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, 1997 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
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(Address of principal executive offices, including zip code)
(415) 944-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
46,635,019 shares of Common Stock, $0.01 par value, as of May 30, 1997
2
FORM 10-Q
INTUIT INC.
INDEX
PART I FINANCIAL INFORMATION
PAGE
NUMBER
------
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1996 and April 30, 1997.......................... 3
Condensed Consolidated Statements of Operations for
the three and nine months ended April 30, 1996 and 1997... 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended April 30, 1996 and 1997............. 5
Notes to Condensed Consolidated Financial
Statements................................................ 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................. 22
ITEM 6: Exhibits and Reports on Form 8-K.............................. 23
Signatures.................................................... 24
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, APRIL 30,
1996 1997
----------- ---------
(In thousands, except par value; unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 44,584 $ 116,649
Short-term investments................................................. 153,434 209,185
Marketable securities.................................................. -- 147,075
Accounts receivable, net............................................... 49,473 67,848
Inventories............................................................ 4,448 2,756
Prepaid expenses....................................................... 9,269 9,762
Deferred income taxes.................................................. 19,205 22,335
----------- -----------
Total current assets........................................... 280,413 575,610
Property and equipment, net.............................................. 95,611 78,434
Purchased intangibles.................................................... 16,449 22,213
Goodwill................................................................. 15,194 29,141
Long-term deferred income tax asset...................................... 6,892 6,892
Other assets............................................................. 3,461 5,608
----------- -----------
Total assets............................................................. $ 418,020 $ 717,898
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 33,972 $ 33,397
Accrued compensation and related liabilities........................... 15,473 22,048
Deferred revenue....................................................... 18,974 24,456
Income taxes payable................................................... -- 22,448
Deferred income taxes.................................................. -- 44,990
Other accrued liabilities.............................................. 42,270 117,885
----------- -----------
Total current liabilities...................................... 110,689 265,224
Deferred income taxes.................................................... 2,513 5,071
Long-term notes payable.................................................. 5,583 34,433
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized -- 3,000 shares
Issued and outstanding -- none....................................... -- --
Common stock, $0.01 par value
Authorized -- 250,000 shares
Issued and outstanding -- 45,807 and 46,557 shares, respectively..... 458 466
Additional paid-in capital............................................. 530,818 552,085
Net unrealized loss on marketable securities........................... -- (5,936)
Cumulative translation adjustment and other............................ (502) (853)
Accumulated deficit.................................................... (231,539) (132,592)
----------- -----------
Total stockholders' equity..................................... 299,235 413,170
----------- -----------
Total liabilities and stockholders' equity............................... $ 418,020 $ 717,898
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1996 1997 1996 1997
------- ------- ------- -------
(In thousands, except per share amounts; unaudited)
Net revenue................................................... $132,069 $ 136,326 $ 453,315 $ 504,810
Costs and expenses:
Cost of goods sold:
Product.................................................. 35,028 28,917 111,685 114,583
Amortization of purchased software....................... 241 526 1,157 680
Customer service and technical support...................... 27,034 27,040 86,617 95,111
Selling and marketing....................................... 33,861 40,196 112,839 130,832
Research and development.................................... 18,176 22,393 56,369 67,784
General and administrative.................................. 7,538 8,737 27,536 31,361
Charge for purchased research and development............... -- 6,080 -- 11,009
Amortization of goodwill and purchased intangibles.......... 10,241 4,284 30,688 20,778
------- ------- ------- -------
Total costs and expenses............................ 132,119 138,173 426,891 472,138
------- ------- ------- -------
Income (loss) from operations....................... (50) (1,847) 26,424 32,672
Interest and other income and expense, net.................... 2,019 2,806 5,390 6,612
------- ------- ------- -------
Income from continuing operations before income taxes......... 1,969 959 31,814 39,284
Income tax provision.......................................... 696 471 25,158 22,400
------- ------- ------- -------
Income from continuing operations............................. 1,273 488 6,656 16,884
Loss from operations of discontinued operations, net of
income tax benefits of $929 and $3,158, respectively......... (1,581) -- (5,376) --
Gain on sale of discontinued operations, net of income tax
provision of $52,617........................................ -- -- -- 71,240
------- ------- ------- -------
Net income (loss)............................................. $ (308) 488 1,280 88,124
======= ======= ======= =======
Income per share from continuing operations................... $ 0.03 $ 0.01 $ 0.14 $ 0.36
Loss per share from discontinued operations................... (0.04) -- (0.11) --
Income per share from sale of discontinued operations.......... -- -- -- 1.50
------- ------- ------- -------
Net income (loss) per share.................................... $ (0.01) $ 0.01 $ 0.03 $ 1.86
======= ======= ======= =======
Shares used in computing net income (loss) per share........... 45,229 47,252 47,425 47,407
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
APRIL 30,
1996 1997
----------- -----------
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $ 1,280 $ 88,124
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net gain on sale of discontinued operations....................... -- (71,240)
Discontinued operations loss offset against gain.................. -- (9,668)
Charge for purchased research and development..................... -- 11,009
Amortization of goodwill and other purchased intangibles.......... 33,500 22,563
Depreciation...................................................... 15,222 22,220
Changes in assets and liabilities:
Accounts receivable............................................ (33,516) (18,175)
Inventories.................................................... 747 1,984
Prepaid expenses............................................... (4,555) (459)
Deferred income tax assets and liabilities..................... 262 (178)
Accounts payable............................................... 22,505 (2,317)
Accrued compensation and related liabilities................... (4,002) 6,031
Deferred revenue............................................... 3,756 1,782
Accrued acquisition liabilities................................ (5,351) (5,483)
Other accrued liabilities...................................... 33,117 54,055
Income taxes payable........................................... 13,105 19,499
----------- -----------
Net cash provided by operating activities.................... 76,070 119,747
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment..................................... (60,881) (15,895)
Sale of marketable securities.......................................... -- 29,500
Cash transferred for acquisitions and dispositions, net of cash
acquired............................................................. -- (34,224)
Increase in other assets............................................... (1,290) (1,202)
Purchase of short-term investments..................................... (179,540) (197,008)
Liquidation and maturity of short-term investments..................... 114,925 137,354
----------- -----------
Net cash used in investing activities........................ (126,786) (81,475)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt................................... (1,612) (1,427)
Net proceeds from issuance of long-term debt........................... -- 30,277
Net proceeds from issuance of common stock............................. 9,464 4,943
----------- -----------
Net cash provided by financing activities.................... 7,852 33,793
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (42,864) 72,065
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 76,298 44,584
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 33,434 $ 116,649
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. ("Intuit" or the "Company") is a leading developer of personal
finance, small business accounting and tax preparation software. The Company
develops, markets and supports software products and services that enable
individuals, professionals and small businesses to automate commonly performed
financial tasks and better organize, understand, manage and plan their financial
lives. Principal products include personal finance products, small business
accounting software, personal and professional tax preparation software, online
financial services and supplies, such as invoice forms and checks, for use with
certain of the Company's products. The Company markets its products through
distributors and retailers and by direct sales to OEMs and individual users. The
Company's customers are located primarily in North America, Europe and Asia.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company for the three and nine months ended April 30, 1996 and 1997 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for those periods. Results of operations for
the three and nine months ended April 30, 1997 are not necessarily indicative of
the results to be expected for the year ending July 31, 1997 or any future
period. These condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ended July 31, 1996 included in the Company's Annual Report
on Form 10-K dated October 24, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining both the collectibility of
accounts receivable and reserves for returns and exchanges, and in assessing the
carrying value of goodwill and purchased intangibles. Actual results could
differ from those estimates.
Net Revenue
Revenue is generally recognized at the time of shipment, net of allowances for
estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collections of
accounts receivable are probable. Reserves are provided for quantities of
current product versions that are considered excess and for inventories of all
previous versions of products at the time new product versions are introduced.
Advance payments are recorded as deferred revenue until the products are shipped
or services are provided. Rebate costs are provided at the time revenue is
recognized. The Company provides warranty reserves for the estimated cost of
replacing defective products at the time revenue is recognized.
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Customer Service and Technical Support
Customer service and technical support costs include order processing, customer
inquiries and telephone assistance. The costs of post-contract customer support
are included in customer service and technical support expenses and are not
included in cost of goods sold.
Cash, Cash Equivalents, Short-Term Investments and Marketable Securities
The Company considers all highly liquid investments purchased with a maturity of
three months or less at date of acquisition 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.
Marketable securities are carried at fair value. Unrealized gains and losses on
marketable securities are included in stockholders' equity. The following is a
summary of cash, cash equivalents, short-term investments and marketable
securities at April 30, 1997:
(In thousands; unaudited) GROSS UNREALIZED
COST GAIN LOSS FAIR VALUE
---------- -------- -------- ---------
Cash and cash equivalents:
Cash....................................... $ 20,612 $ -- $ -- $ 20,612
Money market funds......................... 8,948 -- -- 8,948
Municipal bonds............................ 49,754 -- -- 49,754
Commercial paper........................... 7,972 -- -- 7,972
U.S. Government securities................. 29,363 -- -- 29,363
---------- -------- -------- ---------
$ 116,649 $ -- $ -- $ 116,649
========== ======== ======== =========
Short-term investments:
Certificates of deposit.................... $ 9,374 $ -- $ -- $ 9,374
Corporate notes............................ 42,909 -- -- 42,909
Municipal bonds............................ 120,434 -- -- 120,434
U.S. Government securities................. 36,468 -- -- 36,468
---------- -------- -------- ---------
$ 209,185 $ $ $ 209,185
========== ======== ======== =========
Marketable securities:
Checkfree common stock..................... $ 156,350 $ $(9,275) $ 147,075
========== ======== ======== =========
Cash, cash equivalents, short-term investments and marketable securities totaled
$472.9 million at April 30, 1997. The gross unrealized loss of $9.3 million on
marketable securities at April 30, 1997 is before a tax benefit of $3.3 million.
Marketable securities in Checkfree Corporation ("Checkfree") were obtained as a
result of the Company's sale of its online banking and bill payment transaction
processing business to Checkfree in January 1997. See Note 3 of Notes to
Condensed Consolidated Financial Statements.
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired (goodwill) is
generally amortized on a straight-line basis over periods generally not
exceeding three years. The cost of other intangible assets acquired is generally
amortized on a straight-line basis over periods from 1 to 10 years. The carrying
values of goodwill and intangible assets are reviewed on a regular basis for the
existence of facts or circumstances, both internal and external, that may
suggest impairment. To date no such impairment has been indicated. Should there
be an impairment in the future, the Company will measure the amount of the
impairment based on undiscounted expected future cash flows from the impaired
assets. The cash flow estimates that will be used will reflect management's best
estimates, using appropriate and customary assumptions and projections at the
time. Components of intangible assets are as follows:
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NET BALANCE AT
LIFE IN JULY 31, APRIL 30,
YEARS 1996 1997
----- --------- ---------
(Dollars in thousands; unaudited)
Goodwill............................................... 3 $15,194 $29,141
Customer lists......................................... 3-5 6,952 4,187
Covenants not to compete............................... 4-5 4,248 2,571
Purchased technology................................... 1-5 857 8,492
Other intangibles...................................... 1-10 4,392 6,963
Other intangibles include items such as trade names, logos and other intangible
assets acquired. The balances presented above are net of total accumulated
amortization of $125.1 million and $139.8 million at July 31, 1996 and April 30,
1997, respectively.
Concentration of Credit Risk
The Company's product revenues are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Significant
technological changes in the industry or customer requirements, or the emergence
of competitive products with new capabilities or technologies, could adversely
affect the Company's operating results.
Financial investments that potentially subject the Company to concentration of
credit and/or valuation risk consist principally of short-term investments,
marketable securities and trade accounts receivable. The Company holds shares of
Checkfree common stock as marketable securities, representing approximately
19.5% of Checkfree's outstanding common stock at April 30, 1997. The Company's
ability to dispose of these securities is restricted by volume trading
limitations and other contractual arrangements. Subsequent declines in fair
value below cost that are deemed to be other than temporary will be reported in
earnings. The Company's remaining investment portfolio is diversified and
generally consists of short-term investment grade securities. The credit risk in
the Company's accounts receivable is mitigated by the fact that the Company
performs ongoing credit evaluations of its customers' financial condition and
that accounts receivable are primarily derived from customers in North America.
Generally, no collateral is required. The Company maintains reserves for
estimated credit losses and such losses have historically been within
management's expectations.
New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes a fair value method of
accounting for stock options and other equity instruments. The Company adopted
SFAS No. 123 beginning in fiscal year 1997 and will use the disclosure method as
described in the statement. The required disclosure will be included in the
Company's Annual Report on Form 10-K for the year ending July 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which will require a change in the method used to compute earnings per share and
the restatement of all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact would have resulted in an increase in primary earnings per
share for the nine months ended April 30, 1997 of $0.04 per share. There would
have been no effect on primary earnings per share for the three months ended
April 30, 1997 and the three and nine months ended April 30, 1996. The Company
has not yet determined what the impact of SFAS No. 128 will be on the
calculation of fully diluted earnings per share. The disclosure requirements of
SFAS No. 128 will be effective for the Company's 1998 fiscal year.
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Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. ACQUISITIONS
In January 1996, the Company completed its acquisition of Milkyway KK, a
provider of PC-based financial software in Japan. In February 1997, Milkyway
KK's name was changed to Intuit KK. The acquisition was treated as a pooling of
interests for accounting purposes. In addition to the issuance of 650,000 shares
of Intuit common stock, the Company recorded acquisition related expenses of
$0.6 million. The accompanying condensed consolidated financial statements are
presented on a combined basis for all periods.
In June 1996, the Company completed its acquisition of Interactive Insurance
Services Corp. ("IIS"), a developer of an Internet based system designed to
allow consumers to obtain personalized insurance information from national
insurance carriers via the World Wide Web. The acquisition, which was treated as
a purchase for accounting purposes, had a purchase price of approximately $9.0
million. Under the terms of the acquisition agreement, the Company issued
169,181 shares of Intuit common stock and options to purchase 3,255 shares of
Intuit common stock to IIS stock and option holders, respectively, at the date
of acquisition. Approximately $8.0 million of in-process research and
development was expensed in the quarter ended July 31, 1996.
In September 1996, the Company completed its acquisition of GALT Technologies,
Inc. ("GALT"), a provider of mutual fund information on the World Wide Web. The
acquisition was treated as a purchase for accounting purposes. Under the terms
of the acquisition agreement, the Company issued 212,053 shares of Intuit common
stock and options to purchase approximately 33,686 shares of Intuit common stock
to GALT stock and option holders, respectively, at the date of acquisition. Of
the purchase price of $14.6 million, approximately $8.5 million was allocated to
identified intangible assets and goodwill, which will be amortized over a period
not to exceed three years. Approximately $4.9 million of in-process research and
development was expensed in the quarter ended October 31, 1996.
The following information shows the pro forma net revenue, net loss and net loss
per share of Intuit and GALT combined as if the acquisition had taken place as
of the beginning of fiscal 1996:
Three Months Ended Nine Months Ended
April 30, 1996 April 30, 1996
--------------- --------------
(In thousands, except per share amounts; unaudited)
Net revenue................................. $ 132,352 $ 453,872
Net loss ................................... (1,465) (4,581)
Net loss per share.......................... $ (0.03) $ (0.10)
The above unaudited pro forma results of operations for the nine months ended
April 30, 1996 reflect a charge for in-process research and development of $4.9
million. Both periods reflect the amortization of intangible assets related to
the GALT acquisition. Pro forma information for the nine months ended April 30,
1997 is not shown as it is not materially different from that presented in the
Company's statement of operations.
In February 1997, the Company's French subsidiary completed its acquisition of
Somma France S.A.R.L., a French software company, for a purchase price of
approximately $2.3 million. In addition, assumed liabilities were $0.8 million.
The cash acquisition was treated as a purchase for accounting purposes.
Approximately $2.5 million was allocated to identified intangible assets and
goodwill, which will be amortized over a period not to exceed three years.
In March 1997, Intuit KK, a wholly owned subsidiary of the Company, completed
its acquisition of Nihon Micom Co. Ltd. ("Nihon Micom"), a Japanese small
business accounting software company, for cash. The acquisition was
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treated as a purchase for accounting purposes. The purchase price of the
acquisition was approximately $39.9 million. In addition, liabilities of
approximately $9.6 million were assumed. Approximately $32.8 million was
allocated to identified intangible assets and goodwill, which will be amortized
over a period not to exceed three years. An in-process research and development
charge of $6.1 million was expensed in the quarter ended April 30, 1997. Under
the terms of the agreement, the Company issued options to purchase 89,170 shares
of Intuit common stock to employees of Nihon Micom on the date of acquisition.
Consistent with the guidelines established by Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" ("SFAS No. 86"), for each acquisition accounted
for as a purchase, the Company determined the amounts allocated to developed and
in-process research and development based on whether technological feasibility
had been achieved and whether there was an alternative future use for the
technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage. Accordingly, no amounts were capitalized on the basis of future
alternative use.
3. DISCONTINUED OPERATIONS AND DIVESTITURE
On January 27, 1997, the Company completed the sale of its online banking and
bill payment transaction processing subsidiary, Intuit Services Corporation
("ISC"), to Checkfree in exchange for 12.6 million shares of Checkfree common
stock. The closing price of Checkfree common stock was $14.75 per share on
January 24, 1997, the last business day prior to closing. As a result of the
divestiture, the Company recorded a gain on sale of discontinued operations of
$71.2 million, net of tax, in the quarter ended January 31, 1997. This gain has
been recorded net of certain contingent items relating to the divested business,
the majority of which are anticipated to be resolved by fiscal year end. In
addition to this gain, the Company recorded a $10 million service and license
fee in January 1997 received from Checkfree for providing connectivity to the
Company's Quicken software for Checkfree customers. In February 1997, the
Company sold two million shares of the acquired Checkfree common stock, bringing
its investment in Checkfree to approximately 19.6% of the resulting 54.2 million
shares of Checkfree common stock outstanding following consummation of the
transaction. The Company is accounting for its investment in Checkfree using the
cost method of accounting.
The divested online banking and bill payment business of ISC has been accounted
for as a discontinued operation and, accordingly, its operating results have
been segregated for fiscal 1996. Revenue and net loss from discontinued
operations were $14.3 million and $6.3 million, respectively, for the fiscal
year ended 1996. Operating results for discontinued operations for the period
beginning August 1, 1996 until the close of the sale on January 27, 1997 were
deferred. These losses were approximately $5.8 million, net of a tax benefit of
approximately $3.9 million, and were netted against the gain on sale of
discontinued operations.
4. OTHER ACCRUED LIABILITIES
JULY 31, APRIL 30,
1996 1997
-------- --------
(In thousands; unaudited)
Reserve for returns and exchanges......................................... $24,229 $ 57,247
Acquisition and disposition related items................................. 3,677 26,049
Rebates................................................................... 2,787 7,443
Post-contract customer support............................................ 3,500 6,378
Other accruals............................................................ 8,077 20,768
------- --------
$42,270 $117,885
======= ========
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5. INCOME TAXES
The provision for income taxes was computed by applying the estimated annual
effective tax rate to recurring operations and amortization of intangible
assets, exclusive of the write-off of in-process research and development and
the amortization of goodwill.
6. NOTES PAYABLE
In March 1997, the Company's Japanese subsidiary, Intuit KK, entered into a
three year loan agreement with Japanese banks for approximately $30.3 million
related to its acquisition of Nihon Micom. The interest rate is variable based
on the Tokyo interbank offered rate ("TIBOR") or the short-term prime rate
offered in Japan. At April 30, 1997, the interest rate was approximately 0.9%.
The fair value of the loan approximates cost, as the interest rate on the
borrowings is adjusted periodically to reflect market rates. The loan is
guaranteed by the Company and the Company has pledged approximately $32.5
million of its cash and short-term investments to be restricted as security for
the borrowings at April 30, 1997.
7. LITIGATION
The Company is subject to numerous legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes that
the ultimate amount of liability, if any, with respect to any pending actions
will not materially affect the financial position, results of operations or
liquidity of the Company, the ultimate outcome of any litigation is uncertain.
If an unfavorable outcome were to occur, the impact could be material.
Furthermore, any litigation, regardless of outcome, can have an adverse impact
on the Company as a result of defense costs, diversion of management resources
and other factors. See Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1996 and its Form 10-Q for the quarters ended
October 31, 1996 and January 31, 1997.
8. SUBSEQUENT EVENTS
On May 29, 1997, the Company announced that it had signed a letter of intent to
sell its consumer software and direct marketing subsidiary, Parsons Technology
Inc. ("Parsons"), acquired in September 1994, to Broderbund Software, Inc. The
transaction is subject to the approval of the Broderbund and Intuit Boards of
Directors, government approvals and the satisfaction of other terms and
conditions. The Company will retain the Parsons line of tax products.
On June 10, 1997, the Company announced it will restructure its U.S. technical
support operations, outsource its European technical support and centralize
other European activities to a single location in Germany, the Company's largest
European market. The Company will close its technical support facility in Rio
Rancho, New Mexico and consolidate the operations of that facility within its
Tucson, Arizona technical support facility. In addition, the Company will
centralize its European operations in Munich, Germany while retaining sales
offices in the United Kingdom and France. As a result of these actions and
concurrent staff reductions in Northern California, the Company's worldwide
workforce will be reduced by approximately 270 employees. Although these steps
are expected to improve operational efficiency and enable the Company to
increase its investment in new business opportunities, they will result in
material restructuring charges in future periods.
On June 11, 1997, the Company announced that it has agreed to purchase 2.9
million shares of Excite, Inc. common stock for a purchase price of $13.50 per
share, or approximately $40 million. The shares will represent approximately 19%
of Excite's outstanding common stock after the transaction. Excite, Inc. is a
leading provider of Internet search and navigation services. In connection with
this investment, the Company also announced an agreement with Excite to jointly
program, promote and distribute a new online financial channel. The Company will
be the exclusive provider and aggregator of consumer financial content for all
of Excite's Internet services. Excite will provide hosting as well as
advertising sales services and software services, and will become the exclusive
search and navigation service promoted in the Company's Quicken, QuickBooks and
TurboTax products. The channel is expected to include financial information and
news, stock quotes, directories of services, tracking and decision tools and
transactional services. The companies expect that revenue will be generated from
a
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combination of advertising and fees for enabling transactions for financial
products and services. The transactions have been approved by the Company's
Board of Directors, but completion of the Company's investment in Excite is
subject to certain terms and conditions, including execution of a definitive
business agreement and obtaining regulatory approval. The Company expects to use
the cost method of accounting for its investment in Excite common stock.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are subject to
risks and uncertainties. Statements indicating that the Company "expects,"
"anticipates" or "believes" are forward-looking, as are all other statements
concerning future financial results, product offerings or other events that have
not yet occurred. There are several important factors that could cause actual
results or events to differ materially from those anticipated by the
forward-looking statements contained in the following discussion. Such factors
include, but are not limited to: the growth rates of the Company's market
segments; the positioning of the Company's products in those segments; the
Company's ability to effectively manage its various businesses, and the growth
of its businesses, in a rapidly changing environment; the timing of new product
introductions; retail sell-through of the Company's products (particularly the
leveling off or decline of retail sales of the Company's Quicken product); the
emergence of the Internet, resulting in new competition and unclear consumer
demands; the Company's ability to adapt and expand its product offerings for the
Internet environment; the emergence of the electronic financial services
marketplace; the cost of implementing the Company's electronic financial
services strategy; consumer and financial institution acceptance of online
financial service offerings; the Company's ability to establish successful
strategic relationships with financial institutions and processors of financial
information; changing alliances among financial institutions and other strategic
partners; the emergence of competition from these entities as well as from other
software companies; variations in the cost of, and demand for, customer service
and technical support; the effectiveness of the Company's recently announced
restructuring in controlling these costs; price pressures and the competitive
environment in the consumer and small business software and supplies industry;
the possibility of calculation errors or other "bugs" in the Company's software
products; changes in laws that may govern any of the Company's products or
services; the timing and consumer acceptance of new product releases and
services (including current users' willingness to upgrade from older versions of
the Company's products); the Company's ability to successfully transition its
online banking and bill payment operations to Checkfree Corporation; possible
fluctuations in value of the Company's investment in Checkfree Corporation and
anticipated investment in Excite, Inc.; the consummation of possible
acquisitions; the Company's ability to integrate acquired operations into its
existing business; the Company's ability to successfully complete the proposed
disposition of its Parsons Technology subsidiary; and the Company's ability to
penetrate international markets and manage its international operations.
Additional information on these and other factors that could affect the
Company's financial results are included in the Company's Form 10-K for the
fiscal year ended July 31, 1996 and its Form 10-Qs for the fiscal quarters ended
October 31, 1996 and January 31, 1997 on file with the Securities and Exchange
Commission.
ACQUISITIONS AND DIVESTITURES
In January 1996, the Company completed its acquisition of Milkyway KK, a
provider of PC-based financial software in Japan. In February 1997, Milkyway
KK's name was changed to Intuit KK. The acquisition was treated as a pooling of
interests for accounting purposes. In addition to the issuance of 650,000 shares
of Intuit common stock, the Company recorded acquisition related expenses of
$0.6 million. The accompanying condensed consolidated financial statements, and
discussion thereof, are presented on a combined basis for all periods.
In June 1996, the Company completed its acquisition of Interactive Insurance
Services Corp. ("IIS"), a developer of an Internet based system designed to
allow consumers to obtain personalized insurance information from national
insurance carriers via the World Wide Web. The acquisition, which was treated as
a purchase for accounting purposes, had a purchase price of approximately $9.0
million. Under the terms of the acquisition agreement, the Company issued
169,181 shares of Intuit common stock and options to purchase 3,255 shares of
Intuit common stock to IIS stock and option holders, respectively, at the date
of acquisition. Approximately $8.0 million of in-
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process research and development was expensed in the quarter ended July 31,
1996.
In September 1996, the Company completed its acquisition of GALT Technologies,
Inc. ("GALT"), a provider of mutual fund information on the World Wide Web. The
acquisition was treated as a purchase for accounting purposes. Under the terms
of the acquisition agreement, the Company issued 212,053 shares of Intuit common
stock and options to purchase approximately 33,686 shares of Intuit common stock
to GALT stock and option holders, respectively, at the date of acquisition. Of
the purchase price of $14.6 million, approximately $8.5 million was allocated to
identified intangible assets and goodwill which will be amortized over a period
not to exceed three years. Approximately $4.9 million of in-process research and
development was expensed in the quarter ended October 31, 1996.
In February 1997, the Company's French subsidiary completed its acquisition of
Somma France S.A.R.L., a French software company, for a purchase price of
approximately $2.3 million. In addition, assumed liabilities were $0.8 million.
The cash acquisition was treated as a purchase for accounting purposes.
Approximately $2.5 million was allocated to identified intangible assets and
goodwill, which will be amortized over a period not to exceed three years.
In March 1997, Intuit KK, a wholly owned subsidiary of the Company, completed
its acquisition of Nihon Micom Co. Ltd. ("Nihon Micom"), a Japanese small
business accounting software company, for cash. The acquisition was treated as a
purchase for accounting purposes. The purchase price of the acquisition was
approximately $39.9 million. In addition, liabilities of approximately $9.6
million were assumed. Approximately $32.8 million was allocated to identified
intangible assets and goodwill, which will be amortized over a period not to
exceed three years. An in-process research and development charge of $6.1
million was expensed in the quarter ended April 30, 1997. Under the terms of the
agreement, the Company issued options to purchase 89,170 shares of Intuit common
stock to employees of Nihon Micom on the date of acquisition.
Consistent with the guidelines established by Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" ("SFAS No. 86"), for each acquisition accounted
for as a purchase, the Company determined the amounts allocated to developed and
in-process research and development based on whether technological feasibility
had been achieved and whether there was an alternative future use for the
technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage. Accordingly, no amounts were capitalized on the basis of future
alternative use.
Acquisition-related costs reduced net income by approximately $10.9 million and
$32.5 million for the three and nine month periods ended April 30, 1997,
respectively, compared to $10.5 million and $31.8 million for the three and nine
month periods ended April 30, 1996, respectively. Assuming no acquisitions in
addition to those discussed above and no impairment of value resulting in an
acceleration of amortization, future amortization is anticipated to reduce net
income by approximately $38.0 million, $20.5 million, $12.8 million and $5.4
million for the fiscal years ending July 31, 1997 through 2000, respectively.
Because of the high levels of non-cash amortization expense arising from the
acquisitions discussed above, the Company may report significant operating
losses in the fiscal year ending July 31, 1997 and future periods. In addition,
if the Company completes additional acquisitions in the future that are
accounted for as purchases, operating results could be materially adversely
affected by future amortization relating to such acquisitions.
On January 27, 1997, the Company completed the sale of its online banking and
bill payment transaction processing subsidiary, Intuit Services Corporation
("ISC"), to Checkfree Corporation ("Checkfree") in exchange for 12.6 million
shares of Checkfree common stock. The closing price of Checkfree common stock
was $14.75 per share on January 24, 1997, the last business day prior to
closing. As a result of the divestiture, the Company recorded a gain on sale of
discontinued operations of $71.2 million, net of tax, in the quarter ended
January 31, 1997. This gain has been recorded net of certain contingent items
relating to the divested business, the majority of which are anticipated
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to be resolved by fiscal year end. In February 1997, the Company sold two
million shares of the acquired Checkfree common stock, bringing its investment
in Checkfree to approximately 19.6% of the resulting 54.2 million shares of
Checkfree common stock outstanding following consummation of the transaction.
The Company is accounting for its investment in Checkfree using the cost method
of accounting. See Notes 1 and 3 of Notes to Condensed Consolidated Financial
Statements.
On May 29, 1997, the Company announced that it had signed a letter of intent to
sell its consumer software and direct marketing subsidiary, Parsons Technology
Inc. ("Parsons"), acquired in September 1994, to Broderbund Software, Inc. The
transaction is subject to the approval of the Broderbund and Intuit Boards of
Directors, government approvals and the satisfaction of other terms and
conditions. The Company will retain the Parsons line of tax products.
Although the Company believes the transactions discussed above were in the best
interests of the Company and its stockholders, there are significant risks
associated with these transactions. The acquisitions have expanded the Company's
size, product lines, personnel and geographic locations. The Company's ability
to integrate and organize these new businesses and successfully manage its
growth will necessitate improvements in its operational, financial and
management information systems. The Company is continually taking steps to
improve its internal processes, but there can be no assurance that problems in
these processes will not occur in the future. The divestiture of ISC has
resulted in the elimination of the Company's direct participation in the online
banking and bill payment processing business. The Company's investment in the
shares of Checkfree common stock, which has declined in value since the shares
were acquired, could decrease further in value due to market fluctuations and
the success or failure of Checkfree. If such decline was determined to be other
than temporary, charges to earnings would result. There is also a risk that the
Company will be unable to divest the Checkfree common stock shares quickly
because of contractual and legal restrictions on the sale of such shares and the
relatively large percentage of Checkfree common stock owned by the Company.
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RESULTS OF OPERATIONS
Set forth below are certain condensed consolidated statement of operations data
as well as such data as a percentage of net revenue for the three and nine month
periods ended April 30, 1996 and 1997.
THREE MONTHS ENDED
APRIL 30,
1996 1997
---------------------------- --------------------------
(Dollars in thousands; unaudited) Dollars % of Revenue Dollars % of Revenue
------------ ------------ ---------- ------------
Net revenue:
Software .............................................. $ 110,609 83.8% $ 113,708 83.4%
Supplies .............................................. 21,460 16.2 22,618 16.6
--------- ----- --------- -----
132,069 100.0 136,326 100.0
Costs and expenses:
Cost of goods sold:
Product ........................................... 35,028 26.5 28,917 21.2
Amortization of purchased software ................ 241 0.2 526 0.4
Customer service and technical support ................ 27,034 20.5 27,040 19.8
Selling and marketing ................................. 33,861 25.6 40,196 29.5
Research and development .............................. 18,176 13.8 22,393 16.4
General and administrative ............................ 7,538 5.7 8,737 6.4
Charge for purchased research and development ......... -- -- 6,080 4.5
Amortization of goodwill and purchased
intangibles ....................................... 10,241 7.7 4,284 3.2
--------- ----- --------- -----
Total costs and expenses ..................... 132,119 100.0 138,173 101.4
--------- ----- --------- -----
Loss from operations ........................ (50) -- (1,847) (1.4)
Interest and other income and expense, net ................ 2,019 1.5 2,806 2.1
--------- ----- --------- -----
Income from continuing operations before income
taxes ................................................... 1,969 1.5 959 0.7
Income tax provision ...................................... 696 0.5 471 0.3
--------- ----- --------- -----
Income from continuing operations ......................... 1,273 1.0 488 0.4
Loss from operations of discontinued operations,
net of income tax benefit of $929 ....................... (1,581) (1.2) -- --
--------- ----- --------- -----
Net income (loss) ......................................... $ (308) (0.2)% $ 488 0.4%
========= ===== ========= =====
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NINE MONTHS ENDED
APRIL 30,
1996 1997
------------------------- ------------------------
(Dollars in thousands; unaudited) Dollars % of Revenue Dollars % of Revenue
------- ------------ ------- ------------
Net revenue:
Software......................................... $397,094 87.6% $439,124 87.0%
Supplies......................................... 56,221 12.4 65,686 13.0
--------- ------ ---------- ------
453,315 100.0 504,810 100.0
Costs and expenses:
Cost of goods sold:
Product...................................... 111,685 24.6 114,583 22.7
Amortization of purchased software........... 1,157 0.3 680 0.1
Customer service and technical support........... 86,617 19.1 95,111 18.9
Selling and marketing............................ 112,839 24.9 130,832 25.9
Research and development......................... 56,369 12.4 67,784 13.4
General and administrative....................... 27,536 6.1 31,361 6.2
Charge for purchased research and development.... -- -- 11,009 2.2
Amortization of goodwill and purchased
intangibles.................................. 30,688 6.8 20,778 4.1
--------- ------ ---------- ------
Total costs and expenses................ 426,891 94.2 472,138 93.5
--------- ------ ---------- ------
Income from operations.................. 26,424 5.8 32,672 6.5
Interest and other income and expense, net........... 5,390 1.2 6,612 1.3
--------- ------ ---------- ------
Income from continuing operations before income
taxes.............................................. 31,814 7.0 39,284 7.8
Income tax provision................................. 25,158 5.5 22,400 4.4
--------- ------ ---------- ------
Income from continuing operations.................... 6,656 1.5 16,884 3.4
Loss from operations of discontinued operations,
net of income tax benefit of $3,158................ (5,376) (1.2) --
--
Gain on sale of discontinued operations, net of
income tax provision of $52,617.................... -- 71,240 14.1
--------- ------ ---------- ------
--
Net income........................................... $ 1,280 0.3% $ 88,124 17.5%
========= ====== ========== ======
NET REVENUE for the three and nine month periods ended April 30, 1997 increased
over the comparable periods of fiscal 1996 by 3% and 11%, respectively. These
increases are the result of higher unit sales of both personal and professional
versions of the Company's tax preparation products, continued growth in small
business products including Quickbooks, and increased financial supplies revenue
over comparable periods in fiscal 1996. Net revenue for the nine month period
ended April 30, 1997 includes a $10 million service and license fee received
from Checkfree in the Company's fiscal second quarter for providing connectivity
to Quicken for Checkfree customers. Overall net revenue increases were offset in
part by a decrease in consumer products revenue. In particular, Quicken net
revenue decreased as a result of lower average selling prices and a decrease in
units shipped into the retail channel during the three and nine month periods
ended April 30, 1997, as compared with the three and nine month periods of the
prior year. Revenues from the Company's consumer software products, including
Quicken, have been adversely affected by general softness in consumer software
markets. The Company expects that its revenues will continue to be affected by
this industry softness for the remainder of fiscal 1997.
The Company's net revenue varies significantly by quarter due to seasonality in
consumer buying patterns as well as the timing of new and upgraded product
releases. Seasonality is particularly strong for the Company's personal and
professional tax return preparation products, the sales of which are mostly
compressed into the November through
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March time frame. As in previous years, to assure wide availability of the tax
return preparation products at retail as tax filing deadlines approach, the
Company ships more tax product into the retail channel than is expected to sell
through. Consistent with prior years, a significant reserve is established at
the time of initial shipment for estimated product returns. However, there can
be no assurance that these reserves will be adequate to cover actual product
returns.
Revenue is generally recognized at the time of product shipment or delivery of
electronic or other services, net of allowances for estimated future returns and
for excess quantities in distribution channels, provided that no significant
vendor obligations exist and collections of accounts receivable are probable.
Reserves are provided for quantities of current product versions that are
considered excess and for inventories of all previous versions of products at
the time new product versions are introduced. Advance payments are recorded as
deferred revenue until the products are shipped or services are provided. Rebate
costs are incurred at the time revenue is recognized. The Company provides
warranty reserves at the time revenue is recognized for the estimated cost of
replacing defective products. There can be no assurance that the reserves
established by the Company will be sufficient to cover future obligations.
Providers of consumer software, including the Company, are selling increasingly
through alternative channels, such as OEM, or "bundling" products for a single
low price. While this strategy introduces new customers to products, it also
significantly reduces average selling prices. The consumer software industry has
experienced significant platform shifts in the past, such as from DOS to Windows
and Windows to Windows 95. There is increased competition on the Windows and
Windows 95 platforms, including lower priced products and, at times, free
promotional products that compete with the Company's software. In an effort to
maintain market share in light of these competitive pressures, the Company has
used price reductions and other promotional offers, which have negatively
impacted net revenue and income from operations. The Company may continue these
practices in the future. Alternatively, the Company could maintain prices and
risk losing market share. As platform shifts continue to occur, there are risks
that competitors could introduce new products before the Company's products are
available on a particular platform or that customers may not accept a platform
that the Company has chosen or will choose to pursue. Further consolidation of
the software industry or changes in the personal computer industry could lead to
increased competition in innovation and pricing strategies. The Company cannot
quantify the degree to which these factors have affected or will affect its
business and results of operations. In addition, a number of the Company's
competitors have greater financial resources than the Company, potentially
giving them a competitive advantage.
There can be no assurance that the Company's new or upgraded products will be
accepted, will not be delayed or canceled, or will not contain errors or "bugs"
that could affect the performance of the products or cause damage to a user's
data. If any of these events occurs, the Company may experience reduced net
revenue, loss of market share, increased maintenance release costs and higher
technical support costs. The Company derives significant portions of its
revenues from certain distributors and resellers. Bankruptcy or insolvency of a
distributor or retailer could materially adversely affect the Company's future
revenue streams for a period of time.
COST OF GOODS SOLD decreased to 21.6% and 22.8% of net revenue for the three and
nine month periods ended April 30, 1997, respectively, from 26.7% and 24.9% of
net revenue for the three and nine month periods ended April 30, 1996,
respectively. Software and services cost of goods sold, excluding
acquisition-related amortization costs, decreased to 17.9% and 20.0% of software
and services net revenue for the three and nine month periods ended April 30,
1997, compared to 23.4% and 22.1% in the three and nine month periods ended
April 30, 1996. This improvement resulted primarily from a shift in the mix of
product sales to higher margin deluxe CD-ROM versions, reductions in the cost of
materials, improved inventory management and fewer warranty expenses for current
year products.
Supplies cost of goods sold decreased to 37.8% and 40.5% of supplies net revenue
for the three and nine month periods ended April 30, 1997, compared to 42.6% in
the three and nine month periods ended April 30, 1996. This decrease is
primarily due to increased efficiency in the order taking process, resulting in
lower costs and fewer re-orders.
The Company plans to continue to take actions to improve operational efficiency
and reduce the materials costs of
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all its products. However, there can be no assurance that margin improvements
will be achieved or that current margins will be sustained.
It is the Company's policy to guarantee the calculations of its tax products and
to pay any penalties and interest due the IRS from its customers as a result of
calculation errors. Such errors could have a material adverse effect on the
Company's results of operations. As of April 30, 1997, claims made for such
errors have been insignificant, although significant claims may be received in
the future.
CUSTOMER SERVICE AND TECHNICAL SUPPORT expenses were 19.8% and 18.9% of net
revenue for the three and nine month periods ended April 30, 1997, respectively,
compared to 20.5% and 19.1% of net revenue for the three and nine month periods
ended April 30, 1996, respectively. The Company incurs a fixed base of support
costs, which is increased by seasonal staffing and third-party services during
periods of seasonally higher sales. Customer service and technical support costs
were slightly lower as a percentage of net revenue in the three and nine month
periods ended April 30, 1997 as compared to the same periods a year ago, due to
improved management of existing facilities and resources and the impact of
improved product quality in fiscal 1997. The Company expects these costs to
continue to decrease as a percentage of annual revenue based on anticipated
consolidation of existing facilities announced in June 1997 (see Note 8 of Notes
to Condensed Consolidated Financial Statements). Post-contract customer support
costs are accrued at the time revenue is recognized, are included in customer
service and technical support expenses and are not included in cost of goods
sold.
SELLING AND MARKETING expenses were 29.5% and 25.9% of net revenue for the three
and nine month periods ended April 30, 1997, respectively, compared to 25.6% and
24.9% of net revenue for the three and nine month periods ended April 30, 1996,
respectively. These expenses increased as a percentage of net revenue primarily
as a result of higher marketing program expenses in response to increased tax
product competition and the support of international product launches in the
quarter ended April 30, 1997.
RESEARCH AND DEVELOPMENT expenses were 16.4% and 13.4% of net revenue for the
three and nine month periods ended April 30, 1997, respectively, and 13.8% and
12.4% of net revenue for the three and nine month periods ended April 30, 1996,
respectively. The increases are due primarily to continued development of new
versions and upgrades of software products and development of electronic
commerce services including the insurance and investments areas. The Company has
experienced, and expects to continue to experience, significant growth in
research and development expenses for development efforts on new and existing
products and services, including foreign versions of its products and the
transition of its consumer financial services business to the Internet.
GENERAL AND ADMINISTRATIVE expenses were 6.4% and 6.2% of net revenue for the
three and nine month periods ended April 30, 1997, respectively, and 5.7% and
6.1% of net revenue for the three and nine month periods ended April 30, 1996,
respectively.
INTEREST AND OTHER INCOME AND EXPENSE, NET, was $2.8 million and $6.6 million
for the three and nine month periods ended April 30, 1997, respectively. This
compares to $2.0 million and $5.4 million, respectively, for the corresponding
periods in the prior year. The increases over the prior year periods are largely
the result of increased interest income due to higher average cash and
short-term investment balances in the current year.
INCOME TAXES. For the three months ended April 30, 1997, the Company recorded an
income tax provision of $0.5 million on pretax income of $1.0 million. The tax
rate differs from the statutory rate primarily because of the nondeductible
status of goodwill amortization. There was no valuation allowance for deferred
tax assets of $29.2 million at April 30, 1997 based on management's assessment
that current anticipated levels of taxable income will be sufficient to realize
the net deferred tax assets.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's earnings and stock price have been and may continue to be subject
to significant volatility, particularly on a quarterly basis. The Company has
previously experienced shortfalls in revenue and earnings from levels expected
by securities analysts, which has had an immediate and significant adverse
effect on the trading price of the Company's common stock. There can be no
assurance that this will not recur in the future.
The Company's consumer software business has experienced revenue declines in
recent quarters due to increasing competition, pricing pressures and a general
softness in the consumer software industry. While the Company's Quicken product
continues to maintain a strong market share, its revenues have declined. The
Company is currently attempting to transition much of its consumer financial
products and services business to the Internet, expanding its Quicken Financial
Network website. While the Company believes the Internet presents significant
growth opportunities for the Company's consumer business, there can be no
assurance as to the timing or amount of Internet-related revenue. As part of its
increased focus on Internet opportunities, the Company recently announced that
it has signed a letter of intent to sell its consumer software and direct
marketing subsidiary, Parsons Technology. See "Acquisitions and Divestitures"
discussion above.
The Company's business has experienced and is expected to continue to experience
substantial seasonality, due principally to the timing of the tax return
preparation season, timing of launches for new or updated versions of products
and, to a lesser extent, consumer software buying patterns. Sales of the
Company's tax products are concentrated in the period from November, when
certain professional tax products are released, through March, when consumers
purchase tax preparation products in advance of the April 15 filing deadline. In
addition, sales of the Company's Quicken products are typically strongest during
the year-end holiday buying season. As a result of these seasonal patterns, the
Company typically generates more than 100% of its income from operations before
acquisition-related charges during its fiscal quarters ending January 31 and
April 30. Because of these seasonal factors and a significantly increased level
of operating expenses to support the Company's expanded infrastructure and
development efforts, the Company incurred significant losses from operations
before acquisition-related charges during its fiscal quarters ended July 31,
1996 and October 31, 1996. The Company expects to continue to report seasonal
losses before acquisition-related costs and amortization in the July and October
quarters of future fiscal years. In addition, the Company expects to incur
significant amortization expenses relating to historical and future acquisitions
which may be accounted for as purchases. Such amortization charges will
adversely affect operating income and net income in future quarters.
The Company's quarterly operating results have varied significantly in the past,
and are likely to vary significantly in the future, based upon a number of
factors. In addition to seasonal factors, the Company's quarterly operating
results can be affected significantly by the number and timing of new product or
version releases by the Company as well as the timing of product announcements
or introductions by the Company's competitors, discretionary marketing and
promotional expenditures, research and development expenditures and a variety of
non-recurring events such as acquisitions or claims relating to calculation
errors in the Company's tax products. Products are generally shipped as orders
are received and, consequently, quarterly sales and operating results depend
primarily on the volume and timing of orders received during the quarter, which
are difficult to forecast. A significant portion of the Company's operating
expenses are relatively fixed and planned expenditures are based on sales
forecasts. Thus, if net revenue levels are below expectations, operating results
are likely to be materially adversely affected. In particular, net income, if
any, may be disproportionately affected because only a small portion of the
Company's expenses varies with revenue in the short term. In response to
competition, the Company may also choose to reduce prices or increase spending,
which has, and may continue to, adversely affect the Company's operating results
and financial condition. There can be no assurance that the Company will sustain
revenue growth in the future or be profitable in any future period. Due to the
foregoing factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards, changing customer requirements and
new competitors. The introduction of products and services embodying new
technologies such as the Internet and
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the emergence of new industry standards and practices, including changes in tax
laws, regulations or procedures, can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability to enhance
its existing products and services, develop new products and services that
address the changing requirements of its customers, develop additional products
and services for new or other platforms and environments (including the
Internet) and anticipate or respond to technological advances, emerging industry
standards and practices and regulatory changes in a timely, cost-effective
manner. In response to major industry changes reflected by the increasing
popularity of the Internet among consumers and financial service providers, the
Company has expanded its Internet activities and is transitioning a significant
portion of its consumer business to the Internet. There can be no assurance that
such initiatives can be successfully implemented or that they will result in
increased revenue or profits for the Company. Conversely, there can be no
assurance that consumers' use of the Internet, particularly for commercial
transactions, will continue to increase as rapidly as it has during the past few
years.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had $325.8 million in cash and short-term
investments excluding $147.1 million in marketable securities of Checkfree
common stock (see Note 3 of Notes to Condensed Consolidated Financial
Statements), a $127.8 million increase from July 31, 1996. During the nine
months ended April 30, 1997, operating activities provided $119.7 million in
cash, compared with $76.1 million in the nine months ended April 30, 1996. The
increase was primarily due to the seasonality of the Company's business which
generally results in the majority of cash receipts occurring in the January and
April quarters. The Company's investing activities used $81.5 million in cash in
the nine months ended April 30, 1997 compared to $126.8 million in the
comparable period of the prior year. The decrease in net cash used for investing
activities in the current period is due to higher fixed asset expenditures in
the prior year resulting from moving the Company's headquarters to Mountain
View, California and relocating its San Diego, California operations to a new
facility. In addition, the Company received $29.5 million in proceeds from the
sale of 2.0 million shares of Checkfree common stock in February 1997. These
favorable cash flows from investing activities compared to the prior year were
offset by a use of funds for the acquisition of Nihon Micom in March 1997 (see
"Acquisitions and Divestitures" discussion). The Company's financing activities
provided $33.8 million and $7.9 million of cash in the nine months ended April
30, 1997 and 1996, respectively. This increase is due primarily to proceeds from
a note payable obtained in March 1997 to fund the acquisition of Nihon Micom.
The Company enters into leases for new or expanded facilities in the normal
course of its business. During fiscal 1996, the Company began moving its
headquarters from Menlo Park, California to larger facilities in Mountain View,
California. The move is expected to be completed in calendar year 2000. The
Company also relocated its operations in San Diego, California to a new office
facility in June 1996. The Company leases various other properties throughout
the world. The Company has no other significant capital expenditure commitments,
although additional cash may be used for strategic acquisitions in the future.
The Company believes cash and short-term investments will be sufficient to meet
the Company's anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
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PART II: OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
The Company is subject to numerous legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes that
the ultimate amount of liability, if any, with respect to any pending actions
will not materially affect the financial position, results of operations or
liquidity of the Company, the ultimate outcome of any litigation is uncertain.
If an unfavorable outcome were to occur, the impact could be material.
Furthermore, any litigation, regardless of outcome, can have an adverse impact
on the Company as a result of defense costs, diversion of management resources
and other factors. See Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1996 and its Form 10-Q for the quarters ended
October 31, 1996 and January 31, 1997.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit 10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended
through May 2, 1997.
Exhibit 11.01 Computation of net income (loss) per share.
Exhibit 27.01 Financial Data Schedule (filed only in electronic format).
(B) REPORTS ON FORM 8-K:
None
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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 13, 1997 By: /s/ JAMES J. HEEGER
----------------------------------
James J. Heeger
Senior Vice President and
Chief Financial Officer
Date: June 13, 1997 By: /s/ GREG J. SANTORA
----------------------------------
Greg J. Santora
Vice President of Finance
(Chief Accounting Officer)
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EXHIBIT INDEX
Exhibit 10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended
through May 2, 1997.
Exhibit 11.01 Computation of net income (loss) per share.
Exhibit 27.01 Financial Data Schedule (filed only in electronic format).
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