<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended APRIL 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
62,240,887 shares of Common Stock, $0.01 par value, as of May 28, 1999
<PAGE> 2
- --------------------------------------------------------------------------------
FORM 10-Q
INTUIT INC.
INDEX
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1998 and April 30, 1999................................ 3
Condensed Consolidated Statements of Operations for
the three and nine months ended April 30, 1998 and 1999......... 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended April 30, 1998 and 1999................... 5
Notes to Condensed Consolidated Financial
Statements...................................................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 16
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk........... 27
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.................................................... 28
ITEM 6: Exhibits and Reports on Form 8-K..................................... 30
Signatures........................................................... 31
</TABLE>
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
----------- -----------
(In thousands, except par value) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 138,133 $ 330,225
Short-term investments ....................................................... 244,699 335,925
Marketable securities ........................................................ 499,285 1,095,050
Accounts receivable, net (1) ................................................. 59,417 114,188
Inventories .................................................................. 3,695 2,267
Prepaid expenses and other current assets (2) ................................ 34,896 77,154
----------- -----------
Total current assets ................................................. 980,125 1,954,809
Property and equipment, net .................................................... 69,413 91,195
Purchased intangibles, net ..................................................... 85,797 74,038
Goodwill, net .................................................................. 285,793 243,131
Long-term deferred income taxes ................................................ 21,006 21,006
Investments .................................................................... 17,009 43,223
Restricted investments ......................................................... 28,516 34,568
Other assets ................................................................... 10,937 7,895
----------- -----------
Total assets ................................................................... $ 1,498,596 $ 2,469,865
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 44,035 $ 95,368
Accrued compensation and related liabilities ................................. 23,728 34,488
Deferred revenue ............................................................. 58,560 69,237
Income taxes payable ......................................................... 3,044 --
Deferred income taxes ........................................................ 120,482 361,379
Other accrued liabilities .................................................... 124,820 199,175
----------- -----------
Total current liabilities ............................................ 374,669 759,647
Long-term deferred income taxes ................................................ -- 770
Long-term notes payable ........................................................ 35,566 36,043
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized -- 3,000 shares total; 145 shares designated Series A; 200 shares
designated Series B Junior Participating
Issued and outstanding - none; none ........................................ -- --
Common stock, $0.01 par value
Authorized -- 250,000 shares
Issued and outstanding - 59,320 and 61,949 shares, respectively .......... 593 619
Additional paid-in capital ................................................... 1,080,554 1,190,817
Net unrealized gain on marketable securities ................................. 181,071 545,314
Cumulative translation adjustment and other .................................. 1,531 (1,179)
Accumulated deficit .......................................................... (175,388) (62,166)
----------- -----------
Total stockholders' equity ........................................... 1,088,361 1,673,405
----------- -----------
Total liabilities and stockholders' equity ..................................... $ 1,498,596 $ 2,469,865
=========== ===========
</TABLE>
(1) Includes $4.4 million and $1.6 million due from Checkfree at July 31,
1998 and April 30, 1999, respectively, and $3.4 million due from Excite
at July 31, 1998. (see Note 10).
(2) Includes balances due of $7.3 million and $6.0 million on a note
receivable from Venture Finance Software Corp. at July 31, 1998 and
April 30, 1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------- --------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(In thousands, except per share amounts; unaudited)
<S> <C> <C> <C> <C>
Net revenue(1) .................................... $ 141,996 $ 239,701 $ 475,467 $ 697,620
Costs and expenses:
Cost of goods sold:
Product ....................................... 29,331 50,070 97,206 151,100
Amortization of purchased software and other .. 588 1,885 1,941 5,586
Customer service & technical support ............. 26,389 28,557 91,821 98,312
Selling & marketing .............................. 55,067 43,884 134,006 151,520
Research & development ........................... 25,381 34,325 78,159 104,346
General & administrative ......................... 9,180 14,421 27,387 40,689
Amortization of goodwill and purchased intangibles 3,369 20,890 12,230 62,822
--------- --------- --------- ---------
Total costs & expenses .................. 149,305 194,032 442,750 614,375
--------- --------- --------- ---------
Income (loss) from operations ........... (7,309) 45,669 32,717 83,245
Interest and other income and expense, net ........ 3,104 5,344 7,375 12,642
Realized gain on sale of marketable securities .... -- 58,596 -- 68,684
Gain on disposal of business ...................... -- -- 4,321 --
--------- --------- --------- ---------
Income (loss) before income tax ................... (4,205) 109,609 44,413 164,571
Income tax provision (benefit) .................... (1,999) 37,054 17,534 51,349
--------- --------- --------- ---------
Net income (loss) ................................. $ (2,206) $ 72,555 $ 26,879 $ 113,222
========= ========= ========= =========
Basic net income (loss) per share ................. $ (0.05) $ 1.18 $ 0.56 $ 1.87
========= ========= ========= =========
Shares used in per share amounts .................. 48,209 61,553 47,618 60,409
========= ========= ========= =========
Diluted net income (loss) per share ............... $ (0.05) $ 1.12 $ 0.54 $ 1.79
========= ========= ========= =========
Shares used in per share amounts .................. 48,209 64,817 49,560 63,192
========= ========= ========= =========
</TABLE>
(1) Includes $0.2 million and $12.9 million of revenue from Checkfree for
the three and nine months ended April 30, 1998 and $1.6 million and $4.0
million of revenue for the three and nine months ended April 30, 1999,
respectively. Includes $3.1 million and $6.9 million of revenue from
Excite for the three and nine months ended April 30, 1998 and $5.9
million and $17.6 million of revenue for the three and nine months ended
April 30, 1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
---------------------------
(In thousands; unaudited) 1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 26,879 $ 113,222
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of business, net of tax ............... (1,621) --
Gain on sale of facility ............................... (1,501) --
Amortization of goodwill and other purchased intangibles 12,793 68,408
Depreciation ........................................... 22,038 25,063
Realized gain on sale of marketable securities ......... -- (68,684)
Changes in assets and liabilities:
Accounts receivable ................................. (76,486) (54,771)
Inventories ......................................... 505 1,428
Prepaid expenses .................................... (5,950) (42,258)
Deferred income tax assets and liabilities .......... (473) (1,162)
Accounts payable .................................... 12,530 51,333
Accrued compensation and related liabilities ........ 439 10,760
Deferred revenue .................................... 6,125 10,677
Accrued acquisition liabilities ..................... (35,326) (19,181)
Other accrued liabilities ........................... 100,264 95,424
Income taxes payable ................................ 13,801 46,833
--------- ---------
Net cash provided by operating activities ......... 74,017 237,092
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility .............................. 9,025 --
Proceeds from sale of marketable securities ................. -- 79,993
Purchase of property and equipment .......................... (29,576) (46,846)
Proceeds from business sold ................................. 26,350 --
(Increase) decrease in other assets ......................... (6,685) (15,067)
Purchase of short-term investments .......................... (186,869) (232,868)
Purchase of long-term investments ........................... (11,000) (26,214)
Liquidation and maturity of short-term investments .......... 164,834 135,590
--------- ---------
Net cash used in investing activities ............. (33,921) (105,412)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ........................ (4,638) --
Increase in note receivable ................................. (50,000) --
Net proceeds from issuance of common stock .................. 30,953 60,412
--------- ---------
Net cash provided by (used in) financing activities (23,685) 60,412
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 16,411 192,092
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 46,780 138,133
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 63,191 $ 330,225
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
- --------------------------------------------------------------------------------
INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), and Internet products and
services for individuals and small businesses. Our products and services are
designed to automate commonly performed financial tasks and to simplify the way
individuals and small businesses manage their finances. We sell our products
throughout North America and in many international markets. Sales are made
through retail distribution channels, traditional direct sales to customers and
the Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the nine months ended April 30, 1999 do not necessarily
indicate the results to be expected for the fiscal year ending July 31, 1999 or
any other future period. The July 31, 1998 balance sheet was derived from
audited financial statements but does not include all disclosures required for
audited financial statements by generally accepted accounting principles. These
statements and accompanying notes should be read together with the audited
consolidated financial statements for the fiscal year ended July 31, 1998
included in Intuit's Form 10-K filed with the Securities and Exchange
Commission.
Principles of Consolidation
The condensed consolidated financial statements include all of our accounts and
those of our wholly-owned subsidiaries. We have eliminated all significant
intercompany accounts and transactions. Investments in which management intends
to maintain more than a temporary 20% to 50% interest, or otherwise has the
ability to exercise significant influence, are accounted for under the equity
method. Investments in which we have less than a 20% interest and/or do not have
the ability to exercise significant influence are carried at the lower of cost
or estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectibility of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of return
reserves based on
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<PAGE> 7
historical experience. To recognize revenue, it must also be probable that we
will collect the accounts receivable from our customers. Reserves are provided
for excess quantities of current product versions, as well as previous versions
of products still in the distribution channel when new versions are launched. In
some situations, we receive advance payments from our customers. Revenue
associated with these advance payments is deferred until the products are
shipped or services are provided. We also reduce revenue by the estimated cost
of rebates when products are shipped. Warranty reserves are provided at the time
revenue is recognized for the estimated cost of replacing defective products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provided or delivered at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a
payment (such as the sale of insurance through our InsureMarket website),
revenue is recognized upon completion of the transaction, assuming there are no
remaining obligations on our part.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides free telephone support service to customers. This free service, also
referred to as post-contract customer support, is included in this expense
category. We do not defer the recognition of any revenue associated with sales
of these products, since the cost of providing this free support is
insignificant. The support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and require us
to use a significant amount of the cash investments held as available-for-sale
securities.
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<PAGE> 8
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Cash and cash equivalents:
Cash .......................... $ 22,382 $108,648
Money market funds ............ 6,972 177,192
Corporate notes ............... -- --
Commercial paper .............. -- 3,300
Municipal bonds ............... 81,927 41,085
U.S. Government securities .... 26,852 --
-------- --------
$138,133 $330,225
======== ========
</TABLE>
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Short-term investments:
Certificates of deposit ....... $ 5,043 $ 68
Corporate notes ............... 2,000 --
Commercial paper .............. -- 23,141
Municipal bonds ............... 256,297 310,979
U.S. Government securities .... 9,875 36,305
Restricted short-term
investments................. (28,516) (34,568)
-------- --------
$244,699 $335,925
======== ========
</TABLE>
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Due within one year ............ $225,241 $471,463
Due within two years ........... 159,324 119,098
Due within three years ......... 4,401 1,509
Restricted short-term
investments ................. (28,516) (34,568)
-------- --------
$360,450 $557,502
======== ========
</TABLE>
For information about our restricted investments, see Note 7. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
-8-
<PAGE> 9
Marketable Securities
Our marketable securities are carried at fair value and include unrealized gains
and losses, net of tax, in stockholders' equity. We held the following
marketable securities at July 31, 1998 and April 30, 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------
COST GAIN LOSS FAIR VALUE
-------- -------- ---- ----------
JULY 31, 1998
- -------------
(In thousands)
<S> <C> <C> <C> <C>
Checkfree Corporation common stock ........ $156,350 $106,000 $ -- $262,350
Excite, Inc. common stock ................. 39,150 187,050 -- 226,200
Verisign, Inc. common stock ............... 2,000 5,750 -- 7,750
Concentric Network Corporation common stock -- 2,985 -- 2,985
-------- -------- ---- --------
$197,500 $301,785 $ -- $499,285
======== ======== ==== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------
COST GAIN LOSS FAIR VALUE
-------- -------- ---- ----------
APRIL 30, 1999
- --------------
(In thousands; unaudited)
<S> <C> <C> <C> <C>
Checkfree Corporation common stock .......... $150,081 $338,319 $ -- $ 488,400
Excite, Inc. common stock ................... 37,463 569,187 -- 606,650
-------- -------- ---- ----------
$187,544 $907,506 $ -- $1,095,050
======== ======== ==== ==========
</TABLE>
We acquired the marketable securities described above in connection with the
establishment of ongoing strategic business relationships with the companies in
question, and, in the case of the Checkfree Corporation ("Checkfree") shares, as
the purchase price for a subsidiary we sold to Checkfree in January 1997.
We account for the investment in Checkfree as an available-for-sale equity
security, which accordingly is carried at market value. Checkfree common stock
is quoted on the Nasdaq Stock Market under the symbol CKFR. The closing price of
Checkfree common stock at April 30, 1999 was $48.00 per share. The closing price
on June 7, 1999 was $39.875. At April 30, 1999, we held 10,175,000 shares, or
approximately 19.7%, of Checkfree's outstanding common stock.
During the third fiscal quarter, we sold 125,000 shares of Verisign, 450,000
shares of Excite, and 90,600 shares of Concentric. In connection with these
sales we recognized realized gains of $12.3 million, $39.3 million, and $7.0
million, respectively.
In June 1997, we purchased 5.8 million shares (as adjusted for a two-for-one
stock split) of common stock of Excite. At the same time, we entered into an
agreement with Excite that provides for the joint development, promotion and
distribution of an online financial channel. As of April 30, 1999, Excite's
common stock was quoted on the Nasdaq Stock Market under the symbol XCIT. The
closing price of Excite common stock at April 30, 1999 was $146.00 per share. On
January 19, 1999, Excite and At Home Corporation ("At Home") announced a
proposed merger in which At Home would acquire all of the outstanding stock of
Excite and on May 28, 1999 the merger was completed ( with the combined company
now doing business as Excite@Home). In May 1999, we entered into a forward sale
arrangement with respect to 4,350,000 shares of our Excite common stock. See
Note 11 for more information about these transactions.
Checkfree and At Home are high technology companies whose stocks are subject to
substantial volatility. Accordingly, it is possible that the market price of one
or more of these companies' stocks could decline substantially and quickly,
which could result in a material reduction in the carrying value of these
assets.
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<PAGE> 10
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
LIFE IN NET BALANCE AT
YEARS JULY 31,1998 APRIL 30, 1999
----- ------------ --------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Goodwill ................... 3-5 $285,793 $243,131
Customer lists ............. 3-5 53,517 49,799
Covenant not to compete .... 3-5 2,211 2,723
Purchased technology ....... 1-5 18,763 13,700
Assembled workforce ........ 2-5 5,596 3,713
Trade names and logos ...... 1-10 5,710 4,103
</TABLE>
Balances presented above are net of total accumulated amortization of $103.6
million and $176.2 million at July 31, 1998 and April 30, 1999, respectively.
Concentration of Credit Risk
Almost all of Intuit's operations are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Many
circumstances could have an unfavorable impact on Intuit's operating results.
Examples include significant technological changes in the industry, changes in
customer requirements or the emergence of competitive products or services with
new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At April 30,
1999, we held shares of Checkfree common stock representing approximately 19.7%
of Checkfree's outstanding common stock. We also held approximately 9.9% of
Excite's outstanding common stock as of April 30, 1999. Our ability to dispose
of these securities is limited by trading volume and other legal and contractual
restrictions. If there is a permanent decline in the value of these securities
below cost, we will need to report this decline in our statement of operations.
See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. See Note 11 for information regarding
subsequent dispositions of certain shares of Excite common stock. Our remaining
portfolio is diversified and consists primarily of short-term investment-grade
securities.
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
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<PAGE> 11
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating segments in
financial statements. It also sets standards for related disclosures about
products and services, geographic areas and major customers. The disclosures
prescribed by SFAS 131 will be adopted for the fiscal year ending July 31, 1999.
Change in Estimate of Goodwill Amortization
Our statements of operations reflect a change in estimate for the amortization
life of remaining goodwill related to the June 1998 acquisition of Lacerte from
three years to five years, commencing with the first quarter of fiscal 1999. The
change resulted in a $28.5 million decrease in amortization expense and an
increase in net income by approximately $17.1 million, or $0.27 per share, for
the nine months ended April 30, 1999 but will result in continuing amortization
expenses (with a corresponding decrease in net income) during fiscal 2002 and
2003.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
3. COMPREHENSIVE NET INCOME
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
---------------------------
1998 1999
--------- ---------
(In thousands; unaudited)
<S> <C> <C>
Net income ..................................... $ 26,879 $ 113,222
Unrealized gain on marketable securities ....... 148,367 364,243
Change in cumulative translation adjustment .... 1,475 (2,710)
--------- ---------
Comprehensive net income ....................... $ 176,721 $ 474,755
========= =========
</TABLE>
4. ACQUISITIONS
In June 1998, we acquired substantially all of the assets of Lacerte Software
Corporation and Lacerte Educational Services Corporation (together, "Lacerte"),
for cash. Lacerte is a leading developer and marketer of tax preparation
software and services for tax professionals. The purchase price was
approximately $400 million. In addition, we
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<PAGE> 12
assumed liabilities of $31.8 million. We funded the acquisition by a public
offering of 10.0 million shares of common stock, completed in the fourth quarter
of fiscal 1998.
The acquisition of Lacerte was treated as a purchase for accounting purposes. We
allocated approximately $358.2 million of the purchase price to identified
intangible assets and goodwill. These assets are being amortized over periods of
two to five years. We also expensed approximately $53.8 million of in-process
research and development in the quarter ended July 31, 1998. The following table
shows pro forma net revenue, net income and diluted net income per share of
Intuit and Lacerte as if we had acquired Lacerte at the beginning of fiscal
1998, excluding the impact of the one-time charge for in-process research and
development:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, 1998
------------------------
AS
PRO FORMA REPORTED
-------- --------
(In thousands, except per share data; unaudited)
<S> <C> <C>
Net revenue .................................... $548,969 $475,467
Net income ..................................... 14,334 26,879
Diluted net income per share ................... $ 0.24 $ 0.54
</TABLE>
On April 7, 1999, we acquired the customer list and intellectual property rights
of TaxByte, Inc., for approximately $11 million in cash. TaxByte was a
professional tax preparation software company with a customer base of
approximately 3,600 professional tax preparation firms. The acquisition was
treated as a purchase for accounting purposes and the entire purchase price was
allocated to identified intangible assets and goodwill to be amortized over five
years. No tangible assets were acquired or liabilities assumed in connection
with the purchase.
On March 2, 1999, we announced that we had reached a definitive agreement to
acquire Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of
payroll services. The transaction was completed on May 3, 1999. See Note 11.
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer software and direct marketing
subsidiary, to Broderbund Software, Inc. for approximately $31 million. As a
result of the sale, Broderbund acquired net assets of approximately $17 million
and we incurred direct costs of approximately $9.5 million. We also recorded a
pre-tax gain of $4.3 million and a related tax provision of $2.7 million in the
quarter ended October 31, 1997.
6. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Reserve for returns and exchanges ....... $ 60,343 $106,360
Acquisition and disposition related items 19,181 11,231
Rebates ................................. 16,870 33,397
Post-contract customer support .......... 4,433 4,875
Other accruals .......................... 23,993 43,312
-------- --------
$124,820 $199,175
======== ========
</TABLE>
7. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting purposes. The interest rate is variable based on the Tokyo
inter-bank offered rate or the short-term prime rate offered in Japan.
-12-
<PAGE> 13
At April 30, 1999, the rate was approximately 0.5%. The fair value of the loan
approximates cost as the interest rate on the borrowings is adjusted
periodically to reflect market rates (which are currently significantly lower in
Japan than in the United States). We have guaranteed the loan and pledged
approximately $34.6 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at April 30, 1999.
We are obligated to pay interest only until March 2000.
8. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
9. LITIGATION
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 24, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the last 9 months, a suit was filed in
the Contra Costa County, California Superior Court by an individual consumer
against various retailers, including Circuit City Stores, CompUSA, Fry's
Electronics, Office Depot, The Good Guys and others, alleging that these
retailers have sold software and hardware products which are not Year 2000
compliant, including at least one product published by Intuit. Intuit has
received information indicating that one of the defendants in this action, Fry's
Electronics, may have filed a cross-complaint against various software
publishers and hardware manufacturers, including Intuit, asserting a claim for
indemnity in the main action. Intuit has not been served with or received a copy
of any such cross-complaint.
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<PAGE> 14
On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleged that Checkfree was not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement agreement
by which all claims asserted by each party were dismissed with prejudice. The
arbitration was dismissed with prejudice on May 24, 1999, and Intuit's suit
against Checkfree was dismissed with prejudice on May 25, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
10. RELATED PARTY TRANSACTIONS
We held approximately 9.9% of Excite's outstanding common stock as of April 30,
1999. We reported revenue from Excite for shared advertising activities of $ 3.1
million and $6.9 million for the three and nine months ended April 30, 1998 and
$5.9 million and $17.6 million for the three and nine months ended April 30,
1999, respectively.
As of April 30, 1999, we held approximately 19.7% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported revenues of
$0.2 million and $12.9 million from Checkfree for the three and nine months
ended April 30, 1998 and $1.6 million and $4.0 million for the three and nine
months ended April 30, 1999, respectively. The revenue from Checkfree for the
nine months ended April 30, 1998 includes a royalty payment of $10 million
received in October 1997. We held a receivable due from Checkfree for $4.4
million and $1.6 million at July 31, 1998 and April 30, 1999, respectively.
As of April 30, 1999, we held a 49% equity interest, and an option to purchase
the remaining equity interests, in Venture Finance Software Corporation
("VFSC"). We have entered into an agreement with VFSC to provide them with
services related to on-going development of Web-oriented finance products. We
held a note receivable from VFSC with outstanding balances of $7.3 million and
$6.0 million at July 31, 1998 and April 30, 1999, respectively, representing
amounts due to us from VFSC for development and administrative services we
provided to VFSC.
11. SUBSEQUENT EVENTS
On May 3, 1999, we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services. Since October 1998,
Intuit has been offering payroll services through CRI to its QuickBooks small
business customers. These payroll services include payroll tax filing, tax
deposit services and direct deposit of employee wage payments. CRI is one of the
country's largest payroll services companies and a leader in providing payroll
services to small businesses. The purchase price for privately-held CRI was
approximately $200 million, consisting of approximately $100 million in cash and
approximately $25 million of Intuit stock to be paid at the closing, and
approximately $75 million in cash to be paid in three annual installments of
approximately $25 million each.
On May 5, 1999, we entered into definitive agreements (including a Securities
Contract and Pledge Agreement) with Credit Suisse Financial Products ("CSFP")
for the forward sale of 4,350,000 shares of Excite Common Stock. On May 28,
1999, our shares of Excite Common Stock were converted into shares of At Home as
a result of a merger between Excite and At Home Corporation. In June 1999, we
expect to settle the forward sale arrangement. At settlement, we will receive
approximately $451.4 million from CSFP (representing the proceeds from prior
sales
-14-
<PAGE> 15
by CSFP of 4.350,000 shares of Excite's Common Stock), less a negotiated fee,
and to deliver stock certificates to CSFP for 4,350,000 shares of Excite Common
Stock, which now represent 4,532,273 shares of Class A Common Stock of At Home.
As a result of this transaction, we expect to record a realized gain of
approximately $253.2 million, net of tax, in the fourth quarter of fiscal 1999.
Pursuant to an agreement entered into on May 17, 1999, we completed a $50
million investment in Security First Technologies ("Security First") on May 27,
1999. Security First delivers enterprise-wide Internet applications for
financial institutions. We purchased 970,813 shares of common stock at a price
of $51.50 per share, which represents approximately 3.8% of Security First's
outstanding common stock. In connection with this agreement, we also received an
option to purchase 3,629,187 additional shares of Security First common stock,
which will become exercisable if Security First completes its planned
acquisition of Edify Corporation (a publicly held California-based provider of
Internet and voice electronic commerce solutions), and an option to purchase an
additional 1,800,000 shares of common stock if Security First completes its
planned acquisition of FICS Group, N.V. (a privately held Belgium-based provider
of regulatory financial reporting and remote electronic banking software). These
options are exercisable at a per share purchase price of $51.50. Our investment
in Security First was made in connection with establishing a strategic
relationship to deliver online financial software and services to financial
institutions. The common stock of Security First is quoted on the Nasdaq Stock
Market under the symbol "SONE." The closing price of Security First common stock
on June 7, 1999 was $40,625.
On June 11, 1999, we acquired the customer list and intellectual property rights
of Compucraft Tax Services, LLC, for approximately $8 million in cash with a
provision that could increase the overall purchase price if certain performance
targets are met. Compucraft was a professional tax preparation service bureau
company with an active customer base of approximately 3,400 professional tax
preparation firms. The acquisition will be treated as a purchase for accounting
purposes.
-15-
<PAGE> 16
- --------------------------------------------------------------------------------
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements including
terms such as we "expect" or "anticipate" are forward-looking statements.
Investors should be aware that our actual results may differ materially from
Intuit's expressed expectations because of risks and uncertainties about the
future. We will not necessarily update the information in this Form 10-Q if and
when any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect future results and performance include, but are
not limited to the following: intense competition and pricing pressures,
particularly in the personal tax software market; potentially slower market
growth rates in the small business area and our ability to leverage our existing
small business customer base to take advantage of any market growth and to
increase the number of small business customers using our payroll processing
service; our strategy and implementation with respect to the Internet and our
Internet-based businesses, including but not limited our ability to timely adapt
and expand our product, service and content offerings for the Internet
environment, our ability to operationally support and manage these new Internet
businesses, the success of our business relationships with Excite@Home, AOL, and
others in continuing to increase traffic to Quicken.com, the costs of
implementing our Internet strategy, the impact of interest rate fluctuations on
our online mortgage business, and the uncertainty as to the timing and amount of
future Internet-related revenue and profits; the timing of availability for
future products and services; market growth, sales and upgrade rates for our
QuickBooks multi-user product; the value, size and market volatility of our
equity investments in other companies, including Checkfree Corporation, At Home
Corporation and Security First Technologies; our ability to achieve Year 2000
readiness in our business operations, our products and our dealings with
significant third parties; the expected impact of our recent acquisition of
Computing Resources, Inc. ("CRI") and our ability to successfully manage and
operate the payroll processing business acquired from CRI, which is a new type
of business for Intuit; the impact of acquisitions generally; our relationships
with retailers and other issues with respect to our distribution channels;
results for our international operations; and risks associated with regulated
businesses such as insurance and mortgage lending. Additional information about
factors that could affect future results and events is included our fiscal 1998
Form10-K, our Form 10-Qs for the first and second quarters of fiscal 1999, and
other reports filed with the Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal, we create, sell and support small
business accounting, tax preparation and consumer finance software products,
financial supplies (such as computer checks, invoices and envelopes), and
Internet products for individuals and small businesses. Our revenues come
primarily from the United States, Japan, Germany, Canada and the United Kingdom,
through retail distribution channels, direct customer sales and via the
Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet commerce revenue is growing rapidly. The Internet is a
pervasive force that has fundamentally changed the way we do business. It is
becoming increasingly important to all of our business divisions, both as the
platform for new products and services, and as an incremental, cost-effective
distribution channel. For example, the Internet is the foundation for our
insurance and mortgage marketspaces, the online payroll service for small
businesses that we recently introduced through our QuickBooks product and our
Quicken Store website, where customers can purchase and download desktop
software products and obtain customer service. We also use the Internet to host
our technical support website where we can quickly and cost-effectively provide
patches for product bugs and provide customers with answers to frequently asked
questions.
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<PAGE> 17
We use the term "Internet commerce" to refer to all of our Internet-based
business activities. Internet commerce has two components: Internet products and
electronic distribution. Internet products include activities in which the
customer realizes the value of the goods or services directly on the Internet or
an Intuit server. Internet product revenues include, for example, advertising
revenues generated on our Quicken.com website, online tax preparation and
electronic filing revenues, on-line payroll service revenues and transaction and
processing fees from our online insurance and online mortgage marketspaces.
Electronic distribution activities include the electronic ordering and/or
electronic delivery of traditional desktop software products and financial
supplies through the Internet.
While we have made significant progress in our Internet commerce activities,
investors should be aware that initial success achieved in these areas will not
necessarily result in improved financial results. We believe that the dramatic
growth of the Internet will give us significant opportunities to grow our
revenue over the next several years. However, revenue from Internet commerce was
only approximately 14% of total revenue for the nine months ending April 30,
1999 (approximately 8% for Internet products and 6% for electronic
distribution). It should be noted that Internet revenues are not reported
separately in our financial statements; instead, each of our business divisions
reports Internet commerce revenues that are specific to its operations and are
included in its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred during these periods. These seasonal trends can result in
significant operating losses, particularly in the July 31 and October 31
quarters when our revenues are lower. The seasonality of our revenue patterns
has been further intensified by our June 1998 acquisition of Lacerte, a
professional tax software company. Operating results can also fluctuate for
other reasons, such as changes in product release dates, non-recurring events
such as acquisitions and dispositions, and product price cuts in quarters that
have relatively high fixed expenses. Acquisitions and dispositions in particular
can have a significant impact on the comparability of both our quarterly and
yearly results.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and nine-month periods ended April 30, 1998 and 1999. Investors should
note that results for the three and nine-month periods ended April 30, 1999
include activity for our Lacerte subsidiary, which was acquired in June 1998.
The corresponding year ago periods did not include results for Lacerte.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes. The following revenue discussion is categorized by our
business divisions, which is how we examine results internally. Our domestic
supplies business is considered a part of our small business division while the
international supplies business is considered part of our international
division.
-17-
<PAGE> 18
NET REVENUE
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
-------------------------------- --------------------------------
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Software ............................. $118.8 79% $212.4 $404.1 53% $617.1
% of revenue ......................... 84% 89% 85% 88%
Supplies ............................. $ 23.2 18% $ 27.3 $ 71.4 13% $ 80.5
% of revenue ......................... 16% 11% 15% 12%
Total ................................ $142.0 69% $239.7 $475.5 47% $697.6
</TABLE>
Small Business Division. Small business division revenues come primarily from
the following sources:
o QuickBooks product line
o Supplies products (including checks, envelopes and invoices)
o Tax table services
o Support fees for the QuickBooks Support Network
o Payroll processing fees
Overall, revenue for the division was up 93% and 52% for the three and
nine-month periods ended April 30, 1999, respectively, compared to the same
periods a year ago. The increases were primarily a result of the timing of
recent QuickBooks releases that occurred in June 1998 (version 6.0) and January
1999 (QuickBooks '99). Prior to these releases, we had not launched a new
version of QuickBooks since December 1996 (version 5.0). As a result, the
current three and nine-month periods compare favorably to the same periods of
the prior year, which did not realize the benefit of a recent QuickBooks product
launch. Current fiscal year revenues also benefited from an increase in revenue
per customer, due primarily to an improvement in the mix of QuickBooks sales
toward higher priced, greater functionality products.
Domestic supplies revenues, which are part of the small business division, grew
by 17% and 13% for the three and nine-month periods ended April 30, 1999,
respectively, as a result of our increasing base of small business customers who
use QuickBooks and Quicken. Though they are a smaller component of small
business division revenues, tax tables service revenue and fees charged for
telephone support also grew substantially in the three and nine months ended
April 30, 1999 compared to the same periods of the prior year.
In October 1998, we introduced our new payroll processing service. The service
is offered through our QuickBooks products (version 6.0 and QuickBooks '99) and
handles all aspects of payroll processing, including calculation and electronic
depositing of federal and state payroll tax withholdings, electronic direct
deposit of paychecks, preparation and filing of quarterly and annual payroll tax
returns and creation of employee W-2 forms. While payroll processing provides us
with a significant opportunity to generate revenues, it also introduces new
risks. For example, we are managing the new customer activation process at a
measured rate in order to provide high quality service levels and to minimize
the impact of any potential service disruptions during the initial phases of the
service. In addition, the payroll processing business has been unprofitable in
its initial stages as we make systems and infrastructure investments required
for this new business and incur acquisition, activation and set-up costs for new
payroll service customers. We expect the QuickBooks payroll processing business
to remain unprofitable until we are able to accumulate a large number of
subscribers who have used the service long enough for us to recover these
up-front costs. Though initial customer reaction to this service has been
positive, it has not been a significant contributor to our financial performance
in fiscal 1999.
In connection with this new payroll service business and consistent with our
strategy to expand products and service offerings to our small business
customers, we completed our acquisition of Computing Resources, Inc. ("CRI") on
May 3, 1999 (see Note 11). CRI has been our payroll processing service provider
since October 1998. This acquisition will result in significant future
acquisition related costs, as well as new business risks and integration
challenges common in all acquisitions. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who we believe will have
a low tolerance for payroll processing errors. Our ability to successfully
operate CRI will depend in part on retaining their existing customers and
maintaining relationships with certain banks and other third parties who we will
rely on to retain existing
-18-
<PAGE> 19
customers and attract new customers outside of our QuickBooks customer base. If
we are unable to do so, it could result in a negative impact on our consolidated
results.
Tax Division. Tax division revenues come primarily from the following sources:
o TurboTax and MacInTax personal tax preparation products
o Professional tax preparation products (ProSeries and Lacerte
product lines)
o Electronic tax return preparation and filing fees
Overall, tax division revenues for the three and nine months ended April 30,
1999 grew 100% and 84% respectively, compared to the same periods last year.
Fiscal 1999 includes operating results for our Lacerte subsidiary which was
acquired in June 1998, while fiscal 1998 results do not include Lacerte.
Excluding Lacerte from our fiscal 1999 results, tax division revenues would have
increased by 48% and 36% over the same periods. Growth in our tax business was
driven by our TurboTax product line which experienced significantly higher unit
sales due in part to an increasing number of taxpayers using personal computers
to prepare tax returns. This unit sales growth was partially offset by lower
average selling prices due to a higher percentage of customers buying our lower
priced regular products compared to deluxe versions and increased price
competition, primarily from H&R Block's aggressively priced TaxCut product.
TurboTax results benefited from strong growth in industry-wide retail sales of
personal tax products, though TurboTax growth was lower than the industry growth
rate, resulting in a slight decline in retail market share. We will not be able
to determine final TurboTax sales until retailers return unsold products during
the next two quarters. While we believe our reserves for returned product are
adequate to cover actual returns, higher than expected returns could have a
negative impact on revenue for the season.
Though they are a smaller component of tax division revenues, we also
experienced significant revenue increases for our Web TurboTax product and
electronic filing service compared to last year as a greater number of customers
gained Internet access and became more accustomed to processing transactions
on-line. While we believe that the increasing popularity of the Internet will
provide future revenue growth opportunities for these Internet-based tax
offerings, there are also risks. For example, with lower barriers to entry, we
expect a greater number of competitors offering Internet-based products and
services than we experience with our traditional desktop software business. In
addition, service interruptions can have significant negative financial and
public relations consequences. We experienced an interruption in our electronic
filing services in February 1999 due to a power outage, which was not
significant because it was early in the tax season. However, the heavy volume
of, and peak filings periods for, electronically filed returns caused our
routine server maintenance procedures to take longer than expected, and the
procedures caused the electronic filing service to be unavailable for 14 hours
on April 11-12, 1999. We do not believe this service outage had a material
financial impact, prevented customers from completing and filing their returns
in a timely manner or posed a risk that customer data would be lost or
corrupted. However, we did experience negative publicity. The exact level of
future demand for Web TurboTax and electronic filing will be very difficult to
predict, and in future tax seasons we could experience adverse financial and
public relations consequences if these services are unavailable due to technical
difficulties or other reasons.
Though Microsoft Corporation did not release a competing product for this tax
season, we believe they will enter the personal tax preparation software market
next year. If Microsoft enters the market, their superior financial resources
and strong presence in retail distribution channels could result in an
increasingly competitive environment next tax season and beyond. If the average
selling price of our tax products were to decrease, or if we were to lose
significant market share as a result of increased future competition, our
operating results would suffer.
Excluding Lacerte from fiscal 1999 operating results, our professional tax
(ProSeries) product sales increased by 30% and 14% for the three and nine months
ended April 30, 1999, respectively, compared to the same periods a year ago.
This growth occurred primarily because we have been successful in retaining our
customers from prior years and in many cases have upgraded them to higher priced
products. Revenue from Lacerte products also grew compared to last year (though
Lacerte's prior year revenues are not reported in our operating results) due in
part to price increases and a high customer retention rate.
-19-
<PAGE> 20
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
o Quicken product line
o Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
o Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
Overall, consumer finance division revenues were up 34% and 11% for the three
and nine-month periods ended April 30, 1999 compared to the same periods a year
ago. Excluding the impact of a nonrecurring $10 million royalty fee from
Checkfree in the first quarter of fiscal 1998, revenue growth would have been
24% for the nine months ended April 30, 1999. Quicken revenue was roughly flat
for the three months ended April 30, 1999 compared to the same period in fiscal
1998. For the nine months ended April 30, 1999, Quicken revenue grew 4% compared
to the same year-ago period due primarily to an approximately 5 week earlier
release of Quicken this year and higher unit sales resulting from our
Quicken/TurboTax bundle promotion. This was partially offset by a higher
percentage of customers purchasing our lower priced Quicken Basic products
compared to our Quicken Deluxe versions and increased rebate incentives offered
to customers who purchased the Quicken/TurboTax bundle.
While we expect Quicken revenue to remain roughly flat for fiscal 1999, there is
a risk that it will decline in future periods. In fiscal 1997, Quicken
experienced over a 20% decline in revenues and there is no assurance that
similar declines will not occur in the future. For example, sales could suffer
if customers become less inclined to make upgrade purchases, if our competitors
were to lower their prices or if the demand for personal finance desktop
software declines significantly.
Consumer division revenue growth was primarily the result of increased
Internet-based revenues which grew by 69% and 77% for the three and nine months
ended April 30, 1999, respectively, compared to the same periods last year. This
increase was largely due to higher advertising, sponsorship and
transaction-related revenue through Quicken.com and Quicken. However, revenue
growth was not uniform across all Internet product and service offerings. For
example, advertising revenue and transaction fees from our QuickenMortgage
marketspace have grown relatively rapidly while fees from our InsureMarket
marketspace have grown at a slower pace. Total Quicken.com page views for the
month of April 1999 were up approximately 130% compared to April 1998. While
page view growth has been strong, traffic volumes can vary significantly from
month to month due to seasonal trends, site performance, the timing of launches,
competitor's activities, and other factors.
The rapid growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as Excite and AOL, which have helped to increase traffic
to our Quicken.com website. The Excite agreement calls for us to share revenue
generated from our Quicken.com site and the AOL agreement calls for us to make
significant guaranteed payments to AOL over the term of the agreement. While the
Internet provides a significant opportunity for revenue growth, our financial
commitments to these and other third party providers are significant and we must
continue to increase traffic and revenue in order to be profitable. If our
website traffic and revenue expectations aren't met, there could be a
significant negative impact on our operating results.
We currently expect the recently completed merger between Excite and At Home
(see Note 1) to have a neutral or positive impact on our business relationship
with Excite. Since the newly merged company (doing business under the name
Excite@Home) is expected to offer increased opportunities for distribution of
Excite's online financial content, we believe this should benefit Intuit.
However, our diminished ownership interest in the larger, combined company and
our divestiture of a significant portion of Excite stock (see Note 11) could
have a negative impact on our future relationship with Excite@Home.
-20-
<PAGE> 21
International Division. International division revenues come primarily from the
following sources:
o Japanese small business products
o German Quicken, QuickBooks and Tax products
o Canadian Quicken, QuickBooks and Tax products
o United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues were down 23% and 12%
for the three and nine-month periods ended April 30, 1999, respectively,
compared to the same periods last year. This decrease is a result of lower sales
in Germany and the U.K, which is largely due to later releases of Quicken and
QuickBooks in those countries compared to prior year periods. This was partially
offset by increased revenues in Canada across all product lines. In Japan, our
largest international subsidiary, sales were roughly flat reflecting lower sales
of small business products for the high-end market that we acquired in
connection with our acquisitions of Milky Way and Nihon Micom, offset by sales
of our Japanese QuickBooks product which was introduced in September 1998. The
launch of QuickBooks in Japan is intended to target a lower priced market than
our other Japanese small business products currently reach. Though we have
increased our retail market share in Japan since the launch of QuickBooks, the
overall market for small business products and services in Japan continues to
suffer due primarily to poor economic conditions.
As part of our business strategy, we have refocused our European operations
towards small businesses in selected larger markets. As a result, we have
devoted fewer resources to consumer finance and tax products and to smaller
geographic markets during fiscal 1999. While we expect that international
revenues will be slightly down for the entire fiscal year 1999, there is a risk
that revenues in future periods could be significantly lower if our strategic
initiatives are not effective.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
------------------------------- --------------------------------
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product ....................................... $ 29.3 71% $50.1 $97.2 55% $151.1
% of revenue .................................. 21% 21% 21% 22%
Amortization of purchased software & other .... $ 0.6 217% $ 1.9 $ 1.9 195% $ 5.6
% of revenue .................................. 0% 1% 0% 1%
Total ......................................... $ 29.9 74% $52.0 $99.1 58% $156.7
% of revenue .................................. 21% 22% 21% 23%
</TABLE>
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products, offering Internet-based products and
services, providing our fee for support programs and offering our payroll
service. The second component is the amortization of purchased software, which
is the cost of products obtained through acquisitions. Total cost of goods sold
increased to 22% and 23% of revenue for the three and nine months ended April
30, 1999 respectively, compared to 21% for the same periods of the prior year.
This increase is primarily attributable to two factors. First, consistent with
our growing Internet-based business, we are experiencing a significant increase
in related hardware and infrastructure costs as we purchase equipment to
increase our Internet capability. These costs are classified as cost of goods
sold and, as a percentage of revenue, are significantly higher than the costs of
goods sold for our traditional desktop software business. These infrastructure
costs tend to result from the depreciation of capital assets which are generally
expensed evenly over the estimated useful lives of the assets. As a result, cost
of goods sold as a percentage of revenue may fluctuate significantly,
particularly on a quarterly basis, as they become more fixed in nature and less
connected to the direct cost of manufacturing and shipping software products.
For example, although in a quarter with low revenues we will
-21-
<PAGE> 22
usually have a proportionately lower cost of goods sold because we ship fewer
products, the cost of goods sold from our Internet infrastructure will not
decrease proportionately and thus will inflate the cost of goods sold as a
percentage of revenue for that quarter. Second, we have also experienced
significant increases in our revenues from fee for support programs. The cost of
goods sold associated with these programs is also larger as a percentage of
revenue than cost of goods sold for our traditional desktop software business.
Consequently, as revenues from our Internet-related businesses and fee for
support programs become a larger portion of our overall revenue, our cost of
goods sold as a percentage of revenue is likely to increase.
Due to expected growth in higher cost of goods sold businesses such as our
Internet-based initiatives, fee for support programs and our online payroll
service, we believe cost of goods sold as a percentage of revenue for fiscal
1999 will exceed what we experienced in fiscal 1998. If we experience errors in
current or future products, there could be incremental increases in cost of
goods sold that could adversely effect our operating results.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
--------------------------------- -----------------------------------
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer service & technical support ....... $26.4 8% $28.6 $ 91.8 7% $ 98.3
% of revenue ............................... 19% 12% 19% 14%
Selling & marketing ........................ $55.1 (20%) $43.9 $134.0 13% $151.5
% of revenue ............................... 39% 18% 28% 22%
Research & development ..................... $25.4 35% $34.3 $ 78.2 33% $104.3
% of revenue ............................... 18% 14% 16% 15%
General and administrative ................. $ 9.2 57% $14.4 $ 27.4 49% $ 40.7
% of revenue ............................... 6% 6% 6% 6%
Other acquisition costs, including
amortization of goodwill and purchased
intangibles ................................ $ 3.4 518% $21.0 $ 12.2 415% $ 62.8
% of revenue ............................... 2% 9% 3% 9%
</TABLE>
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 12% and 14% of revenue for the three and nine months ended
April 30, 1999, respectively, compared to 19% for the same periods of the prior
year. These improvements reflect the continuing benefit from cost reductions
resulting from the restructuring and consolidation of our technical support
facilities in the United States and Europe in the fourth quarter of fiscal 1997
and a greater proportion of expenses shifting into cost of sales as a result of
our expanding Internet related and fee for support initiatives. We have also
benefited from our efforts to provide customer service and technical support
less expensively through websites and other electronic means. During the second
and third quarters of fiscal 1999, many customers experienced unusually long
hold times for customer service calls. We may need to increase customer service
and technical support expenses as a percentage of revenue in the fourth quarter
of fiscal 1999 and in fiscal 2000, in order to improve customer service levels
and also to handle customer questions relating to Year 2000 compliance issues.
In addition, if we experience product errors, poor service levels or service
outages for our web-based products, it may result in significant additional
customer service and technical support expenses or customer dissatisfaction.
Selling and Marketing. Selling and marketing expenses were 18% and 22% of
revenue for the three and nine months ended April 30, 1999, respectively,
compared to 39% and 28% for the same periods of the prior year. Prior year
selling and marketing expenses included a $16.2 million charge for the AOL
agreement entered into in February 1998. Excluding this charge, selling and
marketing expenses would have been 27% and 25% of revenue
-22-
<PAGE> 23
for the three and nine months ended April 30, 1998. This decrease is primarily
the result of our acquisition of Lacerte, which experiences comparatively lower
selling and marketing expenses as a percentage of revenue. The positive impact
of Lacerte was partially offset by increased TV and radio advertising for our
Quicken product line and additional costs related to the promotion of QuickBooks
and the payroll product launch. We expect selling and marketing costs as a
percentage of revenue to decline slightly in fiscal 1999 compared to fiscal
1998.
Research and Development. Research and development expenses decreased to 14% and
15% of revenue for the three and nine months ended April 30, 1999, respectively,
compared to 18% and 16% for the same periods of the prior year. This decrease is
due in part to our acquisition of Lacerte which experiences comparatively lower
research and development expenses as a percentage of revenue. We expect research
and development expenses to remain roughly flat as a percentage of revenue for
fiscal year 1999 compared to fiscal 1998. However, if these expenses exceed our
current expectations, they may have an adverse effect on operating results. This
could occur, for example, if we were to undertake a costly product development
venture in response to competitive pressures or other market conditions.
General and Administrative. General and administrative expenses were flat at 6%
of revenue for the three and nine months ended April 30, 1999 and 1998. For
fiscal 1999, we expect general and administrative expenses to remain roughly
flat as a percentage of revenue for fiscal year 1999 compared to fiscal 1998.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
These costs increased to $22.8 and $68.4 million for the three and nine months
ended April 30, 1999, respectively, compared to $4.0 and $14.2 million for the
same periods of the prior year. This increase was primarily attributable to the
amortization of intangibles associated with our acquisition of Lacerte in June
1998.
In connection with our acquisition of Lacerte, we used a third party appraiser's
estimate to determine the value of two in-process projects under development for
which technological feasibility had not been established. These projects were
identified for products being developed under separate operating systems (DOS
and Windows). The value of the projects was determined by estimating the costs
to develop the in-process technology into commercially feasible products,
estimating the net cash flows we believed would result from the products and
discounting these net cash flows back to their present value. As of April 30,
1999, actual results to date have been consistent with assumptions made when we
initially appraised the value of these in-process projects. Specifically,
revenues, development costs and completion dates as they relate to the two
projects are consistent with our expectations. Both projects were released on
schedule in January 1999.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Excluding the impact of our acquisition of CRI which closed
after our quarter end (see Note 11) and assuming no additional acquisitions and
no impairment of value resulting in an acceleration of amortization, future
amortization will reduce net income by approximately $56.3 million, $51.4
million, $44.6 million and $41.5 million for the years ending July 31, 1999
through 2002, respectively. If we complete additional acquisitions or accelerate
amortization in the future, there would be an incremental negative impact on
operating results.
OTHER INCOME
For the three and nine months ended April 30, 1999, interest and other income
and expense, net, increased to $5.3 and $12.6 million respectively compared to
$3.1 and $7.4 million for the same year ago periods reflecting increased cash
and short-term investment balances. The $4.3 million gain on disposal of
business in the nine-month period ended April 30, 1998 resulted from the sale of
Parsons, our direct marketing subsidiary, in August 1997. Our $58.6 and $68.7
million gains on the sale of marketable securities for the three and nine months
ended April 30, 1999 were the result of our sale of Excite, Verisign and
Concentric common stock (see Note 1).
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<PAGE> 24
INCOME TAXES
For the three and nine months ended April 30, 1999, we recorded income tax
provisions of $37.1 and $51.3 million on pretax income of $109.6 and $164.6
million, respectively. This compares to income tax provisions (benefit) of
($2.0) and $17.5 million on pretax income (loss) of ($4.2) and $44.4 million for
the same periods of the prior year. At April 30, 1999, there was a valuation
allowance of $9.6 million for tax assets of our international subsidiaries based
on management's assessment that we may not receive the benefit of certain loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, our unrestricted cash and cash equivalents totaled $330.2
million, a $192.1 million increase from July 31, 1998. The increase was the
result of net cash generated by operations and financing activities, partially
offset by cash used for investing activities. Increase in cash reflects the
seasonality of our business which typically results in the majority of net
revenues and cash receipts occurring in the January and April quarters, though
operating expenses are incurred more consistently throughout the year.
Our operating activities generated $237.1 million in cash for the nine months
ended April 30, 1999, driven by net income of $113.2 million. Additional sources
of cash were net income adjustments made for non-cash expenses such as
acquisition charges and depreciation and significant increases in accounts
payable and other accrued liabilities. These increases in accounts payable and
other accrued liabilities are the result of the seasonality of our business and
the resulting increase in accruals for product returns, customer rebates and
accrued technical support expenses. These increases were partially offset by
higher accounts receivable balances due from retailers and distributors for
large volumes of seasonal product shipments that occur in our second and third
fiscal quarters. We also used cash to increase our prepaid assets, due in part
to a large federal quarterly tax prepayment.
Investing activities resulted in the use of $105.4 million in cash for the nine
months ended April 30, 1999. This was driven by net purchases of short-term
investments and property and equipment. Property and equipment purchases were
made to support our ongoing operations, information system upgrades and our
growing Internet-based businesses. We also used cash to make significant
strategic investments, primarily in private companies. Due to our substantial
investments in marketable securities, such as Checkfree, At Home and Security
First, there is a risk that market value declines may have a significant
negative impact on our liquidity. If such declines were deemed to be permanent,
they would result in a charge to our statements of operations.
Financing activities provided $60.4 million for the nine months ended April 30,
1999 primarily attributable to proceeds from the exercise of employee stock
options.
In connection with our May 3, 1999 acquisition of CRI, we are making significant
cash payments (see Note 11) in our fiscal fourth quarter and beyond. In
addition, in May 1999 we made a $50 million cash investment in Security First
Technologies (see Note 11), which also negatively impacted our liquidity. In the
normal course of business, we enter into leases for new or expanded facilities
in both domestic and international locations. We also evaluate the merits of
acquiring technology or businesses, or establishing strategic relationships with
and investing in other companies. Accordingly, it is possible that we may decide
to use cash and cash equivalents to fund such activities in the future. For
example, if we exercise our option to purchase VFSC (see Note 10) and elect to
pay all or a significant portion of the exercise price in cash, this would have
a negative impact on our liquidity.
Though we are likely to require cash for future strategic initiatives, our
short-term liquidity will improve during the fourth quarter when we receive the
proceeds from the forward sale of a significant portion of our Excite common
stock (see Note 11). We believe that our unrestricted cash, cash equivalents and
short-term investments will be sufficient to meet anticipated seasonal working
capital and capital expenditure requirements for at least the next twelve
months.
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<PAGE> 25
YEAR 2000
The Company has established a Year 2000 Project Office to address the impact of
the year 2000 date transition on its operations, products and services globally.
In 1998, the Company established this office to coordinate a number of existing
projects and put in place a formal, structured year 2000 process moving forward.
The Project Office has a dedicated Program Manager and team who report directly
to Intuit's senior management, and status is reported regularly to the Audit
Committee of the Company's Board of Directors.
The Company has adopted a five-phase approach that it believes follows standard
industry practices for reviewing and preparing the significant elements of
operations, products and services for the Year 2000 date transition. Phase One
(initiation) involves increasing company awareness by educating and involving
all appropriate levels of management regarding the need to address Year 2000
issues. Phase Two (inventory) consists of identifying all of our systems,
products and relationships that may be impacted by Year 2000. Phase Three
(assessment) involves determining our current state of Year 2000 readiness for
those areas identified in the inventory phase and prioritizing areas that need
to be fixed. Phase Four (action) consists of developing Year 2000 solutions
where required, and completing a comprehensive test cycle for all appropriate
inventoried items. Phase Five (implementation) consists of rolling out Year 2000
solutions for affected products, services and technologies and implementing
maintenance and support processes to maintain ongoing compliance.
As a software developer, we have three key areas of focus: (1) our products and
services; (2) our internal systems (including information technology systems
such as financial and order entry systems and non-information technology systems
such as phones and facilities); and (3) the readiness of third parties with whom
we have significant business relationships. The majority of our efforts in the
product area have now completed the action phase and our efforts are primarily
focused on providing our customer base with confirmation of product compliance
or remediation options. We are currently in the action phase for our internal
systems, and in either the assessment phase or the action phase with respect to
third party relationships. We continue to expect that our remediation and
implementation efforts will be substantially complete by the end of the fiscal
year (July 1999), with ongoing maintenance and support activity continuing
throughout calendar year 1999 and into early calendar year 2000.
Costs directly attributed to our Year 2000 project are currently estimated at
approximately $6.5 million for fiscal 1999. This estimate is comprised primarily
of hardware, software, internal resources and consulting fees necessary to
undertake our Year 2000 testing activities during this fiscal year. We currently
anticipate direct costs in the range of $10 to $16 million for fiscal year 2000,
resulting from the completion of the project phases and the transition into an
ongoing maintenance and support activity in fiscal year 2000. We believe that
the nature of our products and the size and profile of our customer base is
likely to lead to a significant increase in the calls to our customer support
centers throughout the remainder of calendar 1999 and early 2000. These support
operations may experience call volumes not experienced to date and we are
developing plans that will allow us to handle the anticipated increase in calls
in a manner that will not lead to material incremental costs. Additionally,
there will be costs associated with the manufacture and distribution of free
solutions for products that are not Year 2000 ready or that will not be tested
for Year 2000 readiness. We believe the provision of free solutions may result
in lost revenue for new product upgrades to within a range of $10 to $17
million, although the exact amount will depend on customer response to the Year
2000 issue.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures.
Despite our efforts, there can be no assurance that all contingencies can be
anticipated or adequately provided for.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that we will be successful in our efforts to
address Year 2000 issues. If we are not successful, there could be significant
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<PAGE> 26
adverse effects on our operations. For example, failure to achieve Year 2000
readiness for our internal systems could delay our ability to manufacture and
ship products, disrupt our customer service and technical support facilities, or
interrupt customer access to our online products and services. If our products
are not Year 2000 ready, we could suffer lost sales or other negative
consequences resulting from customer dissatisfaction, including additional
litigation (see discussion below). We also rely heavily on third parties such as
manufacturing suppliers, service providers, financial institutions and a large
retail distribution channel. If these or other third parties experience Year
2000 failures or malfunctions, there could be a material negative impact on our
ability to conduct ongoing operations. Many of our products are significantly
interconnected with heavily regulated financial institutions. Our relationships
with financial institutions could be adversely impacted if we do not achieve
Year 2000 readiness in a manner and on a time schedule that permits them to
comply with regulatory requirements. We may also incur additional costs if we
are required to accelerate our Year 2000 readiness to meet financial institution
requirements. As with all companies, we also rely on other more widely used
entities such as government agencies, public utilities and other external forces
common to business and industry. Consequently, if such entities were to
experience Year 2000 failures, this could disrupt our ability to conduct ongoing
operations.
Several class action lawsuits have been filed against Intuit in California and
New York, alleging Year 2000 issues with the online banking functionality in
certain versions of our Quicken products, and it is possible that we will face
additional lawsuits. We do not believe the pending lawsuits have merit and
intend to defend them vigorously. We have been working with financial
institutions to provide solutions to their current online banking customers and
are planning to make such solutions available before customers experience any
Year 2000 problems. See "Legal Proceedings" for more information about this
litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
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<PAGE> 27
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of April
30, 1999. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities and Note 11
for information regarding the forward sale of Excite common stock.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of April 30, 1999, the currency of our
Japanese subsidiary has strengthened and the currency of our other subsidiaries
have remained essentially stable since the end of our 1998 fiscal year. Because
we translate foreign currencies into U.S dollars for reporting purposes,
currency fluctuations can have an impact, though generally immaterial, on our
results. We believe that our exposure to currency exchange fluctuation risk is
insignificant primarily because our international subsidiaries invoice
customers and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended April 30, 1999, there was an immaterial
currency exchange impact from our intercompany transactions. Currency exchange
risk is also minimized since foreign debt is due almost exclusively in local
foreign currencies. As of April 30, 1999, we did not engage in foreign currency
hedging activities.
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<PAGE> 28
- --------------------------------------------------------------------------------
PART II
ITEM 1
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 24, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the last 9 months, a suit was filed in
the Contra Costa County, California Superior Court by an individual consumer
against various retailers, including Circuit City Stores, CompUSA, Fry's
Electronics, Office Depot, The Good Guys and others, alleging that these
retailers have sold software and hardware products which are not Year 2000
compliant, including at least one product published by Intuit. Intuit has
received information indicating that one of the defendants in this action, Fry's
Electronics, may have filed a cross-complaint against various software
publishers and hardware manufacturers, including Intuit, asserting a claim for
indemnity in the main action. Intuit has not been served with or received a copy
of any such cross-complaint.
On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleged that Checkfree was not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement
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<PAGE> 29
agreement by which all claims asserted by each party were dismissed with
prejudice. The arbitration was dismissed with prejudice on May 24, 1999, and
Intuit's suit against Checkfree was dismissed with prejudice on May 25, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
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<PAGE> 30
- --------------------------------------------------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<S> <C>
2.01 Exchange Agreement dated as of March 2, 1999 by and among Intuit
Inc., Computing Resources, Inc., Ranson W. Webster and Harry D.
Hart and Amendment No. 1 thereto dated April 30, 1999. Pursuant
to Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request (1)
4.01 Registration Rights Agreement dated as of May 3, 1999 by and
among Intuit Inc., Ranson W. Webster and Norma J. Webster and
Harry D. and Carla J. Hart (2)
10.01 Intuit Inc. 1998 Option Plan for Mergers and Acquisitions, as
amended through April 28, 1999, and form of Stock Option Grant
Agreement for use thereunder (3)
10.02 Securities Contract, dated as of May 5, 1999 between Lacerte
Software Corporation, a wholly-owned subsidiary ("Lacerte") of
the Company and Credit Suisse Financial Products ("CSFP") (4)
10.03 Pledge Agreement, dated as of May 5, 1999, among Lacerte, CSFP
and Credit Suisse First Boston (5)
10.04* Stock Purchase and Option Agreement by and between Security
First Technologies Corporation and Intuit Inc., dated as of May
16, 1999
27* Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company filed the following report on Form 8-K:
1. A Report under items 2 and 7 was filed on May 7, 1999 to report the
Company's acquisition of Computing Resources, Inc. ("CRI") on May 3,
1999. An amendment to Form 8-K was filed on June 14, 1999 to include
CRI's audited financial statements for its fiscal year ended
December 31, 1998 and required pro-forma financial information with
respect to the acquisition.
- ----------
(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.
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<PAGE> 31
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: June 14, 1999 By: /s/ Greg J. Santora
-------------------------------------
Greg J. Santora
Senior Vice President
and Chief Financial Officer
(Principal Financial
and Accounting Officer)
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<PAGE> 32
EXHIBIT INDEX
<TABLE>
<S> <C>
2.01 Exchange Agreement dated as of March 2, 1999 by and among Intuit
Inc., Computing Resources, Inc., Ranson W. Webster and Harry D.
Hart and Amendment No. 1 thereto dated April 30, 1999. Pursuant
to Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request (1)
4.01 Registration Rights Agreement dated as of May 3, 1999 by and
among Intuit Inc., Ranson W. Webster and Norma J. Webster and
Harry D. and Carla J. Hart (2)
10.01 Intuit Inc. 1998 Option Plan for Mergers and Acquisitions, as
amended through April 28, 1999, and form of Stock Option Grant
Agreement for use thereunder (3)
10.02 Securities Contract, dated as of May 5, 1999 between Lacerte
Software Corporation, a wholly-owned subsidiary ("Lacerte") of
the Company and Credit Suisse Financial Products ("CSFP") (4)
10.03 Pledge Agreement, dated as of May 5, 1999, among Lacerte, CSFP
and Credit Suisse First Boston (5)
10.04* Stock Purchase and Option Agreement by and between Security
First Technologies Corporation and Intuit Inc., dated as of May
16, 1999
27* Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.
<PAGE> 1
EXHIBIT 10.04
STOCK PURCHASE AND OPTION AGREEMENT
BY AND BETWEEN
SECURITY FIRST TECHNOLOGIES CORPORATION
AND
INTUIT INC.
DATED AS OF MAY 16, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
SECTION 1. PURCHASE AND SALE OF THE SHARES...........................................1
1.1 Sale and Issuance of the Shares...........................................1
1.2 Closing...................................................................1
SECTION 2. STOCK OPTION..............................................................2
2.1 Grant of Option...........................................................2
2.2 The Per Share Option Exercise Price.......................................2
2.3 Exercise of the Option....................................................3
2.4 Transferability...........................................................4
2.5 Requirements of Law.......................................................4
2.6 Changes in Capitalization.................................................4
2.7 Mergers, Consolidations and Asset Sales...................................4
2.8 Certificate as to Adjustments.............................................5
2.9 Reservation of Common Stock...............................................5
2.10 Notices of Record Date....................................................5
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.........................5
3.1 Organization and Standing.................................................6
3.2 Authorization; Binding Obligation.........................................6
3.3 Capitalization............................................................6
3.4 Validity of Shares; Issuance..............................................7
3.5 No Consents...............................................................7
3.6 Non-Contravention.........................................................7
3.7 Additional Information....................................................7
3.8 Financial Statements......................................................8
3.9 Absence of Change of Events...............................................8
3.10 Bank Regulation...........................................................8
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER...............................8
4.1 Organization and Standing.................................................8
4.2 Authorization.............................................................9
4.3 Non-Contravention.........................................................9
4.4 No Consents...............................................................9
4.5 Adequate Resources........................................................9
4.6 Investment Experience.....................................................10
4.7 Investment Intent.........................................................10
4.8 Registration or Exemption Requirements....................................10
4.9 No Legal, Tax or Investment Advice........................................10
4.10 Passive Investor..........................................................11
SECTION 5. ADDITIONAL AGREEMENTS.....................................................11
5.1 Nonsolicitation...........................................................11
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
5.2 Lock-up Covenant..........................................................11
5.3 Commercially Reasonable Efforts...........................................11
5.4 SEC Filings...............................................................12
SECTION 6. CONDITIONS TO CLOSING.....................................................12
6.1 Conditions to Obligations of All Parties..................................12
6.2 Conditions to the Obligations of Purchaser................................13
6.3 Conditions to Obligations of the Corporation..............................13
SECTION 7. CLOSING...................................................................14
7.1 Deliveries by the Corporation.............................................14
7.2 Deliveries by Purchaser...................................................14
SECTION 8. LEGEND....................................................................15
8.1 Endorsement...............................................................15
8.2 Removal of Legend.........................................................15
SECTION 9. REGISTRATION RIGHTS.......................................................16
9.1 Demand Registration Rights................................................16
9.2 Registration Procedures...................................................16
9.3 Registration Expenses.....................................................18
9.4 Indemnity and Contribution................................................18
SECTION 10. TERMINATION..............................................................20
10.1 Mutual Consent............................................................20
10.2 Other Termination.........................................................20
10.3 Effect of Termination.....................................................20
SECTION 11. MISCELLANEOUS............................................................21
11.1 Additional Actions and Documents..........................................21
11.2 Expenses..................................................................21
11.3 Notices...................................................................21
11.4 Waiver....................................................................22
11.5 Binding Effect............................................................22
11.6 Entire Agreement; Amendment...............................................22
11.7 Severability..............................................................22
11.8 Headings..................................................................23
11.9 Governing Law.............................................................23
11.10 Signature in Counterparts.................................................23
11.11 No Third Party Beneficiaries..............................................23
11.12 Assignability.............................................................23
11.13 Parties Not Partners......................................................24
11.14 Non-Survival of Representations and Warranties............................24
SCHEDULE 3.3.........................................................................1
</TABLE>
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<PAGE> 4
STOCK PURCHASE AND OPTION AGREEMENT
This Stock Purchase and Option Agreement (this "Agreement"),
dated as of the 16th day of May, 1999, is entered into by and between Security
First Technologies Corporation, a Delaware corporation (the "Corporation") and
Intuit Inc., a Delaware corporation ("Purchaser").
WHEREAS, Purchaser desires to subscribe for, and acquire from the
Corporation, such number of shares (the "Shares") of the Corporation's common
stock, par value $.01 per share ("Common Stock"), as determined by dividing
$50,000,000 by the applicable per share price of the Shares (as described below
in Section 1.1), on the terms and under the conditions specified herein, and to
acquire the Option (as defined below in Section 2.1); and
WHEREAS, the Corporation desires to sell and issue to Purchaser
the Shares and issue to Purchaser the Option on the terms and under the
conditions specified herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the sufficiency of which is hereby acknowledged, the parties mutually
agree as follows:
SECTION 1. PURCHASE AND SALE OF THE SHARES.
1.1 SALE AND ISSUANCE OF THE SHARES.
At the Closing (as defined below in Section 1.2) and subject to
the terms and conditions of this Agreement, Purchaser hereby subscribes for, and
agrees to purchase, the Shares at a price per share equal to $51.5032, which
equals the average closing asking price per share of the Common Stock, as quoted
on the Nasdaq Stock Market National Market System, for each of the 10 trading
days preceding the date hereof (the "Per Share Purchase Price"). The number of
Shares shall be 970,813, as determined by dividing $50,000,000 by the Per Share
Purchase Price and rounding down to the nearest whole share. The Corporation
agrees to sell and issue to Purchaser at the Closing for $50,000,000, the
Shares.
1.2 CLOSING.
The closing (the "Closing") of the transaction shall take place
within ten calendar days after the satisfaction or waiver of the conditions set
forth in Section 6, or on such other date as the parties shall mutually agree.
The Closing shall take place at the offices of Hogan & Hartson L.L.P., 555 13th
Street, N.W., Washington, D.C. 20004, or at such other time and place as the
parties shall mutually agree.
<PAGE> 5
SECTION 2. STOCK OPTION
2.1 GRANT OF OPTION.
The Corporation does hereby grant to Purchaser an option (the
"Option") to subscribe for and purchase 4,000,000 shares of Common Stock, less
the number of Shares purchased hereby; provided, however, that (1) if the
Corporation closes on the "Merger," as contemplated by and defined in that
certain Agreement and Plan of Merger dated as of May 16, 1999 by and among the
Corporation, Sahara Strategy Corporation and Edify Corporation (the "Edify
Business Combination Transaction") on or before March 31, 2000, the number of
shares constituting the Option Shares shall be increased by 600,000; and (2) if
the Corporation closes on the "Transaction," as contemplated by and defined in
that certain Share Purchase Agreement dated as of May 16, 1999, by and among S1
Europe Holdings N.V. (a Belgian corporation in the process of incorporation,
represented by Security First Technologies Corporation), the Stockholders of
FICS Group N.V. and, for the limited purposes stated herein, the Corporation and
FICS Group N.V. ("FICS"), and the "S1 Issuance" as contemplated by and defined
in that certain Stock Purchase Agreement dated as of May 16, 1999 by and among
the Corporation, the individuals identified therein and, for the limited
purposes set forth therein, FICS, on or before March 31, 2000, the number of
shares constituting the Option Shares shall be increased by 1,800,000; and (3)
the maximum number of shares constituting the Option Shares shall never exceed
the difference between (A) 6,400,000 and (B) the total number of shares of
Common Stock "beneficially owned" as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), by Purchaser or any
"affiliate" as defined in Rule 405 under the Securities Act of 1933, as amended
(the "Securities Act"), of Purchaser, excluding the Option Shares. The Option
shall vest and therefore become exercisable, if at all, only upon the closing of
the Edify Business Combination Transaction (the "Edify Closing"). If the Edify
Closing does not occur on or before March 31, 2000, the Option will be void in
all respects. If vested, the Option shall be exercisable, in whole or in part,
at any time from the date of the Edify Closing until 5:00 p.m.
Eastern time on the fifth anniversary of the Closing hereunder.
2.2 THE PER SHARE OPTION EXERCISE PRICE.
The maximum number of Option Shares issuable without stockholder
approval pursuant to Rule 4310 of the Rules of the Nasdaq Stock Market shall be
called the "4310 Limit." Under the Option, the exercise price per share of
Common Stock for which the Option may be exercised (the "Per Share Option
Exercise Price") shall equal the Per Share Purchase Price specified in Section
1.1 above; provided, however, that if the grant and exercise of the Option, in
light of the vesting and anti-dilution provisions set forth in Section 2.1
above, exceeds the 4310 Limit, then (a) for that number of Option Shares in
excess of the 4310 Limit, but only for such number of Option Shares, the Per
Share Option Exercise Price shall equal $53.625 and (b) the Purchaser may elect
to exercise any Option Shares for which the Per Share Option Exercise Price is
$53.625 after all other Option Shares have been exercised. The determination of
whether the grant and exercise of the Option exceeds the 4310 Limit shall be
made after consultation by both
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<PAGE> 6
parties with the Nasdaq Stock Market prior to the Closing and shall be set forth
in a written instrument signed by both parties.
2.3 EXERCISE OF THE OPTION.
2.3(a). General. The Option may be exercised in whole or in part
by delivery to the Corporation on any business day, at its principal office,
addressed to the attention of the Corporate Secretary of the Corporation, of a
written notice of exercise, which notice shall specify the number of shares with
respect to which the Option is being exercised. The minimum number of shares of
Common Stock with respect to which an Option may be exercised, in whole or in
part, at any time shall be the lesser of 100 shares or the maximum number of
shares available for purchase under the Option at the time of exercise.
2.3(b). Cash Payment. Unless the Corporation elects to require
Purchaser to effect a net exercise in accordance with Section 2.3(c), payment of
the aggregate Per Share Option Exercise Price for the shares of Common Stock
purchased pursuant to the exercise of an Option shall be made in cash (whether
by check, wire transfer or other reasonably acceptable means).
2.3(c). Net Exercise. At the Corporation's election, in lieu of
paying cash upon the exercise of the Option, Purchaser shall receive a number of
shares of Common Stock calculated according to the following formula without the
payment of any cash in consideration for the cancellation of the Option:
X = [(V - E) x N] divided by V
where "X" equals the number of shares of Common Stock to be received upon
cancellation of the Option pursuant to this Section 2.3(c); "N" equals the
number of shares of Common Stock issuable upon Option exercise if exercised for
cash; "E" equals the Per Share Option Exercise Price; and "V" equals the closing
sales price for such stock or the closing bid if no sales were reported, as
quoted on the Nasdaq National Market System or any other established stock
exchange or national market system (or the largest such exchange or system) for
the trading day immediately preceding the exercise date (or if there are no
sales for such date, then for the last preceding trading day on which there were
sales), as reported in the Wall Street Journal or similar publication. Within
one business day of receiving a notice of exercise described in Section 2.3(a),
the Corporation shall inform Purchaser in writing of its intention to require
Purchaser to effect a net exercise under this Section 2.3(c).
2.3(d). Issuance of Shares. Promptly after the exercise of the
Option (or any portion thereof) and, if Purchaser is not effecting a net
exercise under Section 2.3(c), the payment in full of the aggregate Per Share
Option Exercise Price of the shares of Common Stock covered thereby, Purchaser
shall be entitled to the issuance of a stock certificate or certificates
evidencing ownership of the Option Shares so acquired.
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<PAGE> 7
2.4 TRANSFERABILITY.
Except to the extent provided in Section 11.12, the Option shall
not be assignable or transferable.
2.5 REQUIREMENTS OF LAW.
The Corporation shall not be required to sell or issue any shares
of Common Stock under the Option if the sale or issuance of such shares would
constitute a violation by the Purchaser or the Corporation of any provisions of
any law or regulation of any governmental authority, including without
limitation any federal or state securities laws or regulations.
2.6 CHANGES IN CAPITALIZATION.
If the outstanding shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Corporation by reason of any recapitalization,
reclassification, stock split, reverse split, or stock dividend, or other
increase or decrease in such shares effected without receipt of consideration by
the Corporation, occurring after the date hereof, the number and kind of shares
for which Options are outstanding (including all share numbers in Section 2.1)
shall be adjusted proportionately and accordingly so that the proportionate
interest of the holder of the Option immediately following such event shall, to
the extent practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Option shall not change the aggregate Per Share Option
Price payable with respect to shares subject to the unexercised portion of the
Option outstanding but shall include a corresponding proportionate adjustment in
the Per Share Option Price.
2.7 MERGERS, CONSOLIDATIONS AND ASSET SALES.
If at any time there shall be a merger or consolidation of the
Corporation with or into another corporation, or the sale of the Corporation's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such merger, consolidation or sale, lawful provision shall be
made so that Purchaser shall thereafter be entitled to receive upon exercise of
the Option, during the period specified in the Option and upon payment of the
purchase price or by effecting a net exercise, the number of shares of stock or
other securities or property of the Corporation or the successor corporation
resulting from such merger, consolidation or sale, to which a holder of the
Common Stock deliverable upon exercise of the Option would have been entitled
under the provisions of the agreement in such merger, consolidation or sale if
the Option had been exercised immediately before that merger, consolidation or
sale. In any such case, appropriate adjustment (as determined in good faith by
the Corporation's Board of Directors) shall be made in the application of the
provisions of the Option with respect to the rights and interests of Purchaser
after the merger, consolidation or sale to the end that the provisions of the
Option (including adjustment of the Per Share Option Exercise Price then in
effect and the
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<PAGE> 8
number of Option Shares) shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable after
that event upon exercise of the Option.
2.8 CERTIFICATE AS TO ADJUSTMENTS.
In the case of each adjustment or readjustment of the number of
Option Shares subject to this Agreement and the Per Share Option Exercise Price
pursuant to this Section 2, the Corporation will promptly compute such
adjustment or readjustment in accordance with the terms hereof and cause a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based to be delivered to
the Purchaser. The Corporation will, upon the written request at any time of
Purchaser, furnish or cause to be furnished to Purchaser a certificate setting
forth: (a) such adjustments and readjustments; (b) the Per Share Option Exercise
Price at the time in effect; and (c) the number of Option Shares and the amount,
if any, of other property at the time receivable upon the exercise of the
Option.
2.9 RESERVATION OF COMMON STOCK.
The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the Option, such number of shares of Common Stock as
shall from time to time be sufficient to effect the exercise of the Option in
full.
2.10 NOTICES OF RECORD DATE.
In the event of any taking by the Corporation of a record of the
holders of any class of securities of the Corporation for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation will mail to Purchaser at least five
business days prior to the record date, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right;
provided, however, that the Corporation shall have no obligation under this
Section 2.10 with respect to the taking of any such record which is publicly
disclosed by the Corporation at least five business days prior to the record
date.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
The Corporation represents, warrants and covenants to Purchaser
as follows:
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<PAGE> 9
3.1 ORGANIZATION AND STANDING.
The Corporation is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, and has
the full corporate power and authority to own and operate its properties and
assets and to carry on its business as currently conducted. The Corporation
holds all licenses and permits required for the conduct of its business as now
conducted which, if not in the Corporation's possession, could have a material
adverse effect on the Corporation's financial condition or results of
operations, taken as a whole. The Corporation is duly qualified as a foreign
corporation and is in good standing in all jurisdictions where the conduct of
its business or its ownership or leasing of property requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the Corporation's financial condition or results of
operations, taken as a whole.
3.2 AUTHORIZATION; BINDING OBLIGATION.
The Corporation has all requisite corporate power and authority
to enter into and to deliver this Agreement and perform its obligations
hereunder. The execution, delivery and performance of this Agreement by the
Corporation and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Corporation. This Agreement, when executed and delivered by the Corporation,
shall constitute a valid and binding obligation of the Corporation enforceable
in accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws effecting the
enforcement of creditor's rights.
3.3 CAPITALIZATION.
The authorized capital stock of the Corporation consists of
60,000,000 shares of Common Stock, of which 25,428,778 were issued and
outstanding as of May 10, 1999, and 5,000,000 shares of preferred stock, of
which 466,450 of the 1,637,832 shares designated Series A Convertible Preferred
Stock were issued and outstanding as of May 10, 1999, of which 749,064 of the
749,064 shares designated Series B Redeemable Convertible Preferred Stock were
issued and outstanding as of May 10, 1999, and of which 215,000 of the 215,000
shares designated at Series C Redeemable Convertible Preferred Stock were issued
and outstanding as of May 10, 1999. At such date, there were 12,353,798 shares
of Common Stock reserved for issuance pursuant to employee stock options, of
which options for 9,607,750 shares are currently outstanding. All of the
Corporation's outstanding shares of capital stock were validly issued and are
fully paid and nonassessable. Except as described on Schedule 3.3, there are no
shares of the Corporation's capital stock reserved for issuance or any options,
warrants, rights (including conversion or preemptive rights) or agreements for
the purchase from the Corporation of any shares of its capital stock or
securities exercisable for or convertible into its capital stock.
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<PAGE> 10
3.4 VALIDITY OF SHARES; ISSUANCE.
The Shares and the Option Shares, when issued upon payment of the
consideration therefor in compliance with the provisions of this Agreement will
be validly issued, fully paid and nonassessable, and free of any liens or
encumbrances, and will be issued in compliance with all applicable laws.
3.5 NO CONSENTS.
No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained by the Corporation and no filings are
required to be made by the Corporation in connection with the execution and
delivery of this Agreement and the issuance of the Shares and the Option Shares
hereunder, except as have been so obtained or made prior to the Closing or, with
respect to any that need to be obtained or made subsequent to the Closing, as
will be obtained or made in a timely manner after the Closing, except where the
failure to obtain such orders, permissions, consents, approvals or
authorizations or to make such filings would not affect the Corporation's
ability to issue the Shares or the Option Shares or have a material adverse
effect on the Corporation's financial condition or results of operations or
business prospects, taken as a whole.
3.6 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance with,
this Agreement will not (a) violate any provision of the certificate of
incorporation or bylaws of the Corporation; (b) conflict with or result in a
breach of, or default under, or result in the creation of any lien, claim,
charge or other encumbrance upon any of the assets or properties of the
Corporation pursuant to the provisions of any material agreement, mortgage,
indenture or other document or instrument to which the Corporation is a party or
by which the Corporation or any of its properties or assets is bound, or (c)
violate any existing statutes, laws, ordinances, regulations, orders and other
rules of law applicable to the Corporation or any of its properties or assets,
or applicable to the Corporation's power or authority to perform its obligations
under this Agreement.
3.7 ADDITIONAL INFORMATION.
The information contained in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1998, and all other reports filed
subsequent thereto through the date of the Closing (collectively, the "SEC
Reports") pursuant to Section 13(a) or 15(d) of the Exchange Act, did not and
will not, as the case may be, at the respective dates of filing with the
Securities and Exchange Commission (the "SEC"), contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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<PAGE> 11
3.8 FINANCIAL STATEMENTS.
Each of the consolidated financial statements (including, in each
case any related notes thereto) contained in the SEC Reports (the "Financial
Statements"), (x) was prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited interim financial statements, as may be
permitted by the SEC on Form 10-Q under the Exchange Act) and (y) fairly
presented the consolidated financial position of the Corporation and its
subsidiaries as at the respective dates thereof and the consolidated results of
its operations and cash flows for the periods indicated consistent with the
books and records of the Corporation, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not, or are not expected to be, material in amount. The
balance sheet of the Corporation contained in the Corporation's Form 10-K for
the year ended December 31, 1998 is referred to in this Agreement as the
"Balance Sheet."
3.9 ABSENCE OF CHANGE OF EVENTS.
Except as described in the SEC Reports, between December 31, 1998
and the date of this Agreement no change or event has occurred which would be
reasonably likely to have a material adverse effect on the Corporation's
financial condition or results of operations, taken as a whole.
3.10 BANK REGULATION
The Corporation is not a "bank holding company" as defined under
the Bank Holding Company Act of 1956 or a "savings and loan holding company" as
defined under the Home Owners' Loan Act.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents, warrants and covenants to the Corporation
as follows:
4.1 ORGANIZATION AND STANDING.
Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Purchaser has the full
corporate power and authority to own and operate its properties and assets and
to carry on its business as currently conducted. Purchaser holds all licenses
and permits required for the conduct of its business as now conducted which, if
not in Purchaser's possession, could have a material adverse effect on
Purchaser's financial condition or results of operations, taken as a whole.
Purchaser is duly qualified as a foreign corporation and is in good standing in
all jurisdictions where the conduct of
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<PAGE> 12
its business or its ownership or leasing of property requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on Purchaser's financial condition or results of operations,
taken as a whole.
4.2 AUTHORIZATION.
Purchaser has all requisite corporate power and authority to
enter into and to deliver this Agreement. The execution, delivery and
performance of this Agreement by Purchaser and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Purchaser. This Agreement, when executed and
delivered by Purchaser, shall constitute a valid and binding obligation of
Purchaser enforceable in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws effecting the enforcement of creditor's rights.
4.3 NON-CONTRAVENTION.
The execution, delivery and performance of, and compliance with,
this Agreement will not (a) violate any provision of the certificate of
incorporation or bylaws of Purchaser; (b) conflict with or result in a breach
of, or default under, or result in the creation of any lien, claim, charge or
other encumbrance upon any of the assets or properties of Purchaser pursuant to
the provisions of any material agreement, mortgage, indenture or other document
or instrument to which Purchaser is a party or by which Purchaser or any of its
properties or assets is bound, or (c) violate any existing statutes, laws,
ordinances, regulations, orders and other rules of law applicable to Purchaser
or any of its properties or assets, or applicable to Purchaser's power or
authority to perform its obligations under this Agreement.
4.4 NO CONSENTS.
No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained by Purchaser and no filings are
required to be made by Purchaser in connection with the execution and delivery
of this Agreement and the purchase of the Shares and the Option Shares, if any,
hereunder, except as have been so obtained or made prior to the Closing or, with
respect to any that need to be obtained or made subsequent to the Closing, as
will be obtained or made in a timely manner after the Closing, except where the
failure to obtain such orders, permissions, consents, approvals or
authorizations or to make such filings would not have a material adverse effect
on Purchaser's financial condition or results of operations or business
prospects, taken as a whole.
4.5 ADEQUATE RESOURCES.
Purchaser has sufficient cash and other resources to perform its
obligations hereunder.
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4.6 INVESTMENT EXPERIENCE.
Purchaser is an "accredited investor" as defined in Rule 501(a)
under the Securities Act. Purchaser is aware of the Corporation's business
affairs and financial condition and has had access to and has acquired
sufficient information about the Corporation to reach an informed and
knowledgeable decision to acquire the Shares, and the Option Shares, if any.
Purchaser has such business and financial experience as is required to give it
the capacity to protect its own interests in connection with the purchase of the
Shares, and the Option Shares, if any. Purchaser is able to bear the economic
risk of holding the Shares, and the Option Shares, if any, for an indefinite
period, including the loss of Purchaser's entire investment. The Shares were
not, and, in the case of the Option Shares, if any, will not be, offered or sold
to Purchaser by any form of general solicitation or advertising.
4.7 INVESTMENT INTENT.
Purchaser is purchasing the Shares, and the Option Shares, if
any, for its own account as principal, for investment purposes only, and not
with a view to, or for, resale, distribution or fractionalization thereof, in
whole or in part, within the meaning of the Securities Act. Purchaser
understands that its acquisition of the Shares has not been, and, in the case of
the Option Shares, if any, will not be, registered under the Securities Act or
registered or qualified under any state securities law in reliance on specific
exemptions therefrom, which exemptions may depend upon, among other things, the
bona fide nature of Purchaser's investment intent as expressed herein.
4.8 REGISTRATION OR EXEMPTION REQUIREMENTS.
Purchaser further acknowledges and understands that the Shares,
and the Option Shares, if any, may be required to be held indefinitely, and they
may not be resold or otherwise transferred except in a transaction registered
under the Securities Act or where an exemption from such registration is
available. Purchaser understands that the certificate(s) evidencing the Shares,
and the Option Shares, if any, will be imprinted with a legend that prohibits
the transfer of the Shares, and the Option Shares, if any, unless (a) they are
registered or such registration is not required, and (b) if the transfer is
pursuant to an exemption from registration other than Rule 144 promulgated under
the Securities Act and, if the Corporation shall so request in writing, an
opinion of counsel satisfactory to the Corporation is obtained to the effect
that the transaction is so exempt and in compliance with applicable state law.
4.9 NO LEGAL, TAX OR INVESTMENT ADVICE.
Purchaser understands that nothing in this Agreement or any other
materials presented to Purchaser in connection with the purchase and sale of the
Shares and the Option Shares, if any, constitutes legal, tax or investment
advice. Purchaser has consulted such legal,
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tax and investment advisors as it, in its sole discretion, has deemed necessary
or appropriate in connection with its purchase of the Shares, and the Option
Shares, if any.
4.10 PASSIVE INVESTOR.
Purchaser represents that Purchaser is acquiring the Shares and
the Option without intention of participating in the formulation, determination
or direction of the basic business decisions of the Corporation.
SECTION 5. ADDITIONAL AGREEMENTS.
5.1 NONSOLICITATION.
From the date hereof through and including until five years after
the date of the Closing, each party hereto agrees that it will not, without the
other party's prior written consent, solicit for employment any person who is
now employed by the other party (it being understood that this Section 5.1 shall
not prohibit the placing of general employment advertisements or solicitations
not specifically targeted to any employee or employees of the other party).
5.2 LOCK-UP COVENANT.
During the period beginning on the date hereof and ending on the
date 12 months after the date of the Closing (or such earlier date described
below), Purchaser covenants that it will not, without the prior written consent
of the Corporation, offer, sell or otherwise dispose of, directly or indirectly,
any capital stock of the Corporation which Purchaser may own directly,
indirectly or beneficially; provided, however, that Purchaser may transfer some
or all of the Shares or the Option Shares either (A) to a corporation,
partnership or other legal entity that is controlled by Purchaser, if such
transferee agrees in writing to hold any Shares or Option Shares received
subject to the provisions of this Agreement and to transfer such Shares or
Option Shares back to Purchaser if such transferee ceases to be controlled by
Purchaser or (B) pursuant to Section 11.12.
5.3 COMMERCIALLY REASONABLE EFFORTS.
Purchaser and the Corporation shall use commercially reasonable
efforts to take, or cause to be taken, all actions and do, or cause to be done,
all things necessary, proper or appropriate under applicable laws and
regulations to consummate and make effective the purchase and sale of the Shares
contemplated hereby and any exercise by Purchaser of all or any part of the
Option, including, without limitation, (i) promptly filing Notification and
Report Forms, if any are required, under the Hart Scott Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act") with the Federal Trade
Commission ("FTC") and the Antitrust Division
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of the Department of Justice (the "Antitrust Division"), and responding as
promptly as practicable to any inquiries received from the FTC or the Antitrust
Division for additional information or documentation, and (ii) making all other
necessary filings and obtaining all other necessary governmental and private
party consents, approvals or waivers, required to consummate the transactions
hereunder. Notwithstanding anything to the contrary in this Agreement, neither
Purchaser, nor the Corporation, nor any of their subsidiaries shall be required
to (i) divest, hold separate or license any material business(es), product
line(s) or asset(s), (ii) take any action or accept any limitation that could
reasonably be expected to have a material adverse effect on the financial
condition or results of operations, of Purchaser or the Corporation and their
respective subsidiaries, taken as a whole, as applicable or (iii) agree to any
of the foregoing.
5.4 SEC FILINGS.
Until the Option has been exercised in full or expired in
accordance with its terms, the Corporation agrees to timely file all forms,
reports and documents which the Corporation is required to file with the SEC,
which forms, reports and documents shall not contain any untrue statement of a
material fact or omit to state any 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.
SECTION 6. CONDITIONS TO CLOSING.
6.1 CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
The obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
date of the Closing, of each of the following conditions precedent:
6.1(a). Termination. This Agreement shall not have been
terminated in accordance with its terms.
6.1(b). No Governmental Action. No action or proceeding by or
before any governmental authority shall have been instituted or threatened (and
not subsequently dismissed, settled or otherwise terminated) which is reasonably
expected to restrain, prohibit or invalidate the transactions contemplated by
this Agreement.
6.1(c). Technology Agreements. Each of (i) the certain
Cross-License Agreement dated as of May 16, 1999 by and between Venture Finance
Software Corporation and the Corporation (ii) and the certain Distribution
Agreement dated as of May 16, 1999 by and between the Corporation and Purchaser
has been executed and delivered and all of the conditions precedent to its
effectiveness shall have been satisfied or waived.
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6.1(d) Governmental Clearances. The HSR Act waiting period, if
any, related to this Agreement shall have expired or been terminated, and any
other required authorizations, consents, orders or approvals of, or declarations
or filings with, or expirations of waiting periods imposed by, any government
entity shall have been obtained or filed.
6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER.
The obligations of Purchaser to purchase the Shares as
contemplated by this Agreement are subject to the satisfaction, on or before the
date of the Closing, of each of the following conditions precedent, any one or
more of which may be waived by Purchaser, in its sole and absolute discretion:
6.2(a). Representations and Warranties. The representations and
warranties of the Corporation contained in this Agreement shall be true, correct
and complete in all material respects when made and shall be true and correct as
of the date of the Closing, with the same force and effect as if made on the
date of the Closing.
6.2(b). Compliance with Covenants. The Corporation shall have in
all material respects performed all obligations and agreements and complied with
all covenants contained in this Agreement to be performed and complied with by
the Corporation on or prior to the date of the Closing.
6.2(c). Material Adverse Event. No change, event or effect that
could reasonably be expected to have a material adverse effect on the
Corporation's financial condition or results of operations, taken as a whole,
shall have occurred.
6.2(d). Legal Opinion. Purchaser shall have received from Hogan &
Hartson L.L.P., legal counsel for the Corporation, an opinion dated the date of
the Closing regarding due authorization and valid issuance of the Shares and the
Option Shares by the Corporation.
6.3 CONDITIONS TO OBLIGATIONS OF THE CORPORATION.
The obligations of the Corporation to sell the Shares as
contemplated by this Agreement are subject to the satisfaction, on or before the
date of the Closing, of each of the following conditions precedent, any one or
more of which may be waived by the Corporation, in its sole and absolute
discretion:
6.3(a). Representations and Warranties. The representations and
warranties of Purchaser contained in this Agreement shall be true, correct and
complete in all material respects when made and shall be true and correct as of
the date of the Closing, with the same force and effect as if made on the date
of the Closing.
6.3(b). Compliance with Covenants. Purchaser shall have in all
material respects performed all obligations and agreements and complied with all
covenants contained in this
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Agreement to be performed and complied with by Purchaser on or prior to the date
of the Closing.
SECTION 7. CLOSING.
7.1 DELIVERIES BY THE CORPORATION.
At the Closing, the Corporation shall deliver to Purchaser the
following:
(1) A certificate or certificates registered in
Purchaser's name, representing all of the Shares.
(2) A copy of the resolutions of the Board of Directors of
the Corporation, as certified as of the date of the Closing by the Secretary of
the Corporation, as being true, correct and complete and in full force and
effect, authorizing the execution, delivery and performance of this Agreement by
the Corporation, the authorization, sale, issuance and delivery of the Shares,
and the performance of the Corporation's obligations hereunder.
(3) A certificate of the Corporation signed by an
authorized officer of the Corporation certifying that the representations and
warranties of the Corporation made herein are true, complete and correct in all
material respects as of the date of this Agreement and are true and correct as
of the date of the Closing, and the Corporation has in all material respects
performed all obligations and agreements and complied with all covenants
required to be performed or complied with by the Corporation on or prior to the
Closing.
(4) The legal opinion required by Section 6.2(d) and such
other certificates, instruments or documents as Purchaser may reasonably request
in order to effect and document the transactions contemplated hereby.
7.2 DELIVERIES BY PURCHASER.
At the Closing, Purchaser shall deliver to the Corporation the
following:
(1) $50,000,000, in cash or by wire transfer or certified
or bank cashier's check, payable to the order of the Corporation.
(2) A certificate of Purchaser signed by an authorized
officer of Purchaser certifying that the representations and warranties of
Purchaser made herein are true, complete and correct in all material respects as
of the date of this Agreement and are true and correct as of the date of the
Closing (if different), and Purchaser has in all material respects performed all
obligations and agreements and complied with all covenants required to be
performed or complied with by Purchaser on or prior to the Closing.
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(3) Such other certificates, instruments or documents as
the Corporation may reasonably request in order to effect and document the
transaction contemplated hereby.
SECTION 8. LEGEND.
8.1 ENDORSEMENT.
Each certificate representing the Shares and the Option Shares,
if any, shall bear the following legend (in addition to any legend required by
applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR
ANY OTHER FEDERAL OR STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY OTHER APPLICABLE FEDERAL
SECURITIES LAWS COVERING SUCH SECURITIES OR THE CORPORATION RECEIVES AN
OPINION OF COUNSEL IN FORM SATISFACTORY TO THE CORPORATION THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
Each certificate representing the Shares and any Option Shares issued on
or before May 16, 2000 shall bear the following additional legend:
ADDITIONALLY, THE TRANSFER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER THAT EXPIRE
ON MAY 16, 2000 SPECIFIED IN THE STOCK PURCHASE AND OPTION AGREEMENT
DATED MAY 16, 1999 (THE "AGREEMENT") BETWEEN THE CORPORATION AND THE
ORIGINAL PURCHASER, AND NO TRANSFER OF SHARES SHALL BE VALID OR
EFFECTIVE ABSENT COMPLIANCE WITH SUCH RESTRICTIONS. ALL SUBSEQUENT
HOLDERS OF THIS CERTIFICATE PRIOR TO MAY 16, 2000 WILL HAVE AGREED TO
BE BOUND BY CERTAIN OF THE TERMS OF THE AGREEMENT, INCLUDING SECTION
5.2 OF THE AGREEMENT. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE REGISTERED HOLDER OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION.
8.2 REMOVAL OF LEGEND.
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The legend endorsed on a stock certificate pursuant to Section
8.1 of this Agreement, insofar as it relates to registration under the
Securities Act, shall be removed and the Corporation shall issue a certificate
without such legend to the holder of such Shares, if such Shares are registered
under applicable federal securities laws and a prospectus meeting the
requirements of the rules and regulations of the SEC is available or if such
holder provides to the Corporation an opinion of counsel to such holder
reasonably satisfactory to the Corporation, to the effect that a public sale,
transfer or assignment of such Shares may be made without registration and
without compliance with any restrictions. The legend endorsed on a stock
certificate pursuant to Section 8.1 of this Agreement, insofar as it relates to
additional restrictions specified in this Agreement, shall be removed upon the
expiration of the applicable provisions referenced therein.
SECTION 9. REGISTRATION RIGHTS
9.1 DEMAND REGISTRATION RIGHTS.
9.1(a). At any time after the first anniversary of the Closing,
Purchaser may request registration for sale under the Securities Act of any
Common Stock owned by Purchaser (a "Demand Registration"), provided, however,
that the Corporation shall only be obligated to effect one Demand Registration
for Purchaser. A Demand Registration shall specify the approximate number of
shares of Common Stock that Purchaser requests be registered.
9.1(b). A Demand Registration shall be deemed to occur when such
registration becomes effective under the Securities Act, except that if, after
it becomes effective, such Demand Registration is interfered with by any stop
order, injunction or other order or requirement of the SEC (or any successor
regulator thereto as to federal securities laws) or any other governmental
authority, such registration shall not be deemed to have been effected unless
such stop order, injunction or other order shall have been subsequently vacated
or removed.
9.2 REGISTRATION PROCEDURES.
9.2(a). The Corporation shall have no obligation to include
Common Stock owned by Purchaser in a registration statement unless and until
Purchaser has furnished the Corporation with all information and statements
about or pertaining to Purchaser in such reasonable detail and on such timely
basis as is reasonably deemed by the Corporation to be necessary or appropriate
for the preparation of the registration statement.
9.2(b). Whenever Purchaser has requested that its Common Stock be
registered pursuant to Section 9.1 hereof, the Corporation shall, subject to the
provisions of Section 9.1 and Section 9.2:
(1) prepare and file with the SEC a registration statement
with respect to such Common Stock covered by the Demand Registration and use its
reasonable efforts to
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cause such registration statement to become effective as soon as practicable
after the filing thereof (provided that before filing a registration statement
or prospectus or any amendments or supplements thereto, the Corporation shall
furnish counsel for Purchaser with copies of all such documents proposed to be
filed);
(2) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus contained therein as
may be necessary to keep such registration statement effective for a period of
not less than three months or until Purchaser has completed the distribution
described in such registration statement, whichever occurs first;
(3) furnish to Purchaser the number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
contained in such registration statement (including each preliminary
prospectus), and such other documents as Purchaser may reasonably request;
(4) if required by applicable law, use reasonable efforts
to register or qualify such shares under the state blue sky or securities laws
("Blue Sky Laws") of such jurisdictions as Purchaser reasonably requests (and to
keep such registrations and qualifications effective for a period of three
months, or until Purchaser has completed the distribution of such shares,
whichever occurs first), and to do any and all other acts and things that may be
reasonably necessary or advisable to enable Purchaser to consummate the
disposition of such shares in such jurisdictions; provided, however, that the
Corporation will not be required to do any of the following: (i) qualify
generally to do business in any jurisdiction where it would not be required but
for this Section 9.2(b), (ii) subject itself to taxation in any such
jurisdiction, or (iii) file any general consent to service of process in any
such jurisdiction;
(5) promptly notify Purchaser at any time when a
prospectus relating thereto is required to be delivered under applicable federal
securities laws during the period that the Corporation is required to keep the
registration statement effective, of the occurrence of any event as a result of
which the prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and prepare a supplement or amendment to the prospectus so that, as
thereafter delivered to the purchasers of such shares, the prospectus will not
contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and
9.2(c). The Corporation will use reasonable efforts to cause all
Shares and Option Shares to be listed on the Nasdaq Stock Market National Market
System (or such other securities exchange on which the Common Stock is then
listed).
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9.3 REGISTRATION EXPENSES.
9.3(a). If, pursuant to Section 9.1 hereof, Common Stock owned by
Purchaser is included in a registration statement, then Purchaser shall pay all
transfer taxes, if any, relating to the sale of its Common Stock, the fees and
expenses of its own counsel, and its pro rata portion of any underwriting
discounts or commissions or the equivalent thereof.
9.3(b). Except for the fees and expenses specified in Section
9.3(a) hereof and except as provided below in this Section 9.3(b), the
Corporation shall pay all expenses incident to the registration and to the
Corporation's performance of or compliance with this Agreement, including,
without limitation, all registration and filing fees, fees and expenses of
compliance with Blue Sky Laws, printing expenses, messenger and delivery
expenses, and fees and expenses of counsel for the Corporation and all
independent certified public accountants and other persons retained by the
Corporation. With respect to any registration pursuant to Section 9.3 hereof,
the Corporation shall pay its internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties) and the expenses and fees for listing the securities to be
registered on the Nasdaq Stock Market National Market System, if applicable.
9.4 INDEMNITY AND CONTRIBUTION.
9.4(a). In the event that any Common Stock owned by Purchaser is
sold by means of a registration statement pursuant to Section 9.1 hereof,
Purchaser (for the purposes of this paragraph 9.4(a), the "Indemnifying Person")
agrees to indemnify and hold harmless the Corporation, each of the Corporation's
officers and directors, and each person, if any, who controls or may control the
Corporation within the meaning of the Securities Act (for the purposes of this
paragraph 9.4(a), the Corporation, its officers and directors, and any such
other persons being hereinafter referred to individually as an "Indemnified
Person" and collectively as "Indemnified Persons") from and against all demands,
claims, actions or causes of action, assessments, losses, damages, liabilities,
costs, and expenses, including, without limitation, interest, penalties, and
reasonable attorneys' fees and disbursements, asserted against, resulting to,
imposed upon, or incurred by such Indemnified Person, directly or indirectly
(collectively, hereinafter referred to in the singular as a "Claim" and in the
plural as "Claims"), based upon, arising out of, or resulting from (i) any
untrue statement of a material fact contained in the registration statement or
any omission to state therein a material fact necessary in order to make the
statements made therein not misleading, or (ii) any untrue statement of a
material fact contained in the prospectus, or any supplement or amendment
thereto, or any omission to state therein a material fact necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading, in each case, only to the extent that such Claim
is based upon, arises out of or results from information furnished to the
Corporation by Purchaser for use in connection with the registration statement.
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9.4(b). The Corporation (for the purposes of this paragraph
9.4(b), the "Indemnifying Person") agrees to indemnify and hold harmless
Purchaser, its officers and directors, each person, if any, who controls or may
control Purchaser within the meaning of the Securities Act (for the purposes of
this paragraph 9.4(b), Purchaser, its officers and directors, and any such other
persons also being hereinafter referred to individually as an "Indemnified
Person" and collectively as "Indemnified Persons") from and against all Claims
based upon, arising out of, or resulting from (i) any untrue statement of a
material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein
not misleading, or (ii) any untrue statement of a material fact contained in the
prospectus, or any supplement or amendment thereto, or any omission to state
therein a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading,
except to the extent that such Claim is based upon, arises out of or results
from information furnished to the Corporation by Purchaser for use in the
registration statement.
9.4(c). The indemnification set forth herein shall be in addition
to any liability the Corporation or Purchaser may otherwise have in connection
with any registration of such Common Stock. Within a reasonable time after
receiving definitive notice of any Claim in respect of which an Indemnified
Person may seek indemnification under this Section 9.4, such Indemnified Person
shall submit written notice thereof to Indemnifying Person. The failure of the
Indemnified Person so to notify the Indemnifying Person of any such Claim shall
not relieve the Indemnifying Person from any liability it may have hereunder
except to the extent that (a) such liability was caused or increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person to so notify the Indemnifying Person of any such Claim
shall not relieve the Indemnifying Person from any liability it may have
otherwise than hereunder. The Indemnifying Person shall have the right to
undertake, by counsel or representatives of its own choosing, the defense,
compromise, or settlement (without admitting liability of the Indemnifying
Person or the Indemnified Person) of any such Claim asserted, such defense,
compromise, or settlement to be undertaken at the expense and risk of the
Indemnifying Person, and the Indemnified Person shall have the right to engage
separate counsel, at its own expense, which counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall fail to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person shall
undertake the defense, compromise, or settlement (without admitting liability of
the Indemnified Person or the Indemnifying Person) thereof on behalf of and for
the account and risk of the Indemnifying Person by counsel or other
representatives designated by the Indemnified Person. In the event that any
Claim shall arise out of a transaction or cover any period or periods wherein
the Corporation and Purchaser shall each be liable hereunder for part of the
liability or obligation arising therefrom, then the parties shall, each choosing
its own counsel and bearing its own expenses, defend such Claim, and no
settlement or compromise of such Claim may be made without the joint consent or
approval of the Corporation and Purchaser. Notwithstanding the foregoing, no
Indemnifying Person shall be
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obligated hereunder with respect to amounts paid in settlement of any Claim if
such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
SECTION 10. TERMINATION.
10.1 MUTUAL CONSENT.
The parties may terminate this Agreement at any time by mutual
written agreement.
10.2 OTHER TERMINATION.
The Corporation or the Purchaser may terminate this Agreement
prior to the Closing by giving notice (a "Termination Notice") to the other
party at the time designated in this Section or, in the absence of such
designation, at any time up to and including the date of the Closing, if any one
or more of the following shall have occurred and be continuing:
10.2(a). Termination By Any Party. Any party may terminate this
Agreement if a court or other governmental authority of competent jurisdiction
shall have issued an order, writ, injunction or decree or shall have taken any
other action permanently restraining or otherwise prohibiting the purchase of
the Shares or the exercise of the Option contemplated hereby and such order,
writ, injunction, decree or other action shall have become final and
nonappealable.
10.2(b). Termination By Purchaser. Purchaser may terminate this
Agreement prior to the Closing, if any condition precedent set forth in Sections
6.1 or 6.2 shall not have been satisfied by October 31, 1999.
10.2(c). Termination By the Corporation. The Corporation may
terminate this Agreement prior to the Closing, if any condition precedent set
forth in Sections 6.1 or 6.3 shall not have been satisfied by October 31,1999.
10.3 EFFECT OF TERMINATION.
Termination of this Agreement pursuant to this Section shall not
relieve any party of any liability for a default or other breach, default or
nonperformance under this Agreement. Notwithstanding the foregoing, no party
hereto shall be liable for consequential or punitive damages in connection with
such termination.
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SECTION 11. MISCELLANEOUS.
11.1 ADDITIONAL ACTIONS AND DOCUMENTS.
Each of the parties hereto agrees that it will, at any time,
prior to, at or after the Closing, take or cause to be taken such further
actions, and execute, deliver and file or cause to be executed, delivered and
filed such further documents and instruments (including export license
applications) as may be necessary or reasonably requested in connection with the
consummation of the purchase and sale contemplated by this Agreement or in order
to fully effectuate the purposes, terms and conditions of this Agreement.
11.2 EXPENSES.
Except as specified in Section 9, each party hereto shall pay its
own expenses incurred in connection with this Agreement and in the preparation
for and consummation of the transactions contemplated hereby.
11.3 NOTICES.
All notices, demands, requests, or other communications which may
be or are required to be given or made by any party to any other party pursuant
to this Agreement shall be in writing and shall be hand delivered, mailed by
first-class registered or certified mail, return receipt requested, postage
prepaid, or delivered by overnight air courier, addressed as follows:
(i)if to the Corporation:
Security First Technologies Corporation
3390 Peachtree Road, NE, Suite 1700
Atlanta, GA 30326
Attn.: President
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attn.: Stuart G. Stein, Esq.
(ii) if to Purchaser:
Intuit Inc.
2535 Garcia Avenue
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Mountain View, CA 94043
Attn.: General Counsel
with a copy (which shall not constitute notice) to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attn.: Sarah O'Dowd, Esq.
or such other address as the addressee may indicate by written notice to the
other parties. Each notice, demand, request, or communication which shall be
given or made in the manner described above shall be deemed sufficiently given
or made for all purposes at such time as it is delivered to the addressee (with
the return receipt, the delivery receipt, or the affidavit of messenger being
deemed conclusive but not exclusive evidence of such delivery) or at such time
as delivery is refused by the addressee upon presentation.
11.4 WAIVER.
No waiver by any party of any failure or refusal of any other
party to comply with its obligations under this Agreement shall be deemed a
waiver of any other or subsequent failure or refusal to so comply by such other
party. No waiver shall be valid unless in writing signed by the party to be
charged and only to the extent therein set forth.
11.5 BINDING EFFECT.
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
11.6 ENTIRE AGREEMENT; AMENDMENT.
This Agreement, including the other instruments and documents
referred to herein or delivered pursuant hereto, contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior oral or written agreements, commitments or understandings with respect to
such matters. No amendment, modification or discharge of this Agreement shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification or discharge is sought.
11.7 SEVERABILITY.
If any part of any provision of this Agreement shall be invalid
or unenforceable under applicable law, such part shall be ineffective to the
extent of such invalidity or
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<PAGE> 26
unenforceability only, without in any way affecting the remaining parts of such
provisions or the remaining provisions of said Agreement.
11.8 HEADINGS.
The headings of the sections and subsections contained in this
Agreement are inserted for convenience only and do not form a part or affect the
meaning, construction or scope thereof.
11.9 GOVERNING LAW.
This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed
under and in accordance with the laws of the State of Delaware, excluding the
choice of law rules thereof.
11.10 SIGNATURE IN COUNTERPARTS.
This Agreement may be executed in separate counterparts, none of
which need contain the signatures of all parties, each of which shall be deemed
to be an original, and all of which taken together constitute one and the same
instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
11.11 NO THIRD PARTY BENEFICIARIES.
Except as expressly provided herein, this Agreement is made and
entered into for the sole protection and benefit of the parties hereto, and no
other person or entity shall have any right of action hereon, right to claim any
right or benefit from the terms contained herein or be deemed a third party
beneficiary hereunder.
11.12 ASSIGNABILITY.
All terms and provisions of this Agreement shall be binding upon
and inure to the benefit of the parties hereto, and their respective
transferees, successors and assigns; provided, however, that neither this
Agreement nor any rights, privileges, duties and obligations of the parties
hereto may be assigned or delegated by any party hereto without the prior
written consent of all the parties to this Agreement and any such purported or
attempted assignment shall be null and void ab initio and of no force or effect;
provided, further that Purchaser may assign this Agreement, including the Option
and other rights, privileges, duties and obligations hereunder to (i) any
affiliate of Purchaser, which is wholly or substantially owned directly or
indirectly by Purchaser so long as such assignment does not in any way
materially delay or otherwise materially adversely impact the ability of the
parties hereto to effect the transactions
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<PAGE> 27
contemplated hereby, or (ii) any acquiror of all or substantially all of the
assets or stock of Purchaser whether by merger, tender offer, asset sale or
other transaction.
11.13 PARTIES NOT PARTNERS.
Nothing contained in this Agreement shall constitute any party as
a partner with, agent for or principal of any one or more of the other parties
or their successors and assigns.
11.14 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Except for the representations and warranties of the Corporation
set forth in Section 3.2 hereof, none of the representations, warranties,
covenants and agreements in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Closing, except for those covenants
and agreements contained herein and therein which by their terms apply in whole
or in part after the Closing.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date first above written.
SECURITY FIRST TECHNOLOGIES CORPORATION
By: /s/ James S. Mahan
------------------------------------
Name: James S. Mahan III
Title: Chairman and Chief Executive
Officer
INTUIT INC.
By: /s/ William H. Harris, Jr.
------------------------------------
Name: William H. Harris, Jr.
Title: President & CEO
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<PAGE> 29
SCHEDULE 3.3
1. Common Stock Purchase and Option Agreement by and between Security First
Network Bank and RBC Holdings (Delaware) Inc.
Outstanding Options:
<TABLE>
<CAPTION>
Shares Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
382,556 $6.54 June 30, 1999
347,948 $7.19 December 30, 1999
316,256 $7.91 June 30, 2000
</TABLE>
Effect of these options on the Corporation's fully diluted
capitalization, calculated under the "treasury" method: 794,705 shares.
2. Warrant to purchase common stock of Security First Technologies
Corporation with Royal Bank of Canada. Warrants to purchase 800,000
shares of S1's common stock outstanding at an exercise price of $30.00
per share. The warrant will vest in four equal installments if, as of
four annual measurement dates, Royal Bank has a specified number of
customers using the Virtual Financial Manager software. No impact on
fully diluted number.
3. Warrant to purchase common stock of Security First Technologies
Corporation with Andersen Consulting LLP. Warrants to purchase 200,000
shares of S1's common stock outstanding at an exercise price of $54.94
per share. The warrant will vest, if at all, in three installments of
40,000, 80,000, and 80,000 shares only if S1 enters into agreements to
sell its services or license its products to specified customers as a
result of the relationship with Andersen Consulting. No impact on fully
diluted number.
4. FICS transaction: Currently contemplated that an aggregate of 20,000,000
shares of common stock, including shares of common stock which may be
issued upon exercise of options (18,874,413 shares, calculated to derive
the fully diluted number) will be issued at Closing. The exact breakdown
in terms of a number of shares which will be issued at closing of that
transaction is unavailable. For each additional option granted by FICS
pre-closing, Security First will reduce the number of shares of common
stock it delivers at closing.
5. Edify transaction: Currently contemplated that an aggregate of
approximately 7,521,017 shares of common stock, including shares of
common stock which may be issued upon exercise of options (6,869,799
shares, calculated to derive the fully diluted number) will be issued at
Closing.
<PAGE> 30
6. Shares reserved for issuance upon conversion of preferred stock:
a. The outstanding shares of Series A Preferred are
convertible into 932,900 shares of common stock;
b. The outstanding shares of Series B Preferred are
convertible into 1,070,090 shares of common stock; and
c. The outstanding shares of Series C Preferred are
convertible into 430,000 shares of common stock.
All such shares of common stock are included in the fully diluted
number on an as-converted basis.
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 330,225
<SECURITIES> 1,430,975
<RECEIVABLES> 120,498
<ALLOWANCES> (6,310)
<INVENTORY> 2,267
<CURRENT-ASSETS> 1,954,809
<PP&E> 177,583
<DEPRECIATION> (86,388)
<TOTAL-ASSETS> 2,469,865
<CURRENT-LIABILITIES> 759,647
<BONDS> 36,043
0
0
<COMMON> 619
<OTHER-SE> 1,672,786
<TOTAL-LIABILITY-AND-EQUITY> 2,469,865
<SALES> 239,701
<TOTAL-REVENUES> 239,701
<CGS> 50,070
<TOTAL-COSTS> 51,955
<OTHER-EXPENSES> 142,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,344
<INCOME-PRETAX> 109,609
<INCOME-TAX> (37,054)
<INCOME-CONTINUING> 72,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,555
<EPS-BASIC> 1.18
<EPS-DILUTED> 1.12
</TABLE>
