, including amortization of
goodwill and purchased intangibles........... -- -- 40.4 18 --
------ --- ------- ---
97.4 91 395.5 177 306
------ --- ------- ---
Income (loss) from operations..................... 9.6 9 (172.1) (77) --
Interest income, net.............................. 0.4 -- 2.7 1 --
------ --- -------
Income (loss) before income taxes................. 10.0 9 (169.4) (76) --
Provision for income taxes........................ 3.9 4 3.8 2 --
------ --- ------- ---
Net income (loss)................................. $ 6.1 6% $(173.2) (78)% --
====== === ======= ===
</TABLE>
Net Revenue
Net revenue for the twelve months ended July 31, 1994 increased 109% to
$223.4 million over $107.0 million in the comparable period in 1993. The
increase was primarily due to the inclusion of $67.8 million in net revenue from
ChipSoft operations after December 12, 1993, as well as upgrade releases in the
October and January quarters, higher average selling prices for certain business
and personal finance products, and, to a smaller extent, international revenues,
which increased by $4.8 million. Although Intuit's 1994 results include
significant tax product revenue as a result of the ChipSoft acquisition, the
rate of growth in the tax product business was slower than ChipSoft experienced
in the previous year, primarily as a result of increased competition and
industry mergers. Additionally, Intuit's personal tax products did not win
certain "ease of use" awards that had been received by ChipSoft in previous
years, which may have contributed to the slower revenue growth. As Intuit's core
product lines have matured, the ratio of upgrade sales to full product sales has
increased, negatively affecting average selling prices. Supplies revenue has
been experiencing slower growth than in the past. The shift in software revenues
to upgrade sales contributes to slower growth of potential supplies customers.
Intuit also faces increased competition and pricing pressures. Due to the
seasonality of Intuit's software sales, the proportion of sales represented by
supplies will vary considerably throughout the year.
Revenue is generally recognized at the time of shipment, net of allowances
for estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collection of accounts
receivable is probable. Provisions for estimated future returns have increased
at a higher rate than the increase in gross revenues, primarily because of
customer buying patterns for the tax-related products. The selling season for
tax products lasts only a few months, and it is Intuit's policy to stock
distributors and resellers at a level that reduces out-of-stock situations
during the limited tax season. This policy results in a higher rate of returns
for tax products after the end of the tax season. Advance payments are
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<PAGE> 31
recorded as deferred revenue until the products are shipped. Rebate rights are
accounted for at the time revenue is recognized. Intuit provides warranty
reserves at the time revenue is recognized for the estimated cost of replacing
defective products.
The software industry, including Intuit, is increasingly selling products
through methods that differ from the traditional packaged retail product
channel, such as OEM or "bundling" products for a single low price. This
strategy, while it introduces new customers to the product, also significantly
reduces the average selling price. The software industry, including Intuit, has
experienced a significant platform shift from DOS to Windows. Although Intuit
achieved higher average selling prices for certain finance product lines in the
twelve months ended July 31, 1994, there is increased competition on the Windows
platform, including lower-priced products which compete with Intuit's software.
As platform shifts continue to occur, there are risks that competitors
could introduce new products before Intuit's products are available on a
particular platform, or that customers may not accept a platform that Intuit has
chosen or will choose to pursue. Further consolidation of the software industry
or changes in the personal computer industry could lead to stiffer competition
in innovation and pricing strategies. Intuit cannot quantify how much these
factors have affected or will affect its business.
Cost of Goods Sold
Cost of goods sold increased to 34% of revenue for the twelve months ended
July 31, 1994, from 33% for the prior year period. Cost of goods sold includes
amortization and other merger-related costs of $18.6 million for the twelve
months ended July 31, 1994. Intuit anticipates that cost of goods sold will be
impacted by approximately $11.2 million of amortization costs in fiscal 1995.
Excluding merger costs, cost of goods sold would have been 26% of revenue for
the period ended July 31, 1994.
Software cost of goods sold, excluding amortization and other
merger-related costs, decreased to 21% of software revenue for the twelve months
ended July 31, 1994, from 26% in the previous year. The margin improvement
resulted from sales of tax products subsequent to the ChipSoft acquisition in
December 1993 and, to a lesser extent, from an increase in average selling
prices for certain products and lower materials costs. Supplies cost of goods
sold was 49% of supplies revenue for both twelve month periods ended July 31,
1994 and 1993. Margin improvements were achieved from (i) fulfillment
efficiencies, (ii) a shift in the product mix to higher-margin business
supplies, and (iii) a pricing promotion in fiscal 1993 that was not repeated in
fiscal 1994. The improvements were partially offset by margin declines from
pricing pressures. Intuit plans to continue to take actions to reduce the
materials costs of all its products. However, there can be no assurance that
margin improvements will be achieved.
Reserves are provided for quantities of current product versions that are
considered excess and for inventories of all previous versions of products at
the time new product versions are introduced.
Operating Expenses
Customer service and technical support costs decreased to 18% of revenue in
the twelve months ended July 31, 1994, from 20% in the prior year. Intuit incurs
a fixed base of support costs, which are augmented by temporary help and outside
services during periods of seasonally higher sales. Due to the favorable timing
of the ChipSoft merger, ChipSoft's seasonally low revenues and costs of
operations from August 1, through December 12, 1993 are not reflected in
Intuit's results for the twelve months ended July 31, 1994. As a result, 18% of
revenue is not indicative of the level of such costs which should be anticipated
for the combined companies. Additional costs incurred to improve the quality of
customer service were offset by higher average selling prices. Intuit has
announced plans to move certain support functions to lower cost locations.
However, there is no assurance that future cost savings will be achieved. Intuit
expects that customer service levels will not be interrupted during the
transition, although there is no assurance that current service levels will be
maintained. The post contract customer support costs are included in customer
service and technical support expenses and are not included in cost of goods
sold.
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<PAGE> 32
Selling and marketing expenses decreased to 22% of revenue for the twelve
months ended July 31, 1994, from 23% of revenue in the prior year. Due to the
favorable timing of the ChipSoft merger, ChipSoft's seasonally low revenues and
costs of operations from August 1 through December 12, 1993 are not reflected in
Intuit's results. Intuit's marketing costs for business and personal finance
products increased over fiscal 1993, primarily as a result of increased
advertising expenditures for additional campaigns.
Research and development expenses were 11% of net revenue for both
twelve-month periods ended July 31, 1994 and 1993. Intuit experiences a
relatively constant level of research and development expenses throughout the
year. Due to the favorable timing of the ChipSoft merger, ChipSoft's seasonally
low revenues and costs of operations from August 1, through December 12, 1993
are not reflected in Intuit's results. As a result, 11% is not indicative of the
level of research and development costs which should be anticipated for the
combined companies. Intuit expects significant growth of research and
development spending as a percent of revenue due to development efforts on new
and existing products, including foreign versions of its products. While Intuit
believes there are opportunities in international markets, there is no assurance
Intuit's products will be accepted. Furthermore, there is no assurance that
Intuit's new or upgraded products will be accepted, will not be delayed or
canceled, or will not contain errors or "bugs" that could affect the performance
of the products or cause damage to a user's data. If any of these events occur,
Intuit may experience reduced revenue, lose market share and incur costs to
issue maintenance releases or refunds, or provide more technical support.
General and administrative expenses increased to 6% of revenues for the
twelve months ended July 31, 1994, from 4% in the prior year. The increase is
due to costs associated with being a public company and adding senior management
personnel and infrastructure.
Net Interest Income and Income Taxes
Net interest income increased to $2.7 million for the twelve months ended
July 31, 1994, compared to $0.4 million in the prior year. The increase is due
to higher cash balances, primarily as a result of Intuit's initial public
offering in March 1993 and the ChipSoft merger in December 1993.
For the twelve months ended July 31, 1994, Intuit provided income taxes of
$3.8 million on a pretax loss of $169.4 million. The income tax provision on the
loss occurred because the in-process research and development costs, certain
merger costs, and the goodwill amortization are nondeductible for tax purposes.
There was no valuation allowance for deferred tax assets of $8.7 million at July
31, 1994 based on management's assessment that current levels of taxable income
will be sufficient to realize the net deferred tax asset.
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<PAGE> 33
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1993 AND
1992
Set forth below are certain consolidated statement of operations data as a
percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30
------------------------------------ PERCENT
1992 1993 CHANGE
--------------- ---------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue...................................... $83.8 100.0% $121.4 100.0% 45%
Costs and expenses:
Cost of goods sold............................. 29.1 34.7 39.2 32.3 35
Customer service and technical support......... 15.0 18.0 22.6 18.6 50
Selling and marketing.......................... 20.9 24.8 28.6 23.5 37
Research and development....................... 8.0 9.6 12.5 10.3 56
General and administrative..................... 2.9 3.5 5.3 4.4 81
----- ----- ------ -----
Total costs and expenses......................... 75.9 90.6 108.2 89.1 42
----- ----- ------ -----
Income from operations........................... 7.9 9.4 13.2 10.9 68
Interest income, net............................. 0.3 0.3 0.5 0.4 67
----- ----- ------ -----
Income before income taxes....................... 8.2 9.7 13.7 11.3 67
Provision for income taxes....................... 2.9 3.4 5.3 4.4 83
----- ----- ------ -----
Net income....................................... $ 5.3 6.3% $ 8.4 6.9% 59
===== ===== ====== =====
</TABLE>
Net Revenue
Intuit's net revenue increased 44.8% in fiscal 1993 from fiscal 1992. Net
revenue increased primarily due to increased aggregate unit sales of Intuit's
software products, increased aggregate unit sales of supplies and introductions
of new products. Software products accounted for 68.3% and 68.5% of Intuit's net
revenue in fiscal 1993 and 1992, respectively; supplies and services accounted
for the remainder of net revenue.
The increase in net revenue in fiscal 1993 from fiscal 1992 resulted
primarily from unit volume increases, and secondarily from increases in the
average selling prices. Average selling prices for supplies were somewhat lower
in fiscal 1993 than in fiscal 1992 due to the impact of promotional activities
during the first half of fiscal 1993.
Cost of Goods Sold
Intuit's cost of goods sold as a percentage of net sales decreased to 32.3%
in fiscal 1993 from 34.7% in fiscal 1992. This decrease was caused primarily by
the changeover to 3.5" diskette-only packages (as opposed to "dual-packing" with
both 3.5" and 5.25" diskettes) for Intuit's Windows-compatible software products
and by lower diskette purchase prices.
Net software revenue less cost of goods sold was 75.7% and 73.5% of net
revenue in fiscal 1993 and fiscal 1992, respectively. Intuit's net supplies
revenue less cost of goods sold were 48.1% and 47.4% of net revenue in fiscal
1993 and 1992, respectively. The fluctuations in supplies product net sales less
cost of goods sold were primarily a function of shifts in product mix and
promotional pricing.
Operating Expenses
Customer service and technical support expenses increased in fiscal year
1993 from 1992 to 18.6% from 18.0% of net revenue. Customer service costs
increased due to the introduction and subsequent volume growth of small business
finance products which required significantly more technical support than
personal finance products. In addition, support costs for small business finance
DOS products during fiscal 1993 and 1992 were unusually high due to reliability
problems in the initial releases.
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<PAGE> 34
Selling and marketing expenses decreased to 23.5% from 24.8% of net revenue
in fiscal 1993 from 1992 as a result of high launch costs of personal finance
and business finance products in fiscal 1992. Lower advertising expenditures in
proportion to revenue in fiscal 1993 also contributed to this reduction.
Research and development expenses increased to 10.3% from 9.6% of net
revenue in fiscal 1993 from fiscal 1992 primarily as a result of increases in
spending on new products
General and administrative expenses increased during fiscal 1993 primarily
as a result of increased staffing and associated costs necessary to support
Intuit's growth. In fiscal 1993, Intuit also increased bad debt reserves by $1.5
million (as opposed to a $0.5 million increase in fiscal 1992) to reflect
potential additional risks associated with certain distributor and retail
customers. To date, Intuit has not experienced any significant or unusual
write-offs against bad debt reserves.
Income Taxes
Intuit's effective tax rates for fiscal 1993 and 1992 were 38.9% and 35.2%,
respectively. The increase in the fiscal 1993 tax rate reflects the impact of
the Omnibus Revenue Reconciliation Act of 1993, and the reduction of the
research and experimentation credit as a percentage of pretax accounting income.
Effective October 1, 1992, Intuit adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The effect of the change on
net income for fiscal 1993 and the cumulative effect of the change were not
material.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1994 AND 1993
Set forth below are certain consolidated statement of operations data
(unaudited) as a percentage of net revenue for the three months ended October,
1994 and 1993.
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31
------------------------------ PERCENT
1993 1994 CHANGE
------------- -------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue
Software.......................................... $38.2 81% $ 57.3 84% 50%
Supplies.......................................... 9.2 19 10.9 16 18
----- --- ------ ---
47.4 100 68.2 100 44
Costs and expenses
Cost of goods sold:
Product........................................ 13.3 28 17.8 26 34
Amortization of purchased software............. -- -- 4.1 6 --
Customer service and technical support............ 6.4 14 13.7 20 114
Selling and marketing.......................... 10.7 23 17.8 26 66
Research and development....................... 3.5 7 10.7 16 206
General and administrative..................... 2.5 5 6.8 10 172
Charge for purchased research and
development.................................. -- -- 44.0 65 --
Amortization of goodwill and purchased
intangibles.................................. -- -- 9.0 13 --
----- --- ------ ---
36.4 77 123.9 182 240
----- --- ------ ---
Income (loss) from operations....................... 11.0 23 (55.7) (82) --
Interest income, net................................ 0.2 -- 0.6 1 200
----- --- ------ ---
Income (loss) before income taxes................... 11.2 24 (55.1) (81) --
Provision (benefit) for income taxes................ 3.9 8 (1.5) (2) --
----- --- ------ ---
Net income (loss)................................... $ 7.3 15% $(53.6) (79)% --
===== === ====== ===
</TABLE>
22
<PAGE> 35
Net Revenue
Net revenue for the three months ended October 31, 1994 increased 44% to
$68.2 million over $47.4 million in the comparable period in 1993. The increase
was primarily due to the release of upgrades of several of Intuit's finance
products, inclusion of $8.7 million in net revenue from Parsons' operations
subsequent to September 27, 1994, inclusion of $5.5 million in net revenue from
ChipSoft's operations, and introduction of additional international products.
Increases in average selling prices of new "deluxe" versions of certain finance
products were offset by lower average unit selling prices of products sold
through the OEM channel.
Costs of Goods Sold
Cost of goods sold increased to 32% of revenue for the three months ended
October 31, 1994, from 28% for the prior year period. Cost of goods sold
includes merger related costs of $4.1 million for the three months ended October
31, 1994. Intuit anticipates that cost of goods sold will be impacted by
approximately $11.2 million of amortization costs in fiscal 1995. Excluding
merger costs, cost of goods sold would have been 26% of revenue for the period
ended October 31, 1994.
Software cost of goods sold, excluding merger related amortization costs,
was 23% of software revenue for both three month periods ended October 31, 1994
and 1993. Margin improvement from inclusion of ChipSoft's tax products and
certain new finance products with higher average selling prices, was offset by a
lower margin on OEM products. Supplies cost of goods sold decreased to 44% of
supplies revenue for the three months ended October 31, 1994, from 47% in the
previous year. Supplies margin improvements were achieved from a shift in
product mix to business supplies and a reduction in materials costs, including
price concessions on previous material purchases. Intuit plans to continue to
take actions to reduce the materials cost of all its products. However, there
can be no assurance that margin improvements will be achieved.
Operating Expenses
Intuit offers technical support and customer service without charge.
Customer service and technical support costs increased to 20% of net revenue in
the three months ended October 31, 1994, from 14% in the prior year. Intuit
incurs a fixed base of support costs, which are augmented by seasonal staffing
and third party services during periods of seasonally higher sales. Customer
service and technical support costs were higher during the three months ended
October 31, 1994 primarily as a result of the ChipSoft merger, which resulted in
increased costs for the period without a corresponding increase in revenue.
Selling and marketing expenses increased to 26% of revenue for the three
months ended October 31, 1994, from 23% of net revenue in the prior year.
Selling and marketing costs were higher during the three months ended October
31, 1994 primarily as a result of the ChipSoft merger, which resulted in
increased costs for the period without a corresponding increase in revenue.
Intuit expects selling and marketing expenses to increase in absolute dollars in
the three months ended January 31, 1995 over the three months ended October 31,
1994.
Research and development expenses increased to 16% of net revenue for the
three months ended October 31, 1994, from 7% of net revenue in the prior year.
Intuit experiences a relatively constant level of research and development
expenses throughout the year. Research and development costs were higher during
the three months ended October 31, 1994 primarily as a result of the ChipSoft
merger, which resulted in increased costs for the period without a corresponding
increase in revenue. Intuit has also experienced, and expects to continue to
experience, significant growth of research and development spending as a percent
of revenue for development efforts on new and existing products, including
international versions of its products.
General and administrative expenses increased to 10% of net revenues for
the three months ended October 31, 1994, from 5% in the prior year. The increase
resulted from inclusion of ChipSoft's operations, additional senior management
personal and infrastructure. Additionally, because of the timing of products
launched during the quarter and the corresponding increase in accounts
receivable at October 31, 1994, Intuit
23
<PAGE> 36
provided additional reserves for uncollectible accounts in accordance with its
policy to reserve a certain percentage of accounts receivable.
Net Interest Income and Income Taxes
Net interest income increased to $0.6 million for the three months ended
October 31, 1994, compared to $0.2 million in the prior year. The increase is
due to higher cash balances resulting from the acquisition of ChipSoft in
December 1993 and cash generated from operations, partially offset by $28.8
million in cash paid for Parsons in September 1994.
For the three months ended October 31, 1994, Intuit provided an income tax
benefit of $1.5 million on a pretax loss of $55.1 million. The low benefit rate
arose because of the nondeductible status of both the in-process research and
development charge and goodwill amortization. There was no valuation allowance
for deferred tax assets of $5.7 million at October 31, 1994 based on
management's assessment that current levels of taxable income will be sufficient
to realize the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1994, Intuit had $83.9 million in cash and short-term
investments, a $44.3 million increase over September 30, 1993, primarily due to
the $52.0 million in cash and short-term investments acquired through the
ChipSoft merger. At October 31, 1994, Intuit had $34.1 million in cash and
short-term investments, a $49.8 million decrease from July 31, 1994. The
decrease was primarily due to the $28.8 million in cash paid to the shareholders
of Parsons as partial consideration for the acquisition, as well as the timing
of new product launches and inclusion of ChipSoft operations, which experienced
seasonally low revenues during the quarter ended October 31, 1994.
During fiscal 1994, operating activities generated $9.3 million in cash
compared with $11.7 million in fiscal 1993, primarily as a result of $17.0
million of cash paid in fiscal 1994 for costs associated with the ChipSoft
merger. The largest component of these costs was $13 million related to the
termination of Intuit's agreement to acquire Legal Knowledge Systems, Inc.
Intuit's investing activities provided $1.7 million of cash in fiscal 1994
compared with a cash outflow from investing activities of $29.7 million in
fiscal 1993. The increase resulted primarily from investing proportionately more
of the fiscal 1994 net operating cash flow in cash equivalents and less in
short-term investments. Intuit's initial public offering in fiscal 1993
generated approximately $21 million of cash.
During the quarter ended October 31, 1994, operating activities used $21.9
million in cash compared with providing $9.3 million in fiscal 1993. This
decline resulted primarily from inclusion of ChipSoft's operations in the
quarter ended October 31, 1994. ChipSoft's tax business is seasonal, resulting
in low revenues and significant operating losses in the July and October
quarters, with the majority of net revenues occurring in the January and April
quarters. Intuit's investing activities provided $10.3 million of cash in the
1994 period compared with the use of $2.7 million in fiscal 1993. A decline in
short term investments was partially offset by the investment in Parsons.
Intuit's financing activities provided $3.6 million of cash in the 1994 period
compared with $.4 million in the 1993 period. The primary, noncash financing
activity was the issuance of common stock for the Parson's acquisition in the
1994 period.
The expected future cash requirements for the remaining ChipSoft accrued
merger costs as of July 31, 1994 are $5.3 million. Intuit has committed to spend
approximately $6.0 million for construction of a new support site, and intends
to use its cash resources and obtain financing. On September 27, 1994 Intuit
consummated its merger with Parsons, which required a cash payment of
approximately $28.8 million at close and an additional payment of $2.7 million
in fiscal year 1996. Under the terms of the acquisition of Best's professional
tax preparation business, Intuit may be required to make additional contingent
cash payments not to exceed $7.5 million in fiscal years 1995 and 1996, based on
the achievement of certain defined objectives. Intuit has no other significant
capital expenditure commitments, although additional cash may be used to acquire
technology through purchases and strategic acquisitions. Management of Intuit
believes cash and short term investments and cash generated from operations will
be sufficient to meet its current anticipated liquidity, acquisition and capital
expenditure requirements.
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<PAGE> 37
Intuit derives significant portions of its revenues from certain
distributors and resellers. While the loss of, bankruptcy of, or significant
reduction in sales volume attributable to, any of Intuit's major distributors or
retailers could materially adversely affect Intuit's future revenue streams for
a period of time, management does not believe that credit risk will have a
material adverse effect on Intuit's financial position. Intuit performs credit
evaluations of its customers and to date has not experienced any significant
losses. In addition, Intuit anticipates that in the future, a greater percentage
of net revenues will be derived from direct sales to end-user customers,
potentially reducing Intuit's reliance on distributors and resellers over time.
THE INTUIT SPECIAL STOCKHOLDERS MEETING
DATE, TIME AND PLACE OF MEETING
The Special Meeting will be held on Monday, April 10, 1995 at 8:00 a.m.
local time, in the VMOVA Conference Room at Intuit's offices at 75 Willow Road,
Menlo Park, California.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Intuit Shares at the close of business on the
Record Date, February 10, 1995, are entitled to notice of and to vote at the
Special Meeting. As of the close of business on February 7, 1995, there were
20,385,036 Intuit Shares outstanding and entitled to vote, held of record by
approximately 670 stockholders (although Intuit has been informed that there are
in excess of 7,845 beneficial owners). A majority of these shares, present in
person or represented by proxy, will constitute a quorum for the transaction of
business. Proxies marked to abstain from voting on a proposal and broker
non-votes will be included in determining the presence of a quorum but will not
be counted in determining the number of shares present and voting on such
proposal at the Special Meeting. Each Intuit stockholder is entitled to one vote
for each Intuit Share held as of the Record Date.
VOTING OF PROXIES
The Intuit proxy accompanying this Proxy Statement/Prospectus is solicited
on behalf of the Board of Directors of Intuit for use at the Special Meeting.
Stockholders are requested to complete, date, and sign the accompanying proxy
and promptly return it in the accompanying envelope or otherwise mail or deliver
it to Intuit. All proxies that are properly executed and returned, and that are
not revoked, will be voted at the Special Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, to
approve the Merger Agreements and the Merger. Intuit's Board of Directors does
not presently intend to bring any business before the Special Meeting other than
the proposal referred to in this Proxy Statement/ Prospectus and specified in
the notice of the Special Meeting. So far as is known to Intuit's Board of
Directors, no other matters are to be brought before the Special Meeting. As to
any business that may properly come before the Special Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies. An Intuit
stockholder who has given a proxy may revoke it at any time before it is
exercised at the Special Meeting, by (i) delivering to the Secretary of Intuit
(by any means, including facsimile) a written notice, bearing a date later than
the proxy, stating that the proxy is revoked, (ii) signing and so delivering a
proxy relating to the same shares and bearing a later date prior to the vote at
the Special Meeting or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not, by itself, revoke a
proxy).
VOTE REQUIRED AND VOTING INTENTIONS OF CERTAIN STOCKHOLDERS
Approval by Intuit's stockholders of the Merger Agreements and the Merger
requires the affirmative vote of the holders of a majority of the outstanding
Intuit Shares entitled to vote. Proxies marked to abstain from voting and broker
non-votes will have the same effect as votes against approval of the Merger
Agreements and the Merger. Certain executive officers and directors of Intuit,
who on the Record Date together beneficially owned a total of 7,549,560
outstanding Intuit Shares (constituting approximately 37% of the Intuit Shares
then outstanding), have agreed to vote in favor of the Merger Agreements and the
Merger and against approval of any proposal made in opposition to or in
competition with the Merger.
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<PAGE> 38
SOLICITATION OF PROXIES AND EXPENSES
Intuit will bear the cost of the solicitation of proxies in the enclosed
form from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of Intuit may solicit proxies from stockholders by
telephone, facsimile, telegram, letter or in person. Following the original
mailing of the proxies and other soliciting materials, Intuit will request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold Intuit Shares
and to request authority for the exercise of proxies. In such cases, Intuit,
upon the request of the record holders, will reimburse such holders for their
reasonable expenses.
THE MERGER AND RELATED TRANSACTIONS
GENERAL
The Reorganization Agreement provides for the merger of M/I, a
newly-formed, wholly-owned subsidiary of Microsoft, with and into Intuit. The
discussion in this Proxy Statement/Prospectus of the Merger and the description
of the principal terms of the Reorganization Agreement are subject to and
qualified in their entirety by reference to the Reorganization Agreement, a copy
of which is attached to the Proxy Statement/Prospectus as Annex A.
The Merger will be consummated promptly after its approval by the Intuit
stockholders and the satisfaction or waiver of the other conditions to
consummation of the Merger. Upon consummation of the Merger, Intuit will become
a wholly-owned subsidiary of Microsoft. The Board of Directors and executive
officers of Microsoft are not expected to change upon consummation of the
Merger, except that Scott D. Cook, Intuit's Chairman of the Board, will become
an Executive Vice President responsible for the development of Microsoft's
products and strategic development relating to Electronic Commerce, William V.
Campbell, Intuit's President and Chief Executive Officer, will become a Senior
Vice President of Microsoft, as well as continuing as chief executive officer of
Intuit and will be responsible for Financial Products, a new division of
Microsoft which will include the business of Intuit, and William H. Harris, Jr.,
an Executive Vice President of Intuit, will become a Vice President of
Microsoft. Most of the executive officers of Intuit are expected to continue as
officers of Intuit following the Merger. The stockholders of Intuit will become
shareholders of Microsoft (as described below), and their rights will be
governed by Microsoft's Articles of Incorporation and Bylaws.
CONVERSION OF SHARES
Upon the consummation of the Merger, each then outstanding Intuit Share
will automatically be converted into and become exchangeable for 1.336 Microsoft
Shares. If, however, the Microsoft Average Closing Price (the average closing
price of Microsoft Shares over the ten trading days ending two trading days
prior to the closing of the Merger) is $53.144 or less, the Exchange Ratio will
be adjusted by dividing $71.00 by the Microsoft Average Closing Price and
rounding to the third decimal point. No fractional Microsoft Shares will be
issued in the Merger. Instead, each Intuit stockholder who would otherwise be
entitled to receive a fraction of a Microsoft Share will receive an amount of
cash equal to the Microsoft Average Closing Price multiplied by the fraction of
a Microsoft Share to which such stockholder would otherwise be entitled.
CONVERSION OF INTUIT STOCK OPTIONS
Upon the consummation of the Merger, each of the then outstanding Intuit
Options will be assumed by Microsoft and will automatically be converted into an
option to purchase a number of Microsoft Shares determined by multiplying the
number of Intuit Shares subject to such Intuit Option at the Effective Time of
the Merger by the Exchange Ratio, at an exercise price per Microsoft Share equal
to the exercise price per share of such Intuit Option immediately prior to the
consummation of the Merger divided by the Exchange Ratio. To avoid the issuance
of fractional shares, the number of Microsoft Shares subject to an assumed
Intuit Option will be rounded to the nearest whole share. The other terms of the
Intuit Options, including the vesting schedule, will remain unchanged to the
extent permitted by law and otherwise reasonably practicable.
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<PAGE> 39
Microsoft will cause the Microsoft Shares issuable upon the exercise of the
assumed Intuit Options to be issued pursuant to Microsoft's 1991 Stock Option
Plan, which is subject to a currently effective registration statement on Form
S-8 filed with the Commission.
BACKGROUND OF THE MERGER
On August 4, 1994, William H. Gates, the Chairman of the Board and Chief
Executive Officer of Microsoft, contacted Scott D. Cook, the Chairman of the
Board of Intuit, and expressed his interest in a possible business transaction.
On August 12, 1994, at a regular meeting of Microsoft's Board of Directors, the
possible acquisition of Intuit was discussed and management was authorized to
explore with Intuit the possibility of a business combination. Microsoft
proposed a merger with Intuit to facilitate the rapid development and widespread
consumer use of vastly improved financial software for home and small business
use. Microsoft believes that the merged company will primarily benefit from the
combination of Intuit's experience in the area of consumers' financial needs
with Microsoft's technical expertise and financial resources. On August 18,
1994, Mr. Gates and Mr. Cook met in San Francisco and discussed generally the
possibility of a business combination between the two companies, although
neither made any specific proposal.
After conferring with the Board of Directors and senior management of
Intuit on September 6, 1994 and September 9, 1994, respectively, Mr. Cook met
Mr. Gates on September 13, 1994 at Mr. Gates' home in Bellevue, Washington and
again discussed a possible business combination in general terms. At a meeting
in Tucson, Arizona on September 15, 1994, the Board of Directors of Intuit
considered the discussions that had taken place between Messrs. Gates and Cook,
the possible business combination and the preliminary advice that Intuit had
received from its legal counsel and financial advisors. Messrs. Gates and Cook
met in Phoenix, Arizona on September 19, 1994 and discussed without agreement
the possible range in value of Microsoft Shares that might be issued in exchange
for Intuit Shares in a business combination.
On September 20, 1994, Mr. Cook met with Michael J. Maples, Microsoft's
Executive Vice President, Products, and discussed general background information
relevant to the proposed business combination. On September 25, 1994, Messrs.
Gates and Cook met in Washington, D.C. and continued their discussions as to the
possible exchange ratio at which Microsoft Shares might be issued for Intuit
Shares in a business combination. Messrs. Gates and Mr. Cook met again on
September 28, 1994 at the Seattle airport and again discussed the range of the
exchange ratio without reaching agreement.
Meetings were held on September 28, 29 and 30 among Intuit's Board of
Directors and legal and financial advisors regarding the proposed business
combination and the terms under negotiation. In a telephone conversation on
September 30, 1994, Messrs. Gates and Cook reached a preliminary understanding
on the basic exchange ratio to be used in the business combination (1.336
Microsoft Shares for each Intuit Share) but were unable to agree on terms
relating to any adjustment that might be made in the exchange ratio in order to
provide a minimum value in Microsoft Shares for the Intuit Stockholders.
Following further discussions among Intuit's senior management and legal and
financial advisors, Mr. Cook reached agreement with Mr. Gates in discussions
over the telephone on October 1-2, 1994, regarding a number of terms for the
business combination, including the terms of any increase in the exchange ratio
in the event of a decrease in the market price of Microsoft Shares below a
specified level (which terms were substantially the same as those set forth in
the Reorganization Agreement). See "THE MERGER AND RELATED
TRANSACTIONS -- General -- Conversion of Shares." During these preliminary
meetings between the principals of the two companies significant time was spent
discussing and reviewing Intuit's reasons and justifications for the proposed
range in value. See "-- Intuit's Reasons for the Merger" and "-- Board
Recommendation."
At the meetings of Intuit's Board of Directors on September 6, 15, 28, 29,
and 30, 1994 and the meeting of Intuit's senior management on September 9, 1994,
the directors and members of senior management, in consultation with Intuit's
legal and financial advisors as indicated above, considered (preliminarily in
the early meetings and in greater detail in the later meetings) the business and
financial factors referred to below (see "-- Intuit's Reasons for the Merger")
and certain legal issues involving the structure of the proposed business
combination, the filing and review process under the HSR Act (see "-- Conditions
to the Merger") and, in
27
<PAGE> 40
the later meetings, the proposed sale by Microsoft of its "Money" personal
finance product and related business to Novell (see "-- Related
Agreements -- Agreement with Novell").
On October 3, 1994, legal counsel for Microsoft and legal counsel for
Intuit discussed by telephone aspects of the proposed business combination.
Legal counsel for the respective parties met in Palo Alto, California on October
4, 1994. On that same day, Mr. Cook and William V. Campbell, Intuit's President
and Chief Executive Officer, met with Messrs. Gates and Maples at the Seattle
airport and discussed business issues relating to the proposed Merger, primarily
focusing on Intuit's management organization and possible roles and
responsibilities of Intuit management after the Merger. See "-- Interest of
Certain Persons in the Merger" and "-- Related Agreements." At this time, the
parties signed a nondisclosure agreement.
On October 5, 1994, Mr. Gates spoke by telephone with Robert J.
Frankenberg, President and Chief Executive Officer of Novell regarding the
possible sale by Microsoft to Novell of Microsoft's Money product line.
Microsoft decided to sell its Money product line because it competes with
Intuit's Quicken for Windows product. Intuit's Board of Directors and advisors
met on October 7, 1994 and discussed this potential sale and related matters. A
series of meetings were held between representatives of Microsoft and
representatives of Novell, commencing October 7, 1994 and culminating in
Microsoft and Novell signing an agreement on October 12, 1994, whereby Microsoft
agreed to sell its Money product line and related assets to Novell, contingent
upon the closing of the Merger. See "-- Related Agreements."
Legal counsel for Microsoft sent a draft of the Reorganization Agreement to
Intuit on October 8, 1994. The terms of the Reorganization Agreement and related
agreements were negotiated at Microsoft's offices in Redmond, Washington during
the four-day period beginning October 10, 1994 and ending on October 13, 1994,
the date of signing. The negotiations were conducted on behalf of Intuit by Mr.
Campbell and William H. Harris, Jr., Intuit's Executive Vice President, and
Intuit's legal counsel and financial advisors and, on behalf of Microsoft,
principally by William H. Neukom, Microsoft's Senior Vice President, Law and
Corporate Affairs, Michael W. Brown, Microsoft's Vice President, Finance and
Chief Financial Officer, Gregory B. Maffei, Microsoft's Treasurer, and other
Microsoft legal counsel.
The Board of Directors of Intuit met via telephone conference on October
12, 1994 and considered with Intuit's legal counsel and financial advisors the
terms of the Reorganization Agreement and related agreements as then negotiated.
The Intuit Board met again on October 13, 1994 and, after further discussion
with legal counsel and financial advisors, approved the final terms of the
Reorganization Agreement and related agreements. The Board of Directors of
Microsoft met on October 13, 1994 and, after discussions with Microsoft's legal
counsel and financial advisors, approved the final terms of the Reorganization
Agreement and related agreements. On the same day, following approval by the
respective boards of directors of the two companies, the parties executed the
Reorganization Agreement, and the agreement to merge was announced immediately
thereafter.
Intuit was not contemplating a business combination of the type proposed by
Microsoft when Intuit was first approached by Microsoft regarding the Merger. In
considering the proposed Merger, the management and Board of Intuit considered
whether alternative strategies might achieve the anticipated benefits of the
Merger to Intuit's stockholders. From time to time prior to the initial contact
from Microsoft that led to the Merger, Intuit had been approached by Lotus
Development Corporation ("Lotus") concerning a possible business combination. In
each instance, Intuit determined that a business combination with Lotus would
not be in the best interests of Intuit's stockholders and declined to pursue
discussions of a business combination with Lotus. On October 13, 1994, Lotus
called Scott Cook of Intuit expressing a desire to speak with Mr. Cook before a
definitive agreement was executed with Microsoft. The Intuit Board of Directors
elected not to open discussions with Lotus, having determined that a business
combination with Lotus or any other company would not be likely to have the
advantages referred to immediately below (see "-- Intuit's Reasons for the
Merger") which the proposed business combination with Microsoft was expected to
achieve. As a result, during the period referred to above, Intuit did not make
solicitations to other parties with regard to a possible business combination or
authorize its financial advisors to do so, and did not engage in merger
discussions with any party other than Microsoft.
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INTUIT'S REASONS FOR THE MERGER
The Board of Directors of Intuit considered that the combined company would
have the potential to realize improved operating and financial performance
compared to Intuit continuing to operate separately. The Board of Directors of
Intuit has identified certain benefits for Intuit stockholders and potential
benefits that it believes will contribute to the success of the combined
company. These potential benefits include principally the following:
- Providing Intuit stockholders with Microsoft Shares in a tax-free
exchange at a substantial premium over the market price for Intuit Shares.
- The availability of greater resources for product development,
marketing, and distribution.
- The potential ability to increase international revenues through
Microsoft's broad international distribution and marketing network and its
experience in "localizing" software products for distribution in foreign
countries.
- The ability of the combined company to offer complementary product
lines, increasing the breadth of products offered.
- The ability of Microsoft and Intuit to share technology to improve
each other's products and develop new products and services in the personal
financial services business and other businesses.
- The ability of the combined company to integrate the resources and
technology of Intuit and Microsoft in order to more effectively enter the
emerging automated financial services industry.
- The opportunity to enter the emerging automated financial services
industry with substantial additional financial resources, with the benefit
of Microsoft's technology and with the credibility and established
reputation that Microsoft brings to forging relationships with users of
automated financial services including banks, financial services providers,
and their customers.
- The opportunity to expand Intuit's product portfolio and customer
base, giving Intuit access to a broader array of home productivity software
products to complement Intuit's personal financial services products and
providing Intuit with potential access to additional customers.
In the course of its deliberations, the Board of Directors of Intuit
reviewed a number of additional factors relevant to the Merger. The Intuit Board
considered, principally (i) information concerning Microsoft's and Intuit's
respective businesses, historical financial performance, operations, and
products, including possible future product releases; (ii) the comparative stock
prices of Microsoft and Intuit Shares; (iii) comparisons of trading prices and
volumes of the two companies' stocks, and trading statistics of other selected
software companies; (iv) an analysis of analyst coverage of the two companies;
(v) an analysis of the respective shareholders of the two companies; (vi) an
analysis of various adjustments that would be made in the Exchange Ratio at
various assumed prices of Microsoft Shares and the effect of applying the
Exchange Ratio at the assumed prices; (vii) premiums to market and multiples
paid in other merger and acquisition transactions in the software and other
industries; (viii) an analysis of the relative value that Intuit might
contribute to the future business and prospects of the combined company; (ix)
the compatibility of the management and businesses of Microsoft and Intuit; (x)
implied future per share values of Intuit Shares and Microsoft Shares based on
various arbitrarily assumed future earnings levels; (xi) a financial
presentation by Morgan Stanley, including the opinion of Morgan Stanley that the
Exchange Ratio was fair from a financial point of view to the stockholders of
Intuit; and (xii) reports from management and legal advisors on specific terms
of the relevant agreements and other matters. For a discussion of many of the
foregoing factors, see "-- Opinion of Financial Advisor" below.
In its evaluation of the proposed Merger, Intuit's Board considered the
premium over the market price of Intuit Shares that Intuit stockholders would
receive in Microsoft Shares based on the relative market values of
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Intuit Shares and Microsoft Shares and the Exchange Ratio. At the market prices
of an Intuit Share and a Microsoft Share on September 30, 1994, the date as of
which the Exchange Ratio was determined, the premium was 71.4% (the Exchange
Ratio of 1.336 times the then market price of a Microsoft Share, $56.13, was
$74.98, or 171.4% of the then price of an Intuit Share, $43.75). As of October
12, 1994, the last full trading day before the announcement of the Merger, the
closing prices of Microsoft and Intuit were $56.25 and $47.00, respectively,
resulting in a premium of 60%. The total implied market valuation of Intuit,
based on the number of Microsoft Shares that would be issued under the terms of
the proposed Merger on a fully diluted basis and the value of these shares at
September 30, 1994 and October 12, 1994, respectively, was $1.66 billion and
$1.67 billion. In addition, the Board took into account the fact that the
Exchange Ratio would not be adjusted for any increase in the market value of
Microsoft Shares as at the Closing over the market value on October 12, 1994,
and that, as a result, the potential implied market value of Intuit at the
Closing might be significantly greater than the implied market value on October
12, 1994. At February 7, 1995, the implied Intuit market value, based on the
then market price of Microsoft of $61.00 per share was $1.83 billion. Moreover,
under the terms of the proposed Merger, the Intuit stockholders would have
substantial downside price protection in that the Exchange Ratio would be
increased if the Microsoft Average Closing Price fell below $53.144 to an
adjusted Exchange Ratio obtained by dividing $71.00 by the Microsoft Average
Closing Price and rounding to the third decimal point. After considering
Intuit's and Microsoft's respective businesses, historical financial
performance, operations, products, and prospects, the compatibility of the
managements and businesses of Intuit and Microsoft, as well as the other factors
referred to above, the Board of Intuit concluded that the relative valuation of
Intuit and Microsoft reflected by the Exchange Ratio was appropriate and that
the Merger would have the substantial advantages referred to above for the
combined businesses of the two companies.
The Board of Directors of Intuit also considered a number of potentially
negative factors in its deliberations concerning the Merger, including, among
other things: (i) the potential loss of revenues and business opportunities in
on-line services prior to the Merger as a result of confusion in the market
place and the possible exploitation of such confusion by competitors of Intuit
and Microsoft; (ii) the risk that the Merger might not be approved by the
Department of Justice under the HSR Act or that it might be approved with
material restrictions upon the business of the combined company; (iii) the
possibility that the business combination with Microsoft might adversely affect
Intuit's relationship with service providers and other third parties; (iv) the
possibility of management disruption associated with the Merger and the risk
that, despite the efforts of the combined company, key technical and management
personnel of Intuit might not continue with the combined company; (v) the risk
that the benefits sought to be achieved by the Merger will not be achieved; and
(vi) the risks to the software industry in general and Microsoft in particular
such as those described elsewhere in this Proxy Statement/Prospectus. See
"FINANCIAL ANALYSIS -- Microsoft Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Outlook: Issues and Risks."
In view of the wide variety of factors, both positive and negative,
considered by the Board of Directors of Intuit, the Board did not find it
practical to, and did not, quantify or otherwise assign relative weights to the
specific factors considered. After taking into consideration all of the factors
set forth above, the Board of Directors of Intuit determined that the Merger was
fair to and in the best interests of Intuit and its stockholders and that Intuit
should proceed with the Merger at this time.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF INTUIT HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF INTUIT AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY RECOMMENDED A
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENTS AND THE MERGER.
OPINION OF FINANCIAL ADVISOR
Intuit retained Morgan Stanley to act as its financial advisor in
connection with the Merger. Morgan Stanley was selected by the Board of
Directors of Intuit to act as Intuit's financial advisor based on Morgan
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Stanley's qualifications, expertise and reputation, as well as Morgan Stanley's
investment banking relationship and familiarity with Intuit.
At the meeting of Intuit's Board of Directors on October 13, 1994, Morgan
Stanley rendered its written opinion that, as of such date, based upon the
various considerations set forth in the opinion, the Exchange Ratio of Microsoft
Shares for Intuit Shares reflected in the Reorganization Agreement was fair from
a financial point of view to the Intuit stockholders.
THE FULL TEXT OF THE OPINION OF MORGAN STANLEY DATED OCTOBER 13, 1994,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS.
INTUIT SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY.
MORGAN STANLEY'S OPINION ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO FROM
A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF INTUIT AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In rendering its opinion, Morgan Stanley, among other things: (i) analyzed
certain publicly available financial statements and other information of Intuit;
(ii) analyzed certain internal financial statements and other financial and
operating data concerning Intuit prepared by the management of Intuit; (iii)
analyzed certain financial projections related to Intuit prepared by the
management of Intuit; (iv) discussed the past and current operations and
financial condition and the prospects of Intuit with senior executives of
Intuit; (v) reviewed the reported prices and trading activity for Intuit Shares;
(vi) compared the financial performance of Intuit and the prices and trading
activity of Intuit Shares with that of certain other comparable publicly traded
companies and their securities; (vii) analyzed certain publicly available
financial statements and other information of Microsoft; (viii) analyzed certain
internal financial statements and other financial and operating data concerning
Microsoft prepared by the management of Microsoft; (ix) analyzed certain
financial projections related to Microsoft prepared by the management of
Microsoft; (x) discussed the past and current operations and financial condition
and the prospects of Microsoft with senior executives of Microsoft; (xi)
reviewed the reported prices and trading activity for Microsoft Shares; (xii)
compared the financial performance of Microsoft and the prices and trading
activity of Microsoft Shares with that of certain other comparable publicly
traded companies and their securities; (xiii) analyzed the pro forma impact of
the Merger on Microsoft's earnings per share and consolidated capitalization;
(xiv) reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions; (xv) discussed with the senior
management of Intuit their view of the strategic rationale for the Merger and
certain other benefits of the Merger to Intuit; (xvi) participated in
discussions and negotiations among representatives of Microsoft, Intuit and
their financial and legal advisors; and (xvii) reviewed the Reorganization
Agreement and certain related documents.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for purposes of
rendering its opinion. Morgan Stanley assumed that the financial projections
were reasonably prepared on bases reflecting the best currently available
estimates of the future financial performance of Microsoft and Intuit. Morgan
Stanley did not make any independent valuation or appraisal of the assets or
liabilities of Microsoft or Intuit, and was not furnished with any such
appraisals. Morgan Stanley's opinion states that, in arriving at its opinion,
Morgan Stanley was not authorized to solicit, and did not solicit, expressions
of interest from any party with respect to the acquisition of Intuit or any of
its assets, and that Morgan Stanley did not have discussions or negotiate with
any parties, other than Microsoft, with respect to a potential acquisition of
Intuit or any of its assets. Morgan Stanley's opinion states that it is
necessarily based on economic, market, and other conditions in effect on, and
the information made available to Morgan Stanley as of, the date of the opinion.
The following is a brief summary of Morgan Stanley's presentations to
Intuit's Board of Directors on October 13, 1994.
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COMPARATIVE STOCK PRICE PERFORMANCE
As part of its analysis, Morgan Stanley reviewed the recent stock market
performance of Microsoft and Intuit and compared such performance to that of a
group of productivity software companies, including Adobe Systems Inc., Novell,
Lotus Development Corp., (the "Productivity Software Comparables"), and a group
of consumer software companies, including America Online Inc., Broderbund
Software Inc., Davidson & Associates Inc., Electronic Arts Inc., and The
Learning Company (the "Consumer Software Comparables"). Morgan Stanley observed
that over the periods March 12, 1993 to October 11, 1994 and October 11, 1993 to
October 11, 1994, Intuit outperformed the Consumer Software Comparables index by
16.4% and 28.6%, respectively, and Microsoft outperformed the Productivity
Software Comparables index by 20.6% and 30.7%, respectively.
EXCHANGE RATIO ANALYSIS
Morgan Stanley also reviewed the ratios of Intuit's to Microsoft's stock
prices over various periods ending October 11, 1994, and computed the premium
represented by the minimum Exchange Ratio of 1.336 over these ratios. The ratios
of closing stock prices of Intuit to Microsoft for the various periods ending
October 11, 1994, were .0857 for the previous 12 months; 0.701 for the previous
six months; 0.736 for the previous three months; 0.747 for the previous 30 days;
and 0.800 for October 11, 1994. Morgan Stanley observed that the Exchange Ratio
of 1.336 represented a premium of 55.9%, 90.6%, 81.5%, 78.8% and 67.0%,
respectively, over the aforementioned ratios of Intuit to Microsoft stock
prices.
PEER GROUP COMPARISON
Morgan Stanley compared certain financial information of Microsoft and
Intuit with the Productivity Software Comparables and the Consumer Software
Comparables. Such financial information included, among other things, market
valuation, market value as a multiple of earnings, and adjusted market
capitalization as a multiple of revenues. In particular, such analysis showed
that as of October 11, 1994, based on a compilation of earnings projections by
securities research analysts, Intuit and Microsoft traded at 29.8 and 21.2 times
forecasted earnings for the calendar year 1995, respectively, and 3.9 and 7.1
times latest twelve months revenue, respectively, compared to a median of 15.3
times 1995 earnings and 3.3 times latest twelve months revenue, for the
Productivity Software Comparables, and 25.0 times 1995 earnings and 4.8 times
latest twelve months revenue, for the Consumer Software Comparables.
COMPARABLE TRANSACTIONS
Morgan Stanley reviewed the following nine large software transactions
since 1990: the acquisitions of Ashton-Tate by Borland International, Fox
Software by Microsoft, Goal Systems International by Legent, ChipSoft, Inc. by
Intuit, SOFTIMAGE Inc. by Microsoft, Aldus Corporation by Adobe Systems, Inc.,
Uniface B.V. by Compuware Corp., WordPerfect Corp. by Novell and Software
Toolworks by Pearson PLC. Morgan Stanley compared some of the financial and
market statistics for these transactions with those for the Merger. The analysis
showed a median multiple of latest twelve months revenue of 3.1 times, a median
multiple of latest twelve months earnings of 42.3 times, a median multiple of
projected next twelve months earnings of 29.1 times and a median premium paid
over the market price of the acquired company, one day prior to the announcement
of the transaction, of 42.0%. These statistics were compared with corresponding
multiples of 7.1, 79.3 and 64.6 times, and a premium of 67.1%, for the Merger,
based on a minimum Exchange Ratio of 1.336 and based on Intuit's and Microsoft's
closing share prices on October 11, 1994. Morgan Stanley observed that the
multiples and premium for the Merger were higher than the corresponding median
multiples and premium for the aforementioned comparable transactions.
DISCOUNTED CASH FLOW ANALYSIS
Morgan Stanley performed a discounted cash flow analysis of Intuit based on
certain financial projections prepared by Intuit's management for the fiscal
years ended 1995 through 1999. Morgan Stanley discounted the unlevered free cash
flows (net income plus depreciation and amortization plus deferred taxes plus
after-tax
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net interest expense less capital expenditures less investment in working
capital) over the forecast period at a range of discount rates of 16% to 24%.
The sum of the present values of such free cash flows was then added to the
present value of Intuit's terminal value, computed using a forward multiple
range of 1999 earnings of 20 to 25 times, and discounted at the aforementioned
range of discount rates. Based on this analysis, Morgan Stanley calculated per
share values for Intuit ranging from approximately $53 to $80, based on Intuit's
fully diluted shares outstanding. Morgan Stanley observed that the value of the
consideration to be received per Intuit Share pursuant to the Merger, based on
the closing price of Microsoft Shares on October 11, 1994, as well as the
minimum value of the transaction of $71.00 per Intuit Share, fell well within
the discounted cash flow value range.
PRO FORMA ANALYSIS OF THE MERGER
Morgan Stanley analyzed the pro forma impact of the Merger on Microsoft's
earnings per share for its fiscal years ended 1995 and 1996. Such analysis was
based on earnings estimates for Intuit prepared by Intuit management and
earnings estimates for Microsoft based on a consensus of research analysts
estimates for the corresponding periods. Morgan Stanley observed that, based on
a minimum Exchange Ratio of 1.336, and assuming that the Merger was treated as a
pooling of interests for accounting purposes, the Merger would result in a
slight decrease in Microsoft's earnings per share in fiscal years 1995 and 1996.
Morgan Stanley utilized this analysis in performing the Future Share Price
Analysis, which is more fully outlined below.
FUTURE SHARE PRICE ANALYSIS
Morgan Stanley computed equivalent per share values for Intuit assuming the
Merger was consummated and based on a minimum Exchange Ratio of 1.336. Such
analysis was based on a range of estimated earnings for Intuit and Microsoft for
the fiscal year ended 1999 and a range of forward multiples of Microsoft's pro
forma earnings per share for such fiscal year. An equivalent share price was
then computed for Intuit at the end of fiscal year 1998 which was then
discounted back to the present at a range of discount rates. Such analysis
showed, based on a forward multiple of 1999 earnings of 20 times and a discount
rate of 16%, a present value of the Microsoft Shares received by Intuit
stockholders ranging from approximately $75 to $90 per Intuit Share, which
represented a 68-102% premium to Intuit's closing stock price on October 11,
1994.
The above summary of the presentations by Morgan Stanley to Intuit's Board
of Directors does not purport to be a complete description of such presentations
or of all the advice rendered by Morgan Stanley. Morgan Stanley believes that
its analyses and the summary set forth above must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, could
create an incomplete view of the process underlying the analyses set forth in
Morgan Stanley's presentations to the Intuit Board of Directors and in Morgan
Stanley's opinion. In performing its analyses, Morgan Stanley made numerous
assumptions with respect to industry performance, general business, and economic
conditions and other matters, many of which are beyond the control of Microsoft
or Intuit. The analyses performed by Morgan Stanley are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. In addition, analyses
relating to value of businesses do not purport to be appraisals or to reflect
the prices at which businesses actually may be valued in the marketplace or
sold.
SELECTION AND COMPENSATION OF MORGAN STANLEY
Intuit retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for corporate and other purposes. Morgan Stanley makes a market
in Microsoft Shares and Intuit Shares and may continue to provide investment
banking services to the combined entity in the future. In the course of its
market-making and other trading activities, Morgan Stanley may, from time to
time, have a long or short position in, and buy and sell, securities of
Microsoft and Intuit. Since 1993, Morgan Stanley and its affiliates have
provided financial advisory and financing services to Intuit, including services
rendered in connection the initial public offering of Intuit
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Shares in 1993, and Intuit's merger with ChipSoft in 1993, and have received
customary fees in connection with these services.
Intuit has agreed to pay Morgan Stanley a fee for its financial advisory
services in connection with the Merger, including rendering its opinion and
making the presentations referred to above. The fee will be payable upon the
successful consummation of the Merger. The amount of the fee will depend upon
the closing price of Microsoft Shares over the ten trading days up to and
including the Closing date of the Merger. Based on the average per share closing
price of Microsoft Shares over the ten day period ending November 17, 1994 and
the number of Intuit Shares then outstanding on a fully diluted basis, Morgan
Stanley's fee would be approximately $7.9 million. In no case will the fee be
less than $5.5 million or exceed approximately $7.9 million. Intuit has also
agreed to reimburse Morgan Stanley for its out-of-pocket expenses. In addition,
Intuit has also agreed to reimburse Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates, against certain liabilities
and related expenses, including liabilities under the federal securities laws,
related to Morgan Stanley's engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain management personnel of Intuit have entered into employment and
noncompetition agreements with Microsoft that will become effective upon
consummation of the Merger, as more fully described below. See "-- Related
Agreements". Under such employment agreements, upon the closing of the Merger
the following Intuit officers will become officers of Microsoft: Scott D. Cook,
Intuit's Chairman of the Board, will become an Executive Vice President of
Microsoft, William V. Campbell, Intuit's President and Chief Executive Officer,
will become a Senior Vice President of Microsoft, as well as continuing as chief
executive officer of Intuit and will be responsible for Financial Products, a
new division of Microsoft that will include the business of Intuit, and William
H. Harris, Jr., Executive Vice President of Intuit, will become a Vice President
of Microsoft. See "-- Related Agreements -- Employment Agreements."
Under an employment agreement entered into by Intuit in March 1994 with
William V. Campbell, Intuit's President and Chief Executive Officer, vesting of
the right to exercise Mr. Campbell's stock options will accelerate by 12 months
upon a "change of control" of Intuit. Mr. Campbell has received options to
purchase 300,000 Intuit Shares at $31.875 per share, which options vest 25% on
April 8, 1995 and 25% on each of the next three anniversaries of that date. The
Merger will constitute a change of control under Mr. Campbell's employment
agreement and will have the effect of accelerating the vesting of his options to
purchase 75,000 Intuit Shares. Based on the closing price of Microsoft Shares on
February 7, 1995 and assuming an Exchange Ratio of 1.336, such options would
have a value of approximately $3,721,575. Mr. Campbell's employment agreement
with Intuit also provides that, if Mr. Campbell's employment is terminated
before the end of September 1995 without cause, he will receive 12 months' base
salary continuation or, if his employment is terminated without cause after that
date, he will receive six months' base salary continuation.
In connection with the Intuit/ChipSoft merger, in September 1993 Intuit
entered into an employment agreement with William H. Lane III, Intuit's Chief
Financial Officer. Pursuant to the employment agreement, Intuit has agreed that
the Reorganization Agreement and the Merger constitute a termination of Mr.
Lane's employment without cause within the meaning of that agreement, with the
effect that, upon the Merger, his then unvested options to purchase Intuit
Shares will vest at a rate equal to 2.08% times the number of months of his
employment with Intuit (including his prior employment with ChipSoft), and his
options will be exercisable for a period of 24 months thereafter. If the Merger
occurs in March 1995, the vesting of Mr. Lane's options to purchase
approximately 9,100 Intuit Shares will accelerate. Based on the closing price of
Microsoft Shares on February 7, 1995 and assuming an Exchange Ratio of 1.336,
such options would have a value of approximately $450,705. Mr. Lane has agreed
to assist in a transition for a period of at least 60 days following the Merger
in return for a $40,000 retention bonus from Microsoft. In addition, Mr. Lane
has entered into an employment agreement with Microsoft pursuant to which he
will receive, upon resignation (which is expected to occur several months after
the Merger), one year's base salary continuation ($175,000), plus continuation
of accrual of benefits. See "-- Related Agreements -- Employment Agreements."
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RELATED AGREEMENTS
STOCKHOLDER AGREEMENTS
Microsoft has entered into agreements (the "Stockholder Agreements") with
certain stockholders of Intuit who on the Record Date together owned
beneficially in the aggregate 7,549,560 Intuit Shares representing approximately
37% of the then outstanding Intuit Shares, pursuant to which such stockholders
have agreed to vote their Intuit Shares in favor of the approval of the Merger
and the adoption of the Merger Agreements and against any action or agreement
that would impede or interfere with the performance of the Merger Agreements or
the consummation of the transactions contemplated thereby. Each of such
stockholders have further agreed that until the closing of the Merger (the
"Closing") or the termination of the Reorganization Agreement they will not sell
or otherwise dispose of or limit their right to vote any of their respective
Intuit Shares, enter into a voting arrangement with respect to any of their
Intuit Shares, or participate in any proxy solicitation for the purpose of
opposing or competing with the consummation of the Merger.
AFFILIATES AGREEMENTS
Intuit and Microsoft have entered into agreements (the "Affiliates
Agreements") with certain individuals ("Affiliates") who might be considered
affiliates of Intuit under the Securities Act of 1933 (the "Securities Act"),
pursuant to which such persons have represented, warranted and agreed that: (a)
they will not sell or otherwise dispose of any Intuit Shares they own for thirty
days prior to the Effective Time, and (b) they will not sell or otherwise
dispose of any Microsoft Shares until such time after the consummation of the
Merger as financial results covering at least 30 days of the combined operations
of Intuit and Microsoft have been filed by Microsoft with the Commission or
published by Microsoft in a public report. In addition, the Affiliates of Intuit
have agreed that they will not sell or otherwise dispose of any Microsoft Shares
unless such sale or disposition is permitted pursuant to the provisions of Rule
145 under the Securities Act, is otherwise exempt from registration under the
Securities Act, or is effected pursuant to a registration statement under the
Securities Act.
EMPLOYMENT AGREEMENTS
Scott D. Cook, William V. Campbell, Mari Baker, Eric C.W. Dunn, Mark R.
Goines, William H. Harris, Jr., James J. Heeger, William H. Lane III, John
Monson, Stephen D. Pelletier, William C. Shepard, and William L. Strauss have
each entered into employment and noncompetition agreements with Microsoft
whereby, upon the Merger, Microsoft has agreed to employ such individuals for a
period of two years commencing on the Effective Time. Under the terms of their
respective employment agreements, such individuals will receive an annual base
salary and guaranteed differential bonus equal to the respective base salaries
of each of these individuals at Intuit immediately prior to the Merger. In
addition, such individuals will be eligible for Microsoft's Management Bonus
Plan for senior management that provides for a bonus of 0 to 40% of base salary,
and will be entitled to additional benefits similar to those provided to other
senior Microsoft employees. Under the employment agreements, if within two years
the employee's employment is terminated without cause by Microsoft, or if the
employee resigns as a result of material reduction of the employee's position,
Microsoft will be required to provide severance compensation of up to one year's
base salary and guaranteed differential bonus plus, if the termination occurs in
the first year, accrual of employee benefits though the first anniversary of the
Merger.
AGREEMENT WITH NOVELL
Prior to executing the Reorganization Agreement with Intuit, Microsoft
entered into the Money Agreement with Novell. Under the terms of the Money
Agreement, which is conditioned upon and subject to the closing of the
Reorganization Agreement, Microsoft has agreed to sell, transfer, convey, and
assign to Novell all right, title and interest in and to the Microsoft Money
software program, including product code and documentation, related technology,
relevant trademarks, and marketing materials, together with various licenses and
other contracts related to that business.
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REPRESENTATIONS AND COVENANTS
The Reorganization Agreement contains certain customary representations and
warranties of each of Intuit and Microsoft relating to, among other things: (a)
organization and related matters; (b) capital structure and ownership of
subsidiaries; (c) authorization, execution, delivery, performance, and
enforceability of the Reorganization Agreement and related matters; (d) required
consents and approvals, absence of conflicts under charter documents, and
non-violation of instruments and laws; (e) documents filed by the respective
parties with the Commission and the accuracy of the information contained
therein; (f) the accuracy of information supplied by the parties for inclusion
in filings and other documents contemplated under the Reorganization Agreement;
(g) an absence of defaults under any obligations of the parties; (h) an absence
of undisclosed material adverse changes; (i) the receipt of fairness opinions of
the financial advisors of each of the parties; (j) the lack of any action of
such party that would preclude a pooling of interests accounting; and (k) the
accuracy as of the Closing of all information supplied by each party pursuant to
the Reorganization Agreement.
Intuit has also made additional customary representations and warranties
relating to, among other things: (a) litigation; (b) an absence of undisclosed
liabilities; (c) an absence of violations of any applicable law, rule,
regulation, judgment, decree, or order of any governmental entity; (d) employee
benefit plans; (e) an absence of liens on Intuit property; (f) major contracts;
(g) taxes; (h) interests of officers and directors of Intuit; (i) intellectual
property; (j) survival of major contracts; (k) the vote required for approval of
the Reorganization Agreement and the consummation of the transactions
contemplated thereby; (l) leases; and (m) environmental matters.
Pursuant to the Reorganization Agreement, the parties have agreed that
until the earlier of the termination of the Reorganization Agreement or the
Effective Time, except as expressly contemplated by the Reorganization Agreement
or with the prior written consent of the other party, they will: (a) not take
any action that would breach their respective representations and warranties;
(b) apply for, and use their best efforts to obtain, all consents and approvals
required for the consummation of the transactions contemplated by the
Reorganization Agreement; (c) subject to certain exceptions, use their best
efforts to effectuate the transactions contemplated by the Reorganization
Agreement; and (d) use reasonable efforts to cause each of the parties'
principal stockholders to cooperate with the legal counsel of Intuit and
Microsoft, respectively, in providing opinions as to the tax-free status of the
Merger under the Internal Revenue Code.
Intuit has agreed that until the earlier of the termination of the
Reorganization Agreement or the Effective Time, except as expressly contemplated
by the Reorganization Agreement or with the prior written consent of Microsoft
(which shall not be unreasonably withheld), Intuit and each of its significant
subsidiaries will carry on its business in the ordinary course consistent with
past practice, and that, among other things, it will not: (a) declare or pay any
dividends or make any other distributions in respect of its capital stock; (b)
issue or agree to issue any capital stock, options, warrants, calls, conversion
rights, or other similar securities, subject to certain exceptions; (c) amend
its corporate charter documents; (d) acquire or agree to acquire any
corporation, partnership, or other business organization; (e) dispose of any
assets, except in the ordinary course of business; (f) incur any debt except in
the ordinary course of business; (g) enter into or amend employee benefit plans
or increase employee remuneration except in the ordinary course of business; and
(h) settle any claim, action, or proceeding, except in the ordinary course of
business. In addition, Intuit has agreed that, among other things, it will: (a)
call a special meeting of Intuit stockholders for the consideration and approval
of the Reorganization Agreement and the transactions contemplated thereby; (b)
terminate or modify any employee benefit plans as directed by Microsoft
effective immediately prior to the Effective Time or take such action as may be
directed by Microsoft to merge such plans with Microsoft employee benefit plans
at the Effective Time; (c) use its reasonable efforts to obtain employment
agreements with Microsoft, to become effective only upon consummation of the
Merger, from certain Intuit employees designated by the parties; (d) provide
Microsoft and its counsel with such information as they may reasonably request;
and (e) provide Microsoft with copies of all of its tax returns, reports, and
information statements after their filing.
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Microsoft has agreed that until the earlier of the termination of the
Reorganization Agreement or the Effective Time, except as expressly contemplated
by the Reorganization Agreement or with the prior written consent of Intuit, it
will, among other things: (a) use its reasonable efforts to obtain the execution
of agreements with respect to the sale of Microsoft Shares with each person who
is an affiliate of Microsoft under the Securities Act for purposes of pooling of
interests accounting; (b) use its best efforts to cause the Surviving
Corporation to maintain Intuit's operations in the general areas of Menlo Park
and San Diego, California, for a period of approximately two years following the
Merger; (c) use its best efforts to cause the Microsoft Shares to be issued in
the Merger and upon the exercise of the assumed Intuit Options to be quoted on
The Nasdaq Stock Market; (d) assume Intuit's obligations under any registration
rights agreement between Intuit and any Intuit stockholders and disclosed to
Microsoft, except to the extent that such stockholders' shares are otherwise
freely tradable under the Securities Act; (e) provide certain Intuit employees
whose employment is terminated without cause within one year of the Merger with
severance pay as follows: (i) an amount equal to one year's base salary for
Intuit officers; (ii) an amount equal to six months' base salary for
director-level employees; and (iii) an amount equal to two month's base salary,
plus an additional month's base salary for each year of service with Intuit (up
to a maximum of four months' base salary), for all other employees. Microsoft
has also agreed, if the Merger is consummated, that all rights to
indemnification (including advancement of expenses) of present or former
officers and directors of Intuit regarding actions taken prior to the
consummation of the Merger as provided in Intuit's Certificate of Incorporation
or Bylaws and indemnification agreements will survive the Merger and be in
effect for six years and will be guaranteed by Microsoft.
The Reorganization Agreement also provides that Intuit shall not (and it
shall use its best efforts to ensure that none of its officers, directors,
agents, representatives, or affiliates shall) directly or indirectly solicit,
encourage, initiate, or participate in any negotiation, or enter into any
agreement, or announce publicly any statement in support of the foregoing, with
respect to any offer or proposal to acquire all or a substantial portion of its
or its subsidiaries' businesses or any of its or its subsidiaries' capital stock
(an "Acquisition Transaction"). However, Intuit and its directors are not
prohibited from taking any of such actions if Intuit's directors, after
consultation with legal counsel, determine that such actions are required by the
fiduciary duties of Intuit's directors under Delaware law. Intuit will promptly
communicate to Microsoft the terms of any inquiry or proposal that it may
receive in respect of an Acquisition Transaction or the making of any request by
any person for nonpublic information concerning Intuit or any of its
subsidiaries, and shall provide Microsoft with the material facts relating to
any such offer, proposal, or request, including the identity of the person or
persons taking any of the foregoing actions. Thereafter, Intuit will inform
Microsoft of additional material facts as they arise and furnish Microsoft any
additional information Intuit provided to any third party making a proposal or
requesting information.
CONDITIONS TO THE MERGER
The Reorganization Agreement provides that, unless waived, the respective
obligations of each party to effect the Merger are subject to the following
material conditions: (a) the Reorganization Agreement and the transactions
contemplated thereby shall have been approved and adopted by the required vote
of the holders of Intuit Shares; (b) other than the filing of merger documents
with the Secretaries of State of the States of Delaware and Washington, all
consents legally required for the consummation of the Merger and the
transactions contemplated by the Reorganization Agreement shall have been filed,
occurred, or been obtained, including expiration or termination of the
applicable waiting period under the HSR Act; (c) the Registration Statement
covering the Microsoft Shares to be issued to holders of Intuit Shares pursuant
to the Merger shall have become effective under the Securities Act and shall not
be subject to any stop order, decree or injunction or proceedings seeking a stop
order, and this Proxy Statement/Prospectus shall not be at the Effective Time
subject to any proceedings commenced or threatened by the Commission; (d) no
statute, rule, or executive order shall be enacted, entered, or enforced by any
United States court or governmental entity of competent jurisdiction which
prohibits the consummation of the Merger; (e) the representations and warranties
of the other party shall be true and correct in all material respects as of the
Effective Time as though made on and as of the Effective Time; (f) the other
party shall have performed in all material respects all agreements and covenants
to be performed by it under the Reorganization Agreement; (g) each party shall
have received an
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opinion dated as of the date of Closing of the other party's legal counsel as to
matters customary to transactions of the type contemplated under the
Reorganization Agreement; and (h) there shall not be any action taken, or any
statute, rule, regulation, or order enacted, entered, enforced, or deemed
applicable to the Merger by any governmental entity which imposes any
restriction, condition, or obligation on Microsoft (other than the sale of its
Money personal finance product and related business to Novell) which would
materially adversely impact the condition of Microsoft's software products and
related intellectual property that automate financial, tax, accounting, and
investment information and transactions for individuals and small businesses
(the "Personal Finance Software Business").
The obligations of the parties to effect the Merger are also subject to the
condition that there shall be no overtly threatened or pending action,
proceeding, or other application before any court or governmental entity brought
by any governmental entity (i) seeking to restrain or prohibit the consummation
of the transactions contemplated by the Reorganization Agreement, or seeking to
obtain any material damages, or (ii) seeking to prohibit, or impose any material
limitations on, Microsoft's ownership or operation of all or any portion of
Microsoft's and Intuit's combined Personal Finance Software Business or to
compel Microsoft to dispose of or hold separate all or any material portion of
Microsoft's and Intuit's combined Personal Finance Software Business as a result
of the transactions contemplated by the Reorganization Agreement, other than the
sale by Microsoft of its Money personal finance product and related business to
Novell, or such other transaction proposed by or consented to in writing by
Microsoft. See "INTUIT'S BUSINESS -- Legal Proceedings."
In addition, the obligation of Microsoft to effect the Merger is also
subject to the receipt by Microsoft of (i) duly executed Affiliates Agreements
from each person or entity who may be deemed an affiliate of Intuit under the
Securities Act, and (ii) a letter from Intuit's independent auditor, Ernst &
Young LLP, addressed to Intuit, to the effect that the Merger will qualify for
pooling of interest accounting treatment (without regard to any action or
conduct of Microsoft).
A condition of the respective obligations of Intuit and Microsoft to
consummate the Merger is that each receive a confirming tax opinion from its
legal counsel to the effect that the Merger will constitute a reorganization
under Section 368 of the Code. The legal opinions of Fenwick & West and Preston
Gates & Ellis will not bind the IRS, will not preclude the IRS from adopting a
contrary position, will be subject to certain assumptions and qualifications,
and will be based on the truth and completeness of certain representations of
Intuit, Microsoft, M/I, and certain stockholders of Intuit.
At any time on or prior to the Merger, to the extent legally allowed,
Microsoft or Intuit, without approval of the shareholders of such company, may
waive compliance with any of the agreements or conditions contained in the
Reorganization Agreement for the benefit of that company. Neither Microsoft nor
Intuit currently intends to waive compliance with any such agreements or
conditions. In the event that Intuit waives the condition regarding receipt of
an opinion to the effect that the Merger will be treated as a tax-free
reorganization or Microsoft waives the condition that the Merger qualify for
pooling of interests accounting treatment, Intuit will resolicit the approval of
the Merger by its stockholders pursuant to an amended or supplemented Proxy
Statement/Prospectus. Intuit also intends to resolicit the approval of its
stockholders pursuant to an amended or supplemented Proxy Statement/Prospectus
if it waives any other condition contained in the Reorganization Agreement where
such resolicitation is required by law or is deemed appropriate by Intuit after
consultation with legal counsel.
TERMINATION OR AMENDMENT
TERMINATION
The Reorganization Agreement may be terminated by mutual consent of the
parties at any time prior to the Effective Time. In addition, either party may
terminate the Reorganization Agreement if: (a) there has been a breach of any
representation, warranty, covenant, or agreement contained in the Reorganization
Agreement on the part of the other party which has a material adverse effect on
the business of Microsoft or Intuit, and such breach has not been cured within
10 days after notice of such breach is given; (b) the Merger has not been
consummated before May 30, 1995, provided that if the parties agree to pursue
litigation to contest or resist any administrative or judicial action or
proceeding challenging the Merger as violative of any
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antitrust laws, then such date shall be extended to August 29, 1995; (c) any
required approval of the stockholders of Intuit shall not have been obtained
upon a vote taken by the Intuit stockholders; or (d) any permanent injunction or
other order of a court or other competent authority preventing the Merger shall
have become final and non-appealable. Microsoft may terminate the Reorganization
Agreement in the event that: (i) the Board of Directors of Intuit withdraws or
modifies, in a manner adverse to Microsoft, its approval or recommendation of
the Merger, the Reorganization Agreement, or the transactions contemplated
thereby; or (ii) Intuit or any of its officers, directors, agents,
representatives, or affiliates directly or indirectly solicit, encourage,
initiate, or participate in any negotiation, or enter into any agreement, or
announce any intention to do the foregoing, with respect to any Acquisition
Transaction, other than in exercise of the fiduciary duties of the Board of
Directors of Intuit.
Provided that Microsoft is not then in material breach of the
Reorganization Agreement, Intuit has agreed to pay Microsoft a transaction
termination fee of $15 million in the event that: (a) Microsoft terminates the
Reorganization Agreement because (i) the Board of Directors of Intuit withdraws
or modifies, in a manner adverse to Microsoft, its approval or recommendation of
the Merger, the Reorganization Agreement, or the transactions contemplated
thereby, or (ii) Intuit or any of its officers, directors, agents,
representatives, or affiliates directly or indirectly solicit, encourage,
initiate, or participate in any negotiation, or enter into any agreement, or
announce any intention to do the foregoing, with respect to any Acquisition
Transaction, other than in exercise of the fiduciary duties of the Board of
Directors of Intuit; (b) Intuit shall have agreed to an Acquisition Transaction
with any person, other than Microsoft or any of its affiliates, which results in
a change in the beneficial owners of more than 50% of the voting power of the
capital stock of Intuit, before, or within six months after, the termination of
the Reorganization Agreement; or (c) Microsoft terminates the Reorganization
Agreement following a material breach of the Agreement by Intuit that has a
material adverse effect on the business of Microsoft or Intuit, as the case may
be.
AMENDMENT
The Reorganization Agreement may be amended by Intuit and Microsoft at any
time before or after the approval of the Merger by the Intuit stockholders,
except that, after such stockholder approval, no amendment may be made which by
law requires the further approval of the Intuit stockholders without obtaining
such approval. Under Delaware law further approval is required if an amendment
alters or changes the amount or kind of consideration, alters or changes the
certificate of incorporation of Intuit other than as provided for in the
Reorganization Agreement, or alters or changes any terms or conditions of the
Reorganization Agreement if such alteration or change adversely affects the
Intuit stockholders.
CERTAIN U.S. FEDERAL INCOME TAX MATTERS
The following is a discussion of certain U.S. federal income tax
consequences of the Merger that are generally applicable to Microsoft, Intuit,
and Intuit stockholders. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing regulations thereunder (including final, temporary or proposed), and
current administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences described herein.
The following discussion is intended only as a summary of certain principal
U.S. federal income tax consequences of the Merger and does not purport to be a
complete analysis or listing of all of the potential tax effects relevant to a
decision on whether to vote in favor of approval and adoption of the Merger
Agreement and the Merger. In particular, this discussion does not deal with all
U.S. federal income tax considerations that may be relevant to particular Intuit
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. The discussion also does not address the effects of the Merger on
holders of Intuit Options. In addition, the following discussion does not
address the tax consequences of the Merger under foreign, state or local tax
laws or the tax consequences of transactions effectuated prior to or after the
Merger (whether or not such transactions are in connection with the Merger),
including without limitation transactions in which Intuit Shares are acquired or
Microsoft Shares are disposed of.
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ACCORDINGLY, INTUIT STOCKHOLDERS AND OTHERS AFFECTED BY THE MERGER ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE CONSEQUENCES OF THE MERGER,
INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES TO THEM.
The Merger has been structured with the intent that it be tax free to
Microsoft, Intuit and their respective shareholders for U.S. federal income tax
purposes. Preston Gates & Ellis, counsel to Microsoft, and Fenwick & West,
counsel to Intuit, have each rendered an opinion that the Merger, if consummated
on the terms described in this Proxy Statement/Prospectus, will constitute a
reorganization under sec. 368 of the Code (a "Reorganization"). It is a
condition to the respective obligations of Microsoft and Intuit to consummate
the Merger that their respective counsel render at the Closing opinions that the
Merger constitutes a Reorganization. All such tax opinions referenced above
shall be collectively referred to as the "Tax Opinions." The Tax Opinions have
been and will be based on and subject to certain assumptions and limitations as
well as representations received and to be received from Microsoft and Intuit,
discussed below. An opinion of counsel only represents counsel's best legal
judgment, and has no binding effect or official status of any kind, and no
assurance can be given that contrary positions may not be taken by the IRS or a
court considering the issues. Neither Intuit nor Microsoft has requested or will
request a ruling from the Internal Revenue Service (the "IRS") with regard to
any of the U.S. federal income tax consequences of the Merger.
TAX CONSEQUENCES GENERALLY APPLICABLE TO MICROSOFT, M/I, INTUIT, AND INTUIT
STOCKHOLDERS
Subject to the limitations, qualifications and assumptions referred to
herein, the following US federal income tax consequences will result from the
Merger:
(a) The Merger will constitute a Reorganization if carried out in the
manner set forth in the Reorganization Agreement, and the agreements
referred to therein. In such event, no gain or loss will be recognized by
holders of Intuit Shares upon exchange of such shares solely for Microsoft
Shares in the Merger, except for cash received in lieu of a fractional
Microsoft Share. Cash payments received by holders of Intuit Shares in lieu
of a fractional Microsoft Share would be treated as if such fractional
Microsoft Share had been issued in the Merger and then redeemed by
Microsoft. An Intuit stockholder receiving such cash will recognize gain or
loss, upon such payment, measured by the difference (if any) between the
amount of cash received and the stockholder's basis in such fractional
share.
(b) The aggregate tax basis of the Microsoft Shares received by Intuit
stockholders in the Merger (including any fractional Microsoft Shares not
actually received) will be the same as the aggregate tax basis of the
Intuit Shares surrendered in exchange therefor, reduced by any amount
allocable to any fractional share interest of Intuit stockholders for which
cash is received.
(c) The holding period of the Microsoft Shares received by each Intuit
stockholder in the Merger will include the period for which the Intuit
Shares surrendered in exchange therefor was considered to be held, provided
that the Intuit Shares so surrendered are held as a capital asset at the
time of the Merger.
(d) No gain or loss will be recognized by Microsoft, M/I, or Intuit in
connection with the Merger.
LIMITATIONS ON OPINION AND DISCUSSION
The discussion of certain US federal income tax consequences presented
above is and the Tax Opinions which have been or will be delivered by
Microsoft's and Intuit's respective counsel are or will be subject to certain
assumptions and are or will be based on the accuracy of the representations in
the Reorganization Agreement and the agreements and documents referred to
therein. Among the principal assumptions upon which the above tax discussion is
and Tax Opinions will be based are that the Merger will be consummated pursuant
to the Reorganization Agreement, that Intuit after the Merger will have retained
substantially all of its assets, that the parties intend Intuit will continue
its business as a wholly-owned subsidiary of Microsoft, and that the significant
historic stockholders of Intuit have not disposed of Intuit Shares in
contemplation of the Merger and do not have any plan or intention, existing at
or prior to the time of the Merger, to dispose of
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the Microsoft Shares to be received in the Merger such that they would not have
a significant continuing equity interest in Intuit after the Merger by virtue of
their ownership of Microsoft Shares.
A successful IRS challenge to the status of the Merger as a Reorganization
would result in Intuit stockholders being treated as if they sold their Intuit
Shares in a taxable transaction. In such event, each Intuit stockholder would be
required to recognize all of his or her realized gain or loss with respect to
the disposition of each of his or her Intuit Shares equal to the difference
between the Intuit stockholder's basis in such share and the fair market value,
as of the date the Merger becomes effective, of the Microsoft Shares received in
exchange therefor (plus any cash received for fractional shares). Such gain or
loss would be treated as capital gain or capital loss for each such stockholder
if he or she held his or her Intuit Shares as a capital asset at the time of the
Merger. In such event, an Intuit stockholder's aggregate basis in the Microsoft
Shares so received would equal their fair market value as of the effective time
of the Merger, and the Intuit stockholder's holding period for such Microsoft
Shares would begin the day after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of Microsoft
Shares at the time of the Merger would recognize gain to the extent that such
shares were considered to be received in exchange for services or property
(other than solely in exchange for Intuit Shares). Gain would also have to be
recognized to the extent that an Intuit stockholder was treated as receiving
(directly or indirectly) consideration other than Microsoft Shares in exchange
for Intuit Shares. All or a portion of such gain amounts may be taxable as
ordinary income.
ACCOUNTING TREATMENT
The Merger is anticipated to be accounted for using the pooling of
interests method of accounting under generally accepted accounting principles.
Under the pooling of interests method of accounting, the assets, liabilities and
shareholders' equity of Intuit and Microsoft will be carried forward by
Microsoft at their recorded amounts. Microsoft's historical financial position
will not be materially impacted by the restatement. Likewise, the operating
results of Microsoft will be restated and presented as if Microsoft and Intuit
had been combined for all periods presented. Microsoft's historical results of
operations will not be materially impacted by the restatement, except for the
periods when Intuit recorded one-time charges for purchased in-process research
and development in connection with the acquisitions of ChipSoft, Inc. and
Parsons Technology, Inc. When Intuit completed its acquisition of ChipSoft, Inc.
in December 1993, Intuit recorded a charge of $151 million. Such charge will
reduce Microsoft's restated earnings per share approximately $0.24 for the
quarter ended December 31, 1993. When Intuit completed its acquisition of
Parsons Technology, Inc. in September 1994, Intuit recorded a charge of $44
million. Such charge will reduce Microsoft's restated earnings per share
approximately $0.07 for the quarter ended September 30, 1994.
Intuit and Microsoft have entered into agreements with each director and
officer of Intuit, each of whom may be considered an affiliate of Intuit under
the Securities Act, such that each such person has agreed that he or she will
not transfer any Microsoft Shares prior to the date that Microsoft publishes
financial statements which reflect at least 30 days of combined operations
subsequent to the completion of the Merger. See "THE MERGER AND RELATED
TRANSACTIONS -- Related Agreements." Such agreements relate to pooling of
interests accounting.
Microsoft's obligation to effect the Merger, but not Intuit's, is subject
to the receipt by Microsoft of a letter from Ernst & Young LLP, addressed to
Intuit, to the effect that the Merger will qualify for pooling of interest
accounting treatment (without regard to any action or conduct of Microsoft).
REGULATORY REQUIREMENTS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Department of Justice")
and specified waiting period requirements have been satisfied. Microsoft and
Intuit each filed its respective notification and report forms under the HSR Act
on October 21, 1994. The parties were subsequently notified that the Merger had
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been assigned to the Department of Justice for review. On November 18, 1994, the
parties received written notice from the Department of Justice requesting,
pursuant to the HSR Act, additional information and documents relevant to the
Merger.
Federal and state antitrust enforcement authorities review the legality of
transactions such as the Merger. At any time before or after the Effective Time,
and notwithstanding that the HSR Act waiting period has expired, any such agency
could take any action under antitrust laws that it deems necessary or desirable
in the public interest. Such action could include seeking to enjoin the
consummation of the Merger or seeking divestiture of businesses of Microsoft or
Intuit acquired as a result of the Merger. Under certain circumstances, private
parties may also bring legal actions under the antitrust laws.
Based on information available to them, Microsoft and Intuit believe that
the Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, Microsoft and Intuit would prevail or would not be required to accept
certain conditions (possibly including certain divestitures) in order to
consummate the Merger. Under the Reorganization Agreement, a condition to
consummation of the Merger for each of Microsoft and Intuit is that all consents
and approvals legally required for consummation of the Merger shall have been
obtained and no temporary restraining order, preliminary or permanent
injunction, or other order or decree which prevents the consummation of the
Merger or imposes material conditions with respect to the Merger shall have been
issued and remain in effect.
SURRENDER OF CERTIFICATES; LOST CERTIFICATES
Microsoft has selected First Interstate Bank of Washington, N.A., the
transfer agent for Microsoft Shares, as exchange agent (the "Exchange Agent") to
effect the exchange of certificates representing Intuit Shares in connection
with the Merger. Promptly after the Effective Time, the Exchange Agent will mail
a transmittal form (the "Certificate Transmittal Form") to each holder of record
of certificates which immediately prior to the Effective Time represented
outstanding Intuit Shares. The Certificate Transmittal Form will contain
instructions with respect to the surrender of certificates representing Intuit
Shares to be exchanged for Microsoft Shares (together with cash in lieu of any
fractional share) and will specify that delivery will be effected, and risk of
loss and title to such certificates will pass, only upon delivery of the
certificates to the Exchange Agent. Upon surrender to the Exchange Agent of
certificates representing Intuit Shares in accordance with the instructions
contained in the Certificate Transmittal Form, the holder thereof will be
entitled to receive in exchange therefor a Microsoft stock certificate(s)
representing the appropriate number of Microsoft Shares to which such holder is
entitled and cash in lieu of any fractional Microsoft Share.
INTUIT STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT
UNTIL AN INTUIT STOCKHOLDER HAS RECEIVED A CERTIFICATE TRANSMITTAL FORM AND
SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY.
Any Intuit stockholder who has lost or misplaced a certificate for any of
his Intuit Shares should immediately call Chemical Trust Company of California
at (415) 954-9512 for information regarding the procedures to be followed for
replacing the lost certificate. Until a replacement certificate is obtained, the
Intuit stockholder will be unable to properly submit the Certificate Transmittal
Form.
AFFILIATES' RESTRICTIONS ON SALE OF INTUIT SHARES
The Microsoft Shares to be issued in the Merger have been registered under
the Securities Act by a Registration Statement on Form S-4, thereby allowing
those shares to be traded without restriction by all former holders of Intuit
Common Stock (i) who are not deemed to be "affiliates" of Intuit (as defined for
purposes of Rule 145 under the Securities Act) and (ii) who do not become
"affiliates" of Microsoft after the Merger.
Each of the "affiliates" of Intuit have agreed not to sell their Microsoft
Shares except under certain circumstances, including where such sale is
permitted pursuant to Rule 145 under the Securities Act. In
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general, Rule 145, as currently in effect, imposes restrictions on the manner in
which such affiliates may make resales of Microsoft Shares and also on the
number of Microsoft Shares that such affiliates and others (including persons
with whom the affiliates act in concert), may sell within any three-month
period. These restrictions will generally apply for a period of at least two
years after the Merger (or longer if the person is an affiliate of Microsoft).
NO DISSENTERS' RIGHTS
Stockholders of Intuit who dissent from the Merger will not be entitled to
the rights of appraisal under Section 262 of the Delaware General Corporation
Law, which provides that such appraisal rights are not available for the shares
of any class of stock designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF INTUIT AND
MICROSOFT -- Appraisal or Dissenters' Rights."
MERGER EXPENSES AND FEES
Whether or not the Merger is consummated, each party will bear its own
costs and expenses in connection with the Reorganization Agreement and the
transactions contemplated thereby. In the event that the Merger is consummated,
Intuit will be obligated to pay its financial advisor, Morgan Stanley, a fee of
at least $5.5 million and not more than $7.9 million, plus expenses, incurred in
connection with this transaction, and Microsoft will be obligated to pay to its
financial advisor, Goldman, Sachs & Co., a fee presently estimated to be
approximately $1.1 million, plus expenses. See "-- Opinion of Financial
Advisor -- Selection and Compensation of Morgan Stanley."
MICROSOFT'S BUSINESS
GENERAL
Microsoft was founded as a partnership in 1975 and incorporated in 1981.
Microsoft develops, manufactures, markets, licenses, and supports a wide range
of software products, including operating systems for personal computers (PCs),
workstations, and servers; business and consumer programs for productivity,
reference, education, and entertainment; and software development tools.
Microsoft also markets personal computer books and hardware; and is engaged in
the research and potential development of advanced technology software products.
Microsoft products are available for most PCs, including Apple(R) computers and
those running Intel(R) microprocessors.
Microsoft's business strategy emphasizes the development of a broad line of
microcomputer software products for business and personal use, marketed through
multiple channels of distribution. Microsoft is divided into three main groups:
the Products Group; the Sales and Support Group; and the Operations Group.
The Products Group is comprised of five main divisions, each responsible
for a particular area of software development, technology development, and
product marketing. The Personal Operating Systems Division designs and develops
operating systems for desktop PCs. The Business Systems Division is responsible
for enterprise-wide computing solutions, including client-server architectures,
networking products, and workgroup applications. The Desktop Applications
Division creates productivity applications. The Developer Division creates
database products, as well as programming language products and software
development tools. The Consumer Division develops products designed for the
home, school, and small business market, including multimedia consumer products
and computer input devices (hardware).
Microsoft also has an Advanced Technology Division, which is involved in
research of new technologies for the evolution of personal computing and the
development of innovative consumer software architectures.
The Sales and Support Group is responsible for building long-term business
relationships with customers. This group is aligned with one of three customer
types: end users, organizations, and OEMs. The Sales and Support Group manages
the channels that serve those customers. These channels include the U.S. and
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Canada, Europe, Other International, and OEM. The group also provides support
for Microsoft's products through Product Support Services, Consulting Services,
and Solutions Providers.
The Operations Group is responsible for managing business operations and
overall business planning. This includes the process of manufacture and delivery
of finished goods, licenses, subscriptions, and fulfillment orders; the
publishing efforts of Microsoft Press; and other corporate functions.
For the amount of revenue contributed by the major product groups and sales
channels for the years ended June 30, 1992, 1993, and 1994, see "FINANCIAL
ANALYSIS -- Microsoft Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Net Revenues."
PRODUCTS
PERSONAL OPERATING SYSTEMS
The Personal Operating Systems Division develops desktop operating systems
software, which controls PCs, allocates computer memory, schedules the execution
of applications software, and manages the flow of information and communication
among the various components of the PC. Microsoft's primary proprietary
operating systems for PCs are: the Microsoft MS-DOS operating system, the
Microsoft Windows operating system, and Microsoft Windows for Workgroups.
MS-DOS. Microsoft MS-DOS is a single-user, single-tasking operating system
designed for PCs that utilize Intel microprocessor chips. Since the introduction
of MS-DOS on the IBM PC in 1981, Microsoft has enhanced MS-DOS as new
technologies are developed and user needs have arisen. MS-DOS is preinstalled by
OEMs on most PCs.
Windows. Microsoft Windows is a graphical operating system for MS-DOS-based
PCs. Microsoft Windows supports high-performance Windows-based applications, and
offers ease of use and aesthetic appeal, scalable TrueType(R) fonts, built-in
multimedia functionality, and straightforward integration into corporate
computing environments.
Windows for Workgroups. Windows for Workgroups integrates network and
workgroup functionality directly into the Windows operating system. With Windows
for Workgroups, users can share files, data, and printers, with ease of access
and security.
Windows 95. Microsoft is developing a new personal operating system,
designed to replace MS-DOS, Windows, and Windows for Workgroups as Microsoft's
desktop operating system offering. Windows 95 will be a fully integrated 32-bit
operating system, compatible with existing software applications and capable of
performing as the platform for the next generation of applications, games, PCs,
and peripherals.
BUSINESS SYSTEMS
The Business Systems division is focused on delivering a broad range of
business solutions for organizations. The division develops and markets an
integrated product line of software for creating business solutions, including
operating systems for servers and workstations, as well as applications for
business servers. Server applications development is divided into the areas of
databases, connectivity, and workgroup applications.
Windows NT. Microsoft Windows NT Workstation is a 32-bit, multithreaded
operating system for client-server computing. It is capable of running on Intel
386, 486, and Pentium(TM) systems and exploiting the next generation of
microprocessor systems, including most RISC architectures and multiprocessor
systems. Windows NT has the power to serve as a business workstation to
integrate client-server business applications with existing Windows-based
desktop applications or as a technical workstation to run high-end engineering
or scientific applications. The operating system provides integrated mail and
networking with remote access, pre-emptively scheduled multitasking, and support
for background communication sessions. Windows NT also provides for the
automatic migration of information from previously installed versions of
Windows. The Windows NT(TM) Server, in addition to the features of Windows NT
Workstation, provides extensive network
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management features, administration tools, support for Macintosh(R) clients, and
fault tolerance. It is a platform for database, communications, and mail
servers.
SQL Server. Microsoft also offers Microsoft SQL Server. Originally
developed cooperatively by Microsoft and Sybase, Inc., SQL Server is a
high-performance relational database management system for client-server
architectures and personal computer local area networks. SQL Server supports the
Structured Query Language, which is a commonly used language through which
application programs communicate with relational databases. Microsoft provides
SQL Server for Windows NT and SQL Server for OS/2.
Microsoft Mail. Microsoft markets Microsoft Mail for PC networks. Microsoft
Mail includes client software for the Microsoft Windows, MS-DOS, Macintosh, and
OS/2 platforms. In addition, this workgroup application offers large, corporate
users support for multiple network environments. A companion product, Microsoft
Mail for AppleTalk(R) networks, is used by companies with Macintosh servers.
Microsoft Mail Remote for Windows offers software for remote clients used by
travelers or those working at home to stay in touch with the office mail system.
Schedule+. In 1992, Microsoft introduced the first of its workgroup
applications to take advantage of the Microsoft Mail messaging system, Microsoft
Schedule+. Schedule+ is a calendaring and scheduling program that helps
individuals and groups manage their time and resources. The program searches
other workgroup members' schedules to determine meeting availability times,
provides invitees the means to accept, decline, or tentatively accept
invitations to meetings, and automatically notifies attendees if a meeting is
canceled or rescheduled.
DESKTOP APPLICATIONS SOFTWARE
The Desktop Applications Division develops applications software, which
provides the microcomputer with instructions for the performance of end user
tasks. Microsoft's desktop applications software is designed for use by a broad
class of end users, regardless of business, industry, or market segment. Primary
examples of desktop applications software are word processing, spreadsheet, and
presentation graphics programs. Microsoft's desktop applications programs are
developed principally for Windows and Macintosh operating systems.
Microsoft Office. Microsoft Office is a suite of software products
featuring seamless integration of the most commonly used desktop applications.
Microsoft's suite of products is based upon a document-centric concept, with
common commands and extensive use of object linking and embedding (OLE) cross-
application capabilities. Microsoft Office comes in two editions, Standard and
Professional. The Standard Edition includes Microsoft Word, Microsoft Excel, the
Microsoft PowerPoint presentation graphics program, and a workstation license
for Microsoft Mail. The Standard Edition is available for Windows and Macintosh
operating systems. The Microsoft Office Professional Edition for Windows adds
the Microsoft Access database.
Word Processing. Microsoft's word processing program is Microsoft Word.
Microsoft Word for the MS-DOS operating system was introduced in 1983. Since its
first release, Microsoft Word has been enhanced with innovations that make it
easier for users to do everyday word processing tasks. Microsoft Word for
Windows provides all the features that users of word processing products expect
in the Windows graphical environment, plus the ability to handle graphics,
tables, spreadsheet data, charts, and images imported from other Windows-based
software programs. Microsoft also has a version for the Macintosh operating
system.
Spreadsheets. Microsoft's spreadsheet program is Microsoft Excel, which is
available for the Windows and Macintosh operating systems. It is an integrated
spreadsheet with database and business graphics capabilities. Microsoft Excel
allows full linking and embedding of objects that permits users to view and edit
graphics or charts from other Windows-based programs from the worksheet in which
the object is stored. Microsoft Excel graphics capabilities can be linked to its
spreadsheets to allow simultaneous changes to charts as changes are made to the
spreadsheets. Microsoft Excel was first introduced in 1985 for the Apple
Macintosh. Microsoft Excel for Windows was introduced in 1987.
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Graphics. Microsoft PowerPoint is a presentation graphics program for
producing slides, transparencies, overheads, and prints. Microsoft markets
versions of PowerPoint for Microsoft Windows and the Macintosh.
Project Management. Microsoft Project is a critical path project scheduling
and resource allocation program that runs on Windows and Macintosh operating
systems. The product can perform as a budgeting, monitoring, and cost estimating
tool for large business projects and as a critical path and schedule planning
tool.
DEVELOPER PRODUCTS
The Developer Division provides software development tools, database
products, and technical information to Windows developers worldwide. These
products and services help independent software developers, corporate
developers, solutions developers, and hobbyists create a wide variety of
applications, primarily for Windows and Windows NT.
Database Products. Database products control the maintenance and
utilization of structured data organized into a set of records or files.
Microsoft offers database products which span the needs of individual users up
to large corporations. These products include Microsoft Access, Microsoft
FoxPro(R), Microsoft SQL Server, and a variety of database connectivity
technologies. Microsoft Access is a relational database management application,
also offered in conjunction with Microsoft Office, which provides access to
structured business data. Microsoft FoxPro is a desktop database development
tool which is compatible with the industry standard xBase development language.
FoxPro supports xBase applications on MS-DOS, Windows, Windows NT, Macintosh,
and UNIX. The Open Database Connectivity (ODBC) product provides access and
connectivity to read and write to various databases from other computer industry
vendors from within Microsoft Windows applications.
Software Development Tools and Computer Languages. Software development
tools and computer languages allow software developers to write programs in a
particular computer language and translate programs into a binary
machine-readable set of commands that activate and instruct the hardware.
Microsoft develops and markets a number of software development environments,
language compilers, and software testing tools. In 1994, Microsoft shipped
Microsoft Visual C++(TM) development system for 16 and 32-bit application
development on Windows and Windows NT. The Microsoft Visual Basic(TM)
programming system for the Windows operating system provides easy access to a
wide variety of data sources by integrating the Microsoft Access database engine
and the ability to leverage investments in commercial applications through OLE
2.0. Additionally, Microsoft offers professional, highly-integrated development
environments in the Assembly and FORTRAN languages for MS-DOS, Windows, and
Windows NT.
Developer Information Products. Microsoft supplies software developers with
technical and support information which is critical for successful development
on Windows and Windows NT. Developers subscribe to the Microsoft Developer
Network (MSDN) information service and receive quarterly updates on CD-ROMs,
magazines, and electronically via several on-line information services.
CONSUMER PRODUCTS
The Microsoft Consumer division develops and markets useful, enjoyable, and
fundamental software and services for small businesses, schools, and homes. The
division is developing a synergistic product line focusing on several categories
of home software usage, including Personal Tools, Personal Transactions, Family
Reference/Information, Lifestyle, Entertainment, and Kids. Many of the Family
Reference/Information and Lifestyle titles are available on CD-ROM. The Consumer
division is also responsible for hardware input devices such as the Microsoft
Mouse and the Microsoft BallPoint Mouse.
Personal Tools. Microsoft's leading Personal Tools products are Microsoft
Works and Microsoft Publisher. Microsoft markets versions of Microsoft Works
that run on the Windows, MS-DOS, and Macintosh operating systems. Microsoft
Works is an integrated software program that contains word processing with
spell-checking and thesaurus; spreadsheet with charting; and database with
reporting capabilities. Microsoft Works allows the easy exchange of information
from one tool to another. A large
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percentage of Microsoft Works is licensed through the OEM channel in addition to
the finished goods channels. Microsoft Publisher is an easy-to-use, entry-level
desktop publishing tool for the Windows operating system. Publisher features
PageWizards(TM) design assistants, an interactive tool that automates the design
process of 12 custom publications, including newsletters, calendars, greeting
cards, and invitations.
Personal Transactions. Microsoft Money is a financial organization product
that provides the user with a variety of features for tracking personal or
business expenses. Introduced in 1991, Microsoft Money runs on the Windows
operating system and provides easy tracking of account balances, income, and
expenses, as well as quick reporting and charting of financial information. If
the Merger is approved, the Money product would be sold to Novell. See "THE
MERGER AND RELATED TRANSACTIONS -- Related Agreements -- Agreement with Novell."
Family Reference/Information. Reference and information titles include
Microsoft Encarta(TM) and Microsoft Bookshelf(R), which are both available for
Windows and Macintosh operating systems. The Encarta multimedia encyclopedia
database blends 9 million words of text in 26,000 articles with a wealth of
innovative, interactive information presented through animations, videos, maps,
charts, sounds, and pictures. Bookshelf is a multimedia reference library for
the desktop PC that integrates seven well-respected and authoritative works on
one compact disc. As a source of general reference information, Bookshelf
includes a dictionary, world atlas, world almanac, thesaurus, concise
encyclopedia, and two books of quotations.
Lifestyle. Lifestyle titles include Microsoft Dinosaurs, Microsoft
Dangerous Creatures, Microsoft Ancient Lands, and Microsoft Cinemania(TM), an
interactive guide to the movies with entries for 19,000 films. Musical titles
include Microsoft Beethoven: The Ninth Symphony, Microsoft Stravinsky: The Rite
of Spring, Microsoft Mozart: Dissonant Quartet, Microsoft Multimedia Strauss for
Windows, and Microsoft Musical Instruments.
Entertainment. Microsoft also has a line of entertainment products.
Microsoft has marketed Microsoft Flight Simulator(TM) since 1983. Licensed from
Bruce Artwick Organization Ltd., Microsoft Flight Simulator has been updated
several times and is available for MS-DOS and Macintosh operating systems.
Microsoft Golf was introduced in 1992. Licensed from Access Software, Inc., the
product is a realistic simulation of the sport of golf for the Windows operating
system.
Kids. Titles for children include Microsoft Creative Writer and Microsoft
Fine Artist. Creative Writer is a full-featured creative writing and publishing
program; Fine Artist is a comprehensive art program. Both products take
advantage of the computer's ability to integrate text, high-quality graphics,
sound, and animation to produce an enriching creative experience for children.
In September 1994, Microsoft released the first in a series of products based on
the popular children's books and television series, Magic School Bus.
Input Devices. Microsoft's major hardware product is the Microsoft Mouse, a
hand-held pointing device that facilitates editing of text on the screen. It can
be used with MS-DOS and Windows operating systems and works with many
applications products from Microsoft and other companies. The mouse for the
Intel microprocessor-based PC was first introduced in 1983. The mouse is sold
separately or with Microsoft Windows. In 1991, Microsoft began marketing the
Microsoft BallPoint Mouse, designed especially for use with laptop and notebook
computers. The BallPoint Mouse is shipped with a universal clamp that fits on
the keyboards of most laptop computers and a positioner that allows the user to
adjust the angle of the mouse to the keyboard. In August 1994, Microsoft began
shipping the Microsoft Natural Keyboard, an ergonomically superior keyboard
input device.
MICROSOFT PRESS
Founded in 1983, Microsoft Press publishes books about software products
from Microsoft and other software developers and about current developments in
the industry. Books published by Microsoft Press typically are written and
copyrighted by independent authors who submit their manuscripts to Microsoft for
publication and who receive royalties based on net revenues generated by the
product.
Microsoft Press contracts with an independent commercial printer for the
manufacturing of its books. Publisher's Resources, Inc. acts as Microsoft's main
fulfillment house in the United States, maintaining the
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majority of the inventory of Microsoft Press books. Books are marketed by
independent sales representatives and by Microsoft Press sales personnel.
Internationally, Microsoft Press has numerous international agreements with
publishers for the worldwide distribution of its books. Microsoft Press has
granted a publisher in England the right to distribute English language versions
of its books in all countries except the United States, Canada, Central and
South America, and certain Asian countries. In most cases, Microsoft Press
provides each publisher with a book's manuscript, and the publisher arranges for
its translation and the printing, marketing, and distribution of the translated
version.
LOCALIZATION
Microsoft has a practice of localizing its products, including user
messages and documentation, for distribution in other countries. Thus, in
France, for example, all user messages and documentation are in French and all
monetary references are in French francs, and in the United Kingdom, monetary
references are in pounds and user messages and documentation reflect certain
British conventions. Various Microsoft products have been localized into more
than 30 languages.
MARKETING AND DISTRIBUTION
Microsoft aligns its sales and marketing people with three customer types:
end users, organizations, and OEMs. Microsoft's sales and marketing staff builds
long-term relationships with these customers of Microsoft products. Microsoft
has four major channels of distribution which deliver product to end users:
finished goods in the U.S. and Canada, Europe, and Other International; and OEM.
The end user customer unit has responsibility for activities that target
end users who make individual buying decisions for the PCs they use at work or
home. As such, the end user unit handles distributor and reseller relationships;
reseller sales terms and conditions; channel marketing and promotions; end user
marketing programs; support policies; and seminars, events, and sales training
for resellers. Key products are Microsoft's personal operating systems and
consumer and desktop applications.
The organization customer unit has responsibility for activities that
target groups of users in large, medium, and small organizations. The unit works
with Solutions Providers, the Microsoft Consulting Services division, and
directly with organizations to create enterprise-wide solutions to business
computing problems. The unit handles computing strategy for organizations;
consulting strategy for organizations and Solutions Providers; vertical
marketing programs; and large account licensing programs. Additionally, the unit
is responsible for the technical training of Solutions Providers and channel
resellers; support policies; and seminars, events, and sales training for
resellers and Solutions Providers. Key products are Microsoft's business
systems, developer software, and software licensed via large corporate account
programs.
The OEM customer unit includes the sales force which works with original
equipment manufacturers who include Microsoft software on their PCs.
FINISHED GOODS CHANNELS
Distributors and Resellers. Microsoft markets its products in the finished
goods channels primarily through independent, non-exclusive distributors and
resellers. Distributors include Computer 2000, Ingram Micro, and Merisel.
Resellers include Corporate Software, Egghead Software, Softmart, and Software
Spectrum. Microsoft has a network of field sales representatives and field
support personnel who solicit orders from distributors and resellers and provide
product training and sales support.
Large Accounts. Microsoft has a program designed to make it easier for
large organizations to acquire and maintain Microsoft products. The program,
Microsoft Select, offers flexible software acquisition, licensing, and
maintenance options specially designed to meet the needs of large multinational
organizations. Targeted audiences include technology specialists and influential
end users in large enterprises. Marketing efforts and fulfillment are generally
coordinated with the Microsoft network of large account resellers.
Solutions Providers. The Microsoft Solutions Providers is a comprehensive
support relationship with independent companies who provide integration,
development, training, and support for business computing
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solutions. The program supports value-added resellers, system integrators,
consultants, and training organizations. Under this business partnership
strategy, Microsoft provides sales and product information, development
services, early access to Microsoft products, and customer support tools
including priority telephone support, education, and business development
support. To ensure high-quality technical services for Microsoft's products,
Microsoft Solutions Providers are required to have Microsoft-certified
professionals on staff.
Consulting Services. Microsoft's Consulting Services Division assists
customers in using Microsoft's computer operating systems, applications, and
communications products. The group works with Solutions Providers and helps
create enterprise-wide computing solutions for large corporate accounts.
Direct Marketing. Microsoft uses direct marketing techniques aimed at
existing and potential users of Microsoft's products. Programs are typically
directed through the mail, utilizing lists of targeted individuals. Microsoft
uses direct marketing to promote sales of new versions of products to existing
users. Fulfillment of product to the end user is accomplished by either direct
shipment or through resellers.
International Sales Sites. Microsoft has established marketing, support,
and/or distribution subsidiaries in Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, Colombia, the Czech Republic, Denmark, Dubai, Ecuador,
Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel,
Italy, Japan, Malaysia, Mexico, Morocco, the Netherlands, New Zealand, Norway,
People's Republic of China, Peru, Poland, Portugal, Puerto Rico, Russia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan,
Thailand, Turkey, the United Kingdom, and Venezuela.
Microsoft'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.
OEM Channel. Microsoft's operating systems are licensed primarily to OEMs
under agreements that grant the OEMs the right to distribute copies of
Microsoft's products with the OEMs' microcomputers. Microsoft also markets
certain language and applications programs to OEMs under similar arrangements.
In addition, Microsoft markets the Microsoft Mouse and BallPoint Mouse to OEMs
for distribution to buyers of the OEMs' computers. In almost all cases, the
products are distributed under Microsoft trademarks. Microsoft has OEM
agreements covering one or more of its products with virtually all of the major
microcomputer OEMs, including AST Research, DEC, Dell, Compaq, Fujitsu, Gateway
2000, IBM, NEC, Olivetti, Packard Bell, Toshiba, Unisys, and Zenith.
Advertising. Microsoft works closely with large advertising and direct
marketing firms. Advertising, direct marketing, worldwide packaging, and
marketing materials are targeted to various end-user segments. Microsoft
utilizes broad consumer medium (television, radio, and business publications)
and trade publications. Microsoft also invests heavily in direct marketing and
customer satisfaction areas. In 1995, Microsoft plans to spend more than $100
million on a broad campaign emphasizing Microsoft brand identity.
PRODUCT SUPPORT
Microsoft's Product Support Services group, with locations in the U.S. and
in Microsoft subsidiaries, provides product support coverage options to meet the
needs of users of Microsoft products. Microsoft hires individuals with proven
product expertise and provides them with productivity tools, continuous product
education and training, and consistent processes to deliver quality support for
Microsoft products. Coverage options range from standard no-charge toll
telephone support to fee-based offerings providing unlimited 800 number
telephone and electronic technical support across all Microsoft products 24
hours per day, 7 days per week.
Users have access to Microsoft KnowledgeBase, a repository of over 55,000
technical articles that is updated regularly with useful information regarding
Microsoft products. Microsoft provides access to KnowledgeBase via
CompuServe(R), GEnie(TM), Prodigy, America Online, and Internet. Additionally,
Microsoft offers two information subscription services: Microsoft TechNet and
Microsoft Developer Network.
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As a supplement or alternative to direct support, Microsoft enhances the
third party support channel by providing Microsoft Solutions Providers with
education, training, tools, and support. Microsoft Solutions Providers include
Authorized Training Centers, which offer advanced product education and
certification on Microsoft products, and Authorized Support Centers, which
provide a wide spectrum of multinational support, multivendor support, and
integration services.
CUSTOMERS
As described above, Microsoft has three customer types: end users,
organizations, and OEMs. Microsoft believes that most of the end users of its
products are individuals in businesses, government agencies, educational
institutions, and at home. These end users obtain Microsoft products primarily
through distributors, resellers, and OEMs, which include certain Microsoft
products with their hardware. Microsoft's practice is to ship its products
promptly upon receipt of purchase orders from its customers and, consequently,
backlog is not significant.
PRODUCT DEVELOPMENT
The microcomputer software industry is characterized by rapid technological
change, which requires a continuous high level of expenditures for enhancing
existing products and developing new products. Microsoft is committed to
continued expenditures for research and product development.
Most of Microsoft's software products are developed internally. Microsoft
also purchases technology, licenses intellectual property rights, and oversees
third party development for certain products. Product documentation is also
created internally. Internal development enables Microsoft to maintain closer
technical control over the products and gives Microsoft the freedom to designate
which modifications and enhancements are most important and when they should be
implemented. Microsoft has created a substantial body of proprietary development
tools and has evolved a development methodology for creating and enhancing its
products. These tools and methodology are also designed to simplify a product's
portability among different operating systems or computers.
Microsoft believes that a crucial factor in the success of a new product is
getting it to market quickly to respond to a new user need or an advance in
hardware design, without compromising product quality. Microsoft strives to
become as informed as possible at the earliest possible time about technological
advances and changing usage patterns.
During fiscal years 1992, 1993, and 1994, Microsoft spent $352 million,
$470 million, and $610 million, respectively, on product research and
development activities. Those amounts represented 12.8%, 12.5%, and 13.1%,
respectively, of net revenues in each of those years.
COMPETITION
The microcomputer software market is intensely competitive and subject to
rapid change. Microsoft's competitors include many independent software vendors,
such as Lotus Development, Oracle, and Novell. These companies generally have a
narrower focus than Microsoft in product offerings such as spreadsheets,
relational databases, word processors, and networking software.
Large personal computer OEMs offer operating systems and are devoting
significant resources to creating new operating systems, notably IBM, Apple
Computer, and Sun Microsystems. Microsoft markets its operating systems products
to OEMs and end users. Microsoft competes for that business with the large OEMs
and joint ventures of OEMs, and independent systems software vendors, such as
Novell.
Microsoft believes that the principal competitive factors in marketing
microcomputer software are the product's reputation, features and functions,
ease of use, reliability, price relative to performance, timeliness of delivery,
and availability and quality of support services. There is no assurance that
Microsoft's competitive position will not be adversely affected by one or more
of these factors in the future.
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PRODUCT PROTECTION
Microsoft regards the intellectual property used in its software as
proprietary and attempts to protect it with copyrights, patents, trade secret
laws, internal and external nondisclosure safeguards, and restrictions on
disclosure and transfer that are incorporated into its software license
agreements. Despite these restrictions, it is possible for competitors and users
to copy aspects of Microsoft's products or to obtain and use information that
Microsoft regards as proprietary. Existing laws protecting intellectual property
are helpful but imperfect aids in preventing unauthorized copying and use of
Microsoft's products. Monitoring and identifying unauthorized copying and use of
software can be difficult, and software piracy is a persistent problem for the
software industry. Piracy is particularly acute in international markets. Some
of Microsoft's products distributed internationally use electronic copy
protection to assist in preventing unauthorized copies, but the more typical
Microsoft antipiracy strategy is to work with others in the industry to secure
the passage of appropriate laws protecting software, to educate the market and
persuade users about the benefits of legitimate software, and to participate in
selective enforcement actions.
MANUFACTURING
Microsoft has manufacturing facilities located in the United States, Puerto
Rico, and Ireland. Microsoft's manufacturing operations involve the production
of disks, assembly of purchased parts, and final packaging. Quality control
tests are performed on purchased parts, and finished disks and other products.
The chief materials and components used in Microsoft products include disks,
books, and multicolor printed materials. Microsoft is often able to acquire
component parts and materials on a volume discount basis. Microsoft has multiple
sources for raw materials, supplies, and components.
Microsoft contracts a portion of its manufacturing activity to third
parties. Outside manufacturers produce software products, documentation, and
hardware such as mouse pointing devices. There are other custom manufacturers in
the event that products become unavailable from current sources.
EMPLOYEES
As of June 30, 1994, Microsoft employed 15,257 people, 10,264 domestically
and 4,993 internationally. Of the total, 4,417 were in product research and
development, 8,079 in sales, marketing, and support, 1,344 in manufacturing and
distribution, and 1,417 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,
Microsoft believes it has been successful in its efforts to recruit qualified
employees, but there is no assurance that it will continue to be as successful
in the future. None of Microsoft's employees are subject to collective
bargaining agreements. Microsoft believes that relations with its employees are
excellent.
PROPERTIES
Microsoft's corporate offices consist of approximately two million square
feet of office building space located in Redmond, Washington. There are two
sites that total approximately 300 acres of land. Microsoft is constructing a
225,000 square foot office building, which is expected to be completed in the
spring of 1995. Additionally, construction has started on another series of
office buildings with approximately 675,000 square feet of space. Occupancy is
expected by the end of calendar 1995. Microsoft owns all of its corporate
campus.
Microsoft's domestic manufacturing and distribution operation consists of a
265,000 square foot facility situated on 23 acres in nearby Snohomish County,
Washington, and a 45,000 square foot disk duplication facility in Humacao,
Puerto Rico. The Puerto Rican facility, which began operation in April 1990, is
leased under a 10-year lease, with an option to renew for an additional 10
years. Microsoft's European manufacturing operation consists of 155,000 square
foot facility situated on 12 acres in Dublin, Ireland. The Ireland site also
includes a 25,000 square foot office building for international localization.
Microsoft owns a 65,000 square foot office building on seven acres of land
near London, England. In Les Ulis, France, Microsoft owns a 110,000 square foot
office building on four acres of land.
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In addition, Microsoft leases office space in numerous locations in the
United States and many other countries.
LEGAL PROCEEDINGS
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ)
entered into a consent decree resolving the DOJ's non-public investigation of
Microsoft. On February 15, 1995, the U.S. District Court for the District of
Columbia entered an order denying DOJ's motion to approve the consent decree. On
February 16, 1995 the DOJ filed a notice of appeal to the United States Court of
Appeals for the District of Columbia Circuit and requested expedited
consideration and briefing schedule. In its brief, the DOJ said that United
States District Court Judge Stanley Sporkin's decision to refuse to enter the
final judgment misconstrued the scope of his review under the Tunney Act, and
erroneously rejected a decree that undoubtedly met the Tunney Act's "public
interest" test. On February 17, Microsoft also filed a notice of appeal.
Microsoft is also currently involved in litigation with Apple Computer, Inc. and
Wang Laboratories, Inc. See "MICROSOFT FINANCIAL STATEMENTS -- Notes to
Financial Statements -- Contingencies."
Microsoft is also named as a defendant in the complaint filed against
Intuit and its directors which seeks injunctive and other relief with respect to
the Merger. See "INTUIT'S BUSINESS -- Legal Proceedings."
On February 9, 1995, Apple Computer, Inc. (Apple) added Microsoft and Intel
Corporation as additional defendants in a lawsuit previously brought against The
San Francisco Canyon Co. for alleged copyright infringement, trade secret
misappropriation, unfair competition, and conversion in the U.S. District Court,
Northern District of California. The complaint includes allegations that
Microsoft included a small amount of computer code allegedly owned by Apple in a
version of Microsoft's Video for Windows software product. The complaint seeks
to enjoin Microsoft from marketing products copied or derived from Apple's
allegedly copyrighted material, to require the recall of all infringing products
from the market, and to recover actual and punitive damages in unspecified
amounts. Although this suit is in its preliminary stage, Microsoft believes that
the resolution of the suit will not have a material adverse effect on its
financial condition or results of operations and intends to defend the
litigation vigorously.
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INTUIT'S BUSINESS
BACKGROUND
The mission of Intuit is to fundamentally change the way that individuals
and small businesses manage their financial affairs. To that end, Intuit
develops, markets and supports personal finance, small business accounting and
tax preparation software products, and related supplies and electronic services,
that enable individuals, professionals, and small businesses to automate
commonly performed financial tasks and better organize, understand, and manage
their financial lives. Intuit employs a variety of consumer marketing techniques
to define and design its products and services so that they will be easy to use
and will satisfy customer's needs. Intuit's product development strategy focuses
on products that give new and existing customers added value and provide Intuit
with opportunities for follow-on sales and recurring revenue. For example,
Intuit has developed several integrated, complementary products that seamlessly
share financial information, so that its customers can use several Intuit
products in conjunction with one another, providing Intuit a significant
opportunity to cross-sell its products and leverage its existing customer base.
Intuit commenced operations in March 1983 and was incorporated under the
laws of California in March 1984. Intuit was reincorporated under the laws of
Delaware in March 1993, shortly before its initial public stock offering. In
December 1993, Intuit acquired ChipSoft, a publicly-held developer and marketer
of tax preparation software products. In April 1994, Intuit purchased the assets
of Best's professional tax preparation software business, and, during July 1994,
Intuit acquired NPC, a privately-held provider of automated bill payment
services. Each of the above acquisitions was accounted for as a "purchase"
transaction for accounting purposes.
Unless otherwise indicated herein, "Intuit" refers to Intuit Inc., a
Delaware corporation (and its California predecessors), and its wholly-owned
subsidiaries, including ChipSoft (and its predecessor), Intuit Ltd., a United
Kingdom company, Intuit Deutschland GmbH, a German company, Wintax Software
Corporation, a Canadian corporation that is a subsidiary of ChipSoft, and NPC.
In September 1994, following the close of Intuit's fiscal year end, Intuit
completed its acquisition of Parsons in a transaction that was accounted for as
a purchase. See "Intuit Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Acquisition of Parsons Technology, Inc.,"
and Notes 2 and 11 of Notes to Intuit Consolidated Financial Statements.
Intuit's first product, Quicken, enables individuals to automate many
personal financial transactions such as calculating account balances, printing
checks, creating budgets, reconciling bank statements and preparing personal
financial reports and graphs, in order to record, understand and manage their
finances more effectively. Quicken simplifies data entry by allowing users to
input their financial information through use of an easily recognizable
on-screen metaphor, the checkbook. Intuit's next major financial management
product, QuickBooks, provides owners of small businesses with the more extensive
functions they require while maintaining ease of use. With a design based on
easy to use on-screen invoices and forms, instead of debit-and-credit entry,
QuickBooks is tailored to small business users who are unfamiliar with complex
double-entry accounting principles.
Intuit also develops and markets a range of related supplies designed to be
used in conjunction with its software products to further automate transaction
execution and record keeping. Intuit's line of supplies, which includes paper
checks, invoices and window envelopes, enables users to save time and generate
professional looking forms. Supplies generate significant recurring revenue and
add value and functionality to Intuit's software products. Additionally, through
its Automated Financial Services division, Intuit also offers a number of
on-line services, including electronic bill payment, payroll tax update
services, and the Quicken VISA card with Intellicharge, that extend the
capabilities of Intuit's software products and increase the automation of
financial tasks.
Through its merger with ChipSoft in December 1993, Intuit added to its
product line the individual tax preparation software products TurboTax and
MacInTax, as well as the professional tax preparation software products,
TurboTax ProSeries. Intuit's tax preparation software is designed to harness the
power of the personal computer to allow both individual taxpayers and
professional tax preparers to automate the process of
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preparing tax returns in their homes and offices. This software simplifies the
process of preparing tax returns by reducing calculation time and errors,
automatically transferring data between forms, checking for missing and
incomplete information, and aiding in the organization of tax records. Tax
preparation software further benefits professional tax preparers by allowing
them to speed up the processing of tax returns, reduce costs, and have greater
control over the tax preparation process. By its nature, tax preparation
software must be revised and updated for each new tax year and is thus a source
of renewal revenue.
Intuit also provides extensive free customer support for its products in
order to increase customer satisfaction and brand loyalty, to increase its
registered customer base for future sales opportunities, and to obtain direct
input from customers regarding desirable new products, product features, and
upgrades.
PRODUCTS
Intuit's primary sources of revenue are personal finance products, tax
preparation products, small business accounting products, complementary
supplies, and automated financial services offerings.
PERSONAL FINANCE PRODUCTS
Intuit develops personal finance software products for the three most
popular personal computer operating environments: Windows, DOS, and Macintosh.
As of October 1994, only one of Intuit's largest competitors offered personal
finance products for all three of these environments.
Quicken was introduced in October 1984 and has since been enhanced and
upgraded several times. Quicken allows users to organize, understand and manage
their personal finances. Designed to look and work like a checkbook, it provides
users with an easy-to-use method for recording and categorizing their financial
transactions. Once entered, the financial information can be analyzed and
displayed using a broad set of reports and graphs. Quicken also allows users to
reconcile their bank accounts and track credit card purchases, investments,
cash, and other assets and liabilities. In addition, it provides a budget
spreadsheet for manipulating an annual budget. Quicken also enables users to
make payments by printing computer checks or by initiating electronic payments
via modem. Sales of Quicken and Quicken-related supplies and services would have
represented approximately 30% of Intuit's and ChipSoft's combined pro forma net
sales during the twelve months ended July 31, 1994. Accordingly, a decline in
demand for Quicken, as a result of competition, technological change or other
factors, could have a material adverse effect on Intuit's operating results and
financial condition.
SMALL BUSINESS ACCOUNTING PRODUCTS
Recognizing the widespread customer use of Quicken for small business
applications, Intuit developed a similar family of products for small
businesses.
QuickBooks was developed to address the needs of the small business user
but shares many of Quicken's most popular features, including an easy-to-use
design that does not require the user to be familiar with traditional
double-entry accounting concepts such as debits and credits. For example,
QuickBooks supports both cash-based and accrual-based accounts payable ("A/P")
with separate entry of bills and automatic generation of A/P checks based on
outstanding vendor balances, whereas Quicken is designed primarily for
individuals who pay bills on a cash basis. In addition, QuickBooks offers
flexible invoicing, including printing on pre-printed forms, letterhead or plain
paper, and full tracking and aging of invoices.
QuickPay is a payroll add-on product for Quicken and QuickBooks that
calculates and tracks gross salary and payroll deductions and is targeted to
small businesses that do not use an outside payroll service. A related service
offering is Intuit's Tax Table Update Service, a diskette-based data service
that provides customers with new tax table files whenever relevant federal,
state or local tax rates change.
QuickInvoice works together with Quicken for Windows to allow business
users to generate and print professional-looking invoices and to track revenue
and receivables balances. QuickInvoice uses DDE (Dynamic Data Exchange) links to
Quicken to send and receive transaction information.
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TurboTax for Business is a tax return preparation product that enables
Intuit's QuickBooks small business accounting software users to prepare their
own corporate tax returns without having to retain an outside tax preparation
professional. Intuit sells separate TurboTax for Business programs for preparing
Federal corporate returns (1120 and 1120S) and partnership returns (1065). The
product is also available for a limited number of states.
TAX PREPARATION PRODUCTS
Intuit also develops, markets and supports a broad line of more than 360
software products sold under the brand names TurboTax, TurboTax ProSeries, and
MacInTax. Through its acquisition of Parsons in September 1994, Intuit also
acquired Personal Tax Edge, a lower-end personal tax preparation product that is
marketed primarily through direct sales efforts. Intuit sells its tax
preparation software to consumers and small businesses for use in preparing
their own tax returns and to professional tax preparers for use in preparing
their clients' tax returns.
Tax preparation software must be rewritten each year to reflect annual
changes in tax laws and forms, and customers must purchase new versions each
year in order to file accurate tax returns using such software. As a result, tax
preparation software generates renewal revenues that historically have been more
regular and predictable than upgrade revenues typical of other types of personal
computer software. A change in this pattern could have a material adverse effect
on Intuit's operating results and financial condition.
Pro forma combined net sales of consumer and professional tax products
(inclusive of pre-merger sales by ChipSoft during the period from August 1, 1993
though the December 12, 1993 closing date of the ChipSoft acquisition) were
approximately 34% of total pro forma combined net sales of Intuit and ChipSoft
for the 12 months ended July 31, 1994.
CONSUMER TAX PRODUCTS
The principal market for Intuit's consumer tax preparation software
products consists of individuals who prepare their own federal income tax
returns and own or have access to personal computers.
Intuit's domestic consumer tax products consist of tax planning and
preparation software for federal and state individual income tax returns. Intuit
currently provides 44 state tax preparation products (one for each state that
has an individual income tax) for DOS-based computers and 25 state tax
preparation products for Windows-based and Macintosh computers.
Intuit's tax preparation software products are designed to be easy to use
for computer users of all skill levels, yet sufficiently sophisticated to
prepare complex returns. The programs offer the flexibility of different data
entry methods for different levels of experience, including Intuit's EasyStep
system to help novice users prepare their taxes quickly and easily and identify
tax deductions that might otherwise be missed. In addition, TurboTax and
MacInTax offer extensive, context-sensitive tax help at the touch of a key,
including both the Internal Revenue Service (the "IRS") instructions for, and a
layman's explanation of, most individual line items on the tax forms. The
programs also identify entries that might trigger an IRS audit. Finally, the
programs print out completed IRS-approved forms on virtually any home computer,
ready to be signed and mailed by the user. Alternatively, customers can use
Intuit's software to prepare their returns to be filed electronically.
Intuit releases HeadStart preliminary editions of its federal 1040 and
selected state tax return programs several months in advance of the release of
the final versions of those products. These preliminary editions enable
customers to organize their records and to make tax-planning decisions. Intuit
releases final editions in January or February after all of the relevant forms
have been made available by the IRS. Final editions automatically transfer data
previously entered into preliminary editions.
PROFESSIONAL TAX PREPARATION PRODUCTS
The market for Intuit's professional products includes a wide range of
professionals who prepare tax returns for individuals and small businesses.
Professional users of tax preparation software include individual
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tax preparers, small and mid-sized bookkeeping services and accounting firms,
major regional and "Big Six" accounting firms, as well as entrepreneurs who
prepare taxes on a part-time basis. Tax preparation software is also used by
lawyers, financial planners, and other professionals. Intuit believes that small
to mid-size independent tax preparers currently comprise the largest segment of
its professional tax customer base.
In April 1994, Intuit purchased from Best the assets of Best's professional
tax preparation software business, including its customer service and product
support facility in Fredericksburg, Virginia, which Intuit assumed control over
in August 1994. For the 1994 tax year, Intuit plans to market its existing
professional tax software, the TurboTax ProSeries line, to the approximately
10,000 former Best professional tax customers, and will provide these customers
with data conversion at no charge. Best's tax software products have been
discontinued. See "FINANCIAL ANALYSIS -- Intuit Management Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to Notes
to Intuit Consolidated Financial Statements for additional information
concerning the Best acquisition.
Intuit's core professional products, TurboTax ProSeries 1040 (for DOS,
Windows and Macintosh) provide income tax capabilities and tax management
features appropriate for the specific needs of professional tax preparers. To
service the wide range of needs of its professional customer base, Intuit has
developed a broad suite of products to complement its 1040 products. For
example, Intuit sells separate programs for the preparation of state individual
income tax returns, corporate returns (1120 and 1120S), and partnership returns
(1065), fiduciary returns (1041), not-for-profit returns (990), as well as
certain state equivalents of the returns and add-on modules that provide
practice management, networking, enhanced printing, and electronic filing
capabilities. Intuit also offers a fixed asset depreciation software product and
develops the popular Accountant's Trial Balance accounting software products for
the American Institute of Certified Public Accountants.
OTHER SOFTWARE PRODUCTS
Intuit has more recently begun to market a line of software products that
provide consumers with information useful in managing other aspects of their
personal affairs. These include two products developed by Parsons -- It's Legal,
a product that enables consumers to prepare several legal forms and documents,
and Medical Drug Reference, which enables a user to access information regarding
various medical pharmaceuticals.
Through the Parsons acquisition Intuit also acquired QuickVerse, a
computerized concordance that enables users to quickly find particular verses in
the Bible.
SUPPLIES
Intuit offers a range of paper supplies, including checks, invoices, and
business envelopes, that increase the usefulness of its software products.
Intuit sells wallet, business, and voucher style checks for both continuous-feed
and laser printers, and offers many styles of checks with a choice of
backgrounds or in multi-part formats. Invoice forms are available in multiple
styles for continuous-feed and laser printers, again with a multi-part option.
Matching double-window envelopes, deposit slips, and address stamps complete the
supplies product line. Revenues from supplies products would have represented
approximately 19% of Intuit's and ChipSoft's combined pro forma net sales during
the 12 months ended July 31, 1994.
Because virtually all of the supplies products involve printing to the
customers' specifications, these products are sold directly to users. Customers
receive supplies catalogs and order forms with most Intuit software products.
Users may also order electronically at any time using the "Intuit Marketplace"
feature in Intuit's software products. Orders can be mailed or sent by facsimile
to Intuit's processing center in Palo Alto, California, where billing
information is recorded and the order is forwarded to one of Intuit's two
printing sub-contractors.
Intuit has only two sources for most of its supplies product lines.
Intuit's ability to provide such supplies is dependent on continued relations
with these vendors, and the failure of these vendors to continue to provide
supplies on a timely basis could have an adverse effect on Intuit's operating
results and financial condition.
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AUTOMATED FINANCIAL SERVICES
Intuit has recognized that its large installed base of Quicken, QuickBooks
and QuickPay users, and its control over the technology of these products, has
created a significant opportunity for Intuit to offer value-added services that
further automate financial transactions for its users. Since 1990, Intuit has
introduced a total of four such service offerings.
Quicken VISA Card with IntelliCharge combines the use of a credit card with
software and communications technology to address a widespread customer need.
Research indicated that users of personal finance software products wanted
better understanding and control of their credit card expenditures with greater
ease of data entry. With IntelliCharge, Intuit has created a new product that
combines (i) the Quicken VISA card (issued through Primerica Bank), (ii) the
IntelliCharge service, which collects expenditure data, prepares an electronic
statement for each cardholder on a monthly basis, and distributes it to
cardholders via diskette or modem, and (iii) provisions in the Quicken software
to read this electronic statement, enter the data, and categorize transactions
automatically into appropriate expense categories (based on prior usage or SIC
code). As a result, all credit card data can be automatically entered and
monthly statements can be processed and categorized in a few minutes with
complete accuracy. Although there is no annual fee for the Quicken VISA card,
users are required to pay an annual data-delivery charge for delivery via
diskette. In addition to a portion of this data-delivery charge, Intuit receives
compensation from Travelers Bank, the card-issuing bank, based on credit card
usage.
Electronic Bill Payment, currently provided through CheckFree Corporation
("CheckFree"), allows Quicken users to pay bills without paper checks by
transmitting payment instructions via modem. Intuit is currently compensated by
CheckFree for enrolling end users in the service. Intuit will continue to
support CheckFree for current users, but during 1995 Intuit anticipates that it
will begin to provide its electronic bill payment service through its NPC
subsidiary, which Intuit acquired in July 1994. NPC provides electronic banking,
bill payment and stock quote retrieval services to customers via their modems
and personal computers. In January 1995, CheckFree filed a lawsuit alleging that
NPC's computerized bill payment system infringes a patent held by CheckFree and
seeking to enjoin its use by NPC and Intuit. See "Legal Proceedings". See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Intuit" and Note 2 of Notes to Intuit Consolidated Financial
Statements for more information of the NPC acquisition.
Tax Table Update Service is a diskette-based data service that provides
QuickPay users with new tax table files whenever relevant federal, state or
local tax rates change. The service is provided free in the first year and costs
approximately $40 per year thereafter.
Quicken Quotes is a stock price service that allows modem-equipped end
users to download current stock prices into Quicken Deluxe 4 for Windows. Intuit
and CompuServe Incorporated, the data provider, share the fee revenue derived
from the service.
Each of Intuit's service offerings is provided in conjunction with a single
third party. Although Intuit believes that it has satisfactory contractual and
business relationships with these third parties, termination of any of these
relationships could interrupt Intuit's ability to provide a given service
offering.
PRODUCT DEVELOPMENT AND MARKETING
In fiscal 1994 Intuit internally reorganized several previously centralized
corporate functions into separate business units. This was done to more closely
align Intuit's marketing and product development efforts to better address
target markets. Some of Intuit's current business units include its personal
finance, business products, automated financial services, personal tax,
professional tax, supplies, and information products groups. Each business unit
utilizes its own development, marketing and allocated customer service, and
technical support personnel to develop, market, and support products from the
earliest design stages through product shipment and beyond into the postshipment
maintenance period. The marketing staff for each business unit is responsible
for that business unit's market research, product management, and creation of
consumer demand through advertising, direct mail, and other promotional
techniques. Intuit believes that this
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business unit approach provides more highly focused levels of marketing and
technical input in the early stages of product development and assists
developers in balancing the needs of existing customers (who are potential
upgraders) with the needs of future new customers.
Since its earliest days, Intuit has demonstrated creativity in its
marketing approaches and an ability to apply successful consumer mass marketing
concepts from other industries to the marketing of software products. Examples
include Intuit's use of airline in-flight magazines and television advertising
to generate direct sales and its early penetration of emerging low-price retail
channels such as computer superstores, discount chains, and warehouse and club
stores. Intuit expects to continue these marketing strategies through its new
business units and expects to increase its direct mail marketing efforts in the
coming fiscal year.
Intuit believes that successful products must be easy to use and responsive
to the specific needs and use patterns of its customers, and strives to develop
its products in accordance with these consumer marketing principles.
Accordingly, Intuit attempts to define desirable new products and enhancements
to existing products by conducting market research and working closely with its
current and prospective customers to determine their needs and requirements and
to obtain their input regarding desired product functions. New products and
enhancements are then designed based on this consumer input and field-tested by
actual users who further critique the product and suggest modifications. Once a
product is released, customer reactions and input continue to be monitored by
Intuit's technical support staff and fed back into the development process to
assist in the development of product enhancements and upgrades.
In addition, Intuit strives to define and develop products and upgrades
that will stimulate ongoing sales to repeat customers in order to leverage the
sales opportunities offered by Intuit's existing customer base. For example,
Intuit has developed certain complementary products that can share information
and be used in conjunction with other Intuit products. These integrated products
provide added value and functionality to new and existing customers and expand
Intuit's sales opportunities. Intuit also attempts to exploit new technologies
such as CD-ROM to expand the features and functions of its products and generate
revenue from sales of upgrades.
The development of tax preparation software is unique in the personal
computer software industry because a rigorous annual development cycle is
mandated by the adoption of new tax laws and forms by the federal and state
governments each year. The uncertain timing of the release of tax forms by the
IRS and state government agencies and the complexity of the tax laws create a
need for flexible, highly-sophisticated development management schedules. Intuit
uses its development architectures for both its consumer and professional tax
software products, providing it with significant operating leverage compared to
tax preparation software companies which produce only a consumer tax product or
only a professional tax product.
Intuit's research and development expenses for the twelve months ended July
31, 1994 were $24.5 million (excluding research and development expenses
incurred by ChipSoft from August 1, 1993 through December 12, 1993, the closing
date of the Intuit/ChipSoft merger). Intuit intends to substantially increase
actual spending on research and development during fiscal 1995 in order to
develop new products, as well as adapt existing products for international
markets.
Intuit believes that its future success will depend in large part upon its
ability to enhance its existing products and to develop and introduce new
products on a timely basis. New products or enhancements must keep pace with
competitive offerings, adapt to new hardware platforms, technologies and
emerging industry standards, and provide additional functionality. Thus, while
Intuit's current products primarily facilitate the record-keeping and reporting
of past financial transactions, Intuit plans to develop and offer new products
and services that will automate the processing of current financial transactions
and assist customers in financial planning and decision-making. Intuit currently
has a number of new product development efforts under way, or planned to
commence in the future. Failure to develop and introduce new products in a
timely manner could have a material adverse effect on Intuit's operating results
and financial condition. Additionally, due to the short tax season, any delays
in the completion and shipment of tax software products could have a significant
negative impact on Intuit's net revenues during its second and third fiscal
quarters.
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New software products often contain undetected errors or "bugs" that can
adversely affect the performance of a product or damage a user's data. If
products are released which contain errors, Intuit may lose customer acceptance
of its products, as well as market share, and may be required to issue
maintenance releases or refunds. Any of such steps, if taken, could have a
material adverse impact on Intuit's operating results. In the past Intuit has
inadvertently introduced new products containing bugs for which Intuit issued
free maintenance releases to correct the errors. In particular, following the
March 1992 introduction of QuickBooks, Intuit issued two maintenance releases
and offered technical assistance to certain customers to enable them to resume
use of QuickBooks. The material, product development, and technical service and
support costs associated with the QuickBooks maintenance releases adversely
affected Intuit's operating results in the second half of fiscal 1992. In
addition, errors in Intuit's products can also potentially result in other types
of liability to customers. For example, Intuit guarantees the accuracy of the
tax calculations performed by its federal consumer 1040 tax preparation products
and has agreed to reimburse any penalties paid by a consumer customer to the
Internal Revenue Service solely as a result of miscalculation on a form prepared
using Intuit's 1040 products. Should these products contain a calculation error
affecting a significant number of consumer customers' returns, Intuit could be
subject to liability claims and be required to make substantial payments, and
its operating results and financial condition could be materially adversely
affected. Various customers asserted claims against ChipSoft for expenses they
incurred as a result of certain alleged errors in ChipSoft's 1992 income tax
year electronic filing software and certain problems were experienced in the
1993 tax year professional business tax products. Although Intuit maintains a
data processor's errors and omissions insurance policy, such a policy would not
necessarily afford protection against all such claims. Intuit attempts to assure
the quality and accuracy of the information contained in its products and to
limit its potential liability through indemnification agreements and/or through
appropriate disclaimers in its product documentation. However, there can be no
assurance that the contractual provisions used to limit liability will be
enforceable.
SALES AND DISTRIBUTION
Intuit's marketing efforts have historically focused primarily on creating
consumer demand to "pull" product through the retail channel. As a result,
Intuit has historically maintained a relatively small sales department. However,
recent extensions of Intuit's product lines have increased the need for channel
support. Accordingly, Intuit has added regional sales managers in Seattle,
Dallas, Minneapolis, Boston, Washington, and Canada and has also created an
outbound retail merchandising group to support software retailers. This group
refers orders to distributors and concentrates on building awareness among
retailers of Intuit's products and sales promotions. Intuit expects to incur
higher sales expense due to the addition of these regional sales managers.
In the United States and Canada, a majority of Intuit's products are sold
through retail distribution. Sales to the retail channel are made both by Intuit
directly and by distributors, including Ingram Micro D, Inc., Merisel, Inc.,
Navarre and Handleman. Intuit's products are carried broadly by retail software
outlets, computer superstores and general mass merchandisers. To augment these
efforts, Intuit from time to time has established OEM arrangements. Intuit also
sells products directly to end users.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, there are increasing
numbers of companies competing for access to these channels. Intuit's
arrangements with its distributors and retailers may be terminated by either
party at any time without cause. Distributors and retailers carry competing
products. Retailers of Intuit's products typically have a limited amount of
shelf space and promotional resources for which there is intense competition.
There can be no assurance that distributors and retailers will continue to
purchase Intuit's products or provide Intuit's products with adequate levels of
shelf space and promotional support. In addition, personal computer hardware and
software companies have reported declines in gross margins and greater product
returns as they have increased sales through the mass merchandise distribution
channel. Although to date Intuit has not experienced materially lower margins or
higher returns on its sales through this channel, there can be no assurance that
Intuit will not be similarly affected in the future.
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In the ten months ended July 31, 1994 and twelve months ended September 30,
1993, sales to Ingram accounted for 15% and 12% of net sales, respectively;
sales to Merisel accounted for 15% and 17% of net sales, respectively. No other
customer accounted for more than 10% of net sales during these periods. The net
sales and percentage of net sales figures referred to in this paragraph do not
include any sales by ChipSoft prior to December 12, 1993, the effective date of
Intuit's acquisition of ChipSoft.
Although Intuit's software products are sold primarily as stand-alone
products through retail software stores and direct response marketing, Intuit
has participated in creating bundled product offerings with other hardware and
software manufacturers in OEM relationships. To date, the majority of bundles
have been for special editions of Quicken for Windows and Quicken for DOS that
have more limited feature sets than the standard versions of the same products.
In some cases, OEMs purchase fully-assembled products directly from Intuit,
although recently the trend has been towards "diskless" bundles, under which the
OEM pre-installs the software on personal computers and includes only a
documentation set. In such instances, the OEM pays the cost of goods for the
documentation and a royalty on the software. The prices Intuit receives for OEM
sales are typically significantly lower than distributor prices and can
substantially reduce Intuit's operating margins. However, Intuit believes that
OEM sales enable Intuit to pursue its strategy of continuing to acquire new
customers to whom it can market new products and upgrades.
Intuit also markets and sells its products directly to new and renewal
customers and believes that direct sales will be an increasingly important
channel for sales of Intuit's products and product upgrades. All Intuit's
professional tax and supplies products, and approximately 60% of its personal
tax software products, are sold directly by Intuit to end-users utilizing
direct-response advertising in computer magazines and selected general interest
magazines and newspapers and targeted direct-mail solicitations. Intuit believes
that such advertising generates direct orders, stimulates retail demand and
increases general consumer awareness of Intuit's products. Direct sales are also
made through in-bound and out-bound telemarketing efforts. Intuit believes that
the direct sales channel is an excellent vehicle for developing multiyear
associations with repeat customers for sales of new products and upgrades.
Intuit has made significant improvements in the infrastructure, particularly
personnel and telephone and computer systems, necessary to handle a substantial
direct marketing business, particularly with regard to tax software, and will
continue to expand such infrastructure as its direct-marketing sales grow.
Parsons, which Intuit acquired in September 1994, has extensive experience in
direct mail marketing, and Intuit expects to use Parsons' expertise to increase
its direct sales and marketing efforts in the future. As part of its strategy to
increase direct customer sales, Intuit uses product registration (such as its
recent efforts to require registration of QuickBooks customers) and other
methods (such as its purchase of Best's professional tax customer list) to build
large database of registered customers to whom direct mail marketing campaigns
and other sales promotions can be addressed.
Intuit maintains a stock balancing policy that allows distributors and
retailers to return products at any time for credit. In addition, Intuit often
sells directly to end users using free trial and satisfaction guaranteed offers
and, competitors' promotional or other activities could cause returns to
increase sharply at any time. Further, the rate of product returns could
increase as general mass merchandisers become an increasing percentage of
Intuit's business or other changes in Intuit's distribution channels occur or if
existing products become obsolete. Tax preparation software must be rewritten
each year to reflect annual changes in tax laws and forms, and customers must
purchase new versions each year in order to file accurate returns using such
software. During the tax return preparation season Intuit intentionally ships
more units to its distributors and retailers than it expects them to sell during
such season in order to reduce stock-outs. All of such units of Intuit's tax
products are sold on a returnable basis and, after April 15, Intuit customarily
reduces the price it charges to resellers in order to encourage post-season
sales of unsold tax products. As a result of these factors, Intuit has
historically accepted substantial returns of its tax products each year,
principally from April to September, and expects to continue to do so in the
future. Intuit establishes reserves, including reserves under Intuit's stock
balancing policy, based on estimated future returns of products, taking into
account promotional activities, the timing of new product introductions,
distributor and retailer inventories of Intuit's products and other factors.
Product returns that exceed Intuit's reserves could adversely affect Intuit's
operating results and financial condition; however, through the end of its last
fiscal year, Intuit's returns reserve has been adequate. See "FINANCIAL
ANALYSIS -- Intuit Management Discussion and Analysis of Financial Condition and
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Results of Operations." Such returns and price reductions represent a
substantially higher percentage of sales to distributors and retailers, but
represent only a small percentage of direct sales to end users of Intuit's
products.
INTERNATIONAL
Intuit has begun to develop localized versions of some of its products for
sale to international markets. Intuit now produces a Windows and DOS Quicken for
U.K., Australia, and New Zealand, as well as a Windows version of Quicken for
the German market and a Windows version of QuickBooks for the U.K. market.
Intuit may introduce localized versions of Quicken and QuickBooks in other
countries based on customer demand and available resources. Intuit also produces
personal tax preparation products for certain international markets: WinTax in
Canada and QuickTax for the U.K. and Australian/New Zealand markets. Revenue
derived from sales of Intuit's products outside North America has been less than
3% of net sales during the twelve-month period ended July 31, 1994.
The development of foreign-country versions of Intuit's products can
require substantial additional time, effort, and expense. Because of the nature
of Intuit's products and its emphasis on developing market-driven products
designed to meet customers' specific requirements, substantial customization is
often necessary to adapt Intuit's products to address the diverse ways in which
consumers manage their finances in different cultures and economies, in addition
to making the modifications that are necessary to reflect foreign languages and
currencies. For example, the German version of Quicken is significantly
different than the U.S. version, because Intuit determined that a somewhat
different feature set was necessary to make the product successful in the German
market.
Although international revenues have been low to date, Intuit believes that
international sales can increase substantially and hopes to significantly expand
its foreign customer base. Consequently, Intuit believes that an investment in
well-designed foreign adaptations of its products will be a critical component
in achieving success in overseas sales. To date, Intuit has established
subsidiaries only in the United Kingdom, Germany, and Canada to directly address
the international marketplace.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Intuit believes that providing high quality technical support and customer
service is an important element of the value that it provides its users.
Accordingly, Intuit offers technical support and toll-free customer service by
telephone, mail, facsimile, and modem to its customers without charge 12 hours
per day, five days per week. Intuit dedicates over half of all employees to
full-time support and customer service activities. Intuit has installed
sophisticated call-handling and facsimile processing equipment to improve the
efficiency of these operations. In addition, during periods of peak call
volumes, Intuit hires substantial numbers of temporary employees to assist the
full-time staff in serving customers. Despite its efforts to appropriately staff
and equip its customer service and support functions, from time to time during
peak periods Intuit's ability to timely respond to customer orders and support
calls may be temporarily impaired due to constraints on available personnel or
internal systems. For example, the shipment of a large quantity of backlogged
orders for newly released tax products was recently delayed by performance
limitations of Intuit's internal order/entry and shipping system. In addition,
delays in order fulfillment and events such as the occurrence of unexpected
product errors may result in unusually high volumes of customer calls that
temporarily exceed Intuit's response capacity. These occurrences may adversely
affect Intuit's customer relationships and sales. Intuit operates telephone
support centers in Palo Alto and San Diego, California; Tucson, Arizona;
Fredericksburg, Virginia; Hiawatha, Iowa; and Rio Rancho, New Mexico.
SEASONALITY; QUARTERLY FLUCTUATIONS IN REVENUE
Intuit's business is highly seasonal. Intuit records nearly two-thirds of
its revenues in the second and third quarter of each fiscal year, which quarters
encompass the year-end holiday buying and tax return preparation seasons. As a
result, Intuit generates more than 100% of its operating profits during those
quarters and
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experiences substantial losses in first and fourth fiscal quarters. Because tax
returns are due April 15 of each year, and the data required by individual
taxpayers to prepare their returns is typically not available to them until
January of each year, consumer demand for Intuit's tax products is greatest
during Intuit's second fiscal quarter. Effective August 1, 1994, Intuit changed
its fiscal year end from September 30 to July 31, primarily to eliminate larger
and unpredictable revenue shifts between its first and second quarters caused by
variations in the timing of the Internal Revenue Service's release of final
versions of the Federal tax forms used in Intuit's tax products. Previously, an
early December final forms release by the Internal Revenue Service would allow
Intuit to release final versions of its tax products by December 31 (during its
first fiscal quarter), while a late December or January forms release by the IRS
would push final version products releases into Intuit's second fiscal quarter.
Intuit has also tried to mitigate the extreme seasonality of Intuit's tax
business by shipping HeadStart preliminary editions of its tax products
beginning in the first fiscal quarter, which has the effect of spreading
Intuit's revenues for this product group over two quarters rather than one
quarter. However, if the HeadStart editions of Intuit's tax products do not ship
until November (as was the case with several versions of HeadStart products in
November 1994), this delay in release of the product has the effect of shifting
revenue into Intuit's second fiscal quarter, making year-to-year quarterly
financial comparisons difficult. Changes in timing of product releases can also
affect the comparability of prior fiscal periods. For example, the Macintosh
version of Quicken was released in the fourth quarter of fiscal 1993, but the
next version was not introduced until the first quarter of fiscal 1995. Product
revenues can also be affected by market trends, including shifts in the
popularity of personal computer environments. For example, a substantial portion
of Intuit's professional tax preparation products operate on the DOS environment
but are likely to migrate to the Windows environment in the future. Failure by
Intuit to timely release a line of Windows-based professional tax products could
materially and adversely affect Intuit's operating results. In addition, other
factors, such as the introduction of competitive products, could result in
fluctuations in Intuit's quarterly operating results. Because of the significant
quarterly fluctuations in its revenues and operating income, results for any
particular quarter are not indicative of future results or the results for the
full fiscal year.
COMPETITION
The markets for Intuit's products are intensely competitive and are
characterized by constant pressures to reduce prices, incorporate new features,
and accelerate the release of new product versions. A variety of companies
currently offer products that compete directly with Intuit's products. Certain
of Intuit's competitors or potential competitors have significantly greater
financial, technical and marketing resources and broader product lines than
Intuit. The Windows, DOS, and Macintosh versions of Quicken currently compete
with products from a number of companies, including Block Financial (formerly
MECA Software, Inc.), a subsidiary of H&R Block, Inc., the national tax
preparation company ("MECA"), Microsoft and Computer Associates International,
Inc. ("CA"). Last year's acquisition of MECA by H&R Block, Inc. gives MECA
potentially far greater financial resources and capabilities than it has had in
the past to compete in the personal finance and personal tax preparation
software markets. MECA competes with Quicken with its product Managing Your
Money, a Windows version of which was introduced in April 1994, in addition to
its DOS and Macintosh versions. MECA's relationship to H&R Block gives it
strategic access to H&R Block's tax return preparation business and the H&R
Block-owned CompuServe on-line computer network. On the Windows platform,
Microsoft Money, introduced in September 1991 and updated in September 1992 and
February 1994, competes directly with one of Intuit's high-volume products,
Quicken for Windows. Microsoft has also introduced localized versions of Money
in the French, German, Australian and United Kingdom markets. Money competes
with Quicken both at retail and in OEM hardware bundles where Microsoft's
ability to offer a broad range of software products may represent a competitive
advantage. CA, which has been a participant in the small business accounting
market for many years, entered the personal finance software market in May 1993
with a Windows-based product, Simply Money. As part of its product launch, CA
reportedly made one million or more units of Simply Money available for "free,"
except for a $6.95 shipping and handling charge.
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In the consumer tax preparation software market, MECA's popular TaxCut
product competes with Intuit's TurboTax and MacIntax products on the DOS,
Windows and Macintosh platforms. CA also competes with Intuit's TurboTax product
with a Windows-based product, Simply Tax. During its product launch, CA
reportedly made several hundred thousand units of Simply Tax available at an
introductory price of $9.95 ("free," except for a shipping and handling charge).
Further, at the closing of Intuit's acquisition of Parsons, Intuit granted to
Novell a non-exclusive license to Parsons' tax preparation software, Personal
Tax Edge, which Novell is marketing under the name TaxSaver, making it one of
Intuit's personal tax competitors. In the consumer tax preparation market,
Intuit also competes indirectly with professional tax preparers, including large
tax return preparation chains such as H&R Block (the owner of MECA) and Jackson
Hewitt. In the professional tax preparation market, Intuit competes indirectly
with third-party service bureaus. Certain of the companies that own service
bureaus or operate tax return preparation chains have developed or acquired tax
preparation software programs for sale to third parties and/or for use in their
own businesses. In the professional tax preparation market, which is highly
fragmented and includes more than 40 competitors, Intuit's principal competition
includes LaCerte Software Corporation, Pencil Pushers, Inc., and Commerce
Clearing House/Computax.
QuickBooks for DOS and Windows compete with products from a number of
companies, including CA (Simply Accounting) and Peachtree, a subsidiary of
Automated Data Processing, Inc. (Peachtree Accounting for DOS and Windows),
BestWare Software (MYOB for DOS and Windows), N.E.B.S. (One Write Plus
Accounting for DOS), Dac Easy (Dac Easy Accounting for DOS and Windows), and
M-USA (Pacioli).
Although Intuit believes that its current products are meeting with good
customer acceptance versus the other offerings, there can be no assurance that
the competing companies -- several of which have significantly greater resources
than Intuit -- will not introduce significantly improved and/or lower-priced
products in the future. Such new products and/or lower pricing could have a
material adverse impact on the sales of Intuit products.
Only a small percentage of products introduced in the consumer software
market achieves any degree of sustained market acceptance. Intuit believes that
the principal competitive factors in the software industry are product features
and quality, reliability, ease of use, brand name recognition, access to
distribution channels, quality of support services, and price. Intuit believes
that it competes favorably with respect to each of the first six factors and, to
a lesser extent, with respect to price. In the event that price competition
significantly increases, competitive pressures could cause Intuit to reduce the
prices of its products, and reduced profit margins could result. Prolonged price
competition would have a material adverse effect on Intuit's operating results
and financial condition. A variety of potential actions by Intuit's competitors,
including lower prices, increased promotion, and accelerated introduction of new
or enhanced products, could also have an adverse effect on Intuit's operating
results and financial condition.
Although Intuit believes that its products have been favorably received to
date, there can be no assurance that they will continue to be. Furthermore,
there is a possibility that the introduction of new personal computer hardware
platforms or changes in financial telecommunications technology may provide new
entrants with opportunities to make substantial inroads into the personal
finance or small business accounting markets.
Intuit's supplies products compete with those of a number of companies,
such as Deluxe Computer Forms, New England Business Systems, and Moore Business
Forms. Intuit believes that its success in the supplies business results from a
number of factors, including its direct access to its software user base through
in-box advertising, price, service, product quality, speed of delivery, and
guaranteed compatibility with Intuit software products. There can be no
assurance however, that these factors will continue to allow Intuit to maintain
its existing level of or generate additional supplies revenue for Intuit.
Intuit's automated financial service offerings compete against a
significant number of larger financial service providers, banks and investment
firms, including American Express, Visa, Citibank, Fidelity Investments, and H&R
Block, and stock update services from ValueLine and Charles Schwab.
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PROPRIETARY RIGHTS
Intuit regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee and
third-party nondisclosure agreements, and other intellectual property protection
methods to protect its products and technology. Intuit also has been granted two
patents and has two patent applications pending with respect to certain Quicken
features. However, Intuit believes that the ownership of patents is not
presently a significant factor in its business and that its success does not
depend on the ownership of patents, but primarily on the innovative skills,
technical competence, and marketing abilities of its personnel. Intuit may not
always own the software and related technologies used in its product and service
offerings. For example, Intuit engaged an outside software development house to
develop certain system software that might in the future be used as a "hub" to
route data for possible future automated financial services. Ownership of this
software was retained by the developer and is licensed to Intuit.
Intuit generally has no signed license agreements with the end users of its
products and does not copy-protect its software. In addition, existing copyright
laws afford only limited protection, and it may be possible for unauthorized
third parties to copy Intuit's products or to reverse engineer or obtain and use
information that Intuit regards as proprietary. There can be no assurance that
Intuit's competitors will not independently develop technologies that are
substantially equivalent or superior to Intuit's technologies. Policing
unauthorized use of Intuit's products is difficult, and while Intuit is unable
to determine the extent to which software piracy of its products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of certain countries in which Intuit's products are or may be distributed
do not protect Intuit's products and intellectual rights to the same extent as
the laws of the United States.
Intuit believes that its products, trademarks, and other proprietary rights
do not infringe upon the proprietary rights of third parties. From time to time,
however, Intuit has received communications from third parties asserting that
features or content of certain of its products may infringe upon intellectual
property rights of such parties. To date, no such claim has resulted in
litigation or in the payment of any claims, and Intuit believes that the impact
of any known claims will be immaterial. However, as the number of software
products in the industry increases and the functionality of these products
further overlaps, Intuit believes that software products increasingly will
become the subject of claims that they infringe the rights of others. There can
be no assurance that third parties will not assert infringement claims against
Intuit in the future or that any such assertion will not result in costly
litigation or require Intuit to obtain a license to intellectual property rights
of third parties. There can be no assurance that such licenses will be available
on reasonable terms, or at all.
MANUFACTURING AND SHIPPING
The production of Intuit's software products includes diskette duplication,
purchased component assembly, and final packaging. Diskette duplication
procedures, assembly of purchased product components, and printing of user
manuals are performed by third parties in accordance with Intuit's
specifications. Intuit currently performs quality assurance testing and final
packaging at its facilities for a portion of its products. The remaining
shipments are fulfilled by a third-party fulfillment house. To date, Intuit has
not experienced any material difficulties or delays in the manufacture and
assembly of its products. Intuit normally ships products within one week after
receipt of an order, with the exception of tax preparation software. Orders for
tax software are usually taken beginning in late April (for professional
products) and in late September (for consumer tax products) and the tax products
are shipped when available, typically between October and January. Thus, Intuit
has relatively little backlog at any time and does not consider backlog to be a
significant indicator of future performance.
EMPLOYEES
As of October 3, 1994, Intuit had 1,228 full-time employees, including 129
in sales and marketing, 391 in product development, 517 in customer service and
technical support, 27 in production and 164 in finance, business development,
corporate services, human resources and management information systems,
excluding approximately 450 Parsons employees. In addition, Intuit's United
Kingdom and German subsidiaries had an
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aggregate of 26 full-time employees at October 3, 1994. The employees and Intuit
are not parties to any collective bargaining agreements, and Intuit believes
that its relations with employees are good. Intuit's future success and growth
will depend in large measure upon its ability to attract and retain qualified
technical, management, marketing, product development and sales personnel.
ACQUISITION OF PARSONS TECHNOLOGY, INC.
On September 27, 1994, Intuit completed its acquisition of Parsons, a
privately-held consumer software publisher, through a merger transaction in
which Parsons was merged with a wholly-owned subsidiary of Intuit. Under the
terms of the agreement, Intuit agreed to pay Parsons' shareholders approximately
$31.5 million in cash ($28.8 million of which was paid at closing) and to issue
to Parsons shareholders approximately 900,000 shares of Intuit's common stock.
The transaction, which has been accounted for as a purchase, had an aggregate
purchase price of approximately $67.3 million as of the date the transaction was
closed, which includes a cash payment of approximately $2.7 million and 69,019
shares of common stock issued into escrow that will be paid as deferred
compensation for certain non-competition agreements.
Parsons develops, markets and sells consumer software such as legal, tax,
medical and advice-oriented information software, primarily through direct mail
campaigns. Its product line includes It's Legal (legal software for consumers),
Personal Tax Edge (tax preparation software) QuickVerse (bible concordance
software), MoneyCounts (personal finance software), Medical Matters, Home
Buyers' Companion and Car Buyers' Companion, as well as other software titles.
Intuit entered into a separate agreement with Novell that became effective at
upon the consummation of acquisition of Parson, under which Novell was granted a
non-exclusive perpetual license to market Parsons' personal tax preparation
software product, Personal Tax Edge. Parsons derives a very substantial amount
of its revenue from direct mail sales. See "FINANCIAL ANALYSIS -- Intuit
Management Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 of Notes to Intuit Consolidated Financial Statements for
additional discussion of the acquisition.
MANAGEMENT OF GROWTH
Intuit has recently experienced a period of rapid growth in products,
facilities and personnel. Since December 1993 has acquired ChipSoft, Best
Programs' professional tax product line, NPC and Parsons. In addition, Intuit
has recently added new support centers in Tucson, Arizona and Fredericksburg,
Virginia, and is in the process of establishing a new support center in Rio
Rancho, New Mexico. These acquisitions and additions have expanded Intuit's
size, product line and personnel and resulted in Intuit having many offices in
remote geographic locations. Intuit's ability to integrate and organize these
new businesses and successfully manage its growth will require it to improve its
operational, financial and management information systems and its management and
financial controls. The absorption of this growth presents difficult challenges
and will require substantial time and attention from management in order to
achieve success and avoid growth-associated organizational problems.
PROPERTIES
Intuit leases approximately 56,000 square feet of office space in Menlo
Park, California, 54,000 square feet of office space in Palo Alto, California,
and 20,000 square feet of manufacturing space in Menlo Park, California. Leases
on 36,000 square feet of the office space in Menlo Park expire March 1995, but
are renewable for an additional two-year term. The lease on the remaining 20,000
square feet of office space in Menlo Park expires in March 1995, but is
renewable for two additional two-month terms. Leases on the office space in Palo
Alto expire in August 1997, with a termination option in August 1995. In
addition, Intuit leases approximately 91,000 square feet of office space in San
Diego, California. The lease on the San Diego office space expires in August
1995 but is renewable for a single 3-year term. Intuit also leases approximately
29,000 feet of manufacturing space in San Diego under a lease that expires in
June 1995 but that is renewable for two additional 1-year terms. Intuit leases
approximately 70,000 square feet of office space in Tucson, Arizona, for which
the lease expiration date is August 1998. In addition to the principal
facilities noted above, Intuit also leases smaller amounts of property in
Fredericksburg, Virginia; London, England; Ismaning, Germany;
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Deerfield Beach, Florida; Edmonton, Alberta, Canada; Cedar Rapids, Iowa; and
Downers Grove, Illinois. Additionally, in July 1994 Intuit purchased unimproved
real property in Rio Rancho, New Mexico on which it established a new customer
service and technical support call center that commenced operations in December
1994. In October 1994 Intuit conveyed title to this real property to the City of
Rio Rancho in connection with an industrial revenue bond transaction and
currently leases the property from the City. Intuit holds an option to
repurchase the New Mexico property at a nominal price upon retirement of the
industrial revenue bond. See Note 4 of Notes to Intuit Consolidated Financial
Statements for additional information on lease commitments.
Intuit believes that its facilities are adequate for current and near-term
needs and that, for its principal facilities as noted above, additional space is
available at adjacent locations to provide for anticipated growth during the
life of the leases.
LEGAL PROCEEDINGS
On October 14, 1994, a complaint was filed against Intuit, Microsoft, and
certain of Intuit's directors in the Court of Chancery of the State of Delaware
in and for Newcastle County, bearing the caption "Stanley E. Aronoff, Plaintiff,
v. Christopher W. Brody, Scott D. Cook, L. John Doerr, Michael R. Hallman,
Burton J. McMurtry, Intuit Inc., and Microsoft Corp., Defendants" (Civil Action
No. 13804). The complaint alleges breach of fiduciary duties on the part of
Intuit's directors relating to the proposed Merger with Microsoft by failing to
take steps to maximize value for Intuit's stockholders. The complaint challenges
the fact that Mr. Cook and other officers and directors collectively owning
and/or controlling approximately 37% of Intuit's shares agreed to vote their
shares in favor of the transaction. The complaint also alleges that this
agreement and other actions by the directors effectively foreclosed the
emergence of other potential bidders for Intuit. Microsoft is accused of aiding
and abetting these alleged breaches of fiduciary duties. The complaint seeks (i)
an order that the matter may be maintained as a class action, (ii) an order
declaring the Intuit directors to have committed a breach of fiduciary duty;
(iii) injunctive relief against the Merger and against any "improper action"
which might be taken to diminish, or have the effect of diminishing, shareholder
value, and (iv) an order requiring the directors to explore third-party interest
and accept the highest offer obtainable. Finally, the complaint seeks
unspecified compensatory damages and attorneys' and expert fees. As of February
7, 1995, the plaintiff had not served the complaint on Intuit or Microsoft or
filed a motion seeking to enjoin the Merger. Intuit and Microsoft believe the
complaint is without merit and, if it is served on them, intend to defend the
claims vigorously. Unless the Merger is enjoined, the lawsuit will not affect
the obligation or ability of Intuit or Microsoft to consummate the Merger.
On January 17, 1995, CheckFree Corporation filed a complaint in the United
States District Court for the Southern District of Ohio naming Intuit and its
subsidiary, NPC, as defendants. The complaint alleges that NPC's computerized
bill payment systems infringe a U.S. patent granted to the plaintiff on the same
date as the complaint and seeks unspecified damages and an injunction
prohibiting Intuit and NPC from making, selling and using computerized bill
payment systems that allegedly embody the patented invention. The sale or use of
computerized bill payment systems is not currently material to Intuit's
business, financial condition or results of operations. NPC currently offers
computerized bill payment services that can be accessed through Microsoft's
Money product, while Intuit currently offers CheckFree's computerized bill
payment services to users of Intuit's Quicken product. While Intuit currently
anticipates that it will use NPC's system to provide its customers with bill
payment services in conjunction with its product and service offerings as it
becomes more involved in the emerging automated financial services industry (See
" -- Products" above), it can not predict whether its ability to make, sell and
use the particular systems in question will have a material effect upon its
future business in this area. At this preliminary stage, Intuit has insufficient
information to assess the merits of the complaint or the scope of the injunction
sought, although Intuit intends to defend the litigation vigorously.
With the exception of the foregoing, there are no pending legal proceedings
against Intuit, other than ordinary routine litigation incidental to Intuit's
business, the outcome of which, individually or in the aggregate, is not
expected to have a material effect on Intuit's business or financial condition.
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DESCRIPTION OF CAPITAL STOCK
MICROSOFT
Microsoft has two classes of authorized stock, Microsoft common and
preferred stock (collectively the "Microsoft Securities"). As of February 7,
1995, Microsoft's authorized capital shares consisted of 2,000,000,000 Microsoft
Shares, of which 581,228,389 shares were outstanding. In addition there are
100,000,000 shares of Microsoft preferred stock, $.01 par value per share (the
"Microsoft Preferred Shares"), of which none were outstanding.
MICROSOFT SHARES
Holders of Microsoft Shares are entitled to receive such dividends as may
be declared from time to time by the Board of Directors, and legally available
from Microsoft's assets. In addition, upon any liquidation of Microsoft, holders
of Microsoft Shares are entitled to a pro rata share of all Microsoft assets
available for distribution to shareholders.
Each Microsoft Share is entitled to one vote on all matters voted on by the
stockholders. The holders of the Microsoft Shares have unlimited voting rights.
Holders of Microsoft Shares have no preemptive rights to acquire additional
shares or securities convertible into Microsoft Shares. In addition, holders of
Microsoft Shares do not have the right to cumulate votes in the election of
directors.
MICROSOFT PREFERRED SHARES
Microsoft's Board of Directors is authorized, without shareholder action,
to provide for the issuance of Microsoft Preferred Shares in one or more series
not exceeding the aggregate number of authorized Microsoft Preferred Shares. The
Board of Directors is also authorized to determine: (i) the voting powers, if
any, of Microsoft Preferred Shares; (ii) the rate of dividend, if any, for
Microsoft Preferred Shares; (iii) the rights of holders of Microsoft Preferred
Shares of any series in the event of liquidation, dissolution, or winding up of
the affairs of the corporation; (iv) whether or not a series of Microsoft
Preferred Shares are redeemable, and if so, the terms and conditions of such
redemption; and (v) whether a series of Microsoft Preferred Shares is redeemable
pursuant to a retirement, sinking fund, or otherwise, and the terms and
conditions of such obligation.
In the event of certain significant transactions, holders of Microsoft
Securities have all rights available under the Washington Business Corporation
Act ("WBCA"), including, but not limited to, dissenters' rights.
INTUIT
Intuit has two classes of authorized stock, Intuit common and preferred
stock. As of February 7, 1995, Intuit's authorized capital shares consisted of
60,000,000 Intuit Shares, of which 20,385,036 shares were outstanding. In
addition, there are 3,000,000 shares of Intuit preferred stock, $.01 par value
per share (the "Intuit Preferred Stock"), of which none were outstanding.
INTUIT SHARES
Subject to preferences that may be applicable to any Intuit Preferred Stock
outstanding at the time, the holders of outstanding Intuit Shares are entitled
to receive dividends out of assets legally available therefor at such times and
in such amounts as Intuit's Board of Directors may from time to time determine.
Each stockholder is entitled to one vote for each Intuit Share held by him or
her on all matters submitted to a vote of stockholders. Cumulative voting for
the election of directors is not provided for in Intuit's Certificate of
Incorporation, which means that the holders of a plurality of the shares voted
can elect all of the directors then standing for election. The Intuit Shares are
not entitled to preemptive rights and are not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of Intuit, the assets
legally available for distribution to stockholders are distributable ratably
among the holders of the Intuit Shares and any
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participating Intuit Preferred Stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding Intuit Preferred Stock and
payment of other claims of creditors. Each outstanding Intuit Share is fully
paid and nonassessable.
INTUIT PREFERRED STOCK
Intuit Preferred Stock may be issued from time to time in one or more
series. Intuit's Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of Intuit Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding), without any further vote or action by the stockholders.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF INTUIT AND MICROSOFT
Upon consummation of the Merger, the stockholders of Intuit will become
shareholders of Microsoft whose rights will cease to be defined and governed by
the Delaware General Corporation Law ("DGCL"), and instead will be defined and
governed by the WBCA. In addition, Intuit stockholders will no longer be defined
and governed by Intuit's Certificate of Incorporation and bylaws. Instead, each
Intuit stockholder will become a new shareholder of Microsoft, whose rights as a
shareholder will be defined and governed by Microsoft's Articles of
Incorporation (the "Microsoft Articles") and bylaws. While the rights and
privileges of stockholders of a Delaware corporation are, in many instances,
comparable to those of a stockholder of a Washington corporation, there are
certain differences. These differences, described below, arise from differences
between Delaware and Washington law, between the DGCL and the WBCA, and between
the Intuit Certificate of Incorporation and bylaws and the Microsoft Articles
and bylaws. For a description of the respective rights of the holders of Intuit
Shares and Microsoft Shares, see "DESCRIPTION OF CAPITAL STOCK."
AMENDMENT TO CERTIFICATE/ARTICLES OF INCORPORATION
Under the DGCL, amendments to a corporation's certificate of incorporation
require the approval of the board of directors and stockholders holding a
majority of the outstanding shares entitled to vote on such amendment and a
majority of the outstanding stock of such class entitled to vote on such
amendment as a class, unless a greater proportion is specified in the
certificate of incorporation or by other provisions of the DGCL. Intuit's
Certificate of Incorporation does not specify a greater proportion.
The WBCA authorizes a corporation's board of directors to make various
changes to its articles or incorporation without shareholder action. These
so-called housekeeping changes include changes of corporate name, the number of
outstanding shares to effectuate a stock split or stock dividend in the
corporation's own shares, and the par value of its stock. Otherwise, amendments
to a corporation's articles of incorporation must be recommended to the
shareholders by the board of directors, unless the board of directors determines
that because of conflict of interest or other special circumstances it should
make no recommendation and communicates the basis for its determination to the
shareholders with the amendment, and must be approved by a majority of all the
votes entitled to be cast by any voting group entitled to vote thereon unless
another proportion is specified in the articles of incorporation, by the board
of directors as a condition to its recommendation, or by provisions of the WBCA.
The Microsoft Articles do not specify another proportion.
RIGHT TO CALL SPECIAL MEETING OF SHAREHOLDERS
Under the DGCL, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. The Intuit bylaws authorize the Chairman of the
Board, the Chief Executive Officer, the President, or the holders of more than
ten percent (10%) of the shares entitled to vote at such a meeting, to call a
special meeting.
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<PAGE> 81
The WBCA provides that a special meeting of shareholders of a corporation
may be called by its board of directors, by holders of at least 10% of all the
votes entitled to be cast on any issue proposed to be considered at the proposed
special meeting, or by other persons authorized to do so by the articles of
incorporation or bylaws of the corporation. However, the WBCA allows the right
of shareholders to call a special meeting to be limited or denied to the extent
provided in the articles of incorporation. The Microsoft Articles deny this
right by providing that a special meeting of shareholders may only be called by
the Board of Directors or by a duly designated committee of the board.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER
Section 203 of the DGCL prohibits a Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for three years
following the date that such person becomes an interested stockholder. With
certain exceptions, an interested stockholder is a person or group who or which
owns 15% or more of the corporation's outstanding voting stock or is an
affiliate or associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested stockholder (except for certain transfers in a
conversion or exchange or a pro rata distribution or certain other transactions,
none of which increase the interested stockholder's proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); a
transaction involving the corporation or a subsidiary that directly or
indirectly increases the interested stockholder's proportionate share of the
stock or convertible securities of the corporation or such subsidiary; or
receipt by the interested stockholder (except proportionately as a stockholder),
directly or indirectly, of any loans, advances, guarantees, pledges, or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date on which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock outstanding upon consummation of the transaction
which made him or her an interested stockholder (excluding from the 85%
calculation shares owned by directors who are also officers of the corporation
and shares held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the date on which such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by at least 66 2/3% of the voting stock not owned by the interested
stockholder. The section does not apply if the business combination is proposed
prior to the consummation or abandonment of and subsequent to the earlier of the
public announcement or the notice required under Section 203 of the proposed
transaction which (i) constitutes certain (x) mergers or consolidations, (y)
sales or other transfers of assets having an aggregate market value equal to 50%
or more of either the aggregate market value of the corporation's assets
determined on a consolidated basis or the aggregate market value of all the
corporation's outstanding voting stock or (z) a proposed tender or exchange
offer for 50% or more of the corporation's outstanding voting stock; (ii) is
with or by a person who was either not an interested stockholder during the last
three years or who became an interested stockholder with the approval of the
corporation's board of directors and (iii) is approved or not opposed by a
majority of the board members elected prior to any person becoming an interested
stockholder during the previous three years (or their chosen successors).
A Delaware corporation may elect not to be governed by Section 203 by a
provision of its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by majority stockholder vote
and may be not be further amended by the board of directors. Such an amendment
is not effective until 12 months following its adoption. Intuit's Certificate of
Incorporation and Bylaws do not contain an election not to be governed by
Delaware's anti-takeover statute.
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The WBCA imposes restrictions on certain transactions between a corporation
and certain "Interested Shareholders." First, subject to certain exceptions, a
merger, share exchange, sale of assets other than in the regular course of
business or dissolution of a corporation involving an Interested Shareholder
owning beneficially 20% or more of the corporation's voting securities must be
approved by the holders of two-thirds of the corporation's outstanding voting
securities, other than those of the Interested Shareholder. This restriction
does not apply if the consideration received as a result of the transaction by
noninterested stockholders is not less than the highest consideration paid by
the Interested Shareholders for shares of the corporation's stock during the
preceding two years or if the transaction is approved by a majority of directors
who are not affiliated with the Interested Shareholder. A Washington corporation
may, in its articles of incorporation, exempt itself from coverage of this
provision; however, Microsoft has not done so.
Second, Washington law prohibits a "target corporation," with certain
exceptions, from engaging in certain "significant business transactions" with a
person or group of persons who beneficially owns 10% or more of the voting
securities of a target corporation (an "Acquiring Person") for a period of five
years after the acquisition of such securities, unless the transaction or
acquisition of shares is approved by a majority of the members of the target
corporation's board of directors prior to the date of the acquisition.
Significant business transactions include, among others, merger or consolidation
with, disposition of assets to or with, or issuance or redemption of stock to or
from, the Acquiring Person, termination of 5% or more of the employees of the
target corporation employed in Washington State as a result of the Acquiring
Person's acquisition of 10% or more of the shares or allowing the Acquiring
Person to receive any disproportionate benefit as a stockholder. Target
corporations include domestic corporations with their principal executive
offices in Washington and either a majority or over 1,000 of their employees
resident in Washington. Microsoft currently meets these standards and is subject
to this statute. A corporation may not "opt out" of this statute. The statute
exempts shares acquired prior to March 23, 1988.
MERGERS, SALES OF ASSETS AND OTHER TRANSACTIONS
Under the DGCL, a merger or consolidation must be approved by the board of
directors and by a majority of the outstanding stock of the corporation entitled
to vote thereon, provided that no vote of stockholders of a constituent
corporation surviving a merger is required (unless the corporation provides
otherwise in its certificate of incorporation) if (a) the merger agreement does
not amend the certificate of incorporation of the surviving corporation, (b)
each share of stock of the surviving corporation outstanding before the merger
is an identical outstanding or treasury share after the merger, and (c) the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to the merger.
Under the WBCA, a merger or share exchange of a corporation must be
approved by the affirmative vote of a majority of directors when a quorum is
present, and by each voting group entitled to vote separately on the plan by
two-thirds of all the votes entitled to be cast on the plan by that voting
group, unless another proportion is specified in the articles of incorporation.
The Microsoft Articles provide that a merger or share exchange must be approved
by a majority of the outstanding shares entitled to vote. The WBCA also provides
that certain mergers need not be approved by the shareholders of the surviving
corporation if (i) the articles of incorporation will not change in the merger,
except for specified permitted amendments, (ii) no change occurs in the number,
designations, preferences, limitations, and relative rights of shares held by
those shareholders who were shareholders prior to the merger; (iii) the number
of voting shares outstanding immediately after the merger, plus the voting
shares issuable as a result of the merger, will not exceed the authorized voting
shares specified in the surviving corporation's articles of incorporation
immediately prior to the merger; and (iv) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger, will not exceed the authorized
participating shares specified in the corporation's articles of incorporation
immediately prior to the merger. Microsoft as the sole shareholder of M/I has
already approved the Merger and no approval by the shareholders of Microsoft is
required under the WBCA or the bylaws of the National Association of Securities
Dealers.
The WBCA also provides that, in general, a corporation may sell, lease,
exchange, or otherwise dispose of all, or substantially all, of its property,
other than in the usual and regular course of business or dissolve if the
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<PAGE> 83
board of directors recommends the proposed transaction to the shareholders and
the shareholders approve the transaction by two-thirds of all the votes entitled
to be cast in the transaction, unless another proportion is specified in the
articles of incorporation. The Microsoft Articles provide that the transactions
must be approved by a majority of the outstanding shares entitled to vote.
TRANSACTIONS WITH OFFICERS OR DIRECTORS
Under Delaware law, certain contracts or transactions in which one or more
of a corporation's directors or officers has an interest are not void or
voidable solely because of such interest if either (a) the stockholders or the
board of directors must approve any such contract or transaction after full
disclosure of the material facts, or (b) the contract or transaction is "fair"
as to the corporation at the time it was approved. If board approval is sought,
the contract or transaction must be approved by a majority of the disinterested
directors (even though less than a majority of a quorum).
The WBCA sets forth a safe harbor for transactions between a corporation
and one or more of its directors. A conflicting interest transaction may not be
enjoined, set aside or give rise to damages if: (i) it is approved by a majority
of qualified directors (but no fewer than two); (ii) it is approved by the
affirmative vote of the majority of all qualified shares after notice and
disclosure to the shareholders; or (iii) at the time of commitment, the
transaction is established to have been fair to the corporation. For purposes of
this provision, a "qualified director" is one who does not have either: (a) a
conflicting interest respecting the transaction; or (b) a familial, financial,
professional, or employment relationship with a second director who does have a
conflicting interest respecting the transaction, which relationship would, in
the circumstances, reasonably be expected to exert an influence on the first
director's judgment when voting on the transaction. "Qualified shares" are
defined generally as shares other than those beneficially owned, or the voting
of which is controlled, by a director (or an affiliate of the director) who has
a conflicting interest respecting the transaction.
APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, a stockholder of a corporation participating in certain
corporate mergers or consolidations may, under varying circumstances, be
entitled to appraisal rights pursuant to which such stockholder may receive cash
in the amount of the fair market value of his shares in lieu of the
consideration he would otherwise receive in the transaction. Such appraisal
rights are not available (a) with respect to the sale, lease or exchange of all
or substantially all of the assets of a corporation, (b) with respect to a
merger or consolidation by a corporation the shares of which are either listed
on a national securities exchange or are held of record by more than 2,000
holders if such stockholders receive only shares of the surviving corporation or
shares of any other corporation which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders plus cash in lieu of fractional shares or
any combination thereof, or (c) to stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because the merger agreement does not amend the existing
certificate or incorporation, each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury share
after the merger, and the number of shares to be issued in the merger does not
exceed 20% of the shares of the surviving corporation outstanding immediately
prior to the merger and if certain other conditions are met. Stockholders of
Intuit will not have dissenters or appraisal rights as a result of the proposed
Merger. See "THE MERGER AND RELATED TRANSACTIONS -- No Dissenters' Rights."
Under the WBCA, a shareholder is entitled to dissent from and, upon
perfection of his appraisal right, to obtain fair value of his shares in the
event of certain corporate actions. Among these actions are certain mergers,
consolidations, share exchanges, sales of substantially all assets of the
corporation, and amendments to the corporation's articles of incorporation that
materially and adversely affect shareholder rights.
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<PAGE> 84
DIVIDENDS
Delaware law permits a corporation to declare and pay dividends out of
statutory surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation.
Under the WBCA, a corporation may make a distribution in cash or in
property to its shareholders upon the authorization of its board of directors
unless, after giving effect to such distribution, (i) the corporation would not
be able to pay its debts as they become due in the usual course of business, or
(ii) the corporation's total assets would be less than the sum of its total
liabilities plus, unless the articles of incorporation permit otherwise, the
amount that would be needed, if the corporation were to be dissolved at the time
of the distribution, to satisfy the preferential rights of shareholders whose
preferential rights are superior to those receiving the distribution.
To date, Microsoft has not paid cash dividends on its capital stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the DGCL, a corporation may adopt a provision in its articles of
incorporation eliminating, with certain exceptions, the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the director's fiduciary duty as a director. The Intuit Certificate of
Incorporation eliminates the liability of directors to the fullest extent
permissible under Delaware law. Under Delaware law, however, Intuit is not
allowed to eliminate or limit director monetary liability for: (a) breaches of
the director's duty of loyalty to the corporation or its stockholders; (b) acts
or omissions not in good faith or involving intentional misconduct or a knowing
violation of law; (c) unlawful dividends, stock repurchases or redemptions; or
(d) transactions from which the director received an improper personal benefit.
The WBCA provides that a corporation's articles of incorporation may
include a provision that eliminates or limits the personal liability of a
director to the corporation or its shareholders for monetary damages for conduct
as a director. However, the provision may not eliminate or limit liability of a
director for acts or omissions that involve intentional misconduct by a
director, a knowing violation of law by a director, for unlawful distributions,
or for any transaction from which the director will personally receive a benefit
in money, property, or services to which the director is not legally entitled.
Microsoft's Articles adopt this standard.
Under the DGCL, a corporation may not indemnify any director, officer,
employee or agent made or threatened to be made party to any threatened,
pending, or completed proceeding unless such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceedings, had
no reasonable cause to believe that his or her conduct was unlawful. The DGCL
also establishes several mandatory rules for indemnification. In the case of a
proceeding by or in the right of the corporation to procure a judgment in its
favor (e.g., a stockholder derivative suit), a corporation may indemnify an
officer, director, employee or agent if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no person adjudged to be
liable to the corporation may be indemnified unless, and only to the extent
that, the Delaware Court of Chancery or the court in which such action or suit
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
deems proper. A director, officer, employee, or agent who is successful, on the
merits or otherwise, in defense of any proceeding subject to the DGCL's
indemnification provisions must be indemnified by the corporation for reasonable
expenses incurred therein, including attorney's fees. Intuit's bylaws provide
for mandatory indemnification of Intuit's officers and directors and certain
other persons to the fullest extent
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permissible under Delaware law. In addition, Intuit has entered into agreements
indemnifying its officers and directors and certain other persons consistent
with Delaware law.
Under the WBCA, if authorized by the articles of incorporation, a bylaw
adopted or ratified by shareholders, or a resolution adopted or ratified, before
or after the event, by the shareholders, a corporation has the power to
indemnify a director or officer made a party to a proceeding, or advance or
reimburse expenses incurred in a proceeding, under any circumstances, except
that no such indemnification shall be allowed on account of: (a) acts of
omissions of the directors finally adjudged to be intentional misconduct or a
knowing violation of the law; (b) conduct of the director finally adjudged to be
an unlawful distribution; or (c) any transaction with respect to which it was
finally adjudged that such director personally received a benefit in money,
property, or services to which the director was not legally entitled. Written
commentary by the drafters of the WBCA, which has the status of legislative
history, specifically indicates that a corporation may indemnify its directors
and officers for amounts paid in settlement of derivative actions, provided that
the director's or officer's conduct does not fall within one of the categories
set forth above. Microsoft's Articles provide that Microsoft shall indemnify its
directors and officers to the fullest extent not prohibited by law, including
indemnification for payments in settlement of actions brought against the
director or officer in the name of the corporation, commonly referred to as a
derivative action. Such limitation of liability, described above, also may not
limit a director's liability for violation of, or otherwise relieve Microsoft or
its directors from the necessity of complying with, federal or state securities
laws, or affect the availability of non-monetary remedies such as injunctive
relief or rescission.
LEGAL MATTERS
The validity of the Microsoft Shares to be issued by Microsoft under the
Reorganization Agreement and certain tax and other matters relating to the
Merger will be passed upon by Microsoft's counsel, Preston Gates & Ellis, 5000
Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104. Attorneys who are
partners of or employed by Preston Gates & Ellis who have provided advice with
respect to the Merger in the aggregate own 62,826 Microsoft Shares. Certain tax
and other matters relating to the Merger will be passed upon for Intuit by its
counsel, Fenwick & West, Palo Alto, California.
EXPERTS
The financial statements of Microsoft as of June 30, 1994 and 1993 and for
each of the three years in the period ended June 30, 1994 included in this Proxy
Statement/Prospectus, the related financial statement schedules included
elsewhere in the registration statement, and the financial statements of
Microsoft from which the Selected Financial Data included in this Proxy
Statement/Prospectus have been derived, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement. Such financial statements, financial
statement schedules, and Selected Financial Data have been included herein and
elsewhere in the registration statement in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of Intuit at July 31, 1994 and September 30, 1993
and for the ten months ended July 31, 1994 and for each of the two years in the
period ended September 30, 1993 included in this Proxy Statement/Prospectus and
the financial statement schedules incorporated by reference in the registration
statement in which this Proxy Statement/Prospectus is contained, have been
audited by Ernst & Young LLP, independent auditors, and the information under
the caption "Selected Financial Data" for each of the four years in the period
ended September 30, 1993 and for the ten months ended July 31, 1994, appearing
in this Proxy Statement/Prospectus have been derived from consolidated financial
statements audited by Ernst & Young LLP, as set forth in their reports thereon
elsewhere herein. Such consolidated financial statements, financial statement
schedules and selected financial data are included/incorporated by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
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INDEX TO MICROSOFT FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Income Statements for the Years Ended June 1992, 1993 and 1994 and for the Six Months
Ended December 31, 1993 and 1994.................................................... F-2
Balance Sheets as of June 30, 1993 and 1994 and December 31, 1994..................... F-3
Statements of Stockholder's Equity for Years Ended June 30, 1992, 1993 and 1994....... F-4
Cash Flows Statements for Years Ended June 30, 1992, 1993 and 1994 and for the Six
Months Ended December 31, 1993 and 1994............................................. F-5
Notes to Financial Statements......................................................... F-6
Report of Deloitte & Touche, Independent Auditors..................................... F-15
</TABLE>
F-1
<PAGE> 87
MICROSOFT
INCOME STATEMENTS
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31(1)
---------------------------- -----------------
1992 1993 1994 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $2,759 $3,753 $4,649 $2,112 $2,729
Costs and expenses:
Cost of revenues............................ 467 633 763 344 408
Research and development.................... 352 470 610 284 377
Sales and marketing......................... 854 1,205 1,384 649 874
General and administrative.................. 90 119 166 77 113
------ ------ ------ ------ ------
Total costs and expenses.................... 1,763 2,427 2,923 1,354 1,772
------ ------ ------ ------ ------
Operating income.............................. 996 1,326 1,726 758 957
Interest income -- net........................ 56 82 102 48 78
Litigation charge............................. -- -- (90) -- --
Other expenses................................ (11) (7) (16) (6) (7)
------ ------ ------ ------ ------
Income before income taxes.................... 1,041 1,401 1,722 800 1,028
Provision for income taxes.................... 333 448 576 272 339
------ ------ ------ ------ ------
Net income.................................... $ 708 $ 953 $1,146 $ 528 $ 689
====== ====== ====== ====== ======
Earnings per share............................ $ 1.20 $ 1.57 $ 1.88 $ 0.87 $ 1.10
====== ====== ====== ====== ======
Weighted average shares outstanding........... 588 606 610 607 624
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Unaudited
See accompanying notes.
F-2
<PAGE> 88
MICROSOFT
BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30
-------------------- DECEMBER 31
1993 1994 1994(1)
------ ------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments......................... $2,290 $3,614 $3,839
Accounts receivable -- net of allowances of $76, $92
and $115............................................. 338 475 591
Inventories............................................. 127 102 117
Other................................................... 95 121 149
------ ------ ------------
Total current assets................................. 2,850 4,312 4,696
Property, plant, and equipment -- net..................... 867 930 977
Other assets.............................................. 88 121 288
------ ------ ------------
Total assets....................................... $3,805 $5,363 $5,961
====== ====== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 239 $ 324 $ 431
Accrued compensation.................................... 86 96 110
Income taxes payable.................................... 127 305 364
Other................................................... 111 188 191
------ ------ ------------
Total current liabilities............................ 563 913 1,096
------ ------ ------------
Commitments and contingencies............................. -- -- --
Minority interest......................................... -- -- 125
Put warrants.............................................. -- -- 297
Stockholders' equity:
Common stock and paid-in capital -- shares authorized
2,000; issued and outstanding 565, 581 and 581....... 1,086 1,500 1,699
Retained earnings....................................... 2,156 2,950 2,744
------ ------ ------------
Total stockholders' equity........................... 3,242 4,450 4,443
------ ------ ------------
Total liabilities and stockholders' equity......... $3,805 $5,363 $5,961
====== ====== ==========
</TABLE>
- ---------------
(1) Unaudited
See accompanying notes.
F-3
<PAGE> 89
MICROSOFT
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning of year.................................. $ 395 $ 657 $1,086
Common stock issued......................................... 135 229 280
Common stock repurchased.................................... (3) (7) (17)
Stock option income tax benefits............................ 130 207 151
------ ------ ------
Balance, end of year................................... 657 1,086 1,500
------ ------ ------
RETAINED EARNINGS
Balance, beginning of year.................................. 956 1,536 2,156
Common stock repurchased.................................... (132) (243) (331)
Net income.................................................. 708 953 1,146
Translation adjustment...................................... 4 (90) (21)
------ ------ ------
Balance, end of year................................... 1,536 2,156 2,950
------ ------ ------
Total stockholders' equity........................ $2,193 $3,242 $4,450
====== ====== ======
</TABLE>
See accompanying notes.
F-4
<PAGE> 90
MICROSOFT
CASH FLOWS STATEMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31(1)
---------------------------- -----------------
1992 1993 1994 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income............................... $ 708 $ 953 $1,146 $ 528 $ 689
Depreciation and amortization............ 112 151 237 88 133
Current liabilities...................... 167 177 360 187 194
Accounts receivable...................... (33) (121) (146) (130) (134)
Inventories.............................. (40) (51) 23 (5) (17)
Other current assets..................... (18) (35) (27) (3) (30)
------ ------ ------ ------ ------
Net cash from operations............ 896 1,074 1,593 665 835
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING
Common stock issued...................... 135 229 280 90 140
Common stock repurchased................. (135) (250) (348) (164) (560)
Stock option income tax benefits......... 130 207 151 64 78
------ ------ ------ ------ ------
Net cash from financing............. 130 186 83 (10) (342)
------ ------ ------ ------ ------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and
equipment.............................. (317) (236) (278) (122) (170)
Other assets............................. (41) (17) (64) (19) (90)
Short-term investments................... (284) (723) (860) (568) (785)
------ ------ ------ ------ ------
Net cash used for investments....... (642) (976) (1,202) (709) (1,045)
------ ------ ------ ------ ------
Net change in cash and equivalents............ 384 284 474 (54) (552)
Effect of exchange rates...................... (10) (62) (10) (8) (8)
Cash and equivalents, beginning of period..... 417 791 1,013 1,013 1,477
------ ------ ------ ------ ------
Cash and equivalents, end of period........... 791 1,013 1,477 951 917
Short-term investments........................ 554 1,277 2,137 1,845 2,922
------ ------ ------ ------ ------
Cash and short-term investments............... $1,345 $2,290 $3,614 $2,796 $3,839
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Unaudited
See accompanying notes.
F-5
<PAGE> 91
MICROSOFT
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The financial statements include the accounts
of Microsoft and its wholly owned subsidiaries. Significant intercompany
transactions and balances have been eliminated.
Interim financial information. The interim financial information, as of and
for the six months ended December 31, 1993 and 1994 was prepared by Microsoft in
a manner consistent with the audited financial statements and pursuant to the
rules and requirements of the Securities and Exchange Commission. The unaudited
information, in management's opinion, reflects all adjustments which are of a
normal recurring nature and which are necessary to present the results of the
periods presented. The results of operations for the six months ended December
31, 1994 are not necessarily indicative of the results to be expected for the
entire year.
Foreign currencies. Assets and liabilities recorded in foreign currencies
on the books of foreign subsidiaries are translated at the exchange rate on the
balance sheet date. Translation adjustments resulting from this process are
charged or credited to equity. Revenues, costs, and expenses are translated at
average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are included in other expenses.
Revenue recognition. Revenue from finished goods sales to distributors and
resellers is recognized when related products are shipped. Finished goods
revenue attributable to specified and unspecified enhancements is deferred and
recognized when such obligations are fulfilled. Costs related to insignificant
obligations, primarily telephone support, are accrued.
Revenue from software maintenance, service, and support contracts is
recognized ratably over the contract period.
Revenue from corporate license programs generally is recognized when the
product is installed by the user.
Revenue from products licensed to original equipment manufacturers is
recognized when the licensed products are shipped by the OEM.
Provisions are recorded for returns and bad debts.
Research and development. Research and development costs are expensed as
incurred.
Telephone support. Telephone support costs are included in sales and
marketing.
Income taxes. Income tax expense includes U.S. and international income
taxes, plus an accrual 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. Tax credits are accounted for
as a reduction of tax expense in the year in which the credits reduce taxes
payable.
Earnings per share. Earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options, computed using the treasury stock method.
Stock split. In May 1994, outstanding shares of common stock were split
two-for-one. All share and per share amounts have been restated.
Cash and short-term investments. Microsoft considers all liquid investments
with a maturity of three months or less at the date of purchase to be cash
equivalents. Short-term investments generally mature between one and two years
from issuance. All cash and short-term investments are classified as available
for
F-6
<PAGE> 92
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
sale. Cost approximates market value for all classifications of cash and
short-term investments; realized and unrealized gains and losses are not
material.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property, plant, and equipment. Property, plant, and equipment is stated at
cost and depreciated using the straight-line method. Estimated lives are as
follows: buildings, 30 years; leasehold improvements, the lease term; computer
equipment and other, principally three years.
Diversification of risk. Microsoft's investment portfolio is diversified
and consists of short-term investment grade securities. At June 30, 1993 and
1994, approximately 40% of accounts receivable represented amounts due from ten
channel purchasers. Two of these each accounted for approximately 10% of
revenues in 1993 and 13% in 1994.
Finished goods sales to international customers in Europe, Japan,
Australia, and Canada are primarily billed in local currencies. Payment cycles
are relatively short, generally less then 90 days. European manufacturing costs
and international selling, distribution, and support costs are generally
disbursed in local currencies. Local currency cash balances in excess of
short-term operating needs are generally converted into U.S. dollar cash and
short-term investments upon receipt. Therefore, foreign exchange rate
fluctuations generally do not create a risk of material transaction gains or
losses. As a result, Microsoft's hedging activities for transaction exposures
have been minimal. No material hedge contracts were outstanding at June 30 or
December 31, 1994.
Translated results of operations of Microsoft's foreign subsidiaries are
affected by foreign exchange rates. During 1995, Microsoft hedged a percentage
of planned translated international finished goods revenues by purchasing
options on the applicable currencies. Premiums paid for the options, which were
not material, are being amortized over the lives of the options. Any gains will
be recognized when and if realized.
Statements of Financial Accounting Standards (SFAS). SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, does not materially affect Microsoft. SFAS No. 109, Accounting for
Income Taxes, was adopted in 1994, and the effect on current year and cumulative
net income was not material. Adoption of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in the first quarter of 1995 did not
have a material impact on the financial statements.
Reclassifications. Certain reclassifications have been made for consistent
presentation.
F-7
<PAGE> 93
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
JUNE 30
-----------------
1993 1994
------ ------
<S> <C> <C>
Cash and equivalents:
Cash..................................................... $ 225 $ 263
Commercial paper......................................... 326 619
Money market preferreds.................................. 159 180
Certificates of deposit.................................. 160 218
Bank loan participations................................. 143 197
------ ------
Cash and equivalents.................................. 1,013 1,477
------ ------
Short-term investments:
Municipal securities..................................... 788 1,245
Corporate notes and bonds................................ 226 423
U.S. Treasury securities................................. 199 417
Commercial paper......................................... 64 52
------ ------
Short-term investments................................ 1,277 2,137
------ ------
Cash and short-term investments.................. $2,290 $3,614
====== ======
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30
-----------------
1993 1994
------ ------
<S> <C> <C>
Land....................................................... $ 144 $ 162
Buildings.................................................. 389 440
Computer equipment......................................... 415 532
Other...................................................... 233 311
------ ------
Property, plant, and equipment -- at cost.................. 1,181 1,445
Accumulated depreciation................................... (314) (515)
------ ------
Property, plant, and equipment -- net...................... $ 867 $ 930
====== ======
</TABLE>
INCOME TAXES
The provision for income taxes was composed of:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Current taxes:
U.S. and state...................................... $225 $352 $470
International....................................... 112 123 94
---- ---- ----
Current taxes......................................... 337 475 564
Deferred taxes........................................ (4) (27) 12
---- ---- ----
Provision for income taxes............................ $333 $448 $576
==== ==== ====
</TABLE>
F-8
<PAGE> 94
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
Differences between the U.S. statutory and effective tax rates were:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate................................... 34.0% 34.0% 35.0%
Tax exempt income..................................... (0.6) (0.6) (0.9)
Foreign sales corporation............................. (1.0) (1.0) (1.0)
Tax credits........................................... (1.1) (0.9) (2.1)
State taxes and other -- net.......................... 0.7 0.5 2.5
---- ---- ----
Effective tax rate.................................... 32.0% 32.0% 33.5%
==== ==== ====
</TABLE>
Deferred income tax balances were:
<TABLE>
<CAPTION>
JUNE 30
1994
--------
<S> <C>
Deferred income tax assets:
Gross margin items................................................ $ 72
Expense items..................................................... 132
--------
Deferred income tax assets........................................ 204
--------
Deferred income tax liabilities:
International earnings............................................ (147)
Other............................................................. (4)
--------
Deferred income tax liabilities................................... (151)
--------
Net deferred income tax asset..................................... $ 53
======
</TABLE>
U.S. and international components of income before income taxes were:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
U.S.............................................. $ 658 $ 960 $1,281
International.................................... 383 441 441
------ ------ ------
Income before income taxes....................... $1,041 $1,401 $1,722
====== ====== ======
</TABLE>
The Internal Revenue Service is examining Microsoft's U.S. income tax
returns for 1990 and 1991. The Company believes any adjustments from the
examination will not be material. Income taxes paid were $175 million, $187
million, and $247 million in 1992, 1993, and 1994.
COMMON STOCK
Shares of common stock outstanding were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year.............................. 522 544 565
Issued.................................................. 26 27 25
Repurchased............................................. (4) (6) (9)
---- ---- ----
Balance, end of year.................................... 544 565 581
==== ==== ====
</TABLE>
Microsoft repurchases its common stock in the open market to provide shares
for issuance to employees under stock option and stock purchase plans.
Microsoft's Board of Directors authorized continuation of this program in 1995.
F-9
<PAGE> 95
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
In June 1994, Microsoft merged with SOFTIMAGE Inc. (SI), a leading
developer of 2-D and 3-D computer animation and visualization software, in a
pooling of interests. Microsoft exchanged 2.7 million shares, shown as
outstanding at June 30, 1994, for all of the outstanding stock of SI. SI's
assets and liabilities, which were nominal, are included with those of Microsoft
as of June 30, 1994. Operating results for SI during 1992, 1993, and 1994 were
not material to the combined results of the two companies. Accordingly, the
financial statements for such periods have not been restated.
PUT WARRANTS
In connection with Microsoft's stock repurchase program, put warrants were
sold to independent third parties during the first two quarters of fiscal 1995.
The put warrants entitle the holders to sell shares of Microsoft common stock to
Microsoft at specified prices. On December 31, 1994, 6.4 million warrants were
outstanding, with prices ranging from $49.49 to $59.04 per share. The warrants
expire at various dates between February 1995 and May 1996, are exercisable only
at maturity, and are settleable in cash at Microsoft's option. The maximum
potential repurchase obligation of $297 million has been reclassified from
stockholders' equity to put warrants as of December 31, 1994. There was no
impact on earnings per share for the first two quarters of fiscal 1995.
EMPLOYEE STOCK AND SAVINGS PLANS
Employee stock purchase plan. Microsoft has an employee stock purchase plan
for all eligible employees. Under the plan, shares of Microsoft 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 1992, 1993, and 1994, employees purchased 0.9 million,
1.0 million, and 1.1 million shares at average prices of $24.59, $33.29, and
$34.16 per share. At June 30, 1994, 6.5 million shares were reserved for future
issuance.
Savings plan. Microsoft has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. Microsoft contributes fifty cents for each dollar contributed
by a participant, with a maximum contribution of 3% of a participant's earnings.
Microsoft matching contributions to the savings plan were $5 million, $7
million, and $9 million in 1992, 1993, and 1994.
Stock option plans. Microsoft has stock option plans for directors,
officers, and all employees, which provide for nonqualified and incentive stock
options. The Board of Directors determines the option price (not to be less than
fair market value for incentive options) at the date of grant. The options
generally expire ten years from the date of grant and vest over four and
one-half years. At June 30, 1994, options for 52.6 million shares were vested
and 111.0 million shares were available for future grants under the plans.
F-10
<PAGE> 96
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
OUTSTANDING OPTIONS
<TABLE>
<CAPTION>
PRICE PER SHARE
-------------------------
WEIGHTED
NUMBER RANGE AVERAGE
------ ------------ --------
<S> <C> <C> <C>
Balance June 30, 1991...................... 115.0 $ 0.31-22.39 $ 8.27
Granted.................................. 29.7 20.59-39.79 23.77
Exercised................................ (20.7 ) 0.31-16.61 6.50
Canceled................................. (3.7 ) 1.50-38.84 7.39
------
Balance, June 30, 1992..................... 120.3 0.31-39.79 12.44
Granted.................................. 24.4 30.88-44.25 34.30
Exercised................................ (26.2 ) 0.31-36.92 7.95
Canceled................................. (4.4 ) 4.97-44.13 14.23
------
Balance, June 30, 1993..................... 114.1 0.31-44.25 18.06
Granted.................................. 26.2 35.50-50.13 37.47
Exercised................................ (20.9 ) 1.51-44.25 11.42
Canceled................................. (5.5 ) 5.01-44.13 28.67
------
Balance, June 30, 1994..................... 113.9 0.31-50.13 23.29
======
</TABLE>
LEASES
Microsoft has operating leases for most U.S. and international sales and
support offices and certain equipment. Rental expense for operating leases was
$44 million, $54 million, and $68 million in 1992, 1993, and 1994. Future
minimum rental commitments under noncancelable leases, in millions of dollars,
are: 1995, $67; 1996, $49; 1997, $38; 1998, $32; 1999, $24; and thereafter, $22.
LITIGATION CHARGE
In the third quarter of 1994, Microsoft recorded a $120 million charge to
reflect the estimated impact of a jury verdict in the Stac Electronics patent
litigation and related expenses. In June 1994, Microsoft reached an agreement
with Stac to settle the litigation and adjusted its estimate accordingly,
resulting in a credit of $30 million in the fourth quarter and a net pretax
charge of $90 million for the year.
AGREEMENT TO MERGE
On October 13, 1994, Microsoft announced its agreement to merge with Intuit
Inc., a leading developer of personal finance, tax preparation, and small
business accounting software. Under the terms of the reorganization agreement,
Microsoft will exchange approximately 27 million shares of its common stock for
all of the outstanding shares of Intuit. It is anticipated the transaction will
be accounted for as a pooling of interests. The agreement is subject to approval
by the shareholders of Intuit and satisfaction of regulatory requirements.
MICROSOFT ONLINE SERVICES PARTNERSHIP
During November 1994, a wholly owned subsidiary of Tele-Communications,
Inc. (TCI) purchased a 20% minority interest in the newly formed Microsoft
Online Services Partnership. TCI contributed $125 million of TCI common stock
and Microsoft contributed the business assets of its online service, which is in
development. Microsoft owns 80% of the entity, whose operations have not been
material to the financial results of Microsoft.
F-11
<PAGE> 97
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
CONTINGENCIES
On July 15, 1994, Microsoft entered into an undertaking with the Commission
of the European Communities (European Commission) resolving a complaint
submitted by Novell, Inc. claiming that certain practices of Microsoft violated
Articles 85 and 86 of the Treaty of Rome. The undertaking is effective
immediately, requires no further approval, and closes the investigation of
Novell's complaint by the European Commission's Directorate-General for
Competition. In the undertaking, which involves no admission of wrongdoing on
Microsoft's part, Microsoft agreed to make certain changes in its OEM licensing
practices. Microsoft also agreed to employ a uniform duration in its
nondisclosure agreements for precommercial versions of certain operating system
products, and clarified the rights and responsibilities of those signing such
nondisclosure agreements. The European Commission has the right to monitor
Microsoft's compliance during the 6 1/2 year term of the settlement agreement.
Microsoft does not expect the undertaking with the European Commission to
affect its OEM revenues materially.
On July 15, 1994, Microsoft and the U.S. Department of Justice (DOJ)
entered into a consent decree resolving the DOJ's nonpublic investigation of
Microsoft. The consent decree contained the same provisions as the undertaking
between Microsoft and the European Commission. On February 15, 1995, the U.S.
District Court for the District of Columbia entered an order denying DOJ's
motion to approve the consent decree. On February 16, 1995 the DOJ filed a
notice of appeal to the United States Court of Appeals for the District of
Columbia Circuit and requested expedited consideration and briefing schedule. In
its brief, the DOJ said that United States District Court Judge Stanley
Sporkin's decision to refuse to enter the final judgment misconstrued the scope
of his review under the Tunney Act, and erroneously rejected a decree that
undoubtedly met the Tunney Act's "public interest" test. On February 17,
Microsoft also filed a notice of appeal.
On March 17, 1988, Apple Computer, Inc. (Apple) brought suit against
Microsoft and Hewlett-Packard Company for alleged copyright infringement in the
U.S. District Court, Northern District of California. The complaint included
allegations that the visual displays of Microsoft Windows version 2.03 (and
Windows version 3.0, which was added to the complaint later) infringed Apple's
copyrights and exceeded the scope of a 1985 Settlement Agreement between
Microsoft and Apple. The complaint sought to enjoin Microsoft from marketing
Microsoft Windows versions 2.03 and 3.0 or any derivative work based on Windows
2.03 or 3.0 and from otherwise infringing Apple's copyrights and sought damages
resulting from the alleged infringement.
Microsoft answered the complaint, raising affirmative defenses including
its claim that the 1985 Settlement Agreement entitled it to use the visual
displays in question, denying Apple's allegations that the visual displays in
Microsoft Windows version 2.03 and 3.0 infringe any protectable right of Apple,
and asserting counterclaims.
On August 24, 1993, the U.S. District Court entered final judgment
dismissing all of Apple's claims. Apple appealed a number of the U.S. District
Court's decisions in the case to the Ninth Circuit Court of Appeals, which on
September 19, 1994 issued a decision affirming the rulings of the U.S. District
Court. On December 19, 1994, Apple filed a petition with the U.S. Supreme Court
to grant review of the Ninth Circuit Court's decision.
On July 30, 1993 Wang Laboratories, Inc. (Wang) filed suit in U.S. District
Court for the District of Massachusetts against Microsoft and Watermark
Software, Inc., alleging that unspecified Microsoft products infringe two
patents owned by Wang concerning object management and the handling of compound
documents (United States Patents 5,206,951 issued on April 27, 1993, and
5,129,061 issued on July 7, 1992, respectively). The suit also alleges that
Microsoft induced and continues to induce others, including
F-12
<PAGE> 98
MICROSOFT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 IS UNAUDITED)
Watermark Software, Inc., to infringe the Wang patents. Microsoft's OLE
technology appears to be the subject of Wang's allegations against Microsoft.
The complaint seeks a determination that Microsoft's alleged infringement is
willful, an award of treble damages, an award of attorneys' fees, and to
preliminarily and permanently enjoin Microsoft from continuing the alleged
infringement. In its answer Microsoft denied that any of its products infringe
the Wang patents and asked the Court for a declaratory judgment that those
patents are invalid and unenforceable for failing to meet patent law
requirements. The suit is currently in the early stages of discovery.
Although there is no assurance that these matters will be resolved
favorably and that Microsoft's future financial statements will not be adversely
affected, Microsoft currently believes that resolution of the undertaking, DOJ
investigation, and the lawsuits will not have material adverse effects on its
financial condition or results of operations.
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues U.S. operations..................... $1,878 $2,655 $3,472
European operations............................ 1,019 1,289 1,401
Other international operations................. 272 395 375
Eliminations................................... (410) (586) (599)
------ ------ ------
Total net revenues..................... $2,759 $3,753 $4,649
====== ====== ======
Operating income U.S. operations................. $ 664 $ 961 $1,394
European operations............................ 329 360 346
Other international operations................. 11 18 31
Eliminations................................... (8) (13) (45)
------ ------ ------
Total operating income................. $ 996 $1,326 $1,726
====== ====== ======
Identifiable assets U.S. operations.............. $1,858 $2,944 $4,397
European operations............................ 872 1,133 1,366
Other international operations................. 289 310 423
Eliminations................................... (379) (582) (823)
------ ------ ------
Total identifiable assets.............. $2,640 $3,805 $5,363
====== ====== ======
</TABLE>
Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions. "U.S. operations" include
shipments to customers in the U.S., licensing to OEMs, and exports of finished
goods directly to international customers, primarily in Canada, South America,
and Asia. Exports and international OEM transactions are primarily in U.S.
dollars and totaled $255 million, $426 million, and $787 million in 1992, 1993,
and 1994. "Other international operations" primarily include subsidiaries in
Australia, Japan, Korea, and Taiwan. International revenues, which include
European operations, other international operations, exports, and OEM
distribution, were 55.1%, 55.3%, and 54.0% of total revenues in 1992, 1993, and
1994.
F-13
<PAGE> 99
MICROSOFT
QUARTERLY FINANCIAL AND MARKET INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 YEAR
------------ ----------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
1992
Net revenues............................... $ 581 $ 682 $ 681 $ 815 $2,759
Cost of revenues........................... 105 115 110 137 467
Operating expenses......................... 273 321 320 382 1,296
Net income................................. 144 175 179 210 708
Earnings per share......................... 0.25 0.30 0.30 0.35 1.20
Common stock price per share:
High..................................... 30 37 3/8 44 1/2 43 1/8 44 1/2
Low...................................... 20 1/8 28 3/4 36 1/2 32 7/8 20 1/8
1993
Net revenues............................... $ 818 $ 938 $ 958 $ 1,039 $3,753
Cost of revenues........................... 135 157 161 180 633
Operating expenses......................... 394 455 459 486 1,794
Net income................................. 209 236 243 265 953
Earnings per share......................... 0.35 0.39 0.40 0.43 1.57
Common stock price per share:
High..................................... 41 47 1/2 47 1/8 49 49
Low...................................... 32 3/4 37 7/8 38 3/8 39 7/8 32 3/4
1994
Net revenues............................... $ 983 $ 1,129 $1,244 $ 1,293 $4,649
Cost of revenues........................... 159 185 208 211 763
Operating expenses......................... 481 529 556 594 2,160
Net income................................. 239 289 256 362 1,146
Earnings per share......................... 0.39 0.48 0.42 0.59 1.88
Common stock price per share:
High..................................... 44 1/4 43 1/4 44 5/8 54 5/8 54 5/8
Low...................................... 35 1/8 38 39 41 35 1/8
</TABLE>
Microsoft has not paid cash dividends on its common stock. Microsoft Shares are
traded as "national market securities" on The Nasdaq Stock Market under the
symbol MSFT. On July 29, 1994, there were 26,790 holders of record of Microsoft
Shares.
F-14
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying balance sheets of Microsoft Corporation
and subsidiaries as of June 30, 1993 and 1994, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1994. These financial statements are the responsibility of
Microsoft's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Microsoft Corporation and subsidiaries as of
June 30, 1993 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1994 in conformity with
generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted
auditing standards, the balance sheets of Microsoft Corporation and subsidiaries
as of June 30, 1992, 1991 and 1990, and the related statements of income,
stockholders' equity and cash flows for the years ended June 30, 1991 and 1990
(none of which are presented herein); and we expressed unqualified opinions on
those financial statements.
In our opinion, the information set forth in the selected financial data on
page 8 is fairly stated, in all material respects, in relation to the financial
statements from which it has been derived.
/s/ DELOITTE & TOUCHE
DELOITTE & TOUCHE
Seattle, Washington
July 20, 1994
F-15
<PAGE> 101
INDEX TO INTUIT FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet -- July 31, 1994, September 30, 1993 and October 31,
1994................................................................................ F-17
Consolidated Statement of Operations --
Ten Months Ended July 31, 1994, Twelve Months Ended September 30, 1993 and 1992 and
Three Months Ended October 31, 1994 and 1993..................................... F-18
Consolidated Statement of Stockholders' Equity --
Ten Months Ended July 31, 1994 and Twelve Months Ended September 30, 1993 and
1992............................................................................. F-19
Consolidated Statement of Cash Flows --
Ten Months Ended July 31, 1994, Twelve Months Ended September 30, 1993 and 1992 and
Three Months Ended October 31, 1994 and 1993..................................... F-20
Notes to Consolidated Financial Statements............................................ F-21
Report of Ernst & Young LLP, Independent Auditors..................................... F-31
</TABLE>
F-16
<PAGE> 102
INTUIT INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 JULY 31 OCTOBER 31
1993 1994 1994
------------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,857 $ 19,708 $ 11,732
Short-term investments.............................. 31,683 64,178 22,344
Accounts receivable, net of allowance for doubtful
accounts of $1,612, $2,147 and $4,576,
respectively...................................... 24,944 10,140 53,718
Inventories......................................... 2,936 2,320 7,440
Prepaid expenses.................................... 789 6,957 12,596
Deferred income tax asset........................... 7,302 16,639 17,196
------------- --------- -----------
Total current assets........................... 75,511 119,942 125,026
Property and equipment, net............................ 7,422 24,196 30,900
Intangible assets...................................... -- 33,345 42,485
Goodwill............................................... -- 65,346 67,060
Other assets........................................... 348 1,753 1,760
------------- --------- -----------
Total assets............................................. $83,281 $ 244,582 $ 267,231
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $11,954 $ 12,872 $ 21,211
Accrued compensation and related liabilities........ 3,083 8,002 11,113
Other accrued liabilities........................... 13,131 24,670 43,951
Deferred revenue.................................... 1,467 5,272 9,722
Income taxes payable................................ 4,402 -- --
------------- --------- -----------
Total current liabilities...................... 34,037 50,816 85,997
Long term deferred income tax liability................ -- 7,943 12,386
Commitments............................................ -- -- --
Stockholders' equity:
Convertible preferred stock, .01 par value
Authorized -- 3,000 shares
Issued and Outstanding -- None.................... -- -- --
Common stock, $.01 par value
Authorized -- 30,000, 60,000 and 60,000 shares,
respectively
Issued and outstanding -- 11,205, 19,236 and
20,292 shares, respectively.................... 112 192 203
Additional paid-in capital.......................... 37,230 349,989 386,586
Deferred compensation............................... (100) (63) (63)
Cumulative translation adjustment................... (47) (35) (23)
Retained earnings (deficit)......................... 12,049 (164,260) (217,855)
------------- --------- -----------
Total stockholders' equity..................... 49,244 185,823 168,848
------------- --------- -----------
Total liabilities and stockholders' equity............. $83,281 $ 244,582 $ 267,231
========== ========= =========
</TABLE>
See accompanying notes.
F-17
<PAGE> 103
INTUIT INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS TEN MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30 JULY 31 OCTOBER 31
------------------ ---------- -------------------------
1992 1993 1994 1993 1994
------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............................... $83,793 $121,372 $ 194,126 $47,400 $ 68,184
Costs and expenses:
Cost of goods sold:
Product.............................. 29,085 39,160 50,941 13,261 17,848
Amortization of purchased software
and other.......................... -- -- 18,558 -- 4,141
Customer service and technical
support.............................. 15,060 22,623 34,970 6,415 13,678
Selling and marketing................... 20,853 28,575 41,814 10,758 17,758
Research and development................ 8,018 12,479 22,057 3,522 10,679
General and administrative.............. 2,923 5,304 10,544 2,468 6,801
Charge for purchased research and
development.......................... -- -- 151,888 -- 44,008
Other merger costs...................... -- -- 20,434 -- --
Amortization of goodwill and purchased
intangibles.......................... -- -- 19,978 -- 9,002
------- -------- --------- ------- --------
Total costs and expenses.................. 75,939 108,141 371,184 36,424 123,915
------- -------- --------- ------- --------
Income (loss) from operations............. 7,854 13,231 (177,058) 10,976 (55,731)
Interest income........................... 354 624 2,507 231 626
Interest expense.......................... (66) (100) (10) -- --
------- -------- --------- ------- --------
Income (loss) before income taxes......... 8,142 13,755 (174,561) 11,207 (55,105)
Provision (benefit) for income taxes...... 2,866 5,344 1,752 3,922 (1,510)
------- -------- --------- ------- --------
Net income (loss)......................... $ 5,276 $ 8,411 $(176,313) $ 7,285 $(53,595)
======= ======== ========= ======= ========
Net income (loss) per share............... $ 0.50 $ 0.74 $ (10.43) $ 0.61 $ (2.73)
======= ======== ========= ======= ========
Shares used in computing net income (loss)
per share............................... 10,508 11,350 16,902 11,962 19,638
======= ======== ========= ======= ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 104
INTUIT INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------- PAID IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- -------- ---------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1991......................... 1,601,517 $ 13,216 6,409,241 $ 389 $ -- $ --
Preferred stock canceled............................ -- (13) -- -- -- --
Issuance of common stock............................ -- -- 1,457 4 -- --
Issuance of preferred and common stock upon exercise
of options and tax benefit from options........... 13,007 -- 52,985 122 -- --
Deferred compensation related to grant of stock..... -- -- -- 152 -- (152)
Amortization of deferred compensation............... -- -- -- -- -- 5
Translation adjustment.............................. -- -- -- -- -- --
Net income.......................................... -- -- -- -- -- --
--------- -------- ---------- ----- -------- -----
Balance at September 30, 1992......................... 1,614,524 13,203 6,463,683 667 -- (147)
Preferred stock canceled............................ -- (14) -- -- -- --
Reincorporation to Delaware......................... -- -- -- (602) 602 --
Sale of common stock pursuant to initial public
offering, net of issuance costs of $2,294, and
other issuances of common stock................... -- -- 1,151,790 11 20,595 --
Issuance of preferred and common stock upon exercise
of options........................................ 34,453 -- 291,593 3 364 --
Tax benefit from option transactions................ -- -- -- -- 2,513 --
Conversion of preferred stock to common stock
pursuant to initial public offering............... (1,648,977) (13,189) 3,297,954 33 13,156 --
Amortization of deferred compensation............... -- -- -- -- -- 47
Translation adjustment.............................. -- -- -- -- -- --
Net income.......................................... -- -- -- -- -- --
--------- -------- ---------- ----- -------- -----
Balance at September 30, 1993......................... -- -- 11,205,020 112 37,230 (100)
Stock dividend shares canceled...................... -- -- -- -- (4) --
Issuance of common stock pursuant to ChipSoft merger
and National Payment Clearinghouse acquisition.... -- -- 7,443,761 74 302,019 --
Issuance of common stock upon exercise of options... -- -- 586,975 6 1,463 --
Tax benefit from option transactions................ -- -- -- -- 9,281 --
Amortization of deferred compensation............... -- -- -- -- -- 37
Translation adjustment.............................. -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
--------- -------- ---------- ----- -------- -----
Balance at July 31, 1994.............................. -- $ -- 19,235,756 $ 192 $349,989 $ (63)
========= ======== ========== ===== ======== =====
<CAPTION>
RETAINED
CUMULATIVE EARNINGS TOTAL
TRANSLATION (ACCUMULATED STOCKHOLDERS'
ADJUSTMENT DEFICIT) EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Balance at September 30, 1991......................... $ -- $ (1,665) $ 11,940
Preferred stock canceled............................ -- 13 --
Issuance of common stock............................ -- -- 4
Issuance of preferred and common stock upon exercise
of options and tax benefit from options........... -- -- 122
Deferred compensation related to grant of stock..... -- -- --
Amortization of deferred compensation............... -- -- 5
Translation adjustment.............................. (2) -- (2)
Net income.......................................... -- 5,276 5,276
---- --------- ---------
Balance at September 30, 1992......................... (2) 3,624 17,345
Preferred stock canceled............................ -- 14 --
Reincorporation to Delaware......................... -- -- --
Sale of common stock pursuant to initial public
offering, net of issuance costs of $2,294, and
other issuances of common stock................... -- -- 20,606
Issuance of preferred and common stock upon exercise
of options........................................ -- -- 367
Tax benefit from option transactions................ -- -- 2,513
Conversion of preferred stock to common stock
pursuant to initial public offering............... -- -- --
Amortization of deferred compensation............... -- -- 47
Translation adjustment.............................. (45) -- (45)
Net income.......................................... -- 8,411 8,411
---- --------- ---------
Balance at September 30, 1993......................... (47) 12,049 49,244
Stock dividend shares canceled...................... -- 4 --
Issuance of common stock pursuant to ChipSoft merger
and National Payment Clearinghouse acquisition.... -- -- 302,093
Issuance of common stock upon exercise of options... -- -- 1,469
Tax benefit from option transactions................ -- -- 9,281
Amortization of deferred compensation............... -- -- 37
Translation adjustment.............................. 12 -- 12
Net loss............................................ -- (176,313) (176,313)
---- --------- ---------
Balance at July 31, 1994.............................. $(35) $(164,260) $ 185,823
==== ========= =========
</TABLE>
See accompanying notes.
F-19
<PAGE> 105
INTUIT INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED TEN MONTHS ENDED
SEPTEMBER 30 ENDED OCTOBER 31
------------------- JULY 31 -------------------------
1992 1993 1994 1993 1994
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES
Net income (loss)............................. $ 5,276 $ 8,411 $(176,313) $ 7,285 $ (53,595)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Charge for purchased research and
development................................. -- -- 151,888 -- 44,008
Amortization of goodwill and other intangible
assets...................................... -- -- 38,536 -- 13,143
Depreciation.................................. 1,773 3,580 4,348 325 2,390
Changes in assets and liabilities:
Accounts receivable......................... (2,400) (14,598) 20,999 (19,420) (41,876)
Inventories................................. (1,913) (356) 2,019 (1,006) (4,472)
Prepaid expenses............................ (393) (157) (2,039) (441) (4,674)
Deferred income tax asset................... (852) (5,158) (5,054) (2,892) 177
Accounts payable............................ 3,575 4,416 (3,962) 5,987 6,565
Accrued compensation and related
liabilities............................... 651 1,589 1,918 -- --
Accrued merger liabilities.................. -- -- 6,772 -- --
Other accrued liabilities................... 1,568 9,022 (8,808) 9,413 13,743
Deferred revenue............................ 530 587 (11,467) 3,848 2,728
Income taxes payable........................ (1,148) 4,319 (4,431) 6,236 --
Deferred income tax liability............... -- -- (5,128) -- --
-------- -------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................. 6,667 11,655 9,278 9,335 (21,863)
-------- -------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchase of property and equipment............ (3,204) (4,862) (10,080) (1,055) (5,150)
Payment for acquisitions, net of cash
acquired.................................... -- -- (413) -- (26,284)
Increase in capitalized software costs........ (572) (271) -- -- --
(Increase) decrease in other assets........... (980) 802 (1,300) 120 (91)
Purchase of short-term investments(1)......... (16,174) (57,279) (72,571) (1,777) (16,712)
Liquidation of short-term investments......... 13,473 31,932 86,083 -- 58,546
-------- -------- ----------- ----------- -----------
Net cash provided by (used in) investment
activities................................ (7,457) (29,678) 1,719 (2,712) 10,309
-------- -------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Principal payments under capital lease
obligations................................. (145) (400) -- -- --
Decrease in other liabilities................. -- -- (615) -- --
Net proceeds from issuance of common stock.... 83 23,586 1,469 377 3,578
-------- -------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ (62) 23,186 854 377 3,578
-------- -------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................... (852) 5,163 11,851 7,000 (7,976)
Cash and cash equivalents at beginning of
period........................................ 3,546 2,694 7,857 15,637 19,708
-------- -------- ----------- ----------- -----------
Cash and cash equivalents at end of period...... $ 2,694 $ 7,857 $ 19,708 $ 22,637 $ 11,732
========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................... $ 66 $ 100 $ 10 $ -- $ --
========= ========= =========== =========== ===========
Income taxes paid............................... $ 4,858 $ 3,662 $ 8,767 $ 47 $ 9
========= ========= =========== =========== ===========
</TABLE>
- ---------------
(1) All short-term investments are classified as available-for-sale for the
three months ended October 31, 1994.
See accompanying notes.
F-20
<PAGE> 106
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit develops, markets and supports personal finance, small business
accounting and tax preparation software products and electronic services to
enable individuals, professionals and small businesses to automate commonly
performed financial tasks. Intuit's products enable users to organize,
understand and manage their financial lives.
Interim Financial Information
The accompanying unaudited consolidated financial information of Intuit for
the three months ended October 31, 1994 and 1993 includes all adjustments
(consisting of normal recurring adjustments) that Intuit considers necessary for
a fair presentation of the operating results and cash flows for those periods.
Results of operations for the three month period ended October 31, 1994 are not
necessarily indicative of the results to be expected for the twelve month period
ending July 31, 1995.
Principles of Consolidation and Change in Fiscal Year
The consolidated financial statements include the accounts of Intuit and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. In August 1994, Intuit changed its fiscal
year end to July 31 from September 30. Fiscal 1993 quarterly financial
statements included herein have been recast to the fiscal 1994 basis for
comparative purposes.
Net Revenue
Revenue is generally recognized at the time of shipment, net of allowances
for estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collection of accounts
receivable is probable. Advance payments are recorded as deferred revenue until
the products are shipped. Rebate rights are accounted for at the time revenue is
recognized. Intuit provides warranty reserves at the time revenue is recognized
for the estimated cost of replacing defective products.
Research and Development
Research and development costs incurred to establish the technological
feasibility of computer software products are charged to operations as incurred.
Customer Service and Technical Support
Customer service and technical support costs include order processing,
customer inquiries and telephone assistance. The costs of post contract customer
support are included in customer service and technical support expenses and are
not included in cost of goods sold.
Cash Equivalents and Short-Term Investments
Intuit considers all highly liquid investments purchased with a maturity of
three months or less at date of acquisition to be cash equivalents. Short-term
investments generally mature within two years of purchase. Effective August 1,
1994, Intuit adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). At October 31, 1994, short-term investments totaling $22.3 million, of
which $20.9 million consists of municipal securities, are classified as
available-for-sale and are carried at amortized cost which approximates fair
market value. The adoption of SFAS No. 115 did not have a material impact on
Intuit's financial statements; gross realized and unrealized gains and losses
are not material.
F-21
<PAGE> 107
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist primarily of materials used in software products and related
supplies and packaging materials.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives which range from three
to five years. Leasehold improvements are amortized using the straight-line
method over the lesser of the estimated useful lives or remaining lease terms.
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired (goodwill) is
generally amortized on a straight-line basis over periods generally not
exceeding three years. The cost of identified intangibles is generally amortized
on a straight-line basis over periods from 1 to 15 years. The carrying value of
goodwill and intangible assets is reviewed on a regular basis for the existence
of facts or circumstances both internally and externally that may suggest
impairment. To date no such impairment has been indicated. Should there be an
impairment in the future, Intuit will measure the amount of the impairment based
on undiscounted expected future cash flows from the impaired assets. The cash
flow estimates that will be used will contain management's best estimates, using
appropriate and customary assumptions and projections at the time.
<TABLE>
<CAPTION>
NET BALANCE AT
JULY 31, 1994
DESCRIPTION LIFE IN YEARS --------------
----------- ------------- (IN THOUSANDS)
<S> <C> <C>
Goodwill....................... 2-3 $65,346
Purchased technology........... 1-2 10,513
Customer lists................. 3-5 14,744
Other intangibles.............. 5-15 8,088
</TABLE>
Other intangibles include such items as trade names, logos, non-compete
agreements and other identified intangible assets.
Concentration of Credit Risk
Intuit's investment portfolio is diversified and consists of short-term
investment grade securities. Intuit's accounts receivable are derived from sales
to customers located primarily in North America. Intuit performs ongoing credit
evaluations of its customers' financial condition, and generally no collateral
is required. Intuit maintains reserves for credit losses, and such losses have
been within management's expectations.
Net Income (Loss) Per Share
Net income (loss) per share has been computed using the weighted average
number of common and common equivalent shares, when dilutive, outstanding during
each period. The difference between primary and fully diluted net income (loss)
per common share is not significant in all periods presented.
Foreign Currency Translation
Gains and losses from the translation of foreign subsidiaries' financial
statements are reported as a separate component of stockholders' equity. Net
gains and losses resulting from foreign exchange transactions were immaterial in
all periods presented.
F-22
<PAGE> 108
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the fiscal 1994 consolidated financial statement presentation.
2. MERGERS AND ACQUISITIONS
On December 12, 1993, Intuit completed its merger with ChipSoft, Inc.
("ChipSoft"). The total purchase price of the merger was $306.4 million in
common stock, stock options, and acquisition costs ($255.3 million net of
tangible assets acquired). The acquisition was treated as a purchase for
accounting purposes, and accordingly, the assets and liabilities were recorded
based on their independently appraised fair values at the date of the
acquisition. Of the purchase price, $150.5 million was allocated to in-process
research and development, $33.5 million to intangible assets, and $82.3 million
to goodwill, including approximately $11 million relating to the tax effecting
of identified intangibles. The amount of the purchase price allocated to
in-process research and development was charged to Intuit's operations. In
addition to the in-process research and development charge, Intuit incurred
merger-related charges of approximately $20.4 million during the ten months
ended July 31, 1994, of which $13 million related to the termination of Intuit's
agreement to acquire Legal Knowledge Systems, Inc. The remaining merger-related
liabilities at July 31, 1994 include provisions to complete the consolidation of
facilities and elimination of redundancies by integrating business functions,
including customer service, technical support and information systems. Results
of operations include ChipSoft from the date of acquisition.
On September 27, 1994, Intuit completed its acquisition of Parsons
Technology, Inc. ("Parsons"), a privately-held consumer software publisher,
pursuant to which Parsons became a wholly-owned subsidiary of Intuit. Under the
terms of the agreement, Intuit paid approximately $28.8 million in cash and
issued approximately 900,000 shares of Intuit common stock to Parsons'
shareholders. The transaction, which was accounted for as a purchase, had an
aggregate purchase price of approximately $67.3 million, which, in addition to
the above amounts, includes approximately $2.7 million in cash and 69,019 shares
of Intuit common stock that will be paid as deferred compensation for certain
non-competition agreements. Of the purchase price, approximately $44.0 million
was allocated to in-process research and development. The remaining purchase
price was allocated as follows, along with the corresponding attributed life:
goodwill of $9.9 million (3 years), purchased technology of $2.6 million (1
year), customer lists of $4.6 million (3 years), and other intangibles of $6.8
million (2-4 years). The amount allocated to in-process research and development
was written-off in the quarter ended October 31, 1994. Results of operations
include Parsons from the date of acquisition.
Consistent with Intuit's tests for internally developed software, Intuit
determined the amounts to be allocated to developed and in-process technology
based on whether technological feasibility had been achieved and whether there
was any alternative future use for the technology. Due to the absence of
detailed program designs, evidence of technological feasibility was established
through the existence of a completed working model at which point functions,
features and technical performance requirements can be demonstrated. As of the
date of the acquisition, Intuit concluded that the in-process technology had no
alternative future use after taking into consideration the potential for usage
of the software in different products, resale of the software and internal
usage.
F-23
<PAGE> 109
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The unaudited pro forma results of operations of Intuit for the twelve
months ended September 30, 1993 and the ten months ended July 31, 1994, assuming
the ChipSoft acquisition occurred on October 1, 1992 on the basis described
above are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS TEN MONTHS
ENDED ENDED
SEPTEMBER 30, 1993 JULY 31, 1994
(In thousands, except per share data) ------------------ -------------
<S> <C> <C>
Net revenue................................ $189,460 $207,009
Net loss................................... (202,153) (6,468)
Loss per share............................. (11.35) (0.34)
</TABLE>
The unaudited pro forma results for the twelve months ended September 30,
1993 reflect a charge for purchased research and development and other
merger-related expenses of $170.9 million arising from the acquisition of
ChipSoft. The pro forma results for the ten and twelve months ended July 31,
1994 and September 30, 1993 also reflect amortization of software, goodwill and
other intangible assets associated with the ChipSoft merger.
The unaudited pro forma results of operations of Intuit for the three
months ended October 31, 1993 and 1994, respectively, assuming the ChipSoft
merger occurred on October 1, 1992 and the Parsons acquisition occurred on
August 1, 1993, on the basis described above are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
--------------------
1993 1994
-------- -------
(In thousands,
except per share
data)
<S> <C> <C>
Net revenue...................... $ 64,960 $75,588
Net loss......................... (52,028) (8,157)
Loss per share................... $ (2.69) (0.40)
</TABLE>
Note: All material intercompany transactions have been eliminated.
The unaudited pro forma results for the three months ended October 31, 1993
do not include a charge for purchased research and development and other merger
related charges of $170.9 million arising from the acquisition of ChipSoft, but
do reflect a charge for purchased research and development of $44 million
related to the Parsons acquisition. The pro forma results also reflect
amortization of acquired software, goodwill and other intangible assets.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the acquisitions occurred at the beginning of
the periods indicated, nor should it be used to project Intuit's results of
operations for any future date or period.
In April 1994, Intuit acquired certain assets of Best Programs, Inc.'s
("Best") professional tax preparation business for an initial purchase price of
$6.5 million in cash. Up to two additional annual cash "earn out" payments (not
to exceed a total of $7.5 million) may become due to Best, depending on the
number of Best customers who purchase Intuit's professional tax products during
the two years following the acquisition. The acquisition was treated as a
purchase for accounting purposes, and accordingly, the assets and liabilities
were recorded based on their fair values at the date of the acquisition. Of the
purchase price, $5.8 million was allocated to intangible assets.
In July 1994, Intuit completed its acquisition of National Payment
Clearinghouse, Inc. ("NPC"), for consideration of $7.6 million in common stock
and cash. NPC provides electronic banking, bill payment and stock quote
retrieval services to consumers via their modems and personal computers. The
acquisition was treated as a purchase for accounting purposes, and accordingly,
the assets and liabilities were recorded based
F-24
<PAGE> 110
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on their fair values at the date of the acquisition. Of the purchase price, $1.4
million was allocated to in-process research and development, $6.0 million to
intangible assets, and $2.1 million to goodwill. The amount of the purchase
price allocated to in-process research and development was charged to Intuit's
operations at the time of the acquisition. Results of operations include NPC
from the date of acquisition.
Pro forma information related to the purchase acquisitions of Best and NPC
has not been presented due to immateriality.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30 JULY 31
(In thousands) 1993 1994
------------ --------
<S> <C> <C>
Machinery and equipment.................. $ 9,482 $ 31,470
Furniture and fixtures................... 2,529 3,021
Leasehold improvements................... 881 1,233
Land..................................... -- 1,015
-------- --------
12,892 36,739
Less accumulated depreciation and
amortization........................... (5,470) (12,543)
-------- --------
$ 7,422 $ 24,196
======== ========
</TABLE>
4. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30 JULY 31 OCTOBER 31
(In thousands) 1993 1994 1994
------------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Reserve for returns and exchanges........ $ 6,791 $10,657 $20,381
Merger-related items..................... -- 6,772 6,383
Rebates.................................. 2,884 227 2,049
Deferred acquisition costs............... -- -- 5,419
Other accruals........................... 3,456 7,014 9,719
------- ------- -------
$13,131 $24,670 $43,951
======= ======= =======
</TABLE>
5. COMMITMENTS
Intuit leases its office facilities and some equipment under various
operating lease agreements. The leases provide for annual rent increases ranging
from 0% to 6%. Annual minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
JULY 31
(In thousands) 1994
--------
<S> <C>
1995................................................... $ 6,538
1996................................................... 2,961
1997................................................... 2,055
1998................................................... 1,098
1999................................................... 463
Thereafter............................................. 497
-------
$13,612
=======
</TABLE>
F-25
<PAGE> 111
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total rent expense for the ten months ended July 31, 1994 and twelve months
ended September 30, 1993 and 1992 was approximately $3.6 million, $2.5 million
and $1.6 million, respectively. Intuit has commitments for construction of a new
support site for approximately $6.0 million.
6. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
The unaudited results of operations of Intuit for the ten months ended July
31, 1993 were as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
JULY 31, 1994
(In thousands, except per share data) -----------------
<S> <C>
Net revenue....................................... $92,050
Costs and expenses................................ 83,807
Income from operations............................ 8,243
Provision for income taxes........................ 3,376
Net income........................................ 5,233
Income per share.................................. 0.47
</TABLE>
7. STOCKHOLDERS' EQUITY
On January 31, 1993, Intuit adopted the 1993 Equity Incentive Plan (the
"1993 Plan"), which authorized the granting of incentive and non-qualified stock
options, restricted stock awards and stock bonuses to employees, directors,
consultants, independent contractors of and advisors to Intuit. The options have
a ten year term and generally become exercisable over a four-year period.
Options assumed in the acquisition of NPC were made under the 1993 Plan.
In addition, Intuit has several discontinued option plans pursuant to which
there are still outstanding options, including the ChipSoft option plans, which
were assumed by Intuit on December 12, 1993. The options have a seven year term
and generally became exercisable over a five year period. A summary of activity
under the Plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------
SHARES AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
---------------- --------- -------------
<S> <C> <C> <C>
Balance at September 30, 1992......................... 49,152 1,229,042 $ 0.10-$ 8.50
Additional shares authorized for issuance........... 1,750,000 -- --
Options granted..................................... (457,076) 457,076 $10.00-$37.75
Stock bonus awards.................................. (2,537) -- $30.50-$35.25
Options exercised................................... -- (269,564) $ 0.10-$15.00
Options canceled or expired......................... 54,607 (54,607) $ 0.50-$30.50
Discontinuation of 1988 Plan........................ (656,691) -- --
--------- --------- -------------
Balance at September 30, 1993......................... 737,455 1,361,947 $ 0.10-$37.75
Additional shares authorized for issuance........... 500,000 -- --
Options assumed from ChipSoft Merger................ -- 838,188 $ 0.90-$37.00
Options assumed from NPC acquisition................ (12,305) 12,305 $ 0.22
Options granted..................................... (642,414) 642,414 $30.25-$47.00
Options exercised................................... -- (586,975) $ 0.10-$37.00
Options canceled or expired......................... 41,238 (109,471) $ 0.90-$47.00
--------- --------- -------------
Balance at July 31, 1994.............................. 623,974 2,158,408 $ 0.10-$47.00
========= ========= =============
</TABLE>
F-26
<PAGE> 112
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At July 31, 1994 and September 30, 1993, options under the various plans
for 729,943 and 515,425 shares, respectively, were exercisable. At July 31,
1994, all 623,974 shares available for grant were under the 1993 Plan.
On July 31, 1990, Intuit declared a stock dividend for each share of common
stock outstanding at that date. At July 31, 1994, stock options for 143,466
common shares granted before July 31, 1990 were outstanding at exercise prices
of between $0.10 and $3.00 which, if exercised, would result in the issuance of
71,733 shares of common stock as a dividend.
8. PROFIT-SHARING AND BENEFIT PLANS
Profit Sharing Plans
Intuit maintains profit-sharing plans for full-time employees. Amounts
provided are determined pursuant to criteria established by the Compensation
Committee of the Board of Directors. Profit-sharing expense for the ten months
ended July 31, 1994 and twelve months ended September 30, 1993 and 1992 was
$3,144,000, $1,597,000 and 1,060,000, respectively.
Benefit Plans
At July 31, 1994, Intuit maintained three 401(k) retirement savings plans
for its full-time employees. Each participant in each plan may elect to
contribute from 1% to 20% of his or her annual salary to the plan. Intuit, at
its discretion, may make contributions to any plan, but has made none to date.
The contributions vest ratably over time.
9. INCOME TAXES
Effective October 1, 1992, Intuit adopted Statement of Financial Accounting
Standard No. 109 (FAS 109), "Accounting for Income Taxes." Prior to the adoption
of Statement 109, income tax expense was determined using the deferred method.
As permitted by FAS 109, Intuit elected not to restate the financial statements
of any prior years. The effect of the change on income taxes for 1993 and the
cumulative effect of the change were not material. The components of the
provision for income taxes consist of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30
-------------------------------------- TEN MONTHS ENDED
1992 1993 JULY 31, 1994
----------------- ------------------ ----------------
(In thousands) (DEFERRED METHOD) (LIABILITY METHOD) (LIABILITY
METHOD)
<S> <C> <C> <C>
Current:
Federal..................... $ 2,927 $ 8,291 $ 8,510
State....................... 840 2,211 2,067
Foreign..................... 22 -- 395
----------------- ---------- ----------------
3,789 10,502 10,972
----------------- ---------- ----------------
Deferred:
Federal..................... (706) (4,165) (7,976)
State....................... (217) (993) (1,244)
----------------- ---------- ----------------
(923) (5,158) (9,220)
----------------- ---------- ----------------
$ 2,866 $ 5,344 $ 1,752
============= ============= ==============
</TABLE>
F-27
<PAGE> 113
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes. The sources
and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30
-------------------------------------- TEN MONTHS ENDED
1992 1993 JULY 31, 1994
----------------- ------------------ ------------------
(In thousands) (DEFERRED METHOD) (LIABILITY METHOD) (LIABILITY METHOD)
<S> <C> <C> <C>
Income (loss) before income
taxes..................... $8,142 $13,755 $(174,561)
------ ------- ---------
Statutory federal income tax
34%, 35% and 35%,
respectively.............. 2,768 4,780 (61,096)
State income tax, net of
federal benefit........... 414 792 534
Research and experimental
credits................... (240) (300) (350)
In-process research and
development............... -- -- 63,665
Tax exempt interest......... -- -- (884)
Other, net.................. (76) 72 (117)
------ ------- ---------
Total............. $2,866 $ 5,344 $ 1,752
====== ======= =========
</TABLE>
Significant components of Intuit's current deferred tax asset for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 JULY 31, 1994
------------------ -------------
(In thousands) (LIABILITY METHOD)
<S> <C> <C>
Accounts receivable valuation reserve......... $3,274 $ 6,562
Rebate and other reserves..................... 1,555 93
Accrued expenses not currently deductible..... 1,447 3,357
State income taxes............................ 597 211
Deferred revenue.............................. 415 921
Merger charges................................ -- (6,748)
Advertising accruals.......................... -- 625
Fixed asset adjustments....................... (47) 492
Other, net.................................... 61 3,183
------ -------
Total deferred tax assets........... $7,302 $ 8,696
====== =======
</TABLE>
There was no valuation allowance for the deferred tax assets at July 31,
1994 or September 30, 1993.
The deferred tax benefit results primarily from the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1992
--------------------
(In thousands) (DEFERRED METHOD)
<S> <C>
Accounts receivable valuation reserves.................... $(323)
Warranty reserves......................................... (258)
Accrued advertising....................................... (324)
Other net................................................. (18)
-----
Total........................................... $(923)
=====
</TABLE>
F-28
<PAGE> 114
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION
Intuit conducts its business within one industry segment. One distributor
accounted for 15%, 17% and 11% of net revenues in fiscal 1994, 1993 and 1992,
respectively. A second distributor accounted for 15%, 12% and 13% of net
revenues in these fiscal periods.
Net revenues from customers outside of North America were not significant
in either fiscal 1994, 1993 or 1992.
11. SUBSEQUENT EVENTS
On October 13, 1994, Intuit entered into an agreement and plan of
reorganization with Microsoft, Inc. ("Microsoft"), pursuant to which Intuit
would be merged with a subsidiary of Microsoft (the "Merger"). Under the terms
of the agreement, holders of shares of Intuit common stock will receive 1.336
shares of Microsoft common stock for each outstanding Intuit share, with an
adjustment mechanism to ensure that Intuit stockholders receive no less than $71
in Microsoft shares per outstanding Intuit share, and Microsoft would assume all
outstanding Intuit stock options at the same conversion rate at which
outstanding Intuit stock is exchanged for Microsoft stock in the Merger.
Following the Merger, which is intended to be accounted for as a pooling of
interests, Intuit would become a wholly-owned subsidiary of Microsoft.
The Merger is subject to approval by Intuit's stockholders and will be
voted on at Intuit's special meeting of stockholders, which is currently
expected to be held in March 1995. In addition, consummation of the Merger is
subject to a number of other conditions that, if not satisfied or waived, may
cause the Merger not to be consummated and the plan of reorganization to be
terminated. In particular, the closing of the Merger is conditioned on
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
On October 14, 1994, a complaint was filed against Intuit, Microsoft and
certain of Intuit's directors in the Court of Chancery of the State of Delaware
in and for Newcastle County, bearing the caption "Stanley E. Aronoff, Plaintiff,
v. Christopher W. Brody, Scott D. Cook, L. John Doerr, Michael R. Hallman,
Burton J. McMurtry, Intuit Inc., and Microsoft Corp., Defendants," (Civil Action
No. 13804). The complaint alleges breach of fiduciary duties on the part of
Intuit's directors relating to the proposed Merger with Microsoft. The complaint
challenges the fact that Mr. Cook and other officers and directors collectively
owning and/or controlling approximately 37% of Intuit's shares agreed to vote
their shares in favor of the transaction. The complaint also alleges that this
agreement and other actions by the directors effectively foreclosed the
emergence of other potential bidders for Intuit. Microsoft is accused of aiding
and abetting these alleged breaches of fiduciary duties. The complaint seeks (a)
an order that the matter may be maintained as a class action, (b) injunctive
relief against the Merger and against any "improper action" which might be taken
to diminish, or have the effect of diminishing, shareholder value, and (c) an
order requiring the directors to explore third-party interest and accept the
highest offer obtainable. Finally, the complaint seeks unspecified compensatory
damages and attorneys' and expert fees. The complaint had not been served on any
of the defendants as of October 27, 1994. Intuit believes the complaint is
without merit, and intends to defend the claims vigorously. Although there can
be no assurance that the lawsuit will be resolved favorably or that Intuit's
future financial statements will not be adversely affected, Intuit does not
currently expect that resolution of the lawsuit, if served, will have a material
adverse effect on Intuit's financial condition or results of operations.
12. EVENTS SUBSEQUENT TO AUDITOR'S REPORT
On January 17, 1995, CheckFree Corporation ("CheckFree") filed a complaint
in the United States District Court for the Southern District of Ohio naming
Intuit and its subsidiary, NPC, as defendants. The complaint alleges that NPC's
computerized bill payment system infringes a U.S. patent granted to the
plaintiff
F-29
<PAGE> 115
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on the same date as the complaint and seeks unspecified damages and an
injunction prohibiting Intuit and NPC from making, selling and using
computerized bill payment systems that allegedly embody the patented invention.
The sale of computerized bill payment systems is not currently material to
Intuit's business, financial condition or results of operations. NPC currently
offers computerized bill payment services that can be accessed through
Microsoft's Money product, while Intuit currently offers CheckFree's
computerized bill payment services to users of Intuit's Quicken product. Intuit
anticipates that it will include NPC's system with the products and services
Intuit offers when it enters the emerging automated financial services industry,
although Intuit cannot predict whether its ability to sell the particular
systems in question will have a material effect upon its future business in this
area. At this preliminary stage, Intuit has insufficient information to assess
the merits of the complaint or the scope of the injunction sought, although
Intuit intends to defend the litigation vigorously.
13. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following selected quarterly data have been recast to the new fiscal
year quarters of Intuit.
<TABLE>
<CAPTION>
FISCAL 1994 QUARTER ENDED(I)
-------------------------------------------------
OCTOBER 31 JANUARY 31(ii) APRIL 30 JULY 31
---------- -------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue......................... $47,400 $ 90,544 $54,385 $ 31,119
Costs of goods sold................. 13,261 33,021 19,208 11,938
All other costs and expenses(iii)... 23,163 218,208 44,023 32,695
Income (loss) from operations....... 10,976 (160,685) (8,846) (13,514)
Net income (loss)................... 7,284 (163,910) (6,247) (10,344)
Net income (loss) per share......... 0.61 (10.65) (0.33) (0.54)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1993 QUARTER ENDED(I)
-------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue......................... $27,192 $33,368 $26,169 $20,251
Costs of goods sold................. 8,884 11,628 8,557 6,727
All other costs and expenses(iii)... 14,296 17,265 16,548 13,476
Income from operations.............. 4,013 4,474 1,065 45
Net income.......................... 2,549 2,789 724 174
Net income per share................ 0.24 0.26 0.06 0.01
</TABLE>
- ---------------
(i) Includes the results of ChipSoft from December 12, 1993.
(ii) Includes a charge of $150.5 million related to purchased research and
development at the time of the ChipSoft merger.
(iii) Includes customer service and technical support costs (including post
contract customer support).
F-30
<PAGE> 116
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Intuit Inc.
We have audited the accompanying consolidated balance sheets of Intuit Inc.
as of July 31, 1994 and September 30, 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the ten
months ended July 31, 1994 and for each of the two years in the period ended
September 30, 1993. These financial statements are the responsibility of
Intuit's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Intuit at July
31, 1994 and September 30, 1993, and the consolidated results of its operations
and its cash flows for the ten months ended July 31, 1994 and for each of the
two years in the period ended September 30, 1993, in conformity with generally
accepted accounting principles.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of September 30, 1992,
1991 and 1990 and the related consolidated statements of income, stockholders'
equity, and cash flows for the years ended September 30, 1991 and 1990 (none of
which are presented separately herein); and we expressed unqualified opinions on
those consolidated financial statements. In our opinion, the information set
forth under the caption "Selected Financial Data" for each of the four years in
the period ended September 30, 1993 and for the ten months ended July 31, 1994,
appearing on page 8, is fairly stated in all material respects in relation to
the consolidated financial statements from which it has been derived.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
August 25, 1994,
except for Note 11 as to which
the date is October 27, 1994
F-31
<PAGE> 117
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MICROSOFT CORPORATION
AND
INTUIT INC.
DATED AS OF OCTOBER 13, 1994
AND
AMENDED AS OF FEBRUARY 16, 1995
<PAGE> 118
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger...................................................... A-1
1.2 Closing........................................................................... A-1
1.3 Effects of the Merger............................................................. A-1
1.4 Tax-Free Reorganization........................................................... A-1
1.5 Accounting Treatment.............................................................. A-1
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS, EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock........................................................... A-2
2.1.1 Capital Stock of Sub..................................................... A-2
2.1.2 Cancellation of Company Common Stock..................................... A-2
2.1.3 Conversion of Company Common Stock....................................... A-2
2.1.4 Adjustments of Exchange Ratio............................................ A-2
2.1.5 Appraisal Rights......................................................... A-2
2.1.6 Fractional Shares........................................................ A-2
2.2 Exchange of Certificates.......................................................... A-2
2.2.1 Exchange Agent........................................................... A-2
2.2.2 Parent to Provide Common Stock and Cash.................................. A-2
2.2.3 Exchange Procedures...................................................... A-3
2.2.4 No Further Ownership Rights in Company Common Stock...................... A-3
2.2.5 Return to Parent......................................................... A-3
2.3 Company Options................................................................... A-4
2.3.1 Assumption by Parent..................................................... A-4
2.3.2 Registration............................................................. A-4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Company......................................... A-4
3.1.1 Organization, Standing and Power......................................... A-4
3.1.2 Capital Structure........................................................ A-5
3.1.3 Authority................................................................ A-5
3.1.4 SEC Documents and Financial Statements................................... A-6
3.1.5 Information Supplied..................................................... A-6
3.1.6 No Defaults.............................................................. A-7
3.1.7 Litigation............................................................... A-7
3.1.8 No Material Adverse Change............................................... A-7
3.1.9 Absence of Undisclosed Liabilities....................................... A-7
</TABLE>
i
<PAGE> 119
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
3.1.10 No Violations............................................................ A-7
3.1.11 Certain Agreements....................................................... A-8
3.1.12 Employee Benefit Plans................................................... A-8
3.1.13 Properties, Liens, etc................................................... A-8
3.1.14 Major Contracts.......................................................... A-9
3.1.15 Taxes.................................................................... A-9
3.1.16 Interests of Officers.................................................... A-10
3.1.17 Technology............................................................... A-10
3.1.18 Material Relations....................................................... A-11
3.1.19 Opinion of Financial Advisor............................................. A-11
3.1.20 Vote Required............................................................ A-11
3.1.21 Accounting Matters....................................................... A-11
3.1.22 Brokers and Finders...................................................... A-11
3.1.23 Change of Control........................................................ A-11
3.1.24 Leases in Effect......................................................... A-11
3.1.25 Environmental............................................................ A-11
3.1.26 Questionable Payments.................................................... A-12
3.1.27 Disclosure............................................................... A-12
3.1.28 Reliance................................................................. A-12
3.2 Representations and Warranties of Parent and Sub.................................. A-12
3.2.1 Organization; Standing and Power......................................... A-12
3.2.2 Capital Structure........................................................ A-12
3.2.3 Authority................................................................ A-13
3.2.4 SEC Documents and Financial Statements................................... A-13
3.2.5 Information Supplied..................................................... A-15
3.2.6 No Defaults.............................................................. A-15
3.2.7 No Material Adverse Change............................................... A-15
3.2.8 Opinion of Financial Advisor............................................. A-15
3.2.9 Accounting Matters....................................................... A-15
3.2.10 Brokers and Finders...................................................... A-16
3.2.11 Interim Operation of Sub................................................. A-16
3.2.12 Disclosure............................................................... A-16
3.2.13 Reliance................................................................. A-16
ARTICLE IV
COVENANTS OF COMPANY
4.1 Conduct of Business............................................................... A-16
4.1.1 Ordinary Course.......................................................... A-16
4.1.2 Dividends: Changes in Stock.............................................. A-17
4.1.3 Issuance of Securities................................................... A-17
4.1.4 Governing Documents...................................................... A-17
</TABLE>
ii
<PAGE> 120
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
4.1.5 Exclusivity; Acquisition Proposals....................................... A-17
4.1.6 No Acquisitions.......................................................... A-18
4.1.7 No Dispositions.......................................................... A-18
4.1.8 Indebtedness............................................................. A-18
4.1.9 Plans.................................................................... A-18
4.1.10 Claims................................................................... A-18
4.1.11 Agreement................................................................ A-18
4.2 Breach of Representation and Warranties........................................... A-18
4.3 Pooling........................................................................... A-18
4.4 Consents.......................................................................... A-18
4.5 Best Efforts...................................................................... A-18
4.6 Information for Prospectus/Proxy Statement........................................ A-18
4.7 Company Plans..................................................................... A-19
4.8 Employee Agreements............................................................... A-19
4.9 Stockholder Approval.............................................................. A-19
4.10 Tax Returns....................................................................... A-19
4.11 Representations of Stockholders................................................... A-19
ARTICLE V
COVENANTS OF PARENT
5.1 Breach of Representations and Warranties.......................................... A-19
5.2 Consents.......................................................................... A-19
5.3 Best Efforts...................................................................... A-19
5.4 Agreements of Parent Affiliates................................................... A-20
5.5 Representations of Stockholders................................................... A-20
5.6 Relocation of Facilities.......................................................... A-20
5.7 Nasdaq Listing.................................................................... A-20
5.8 Registration Rights............................................................... A-20
5.9 Severance......................................................................... A-20
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Preparation of S-4................................................................ A-20
6.2 Letter of the Company's Accountants............................................... A-21
6.3 Letter of Parent's Accountants.................................................... A-21
6.4 Access to Information............................................................. A-21
6.5 Legal Conditions to the Merger.................................................... A-21
6.6 Affiliates........................................................................ A-21
6.7 HSR Act Filings................................................................... A-22
6.7.1 Filings and Cooperation.................................................. A-22
6.7.2 Spin-Off Agreement....................................................... A-22
6.7.3 Best Efforts............................................................. A-22
</TABLE>
iii
<PAGE> 121
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
6.8 Employee Benefits................................................................. A-22
6.9 Officers and Directors............................................................ A-23
6.10 Expenses.......................................................................... A-23
6.11 Additional Agreements............................................................. A-23
6.12 Public Announcements.............................................................. A-23
6.13 State Takeover Laws............................................................... A-23
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Merger........................ A-23
7.1.1 Stockholder Approval..................................................... A-23
7.1.2 Consents................................................................. A-23
7.1.3 S-4...................................................................... A-24
7.1.4 No Restraints............................................................ A-24
7.1.5 Legal Action............................................................. A-24
7.1.6 Tax-Free Reorganization.................................................. A-24
7.1.7 No Burdensome Condition.................................................. A-24
7.2 Conditions of Obligations of Parent and Sub....................................... A-24
7.2.1 Representations and Warranties of Company................................ A-24
7.2.2 Performance of Obligations of Company.................................... A-24
7.2.3 Affiliates............................................................... A-24
7.2.4 Pooling of Interests; Comfort Letters.................................... A-25
7.2.5 Opinion of Company's Counsel............................................. A-25
7.3 Conditions of Obligation of Company............................................... A-25
7.3.1 Representations and Warranties of Parent and Sub......................... A-25
7.3.2 Performance of Obligations of Parent and Sub............................. A-25
7.3.3 Opinion of Parent Counsel................................................ A-25
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination....................................................................... A-25
8.2 Effect of Termination............................................................. A-26
8.3 Break-up Fee...................................................................... A-26
8.4 Amendment......................................................................... A-26
8.5 Extension, Waiver................................................................. A-26
ARTICLE IX
GENERAL PROVISIONS
9.1 Nonsurvival of Representations, Warranties and Agreements......................... A-27
9.2 Notices........................................................................... A-27
9.3 Interpretation.................................................................... A-27
</TABLE>
iv
<PAGE> 122
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
9.4 Counterparts...................................................................... A-28
9.5 Miscellaneous..................................................................... A-28
9.6 No Joint Venture.................................................................. A-28
9.7 Governing Law..................................................................... A-28
First Amendment to Agreement and Plan of Reorganization........................... A-30
</TABLE>
v
<PAGE> 123
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE DEFINED
- --------------------------------- ------------
<S> <C>
Acquisition Transaction.......... A-17
affiliate........................ A-3
Affiliate Agreements............. A-21
Affiliates....................... A-21
Antitrust Laws................... A-22
blue sky......................... A-6
Business Condition............... A-4
Cause............................ A-20
Certificate...................... A-2
Closing.......................... A-1
Closing Date..................... A-1
Code............................. A-1
Company.......................... A-1
Company Break-up Fee............. A-26
Company Comfort Letter........... A-21
Company Common Stock............. A-2
Company Disclosure Schedule...... A-4
Company Financial Statements..... A-6
Company Intellectual Property
Rights......................... A-10
Company Options.................. A-5
Company Preferred Stock.......... A-5
Company Properties............... A-12
Company Required Statutory
Approvals...................... A-6
Company SEC Documents............ A-6
Company Stock Option Plan(s)..... A-5
Company Stockholder Agreements... A-19
Company Stockholders Meeting..... A-19
Company Voting Debt.............. A-5
Company's Principal
Stockholders................... A-19
Confidentiality Agreement........ A-21
Consents......................... A-5
DGCL............................. A-1
Effective Time................... A-1
Environmental Law................ A-12
ERISA............................ A-8
Exchange Act..................... A-6
Exchange Agent................... A-2
Exchange Ratio................... A-2
Governmental Entity.............. A-5
Hazardous Substance.............. A-13
HSR Act.......................... A-6
incentive stock option........... A-4
include.......................... A-27
includes......................... A-27
<CAPTION>
TERM PAGE DEFINED
- --------------------------------- ------------
<S> <C>
including........................ A-27
Lease............................ A-11
Leases........................... A-11
Liabilities...................... A-7
Material Adverse Effect.......... A-4
Merger........................... A-1
Merger Documents................. A-1
multiemployer plan............... A-8
Order............................ A-22
Parent........................... A-1
Parent Average Closing Price..... A-2
Parent Comfort Letter............ A-21
Parent Common Stock.............. A-13
Parent Disclosure Schedule....... A-13
Parent Financial Statements...... A-15
Parent Options................... A-13
Parent Preferred Stock........... A-13
Parent Required Statutory
Approvals...................... A-14
Parent SEC Documents............. A-15
Parent Stock Option Plans........ A-13
Parent Stock Purchase Plan....... A-13
Parent Voting Debt............... A-14
Personal Finance Software
Business....................... A-24
plan of reorganization........... A-1
Plans............................ A-8
Proxy Statement.................. A-6
Proxy Statement/Prospectus....... A-6
Required Statutory Approvals..... A-14
Return Periods................... A-9
S-4.............................. A-6
SEC.............................. A-6
Securities Act................... A-3
Significant Subsidiary........... A-13
single-employer plan............. A-8
Spin-Off Agreement............... A-22
Sub.............................. A-1
Subsidiary....................... A-2
Surviving Corporation............ A-1
Surviving Corporation's Common
Stock.......................... A-1
tax.............................. A-9
taxes............................ A-9
Violation........................ A-5
WBCA............................. A-1
</TABLE>
vi
<PAGE> 124
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of October 13, 1994, among
Microsoft Corporation, a Washington corporation ("PARENT"), M/I Acquisition
Corporation, a Washington corporation and a wholly-owned subsidiary of parent
("SUB"), and Intuit Inc., a Delaware corporation ("COMPANY").
INTENDING TO BE LEGALLY BOUND, and in consideration of the premises and the
mutual representations, warranties, covenants and agreements contained herein,
Parent, Sub and Company hereby agree as follows:
ARTICLE I
THE MERGER
1.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement, Sub will be merged into Company (the "MERGER"). An Agreement and Plan
of Merger, and articles, certificates or other appropriate filing documents (the
"MERGER DOCUMENTS") shall be duly prepared, executed and acknowledged by the
parties and thereafter delivered to the Secretaries of State of the States of
Delaware and Washington, for filing, as provided in the Delaware General
Corporation Law (the "DGCL") and the Washington Business Corporation Act (the
"WBCA") as soon as practicable on or after the Closing Date (as defined in
Section 1.2). The Merger shall become effective upon the filing of the Merger
Documents with the Secretaries of State of the States of Delaware and Washington
or at such time thereafter as is provided in the Merger Documents (the
"EFFECTIVE TIME").
1.2 CLOSING. The closing of the Merger (the "CLOSING") will take place as
soon as practicable on the first business day after satisfaction or waiver of
the last to be fulfilled of the conditions set forth in Article VII that by
their terms are not to occur at the Closing (the "CLOSING DATE"), at the offices
of Preston Gates & Ellis, Seattle, Washington, unless another date or place is
agreed to in writing by the parties hereto.
1.3 EFFECTS OF THE MERGER. At the Effective Time, (i) the separate
existence of Sub shall cease and Sub shall be merged with and into Company and
Company after the Merger is sometimes referred to herein as the "SURVIVING
CORPORATION"), (ii) the Certificate of Incorporation of Company shall be the
Certificate of Incorporation of the Surviving Corporation, except that such
Certificate of Incorporation shall be amended to provide that the authorized
capital stock of the Surviving Corporation shall be 1,000 shares of Common
Stock, $.01 par value ("SURVIVING CORPORATION'S COMMON STOCK"), until duly
amended, (iii) the Bylaws of Company shall be the Bylaws of the Surviving
Corporation until duly amended, (iv) the directors and officers of the Surviving
Corporation shall be designated by Parent prior to the Closing, and (v) the
Merger shall, from and after the Effective Time, have all the effects provided
by applicable law. Alternatively, at Parent's election, the Merger may be
restructured so that Parent (rather than Sub) and Company are the parties hereto
and Parent is the Surviving Corporation in which event references to Sub shall
where appropriate apply to Parent and Parent shall thereby have such rights and
obligations of Sub as are reflected in appropriate Merger Documents shall be
prepared by the parties and filed at the Closing.
1.4 TAX-FREE REORGANIZATION. The Merger is intended to be a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "CODE"), and this Agreement is intended to be a "PLAN OF
REORGANIZATION" within the meaning of the regulations promulgated under Section
368 of the Code.
1.5 ACCOUNTING TREATMENT. The business combination to be effected by the
Merger is intended to be treated for accounting purposes as a "pooling of
interests." However, Parent has reserved the right under this Agreement to cause
the Merger to be treated for accounting purposes as a "purchase."
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ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS, EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action (except as provided in Section 4.9) on the part of
the holder of any shares of Company common stock, par value $.01 per share
("COMPANY COMMON STOCK"):
2.1.1 Capital Stock of Sub. All issued and outstanding shares of
capital stock of Sub shall continue to be issued and shall be converted into
1,000 shares of Surviving Corporation Common Stock with the stock certificate of
Sub evidencing ownership of such shares of capital stock of the Surviving
Corporation.
2.1.2 Cancellation of Company Common Stock. All shares of Company
Common Stock that are owned directly or indirectly by Company or Parent or by
any Subsidiary (as defined below) of Company or Parent shall be canceled and no
stock of Parent or other consideration shall be delivered in exchange therefor.
In this Agreement, a "SUBSIDIARY" of any corporation or other entity means a
corporation, partnership or other entity of which such corporation or entity,
directly or indirectly, owns or controls voting securities or other interests
which are sufficient to elect a majority of the Board of Directors or other
managers of such corporation, partnership or other entity.
2.1.3 Conversion of Company Common Stock. Each issued and outstanding
share of Company Common Stock (other than shares to be canceled pursuant to
Section 2.1.2) shall be converted, without any action on the part of the holders
thereof, into and become exchangeable for 1.336 shares of Parent Common Stock
(as defined in Section 3.2.2) (the "EXCHANGE RATIO"); provided that if the
"Parent Average Closing Price" (as defined below) is $53.144 or less the
Exchange Ratio shall be recomputed and rounded to the third decimal by dividing
$71.00 by the Parent Average Closing Price. The PARENT AVERAGE CLOSING PRICE
shall mean the average closing price of the Parent Common Stock as publicly
reported for the Nasdaq National Market as of 4:00 p.m. Eastern Time over the
last ten (10) trading days ending two trading days prior to the Closing Date.
All such shares of Company Common Stock shall no longer be outstanding and shall
cease to exist, and each certificate (a "CERTIFICATE") previously representing
any such shares shall represent only the right to receive (i) whole shares of
Parent Common Stock and (ii) cash in lieu of fractional shares, in each case as
provided by this Section 2.1.
2.1.4 Adjustments of Exchange Ratio. If, between the date of this
agreement and the Effective Time, the outstanding shares of Parent Common Stock
or Company Common Stock shall have been changed into a different number of
shares or a different class or series or otherwise changed by reason of any
reclassification, recapitalization, split-up, stock dividend, stock combination,
exchange of shares or readjustment or similar transaction, the Exchange Ratio
shall be correspondingly adjusted.
2.1.5 Appraisal Rights. Appraisal rights are not available in
accordance with Section 262(b) of the DGCL.
2.1.6 Fractional Shares. No fractional shares of Parent Common Stock
shall be issued in the Merger and such fractional interests shall not entitle
the owner thereof to vote. In lieu of any fractional share, each holder of
shares of Company Common Stock who would otherwise be entitled to receive a
fraction of a share of Parent Common Stock will be entitled to receive from
Parent an amount of cash, without interest, equal to the Parent Average Closing
Price multiplied by the fraction of a share of Parent Common Stock to which such
holder would otherwise be entitled.
2.2 EXCHANGE OF CERTIFICATES.
2.2.1 Exchange Agent. Prior to the Closing Date, Parent shall appoint
First Interstate Bank of Washington, N.A., or other bank or trust company
reasonably satisfactory to Company, to act as exchange agent (the "EXCHANGE
AGENT") in the Merger.
2.2.2 Parent to Provide Common Stock and Cash. Promptly after the
Effective Time Parent shall make available to the Exchange Agent the
certificates representing whole shares of Parent Common Stock
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issued pursuant to Section 2.1 in exchange for outstanding shares of Company
Common Stock and, from time to time, cash for payment in lieu of fractional
shares.
2.2.3 Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record as of the Effective
Time of a Certificate or Certificates, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
a duly executed letter of transmittal and such other documents as the Exchange
Agent shall require, the holder of such Certificate shall be entitled to receive
in exchange therefor the number of whole shares of Parent Common Stock to which
the holder of Company Common Stock is entitled pursuant to Section 2.1 hereof
plus cash in lieu of fractional shares as provided in Section 2.1.6. The
Certificate so surrendered shall forthwith be canceled. Notwithstanding any
other provision of this Agreement, until holders of Certificates have
surrendered them for exchange as provided herein, (i) no dividends or other
distributions shall be paid with respect to any shares represented by such
Certificates and no payment for fractional shares shall be made, and (ii)
without regard to when such Certificates are surrendered for exchange as
provided herein, no interest shall be paid on any dividends or other
distributions or any payment for fractional shares. Upon surrender of a
Certificate, there shall be paid to the holder of such Certificate the amount of
any dividends or other distributions which theretofore became payable, but which
were not paid by reason of the foregoing, with respect to the number of whole
shares of Parent Common Stock represented by the certificate or certificates
issued upon such surrender. If any certificate for Parent Common Stock is to be
issued in a name other than in which the Certificate surrendered in exchange
therefore is registered, it shall be a condition of such exchange that the
person requesting such exchange pay any transfer or other taxes required by
reason of the issuance of certificates for such shares of Parent Common Stock in
a name other than that of the registered holder of the Certificate surrendered,
or establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Certificates of Parent Common Stock issued to
holders of Company Common Stock issued under a Company restricted stock plan
shall bear legends substantially similar to the legends presently on the Company
Common Stock certificates and as required by WBCA sec. 23B.06.270 and other
applicable law.
2.2.4 No Further Ownership Rights in Company Common Stock. All Parent
Common Stock delivered upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such shares of
Company Common Stock. After the Effective Time there shall be no transfers on
the stock transfer books of the Company of shares of Company Common Stock. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article II. Certificates surrendered for exchange by any person
constituting an "AFFILIATE" of Company for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or for purposes of
preserving pooling of interests accounting treatment for the Merger shall not be
exchanged until Parent receives a written agreement from such persons as
provided by Section 6.6.
2.2.5 Return to Parent. Any Parent Common Stock and any cash in lieu of
fractional share interests made available to the Exchange Agent and not
exchanged for Certificates within six months after the Effective Time and any
dividends and distributions held by the Exchange Agent for payment or delivery
to the holders of unsurrendered Certificates representing Company Common Stock
and unclaimed at the end of such six month period shall be redelivered or repaid
by the Exchange Agent to Parent, after which time any holder of Certificates who
has not theretofore delivered or surrendered such Certificates to the Exchange
Agent, subject to applicable law, shall look as a general creditor only to
Parent for payment of the Parent Common Stock, cash in lieu of fractional
shares, and any such dividends or distributions. Notwithstanding any provision
of this Agreement, none of Parent, the Exchange Agent, the Surviving Corporation
or any other party hereto shall be liable to any holder of Company Common Stock
for any Parent Common Stock, cash in lieu of fractional shares or dividends or
distributions delivered to a public official pursuant to applicable abandoned
property, escheat or similar law.
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2.3 COMPANY OPTIONS.
2.3.1 Assumption by Parent. At the Effective Time, each of the then
outstanding Company Options (as defined in Section 3.1.2) shall by virtue of the
Merger and at the Effective Time, and without any further action on the part of
any holder thereof, be assumed by Parent and converted into an option to
purchase that number of shares of Parent Common Stock determined by multiplying
the number of shares of Company Common Stock subject to such Company Option at
the Effective Time by the Exchange Ratio, at an exercise price per share of
Parent Common Stock equal to the exercise price per share of such Company Option
immediately prior to the Effective Time divided by the Exchange Ratio. If the
foregoing calculation results in an assumed Company Option being exercisable for
a fraction of a share of Parent Common Stock, then the number of shares of
Parent Common Stock subject to such option shall be rounded to the nearest whole
number of shares. The term, exercisability, vesting schedule, status as an
"INCENTIVE STOCK OPTION" under Section 422 of the Code, if applicable, and all
other terms and conditions of Company Options will to the extent permitted by
law and otherwise reasonably practicable be unchanged. Continuous employment
with Company or any Company Subsidiaries shall be credited to the optionee for
purposes of determining the vesting of the number of shares of Parent Common
Stock subject to exercise under the optionee's converted Company Option after
the Effective Time.
2.3.2 Registration. Parent shall cause the shares of Parent Common
Stock issuable upon exercise of the assumed Company Options to be registered, or
to be issued pursuant to a then effective regulation statement, no later than 30
days after the Effective Time on Form S-8 promulgated by the SEC and shall use
its best efforts to maintain the effectiveness of such registration statement or
registration statements for so long as such assumed Company Options remain
outstanding. With respect to those individuals who subsequent to the Merger will
be subject to the reporting requirements under Section 16(a) of the Exchange
Act, Parent shall administer the Company Options assumed pursuant to this
Section 2.3 in a manner that complies with Rule 16b-3 promulgated by the SEC
under the Exchange Act, but shall have no responsibility for such compliance by
Company or its predecessors.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF COMPANY. Except as disclosed in a
document referring specifically to the representations and warranties in this
Agreement which identifies by section number the section and subsection to which
such disclosure relates and is delivered by Company to Parent prior to the
execution of this Agreement (the "COMPANY DISCLOSURE SCHEDULE"), Company
represents and warrants to Parent and Sub as follows:
3.1.1 Organization, Standing and Power. Each of Company and its
Significant Subsidiaries (as defined in Section 3.3.1) is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization (except with respect to any such
Subsidiary incorporated in a jurisdiction where the concept of good standing is
not recognized) has all requisite power and authority to own, lease and operate
its properties and to carry on its businesses as now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in which
a failure to so qualify would have a Material Adverse Effect (as hereinafter
defined) on the Business Condition (as hereinafter defined) of Company. As used
in this Agreement, "BUSINESS CONDITION" with respect to any entity shall mean
the business, financial condition, results of operations or assets (without
giving effect to the consequences of the transactions contemplated by this
Agreement) of such entity and its Significant Subsidiaries taken as a whole. For
the purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" means
material adverse effect other than resulting from (i) changes attributable to
conditions affecting the Personal Software Business generally (in the case of
Company), or the software industry generally (in the case of Parent), (ii)
changes in general economic conditions, or (iii) changes attributable to the
announcement or pendency of the Merger. Company has delivered to Parent complete
and correct copies of the Certificate or Articles of Incorporation and Bylaws of
Company and each of its Significant Subsidiaries, in each case, as amended to
the date hereof. All Subsidiaries of the Company are identified in the Company
Disclosure Schedule.
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3.1.2 Capital Structure. The authorized capital stock of Company
consists of 60,000,000 shares of Company Common Stock and 3,000,000 shares of
Preferred Stock, $.01 par value ("COMPANY PREFERRED STOCK"). As of the date
hereof, there are not more than 20,211,000 shares of Company Common Stock
outstanding, not more than 4,400 shares in the Company's treasury or held by
Significant Subsidiaries of the Company, not more than 3,061,000 shares of
Company Common Stock are reserved for issuance upon the exercise of outstanding
employee stock options ("COMPANY OPTIONS") under Company's 1988 Stock Option
Plan, 1993 Equity Incentive Plan and other stock option plans and other options
(the "COMPANY STOCK OPTION PLAN(S)"). There are no shares of Company Preferred
Stock outstanding. All outstanding shares of Company Common Stock are, and any
shares of Company Common Stock issued upon exercise of any Company Options will
be validly issued, fully paid, nonassessable and not subject to any preemptive
rights, or to any agreement to which Company or any of its Significant
Subsidiaries is a party or by which Company or any of its Significant
Subsidiaries may be bound other than agreements pursuant to which the Company
has the right to repurchase shares of Company Common Stock. Except for the
shares described above issuable pursuant to Company Options and the Company
Incentive Plan, there are not any options, warrants, calls, conversion rights,
commitments, agreements, contracts, understandings, restrictions, arrangements
or rights of any character to which Company or any Subsidiary of Company is a
party or by which any of them may be bound obligating Company or any Subsidiary
of Company to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of Company or of any Subsidiary of
Company or obligating Company or any Subsidiary of Company to grant, extend or
enter into any such option, warrant, call, conversion right, commitment,
agreement, contract, understanding, restriction, arrangement or right. Company
does not have outstanding any bonds, debentures, notes or other indebtedness the
holders of which have the right to vote (or convertible or exercisable into
securities having the right to vote) with holders of Company Common Stock on any
matter ("COMPANY VOTING DEBT"). Company is the owner, directly or indirectly, of
all outstanding shares of capital stock of each of its Significant Subsidiaries
free and clear of all liens, pledges, security interests, claims or other
encumbrances and all such shares are duly authorized, validly issued, fully paid
and nonassessable.
3.1.3 Authority. Company has all requisite corporate power and
authority to enter into this Agreement and subject, in the case of this
Agreement, to approval of this Agreement by the stockholders of Company and the
Company Required Statutory Approvals (as defined below), to consummate the
transactions contemplated hereby and thereby. The execution and delivery by
Company of this Agreement and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Company, including the unanimous approval of the Board of
Directors of Company, subject only to approval of this Agreement by the
stockholders of Company. This Agreement has been duly executed and delivered by
Company and constitutes a valid and binding obligation of Company enforceable in
accordance with its terms, except that such enforceability may be subject to (i)
bankruptcy, insolvency, reorganization or other similar laws relating to
enforcement of creditors' rights generally and (ii) general equitable
principles. Subject to the satisfaction of the conditions set forth in Sections
7.1 and 7.3, the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and thereby will not,
conflict with or result in any violation of, or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or the creation of a lien, pledge, security interest, charge or other
encumbrance on assets (any such conflict, violation, default, right, loss or
creation being referred to herein as a "VIOLATION") pursuant to (i) any
provision of the Certificate of Incorporation or Bylaws of Company or the
comparable governing instruments of any Subsidiary of Company or (ii) any loan
or credit agreement, note, bond, mortgage, indenture, contract, lease, or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Company
or any Subsidiary of Company or their respective properties or assets, other
than, in the case of (ii), any such Violation which individually or in the
aggregate would not have a Material Adverse Effect on the Business Condition of
Company. No consent, approval, order or authorization of or registration,
declaration or filing with or exemption by (collectively "CONSENTS"), any court,
administrative agency or commission or other governmental authority or
instrumentality, whether domestic or foreign (each a "GOVERNMENTAL ENTITY"), is
required by or with respect to Company in connection with the execution and
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delivery of this Agreement or the consummation by Company of the transactions
contemplated hereby or thereby, except for Consents, if any, relating to
(i) the filing of a premerger notification report and all other required
documents by Parent and Company, and the expiration of all applicable
waiting periods, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR ACT"), (ii) the filing with the Securities and Exchange
Commission (the "SEC") of the filing Form S-4, including the Proxy
Statement/Prospectus (as defined in Section 3.1.5, and such reports and
information as may be required under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), the Securities Act and the rules and regulations
promulgated by the SEC under the Exchange Act or the Securities Act, and the
declaration of the effectiveness of the S-4 by the SEC, (iii) such filings,
authorizations, orders and approvals as may be required under foreign laws,
state securities laws and the NASD Bylaws or "BLUE SKY" laws, and (iv) the
filing of the Merger Documents with the Secretaries of State of the States of
Delaware and Washington (the filings and approvals referred to in clauses (i)
through (iii) are collectively referred to as the "COMPANY REQUIRED STATUTORY
APPROVALS") and except for such other Consents which if not obtained or made
would not have a Material Adverse Effect on the Business Condition of Company.
3.1.4 SEC Documents and Financial Statements. Company has furnished
Parent with a true and complete copy of each statement, report, schedule,
registration statement and definitive proxy or information statement filed by
Company, or any present or former Subsidiary, with the SEC since January 1, 1992
(the "COMPANY SEC DOCUMENTS"), which are all the documents (other than
preliminary material) that Company, or any present or former Subsidiary, was
required to file with the SEC since such date. As of their respective filing
dates, the Company SEC Documents complied in all material respects with the
requirements of the Exchange Act or the Securities Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Company SEC
Documents, and none of the Company SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Company included in the Company SEC Documents (the "COMPANY
FINANCIAL STATEMENTS") comply as to form in all material respects with all
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto and have been prepared in accordance with
generally accepted accounting principles consistently applied (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of Company and its Significant Subsidiaries as at the dates thereof and
the results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments not material in scope or amount). There has been no change in
Company's accounting policies or the methods of making accounting estimates or
changes in estimates that are material to Company Financial Statements, except
as described in the notes thereto.
3.1.5 Information Supplied. None of the information supplied or to be
supplied by Company or its Significant Subsidiaries, auditors, attorneys,
financial advisors or other consultants or advisors for inclusion in (a) the
registration statement on Form S-4, and any amendment thereto, to be filed under
the Securities Act with the SEC by Parent in connection with the issuance of the
Parent Common Stock in or as a result of the Merger (the "S-4"), or (b) the
proxy statement and any amendment or supplement thereto to be distributed in
connection with Company's meetings of stockholders to vote upon this Agreement
and the transactions contemplated hereby (the "PROXY STATEMENT" and, together
with the prospectus included in the S-4, the "PROXY STATEMENT/PROSPECTUS") will,
in the case of the Proxy Statement and any amendment or supplement thereto, at
the time of the mailing of the Proxy Statement and any amendment or supplement
thereto, and at the time of the meeting of stockholders of Company to vote upon
this Agreement and the transactions contemplated hereby, or, in the case of the
S-4, as amended or supplemented, at the time it becomes effective and at the
time of any post-effective amendment thereto and at the time of the meeting of
stockholders of Company, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading or necessary to correct any statement in any earlier filing with
the SEC of such Proxy Statement/Prospectus or any amendment or supplement
thereto or any earlier communication (including the Proxy Statement/Prospectus)
to stockholders of Company with respect to the transactions contemplated by this
Agreement. The Proxy Statement/Prospectus will comply as to form in all material
respects with the
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provisions of all applicable laws, including the provisions of the Exchange
Act and the rules and regulations of the SEC thereunder, except that no
representation is made by Company with respect to information supplied by Parent
specifically for inclusion therein.
3.1.6 No Defaults. Neither Company nor any Subsidiary of Company is, or
has received notice that it would be with the passage of time, in default or
violation of any term, condition or provision of (i) the Certificate of
Incorporation or Bylaws of Company or any comparable governing instrument of any
Significant Subsidiary of Company; (ii) any judgment, decree or order applicable
to Company or any Significant Subsidiary of Company; or (iii) any loan or credit
agreement, note, bond, mortgage, indenture, contract, agreement, lease, license
or other instrument to which Company or any Significant Subsidiary of Company is
now a party or by which it or any of its properties or assets may be bound,
except for defaults and violations which, individually or in the aggregate,
would not have a Material Adverse Effect on the Business Condition of Company.
3.1.7 Litigation. There is no claim, action, suit or proceeding pending
or, to the knowledge of Company, threatened, which would, if adversely
determined, individually or in the aggregate, have a Material Adverse Effect on
the Business Condition of Company, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Company or any of its Significant Subsidiaries having, or which, insofar
as reasonably can be foreseen, in the future could have, any such effect. To the
knowledge of Company, there is no investigation pending or threatened against
Company or any Subsidiary of Company, before any foreign, federal, state,
municipal or other governmental department, commission, board, bureau, agency,
instrumentality or other Government Entity. The Company Disclosure Schedule sets
forth, with respect to any pending action, suit, proceeding, or investigation to
which Company or any of its Significant Subsidiaries is a party and which
involves claims reasonably expected to exceed $5,000,000, the forum, the parties
thereto, the subject matter thereof, and the amount of damages claimed.
3.1.8 No Material Adverse Change. Since July 31, 1994, Company and its
Significant Subsidiaries have conducted their respective businesses in the
ordinary course and there has not been: (i) any Material Adverse Effect on the
Business Condition of Company or any development or combination of developments
of which management of Company has knowledge which is reasonably likely to
result in such an effect; (ii) any damage, destruction or loss, whether or not
covered by insurance, having a material Adverse Effect on the Business Condition
of Company; (iii) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to the
capital stock of Company; (iv) any increase or change in the compensation or
benefits payable or to become payable by Company or any Subsidiary to any of
their employees, except in the ordinary course of business consistent with past
practice; (v) any acquisition or sale of a material amount of property of
Company or any of its Significant Subsidiaries, except in the ordinary course of
business; (vi) any increase or modification in any bonus, pension, insurance or
other employee benefit plan, payment or arrangement made to, for, or with any of
its employees; or (vii) the granting of stock options, restricted stock awards,
stock bonuses, stock appreciation rights and similar equity based awards other
than in connection with the hiring of new employees with the number of shares
having been granted in numbers consistent with Company's past practices and
which will not result in a compensation charge against earnings or the loss of
deductions for federal or state income tax purposes.
3.1.9 Absence of Undisclosed Liabilities. Company and its Significant
Subsidiaries, taken as a whole, have no liabilities or obligations (whether
absolute, accrued or contingent) except (i) liabilities, obligations or
contingencies ("LIABILITIES") that are accrued or reserved against in the
consolidated balance sheet of Company and its Significant Subsidiaries as of
July 31, 1994 or reflected in the notes thereto or (ii) additional Liabilities
reserved against since July 31, 1994 that (x) have arisen in the ordinary course
of business; (y) are accrued or reserved against on the books and records of the
Company and its Significant Subsidiaries; and (z) amount in the aggregate to
less than $5,000,000.
3.1.10 No Violations. The businesses of Company and its Significant
Subsidiaries are not being conducted in violation of, or in a manner which could
cause liability under any applicable law, rule or regulation, judgment, decree
or order of any Governmental Entity, except for any violations or practices,
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which, individually or in the aggregate, have not had and will not have a
Material Adverse Effect on the Business Condition of Company.
3.1.11 Certain Agreements. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, unemployment compensation, parachute payment, bonus or otherwise)
becoming due to any director, employee or independent contractor of Company or
its Significant Subsidiaries, from Company or any of its Significant
Subsidiaries under any Plan (as hereinafter defined), agreement or otherwise,
(ii) materially increase any benefits otherwise payable under any Plan or
agreement, or (iii) result in the acceleration of the time of payment or vesting
of any such benefits.
3.1.12 Employee Benefit Plans. All employee benefit plans (including
without limitation all plans which authorize the granting of stock options,
restricted stock, stock bonuses or other equity based awards) covering active,
former or retired employees of Company and its Significant Subsidiaries are
listed in the Company Disclosure Schedule (the "PLANS"). Company has made
available to Parent, where applicable, a copy of each Plan, any related trust
agreement and annuity or insurance contract, if any, and each Plan's most recent
annual report (Form 5500) filed with the Internal Revenue Service. (i) Each Plan
has been maintained and administered in material compliance with its terms and
with the requirements prescribed by any and all applicable statutes, orders,
rules and regulations, and is, to the extent required by applicable law or
contract, fully funded without having any deficit or unfunded actuarial
liability; (ii) All required employer contributions under any such plans have
been made and the applicable funds have been funded in accordance with the terms
thereof and no past service funding liabilities exist thereunder; (iii) Each
Plan that is required or intended to be qualified under applicable law or
registered or approved by a Governmental Entity has been so qualified,
registered or approved by the appropriate Governmental Entity, and nothing has
occurred since the date of the last qualification, registration or approval to
adversely affect, or cause, the appropriate Governmental Entity to revoke such
qualification, registration or approval; (iv) To the extent applicable, the
Plans comply, in all material respects, with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code, and
any Plan intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified and nothing has
occurred to cause the loss of such qualified status; (v) No Plan is covered by
Title IV of ERISA or Section 412 of the Code; (vi) Neither Company nor any
Subsidiary has incurred any liability or penalty under Section 4975 of the Code
or Section 502(i) of ERISA; (vii) There are no pending or anticipated material
claims against or otherwise involving any of the Plans and no suit, action or
other litigation (excluding claims for benefits incurred in the ordinary course
of Plan activities) has been brought against or with respect to any such Plan;
(viii) All material contributions, reserves or premium payments, required to be
made as of the date hereof to the Plans have been made or provided for; (ix)
Neither Company nor any Subsidiary has incurred any liability under Subtitle C
or D of Title IV of ERISA with respect to any "SINGLE-EMPLOYER PLAN," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by
Company, any Subsidiary or any entity which is considered one employer with
Company under Section 4001 of ERISA; (x) Neither Company nor any Subsidiary has
incurred any withdrawal liability under Subtitle E of Title IV of ERISA with
respect to any "MULTIEMPLOYER PLAN," within the meaning of Section 4001(a)(3) of
ERISA; and (ix) Neither Company nor any Subsidiary has any obligations for
retiree health and life benefits under any Plan, and there are no restrictions
on the rights of Company or the Significant Subsidiaries to amend or terminate
any such Plan without incurring any liability thereunder. Except as disclosed on
the Company Disclosure Schedule, Company and its Significant Subsidiaries have
administered the Company Stock Option Plan, the Company Incentive Plan and other
executive compensation Plans in a manner which will not result in a compensation
charge against earnings or the loss of deductions for federal and state income
tax purposes.
3.1.13 Properties, Liens, etc. Except as reflected in the Company
Financial Statements or in the notes thereto, and except for statutory
mechanics' and materialmen's liens, liens for current taxes not yet delinquent,
and liens or encumbrances which do not confer upon the secured parties rights to
property which are material to the Business Condition of Company, Company or one
of its Significant Subsidiaries owns, free and clear of any liens, claims,
charges, options or other encumbrances, all of its tangible and intangible
property, real and personal, whether or not reflected in Company Financial
Statements (except that sold or
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disposed of in the ordinary course of business since the date of such
statements) and all such property acquired since the date of such statements.
All plants, structures and material equipment owned or leased by Company or its
Significant Subsidiaries and used in the operation of its business are in
satisfactory condition and repair for the requirements of its business as
presently conducted.
3.1.14 Major Contracts. Except as otherwise disclosed in Company's
Disclosure Schedule, neither Company nor any of its Significant Subsidiaries is
a party to or subject to:
(a) Any union contract, or any employment contract or arrangement
providing for future compensation, written or oral, with any officer,
consultant, director or employee which (i) exceeds $250,000 per annum, or
(ii) is not terminable by it or its Subsidiary on 30 days' notice or less
without penalty or obligation to make payments related to such termination;
(b) Any joint venture contract or arrangement or any other agreement
which has involved or is expected to involve a sharing of revenues of $1.0
million per annum or more to other persons;
(c) Any lease for real or personal property in which the amount of
payments which Company is required to make on an annual basis exceeds
$100,000 and which has not been filed as an exhibit to the Company SEC
Documents;
(d) Any material agreement, license, franchise, permit, indenture or
authorization which has not been terminated or performed in its entirety
and not renewed which may be, by its terms, terminated, impaired or
adversely affected by reason of the execution of this Agreement, the
closing of the Merger, or the consummation of the transactions contemplated
hereby or thereby; or
(e) Any contract containing covenants purporting to materially limit
Company's freedom or that of any Significant Subsidiary of Company to
compete in any line of business in any geographic area.
All contracts, plans, arrangements, agreements, leases, licenses,
franchises, permits indentures, authorizations, instruments and other
commitments listed in the Company Disclosure Schedule pursuant to this Section
3.1.14 are valid and in full force and effect and neither Company nor any of its
Significant Subsidiaries has, nor to the knowledge of Company has any other
party thereto, breached any material provisions of, or is in default in any
material respect under the terms thereof.
3.1.15 Taxes. Company and each of its Significant Subsidiaries has
timely filed (or caused to be filed) all federal, state, local and foreign tax
returns, reports and information statements required to be filed by each of
them, which returns, reports and statements are true, correct and complete in
all material respects, and paid all taxes required to be paid as shown on such
returns, reports and statements. All taxes required to be paid in respect of the
periods covered by such returns ("RETURN PERIODS") have either been paid or
fully accrued on the books of Company. Company and each of its Significant
Subsidiaries has fully accrued all unpaid taxes in respect of all periods (or
the portion of any such periods) subsequent to the Return Periods. There is no
material difference between the amounts of the book basis and the tax basis of
any assets of Company and its Significant Subsidiaries that is not reflected in
an appropriate accrual of deferred tax liability on the books of Company. No
deficiencies or adjustments for any tax have been claimed, proposed or assessed,
or to the best of Company's knowledge, threatened. The Company Disclosure
Schedule accurately sets forth the years for which Company's federal and state
income tax returns, respectively, have been audited and any years which are the
subject of a pending audit by the Internal Revenue Service and the applicable
state agencies. Except as so disclosed, Company is not subject to any pending
or, to the best of Company's knowledge, threatened, tax audit or examination and
Company has not waived any statute of limitation with respect to the assessment
of any tax. The Company Financial Statements contain adequate accruals for all
unpaid taxes. For the purposes of this Agreement, the terms "TAX" and "TAXES"
shall include all federal, state, local and foreign taxes, assessments, duties,
tariffs, registration fees, and other governmental charges including without
limitation all income, franchise, property, production, sales, use, payroll,
license, windfall profits, severance, withholding, excise, gross receipts and
other taxes, as well as any interest, additions or penalties relating thereto
and any interest in respect of such additions or penalties. Company has provided
Parent true and correct copies of all tax returns, information, statements,
reports, work papers and other tax data
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reasonably requested by Parent. No consent or agreement has been made
under Section 341 of the Code by or on behalf of Company or any predecessor
thereof.
There are no liens for taxes upon the assets of Company or its
Significant Subsidiaries except for taxes that are not yet payable. The Company
has not entered into any agreements, waivers or other arrangements in respect of
the statute of limitations in respect of its taxes or tax returns. Company has
withheld all taxes required to be withheld in respect of wages, salaries and
other payments to all employees, officers and directors and timely paid all such
amounts withheld to the proper taxing authority.
Neither Company nor any Subsidiary has participated in, or cooperated
with, an international boycott within the meaning of Section 999 of the Code.
Neither Company nor any Subsidiary is required to include in income any
adjustment pursuant to Section 481(a) of the Code (or similar provisions of
other law or regulations) in its current or in any future taxable period, by
reason of a change in accounting method; nor does Company or any Subsidiary have
any knowledge that the IRS (or other taxing authority) has proposed; or is
considering, any such change in accounting method. Neither Company nor
Subsidiary is a party to any agreement, contract, or arrangement that would
result in the payment of any "excess parachute payment" within the meaning of
Section 280G of the Code. None of the assets of Company or of any Subsidiary is
property that is required to be treated as owned by any other person pursuant to
the "safe harbor lease" provisions of former Section 168(f)(8) of the Internal
Revenue Code of 1954 as amended and in effect immediately prior to the enactment
of the Tax Reform Act of 1986 and none of the assets of Company or any
Subsidiary is "tax exempt use property" within the meaning of Section 168(h) of
the Code. None of the assets of Company or of any Subsidiary secures any debt
the interest on which is tax exempt under Section 103 of the Code.
3.1.16 Interests of Officers. None of Company's officers or directors
has, nor to the knowledge of Company does any officer or director of any
Subsidiary have, any material interest in any property, real or personal,
tangible or intangible, including inventions, copyrights, trademarks or trade
names, used in or pertaining to the business of Company or that of its
Significant Subsidiaries, or any supplier, distributor or customer of Company or
its Subsidiary, except, in the case of the Company, for the normal rights of a
stockholder, and except for rights under existing employee benefit plans.
3.1.17 Technology. Company owns, or is licensed to use, the rights to
all patents, trademarks, trade names, service marks, copyrights and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
computer software programs or applications and tangible or intangible
proprietary information or material that in any material respect are used or
proposed to be used in the business of Company and its Significant Subsidiaries
as currently conducted or proposed to be conducted (the "COMPANY INTELLECTUAL
PROPERTY RIGHTS"). The Company Disclosure Schedule lists: (i) all material
patents, trademarks, trade names, service marks, registered and unregistered
copyrights, and any applications therefor included in the Company Intellectual
Property Rights, together with a list of all of Company's currently marketed
software products; and (ii) all material licenses and other agreements to which
Company or any of its Significant Subsidiaries is a party and pursuant to which
Company or any of its Significant Subsidiaries is authorized to use any Company
Intellectual Property Right, and includes the identities of the parties thereto,
a description of the nature and subject matter thereof, the applicable royalty
and the term thereof. Neither Company nor any of its Significant Subsidiaries
is, or as a result of the execution, delivery or performance of Company's
obligations hereunder will be, in violation of any material license or agreement
described in the Company Disclosure Schedule. No claims with respect to the
Company Intellectual Property Rights have been asserted or, to the knowledge of
Company, are threatened by any person nor does Company or any Subsidiary of
Company know of any valid grounds for any bona fide claims (i) to the effect
that the manufacture, sale or use of any product or process as now used or
offered or proposed for use or sale by Company or any Subsidiary of Company
infringes on any copyright, trade secret or patent of any person, (ii) against
the use by Company or any Subsidiary of Company of any trademarks, trade names,
trade secrets, copyrights, technology, knowhow, processes or computer software
programs and applications used in the business of Company and its Significant
Subsidiaries as currently conducted or proposed to be conducted, or (iii)
challenging the ownership, validity or effectiveness of any of the Company
Intellectual Property Rights. To Company's knowledge, after reasonable
investigation, all granted and issued patents and all registered
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trademarks listed on the Company Disclosure Schedule and all copyrights
held by Company are valid, enforceable and subsisting. To Company's knowledge,
after reasonable investigation, there is no material unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property
Rights by any third party, employee or former employee.
3.1.18 Material Relations. To Company's knowledge, none of the parties
to any of the major contracts identified in Company's Disclosure Schedule
pursuant to Section 3.1.14 have terminated, or in any way expressed an intent to
materially reduce or terminate the amount of its business with Company in the
future.
3.1.19 Opinion of Financial Advisor. Company has received the opinion
of Morgan Stanley & Co. Incorporated, dated the date hereof, a copy of which has
been provided to Parent, to the effect that, as of such date, the Exchange Ratio
is fair to Company's stockholders from a financial point of view.
3.1.20 Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of Company Common Stock is the only vote of the
holders of Company's capital stock necessary to approve this Agreement and the
consummation of the transactions contemplated hereby.
3.1.21 Accounting Matters. To the best knowledge of Company, neither
Company nor any of its affiliates has taken or agreed to take any action that,
without giving effect to any action taken or agreed to be taken by Parent or any
of its affiliates, would prevent Parent from accounting for the business
combination to be effected by the Merger as a pooling of interests. Company has
received a letter from Ernst & Young, a copy of which has been provided to
Parent, confirming the foregoing representation.
3.1.22 Brokers and Finders. Other than Morgan Stanley & Co.
Incorporated in accordance with the terms of its engagement letter, a copy of
which has previously been provided to Parent, none of Company or any of its
Significant Subsidiaries nor any of their respective directors, officers or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or similar payments in
connection with the transactions contemplated by this Agreement.
3.1.23 Change of Control. With regard to any options granted under
Company Stock Option Plans or restricted stock, stock bonus or other awards
granted under the Company Incentive Plan which are not exercisable or vested
prior to the Effective Time Company has not taken any action to make such
options or awards exercisable or vested by reason of the Merger. Company has
taken all action necessary relating to Company Stock Option Plans and Company
Incentive Plan to provide that the occurrence of the transactions contemplated
by this Agreement shall not entitle participants under such plans to a cash-out
of the stock options, restricted stock, stock bonus or other awards granted to
them thereunder.
3.1.24 Leases in Effect. All real property leases and subleases as to
which the Company or any Subsidiary is a party and any amendments or
modifications thereof which have been filed as exhibits to Company SEC Documents
or are listed on Company Disclosure Schedule pursuant to Section 3.1.14(e) (each
a "LEASE") and collectively, the "LEASES") are valid, in full force and effect,
enforceable, and there are no existing defaults on the part of the Company, and
Company has not received nor given notice of default or claimed default with
respect to any Lease, nor is there any event that with notice or lapse of time,
or both, would constitute a default thereunder. No consent is required from any
party under any Lease in connection with the completion of the transactions
contemplated by this Agreement, and Company has not received notice that any
party to any Lease intends to cancel, terminate, or refuse to renew the same or
to exercise any option or other right thereunder, except where the failure to
receive such consent, or where such cancellation, termination or refusal, would
not have a Material Adverse Effect on Company's Business Condition.
3.1.25 Environmental.
(a) To the best knowledge of Company, except as set forth on Company
Disclosure Schedule, (i) the businesses as presently or formerly engaged in by
Company and its Significant Subsidiaries are and have been conducted in
compliance with all applicable Environmental Laws (as defined in subparagraph
(b) below), including, without limitation, having all permits, licenses and
other approvals and authorizations, during the time the Company engaged in such
businesses, (ii) the properties presently or formerly owned or
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operated by Company or any Subsidiary of Company (including, without
limitation, soil, groundwater or surface water on, under or adjacent to the
properties, and buildings thereon) ("COMPANY PROPERTIES") do not contain any
Hazardous Substance (as defined in subparagraph (c) below) other than as
permitted under applicable Environmental Law (provided, however, that with
respect to Company Properties formerly owned or operated by Company or any
Subsidiary of Company, such representation is limited to the period Company or
any Subsidiary of Company owned or operated such Company Properties), (iii)
neither Company nor any Subsidiary of Company has received any notices, demand
letters or request for information from any Federal, state, local or foreign
governmental entity or any third party indicating that the Company or any
Subsidiary of Company may be in violation of, or liable under, any Environmental
Law in connection with the ownership or operation of Company's or its
Significant Subsidiaries' businesses, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or threatened against Company or any Subsidiary of Company
with respect to Company or any Subsidiary of Company or the Company Properties
relating to any violation, or alleged violation, of any Environmental Law, (v)
no reports have been filed, or are required to be filed, by Company or any
Subsidiary of Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law on or at Company
Properties, (vi) no Hazardous Substance has been disposed of, transferred,
released or transported from any of Company Properties during the time such
Company Property was owned or operated by Company or any Subsidiary of Company,
other than as permitted under applicable Environmental Law, (vii) there have
been no environmental investigations, studies, audits, tests, reviews or other
analyses conducted by or which are in the possession of Company or any
Subsidiary of Company relating to Company or any Subsidiary of Company or the
Company Properties which have not been delivered to Parent prior to the date
hereof, (viii) there are no underground storage tanks on, in or under any of the
Company Properties and no underground storage tanks have been closed or removed
from any Company Properties which are or have been in the ownership of Company
or any Subsidiary of Company (provided, however, that with respect to Company
Properties formerly owned or operated by Company or any Subsidiary of Company,
the representations in this subsection (viii) are limited to the period Company
or any Subsidiary of Company owned or operated such Company Properties), (ix)
there is no asbestos present in any Company Property presently owned or operated
by Company or any Subsidiary of Company, and no asbestos has been removed from
any Company Property while such Company Property was owned or operated by
Company or any Subsidiary of Company, (x) none of the Company Properties has
been used at any time by Company or any Subsidiary of Company as a sanitary
landfill or hazardous waste disposal site, and (xi) neither Company nor any
Subsidiary of Company has incurred, and none of the Company Properties are
presently subject to, any material liabilities (fixed or contingent) relating to
any suit, settlement, court order, administrative order, judgment or claim
asserted or arising under any Environmental Law.
(b) "Environmental Law" means (i) any federal, state, foreign and
local law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity, (x) relating
to the protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety, or (y) the exposure to, or the
use, storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of Hazardous Substances, in
each case as amended and as now or hereafter in effect. The term Environmental
Law includes, without limitation, the federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
federal Clean Air Act, the federal Clean Water Act, the federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the federal Solid Waste Disposal and the federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Occupational Safety and Health Act of 1970, each as amended and as
now or hereafter in effect, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Substance.
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(c) "Hazardous Substance" means any substance presently or hereafter
listed, defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, under any Environmental Law, whether by type
or by quantity, including any substance containing any such substance as a
component. Hazardous Substance includes, without limitation, any toxic waste,
pollutant, contaminant, hazardous substance, toxic substance, hazardous waste,
special waste, industrial substance or petroleum or any derivative or by-product
thereof, radon, radioactive material, asbestos, asbestos containing material,
urea formaldehyde foam insulation, lead and polychlorinated biphenyl.
3.1.26 Questionable Payments. Neither Company nor any of its
Significant Subsidiaries nor to its best knowledge any director, officer,
employee or agent of Company or any of its Significant Subsidiaries has: (i)
made any payment or provided services or other favors in the United States or
any foreign country in order to obtain preferential treatment or consideration
by any Governmental Entity with respect to any aspect of the business of Company
or its Significant Subsidiaries or (ii) made any political contributions that
would not be lawful under the laws of the United States, any foreign country or
any jurisdiction within the United States or any foreign country. Neither
Company nor any of its Significant Subsidiaries, nor, to the best knowledge of
Company, any director, officer, employee, agent, customer or supplier of Company
or any of its Significant Subsidiaries has been or is the subject of any
investigation by any Governmental Entity in connection with any such payment,
provision of services or contribution.
3.1.27 Disclosure. No representation or warranty made by Company in
this Agreement, nor any document, written information, statement, financial
statement, certificate or exhibit prepared and furnished or to be prepared and
furnished by Company or its representatives pursuant hereto or in connection
with the transactions contemplated hereby, when taken together, contains any
untrue statement of a material fact, or omits to state a material fact necessary
to make the statements or facts contained herein or therein not misleading in
light of the circumstances under which they were furnished.
3.1.28 Reliance. The foregoing representations and warranties are made
by Company with the knowledge and expectation that Parent is placing reliance
thereon.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Except as disclosed
in a document referring specifically to the representations and warranties in
this Agreement which identifies by section number the section and subsection to
which such disclosure relates and is delivered by Parent to Company prior to the
execution of this Agreement (the "PARENT DISCLOSURE SCHEDULE"), Parent and Sub
represent and warrant to Company as follows:
3.2.1 Organization; Standing and Power. Each of Parent, its Significant
Subsidiaries and Sub is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization (except with respect to any jurisdiction where the concept of good
standing is not recognized) has all requisite power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which a failure to so qualify would have a material adverse
effect on the Business Condition of Parent. As used in this Agreement, a
"SIGNIFICANT SUBSIDIARY" shall mean any Subsidiary of Parent or Company which
accounts for 5% or more of the consolidated revenues, assets or earnings of the
Parent or Company, as the case may be, and its respective Significant
Subsidiaries.
3.2.2 Capital Structure. The authorized capital stock of Parent
consists of 2,000,000,000 shares of Parent common stock, $.00005 par value
("PARENT COMMON STOCK"). As of the date hereof, there are not more than
586,000,000 shares of Parent Common Stock outstanding, not more than 125,000,000
shares of Parent Common Stock are reserved for issuance upon the exercise of
outstanding employee stock options ("PARENT OPTIONS") under the Parent's 1981,
1991 Consultants and Advisors and Non-Employee Directors Stock Option Plans (the
"PARENT STOCK OPTION PLANS"), not more than 3,200,000 shares of Parent Common
Stock are reserved for issuance under Parent's 1991 Employee Stock Purchase Plan
(the "PARENT STOCK PURCHASE PLAN") and 3,900,000 shares of Parent Common Stock
are held by Parent in its treasury or by any Subsidiary of Parent. The Board of
Directors of Parent have proposed an amendment to Parent's Certificate of
Incorporation authorizing 100,000,000 shares of preferred stock, $.01 par value
("PARENT PREFERRED STOCK") which is subject to approval of the stockholders of
Parent at its annual meeting. There are no shares of Parent
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Preferred Stock outstanding. All outstanding shares of Parent Common Stock are,
and any shares of Parent Common Stock issued upon exercise of any Parent Options
and any shares of Parent Common Stock purchased pursuant to the Parent Stock
Purchase Plan, will be validly issued, fully paid, nonassessable and not subject
to any preemptive rights, or to any agreement to which Parent or any of its
Significant Subsidiaries is a party or by which Parent or any of its Significant
Subsidiaries may be bound. The shares of Parent Common Stock issuable upon the
Merger and issuable pursuant to Company Options and the Company Incentive Plan
to be assumed in the Merger pursuant to Section 2.3.1 hereof are duly authorized
and reserved for issuance and, when issued in accordance with the terms of the
Merger Agreement and such assumed Company Options, will be validly issued, fully
paid, nonassessable and not subject to any preemptive rights. The authorized
capital stock of Sub consists of 1,000 shares of common stock, $.01 par value,
all of which are validly issued, fully paid and nonassessable and owned by
Parent. Except for the shares described above issuable pursuant to Parent
Options and the Parent Stock Purchase Plan, there are not any options, warrants,
calls, conversion rights, commitments, agreements, contracts, understandings,
restrictions, arrangements or rights of any character to which Parent or any
Subsidiary of Parent is a party or by which any of them may be bound obligating
Parent or any Subsidiary of Parent to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of the capital stock of Parent or
of any Subsidiary of Parent or obligating Parent or any Subsidiary of Parent to
grant, extend or enter into any such option, warrant, call, conversion right,
commitment, agreement, contract, understanding, restriction, arrangement or
right. Parent does not have outstanding any bonds, debentures, notes or other
indebtedness the holders of which have the right to vote (or convertible or
exercisable into securities having the right to vote) with holders of Parent
Common Stock on any matter ("PARENT VOTING DEBT"). Parent is the owner of all
outstanding shares of capital stock of each of its Significant Subsidiaries free
and clear of all liens, pledges, security interests, claims or other
encumbrances and all such shares are duly authorized, validly issued, fully paid
and nonassessable.
3.2.3 Authority. Parent and Sub have all requisite corporate power and
authority to enter into this Agreement, and subject to the Parent Required
Statutory Approvals (as defined below), to consummate the transactions
contemplated hereby and thereby. The execution and delivery by Parent and Sub of
this Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Parent and Sub, including the unanimous approval of each of the respective
Boards of Directors. This Agreement has been duly executed and delivered by
Parent and Sub and constitutes a valid and binding obligation of Parent and Sub
enforceable in accordance with its terms. Subject to satisfaction of the
conditions set forth in Sections 7.1 and 7.2, the execution and delivery of this
Agreement and the Stock Option Agreement do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with or result
in any Violation of (i) any provision of the Certificate of Incorporation or
Bylaws of Parent or the comparable governing instruments of any Subsidiary of
Parent or (ii) any loan or credit agreement note, bond, mortgage, indenture,
contract, lease, or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent or any Subsidiary of Parent or their respective
properties or assets, other than, in the case of (ii), any such Violation, which
individually or in the aggregate would not have a Material Adverse Effect on the
Business Condition of Parent. No Consent is required by or with respect to
Parent or Sub in connection with the execution and delivery of this Agreement or
the Stock Option Agreement by Parent or Sub or the consummation by Parent and
Sub of the transactions contemplated hereby or thereby, except for (i) the
filing of a premerger notification report by Parent and Company under the HSR
Act, (ii) the filing of the Joint Proxy Statement/Prospectus with the SEC
pursuant to the Exchange Act, the Securities Act and the declaration of the
effectiveness thereof by the SEC and compliance with various state securities or
"BLUE SKY" laws, and (iii) the filing of the Merger Documents with the
Secretaries of State of the States of Delaware and Washington (the filings and
approvals referred to in clauses (i) through (iii) are collectively referred to
as the "PARENT REQUIRED STATUTORY APPROVALS" and together with the Company
Required Statutory Approvals, the "REQUIRED STATUTORY APPROVALS") and except for
such other Consents which if not obtained or made would not have a material
adverse effect on the value of the Parent Common Stock and would not have a
Material Adverse Effect on the Business Condition of Parent.
3.2.4 SEC Documents and Financial Statements. Parent has furnished
Company with a true and complete copy of each statement, report, schedule,
registration statement and definitive proxy or information
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statement filed by Parent with the SEC since July 1, 1991 (the "PARENT SEC
DOCUMENTS"), which are all the documents (other than preliminary material) that
Parent was required to file with the SEC since such date. As of their respective
filing dates, the Parent SEC Documents complied in all material respects with
the requirements of the Exchange Act or the Securities Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such Parent
SEC Documents, and none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Parent included in the Parent SEC Documents (the "PARENT
FINANCIAL STATEMENTS") comply as to form in all material respects with all
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto and have been prepared in accordance with
generally accepted accounting principles consistently applied (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of Parent and its Significant Subsidiaries as at the dates thereof and
the results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments not material in scope or amount). There has been no change in
Parent's accounting policies or the methods of making accounting estimates or
changes in estimates that are material to Parent Financial Statements or
estimates except as described in the notes thereto.
3.2.5 Information Supplied. None of the information supplied or to be
supplied by Parent or its Significant Subsidiaries, auditors, attorneys,
financial advisors, other consultants or advisors or Sub for inclusion in the
S-4 or the Proxy Statement/Prospectus, will, in the case of the Proxy Statement
and any amendment or supplement thereto, at the time of the mailing of the Proxy
Statement and any amendment or supplement thereto, and at the time of any
meeting of stockholders of Company to vote upon this Agreement and the
transactions contemplated hereby, or in the case of the S-4, as amended or
supplemented, at the time it becomes effective and at the time of any
post-effective amendment thereto contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they are
made, not misleading or necessary to correct any statement in any earlier filing
with the SEC of such Joint Proxy Statement/Prospectus or any amendment or
supplement thereto or any earlier communication (including the Proxy
Statement/Prospectus) to stockholders of Company with respect to the
transactions contemplated by this Agreement. The S-4 and the Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of all applicable laws including the provisions of the Securities Act
and the Exchange Act and the rules and regulations of the SEC thereunder, except
that no representation is made by Parent with respect to information supplied by
Company specifically for inclusion therein.
3.2.6 No Defaults. Neither Parent nor any Significant Subsidiary of
Parent is, or has received notice that it would be with the passage of time, in
default or violation of any term, condition or provision of (i) the Restated
Articles of Incorporation or Bylaws of Parent or any comparable governing
instrument of any Significant Subsidiary of Parent; (ii) any judgment, decree or
order applicable to Parent or any Significant Subsidiary of Parent; or (iii) any
loan or credit agreement, note, bond, mortgage, indenture, contract, agreement,
lease, license or other instrument to which Parent or any Significant Subsidiary
of Parent is now a party or by which it or any of its properties or assets may
be bound, except for defaults and violations which, individually or in the
aggregate, would not have a Material Adverse Effect on the Business Condition of
Parent.
3.2.7 No Material Adverse Change. Since June 30, 1994, Parent and its
Subsidiaries have conducted their respective businesses in the ordinary course
and there has not been a Material Adverse Effect on the Business Condition of
Parent or any development or combination of developments of which management of
Parent has knowledge which is reasonably likely to result in such an effect.
3.2.8 Opinion of Financial Advisor. Parent has received the opinion of
Goldman, Sachs & Co., dated the date hereof, to the effect that, as of such
date, the Exchange Ratio is fair to Parent.
3.2.9 Accounting Matters. To the best knowledge of Parent, neither
Parent nor any of its affiliates has taken or agreed to take any action that,
without giving effect to any action taken or agreed to be taken by
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Company or any of its affiliates, would prevent Parent from accounting for the
business combination to be effected by the Merger as a pooling of interests.
3.2.10 Brokers and Finders. Other than Goldman, Sachs & Co. in
accordance with the terms of its engagement letter, none of Parent or any of its
Significant Subsidiaries nor any of their respective directors, officers or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or similar payments in
connection with the transactions contemplated by this Agreement.
3.2.11 Interim Operation of Sub. Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby, has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
3.2.12 Disclosure. No representation or warranty made by Parent or Sub,
nor any document, written information, statement, financial statement,
certificate or exhibit prepared and furnished or to be prepared and furnished by
Parent or its representatives pursuant hereto or in connection with the
transaction contemplated hereby, when taken together, contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein or therein not misleading in light
of the circumstances under which they were furnished.
3.2.13 Reliance. The foregoing representations and warranties are made
by Parent with the knowledge and expectation that Company is placing reliance
thereon.
ARTICLE IV
COVENANTS OF COMPANY
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, Company
agrees (except as expressly contemplated by this Agreement or with Parent's
prior written consent which will not be unreasonably withheld) that:
4.1 CONDUCT OF BUSINESS.
4.1.1 Ordinary Course. Company and its Significant Subsidiaries shall
carry on their respective businesses in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted and, to the extent
consistent with such businesses, use all reasonable efforts consistent with past
practice and policies to preserve intact their present business organizations,
keep available the services of their present officers, consultants, and
employees and preserve their relationships with customers, suppliers,
distributors and others having business dealings with them. Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business, of Company or its Significant Subsidiaries, and
material and adverse to the Business Condition of Company. Neither Company nor
any of its Significant Subsidiaries shall:
(a) accelerate, amend or change the period of exercisability or
vesting of options granted under the Company Stock Option Plans or
restricted stock, stock bonus or other awards under the Company Incentive
Plan (including any discretionary acceleration of the exercise periods of
Company's Board of Directors permitted under such plans) or authorize cash
payments in exchange for any options, restricted stock, stock bonus or
other awards granted under any of such Plans;
(b) grant any severance or termination pay to any officer or director
or, except in the ordinary course of business consistent with past
practices, to any employee of Company or any of its Significant
Subsidiaries;
(c) except in the ordinary course of business consistent with past
practices and other than transfers between or among Company and any of its
wholly owned Significant Subsidiaries, transfer to any person or entity any
rights to the Company Intellectual Property Rights;
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(d) enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing or manufacturing rights of any type or
scope for a period of more than two years with respect to any hardware or
software products of Company or any of its Significant Subsidiaries; and
(e) commence a lawsuit other than: (i) for the routine collection of
bills; (ii) for software piracy; (iii) in such cases where Company is good
faith determines that failure to commence suit would result in a material
impairment of a valuable aspect of Company's business, provided Company
consults with Parent prior to filing such suit; or (iv) for a breach of
this Agreement.
(f) enter into one or more leases which extend for a period of five
years beyond the date of this Agreement and which obligate the Company to
pay aggregate gross rent in excess of $3,200,000.
4.1.2 Dividends: Changes in Stock. Company shall not, and shall not
permit any of its Significant Subsidiaries to: (i) declare or pay any dividends
on or make other distributions (whether in cash, stock or property) in respect
to any of its capital stock; (ii) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of
Company; (iii) repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock other than repurchase of vested stock from former
employees; or (iv) propose any of the foregoing.
4.1.3 Issuance of Securities. Company shall not, and shall not permit
its Significant Subsidiaries to, issue, deliver, or sell, or authorize, propose
or agree to, or commit to the issuance, delivery, or sale of any shares of its
capital stock of any class, any Company Voting Debt or any securities
convertible into its capital stock or Company Voting Debt, any options,
warrants, calls, conversion rights, commitments, agreements, contracts,
understandings, restrictions, arrangements or rights of any character obligating
it or any of its Significant Subsidiaries to issue any such shares, Voting Debt
or other convertible securities other than the issuance of options for Company
Common Stock to employees under the Company Stock Option Plans in amounts and on
terms consistent with prior practices, and in any event in an aggregate amount
not in excess of 200,000 shares and to any single person in an amount not in
excess of 10,000 shares; or (ii) the issuance of Company Common Stock pursuant
to options outstanding as of the date hereof under the Company Stock Option
Plans.
4.1.4 Governing Documents. Company shall not, nor shall it cause or
permit any of its Significant Subsidiaries to, amend its Articles or Certificate
of Incorporation or Bylaws.
4.1.5 Exclusivity; Acquisition Proposals. Unless and until this
Agreement shall have been terminated by either party pursuant to Section 8.1
hereof, Company shall not (and it shall use its best efforts to ensure that none
of its officers, directors, agents, representatives or affiliates) take or cause
or permit any Subsidiary to take, directly or indirectly, any of the following
actions with any party other than Parent and its designees: (i) solicit,
encourage, initiate or participate in any negotiations, inquiries or discussions
with respect to any offer or proposal to acquire all or any significant part of
its business, assets or capital shares whether by merger, consolidation, other
business combination, purchase of assets, tender or exchange offer or otherwise
(each of the foregoing, an "ACQUISITION TRANSACTION"); (ii) disclose, in
connection with an Acquisition Transaction, any information not customarily
disclosed to any person other than Parent or its representatives concerning
Company's business or properties or afford to any person other than Parent or
its representatives or entity access to its properties, books or records, except
in the ordinary course of business and as required by law or pursuant to a
governmental request for information; (iii) enter into or execute any agreement
relating to an Acquisition Transaction; or (iv) make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Transaction or any offer or proposal relating to an Acquisition Transaction
other than with respect to the Merger; provided, however, that nothing contained
herein shall prohibit Company or any such persons from taking any of the actions
specified above if, in each case, the Company's directors determine in good
faith, after consultation with legal counsel, that any such action is required
by the fiduciary duties of the Company's directors under Delaware law. In the
event Company shall receive any offer or proposal, directly or indirectly, of
the type referred to in clause (i) above, or any request for disclosure or
access with respect to information of the type referred to in clause (ii) above,
it shall immediately , and prior to taking any action in response thereto,
inform Parent as to all material facts concerning any such offer, proposal or
request including the identity of the party making the offer, proposal or
request, and will thereafter
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cooperate with Parent by informing Parent of additional material facts as they
arise and furnishing to Parent any additional information it furnished to any
third party making such proposal or requesting information.
4.1.6 No Acquisitions. Company shall not, and shall not permit any
Subsidiary of Company to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquire or agree
to acquire any assets which are material, individually or in the aggregate, to
the Business Condition of Company.
4.1.7 No Dispositions. Company shall not, and shall not permit any
Subsidiary of Company to, sell, lease, license, transfer, mortgage, encumber or
otherwise dispose of any of their assets or cancel, release, or assign any
indebtedness or claim, except in the ordinary course of business or in amounts
which are not material, individually or in the aggregate, to the Business
Condition of Company.
4.1.8 Indebtedness. Company shall not, and shall not permit any
Subsidiary of Company to, incur any indebtedness for borrowed money by way of
direct loan, sale of debt securities, purchase money obligation, conditional
sale, guarantee, or otherwise in amounts which are not material, individually or
in the aggregate, to the Business Condition of Company.
4.1.9 Plans. Company shall not, and shall not permit any Subsidiary of
Company to, adopt or amend in any material respect any Plan, or pay any pension
or retirement allowance not required by any existing Plan. Company shall not and
shall not permit any Subsidiary of Company to, enter into any employment
contracts, pay any special bonuses or special remuneration to officers,
directors, or employees, or increase the salaries, wage rates or fringe benefits
of its officers or employees other than pursuant to scheduled reviews under
Company's normal compensation review cycle, in all cases consistent with
Company's existing policies and past practice.
4.1.10 Claims. Company shall not, and shall not permit any Subsidiary
of Company to, settle any claim, action or proceeding, except in the ordinary
course of business or in amounts which are not material, individually or in the
aggregate, to the Business Condition of Company.
4.1.11 Agreement. Company shall not, and shall not permit any
Subsidiary of Company to, agree to take any of the actions prohibited by this
Section 4.1.
4.2 BREACH OF REPRESENTATION AND WARRANTIES. Company will not take any
action which would cause or constitute a breach of any of the representations
and warranties set forth in Section 3.1 or which would cause any of such
representations and warranties to be inaccurate in any material respect. In the
event of, and promptly after becoming aware of, the occurrence of or the pending
or threatened occurrence of any event which would cause or constitute such a
breach or inaccuracy, Company will give detailed notice thereof to Parent and
will use its best efforts to prevent or promptly remedy such breach or
inaccuracy.
4.3 POOLING. Company shall not take or cause to be taken any action,
whether before or after the Effective Time, which would disqualify the Merger as
a pooling of interests for accounting purposes.
4.4 CONSENTS. Company will promptly apply for or otherwise seek, and use
its best efforts to obtain, all consents and approvals, and make all filings,
required with respect to Company for the consummation of the Merger, except such
consents and approvals as Parent and Company agree Company shall not seek to
obtain.
4.5 BEST EFFORTS. Except as to matters as to which Company agrees in this
Agreement to use reasonable efforts, Company will use its best efforts to
effectuate the transactions contemplated hereby and to fulfill and cause to be
fulfilled the conditions to closing under this Agreement, provided that Company
shall in no event be required to agree to the imposition of, or comply with, any
condition, obligation or restriction on Company or any of its Significant
Subsidiaries or on the Surviving Corporation of the type referred to in Section
7.1.7 hereof.
4.6 INFORMATION FOR PROSPECTUS/PROXY STATEMENT. Company will promptly
provide to Parent and its counsel for inclusion within the Proxy
Statement/Prospectus and the S-4 in a form reasonably satisfactory to
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Parent and its counsel, such information concerning Company, its operations,
capitalization, technology, share ownership and other information as Parent or
its counsel may reasonably request.
4.7 COMPANY PLANS. Consistent with the provisions in Section 6.8, and
without the loss of any vested benefits but without accelerating any unvested
rights, Company shall terminate or modify the Plans as may be directed by Parent
immediately prior to the Effective Time or take such action as directed by
Parent to merge such Plans with the Parent plans at the Effective Time.
4.8 EMPLOYEE AGREEMENTS. Concurrently with the execution of this
Agreement, certain officers of the Company as identified on Schedule 4.8(a) have
executed Employee Agreements. Prior to the Effective Time, Company will use its
reasonable efforts to obtain Employee Agreements in the form attached hereto as
Exhibit 4.8 with each other officer of Company.
4.9 STOCKHOLDER APPROVAL. Company will call a special Stockholders Meeting
to be held no later than 35 days after the Form S-4 shall have been declared
effective by the SEC to submit this Agreement, the Merger and related matters
for the consideration and approval of Company's Stockholders ("COMPANY
STOCKHOLDERS MEETING"). Such approval will be recommended by Company's Board of
Directors and management, subject to the fiduciary obligations of its directors
and officers as set forth in Section 4.1.5. Such meeting will be called, held
and conducted, and any proxies will be solicited, in compliance with applicable
law. Concurrently with the execution of this Agreement, (i) certain officers,
directors and employees of Company, (ii) Pincus Capital Company, L.P., (iii)
Warburg, L.P. Pincus Investors, L.P., and (iv) Kleiner Perkins Caufield & Byers
(collectively the "COMPANY'S PRINCIPAL STOCKHOLDERS") have executed Stockholder
Agreements in the form of Exhibit 4.9 ("COMPANY STOCKHOLDER AGREEMENTS")
agreeing, among other things, to vote in favor of the Merger and against any
competing proposals.
4.10 TAX RETURNS. Company shall promptly provide Parent with copies of all
tax returns, reports and information statements after their filing.
4.11 REPRESENTATIONS OF STOCKHOLDERS. Company will use reasonable efforts
to cause each of Company's Principal Stockholders to cooperate with counsel to
Company and Parent to assist them in providing the tax opinions called for by
Section 7.1.6 hereof.
ARTICLE V
COVENANTS OF PARENT
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, Parent
agrees (except as expressly contemplated by this Agreement or with the Company's
prior written consent which will not be unreasonably withheld) that:
5.1 BREACH OF REPRESENTATIONS AND WARRANTIES. Parent will not take any
action which would cause or constitute a breach of any of the representations
and warranties set forth in Section 3.2 or which would cause any of such
representations and warranties to be inaccurate in any material respect, other
than actions of Parent which might lead to Parent's inability to make its
representation in Section 3.2.9 as of the Closing Date. In the event of, and
promptly after becoming aware of, the occurrence of or the pending or threatened
occurrence of any event which would cause or constitute such a breach or
inaccuracy, Parent will give detailed notice thereof to Company and will use its
best efforts to prevent or promptly remedy such breach or inaccuracy.
5.2 CONSENTS. Parent will promptly apply for or otherwise seek, and use
its best efforts to obtain, all consents and approvals, and make all filings,
required for the consummation of the Merger.
5.3 BEST EFFORTS. Except as to matters as to which Parent agrees in this
Agreement to use reasonable efforts, Parent will use its best efforts to
effectuate the transactions contemplated hereby and to fulfill and cause to be
fulfilled the conditions to closing under this Agreement, provided that Parent
shall in no event be required to agree to the imposition of, or to comply with,
any condition, obligation or restriction on Parent or
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any of its Significant Subsidiaries or on the Surviving Corporation of the type
referred to in Section 7.1.7 hereof.
5.4 AGREEMENTS OF PARENT AFFILIATES. Prior to the Effective Time, Parent
will use its reasonable efforts to obtain the execution of agreements with
respect to the sale of Parent Common Stock with each person who is an Affiliate
of Parent for purposes of compliance with pooling restrictions.
5.5 REPRESENTATIONS OF STOCKHOLDERS. Parent will use reasonable efforts to
cause each of its principal stockholders who is the beneficial owner of five
percent (5%) or more to cooperate with counsel to Parent and Company to assist
them in providing the tax opinions called for by Section 7.1.6.
5.6 RELOCATION OF FACILITIES. Parent acknowledges that it has no current
plans to relocate Company operations, and Parent agrees that after the Effective
Time, it will use its best efforts to cause the Surviving Corporation to
maintain the former Company operations in the general areas of Menlo Park and
San Diego, California, for a period of approximately two years. The parties
acknowledge the timing and location of possible relocations could be effected by
lease terminations and/or opportunities. This section is not intended to confer
upon any person, other than the parties to this Agreement, any rights or
remedies hereunder.
5.7 NASDAQ LISTING. Parent will use it best efforts (i) to cause the
shares of Parent Common Stock to be issued in the Merger to be quoted upon the
Effective Time on the Nasdaq National Market or listed on such national
securities exchange as Parent Common Stock is listed and (ii) to cause the
shares of Parent Common Stock issued upon the exercise of assumed Company
Options to be quoted upon issuance on the Nasdaq National Market or listed on
such national securities exchange as Parent Common Stock is listed.
5.8 REGISTRATION RIGHTS. Parent shall assume Company's obligations under
registration rights granted by Company to its stockholders and disclosed in the
Company Disclosure Schedule, except to the extent that such stockholders' shares
of Company Common Stock subject to those registration rights are otherwise
freely tradable under the Securities Act (which shall be deemed to include
shares tradable pursuant to SEC Rule 145(d)).
5.9 SEVERANCE. Parent shall cause the following severance benefits to be
provided to Company employees (as defined below) whose employment is terminated
by Parent without cause within one year after the Effective Time, as follows:
(i) except as otherwise provided in individual employment agreements, officers
will receive on termination, severance pay equal to one year's base salary; (ii)
director-level employees will receive on termination severance pay equal to six
month's base salary; and (iii) all other employees will receive on termination
severance pay equal to two month's base salary plus one additional month's base
salary for each year of prior service with the Company (up to a maximum of four
additional month's base salary). For the purposes of this Section 5.9, "CAUSE"
shall mean: (i) an intentional tort so as to cause loss, damage or injury to the
Parent or the Surviving Corporation or the property, reputation or employees of
Parent or the Surviving Corporation, (ii) any crime or act of fraud or
dishonesty against Parent or the Surviving Corporation, (iii) a conviction for
the commission of a felony, (iv) the willful failure to perform his or her
duties as an employee or officer, (v) the willful disregard of the written
instructions or policies of Parent or the Surviving Corporation as to cause
loss, damage or injury to the property, reputation or employees of Parent or the
Surviving Corporation or its Subsidiaries, or (vi) any other material breach of
any agreement between the employee or director and Parent or the Surviving
Corporation.
ARTICLE VI
ADDITIONAL AGREEMENTS
In addition to the foregoing, Parent and Company each agree to take the
following actions after the execution of this Agreement.
6.1 PREPARATION OF S-4. As promptly as practicable after the date hereof,
Parent and Company shall prepare and file with the SEC the Proxy Statement and
any other documents required by the Exchange Act in connection with the Merger,
and Parent shall prepare and file with the SEC the S-4, in which the Proxy
Statement will be included as a prospectus. Each of Parent and Company shall use
its best efforts to have the
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S-4 declared effective under the Securities Act as promptly as practicable after
such filing. Parent shall also take any action required to be taken under any
applicable state securities or "BLUE SKY" laws in connection with the issuance
of the Parent Common Stock in the Merger.
6.2 LETTERS OF THE COMPANY'S ACCOUNTANTS. Company shall use its best
efforts to cause to be delivered to Parent letters (each, a "COMPANY COMFORT
LETTER") addressed to Parent and Company of Ernst & Young, the Company's
independent auditors, dated the date on which the S-4 shall become effective and
within two business days prior to the Closing Date, in form and substance
reasonably satisfactory to Parent and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the S-4.
6.3 LETTER OF PARENT'S ACCOUNTANTS. Parent shall use its best efforts to
cause to be delivered to Company letters (each a "PARENT COMFORT LETTER")
addressed to Company and Parent of Deloitte & Touche, Parent's independent
auditors, dated the date on which the S-4 shall become effective, the date of
Company's Stockholders Meeting, and within two business days prior to the
Closing Date in form and substance reasonably satisfactory to the Company and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
6.4 ACCESS TO INFORMATION. Subject to appropriate restrictions on access
to information which Company determines in good faith to be proprietary or
competitively sensitive, Company and Parent shall, subject to applicable law,
each afford the other and their respective accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of their and their respective
Significant Subsidiaries' properties, books, contracts, commitments and records,
and (b) all other information concerning the business, properties and personnel
of Company and Parent and their respective Significant Subsidiaries, as the
other party may reasonably request which is necessary to complete the
transaction and prepare for an orderly transition to operations after the
Effective Time. Company and Parent agree to provide to the other and their
respective accountants, counsel and representatives copies of internal financial
statements promptly upon the request therefore. No information or knowledge
obtained in any investigation pursuant to this Section 6.3 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger. Company
and Parent agree that the non-disclosure agreement, each dated October 4, 1994
(the "CONFIDENTIALITY AGREEMENT"), between Company and Parent shall continue in
full force and effect and shall be applicable to all Evaluation Material (as
defined in the Confidentiality Agreement) received pursuant to this Agreement.
6.5 LEGAL CONDITIONS TO THE MERGER. Each of Parent, Sub and Company will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on any of them with respect to the Merger and
will promptly cooperate with and furnish information to each other in connection
with any such requirements imposed upon the other. Each of Parent, Sub and
Company will take, and will cause its respective Significant Subsidiaries to
take, all reasonable actions to obtain (and to cooperate with the other parties
in obtaining) any consent, approval, order or authorization of, or any exemption
by, any Governmental Entity, or other third party, required to be obtained or
made by Company or Parent or their respective Significant Subsidiaries in
connection with the Merger or the taking of any action contemplated thereby or
by this Agreement. The foregoing shall not require any party to agree to the
imposition of, or to comply with, any condition, obligation or restriction on
Parent or any of its Significant Subsidiaries or on the Surviving Corporation of
the type referred to in Section 7.1.7 hereof.
6.6 AFFILIATES. Contemporaneously with the execution of this Agreement,
the affiliate agreements (the "AFFILIATE AGREEMENTS") in the form attached as
Exhibit 6.6 have been executed with the Company's Principal Stockholders and all
of the executive officers and directors of the Company (the "AFFILIATES").
Parent shall be entitled to place appropriate legends on the certificate
evidencing any shares of Parent Common Stock to be received by Affiliates
pursuant to the terms of this Agreement and to issue appropriate stop transfer
instructions to the transfer agent for shares of Parent Common Stock consistent
with the terms of the Affiliates Agreements.
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6.7 HSR ACT FILINGS.
6.7.1 Filings and Cooperation. Each of Parent and Company shall (i)
promptly make or cause to be made the filings required of such party or any of
its Affiliates or Significant Subsidiaries under the HSR Act with respect to the
Merger and the other transactions provided for in this Agreement, (ii) comply at
the earliest practicable date with any request under the HSR Act for additional
information, documents, or other material received by such party or any of its
Affiliates or Significant Subsidiaries from the Federal Trade Commission or the
Department of Justice or other Governmental Entity in respect of such filings,
the Merger, or such other transactions, and (iii) cooperate with the other party
in connection with any such filing and in connection with resolving any
investigation or other inquiry of any such agency or other Governmental Entity
under any Antitrust Laws (as defined in Section 6.7.3) with respect to any such
filing, the Merger, or any such other transaction. Each party shall promptly
inform the other party of any material communication with, and any proposed
understanding, undertaking, or agreement with, any Governmental Entity regarding
any such filings, the Merger, or any such other transactions. Neither party
shall participate in any meeting with any Governmental Entity in respect of any
such filings, investigation, or other inquiry without giving the other party
notice of the meeting and, to the extent permitted by such Governmental Entity,
the opportunity to attend and participate.
6.7.2 Spin-Off Agreement. Parent has agreed to divest its Personal
Finance Software Business product, conditioned upon and subject to the Closing
of the Merger, and take such other actions as are provided for in Parent's
agreement with Novell, Inc. dated October 12, 1994, a copy of which has been
furnished to the Company (the "SPIN-OFF AGREEMENT"). In the event the proposed
transaction under the Spin-Off Agreement is terminated prior to Closing, Parent
shall use its best efforts to find another qualified buyer for Parent's Personal
Finance Software Business product on terms substantially similar to the Spin-Off
Agreement.
6.7.3 Best Efforts. Each of Parent and Company shall use its best
efforts to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the Merger or any other transactions
provided for in this Agreement under the HSR Act, the Sherman Act, as amended,
the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and
any other federal, state or foreign statutes, rules, regulations, orders, or
decrees that are designed to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade (collectively,
"ANTITRUST LAWS"). In connection therewith, if any administrative or judicial
action or proceeding is instituted (or threatened to be instituted) challenging
the Merger as violative of any Antitrust Law, and, if by mutual agreement,
Parent and Company decide that litigation is in their best interests, each of
Parent and Company shall cooperate and use its best efforts vigorously to
contest and resist any such action or proceeding and to have vacated, lifted,
reversed, or overturned any decree, judgment, injunction, or other order,
whether temporary, preliminary, or permanent (each an "ORDER"), that is in
effect and that prohibits, prevents, or restricts consummation of the Merger.
Each of Parent and Company shall use its best efforts to take such action as may
be required to cause the expiration of the notice periods under the HSR Act or
other Antitrust Laws with respect to the Merger and such other transactions as
promptly as possible after the execution of this Agreement. Notwithstanding
anything to the contrary in this Section 6.7.3 or in Section 6.7.1, (x) neither
Parent nor any of its Significant Subsidiaries shall be required to divest any
of their respective businesses, product lines, or assets (other than as provided
in the Spin-Off Agreement or Section 6.7.2), or to take or agree to take any
other action or agree to any limitation (other than the actions and limitations
provided for in the Spin-Off Agreement or Section 6.7.2) that would have a
Material Adverse Effect on the Personal Finance Software Business of Parent
combined with the Surviving Corporation after Closing, and (y) neither Company
nor its Subsidiaries shall be required to divest any of their respective
businesses, product lines, or assets, or to take or agree to take any other
action or agree to any limitation would have a material adverse effect on the
Business Condition of Company.
6.8 EMPLOYEE BENEFITS. Parent and Company agree that the Surviving
Corporation will provide benefits for Company employees that are in the
aggregate substantially equivalent to the benefits provided to Parent employees
with prior service considerations as if such Company employees had been employed
by Parent for the period for which they were employed by Company; provided,
however, that nothing contained herein shall
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be considered as requiring Parent or the Surviving Corporation to continue any
specific plan or benefit or as precluding amendments to any specific plan or
benefit (other than for the period through July 31, 1995, during which time the
Surviving Corporation will continue, or Parent will provide, salary, wage and
bonus schemes (whether by separate employment agreement or otherwise)
substantially equivalent to Company's existing compensation plans as of the date
of this Agreement); and provided further, that nothing expressed or implied in
this Agreement shall confer upon any employee, beneficiary, dependent, legal
representative or collective bargaining agent of such employee any right or
remedy of any nature or kind whatsoever under or by reason of this Agreement,
including without limitation any right to employment or to continued employment
for any specified period, at any specified location or under any specified job
category.
6.9 OFFICERS AND DIRECTORS. Parent agrees that all rights to
indemnification (including advancement of expenses) existing on the date hereof
in favor of the present or former officers and directors of Company with respect
to actions taken in their capacities as directors or officers of Company prior
to the Effective Time as provided in Company's Certificate of Incorporation or
Bylaws and indemnification agreements shall survive the Merger and continue in
full force and effect for a period of six years following the Effective Time and
shall be guaranteed by Parent.
6.10 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby and thereby shall be paid by the party incurring such
expense, except that if the Merger is not consummated expenses incurred in
connection with printing and mailing of the documents distributed or to be
distributed to stockholders of Company and the filing fee with respect to the
S-4 shall be shared equally by Parent and Company.
6.11 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is reasonably necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises of
either of the Constituent Corporations, the proper officers and directors of
each corporation which is a party to this Agreement shall take all such
necessary action.
6.12 PUBLIC ANNOUNCEMENTS. Parent and Company shall cooperate with each
other in releasing information concerning this Agreement and the transactions
contemplated herein. Where practicable each of the parties shall furnish to the
other drafts of all releases prior to publication. Nothing contained herein
shall prevent either party at any time from furnishing any information to any
governmental agency or from issuing any release when it believes it is legally
required to do so.
6.13 STATE TAKEOVER LAWS. Company shall take all necessary steps to exempt
the transactions contemplated by this Agreement from, or if necessary challenge
the validity or applicability of Section 203 of DGCL to the Merger.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
7.1.1 Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the required vote of
holders of Company Common Stock.
7.1.2 Consents. Other than the filing of the Merger Documents with the
Secretaries of State of the States of Delaware and Washington, all Consents
legally required for the consummation of the Merger and the transactions
contemplated by this Agreement shall have been filed, occurred, or been
obtained, other than such Consents, the failure of which to obtain would not
have a material adverse effect on the consummation of the Merger or the other
transactions contemplated hereby or on the Business Condition of Parent or
Company.
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7.1.3 S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a stop
order and the Proxy Statement shall not be at the Effective Time subject to any
proceedings commenced or threatened by the SEC.
7.1.4 No Restraints. No statute, rule, regulation, executive order,
decree or injunction shall have been enacted, entered, promulgated or enforced
by any United States court or Governmental Entity of competent jurisdiction
which enjoins or prohibits the consummation of the Merger and shall be in
effect.
7.1.5 Legal Action. There shall not be pending any action, proceeding
or other application before any court or Government Entity brought by any
Governmental Entity: (i) challenging or seeking to restrain or prohibit the
consummation of the transactions contemplated by this Agreement, or seeking to
obtain any material damages; or (ii) seeking to prohibit or impose any material
limitations on Parent's or the Surviving Corporation's ownership or operation of
all or any portion of Parent's and Company's combined "Personal Finance Software
Business" (as defined below) or to compel Parent or Surviving Corporation to
dispose of or hold separate all or any material portion of Parent's and
Surviving Corporation's combined Personal Finance Software Business as a result
of the transactions contemplated by the Agreement, other than in accordance with
the provisions of Section 6.7.2 or other plan, proposed by or consented to, in
writing by Parent. "PERSONAL FINANCE SOFTWARE BUSINESS" shall mean software
products and related intellectual property that automate financial, tax,
accounting and investment information and transactions for individuals and small
businesses together with all other assets specifically dedicated to such
business.
7.1.6 Tax-Free Reorganization. Each of Company and Parent shall have
received a written opinion from their respective counsel to the effect that the
Merger will constitute a reorganization within the meaning of Section 368 of the
Code, and that Parent, Sub and Company will each be a party to that
reorganization. In preparing Company and Parent tax opinions, counsel may rely
on reasonable representations related thereto.
7.1.7 No Burdensome Condition. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger by any Governmental Entity which, in connection with
the grant of any Required Statutory Approval, imposes any restriction, condition
or obligation upon Parent other than as provided in Section 6.7.2, Company or
the Surviving Corporation which would materially adversely impact the Business
Condition of the Personal Finance Software Business of the Surviving Corporation
or the economic or business benefits of the transactions contemplated by this
Agreement.
7.2 CONDITIONS OF OBLIGATIONS OF PARENT AND SUB. The obligations of Parent
and Sub to effect the Merger are subject to the satisfaction of the following
conditions unless waived by Parent and Sub:
7.2.1 Representations and Warranties of Company. The representations
and warranties of Company set forth in this Agreement shall be true and correct
as of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date, except: (i) as otherwise contemplated by this
Agreement, or (ii) in respects that do not have a Material Adverse Effect on
Company's Business Condition or on the benefits of the transactions provided for
in this Agreement. Parent shall have received a certificate signed on behalf of
Company by the chief executive officer and the chief financial officer of
Company to such effect on the Closing Date.
7.2.2 Performance of Obligations of Company. Company shall have
performed all agreements and covenants required to be performed by it under this
Agreement prior to the Closing Date, except for breaches that do not have a
Material Adverse Effect on Company's Business Condition or on the benefits of
the transactions provided for in this Agreement. Parent shall have received a
certificate signed on behalf of Company by the chief executive officer and the
chief financial officer of Company to such effect.
7.2.3 Affiliates. Parent shall have received from each person or entity
who may be deemed pursuant to Section 6.5 hereof to be an Affiliate of Company a
duly executed Affiliates Agreement substantially in the form attached hereto as
Exhibit 6.6.
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7.2.4 Pooling of Interests; Comfort Letters. Company shall not have
breached its representation in Section 3.1.21 or its covenant in Section 4.3
with the result that the Merger will not qualify for pooling of interest
accounting treatment. Parent shall have received a letter from Ernst & Young
addressed to the Company to the effect that the Merger will qualify for pooling
of interest accounting treatment (without regard to any action or conduct by
Parent) and a Company Comfort Letter, dated as of a date within two business
days prior to the Closing.
7.2.5 Opinion of Company's Counsel. Parent shall have received an
opinion dated the Closing Date of Fenwick & West, counsel to Company, as to
matters that are customary for transactions of this type.
7.3 CONDITIONS OF OBLIGATION OF COMPANY. The obligation of Company to
effect the Merger is subject to the satisfaction of the following conditions
unless waived by Company:
7.3.1 Representations and Warranties of Parent and Sub. The
representations and warranties of Parent and Sub set forth in this Agreement
shall be true and correct as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except: (i) as otherwise
contemplated by this Agreement, or (ii) in respects that do not have a Material
Adverse Effect on the Parent's Business Condition or on the benefits of the
transactions provided for in this Agreement, or (iii) other than actions which
would or might cause Parent's representation in Section 3.2.9 to be untrue or
incorrect as of the Closing Date. Company shall have received a certificate
signed on behalf of Parent by authorized officers of Parent to such effect on
the Closing Date.
7.3.2 Performance of Obligations of Parent and Sub. Parent and Sub
shall have performed all agreements and covenants required to be performed by
them under this Agreement prior to the Closing Date except for breaches that do
not have a Material Adverse Effect on Parent's Business Condition or on the
benefits of the transactions provided for in this Agreement, and Company shall
have received a certificate signed on behalf of Parent by authorized officers of
Parent to such effect.
7.3.3 Opinion of Parent Counsel. Company shall have received an opinion
dated the Closing Date of Preston Gates & Ellis, counsel to Parent, as to
matters that are customary for transactions of this type.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of matters presented in
connection with the Merger by the stockholders of Company or Sub:
(a) by mutual consent of Parent and Company;
(b) by either Parent or Company (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
agreement contained in this Agreement) if there has been a breach of any
representation, warranty, covenant or agreement which has a Material
Adverse Effect on the Business Condition of Company or Parent, as the case
may be, or on the benefits of the transaction provided for in this
Agreement, and such breach has not been cured, or best efforts are not
being employed to cure such breach, within 10 days after notice thereof is
given to the party committing such breach;
(c) by either Parent or Company if the Merger shall not have been
consummated before March 30, 1995, provided, however if the parties have
agreed to pursue litigation pursuant to Section 6.7.3, such date shall be
extended to June 30, 1995;
(d) by Parent or Company if any approval of the stockholders of
Company shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at any Company Stockholders Meeting or any
adjournment thereof;
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(e) by either Parent or Company if any permanent injunction or other
order of a court or other competent authority preventing the Merger shall
have become final and non-appealable;
(f) by Parent if the Board of Directors of Company shall have
withdrawn or modified in a manner adverse to Parent's approval or
recommendation of the Merger, this Agreement or the transactions
contemplated hereby; or
(g) by Parent if Company or any of the other persons or entities
described in Section 4.1.5 shall take any of the actions that would be
proscribed by Section 4.1.5 other than actions in exercise of the Company's
fiduciary duties and satisfying all conditions of Section 4.1.5.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors of the party taking such action without any requirement to submit such
action to the stockholders of such party.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Company or Parent as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and there shall be no liability or
obligation on the part of Parent, Sub or Company or their respective officers or
directors, except that (i) the provisions of the last sentence of Section 6.4
and all of Sections 6.10, 8.2, 8.3 and 9.7 and the Confidentiality Agreement (as
defined below) shall survive any such termination and abandonment, and (ii) no
party shall be released or relieved from any liability arising from the willful
breach by such party of any of its representations, warranties, covenants or
agreements as set forth in this Agreement except as provided in Section 8.3(b).
8.3 BREAK-UP FEE.
(a) Company agrees to pay Parent, (provided that Parent is not then in
material breach of any representation, warranty, covenant or agreement contained
in this Agreement) promptly upon the termination of this Agreement (or such
later date as may apply in the case of (iii) below) by wire transfer, the sum of
$15 Million in immediately available funds (the "COMPANY BREAK-UP FEE") in the
event that following the date of the execution of this Agreement, and at or
prior to the termination of this Agreement, any of the following events shall
have occurred:
(i) Parent shall have terminated this Agreement pursuant to Section
8.1(f) or Section 8.1(g) hereof;
(ii) Company shall have agreed to an Acquisition Transaction which
results in a change in the beneficial owners of more than fifty percent
(50%) of the voting power of the capital stock of the Company, before, or
within six months after, termination of this Agreement, with any person,
other than Parent or any of its affiliates; or
(iii) Parent shall have terminated this Agreement pursuant to Section
8.1(b) hereof, following a material breach of this Agreement by Company.
(b) The right to the payment of the fees set forth in this Section 8.3
shall be the exclusive remedy at law or in equity to which Parent may be
entitled upon termination of this Agreement under the conditions set forth in
Section 8.3(a).
8.4 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Directors, at any time before or after
approval of matters presented in connection with the Merger by the stockholders
of Company or Parent, but after any such stockholder approval, no amendment
shall be made which by law requires the further approval of stockholders without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.5 EXTENSION, WAIVER. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (iii) waive
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compliance with any of the agreements, covenants or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to be conditions
to the Merger and shall not survive the Merger, except for the agreements
contained in Article II and in Sections 2.3.3, 4.3, 6.4, 6.7, 6.9 and 6.12 and
the agreements delivered pursuant to this Agreement.
9.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt if delivered personally, sent by
electronic mail or facsimile (receipt confirmed) or delivered by a nationally
recognized overnight courier to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052
Attention: William H. Neukom, Senior Vice President,
Law and Corporate Affairs
Facsimile No.: (206) 869-1327
with copies to:
Preston Gates & Ellis
5000 Columbia Center
701 Fifth Avenue
Seattle, Washington 98104
Attention: Richard B. Dodd
Facsimile No.: (206) 623-7022
(b) if to Company, to:
Intuit Inc.
66 Willow Place
P.O. Box 3014
Menlo Park, California 94306
Attention: Chief Executive Officer
Facsimile No.: (415) 329-2785
with a copy to:
Fenwick & West
Two Palo Alto Square
Palo Alto, California 94306
Attention: Gordon K. Davidson
Facsimile No.: (415) 857-0361
9.3 INTERPRETATION. When a reference is made in this Agreement to Sections
or Exhibits, such reference shall be to a Section or Exhibit to this Agreement
unless otherwise indicated. The words "INCLUDE," "INCLUDES," and "INCLUDING"
when used therein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference
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purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. This Agreement has been negotiated by the respective parties
hereto and their attorneys and the language hereof will not be construed for or
against either party. A reference to a Section or an Exhibit will mean a section
in, or exhibit to, this Agreement unless otherwise explicitly set forth.
9.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to each the other parties, it being understood that
all parties need not sign the same counterpart.
9.5 MISCELLANEOUS. This Agreement, the Confidentiality Agreement, and the
documents referred to herein (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) is not intended to confer upon any
other person any rights or remedies hereunder (except as otherwise expressly
provided herein and except that Section 6.9 is for the benefit of Company's
directors and officers and Section 2.3.1 is for the benefit of holders of
Company Stock Options and said Sections are intended to confer rights on such
persons); and (c) shall not be assigned by operation of law or otherwise except
as otherwise specifically provided.
9.6 NO JOINT VENTURE. Nothing contained in this Agreement will be deemed
or construed as creating a joint venture or partnership between any of the
parties hereto. No party is by virtue of this Agreement authorized as an agent,
employee or legal representative of any other party. No party will have the
power to control the activities and operations of any other and their status is,
and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
9.7 GOVERNING LAW. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Washington, except to the extent that the DGCL applies to actions taken or
required to be taken by the Company's Board of Directors or stockholders.
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IN WITNESS WHEREOF, Parent, Sub and Company have caused this Agreement to
be signed by their respective officers thereunder duly authorized, all as of the
date first written above.
MICROSOFT CORPORATION
By /s/ WILLIAM H. NEUKOM
---------------------------------
William H. Neukom
Senior Vice President,
Law and Corporate Affairs
M/I ACQUISITION CORPORATION
By /s/ ROBERT A. ESHELMAN
---------------------------------
Robert A. Eshelman
Secretary/Treasurer
INTUIT INC.
By /s/ SCOTT D. COOK
---------------------------------
Scott D. Cook
Chairman
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<PAGE> 153
FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
FIRST AMENDMENT TO THAT CERTAIN AGREEMENT AND PLAN OF REORGANIZATION
dated as of October 13, 1994 (the "REORGANIZATION AGREEMENT"), among Microsoft
Corporation, a Washington corporation ("PARENT"), M/I Acquisition Corporation,
a Washington corporation and a wholly-owned subsidiary of Parent ("SUB"), and
Intuit Inc., a Delaware corporation ("COMPANY").
INTENDING TO BE LEGALLY BOUND, and in consideration of the agreements
contained herein, Parent, Sub and Company hereby agree as follows:
Section 8.1(c) of the Reorganization Agreement shall be revised to read
as follows:
(c) by either Parent or Company if the Merger shall not
have been consummated before May 30, 1995, provided, however if the
parties have agreed to pursue litigation pursuant to section 6.7.3,
such date shall be extended to August 29, 1995;
All other terms and provisions of the Reorganization Agreement shall
remain in full force and effect.
This Amendment incorporates by reference Sections 9.1 through 9.7 of
the Reorganization Agreement.
DATED: February 16, 1995 MICROSOFT CORPORATION
By /s/ WILLIAM H. NEUKOM
------------------------
William H. Neukom
Senior Vice President
Law and Corporate Affairs
M/I ACQUISITION CORPORATION
By /s/ ROBERT A. ESHELMAN
-------------------------
Robert A. Eshelman
Secretary/Treasurer
INTUIT INC.
By /s/ WILLIAM H. LANE
-------------------------
William H. Lane III
Vice President/Chief Financial Officer
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<PAGE> 154
ANNEX B
[MORGAN STANLEY LETTERHEAD]
October 13, 1994
Board of Directors
Intuit Inc.
66 Willow Place
Menlo Park, CA 94025
Members of the Board:
We understand that Intuit Inc. ("Intuit" or the "Company"), Microsoft
Corporation ("Microsoft") and M/I Acquisition Corporation, a wholly-owned
subsidiary of Microsoft ("M/I"), have entered into an Agreement and Plan of
Reorganization, dated the date hereof (the "Merger Agreement"), which provides,
among other things, for the merger (the "Merger") of M/I with and into Intuit.
Pursuant to the Merger, Intuit will become a wholly-owned subsidiary of
Microsoft and each outstanding share of common stock, par value $0.01 per share
(the "Intuit Common Stock") of Intuit, other than shares held in treasury or
held by Microsoft or any affiliate of Microsoft, will be converted and become
exchangeable for 1.336 shares (the "Exchange Ratio") of Microsoft common stock,
$0.00005 par value (the "Microsoft Common Stock"); provided that if the
"Microsoft Average Closing Price" (as defined in the Merger Agreement) is
$53.144 or less, the Exchange Ratio shall be recomputed by dividing $71.00 by
the Microsoft Average Closing Price. The terms and conditions of the Merger are
more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
Intuit Common Stock.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of the Company;
(ii) analyzed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(iii) analyzed certain financial projections related to the Company
prepared by the management of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the reported prices and trading activity for the Intuit
Common Stock;
(vi) compared the financial performance of the Company and the prices and
trading activity of the Intuit Common Stock with that of certain
other comparable publicly traded companies and their securities;
(vii) analyzed certain publicly available financial statements and other
information of Microsoft;
(viii) analyzed certain internal financial statements and other financial
and operating date concerning Microsoft prepared by the management
of Microsoft;
(ix) analyzed certain financial projections related to Microsoft prepared
by the management of Microsoft;
(x) discussed the current operations and financial condition and the
prospects of Microsoft with certain senior executives of Microsoft;
(xi) reviewed the reported prices and trading activity for the Microsoft
Common Stock;
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<PAGE> 155
(xii) compared the financial performance of Microsoft and the prices and
trading activity of the Microsoft Common Stock with that of certain
other comparable publicly-traded companies and their securities;
(xiii) analyzed the pro forma impact of the Merger on Microsoft's earnings
per share and consolidated capitalization;
(xiv) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(xv) discussed with senior management of Intuit their view of the
strategic rationale for the Merger and certain other benefits of the
Merger to Intuit;
(xvi) participated in discussions and negotiations among representatives
of the Company, Microsoft and their financial and legal advisors;
(xvii) reviewed the Merger Agreement and certain related documents; and
(xviii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company or Microsoft. We have not made any independent valuation or appraisal of
the assets or liabilities of the Company or Microsoft, nor have we been
furnished with any such appraisals. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets, nor did we have discussions or negotiate with any parties,
other than Microsoft, with respect to a potential acquisition of the Company or
any of its assets.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for the Company and have received fees
for the rendering of these services.
Based on the foregoing we are of the opinion on the date hereof that the
Exchange Ratio pursuant to the Merger Agreement is fair from a financial point
of view to the holders of Intuit Common Stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ FRANK P. QUATTRONE
Frank P. Quattrone
Managing Director
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<PAGE> 156
INTUIT INC.
155 LINFIELD AVENUE
MENLO PARK, CALIFORNIA 94025
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INTUIT INC.
The undersigned hereby appoints Scott D. Cook, William V. Campbell and
William H. Lane, III as proxies, each with full powers of substitution, and
hereby authorizes them, and each of them acting without the others, to represent
and to vote, as designated below, all shares of Common Stock, $.01 par value, of
Intuit Inc. ("Intuit") held of record by the undersigned, on February 10, 1995,
at the Special Meeting of Stockholders of Intuit Inc. to be held on Monday,
April 10, 1995, and at any adjournment thereof.
This Proxy, when properly executed and returned in a timely manner, will be
voted at the Special Meeting and any adjournment thereof in the manner described
herein. If no contrary indication is made, the proxy will be voted FOR Proposal
1 and in accordance with the judgment of the persons named as proxies herein on
any other matters that may properly come before the Special Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
CONTINUED AND TO BE SIGNED AND DATED ON THE REVERSE SIDE.
-----------------------------------------------------------------------
SEE REVERSE
SIDE
-----------------------------------------------------------------------
<TABLE>
<C> <C> <S>
- ------------------------------ /X/ Please mark votes
Common Stock as in this example
</TABLE>
The Board of Directors unanimously recommends that you vote FOR Proposal 1.
<TABLE>
<S> <C> <C> <C>
1. PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT WITH FOR AGAINST ABSTAIN
MICROSOFT CORPORATION, THE AGREEMENT OF MERGER BETWEEN INTUIT AND / / / / / /
M/I ACQUISITION CORPORATION AND THE MERGER, AS DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
In accordance with their judgment, the proxies are authorized to vote upon such other matters as may
properly come before the Special Meeting or any adjournment thereof.
MARK HERE FOR
CHANGE OF ADDRESS
AND NOTE AT LEFT / /
</TABLE>
This Proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized person executing on behalf of the partnership.
<TABLE>
<S> <C>
Signature: Date , 1995
Signature: Date , 1995
</TABLE>
(Reverse Side)
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XII of Microsoft's Restated Articles of Incorporation authorizes
Microsoft to indemnify any present or former director or officer to the fullest
extent not prohibited by the Washington Business Corporation Act, public policy
or other applicable law. Chapter 23B.08.510 and .570 of the Washington Business
Corporation Act authorizes a corporation to indemnify its directors, officers,
employees, or agents in terms sufficiently broad to permit such indemnification
under certain circumstances for liabilities (including provisions permitting
advances for expenses incurred) arising under the Securities Act of 1933.
In addition, pursuant to the terms of the Reorganization Agreement,
Microsoft has agreed that all rights to indemnification (including advancement
of expenses) existing as of October 13, 1994 in favor of the present or former
officers and directors of Intuit with respect to actions taken in their
capacities as directors or officers of Intuit prior to the Effective Time as
provided in Intuit's Certificate of Incorporation or Bylaws and indemnification
agreements shall survive the Merger and continue in full force and effect for a
period of six years following the Effective Time and shall be guaranteed by
Microsoft.
Article V of the Intuit Certificate of Incorporation eliminates the
liability of directors to the fullest extent permissible under Delaware law.
Article VI of Intuit's Bylaws provides for indemnification of Intuit's officers,
directors, and certain other persons to the fullest extent permissible under
Delaware law. Under Section 145 of the Delaware General Corporation Law, a
corporation has the power to indemnify any person who was or is a party to any
threatened, pending, or completed action, whether civil or criminal, by reason
of the fact that such person is or was a director, officer or employee of the
corporation or held certain other positions. In addition, Intuit has entered
into Indemnification Agreements with each of its directors and officers. Under
these agreements, Intuit has agreed to maintain directors' and officers'
liability insurance, if feasible, and to indemnify such officers and directors
for liability and expense not covered by insurance provided that the officer or
director acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of Intuit. The form of this agreement is attached
as Exhibit 10.9. In addition, in connection with Intuit's acquisition of
ChipSoft, Intuit agreed to indemnify for six years the former officers and
directors of ChipSoft with respect to any claim of liability arising out of or
pertaining to (i) the Intuit/ChipSoft merger or the related transactions or (ii)
any act or omission occurring prior to the merger. See "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF INTUIT AND MICROSOFT -- Limitation of Liability and
Indemnification of Officers and Directors" in the Proxy Statement/Prospectus.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT INDEX
(A) EXHIBIT NUMBER AND DESCRIPTION
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2.1(1) Agreement and Plan of Reorganization by and between Intuit and ChipSoft,
Inc. dated as of September 1, 1993 and the related Agreement of Merger
2.2(6) Agreement and Plan of Reorganization dated as of October 13,
1994 by and among Microsoft Corporation, M/I Acquisition
Corporation and Intuit Inc.
2.3(8) Form of Agreement of Merger by and between M/I Acquisition Corporation and
Intuit Inc.
2.4(6) First Amendment to Agreement and Plan of Reorganization dated as of
February 17, 1995 by and between Microsoft Corporation, M/I Acquisition
Corporation and Intuit Inc.
3.1(2) Restated Articles of Incorporation
3.2(2) Bylaws
5.1(8) Opinion of Preston Gates & Ellis
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8.1(8) Opinion of Preston Gates & Ellis re Tax Matters
8.2(8) Opinion of Fenwick & West re Tax Matters
8.3(8) Form of Closing Opinion of Preston Gates & Ellis re Tax
Matters
8.4(8) Form of Closing Opinion of Fenwick & West re Tax Matters
10.1(2) Microsoft Corporation 1991 Stock Option Plan
10.2(3) Microsoft Corporation 1981 Stock Option Plan
10.3(2) Microsoft Corporation Stock Option Plan for Non-Employee
Directors
10.4(2) Microsoft Corporation Stock Option Plan for Consultants and
Advisors
10.5(2) Microsoft Corporation 1991 Employee Stock Purchase Plan
10.6(2) Microsoft Savings Plus Plan
10.7(4) Trust Agreement dated June 1, 1993 between Microsoft
Corporation and First Interstate Bank of Washington
10.8(4) Form of Indemnification Agreement (Microsoft)
10.9(5) Form of Indemnification Agreement entered into by Intuit
with each of its directors and officers
10.10(8) Employment Agreement between Scott D. Cook and
Microsoft Corporation
10.11(8) Employment Agreement between William V. Campbell and
Microsoft Corporation
10.12(5) Employment Agreement, dated as of March 30, 1994, between
William V. Campbell and Intuit Inc.
10.13(8) Employment Agreement between William H. Harris, Jr. and Microsoft
Corporation
21(2) Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
23.3(8) Consent of Preston Gates & Ellis (included in Exhibits 5.1 and 8.1)
23.4(8) Consent of Fenwick & West (included in Exhibit 8.2)
23.5 Consent of Morgan Stanley & Co. Incorporated
24(80 Power of Attorney
27(7) Financial Data Schedules
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(1) Incorporated by reference to Intuit's Registration Statement on Form S-4,
filed September 20, 1993, as amended (File No. 22-69018).
(2) Incorporated by reference to Microsoft's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1994.
(3) Incorporated by reference to Microsoft's Registration Statement on Form S-8.
(File No. 33-37623).
(4) Incorporated by reference to Microsoft's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1993.
(5) Incorporated by reference to Intuit's Annual Report on Form 10-K, filed
October 31, 1994, as amended.
(6) Included as an exhibit to the Proxy Statement/Prospectus.
(7) Incorporated by reference to Microsoft's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1994 and Microsoft's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994.
(8) Incorporated by reference to Microsoft's Registration Statement on Form S-4
as filed February 9, 1995 (Registration Number 33-57651).
Pursuant to Item 601(b)(2) of Regulation S-K, Microsoft agrees to furnish to the
Commission, on request, supplemental copies of any omitted schedule.
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<PAGE> 159
(B) FINANCIAL STATEMENT SCHEDULES
1. Valuation and Qualifying Accounts, incorporated by reference to
Microsoft's Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1994.
ITEM 22. UNDERTAKINGS.
The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(6) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
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<PAGE> 160
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington on February 14, 1995.
MICROSOFT CORPORATION
By: /s/ WILLIAM H. GATES
------------------------------------
William H. Gates, Chairman and CEO
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
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/s/ WILLIAM H. GATES Dated February 14, 1995
- -------------------------------------
William H. Gates
Chairman and CEO and Director
Principal Executive Officer
/s/ MICHAEL W. BROWN Dated February 14, 1995
- -------------------------------------
Michael W. Brown
Vice President, Finance and CFO
Principal Financial Officer and
Principal Accounting Officer
</TABLE>
Dated: February 14, 1995
By: /s/ ROBERT W. HERBOLD
Executive Vice President and Chief
Operating Officer
Directors:
Paul G. Allen
Richard A. Hackborn
David F. Marquardt
Robert D. O'Brien
William G. Reed, Jr.
Jon A. Shirley Pursuant to a Power of Attorney
dated January 28, 1995.
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Microsoft Corporation on Form S-4 of the reports of Deloitte & Touche dated
July 20, 1994, included and incorporated by reference in the Annual Report on
Form 10-K of Microsoft Corporation for the year ended June 30, 1994, and to the
use of our reports dated July 20, 1994, appearing in the Prospectus which is
part of the Registration Statement. We also consent to the reference to us
under the headings "Selected Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 16, 1995
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated August 25, 1994
except for Note 11 as to which the date is October 27, 1994, with respect to
the financial statements of Intuit Inc. included in Amendment No. 1 to the
Registration Statement (Form S-4) and related Prospectus of Microsoft
Corporation for the registration of 28,271,076 shares of its common stock.
We also consent to the incorporation by reference therein of our report with
respect to the financial statement schedules of Intuit Inc. for the ten months
ended July 31, 1994 and for each of the two years in the period ended September
30, 1993 included in the Annual Report (Form 10-K) for 1994 filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Palo Alto, California
February 13, 1995
<PAGE> 1
EXHIBIT 23.5
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
February 14, 1995
Intuit Inc.
155 Linfield Avenue
Menlo Park, CA 94025
Dear Sirs:
We hereby consent to the inclusion of the Registration Statement on
Form S-4, relating to the proposed merger of Intuit Inc. with M/I Acquisition
Corporation, a wholly owned subsidiary of Microsoft Corporation, of our opinion
letter appearing as Annex B to the Proxy Statement/Prospectus which is a part
of the Registration Statement, and to the references of our firm name under the
captions "SUMMARY OF PROXY STATEMENT/PROSPECTUS -- Opinion of Financial
Advisor", "THE MERGER AND RELATED TRANSACTIONS -- Background of the Merger",
"THE MERGER AND RELATED TRANSACTIONS -- Intuit's Reasons for the Merger" and
"THE MERGER AND RELATED TRANSACTIONS -- Opinion of Financial Advisor." In
giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 or the rules and regulations adopted by the Securities and Exchange
Commission thereunder nor do we admit that we are experts with respect to any
part of such Registration Statement within the meaning of the term "experts" as
used in the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ GEORGE F. BOUTROS
-------------------------------
Name: George F. Boutros
Title: Principal
