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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended JULY 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21180
INTUIT INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of Incorporation) (IRS Employer Identification No.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of Principal Executive Offices, including zip code)
(650) 944-6000
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(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Preferred Stock Purchase Rights
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 30, 1998, there were 59,480,974 shares of the Registrant's
common stock, $0.01 par value, outstanding, which is the only outstanding class
of common stock of the Registrant. As of that date, the aggregate market value
of the shares of common stock held by non-affiliates of the Registrant (based on
the closing price of $46.5625 for the common stock as quoted by the Nasdaq
National Market on such date), was approximately $2,439,952,387.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in January 1999 are incorporated by reference into
Part III of this report on Form 10-K.
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FISCAL 1998 FORM 10-K
INTUIT INC.
INDEX
ITEM Page
PART I
ITEM 1: Business....................................................................... 3
ITEM 2: Properties..................................................................... 19
ITEM 3: Legal Proceedings.............................................................. 20
ITEM 4: Submission of Matters to a Vote of Security Holders............................ 20
ITEM 4A: Executive Officers of the Registrant........................................... 20
PART II
ITEM 5: Market for Registrant's Common Equity
and Related Stockholder Matters............................................ 24
ITEM 6: Selected Financial Data........................................................ 25
ITEM 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 26
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk..................... 36
ITEM 8: Financial Statements and Supplementary Data.................................... 37
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 60
PART III
ITEM 10: Directors and Executive Officers of the Registrant............................. 60
ITEM 11: Executive Compensation......................................................... 60
ITEM 12: Security Ownership of Certain Beneficial Owners
and Management............................................................. 60
ITEM 13: Certain Relationships and Related Transactions................................. 60
PART IV
ITEM 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................................... 60
Signatures ........................................................................... 66
Intuit, the Intuit logo, Quicken, QuickBooks, QuickBooks Pro, TurboTax,
MacInTax, ProSeries and InsureMarket, among others, are registered trademarks
and/or registered service marks of Intuit Inc. or one of its subsidiaries.
Quicken.com, QuickenMortgage, Quicken Business CashFinder, Lacerte, QuickTax and
QuickSteuer, Kobanto and Yayoi, among others, are trademarks and/or service
marks of Intuit Inc. or one of its subsidiaries.
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PART I
ITEM 1
BUSINESS
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: competition (page 15); our strategy and implementation with respect to
the Internet and our Internet-based businesses, including but not limited to our
ability to operationally support and manage these new businesses (page 8); the
timing of availability for future products and services, including availability
of our online payroll service (pages 9 and 13); market growth, sales of new
products and customer upgrade rates, including but not limited to sales and
upgrade rates for our new QuickBooks(R) multi-user product (pages 9 and 13); the
value and size of our equity investments in other companies, including Checkfree
Corporation and Excite, Inc. (Notes 1 and 17 of the financial statement notes on
pages 43 and 58); our ability to achieve Year 2000 readiness in our business
operations, our products and our dealings with significant third parties (page
34); the expected impact of our recent acquisition of Lacerte Software
Corporation and Lacerte Educational Services Corporation (now called Lacerte
Educational Services, Inc.) (page 4); our relationships with retailers and other
issues with respect to our distribution channels (pages 14 and 15);
international operations (page 12); our regulated businesses (page 18); customer
service and technical support (page 17); regulatory changes (page 18); and the
impact of acquisitions generally (pages 26 and 33).
BUSINESS OVERVIEW
BUSINESS STRATEGY AND FISCAL 1998 HIGHLIGHTS
Intuit's mission is to revolutionize the way individuals, small businesses and
financial professionals manage their finances. We provide a range of small
business accounting, tax preparation and consumer finance desktop software,
financial supplies (such as computer checks, envelopes and invoices), and
Internet products for individuals and small businesses. Our products and
services include QuickBooks(R), the leading small business accounting software;
TurboTax(R), the leading personal tax preparation software; our popular
ProSeries(R) and Lacerte(TM) professional tax products; Quicken(R), the leading
personal finance software; and the Quicken.com(SM) website, one of the fastest
growing online financial sites on the Internet. Our revenues come primarily from
the United States, Japan, Germany, Canada and the United Kingdom. We sell
products through retail distribution channels and direct sales to customers, as
well as through electronic distribution channels such as our Quicken Store
website.
The Internet is a pervasive force that has reshaped our business and is
providing new opportunities and challenges. We recently made some major changes
to our business strategy to capitalize on these opportunities. While desktop
software and related products and services still provide most of our revenue,
our Internet-based businesses are growing rapidly, and the Internet has become
an integral part of our business strategy in all of our business divisions. In
addition, we intend to provide a broader range of products and services targeted
at the small business community, a market that we believe has significant growth
potential.
We are currently focusing our strategic efforts in three directions. First, we
have added Internet connectivity to our tax, small business and personal finance
desktop software. Second, we have created, and are substantially expanding, new
Internet-based resources and businesses in order to establish Intuit as a
premier provider of personal and business financial information and services on
the Internet. Third, we are expanding our small business offerings.
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Our primary business objective during fiscal 1998 was to make progress on the
three strategic efforts described above, while still delivering solid financial
performance to our stockholders. These are some of our major events for fiscal
1998:
- - Increased traffic, service offerings and aggregated content on our
Quicken.com personal finance website, through strategically important
distribution relationships, continuing product and service development
and the launch of marketspaces for mortgages and auto insurance
- - Launched the first multi-user version of our QuickBooks Pro(R) small
business accounting software
- - Expanded one of our most profitable business areas through the
acquisition of Lacerte and its professional tax software product line
(financed by a public offering of 10 million shares of Common Stock)
- - Initiated a new focus on employer services for small businesses, with
the development of our online payroll service that we introduced on a
limited basis in September 1998
- - Returned to profitability in our Quicken desktop business
- - Improved our focus in strategically important areas by selling our
Parsons subsidiary
Although fiscal 1998 was a successful year for Intuit in many respects, we
continue to face significant challenges and risks. For example, our
international operations had a disappointing year relative to our expectations,
our Internet businesses are requiring significant levels of investment, and
competition is intensifying, particularly for TurboTax and our Internet
products. We encourage you to read the entire Form 10-K carefully to better
understand our business and our financial results, and the risks and
uncertainties we face.
SIGNIFICANT TRANSACTIONS
Strategic Internet Distribution Relationships with Excite, America Online and
CNNfn. In June 1997, we entered into an agreement with Excite Inc. to jointly
develop, promote and distribute a new online financial channel now called Excite
Money and Investing by Quicken.com. The channel debuted in early fiscal 1998. We
are the exclusive provider and aggregator of personal financial content for all
of Excite's Internet services, and we share revenue from the channel with
Excite. See Note 5 of the financial statement notes (page 50) for more details.
In February 1998, we announced a three-year agreement with AOL under which
Intuit is the exclusive provider, subject to certain limited exceptions, of
online tax preparation and filing, multi-carrier life and auto insurance and
multi-lender mortgage services on both the AOL service and AOL.com, which is
AOL's default site for Internet access by AOL members. In addition, on AOL.com,
Intuit is the primary source of financial content for the Personal Finance Web
Channel. We have guaranteed payments to AOL totaling $30 million over three
years, and AOL may also be eligible for additional revenue-sharing after we have
recovered certain advances and other amounts. See Note 5 of the financial
statement notes (page 50) for more details.
In October 1997, we entered into a five-year agreement with CNNfn, a financial
news website, to create a co-branded personal finance channel. The channel,
which launched in December 1997, includes business news and financial
information. In exchange for marketing fees paid to CNNfn, we receive a share of
certain revenues from the site.
Our relationships with Excite, AOL and CNNfn have helped us increase the
customer base for our Internet-based products, and we expect this benefit to
continue. This should help us attract more financial institutions to participate
in the online financial products that we offer and eventually generate
increasing revenue for us from a combination of advertising and transaction
fees. During fiscal 1998, page views per month on our Quicken.com website
increased from 16 million to 90 million. Advertising sales also increased
significantly during fiscal 1998, although they are still not material. While we
are encouraged by these results, we can't be certain that these growth levels
can be sustained. See "Risks of Internet Commerce," on page 8.
Acquisition of Lacerte. On June 22, 1998, we acquired substantially all of the
assets and liabilities of Lacerte Software Corporation and Lacerte Educational
Services Corporation (now called Lacerte Educational Services, Inc.), for a
price of $400 million in cash. We financed the acquisition with a public
offering of Common Stock in
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the fourth quarter of fiscal 1998. See MD&A (page 26) and Notes 3 and 8 of the
financial statement notes (pages 49 and 54) for details about the acquisition
and the offering. Lacerte is a leading provider of tax preparation software and
services for tax professionals. We believe that the acquisition may give us
several strategic benefits. First, we believe it will contribute to our
recurring revenue base, since users of Lacerte's products (like users of our
ProSeries tax products), must purchase annual updates that reflect changes in
tax law and tax forms. Currently a very high percentage of Lacerte's customers
renew their licenses each year. Second, Lacerte has been a highly profitable
company, and to the extent that we can sustain its profitability, it could make
a significant contribution to our earnings. Third, we believe that the
acquisition will enable us to compete more effectively with other large
providers of professional tax preparation software. As the complexity of
professional tax products increases, our annual cost of producing and supporting
these products also increases. We believe it is important to expand our customer
base and sales volume in order to improve our competitive position, and Lacerte
had approximately 30,000 customers as of March 31, 1998. Fourth, we expect the
acquisition to strengthen our presence in the professional income tax compliance
market. Although the Intuit ProSeries product line and Lacerte's product line
are both designed for tax professionals, they function differently and can
provide complementary solutions for different practitioner preferences.
Our acquisition of Lacerte poses a number of risks that could adversely affect
our ability to achieve the anticipated benefits. We currently intend to have
Lacerte operate as a separate entity, with separate sales and marketing,
research and development, customer support and administrative organizations.
This may create operating inefficiencies and communication difficulties. These
challenges may be exacerbated by the fact that Lacerte is located in Texas,
where we have not had any material operations. The resources required to
establish relationships with, and procedures for communicating with, Lacerte may
affect our ability to successfully pursue other opportunities for a period of
time. The departure of key Lacerte employees or significant numbers of Lacerte
employees, which is a risk with any acquisition, would negatively affect us.
Lacerte customers may be uncertain about our plans and ability to support both
Lacerte's products and our existing ProSeries software, and this could hinder
our ability to retain these customers, which would negatively affect us. Lacerte
is in the process of a major product line transition that will require
significant development efforts. The departure of engineers, or other
difficulties caused by the acquisition, could hinder Lacerte's ability to
successfully complete this development. If, in the future, Intuit and Lacerte
decide to integrate their operations, the integration could present a number of
risks and divert management's attention from other matters.
We assumed substantially all of the liabilities related to Lacerte's business
with the exception of certain tax liabilities. If unanticipated liabilities are
discovered later, we will likely have to satisfy those liabilities, which could
have a material adverse effect on our operating results. The acquisition
resulted in a one-time charge for in-process research and development of $53.8
million in fiscal 1998 and will result in $358.2 million of amortization
expenses over the next three to five years. See MD&A, page 33, and Note 3 of the
financial statement notes (page 49), for a more detailed discussion of the
financial impact of the Lacerte acquisition.
Other Recent Acquisitions and Divestitures. During the past few years we made
several other acquisitions to expand our business more rapidly in selected
areas, and we have sold businesses that no longer support our corporate
strategy. We acquired two Japanese companies that make small business accounting
software, and two companies that have been important to the growth of our
Quicken.com website. We sold our banking and bill payment processing subsidiary
(Intuit Services Corporation) and our direct marketing consumer software
subsidiary (Parsons) to allow us to increase our focus in strategically
important areas. These transactions have had, and will continue to have, a
significant impact on our financial results, and they may make period-to-period
comparisons of our financial results less meaningful. For more details about
these transactions and their impact, see Notes 3 and 4 of the financial
statement notes, beginning on page 48.
While we believe our recent acquisitions were in the best interests of Intuit
and its stockholders, there are significant risks associated with these
transactions. The acquisitions have expanded our size, product lines, personnel
and geographic locations. Our ability to integrate and organize these new
businesses has required improvements in our operational, financial and
management information systems, and further improvements will be necessary to
address issues presented by growth through acquisitions. Our acquisitions have
also resulted in significant amortization expenses, including amortization of
purchased software (reflected in cost of goods sold) and amortization of
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goodwill and purchased intangibles (reflected in operating expenses), as well
as charges for purchased research and development. These expenses have had a
negative impact on our operating results, resulting in a reduction in net income
of $46.5 million in fiscal 1996, $34.6 million in fiscal 1997 and $44.3 million
in fiscal 1998. Based on acquisitions completed as of July 31, 1998, future
amortization will reduce net income (after tax) by approximately $78.5 million,
$72.8 million and $61.6 million for the years ending July 31, 1999 through 2001,
respectively. If we complete additional acquisitions in the future, there could
be an incremental negative impact on operating results. See MD&A, pages 32-33.
Web-based Finance Joint Venture. In May 1998, we participated in the formation
of a joint venture company, Venture Finance Software Corp. ("VFSC") that is
developing certain Web-oriented finance products. In exchange for our equity
interest in VFSC, we granted VFSC licenses to certain technology and
intellectual property rights. VFSC is receiving cash funding from other
investors. Affiliates of Morgan Stanley & Co Incorporated are the principal
investors in the joint venture company. In addition, of the $46 million
potential funding for VFSC, venture capital funds managed by Kleiner Perkins
Caufield & Byers, of which L. John Doerr, a director of Intuit, is a general
partner, have agreed to invest up to $1 million. We have agreed with VFSC not to
compete in certain areas of server-based personal finance for a period of ten
years. Intuit is managing the development and commercialization efforts of the
joint venture. We have an option to purchase the equity interests of the other
investors in VFSC between two and four years after the formation of VFSC. The
price to exercise this option would be substantial, and we will also have
ongoing amortization expenses if we exercise the option. There are many
technological risks involved in the development of Web-oriented finance
products, and we can't be certain that the development will be successful or
that we will exercise the purchase option. See MD&A (page 33) and Note 5 of the
financial statement notes (page 50) for more details about this transaction.
CORPORATE BACKGROUND
Intuit began operations in March 1983 and was incorporated in California in
March 1984. In March 1993, we reincorporated in Delaware and completed our
initial public offering. Our principal executive offices are located at 2535
Garcia Avenue, Mountain View, California, 94043, and our telephone number is
(650) 944-6000. When we refer to "we" or "Intuit" in this Form 10-K, we mean the
current Delaware corporation (Intuit Inc.) and its California predecessor, as
well as all of our consolidated subsidiaries.
PRODUCTS AND SERVICES
OVERVIEW
Intuit offers products and services through four principal business divisions:
- - SMALL BUSINESS DIVISION: Accounting software, financial supplies,
employer services and other related services
- - TAX DIVISION: Personal, professional and small business tax preparation
software, electronic tax return filing, web-based tax preparation and
related services
- - CONSUMER FINANCE DIVISION: Personal finance software, websites and
marketspaces and related services
- - INTERNATIONAL DIVISION: Small business, tax and consumer finance
products in selected foreign markets
Desktop software and related products and services delivered through traditional
retail and direct sales channels currently provide most of our revenue, and we
expect this to continue for the foreseeable future. (See MD&A, beginning on page
26, for information about revenues for our principal products.) However, we're
beginning this description of our products and services with a separate
discussion of our Internet-based activities for two reasons. First, the Internet
has become an integral part of our business strategy in all of our business
divisions, and consequently, understanding our Internet strategy is necessary
for understanding each of the business divisions we have described on pages
9-12. Second, we are providing separate information about our Internet
businesses because investors have requested this type of analysis. However, we
do not have a separate "Internet" division within the company. We manage our
company, and review our internal financial results, based on the four business
divisions identified above.
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INTERNET COMMERCE
Overview. 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 foundation 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, our Quicken Store
website where customers can purchase and download desktop software products and
obtain customer service, and 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.
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 where 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, and transaction and processing fees from our online
insurance and online mortgage services. Electronic distribution includes
revenues generated by electronic ordering and/or delivery of traditional desktop
software products and financial supplies.
Business Opportunities. The Internet enables consumers to have greater
confidence in making financial decisions by providing them up-to-date,
personalized financial information quickly and inexpensively. In addition, the
Internet enables financial service firms offering complex financial products to
reach new customers in a cost-effective manner. These trends create some
compelling business opportunities, and we believe Intuit is in a position to
take advantage of these opportunities for several reasons. First, we have
expertise in building technical systems that simplify complex financial matters
for consumers and small businesses. Second, we have a large base of financially
sophisticated customers. Third, we have strong brand name recognition and
loyalty. Our objective is to use these strengths to establish Intuit as a
premier provider of personal and business financial information and services on
the Internet.
Strategy and Implementation. There are four main components to our Internet
strategy:
- - Invest in new, entirely Web-based businesses
- - Integrate online, Web-based resources into our desktop software products
- - Put desktop software functionality onto the Internet
- - Increase our presence on the Internet by establishing strategic
distribution relationships and improving brand awareness for our
Internet offerings
During fiscal 1998, we made significant progress in implementing our Internet
strategy. We launched QuickenMortgage(SM), our consumer mortgage service, in
November 1997, and expanded the scope and depth of our InsureMarket(R) site.
Many of our desktop products released during fiscal 1998 have direct links to
Quicken.com and have embedded Web "browser" software to simplify Web access. We
expanded the software tools and financial information available on our
Quicken.com website. We launched our Web TurboTax online tax preparation service
(formerly TurboTax Online) in February 1998, and our Web-based electronic filing
for our desktop and online tax products. We established important relationships
with leading Internet media companies (such as Excite), online services
providers (such as America Online) and Internet-based financial networks (such
as CNNfn).
We currently measure the success of our Internet activities in a variety of
ways, including the following four measures:
- - Revenues. Revenues from Internet commerce more than doubled during the
past fiscal year.
- - Page views. Monthly page views for our Quicken.com site (measured
internally by Intuit) increased from 16 million at the end of fiscal
1997 to 90 million at the end of fiscal 1998.
- - Reach. Household reach, as measured by Media Metrix, increased from 2.4%
of Internet households in July 1997 to 4.2% in July 1998.
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- - Financial institution participation. Participation increased 35% during
fiscal 1998, to more than 50 mutual fund companies, brokerage firms,
lenders and insurance companies that provide products and services
through our Quicken.com site.
Although we have made significant progress in each of these areas during the
past year, 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 and the Web will give us significant
opportunities to grow our revenue over the next several years. However, revenue
from Internet commerce was only 8% of our total revenue during fiscal 1998 (6%
for Internet products and 2% for electronic distribution). Our Internet-related
expenses have been, and will continue to be, significant. We can't predict if or
when Internet commerce will generate meaningful revenue or profits.
Risks of Internet Commerce. We face many risks in pursuing our Internet
strategy, particularly for our Internet products. The Internet represents a new
business model for Intuit, where revenues come from advertising, marketing,
transaction and processing fees, instead of software product sales. Website
traffic is an important foundation for this business model. We have made
significant progress in increasing traffic to Quicken.com through our
relationships with Excite, AOL and others. However, we may need to establish
additional relationships to help us to increase advertising revenue as well as
to continue increasing traffic. This may be difficult, especially given the
relatively limited number of leading Internet companies. If our competitors
establish relationships with these companies (particularly exclusive
relationships), our ability to expand our Internet businesses could be hindered.
Even if we establish these relationships, we can't be certain that they will
result in significant increases in revenue.
We need to quickly and successfully build new skills as a website developer and
publisher, which are complementary but different skills from desktop software
development skills. In particular, development cycles for Web-based products are
extremely short and irregular, while desktop software products generally have
much longer and more predictable development and release cycles. We must
continue to develop new and continually evolving operational infrastructures to
support and manage our Internet-based businesses and the complex operational
requirements of our strategic Internet relationships. The rapid pace of change
in this area creates unique risks, and we may be unable to manage costs
effectively and/or to meet customer expectations.
We face intense competition for our Internet products. In several businesses,
there are very low barriers to entry, and the market is extremely fragmented,
making it difficult for any one company to acquire the scale that is necessary
(although not, by itself, sufficient) to begin generating any meaningful revenue
or profits. Many of our competitors are either large companies that can afford
major investments in these businesses, or small privately held companies that
can benefit from a much narrower product focus than Intuit, and whose
shareholders will tolerate significant and extended operating losses.
Customers may refuse to transact business over the Internet due to privacy or
security concerns. We can't be certain that consumers' use of the Internet,
particularly for commercial transactions, will continue to increase as rapidly
as it has during the past few years. If Internet use does not grow as a result
of privacy or security concerns, or for other reasons, our Internet-based
businesses would be seriously adversely affected.
In September 1996, we decided to move from a proprietary electronic
communications link between our software and financial institutions, to an
Internet-based link based on a standard called Open Financial Exchange (referred
to as "OFX"). To some degree, expansion of our desktop product connectivity
initiatives depends on industry adoption of OFX as a connectivity standard.
While we believe that OFX is the right strategic approach for Intuit, we face
risks and challenges in implementing it. Financial institutions may not accept
and implement OFX as rapidly as we would like, or they may adopt alternative
connectivity standards that may not support interoperability with OFX. If OFX is
not adopted by many financial institutions, we may need to incur significant
expenses to alter our products to conform to other evolving standards.
Because our Internet-based products are available in many states and foreign
countries, we may be subject to regulation and taxation in many additional
jurisdictions. Also, to the extent that states or foreign countries are
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generally successful in their efforts to impose taxes on Internet commerce, the
growth of the use of the Internet could slow substantially, which could have an
adverse effect on the growth of our Internet-based businesses. If Internet
activity becomes heavily regulated in other respects, that could have major
negative consequences for our Internet-based businesses.
SMALL BUSINESS DIVISION
We believe that the small business market provides excellent opportunities for
growing our business, both through increasing our customer base and through
increasing the range of offerings we provide to small business customers.
Expanding our small business offerings is one of our primary strategic
objectives. These are the major products and services offered by our Small
Business Division:
QuickBooks and QuickBooks Pro Software. Our QuickBooks product line brings
extensive bookkeeping capabilities to small business users in an easy-to-use
design that does not require customers to be familiar with debit/credit
accounting. QuickBooks Pro is an enhanced version of QuickBooks that addresses
the needs of small businesses in the U.S. that are project, job or time based,
and/or that are looking for a multi-user product.
In June 1998, we launched version 6.0 of our QuickBooks and QuickBooks Pro
products. QuickBooks Pro 6.0 is our first multi-user accounting software
product. We think it represents a good business opportunity because the
multi-user feature has been the most frequent customer request over the past few
years. However, there are a number of risks we face in capitalizing on this
opportunity. For example, the relatively high price we charge for the multi-user
product (approximately $219 per user, with 5-user packs for $600), may make it
more difficult to persuade retailers to devote generous shelf space to the
product and maintain a significant inventory. The product upgrade rate among
existing customers may be lower than upgrade rates we have experienced with
prior QuickBooks launches because users that don't require a multi-user product
may choose not to upgrade at this point. In addition, we may have increased
technical support costs if users need additional support because of the more
complex multi-user features.
Financial Supplies. We offer a range of financial supplies designed for use with
our small business and consumer finance desktop software products. Supplies
include professional-quality paper checks, envelopes, invoices, business forms,
deposit slips and rubber stamps. In September 1997, we launched a supplies
website to enable customers to order supplies online, which has reduced order
fulfillment costs and increased customer satisfaction. By the end of fiscal
1998, approximately 10% of supplies orders were generated by the website.
See MD&A, beginning on page 26, for more details.
In September 1995, we entered into an exclusive five-year contract with John H.
Harland Co. to print all of our check products, which accounted for about 75% of
our supplies revenue in fiscal 1998. We believe our relationship with Harland is
strong, and the financial terms of the contract are favorable for Intuit.
However, if we experience any problems with Harland's performance, it could have
a material negative impact on sales of supplies and on Intuit as a whole.
Online Payroll Service. As part of our focus on expanding our small business
offerings by providing employer services that complement our desktop software,
in September 1998 we introduced a new online payroll service. The service is
currently available to a limited number of customers, with broader availability
expected in December 1998. The service 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-2s. The service uses payroll data entered by customers into their QuickBooks
6.0 files and transmitted to Intuit electronically, so customer effort is
minimized. While entering this business gives us a significant opportunity to
increase revenues, there are also risks. It's possible that the expanded
availability of the service may be delayed. In addition, all of the processing
for these payroll services is performed for Intuit by Computing Resources Inc.
("CRI"), a third party service provider, so our relationship with CRI is crucial
to the success of the service. While CRI has performed payroll processing for
over 20 years, it has historically handled a significantly lower volume than we
may experience if the subscriptions to the payroll service meet our
expectations. Since CRI is the sole provider of these processing services, any
failure of CRI to perform
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these services would prevent us from providing payroll services to our customers
until a substitute provider could take over CRI's functions, and finding an
alternate provider could be a lengthy process. We expect that customers will
have very little tolerance for untimely or inaccurately processed payroll
information. Failure to provide uninterrupted, accurate services to our
customers, whether due to CRI's failure to perform, or any other problem with
the payroll service, would have a serious impact on our ability to retain
customers or attract new customers, could require us to make significant
payments to customers under our service guarantee, and could also give rise to
other customer claims against us. We are also incurring significant start-up
costs to initiate this service, including costs to establish the operational
infrastructure to manage and support a service business, which is different from
our traditional desktop software infrastructure. See MD&A, page 26, for more
details.
QuickBooks Support Network ("QBSN"). QBSN is our fee-for-support program for
QuickBooks users. The program reflects our belief that high-quality customer
support tailored to the specific requirements of small businesses can be a
profitable and strategically important business, rather than simply an operating
expense. During fiscal 1998, we expanded and refined QBSN to improve the quality
of the services provided.
Small Business Website. In March 1998, we launched Small Business by
Quicken.com, a website that addresses the specific needs of small businesses.
Our current goal is to build relationships with current and potential small
business customers by providing information, tools and community discussion
opportunities. The site currently offers Quicken Business CashFinder(SM), a tool
to help small businesses obtain loans and to assist financial institutions in
reaching small business customers. The site is a top level channel on Excite,
and is also accessible directly from QuickBooks 6.0 products and our Quicken.com
site. Small business website revenues come from advertising, sponsorship and
transaction fees, but they are not expected to be material, or to offset
expenses of the site, for the foreseeable future.
TAX DIVISION
We offer a broad range of federal and state tax preparation software for
individuals, tax professionals and small businesses. Our tax business has been a
fairly predictable source of recurring revenue (with customers buying new
products every year), as well as a very seasonal business. These are the major
products and services offered by our Tax Division:
Personal Tax Software. Our TurboTax products (for Windows) and MacInTax(R)
products (for the Macintosh) are designed for individual consumers who prepare
their own tax returns. Our tax products are designed to be easy to use, but
sophisticated enough for complicated tax returns.
Professional Tax Software. Our ProSeries and Lacerte tax products are designed
for tax professionals who prepare individual, business, estate, trust and gift
tax returns for their individual and business clients. We acquired the Lacerte
professional tax product line in June 1998. We believe the two product lines
provide complementary solutions for differing practitioner preferences, with our
ProSeries products emphasizing ease-of-use and data entry on government form
facsimiles, and the Lacerte products emphasizing efficiency and
customer-tailored data sheet entry. See "Acquisition of Lacerte," on page 4, for
more details about the acquisition. Customers can elect to license professional
tax products for a single fee for unlimited annual use or to use them on a
"pay-per-return" basis.
Small Business Tax Software. For small business owners that prepare their own
business tax returns, we offer TurboTax for Business and MacInTax for Business.
TurboTax for Business can import data directly from QuickBooks accounting
software.
Electronic Filing Service. Users of our desktop tax software can file their
federal (and many state) tax returns electronically through our proprietary
electronic filing center. The total number of electronically filed returns for
all of our tax products rose significantly from fiscal 1997 to fiscal 1998.
Web-Based Tax Preparation Service. In February 1998, we launched Web TurboTax
(formerly called TurboTax Online), a Web-based interactive tax preparation
solution that allowed individual taxpayers to prepare and electronically file
their Form 1040A and Form 1040EZ federal income tax returns entirely online. We
have not
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experienced any significant technical problems with our Web-based electronic
filing or online tax preparation products. However, the dramatic increase in
demand for tax preparation and electronic filing during the last week of the tax
season increases the risk of possible problems. Because of the time sensitivity
for filing tax returns, any future problems could cause serious financial and
public relations consequences.
In August 1998, we announced the Quicken Tax Freedom Project, a philanthropic
public service initiative under which we plan to provide online tax preparation
and electronic filing at no charge to lower income federal and state tax filers,
specifically those with adjusted gross incomes of $20,000 or less. Intuit will
provide the service through our Web TurboTax product beginning in January 1999.
We don't expect that this service will have a material impact on our revenues
from our desktop or online tax products, as the average income of our current
customers and their clients is well above the $20,000 income threshold.
CONSUMER FINANCE DIVISION
As indicated below, the Internet had a profound effect in the Consumer Finance
Division, which was responsible for most of our Internet products during fiscal
1998. These are the major products and services offered by our Consumer Finance
Division:
Quicken Software. Our Quicken desktop software products help users organize,
understand and manage their personal finances by providing easy methods for
recording and categorizing various types of financial transactions. For example,
Quicken enables customers to reconcile checking and savings accounts, record
credit card purchases and payments, and track cash, investments, mortgages and
other assets and liabilities. Our latest Quicken products incorporate a number
of Web integration features, such as direct links to relevant portions of
Quicken.com, an embedded Web browser, online banking and bill payment functions,
and a feature that allows customers of participating brokerage firms to download
brokerage account data and execute securities trades through their broker's
website. We just launched our Quicken '99 product line in September 1998, five
weeks ahead of our traditional late October release date. The product line
includes a new bundled product called Quicken Financial Center, which includes
both Quicken Deluxe and TurboTax Deluxe.
Online Transactions. Quicken includes an online banking feature that allows
users to download transaction and account information from participating
financial institutions directly into their Quicken accounts. We also offer
online bill payment through Quicken, with services provided by Checkfree or
participating financial institutions. Online revenues come primarily from
advertising and marketing fees paid by participating financial institutions.
Quicken.com. Quicken.com is our personal finance website. It's designed to
enable people to make better financial decisions and perform financial tasks
more easily by giving them useful tools, software applications, resources and
objective information about a variety of personal finance topics, in one
location. (Quicken.com also has offerings designed for small businesses - see
"Small Business Website" on page 10.) Quicken.com includes "channels" for
Investments, Tax, Insurance, Home/Mortgage and other financial areas.
Quicken.com content is created by Intuit and by third party publishers and
financial experts. We do not currently charge customers a fee to access
Quicken.com, but we receive revenue from financial institutions and other
companies that advertise and/or sell their products or services on Quicken.com.
Quicken.com includes our Quicken InsureMarket and QuickenMortgage marketspaces.
Marketspaces help buyers find the financial products and services they are
seeking, and help providers of financial products and services find new
customers. Our Quicken InsureMarket site enables customers to shop for insurance
products online. Users can currently apply for and purchase term life insurance
from ten national carriers. Auto insurance is currently available from one
carrier in eleven states, and we expect to expand the number of carriers and
states during fiscal 1999. Our QuickenMortgage site allows consumers to shop for
home mortgages online. Users can currently pre-qualify for, and apply for,
mortgages from eleven lenders nationwide. We receive initial implementation
fees, ongoing annual participation fees and transaction-based fees from
insurance carriers and lenders who participate in these marketspaces, and some
participating institutions also pay us fees for data processing and other
administrative services. We rely on a single third party to perform the back-end
processing services for our QuickenMortgage site. Failure of that party to
perform these services would require us to discontinue certain aspects of our
mortgage
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service until an alternative service provider could be located. This would have
a serious negative impact on the performance of the QuickenMortgage marketspace.
We believe the long-term success of Quicken.com will depend on our ability to
build scale rapidly, which will require us to increase our customer base as
quickly as possible, get greater participation by financial institutions and
expand the depth and breadth of offerings on the site. We believe that the
investments channel is the most important site for increasing advertising and
sponsorship participation by financial institutions, since it tends to attract
relatively more affluent, financially savvy consumers that financial
institutions are seeking for their products and services. Accordingly, expansion
of the investments channel content, both through internal development and the
acquisition of third party content, has been and will continue to be a high
priority. For our marketspaces, participation by financial institutions involves
a greater commitment than purchasing advertising, but the marketspaces allow
participants to focus on a very specific group of consumers who are already
actively seeking the products and services they offer. Although we have devoted
significant internal resources to marketspace development efforts, our progress
in certain areas has been hampered by technological and other challenges
involved in working with large financial institutions. To supplement our
internal development efforts, we will also consider acquisitions of, and
strategic relationships with, third parties that have technology to enable us to
expand our marketspaces more rapidly.
INTERNATIONAL DIVISION
Our International Division is divided into three regions: Japan, Europe and
Asia/Pacific. The recent performance of our international operations has been
disappointing relative to our expectations. In response, we have restructured
certain operations to make them more efficient, and we have narrowed our
strategic focus to fewer products (primarily small business products) in fewer
markets. We are also investing resources to create personal finance websites in
Canada, the United Kingdom and Germany. We do not expect significant growth in
our International Division during fiscal 1999.
Japan Region. Our Intuit KK subsidiary in Japan currently offers small business
products developed by Milkyway KK (acquired in January 1996) and Nihom Micom
(acquired in March 1997) that address the upper and middle segments of the small
business market in Japan. Fiscal 1998 results were negatively affected by
increasing competition in the high end of the small business accounting market
and our late entry into the market for high-end Windows products, as well as
adverse economic conditions in Japan and in Asia generally. We are refocusing
our efforts on the lower end of the small business market, which we are
addressing with a localized version of QuickBooks launched in September 1998.
However, the economic conditions and currency exchange rates may continue to
have an impact.
Europe Region. We serve selected European markets and South Africa with
localized versions of our products through our offices in Germany, France and
the United Kingdom. During fiscal 1998, we restructured our European region to
centralize management operations in Munich. We also outsourced all European
customer service, technical support, manufacturing and order fulfillment
functions to third party vendors. With our new focus on small business products
in selected larger markets, we are devoting fewer resources to consumer finance
and tax products, and to smaller geographic markets.
Asia/Pacific Region. Our Asia/Pacific region includes Canada, Australia, Latin
America, Hong Kong and other parts of Southeast Asia. We offer Quicken in
Canada, Australia, Hong Kong, the Philippines and Singapore, as well as several
Latin American countries. We offer QuickBooks in Canada, Australia and Hong
Kong. We also offer our QuickTax(TM) personal and professional tax products in
Canada and Australia. Our Canadian operations enjoyed more success in fiscal
1998 than our other international operations, in terms of both growth and
profitability.
Special Risks for International Operations. Developing and localizing products
for foreign markets is more time-consuming and costly than developing products
for the U.S. market. Recruiting and retaining talented software engineers and
managers can be more difficult in our international offices as well. Delays or
other problems in product launches may be more likely because of these factors,
and we experienced significant product launch delays in fiscal 1996 and fiscal
1998. Economic conditions in international markets can also negatively affect
our
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business, as they did in Japan in fiscal 1998 and in Europe in fiscal 1996.
Our international revenue and expenses are currently denominated in a variety of
foreign currencies and are subject to fluctuations in currency exchange rates.
We don't currently engage in any hedging activities. Although currency
fluctuations have not had a significant negative impact in the past, this could
change in the future if our international operations grow. Other risks that
could have a negative impact on our international operations include unexpected
changes in regulatory requirements, tariffs and other trade barriers; longer
accounts receivable payment cycles and collection difficulties; the burden of
complying with a wide variety of foreign laws; possible adverse tax consequences
including repatriation of earnings; and potentially less protection for our
intellectual property rights under foreign laws.
PRODUCT DEVELOPMENT
A primary goal of our development efforts is to design products and services
that will appeal to our large existing customer base as well as to new
customers. For existing customers we focus on both upgrades of products they
already own, and new, complementary products and services. We also focus on
products that generate recurring revenue, such as our tax preparation products,
financial supplies and our online payroll service. While much of our product
development is done internally, we supplement our internal development efforts
by acquiring strategically important products and technology from third parties,
or establishing other relationships that enable us to expand our business more
rapidly.
During the past few years, we have devoted significant resources to developing
and expanding new products and services, including our multi-user QuickBooks Pro
product, and Internet products such as QuickenMortgage and our online payroll
service. Our total research and development expenses as a percentage of revenue
were 14% in fiscal 1996, 16% in fiscal 1997 and 18% in fiscal 1998. Hiring and
retaining highly qualified technical employees is critical to the success of our
development efforts, particularly in new product areas, and we face intense
competition for these employees.
The expansion of our Internet-based products has had a significant impact on our
development process. Our desktop software products tend to have a fairly
predictable, structured development cycle of about 12-24 months. Once new
products are released, they generally are not modified (except to fix "bugs")
until the next scheduled product upgrade. The development process for
Internet-based products is much more rapid, much less predictable, and has much
shorter development cycles . Getting products and services launched quickly is
crucial to competitive success, but this time pressure may result in lower
product quality. Once launched, Internet-based offerings must be continuously
and rapidly updated to incorporate changing technology and customer demands, as
well as to fix bugs. In addition, Internet-based products must address customer
concerns about privacy and security. We currently incorporate a variety of
security measures into our products and services, and we are developing a
customer information privacy policy. However, a major breach of customer privacy
or security could have serious consequences for us.
The development process for our products and services is complex and involves
some risks. Product and service launches can be delayed for a variety of
reasons. Products may have "bugs" that hinder product performance, give
customers incorrect results and/or damage customer data. These problems can be
expensive to fix, particularly if we need to do a major maintenance release or
pay refunds to customers. They can also result in higher technical support costs
and lost customers.
The development of tax preparation software presents a unique challenge because
of the demanding annual development cycle required to incorporate tax law
changes each year. Tax law change issues also affect our tax table service and
our payroll service. We can't predict how complex the tax law changes will be
each year, when the changes will be made, or when tax forms included in the
products will be available from the IRS and state tax agencies. The rigid
development timetable increases the risk of errors in the products. Although
fiscal 1998 and 1997 tax product quality was high, in fiscal 1996 we had product
defects that led to negative publicity, customer dissatisfaction and incremental
operating expenses. We guarantee the accuracy of the tax calculations performed
by our federal personal tax products and we have agreed to reimburse any
penalties paid by a consumer customer to the Internal Revenue Service solely as
a result of miscalculation on a form prepared using our personal tax products.
If
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these products contain a calculation error affecting a significant number of
consumer customers' returns, we could be subject to liability claims and be
required to make substantial payments, and our operating results and financial
condition could be materially adversely affected.
The rigid development timetable for tax products also increases the risk of a
product launch delay. Since the tax return preparation season is brief, it is
imperative that we release tax products as early as possible. A late release in
any year could cause our current and prospective customers to choose a
competitive product for that year's tax season, making it more difficult for us
to sell our products to those customers in future tax seasons.
MARKETING, SALES AND DISTRIBUTION
MARKETS
The markets that we compete in, particularly in the Internet area, are
characterized by rapidly changing customer demands, continuous technological
changes and improvements, shifting industry standards and frequent new product
introductions by other companies. Changes in any of these areas can quickly
render existing products obsolete, so our marketing success depends on our
ability to respond rapidly to these changes with new products and services, as
well as improvements to existing products and services.
RETAIL DISTRIBUTION
We market our desktop software in North America through traditional retail
software outlets, computer superstores, office and warehouse clubs and general
mass merchandisers. We also have OEM, or "original equipment manufacturer,"
relationships with hardware and software manufacturers who combine our products
with their products and sell them to retailers and consumers. Although OEM sales
generate little revenue (due to low pricing for OEMs) and reduce operating
margins in the short term, they are strategically important because they are a
good source of new customers.
In Japan, Europe and other international markets, we rely on distributors, VARs
and OEMs, who sell products into the retail channel. In Japan, we expect that
our shift in focus to the lower end of the small business accounting market will
require us to strengthen our direct relationships with retailers, which will
present challenges.
Retail sales revenue represented about 30% of total revenues during fiscal 1996,
27% in fiscal 1997 and 32% in fiscal 1998. The only retailer or distributor that
accounted for more than 10% of our net revenue during the past three fiscal
years was Ingram Micro Inc. (13% in fiscal 1996, 12% in fiscal 1997 and 15% in
fiscal 1998).
There are increasing numbers of companies competing for access to the
distribution channels we use. Our arrangements with our distributors and
retailers may be terminated by either party at any time without cause. Retailers
typically have a limited amount of shelf space and promotional resources, for
which there is intense competition. Any termination or significant disruption of
our relationship with any of our major distributors or retailers, or a
significant reduction in sales volume attributable to any of our principal
resellers, could materially adversely affect our results of operations and
financial condition. Also, the bankruptcy, deterioration in financial condition
or other business difficulties of a distributor or retailer could impact our
ability to collect our accounts receivable from the affected party, which could
have an adverse effect on our operating results and financial condition.
During fiscal 1998, our personal tax business benefited from particularly strong
relationships with several major retailers. However, during the past few years,
there has been increasing consolidation among retailers, and we expect this
consolidation trend to continue. Consolidation has resulted in a number of large
retailers with significant bargaining power. This factor, combined with intense
competition for access to retail shelf space and promotional support, has made
it challenging for us to negotiate financially favorable terms with retailers.
We expect to face even greater challenges in negotiating retail relationships in
fiscal 1999 and beyond, particularly given Microsoft's possible entrance into
the personal tax market. This could have a negative impact on our future
results.
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DIRECT DISTRIBUTION
We believe that mail and telephone direct sales campaigns are an effective way
to generate orders and provide opportunities for cross-selling, as well as to
stimulate retail demand and increase consumer awareness of our products. Direct
sales frequently generate significantly higher revenue per unit than retail
sales, but this also means that aggressive retail pricing (such as we have seen
in the personal tax area) can harm direct sales efforts. We use targeted
direct-mail and telephone solicitations, direct-response newspaper and magazine
advertising, and television and radio advertising to encourage direct sales.
ELECTRONIC DISTRIBUTION
Customers can order and receive software products electronically through the
Quicken Store, which is accessible through Quicken.com and other Intuit
websites. Electronic delivery has been a particularly effective method of
distribution for our TurboTax state tax preparation products. Customers can also
order financial supplies through our supplies website. Electronic ordering and
delivery are convenient for customers and less expensive for Intuit. During
fiscal 1998, about 2% of our total desktop software and supplies revenues were
generated by products ordered and/or delivered electronically, but we expect
this percentage to increase in fiscal 1999.
PRODUCT RETURNS
Like most other software companies, we have a generous return policy for our
distributors and retailers, although we encourage them to make returns promptly.
We have an unconditional return policy for direct customers. We establish
reserves for product returns in our financial statements, based on estimated
future returns of products, taking into account promotional activities, the
timing of new product introductions, distributor and retailer inventories of our
products and other factors. In the past, returns have not generally exceeded the
reserves we have established for them. However, if in the future retail
sell-through of a major product falls significantly below expectations, or if
competitors' promotional or other activities result in increased product
returns, returns could exceed the reserves established for them and could have a
negative effect on our financial performance. In addition, the rate of product
returns could increase as other changes in our distribution channels occur or
existing products become obsolete.
During the tax return preparation season, we generally ship significantly more
tax products to our distributors and retailers than we expect them to sell
during the tax season, in order to reduce the risk that distributors or
retailers will run out of products during the short tax season. As a result, we
have historically accepted significant returns of tax products each year,
principally from April to September, and we expect to continue to do so in the
future.
COMPETITION
OVERVIEW
We face intense competition from many companies in almost all of our business
areas, both domestically and internationally. Many of our competitors have
significantly greater financial, technical and marketing resources than we do.
The most important competitive factors for our desktop software are product
features, ease of use, quality and reliability, brand name recognition, timing
of product launches compared to competitors (particularly for tax products),
price, access to distribution channels and quality of technical support
services. For our Internet products, the most important competitive factors are
speed in getting new products to market, the ability to distribute them
effectively (i.e., generate significant website traffic), brand name
recognition, product features and ease of use. We believe we compete effectively
on most of these factors, as our three principal desktop software products
(Quicken, QuickBooks and TurboTax) are the leading products in their respective
markets, and our Quicken.com site is one of the top personal finance sites as
measured by household reach statistics published by Media Metrix. However, we
always face the risk that competitors will introduce better products and
services, reduce prices, gain better access to distribution channels, increase
advertising (including advertising targeted at
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Intuit customers), and release new products before we do. Any of these events
(particularly any prolonged price competition) could have a material negative
impact on our financial performance. They could also affect our ability to keep
existing customers and acquire new customers, which is particularly important
for our Internet products.
SMALL BUSINESS DIVISION
The major domestic competitor for our small business accounting software is
currently Peachtree Software (a division of ADP). A trial version of Peachtree's
multi-user product is being "bundled" with Microsoft Office Small Business
Edition. Peachtree also has a new product that integrates with Microsoft Office,
a feature that QuickBooks does not yet offer. These factors may affect our
competitive position. Despite competitive pressures, according to statistics
published by PC Data, QuickBooks accounted for an average of about 80% of
monthly retail dollar sales of small business accounting software from August
1997 through July 1998.
Our financial supplies business competes with a number of business forms
companies, such as Deluxe Business Systems, New England Business Services and
Moore Business Forms, as well as with direct mail check printers and banks. In
addition, our QuickBooks products have certain features (such as customizable
invoicing) that compete with our supplies products. Also, online bill payment
services and online payroll services with direct deposit capabilities (including
services offered by or through Intuit) offer a competitive alternative to
printed checks. Significant competitive factors for the supplies business
include ordering convenience, distribution channels, product quality, speed of
delivery and price. We believe we compete effectively in most of these areas,
but we have experienced increased pricing pressures from many of our
competitors. While we have been able to offset some of the impact of price
competition by improving operational efficiencies and customer service, at some
point continuing price pressures could negatively affect revenue and
profitability for our supplies business.
TAX DIVISION
In the personal tax area, our major domestic competitor is currently Block
Financial Corporation, the makers of TaxCut software. During fiscal 1997, TaxCut
was priced very aggressively, and reached the market earlier than our TurboTax
products, which adversely impacted sales of TurboTax. During fiscal 1998, we
released TurboTax several weeks earlier than in fiscal 1997, which enabled us to
compete more successfully with TaxCut. According to statistics published by PC
Data, TurboTax accounted for over 80% of retail dollar sales of PC-based
personal tax preparation software during the recent tax season. We expect
competition to remain fierce during fiscal 1999. Competition could become
particularly intense if Microsoft enters this market with a personal tax
product. Microsoft is a formidable competitor, and its presence in the personal
tax market would lead to additional pricing pressures, and could adversely
impact our ability to negotiate advantageous terms with major retailers.
The professional tax preparation software marketplace is very competitive. Our
largest competitors in the U.S. are Commerce Clearing House (CCH), with its
Computax product line, and RIA, with its Fast Tax and Creative Solutions
offerings. In the past, professional tax software providers have been highly
fragmented, but recent years have seen substantial consolidation. We believe our
recent acquisition of Lacerte improves our competitive position in professional
tax. See "Acquisition of Lacerte," on page 4, for more details about the
acquisition.
Intuit attempts to monitor regulatory and public policy developments that could
affect the current business climate. During calendar year 1998, for example, the
federal government considered extending current services provided by the IRS -
specifically, the free provision of certain tax forms using the Internet. The
IRS also sought greater authority in the future to permit taxpayers to fill out
government provided tax forms and return them directly to the government,
although this would require a significant expansion of the current IRS
infrastructure. In the future, federal or state authorities may take actions
that lead to greater government competition with the private sector, and
legislative simplification of federal or state income tax laws could reduce
demand for tax preparation software generally. On the other hand, certain policy
changes considered and made during the 1998 Congressional legislative cycle
actually removed barriers to electronic filing that had previously hampered
taxpayers, and this may benefit Intuit. Future regulatory and legislative
activity can enhance or harm Intuit's competitive position, and impact others in
the tax preparation industry.
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CONSUMER FINANCE DIVISION
In desktop consumer finance software, Microsoft is currently our primary
domestic competitor. Quicken competes directly with Microsoft Money, which is
aggressively promoted with free product offers through various distribution
channels, and with advertising targeted at Quicken users. These competitive
pressures, as well as other factors, have negatively affected Quicken revenue
and profitability, particularly during fiscal 1997, when Quicken revenue
declined by over 20%. During fiscal 1998, Quicken revenue and profitability
improved significantly from fiscal 1997 levels with only a slight decline in our
competitive position as measured by retail market share (see MD&A, page 29).
According to statistics published by PC Data, Quicken accounted for an average
of over 80% of monthly retail dollar sales for personal finance software from
August 1997 through July 1998, but we expect competitive pressures to continue.
There are many competitors for our other consumer finance products and services,
particularly for our Internet products. We expect that competition will increase
as we expand our offerings, and as more companies expand their businesses onto
the Internet. Our Quicken.com site competes for traffic with online financial
publishers and the financial areas on numerous online services such as Yahoo!,
as well as financially-oriented websites such as MSN Investor. We also face
competition from financial institutions that are developing their own financial
software and websites. Our insurance and mortgage marketspaces compete primarily
with smaller companies with a very narrow product focus, but Microsoft is also a
competitor in the mortgage area. In addition, in connection with a product
development joint venture established by Intuit and certain private investors,
we have agreed with the joint venture not to compete in certain areas of
Web-based personal finance for a period of ten years. See "Web-based Finance
Joint Venture" on page 6. See "Risks for Internet Commerce," on page 8, for a
discussion of additional competitive risks for our Internet offerings.
INTERNATIONAL DIVISION
In the small business accounting software market in Japan, our primary
competitors are OBC, PCA and Sorimachi. In Europe, we face competition from The
Sage Group PLC (based in the United Kingdom) and Microsoft in the small business
market. Strong competition in this market may have a more significant impact on
our international business in the future, as the focus of our business in Europe
is shifting more towards the small business market. We have a number of
competitors in international tax, including CCH in Canada and TaxCalc in the
United Kingdom. Microsoft is also a competitor in the consumer finance area.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support by telephone (including
automated voice response systems), fax, electronic mail and the Web. We have a
full-time customer service and technical support staff that is supplemented by
seasonal employees and outsourcing during periods of peak call volumes (such as
during the tax return filing season, or shortly after a major product launch).
Despite our efforts to adequately staff and equip our customer service and
support operations, during peak periods we occasionally can't respond promptly
to all customer requests for assistance. We may also have an unusually high
volume of requests, and be unable to respond promptly, if large numbers of
customer order shipments are delayed or if we have product bugs.
During the past few years, we have focused on developing support capabilities
that can supplement, or in some situations replace, telephone service and
support. For example, customers who are connected to the Internet can use our
website to get answers to commonly asked questions, check on the status of a
product order and receive bug fixes electronically. Alternative service and
support methods are less expensive for us and are often more efficient and
effective for customers as well. These programs, combined with a recent
consolidation and restructuring of our technical support facilities, have
allowed us to make significant improvement in the efficiency of our service and
support operations. See MD&A, page 31.
Beginning in fiscal 1996, we started to institute fee-for-support programs for
QuickBooks and for older versions of Quicken. We expanded these programs during
fiscal 1997 and 1998, and we have also begun to eliminate support
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for older versions of some products. Revenues from our fee-for-support programs
have not been material to date. However, the programs have helped to control
technical support costs, and as we expand the QuickBooks Support Network to
provide higher-quality support tailored to the specific requirements of small
businesses, we believe our customer support operations can become a
strategically important revenue source.
MANUFACTURING AND SHIPPING
The major steps involved in manufacturing desktop software are duplicating disks
and CDs, printing manuals and boxes, and assembling and shipping the final
products. We outsource most of these tasks to vendors who are required to follow
our strict quality guidelines. We have a small in-house manufacturing and
shipping facility to handle low-volume products, and to handle shipments for
direct sales. We have multiple sources for all of our raw materials and
availability has not been a problem for us. Prior to major product releases, we
tend to have significant levels of backlog, but at other times backlog is
minimal and we normally ship products within a week of receiving an order.
Because of this fluctuation in backlog, we don't think backlog is necessarily an
important measure of future sales.
GOVERNMENT REGULATION
Some of our products and services are regulated businesses under federal or
state laws. We offer these regulated products and services through separate
subsidiary corporations. These subsidiaries must comply with a variety of
regulations that don't apply to most software companies. Establishing and
maintaining regulated subsidiaries requires significant financial, legal and
management resources. If the subsidiaries fail to comply with applicable
regulations, they could face liability to customers and/or penalties and
sanctions by government regulators.
Our Quicken Investment Services, Inc. subsidiary (or "QISI") is registered as an
investment adviser with the Securities and Exchange Commission and is subject to
certain state regulatory laws as well. QISI is responsible for certain of the
investment-related features in our products and services. Investment adviser
regulations restrict QISI's business practices in several areas, including
advertising and distribution arrangements. The business activities of IIS, which
operates the Quicken InsureMarket website, are subject to state insurance
regulations. IIS (or one of its officers) currently has an insurance license in
each state where we believe licensing is necessary. State insurance laws
regulate various aspects of the business operations of IIS and participating
insurance carriers, including advertising, record-keeping and compensation. Our
QuickenMortgage and Quicken Business CashFinder services are offered by a
subsidiary called Intuit Lender Services, Inc. (or "ILSI"). ILSI (or one of its
officers) currently has a mortgage or loan broker license in each state where we
believe licensing is necessary. State laws regulate various aspects of the
business operations of ILSI and participating lenders, including advertising,
record-keeping and compensation.
Our Quicken products allow customers of participating brokerages to trade
securities through their broker's website. Quicken InsureMarket may expand its
site to include other insurance products, such as variable annuities, that are
considered "securities" under federal and state laws. We believe we have
structured these services in a way that avoids direct government regulation.
However, it's possible that these services, or other services we may offer in
the future, may be regulated under federal and/or state securities broker-dealer
laws or other regulations. We continually analyze new business opportunities,
and any new businesses that we pursue may require additional costs for
regulatory compliance.
Various Intuit products contain powerful encryption technology. Government
regulations currently prohibit this technology from being exported outside of
the United States and Canada. Some agencies of the federal government are
seeking to relax export laws, but others are seeking to tighten export
restrictions on software containing encryption technology. These regulations may
affect international sales of our desktop software as well as our ability to
provide the level of security customers are seeking in Internet-based products
and services on a worldwide basis.
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INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark and trade secret laws,
and employee and third-party nondisclosure agreements to protect our software
products and other proprietary technology. While our proprietary technology is
important, we believe our success depends more heavily on the innovative skills
and technical competency of our employees. We don't have any copy-protection
mechanisms in our software because we don't believe they are practical or
effective. Current U.S. laws that prohibit copying give us only limited
practical protection from software "pirates," and the laws of many other
countries provide almost no protection for our intellectual property. Policing
unauthorized use of our products is difficult, expensive and time-consuming and
we expect that software piracy will be a persistent problem for our desktop
software products. In addition, the unique technology of the Internet may tend
to increase, and provide new methods for, illegal copying of the technology used
in our Internet-based products. We consider our principal trademarks (including
Intuit, Quicken, QuickBooks and TurboTax) to be important assets and have
registered these and other trademarks and service marks in the U.S. and many
foreign countries. The initial duration of trademark registrations varies from
country to country and is 10 years in the U.S. Most registrations can be renewed
repeatedly.
We don't necessarily own all of the software and other technologies used in our
products and services, but we have all licenses that we believe are necessary
for using that technology. We don't believe that our products, trademarks and
other proprietary rights infringe anyone else's proprietary rights. However,
other parties occasionally claim that features or content of certain of our
products, or our use of certain trademarks, may infringe their property rights.
Past claims have not resulted in any significant litigation, settlement or
licensing expenses, but future claims could.
EMPLOYEES
As of September 30, 1998, Intuit and its domestic subsidiaries had about 2,500
full-time employees, and our international subsidiaries had about 360 full-time
employees. We believe our future success and growth will depend on our ability
to attract and retain qualified employees in all areas of our business. We don't
have any collective bargaining agreements with our employees, and we believe
employee relations are generally good. We do not have any key person life
insurance, and we do not have employment agreements with any employees that can
insure continued service. Although we believe we offer competitive compensation
and a good working environment, we face intense competition for qualified
employees. Like many of our competitors, we have had difficulties during the
past few years hiring and retaining employees.
ITEM 2
PROPERTIES
Our principal offices are located in Mountain View, California. We also lease
office and manufacturing space in Palo Alto and San Diego, California. We lease
our Mountain View facilities (currently about 260,000 square feet) under leases
with staggered eight-year terms that we entered into in November 1994. Since
December 1995, we have been in the process of moving our Palo Alto operations to
Mountain View in stages. The move will be completed over the next several years.
In June 1996, we relocated our San Diego operations to new offices
(approximately 140,000 square feet) under a "build-to-suit" lease. The San Diego
build-to-suit lease was amended this past fiscal year to provide for the
construction and lease of a 71,000 square foot building (including a computer
center), and to extend and revise the terms of the existing lease. See Note 7 of
the financial statements (page 51) for information about our lease commitments.
We also lease facilities in Tucson, Arizona and Fredericksburg, Virginia (for
customer service call centers), in Alexandria, Virginia (where our IIS
subsidiary is located), in Dallas, Texas (where our Lacerte subsidiaries are
located), and in Canada, England, France, Germany and Japan. During fiscal 1998,
we entered into a "build-to-suit" lease to provide for the construction of two
buildings totaling approximately 135,000 square feet on property located in
Tucson, Arizona. In fiscal 1998 we also entered into a construction agreement to
build a 45,000 square
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foot customer service and technical support facility on property owned by Intuit
and located in Fredericksburg, Virginia.
We believe our facilities are adequate for our current and near-term needs and
that we will be able to locate additional space to accommodate anticipated
growth.
ITEM 3
LEGAL PROCEEDINGS
Intuit is currently a defendant in the following six class action lawsuits
alleging that certain of our Quicken products have on-line banking functions
that are not Year 2000 compliant: Alan Issokson v. Intuit Inc. (filed April 29,
1998 in the Santa Clara County, California Superior Court); Rocco Chilelli v.
Intuit Inc. (filed May 13, 1998 in the New York Supreme Court, New York County,
New York); Glenn Faegenburg v. Intuit Inc. (filed May 27, 1998 in the New York
Supreme Court, New York County, New York); 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 Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the
New York Supreme Court, New York County, New York). All of the lawsuits are
substantively very similar. The lawsuits assert breach of implied warranty
claims, violations of federal and/or state consumer protection laws, 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 34, for a discussion of Intuit's status and plans with respect to
Year 2000 compliance.
On June 23, 1998, Intuit moved to dismiss the Issokson complaint. In August
1998, our motion was granted but the plaintiff still has an opportunity to amend
the complaint to allege injury. We believe this will be difficult in light of
the remedies that we are providing to our Quicken customers. However, if the
complaint is amended in a manner that is satisfactory to overcome another motion
to dismiss, we believe we have good and valid defenses to the claims asserted,
and we intend to vigorously defend against the lawsuit.
We have filed motions to dismiss the complaints in every other case except the
Colburn action. We plan on filing a demurrer in the Colburn action in the
future. Discovery is stayed in the New York actions pending hearings on the
motions. Discovery is ongoing in the Issokson and Stein actions. Given the
outcome of the motion to dismiss in the Issokson case, we believe we may prevail
on these motions as well. However, the ultimate outcome of any litigation is
uncertain, and regardless of outcome, litigation can have an adverse impact on
Intuit because of defense costs, diversion of management resources and other
factors.
We are subject to other legal proceedings and claims that arise in the 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, as
noted above, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A
EXECUTIVE OFFICERS OF THE REGISTRANT
Effective August 1, 1998, our Board of Directors elected William V. Campbell as
Chairman of the Board and William H. Harris, Jr. as President and Chief
Executive Officer of Intuit. Intuit founder Scott D. Cook became chairman of the
Executive Committee of the Board and continues to work full-time with Intuit. In
addition, the Board elected Mr. Harris as a director of Intuit, effective May
12, 1998. Prior to these changes, Mr. Cook served as
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Chairman of the Board, Mr. Campbell served as President and Chief Executive
Officer and Mr. Harris served as Executive Vice President.
The following table shows our current officers and their areas of
responsibility. Biographies of our executive officers are included after the
table.
NAME AGE POSITION
- ---- --- --------
William V. Campbell 58 Chairman of the Board of Directors
Scott D. Cook 46 Chairman of the Executive Committee of the Board of Directors
William H. Harris, Jr. 42 President and Chief Executive Officer; Director
Mari J. Baker 33 Senior Vice President, Human Resources and Corporate Communications
Eric C.W. Dunn 40 Senior Vice President and Chief Technology Officer
Alan A. Gleicher 46 Senior Vice President, Sales
Mark R. Goines 45 Senior Vice President, Consumer Finance Division
James J. Heeger 42 Senior Vice President, Small Business Division
David A. Kinser 47 Senior Vice President, Operations
Raymond G. Stern 37 Senior Vice President, Strategy, Finance and Administration
Larry J. Wolfe 47 Senior Vice President, Tax Products Division
Greg J. Santora 47 Vice President, Finance and Corporate Services; Chief Financial Officer
Linda Fellows 50 Treasurer and Director of Investor Relations
Catherine L. Valentine 46 Vice President, General Counsel and Corporate Secretary
Joel T. Brown 37 Vice President and General Manager, Employer Services Group
Kristen Brown 34 Vice President, Corporate Business Development
Craig B. Carlson 35 Vice President, Product Development, Small Business Division
John Dick 49 Vice President and General Manager, Technology Operations
Caroline F. Donahue 37 Vice President, Retail Sales
Brooks Fisher 41 Vice President and General Manager, Community and Marketspaces
Brian D. Fitzgerald 49 Vice President, Worldwide Operations
Larry King, Jr. 37 Vice President and General Manager, Financial Supplies Group
Elisabeth Lang 41 Vice President, Corporate Communications
Cary Masatsugu 42 Vice President and General Manager, Small Business Internet
Bernard F. McKay 46 Vice President, Government Programs and Policy
Robert J. Meighan 40 Vice President and General Manager, Personal Tax Group
Daniel T. Nye 32 Vice President, International
Carl Reese 41 Vice President, QuickenMortgage
Tanya L. Roberts 37 Vice President, Direct Marketing and Sales
William C. Shepard 56 Vice President and General Manager, Professional Products Group
Melanie Singer 34 Vice President, Tax Software Engineering
Eric B. Torres 34 Vice President, Consumer Product Development
Paul Vaillancourt 42 Vice President, U.S. Customer Support
Mr. Campbell was elected to Intuit's Board of Directors in May 1994 and
currently serves as Chairman of the Board. He served as Intuit's President and
Chief Executive Officer from April 1994 through July 1998. Mr. Campbell was
President and Chief Executive Officer of GO Corporation (a pen-based computing
software company) from January 1991 to December 1993. Mr. Campbell also serves
on the board of directors of SanDisk, Inc. (a computer storage devices company),
Great Plains Software, Inc. (a software company), Apple Computer, Inc. (a
computer company) and Netscape Communications Corp. (an Internet browser
company). He is a member of SanDisk's Compensation Committee and a member of
Apple's Audit Committee. Mr. Campbell holds both a Bachelors and a Masters
degree in economics from Columbia University.
Mr. Cook, a founder of Intuit, has been a director of Intuit since March 1984
and is currently Chairman of the Executive Committee of the Board. He served as
Intuit's Chairman of the Board from March 1993 through July 1998. From March
1984 to April 1994, he also served as President and Chief Executive Officer of
Intuit.
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Mr. Cook also serves on the board of directors of Amazon.com, Inc. (an
online bookseller) and ebay Inc. (an online electronic commerce company). Mr.
Cook holds a Bachelor of Arts degree in economics and mathematics from the
University of Southern California and a Masters in Business Administration from
Harvard University.
Mr. Harris became President and Chief Executive Officer of Intuit in August 1998
and joined Intuit's Board of Directors in May 1998. He joined Intuit as
Executive Vice President in December 1993, in connection with Intuit's
acquisition of ChipSoft, Inc. (a tax preparation software company), and served
in that capacity through July 1998. He was responsible for Intuit's tax and
consumer finance businesses from July 1996 through July 1998. From January 1992
to December 1993, Mr. Harris served as President and Chief Operating Officer of
ChipSoft. Mr. Harris earned a Bachelor of Arts degree in American Studies from
Middlebury College in Vermont and a Masters in Business Administration from
Harvard University.
Ms. Baker has served as Intuit's Senior Vice President of Human Resources and
Corporate Communications since December 1997. She served as Senior Vice
President of the Consumer Division from March 1997 to December 1997, and as Vice
President and General Manager of the Personal Finance Group from July 1996 to
March 1997. From April to July 1996, she served as Vice President of Intuit's
Financial Supplies Group, and she served as Vice President of International from
September 1994 to April 1996. From January 1994 through September 1994, Ms.
Baker was Vice President of Marketing for Now Software, Inc. (a personal and
small business software company). Ms. Baker first joined Intuit in April 1989
and served in various marketing positions until she left Intuit in December
1993. Ms. Baker holds Bachelor of Arts degrees in economics and sociology from
Stanford University. Ms. Baker also serves on the Board of Trustees for Stanford
University.
Mr. Dunn has served as a Senior Vice President of Intuit since July 1996 and as
Chief Technology Officer since March 1997. He was responsible for the
Consumer/International Division from July 1996 to March 1997. He served as Vice
President and General Manager of Intuit's Personal Finance Group from May 1994
to July 1996, and served as Intuit's Chief Financial Officer and a director from
September 1986 to December 1993. Mr. Dunn holds a Bachelor of Arts degree in
physics and a Masters in Business Administration from Harvard University.
Mr. Gleicher became Intuit's Senior Vice President of Sales in March 1997. He is
responsible for retail, direct and OEM sales. He served as Intuit's Vice
President of Sales from December 1993 to March 1997. From September 1990 until
Intuit's acquisition of ChipSoft, Inc. (a tax preparation software company) in
December 1993, Mr. Gleicher served as ChipSoft's President, Personal Tax
Division. Prior to joining ChipSoft, Mr. Gleicher was President and a co-founder
of SoftKat, which was a leading educational and consumer software distributor.
Mr. Gleicher has a Bachelors degree in economics and business finance from San
Diego State University. He also earned a certificate from the Marketing
Management Program at Stanford University.
Mr. Goines has served as a Senior Vice President of Intuit since August 1997. He
has been responsible for the Consumer Division since December 1997, and was
Senior Vice President and General Manager of the International Group from August
1997 until December 1997. He served as Intuit's Vice President and General
Manager of the International Group from April 1996 to August 1997. Mr. Goines
was formerly the Vice President of Intuit's Personal Tax Group and the Director
of Product Management of ChipSoft, Inc. (a tax preparation software company that
was acquired by Intuit in 1993). Prior to joining Intuit, Mr. Goines served in a
variety of capacities in the area of consumer financial services. Mr. Goines
holds a Bachelor of Science degree and a Masters of Business Administration from
the University of California at Berkeley.
Mr. Heeger became Senior Vice President of Intuit's Small Business Division in
July 1997. He served as Chief Financial Officer of Intuit from April 1996 to
July 1997, and was Senior Vice President in charge of the Finance, Customer
Services and Operations functions from July 1996 until July 1997. He served as
Vice President and General Manager of Intuit's Supplies Group from December 1993
to April 1996 and served as Intuit's Vice President of Operations from August
1993 to December 1993. From September 1982 to August 1993, Mr. Heeger served in
a number of marketing and operations roles at Hewlett-Packard Company. From 1987
to August 1993, he was responsible for distribution of Hewlett-Packard's
personal computer products. Mr. Heeger received a Bachelor of Science degree in
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management from the Massachusetts Institute of Technology and a Masters in
Business Administration from Stanford University.
Mr. Kinser joined Intuit as Senior Vice President of Operations in February
1997. Prior to that, Mr. Kinser served as a consultant to Intuit from July 1995
to February 1997. Mr. Kinser served as Chief Financial Officer and Vice
President of Operations for Collabra Software from 1994 to 1995. Mr. Kinser
served as Chief Financial Officer of EO Corp. from 1991 to 1993. He has also
held executive positions at Claris Corp. and Apple Computer, Inc. Mr. Kinser
holds a Bachelor of Arts degree from Humboldt State University.
Mr. Stern joined Intuit in January 1998 as Senior Vice President of Strategy,
Finance and Administration. Mr. Stern is responsible for all aspects of Intuit's
strategic planning and business development, as well as the finance and legal
functions. Prior to joining Intuit, Mr. Stern spent over ten years with The
Boston Consulting Group (a business consulting firm), where he was the partner
responsible for the firm's West Coast high technology practice from May 1994 to
December 1997. Mr. Stern holds a Bachelor of Science degree in mechanical
engineering from Stanford University and a Masters in Business Administration
from Harvard University.
Mr. Wolfe became Intuit's Senior Vice President of the Tax Products Group in May
1997. Prior to that, he served as Vice President and General Manager of Intuit's
Personal Tax Group from April 1996 to May 1997. He was the director of technical
support and sales for Intuit's Professional Tax Group from March 1994 to April
1996. From January 1990 to March 1994, Mr. Wolfe was Vice President of Direct
Link Software, Inc. ("DLS") and its successors. DLS was a privately held
software company from January 1990 to March 1993, when it was acquired by
ChipSoft, Inc. ChipSoft was subsequently acquired by Intuit in December 1993.
Mr. Wolfe holds a Bachelor of Science degree in business administration from the
University of Southern California and is a certified public accountant.
Mr. Santora became Intuit's Chief Financial Officer in July 1997 and has served
as Vice President of Finance since November 1996. He joined Intuit as Corporate
Controller in January 1996. From 1983 to 1995, Mr. Santora held a variety of
senior financial positions at Apple Computer, Inc., including Senior Finance
Director of Apple Americas from May 1992 to January 1996 and Director of
Internal Audit from May 1991 to May 1992. Mr. Santora, who is a certified public
accountant, holds a Bachelor of Science degree in accounting from the University
of Illinois and a Masters in Business Administration from San Jose State
University.
Ms. Fellows joined Intuit as Corporate Treasurer and Director of Investor
Relations in May 1997. Prior to that, Ms. Fellows served as Treasurer and
Director of Investor Relations of Bay Networks, Inc. from October 1990 to April
1997. Ms. Fellows holds a Bachelor of Arts degree from Stanford University and a
Masters in Business Administration from the University of Santa Clara.
Ms. Valentine joined Intuit as General Counsel in September 1994. She has served
as a Vice President of Intuit since August 1997 and as Corporate Secretary since
April 1996. From November 1993 to September 1994, she was General Counsel of
Macromedia, Inc. (a multimedia software tools company). Ms. Valentine was
General Counsel of GO Corporation (a pen-based computing software company) from
September 1991 to November 1993. Ms. Valentine holds Bachelor of Arts degrees in
finance and economics from the University of Illinois and a Juris Doctorate from
the University of Chicago.
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PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Intuit's common stock began trading over the counter in March 1993 at the time
of our initial public offering. It is quoted on the Nasdaq National Market under
the symbol "INTU." The following table shows the range of high and low closing
sale prices reported on the Nasdaq National Market for the periods indicated.
Prices reflect inter-dealer prices without retail markup, markdown or
commissions. On September 30, 1998, the closing price of Intuit's Common Stock
was $46.5625.
The market price of our Common Stock has been volatile because of many factors,
including the seasonality and quarterly fluctuations in our revenue and
operating results (see MD&A, page 25), announcements of technical innovations,
new commercial products, company or product acquisitions or the development of
strategic relationships by Intuit or its competitors, changes in earnings
estimates by analysts and changes in market conditions in the computer hardware
and computer software industries. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated to the
operating performance of the companies affected. These market fluctuations may
adversely affect the market price of Intuit's Common Stock in the future.
High Low
---- ---
FISCAL 1997
First quarter......................... $40.50 $26.00
Second quarter........................ 39.75 26.88
Third quarter......................... 28.63 21.50
Fourth quarter........................ 28.50 22.13
FISCAL 1998
First quarter......................... $35.75 $23.88
Second quarter........................ 41.25 27.13
Third quarter......................... 53.38 39.13
Fourth quarter........................ 66.50 45.00
STOCKHOLDERS
As of September 30, 1998, we had approximately 800 record holders of our common
stock, and about 56,000 beneficial holders.
DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business, so
we don't anticipate paying any cash dividends in the foreseeable future.
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ITEM 6
SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information for Intuit
for the past five fiscal years. The comparability of the information is affected
by a variety of factors, including our acquisitions and dispositions of
businesses. In addition, in August 1994, Intuit changed its fiscal year end to
July 31 from September 30. Consequently, fiscal 1994 includes only ten months of
operating results. To better understand the information in the table, investors
should also read "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 26, and the Consolidated Financial
Statements and Notes beginning on page 37.
FIVE-YEAR SUMMARY
TEN MONTHS
ENDED
JULY 31, YEARS ENDED JULY 31,
----------- --------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
Net revenue .......................... $ 210,376 $ 419,160 $ 538,608 $ 598,925 $ 592,736
Loss from continuing operations ...... (183,974) (44,296) (14,355) (2,932) (12,157)
Net income (loss) .................... (183,974) (44,296) (20,699) 68,308 (12,157)
Basic loss per share from continuing
operations ....................... (5.34) (1.07) (0.32) (0.06) (0.24)
Basic net income (loss) per share .... (5.34) (1.07) (0.46) 1.47 (0.24)
Diluted loss per share from continuing
operations .......................... (5.34) (1.07) (0.32) (0.06) (0.24)
Diluted net income (loss) per share .. $ (5.34) $ (1.07) $ (0.46) $ 1.44 $ (0.24)
JULY 31,
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(In thousands)
Cash, cash equivalents and
short-term investments ........... $ 87,185 $ 197,775 $ 198,018 $ 205,099 $ 382,832
Working capital ...................... 68,675 164,281 169,724 243,195 605,456
Total assets ......................... 257,593 398,605 418,020 663,676 1,498,596
Long term obligations ................ 3,715 8,770 5,583 36,444 35,566
Total stockholders' equity ........... $ 183,872 $ 280,399 $ 299,235 $ 415,061 $ 1,088,361
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ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the areas
identified in the first paragraph on page 3.
OVERVIEW
In the Management Discussion and Analysis section of the 10-K we are providing
more detailed information about our operating results and changes in financial
position over the past three years. This section should be read in conjunction
with the Consolidated Financial Statements and related Notes beginning on page
37.
During the fiscal year ended July 31, 1998, our overall revenue decreased by 1%
compared to fiscal 1997, due primarily to the loss of revenue as a result of the
disposition of our Parsons subsidiary in August 1997. If for comparison
purposes, Parsons revenue was excluded from fiscal 1997, then our revenue in
fiscal 1998 would have been 13% higher than in fiscal 1997.
On a generally accepted accounting principles ("GAAP") basis, we reported a net
loss of $12.2 million for fiscal 1998 compared to net income of $68.3 million in
fiscal 1997. This comparison is unfavorably impacted by a $53.8 million charge
for purchased research and development associated with the acquisition of
Lacerte in fiscal 1998 and a $71.2 million gain from the sale of Intuit Services
Corporation in fiscal 1997. After excluding one-time charges such as the fiscal
1998 AOL charge of $16.2 million, the impact of our divested Parsons subsidiary,
the gain on sale of discontinued operations, restructuring charges and
acquisition-related charges in fiscal 1998 and 1997, we would have experienced a
38% improvement in net income in fiscal 1998 over fiscal 1997. This improved
performance was primarily the result of lower cost of sales, and lower customer
service and technical support costs. Our performance improved while we were
making significant investments in our new QuickBooks multi-user technology and
our expanding Internet products, including the new online payroll service we
introduced on a limited basis in September 1998. Since we anticipate that all of
our divisions will increasingly leverage the Internet as a means of offering
products, we expect to continue incurring significant research and development
investments in fiscal 1999 through internal development, acquisitions and
strategic partnerships. The development and expansion of our Internet commerce
businesses will involve significant risks including intense competition and
difficulty in developing and implementing new business models and new
operational infrastructures. See page 8 of the business section for more
information regarding these risks.
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 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 quarter ending January 31. We experience lower
revenues for the quarters ending April 30, July 31, and October 31, while
operating expenses to develop and manage products and services continue during
these periods. This can result in significant operating losses, particularly in
the July 31 and October 31 quarters. The seasonality of our revenue patterns is
likely to be exacerbated by our acquisition of Lacerte. 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
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with relatively high fixed expenses. Acquisitions and dispositions in particular
have a significant impact on the comparability of both our quarterly and yearly
results.
RESULTS OF OPERATIONS
Our sale of Parsons at the beginning of fiscal 1998 has impacted the
comparability of our operating results for fiscal 1997 and fiscal 1998.
Accordingly, the following revenue, cost of goods sold and operating expense
tables compare our fiscal 1998 results determined in accordance with GAAP to our
fiscal 1997 results, which exclude all revenues and expenses associated with our
divested Parsons subsidiary. Since Parsons was divested for our entire 1998
fiscal year, we believe this comparison provides a more meaningful analysis of
our results. Fiscal 1997 and fiscal 1996 results are being presented and
compared on a GAAP basis since both years include activity from our divested
Parsons subsidiary.
NET REVENUE
(Dollars in millions) 1996 CHANGE 1997 1997 CHANGE 1998
------------------------------- --------------------------------------
(GAAP) (GAAP) (Excluding Parsons) (GAAP)
Software and related services $463.0 11% $512.0 $438.6 14% $498.3
% of revenue ................ 86% 85% 83% 84%
Supplies .................... $ 75.6 15% $ 86.9 $ 86.9 9% $ 94.4
% of revenue ................ 14% 15% 17% 16%
Total ....................... $538.6 11% $598.9 $525.5 13% $592.7
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for reporting
purposes. The following revenue discussion is categorized by our business
divisions, which is how we examine our 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.
Each of our business divisions reports Internet commerce revenues that are
specific to its operations and are included in its results. 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 where 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, and transaction and processing fees from our online insurance and
online mortgage services. Electronic distribution includes revenues generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies.
Although we have made significant progress in our Internet commerce activities
during the past year, 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 and the Web will give us
significant opportunities to grow our revenue over the next several years.
However, revenue from Internet commerce was only 8% of total revenue during
fiscal 1998 (6% for Internet products and 2% for electronic distribution).
We recognize revenue from sales of our desktop software products when products
are shipped, less reserves for expected returns and rebates from both the retail
and direct distribution channels. These reserves are difficult to estimate,
especially for seasonal products. If actual returns are significantly higher
than our estimated reserves, this could have a material negative impact on our
revenue and operating results. See Note 1 of the financial statement notes (page
43) for additional information regarding net revenue.
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Small Business Division. Small Business Division revenues come primarily from
the following sources:
- - QuickBooks product line
- - Supplies products (including checks, envelopes and invoices)
- - Tax table services
- - Support fees charged to customers for telephone assistance
Overall, revenue for the division grew 16% in fiscal 1998 compared to fiscal
1997. Revenues for the division were largely affected by the timing of our
QuickBooks product releases in fiscal 1998 compared to fiscal 1997. In fiscal
1997, we launched QuickBooks 5.0 in the second quarter (December 1996). In
fiscal 1998 we launched our QuickBooks 6.0 products (including the QuickBooks
Pro multi-user product) in the fourth quarter (June 1998). With the QuickBooks
Pro multi-user product, we are targeting the multi-user market for the first
time. While we believe this will appeal to larger small business customers than
we have been able to reach in the past, there are also risks. The multi-user
version of QuickBooks has a higher sale price than single-user versions, which
may adversely impact the channels we use to distribute the product, and may also
adversely impact QuickBooks upgrade sales. Customer service and technical
support costs may also be higher due to the added complexity of this product. If
these or other risks occur, there could be a negative impact on our operating
results.
Supplies revenues grew by 9% in fiscal 1998 compared to fiscal 1997.
This growth was primarily the result of our increasing customer base of small
business owners who use QuickBooks and Quicken to run their small businesses.
Our supplies business is a more consistent source of revenue than our software
business, and is derived from an existing customer base. While customers may go
long periods of time without buying a new version of software, they will often
buy supplies in between software purchases. Tax table service revenues and fees
charged for telephone support also grew substantially in fiscal 1998.
In September 1998, we introduced our new payroll processing service for our
small business customers. In fiscal 1998, we incurred considerable research and
development costs to develop this service. These expenditures will continue in
fiscal 1999. We expect this service to be unprofitable in its initial stages and
long term profitability will depend on our ability to obtain a large number of
subscribers for this service from our QuickBooks user base. If subscriptions
don't meet expectations, our future operating results could be negatively
impacted.
Small Business Division revenues increased by 25% in 1997 compared to 1996. This
was largely driven by higher QuickBooks product sales resulting from the release
of version 5.0 in December 1996. We also benefited from a favorable shift in
consumer buying patterns to higher-priced, increased functionality QuickBooks
products in fiscal 1997 compared to fiscal 1996. Supplies net revenue increased
by 17% in fiscal 1997 over fiscal 1996 as the result of higher customized check,
envelope and invoice orders from an increasing small business customer base.
Increased tax table service revenues and an expanded fee-for-support program
(which began charging users for telephone assistance with their QuickBooks
products beginning in fiscal 1997) also contributed to growth.
Tax Division. Tax Division revenues come primarily from the following sources:
- - TurboTax and MacInTax personal tax preparation products
- - Professional tax preparation products (ProSeries and Lacerte product
lines)
- - Electronic tax return preparation and filing fees
Overall, Tax Division revenues grew 10% in fiscal 1998 compared to fiscal 1997.
This growth reflects higher sales of our TurboTax products in fiscal 1998 and a
sales mix improvement towards higher-priced deluxe products. The personal tax
market was more competitive in fiscal 1998 because our primary competitor
lowered its prices earlier in the tax software sales season this year. Despite
intense competition, we achieved sales increases largely due to positive product
reviews in the press, federal tax law changes enacted in late 1997 and an
expanded investment in retail distribution. We were also successful in getting
our TurboTax products to market more quickly in fiscal 1998. The Tax Division
also experienced growth in Internet commerce revenues during fiscal 1998 as
evidenced by significant increases in electronic filing and state tax product
downloads compared to the prior year. We believe that
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competition will continue to be intense in fiscal 1999 and beyond. It is
possible that Microsoft Corporation will enter the personal tax preparation
software market, which could have a negative impact on our revenue,
profitability and market share. We are also at risk if federal or state
government agencies choose to offer tax preparation software products or
electronic filing services that would compete with our products.
Our professional tax product sales increased 10% in fiscal 1998 compared to
fiscal 1997. We experienced this growth primarily because we have been
successful in attaining new customers and in many cases have upgraded renewal
customers to higher-priced, increased functionality products. We expect the
acquisition of Lacerte will significantly expand our professional tax operations
during fiscal 1999. In its fiscal years ended March 31, 1997 and 1998, Lacerte
had revenue of $68.1 million and $75.6 million, respectively, and income from
operations of $23.4 million and $28.9 million, respectively. While we expect
that the acquisition will add to revenue and earnings, there are risks. See
"Acquisition of Lacerte" on page 4 of the Business section for more detail
regarding strategic benefits and risks of the Lacerte acquisition. We are also
assuming significant acquisition-related costs as a result of the transaction.
See Note 3 of the financial statement notes (page 49) for a discussion of these
costs.
Both personal and professional tax products experienced revenue growth in fiscal
1997. Personal tax product revenues for fiscal 1997 grew by approximately 13%
over fiscal 1996 as a result of increases in both the direct and retail channel
sales of Intuit's TurboTax and related products. Sales increases were
attributable both to higher unit sales and a favorable shift in buying patterns
to higher-priced products. Professional tax product revenues grew by
approximately 16% over the prior year due to strong customer acceptance of
Windows-based product offerings and an increase in pay-per-return revenues.
Consumer Finance Division. Consumer Finance Division revenues are derived
primarily from the following sources:
- - Quicken product line
- - Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
- - Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing services
through Quicken and Quicken.com
Overall, Consumer Finance Division revenues grew 24% in fiscal 1998 compared to
fiscal 1997. Our Quicken product sales were up slightly for the year, reflecting
a more favorable sales mix toward our higher-priced products, offset by lower
overall unit sales. While we anticipate that Quicken revenues will remain
roughly flat for fiscal year 1999, there is a risk that they will decline. In
fiscal 1997, Quicken experienced over a 20% decline in revenues. There is no
assurance that similar declines will not occur in the future. Fiscal 1998
revenue included a $10 million royalty payment from Checkfree, which we will not
receive in fiscal 1999.
Growth for the division was driven by increasing Internet product revenues,
which approximately doubled in fiscal 1998 compared to fiscal 1997. This growth
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. The AOL agreement calls for us to make
significant guaranteed payments over the term of the agreement. See Note 5 (page
50) of the financial statement notes for more information regarding the Excite
and AOL agreements. While the Internet provides a significant opportunity for
revenue growth, there are also risks. Since we have made significant financial
commitments to third party providers, we must continue to increase traffic and
revenue in order to become profitable. See "Risks of Internet Commerce," on page
8, for more information regarding risks.
Consumer Finance Division revenues declined approximately 20% in fiscal 1997
compared to fiscal 1996. The combination of price reductions and lower retail
unit sales of Intuit's Quicken product line were primarily responsible for the
decline. In addition, we experienced a shift in consumer buying patterns away
from deluxe versions of products and toward lower-priced regular product
versions in fiscal 1997. In fiscal 1997, Intuit's
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revenues included a $10 million fee from Checkfree for connectivity to
Checkfree's bill payment service through Quicken.
International Division. International Division revenues come primarily from the
following sources:
- - Japanese small business products
- - German Quicken, QuickBooks and Tax products
- - Canadian Quicken, QuickBooks and Tax products
- - United Kingdom Quicken, QuickBooks and Tax products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. International Division revenues were down slightly in fiscal
1998 compared to fiscal 1997. This reflects lower revenues in Europe, roughly
flat revenues in Japan and higher revenues in Canada. In fiscal 1998, we
launched a new version of Quicken throughout Europe and a new version of
QuickBooks in Germany. In Japan, revenues were negatively impacted by the recent
economic slowdown, increasing competition in the high-end small business
accounting market and a weak Japanese currency. This was partially offset by
increased revenues resulting from our acquisition of Nihon Micom. In Canada, we
experienced solid revenue growth from our QuickTax, Quicken and QuickBooks
products. We have refocused our product development in Europe towards small
business products in selected larger markets. As a result, we expect to devote
fewer resources to consumer finance and tax products, and to smaller geographic
markets. We also introduced QuickBooks in Japan in September 1998 in an effort
to target a lower-priced market than our current products reach. While we expect
that international revenues will be flat or slightly down in fiscal year 1999,
there is a risk that they could be significantly lower if our initiatives are
not effective or if the Japanese currency continues to devalue significantly.
In anticipation of the upcoming conversion to a common European currency, we
have performed preliminary evaluations to determine the impact on our internal
systems and products. Based on these evaluations, we currently believe the
conversion will have an immaterial impact on our operations.
International Division revenues experienced growth of approximately 28% during
fiscal 1997 compared to fiscal 1996. This growth was the result of significant
gains in the Japan and European regions. In Japan, growth resulted from the
release of a Windows-based product acquired from Nihon Micom. In the European
region, sales improved due to Quicken product releases in Germany and the
release of QuickBooks in the U.K. In Canada, fiscal 1997 growth was attributable
to an increase in unit sales of Canadian versions of Quicken, QuickBooks and
QuickTax products.
COST OF GOODS SOLD
(Dollars in millions) 1996 CHANGE 1997 1997 CHANGE 1998
------------------------------- --------------------------------------
(GAAP) (GAAP) (Excluding Parsons) (GAAP)
Product ............. $136.5 1% $137.3 $119.3 1% $120.5
% of revenue ........ 25% 23% 23% 20%
Amortization of
purchased software
and other .......... $ 1.4 7% $ 1.5 $ 1.5 93% $ 2.9
% of revenue ........ 0% 0% 0% 0%
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products. The second component is the amortization
of purchased software, which is the cost of products obtained through business
acquisitions. Excluding the operating results of our divested Parsons subsidiary
for fiscal 1997, cost of goods sold decreased to 20% of net revenue in fiscal
1998 compared to 23% in fiscal 1997. This improvement was the result of our
customers buying more of our CD ROM products, which cost less to manufacture and
ship than disk-based products. We have also improved the efficiency of our
order-taking process in the financial supplies business, which has reduced
costly re-orders. While we are continuing our efforts to reduce these costs, we
expect cost of goods sold as a percentage of net revenue to increase in fiscal
1999 due largely to the changing nature of our business. Primary reasons are as
follows:
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- - Our expanding service related businesses (such as online payroll and
support fees for telephone assistance) tend to produce lower margins and
will result in higher cost of sales as a percentage of revenue.
- - We are increasing our investment in the infrastructure required to
support our expanding Internet commerce businesses. Although not
significant in fiscal 1998, these costs will be classified as cost of
goods sold in fiscal 1999.
- - Some of these new cost of sales items (such as depreciation of servers)
tend to be fixed in nature and may cause significant variations in
quarterly comparisons of cost of sales as a percentage of revenue.
We believe that all of these factors will continue to put upward pressure on our
cost of goods sold as a percentage of revenue in fiscal 1999 and beyond. Cost of
goods sold could also be negatively impacted if we experience errors in our
current or future products. While this risk is mitigated by our increasing
capability to fix product errors less expensively via the Internet, our results
may suffer if there is a material product error.
Total cost of goods sold decreased as a percentage of net revenue for fiscal
1997 compared to fiscal 1996. This was the result of improvements in supplies
order processing, a reduction of obsolete inventory write-offs in Germany, lower
materials costs, increasing sales of CD ROM products and a decrease in warranty
expenses in fiscal 1997 compared to 1996.
OPERATING EXPENSES
(Dollars in millions) 1996 CHANGE 1997 1997 CHANGE 1998
--------------------------------- -----------------------------------------
(GAAP) (GAAP) (Excluding Parsons) (GAAP)
Customer service and technical
support ...................... $106.9 12% $119.8 $112.4 5% $117.7
% of revenue ................. 20% 20% 21% 20%
Selling and marketing ........ $142.3 14% $162.0 $129.8 27% $164.8
% of revenue ................. 26% 27% 25% 28%
Research and development ..... $ 75.6 23% $ 93.0 $ 85.8 27% $108.6
% of revenue ................. 14% 16% 16% 18%
General and administrative ... $ 33.1 13% $ 37.5 $ 35.0 5% $ 36.7
% of revenue ................. 6% 6% 7% 6%
Charge for purchased research
and development .............. $ 8.0 38% $ 11.0 $ 11.0 389% $ 53.8
% of revenue ................. 1% 2% 2% 9%
Other acquisition costs,
including amortization of
goodwill and purchased
intangibles .................. $ 40.6 (35)% $ 26.5 $ 21.5 13% $ 24.2
% of revenue ................. 8% 4% 4% 4%
Restructuring costs .......... -- N/A $ 10.4 $ 10.4 (100)% --
% of revenue ................. -- 2% 2% --
Customer Service and Technical Support. Excluding the operating results of our
divested Parsons subsidiary for fiscal 1997, customer service and technical
support expenses decreased to 20% of net revenue in fiscal 1998 compared to 21%
in fiscal 1997. We benefited from cost reductions due to the restructuring and
consolidation of our technical support facilities in the United States and
Europe in the fourth quarter of fiscal 1997. We have also benefited from our
initiatives to provide customer service and technical support less expensively
through websites
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and other electronic means. While we anticipate that service and support
expenses will stay relatively flat or decrease as a percentage of revenue
because of the 1997 restructuring and increased fees charged for telephone
support, there is a risk that these expenses could increase. For example, our
new multi-user QuickBooks product may result in higher customer service and
technical support expenses since customers may need considerably more
assistance with this more complex product.
Customer service and technical support expenses remained constant at
approximately 20% of net revenue for both fiscal 1997 and 1996. International
technical support cost increases were offset by improved management of domestic
technical support facilities and resources and higher product quality in fiscal
1997 compared to 1996.
Selling and Marketing. Excluding the operating results of our divested Parsons
subsidiary for fiscal 1997, selling and marketing expenses increased to 28% of
net revenue in fiscal 1998 compared to 25% in fiscal 1997. The significant
increase was due to a charge of $16.2 million related to the AOL agreement in
the third quarter of fiscal 1998, as well as increased selling and marketing
costs in support of our TurboTax product launch and increased promotion of our
Internet products. We expect this trend to continue as competition intensifies
in the personal tax market and for our Internet products in fiscal 1999.
Selling and marketing expenses for fiscal 1997 grew to 27% of net revenue
compared to 26% in 1996. This increase was due to higher marketing expenses in
response to increased tax product competition and the support of several key
international product launches.
Research and Development. Excluding the operating results of our divested
Parsons subsidiary for fiscal 1997, research and development expenses increased
to 18% of net revenue in fiscal 1998 compared to 16% in fiscal 1997. The
development of the multi-user version of QuickBooks contributed to these
increasing costs since it was more expensive to develop than our less complex
single-user products. Increases were also a result of our increased spending to
improve and expand our Internet products in an effort to attract more customer
traffic to Quicken.com. We believe that research and development expenses
related to Internet products will continue to increase in fiscal 1999. This
could have an adverse effect on our operating results, particularly if revenue
from these services does not meet expectations.
Research and development expenses grew to 16% of net revenue in fiscal 1997
compared to 14% in 1996. This increase resulted from an increased investment in
Internet product initiatives as well as the development of our desktop software.
Specifically, expenses rose as a result of development costs related to Quicken
InsureMarket, development work on Open Financial Exchange (a specification for
the exchange of financial information over the Internet) and the development of
other financial websites.
General and Administrative. Excluding the operating results of our divested
Parsons subsidiary for fiscal 1997, general and administrative expenses
decreased to 6% of net revenue in fiscal 1998 compared to 7% in fiscal 1997.
General and administrative expenses remained essentially flat at 6% of net
revenue for both fiscal 1997 and fiscal 1996.
Charge for Purchased Research and Development. When acquiring a company, we
often record a one-time charge for purchased research and development. This
charge represents the value of products we acquire that aren't yet complete
enough to be considered technologically feasible. We recorded such a charge of
$53.8 million in fiscal 1998 as the result of the Lacerte acquisition, $11
million in fiscal 1997 ($4.9 million when we acquired GALT Technologies, Inc.
and $6.1 million when we acquired Nihon Micom) and $8.0 million in fiscal 1996
as a result of the acquisition of IIS. Since these charges are specific to each
particular acquisition, we are unable to estimate what these charges may be in
the future.
The fiscal 1998 charge for purchased in-process research and development
resulted from our acquisition of Lacerte. The amount of this write-off was
determined by valuing the projects under development for which technological
feasibility had not been established. Two projects were identified for products
being developed under separate operating systems (DOS and Windows). The value of
the products was determined by estimating the costs to develop the in-process
technology into commercially feasible products, estimating the net cash flows we
believe
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will result from the products and discounting these net cash flows back
to their present value. We believe these products will be completed by March
1999 and that the risk of these products not being successfully completed is
low. However, if we were unable to successfully develop these products, it could
have a negative impact on our operating results.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
Excluding the operating results of our divested Parsons subsidiary for fiscal
1997, these costs increased to $24.2 million in fiscal 1998 compared to $21.5
million in fiscal 1997. This increase was due primarily to our acquisition of
Lacerte. Acquisition costs decreased by $14.1 million to $26.5 million in fiscal
1997 compared to 1996. This decrease was due to the fact that a majority of the
intangibles related to our December 1993 acquisition of Chipsoft Inc. became
fully amortized during fiscal 1997. For future periods, acquisition costs will
continue to have an impact on our results. Based on acquisitions completed as of
July 31, 1998, future amortization will reduce net income (after tax) by
approximately $78.5 million, $72.8 million and $61.6 million for the years
ending July 31, 1999 through 2001, respectively. If we complete additional
acquisitions in the future, this could result in additional amortization
charges. Specifically, if we exercise our option to purchase Venture Finance
Software Corp. (see Note 5 (page 50) of the financial statement notes), we would
record substantial intangible assets that would be amortized over the life of
VFSC's technology.
Restructuring Costs. Restructuring charges of $10.4 million were recorded in our
fourth quarter of fiscal 1997 to account for the consolidation of technical
support sales and other operations in the U.S. and Europe. As part of the
restructuring, we closed our Rio Rancho, New Mexico customer support facility.
As of July 31, 1998 we have a balance of approximately $1.8 million in accrued
restructuring related expenses.
OTHER INCOME
For fiscal 1998, interest and other income and expense, net, remained
essentially flat as a percentage of revenue compared to the same periods of the
prior year. The $4.3 million gain on disposal of business in fiscal 1998
resulted from the sale of our Parsons subsidiary in August 1997.
INCOME TAXES
For fiscal 1998 we recorded a tax benefit of $7.7 million and pretax loss of
$19.8 million, resulting in an effective tax benefit rate of 38.9%. The
effective tax rates in prior years were significantly higher due to charges for
in-process research and development and amortization of certain intangibles
related to various acquisitions for which no tax benefit is available. As of
July 31, 1998, we have provided a valuation reserve of $9.6 million related to
the benefit of losses in our foreign subsidiaries that we believe are unlikely
to be realized.
DISCONTINUED OPERATIONS
We sold our ISC subsidiary to Checkfree Corporation in the second quarter of
fiscal 1997. This resulted in a $71.2 million gain, net of tax. See Note 4 of
the financial statement notes for additional information regarding this sale and
the on-going treatment of our investment in Checkfree.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, our unrestricted cash and cash equivalents totaled $138.1
million, a $91.4 million increase from July 31, 1997. Improvements in liquidity
were a result of net cash provided by operations and financing activities,
partially offset by cash used for investing activities.
Our operations provided $68.3 million in cash during the twelve months ended
July 31, 1998. Primary contributors to cash provided were net income adjusted
for non-cash expenses such as acquisition charges and depreciation as well as a
significant increase in accrued liabilities. The increase in liabilities was
driven by higher reserves for rebates and returns resulting from product
releases occurring during the fourth quarter of the current fiscal year. In the
prior fiscal year, product releases occurred during our first and second fiscal
quarters, which generally resulted in lower reserves at year-end. These
increases were partially offset by cash used for payments we made for
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expenses related to the ISC and Parsons sales, a reduction in prepaid assets and
a reduction in deferred tax liabilities. We also experienced a significant
increase in accounts receivable balances due to the fourth quarter product
releases.
Investing activities used $473.2 million in cash for the twelve months ended
July 31, 1998. The primary use of cash was our acquisition of Lacerte, a
professional tax preparation software company, for approximately $400 million in
cash. The acquisition was funded by a public offering of 10 million shares of
common stock, discussed below. Other uses of cash included net purchases of both
short-term and long-term investments, in addition to purchases of property and
equipment. Capital expenditures are primarily for equipment and facilities to
support our ongoing and expanding operations and information systems. Uses of
cash were partially offset by $26.4 million in cash proceeds from the sale of
our Parsons subsidiary and $9.0 million from the sale of our technical support
facility in New Mexico. Due to our significant investments in marketable
securities, there is a risk that market value declines may have a negative
impact on our liquidity. For example, we experienced a significant decline in
the value of our investment in Checkfree subsequent to our fiscal year end.
There can be no assurance that similar declines will not occur for any of our
marketable securities. If such declines are deemed to be permanent, they will
result in a charge to our statement of operations. See Note 17 (page 58) of the
financial statement notes for more information about recent declines in
marketable securities.
The $496.3 million in cash provided by financing activities is primarily due to
our public offering of 10 million shares of common stock in the fourth quarter
of fiscal 1998. Net proceeds were approximately $456 million. In March 1997, we
borrowed $30.3 million from Japanese banks in connection with our acquisition of
Nihon Micom. We have guaranteed the loan and pledged approximately $28.5 million
of short-term investments (110% of the current loan balance) to be restricted as
security for the borrowings at July 31, 1998.
Our agreement with AOL obligates us to pay a minimum of $30 million over the
term of the three-year agreement. Of this amount, approximately $16.2 million
was paid to AOL in the third quarter of fiscal 1998. We currently do not have
any other significant capital expenditure commitments, though we may require
additional cash for strategic projects in the future. For example, if we
exercise our option to purchase VFSC (see Note 5 of the financial statement
notes) and elect to pay all or a significant portion of the exercise price in
cash, it would require a significant cash expenditure.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. See Note 7 of the
financial statement notes (page 51) and the "Properties" section (page 19) for
more information on lease commitments.
We believe that our unrestricted cash and cash equivalents will be sufficient to
meet anticipated seasonal working capital and capital expenditure requirements
for at least the next twelve months.
YEAR 2000
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference in a year that begins with "20" instead of "19." This, as well as
other date related processing issues, may cause systems to fail or malfunction
unless corrected.
We are currently taking steps to address Year 2000 issues in the following three
areas: (1) our internal systems (including information technology such as
financial and order entry systems and non-information technology systems such as
phones and facilities); (2) our products; and (3) the readiness of third parties
with whom we have business relationships. We have assigned a dedicated Year 2000
project team to develop and implement a comprehensive five-phase Year 2000
readiness plan for our world-wide operations relating to all of these areas.
This plan has executive sponsorship, is regularly reviewed by senior management
and includes progress reports to the board of directors on a regular basis.
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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) will consist of developing a plan for
those areas identified as needing correction in the assessment phase. Phase Five
(implementation) will consist of executing our action plan and completing the
steps identified to attain Year 2000 readiness. We are currently in the
inventory phase of the plan for both our internal systems and third party
relationships. For our products, we are in either the inventory or assessment
phase of our plan. We currently expect to complete implementation for all of the
targeted areas by the end of our 1999 fiscal year (July 1999).
While Year 2000 costs incurred to date (including litigation costs) have not
been material, we will incur additional costs as we complete the project phases.
Based on preliminary assessments resulting from the early phases of our plan in
each of the targeted areas, we are currently unable to determine whether
additional costs to achieve Year 2000 readiness will be material. Additional
costs incurred may include but are not limited to: the cost of manufacturing and
distributing free solutions for products that are not Year 2000 ready; the
impact of lost sales due to distribution of free Year 2000 ready solutions for
affected products; the administrative costs of completing the Year 2000 project;
the cost of correcting our internal systems; and the cost of implementing
necessary contingency plans.
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 all Year 2000 issues. If we are not successful, there could be
significant 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. For example, our
ability to manufacture and ship products into the retail channel, to receive
retail sales information necessary to maintain proper inventory levels, or to
complete online transactions dependent upon third party service providers, could
be affected. Many of our products are significantly interconnected with heavily
regulated financial institutions. Our relationships with financial institutions
could be 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.
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. For
example, we have contracted with multiple suppliers to better ensure that our
products can be manufactured if a particular supplier experiences system
failures. We are building a second data center facility that will give us an
opportunity to develop back-up systems. We have also contracted with multiple
transportation companies to provide product delivery alternatives. While we
believe these contingency plans will reduce certain risks, we are still
assessing the need for additional contingency plans in areas where we believe
there may be significant exposure.
Several class action lawsuits have recently 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 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
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planning to make such solutions available before customers experience any Year
2000 problems. See Part I, Item 3, "Legal Proceedings" (page 20) for more
information.
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.
ITEM 7A
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.
The following table provides expected maturity and interest rate information for
our investment portfolio. Maturity information is based on principal cash flows
and interest rates are calculated on a weighted average basis.
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates)
YEARS ENDING JULY 31, FAIR VALUE
---------------------------------------------------------- JULY 31,
1999 2000 2001 2002 2003 TOTAL 1998
---- ---- ---- ---- ---- ----- ----
Cash Equivalents ........... $ 115,751 -- -- -- -- $115,751 $115,751
Average Interest Rate 4.30% 4.30%
Investments ................ $ 109,447 $ 163,317 $ 408 -- -- $273,172 $273,215
Average Interest Rate 4.18% 3.90% 3.80% 4.01%
Total Portfolio ............ $ 225,198 $ 163,317 $ 408 -- -- $388,923 $388,966
Average Interest Rate 4.24% 3.90% 3.80% 4.09%
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of July
31, 1998. These securities are subject to considerable market risk due to their
volatility. See Note 17 of the financial statement notes for more information
regarding risks related to our investments in marketable securities.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. Since we translate foreign currencies into U.S
dollars for reporting purposes, these weakened currencies had a negative, though
immaterial, impact on our results. We also 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. There was also an immaterial currency
exchange impact from our intercompany transactions for fiscal year 1998.
Currency exchange risk is also minimized since foreign debt is due almost
exclusively in local foreign currencies. During fiscal 1998, we did not engage
in foreign currency hedging activities.
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37
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTUIT INC.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Ernst & Young LLP, independent auditors.................................... 38
Consolidated Balance Sheets as of July 31, 1997 and 1998............................. 39
Consolidated Statements of Operations for the three years ended July 31, 1998........ 40
Consolidated Statements of Stockholders' Equity for the three years ended
July 31, 1998.................................................................. 41
Consolidated Statements of Cash Flows for the three years ended July 31, 1998........ 42
Notes to Consolidated Financial Statements........................................... 43
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this
report and should be read in conjunction with the Consolidated
Financial Statements:
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts.................................... 59
37
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Intuit Inc.
We have audited the accompanying consolidated balance sheets of Intuit Inc. as
of July 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 1998. Our audits also included the financial statement
schedule listed on the Index to Financial Statement Schedules on the preceding
page. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Intuit
Inc. at July 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
August 19, 1998
38
39
INTUIT INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, JULY 31,
(In thousands, except par value) 1997 1998
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 46,780 $ 138,133
Short-term investments .................................................... 158,319 244,699
Marketable securities ..................................................... 190,800 499,285
Accounts receivable, net of allowance for doubtful accounts
of $4,499 and $5,335, respectively (1) ................................. 42,190 59,417
Inventories ............................................................... 3,295 3,695
Prepaid expenses and other current assets (2) ............................. 13,393 34,896
-------- ----------
Total current assets .............................................. 454,777 980,125
Property and equipment, net ................................................. 83,404 69,413
Purchased intangibles, net .................................................. 19,836 85,797
Goodwill, net ............................................................... 26,935 285,793
Other assets ................................................................ 2,808 10,937
Long-term deferred income taxes ............................................. -- 21,006
Investments ................................................................. 41,150 17,009
Restricted investments ...................................................... 34,766 28,516
-------- ----------
Total assets ................................................................ $663,676 $1,498,596
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 35,688 $ 44,035
Accrued compensation and related liabilities .............................. 22,458 23,728
Deferred revenue .......................................................... 22,732 58,560
Income taxes payable ...................................................... 3,811 3,044
Deferred income taxes ..................................................... 27,310 120,482
Other accrued liabilities ................................................. 99,583 124,820
-------- ----------
Total current liabilities ......................................... 211,582 374,669
Long-term deferred income taxes ............................................. 589 --
Long-term notes payable ..................................................... 36,444 35,566
Commitments and contingencies ...............................................
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 - 46,942 and 59,320 shares, respectively ........ 469 593
Additional paid-in capital ................................................ 558,391 1,080,554
Net unrealized gain on marketable securities .............................. 20,668 181,071
Cumulative translation adjustment and other ............................... (1,236) 1,531
Accumulated deficit ....................................................... (163,231) (175,388)
-------- ----------
Total stockholders' equity ........................................ 415,061 1,088,361
-------- ----------
Total liabilities and stockholders' equity .................................. $663,676 $1,498,596
======== ==========
(1) Includes $1.0 and $3.4 million from Checkfree as of July 31, 1997 and 1998,
respectively. (See Note 15.)
(2) Includes a $7.3 million note receivable from Venture Finance Software
Corporation as of July 31, 1998. (See Note 15.)
See accompanying notes.
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40
INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31,
1996 1997 1998
--------- --------- ---------
(In thousands, except per share data)
Net revenue (1) .......................................... $ 538,608 $ 598,925 $ 592,736
Costs and expenses:
Cost of goods sold:
Product ............................................. 136,470 137,281 120,538
Amortization of purchased software and other ........ 1,399 1,489 2,905
Customer service and technical support ................. 106,872 119,762 117,714
Selling and marketing .................................. 142,319 162,047 164,834
Research and development ............................... 75,558 93,018 108,604
General and administrative ............................. 33,153 37,460 36,719
Charge for purchased research and development .......... 8,043 11,009 53,800
Other acquisition costs, including amortization of
goodwill and purchased intangibles .................... 40,570 26,543 24,204
Restructuring costs .................................... -- 10,356 --
--------- --------- ---------
Total costs and expenses ....................... 544,384 598,965 629,318
--------- --------- ---------
Loss from operations ........................... (5,776) (40) (36,582)
Interest and other income and expense, net ............... 7,646 9,849 12,438
Gain on disposal of business ............................. -- -- 4,321
--------- --------- ---------
Income (loss) from continuing operations before
income taxes ........................................... 1,870 9,809 (19,823)
Provision (benefit) for income taxes .................... 16,225 12,741 (7,666)
--------- --------- ---------
Loss from continuing operations .......................... (14,355) (2,932) (12,157)
Loss from operations of discontinued operations, net of
income tax benefit of $3,725 .......................... (6,344) -- --
Gain from sale of discontinued operations, net of
income tax provision of $52,617 ....................... -- 71,240 --
--------- --------- ---------
Net income (loss) ........................................ $ (20,699) $ 68,308 $ (12,157)
========= ========= =========
Basic net loss per share from continuing operations ...... $ (0.32) $ (0.06) $ (0.24)
Basic net loss per share from operations of discontinued
operations .............................................. (0.14) -- --
Basic net income per share from sale of discontinued
operations .............................................. -- 1.53 --
--------- --------- ---------
Basic net income (loss) per share ........................ $ (0.46) $ 1.47 $ (0.24)
========= ========= =========
Shares used in per share amounts ......................... 45,149 46,424 49,676
========= ========= =========
Diluted net loss per share from continuing operations .... $ (0.32) $ (0.06) $ (0.24)
Diluted net loss per share from operations of discontinued
operations ............................................. (0.14) -- --
Diluted net income per share from sale of discontinued
operations ............................................. -- 1.50 --
--------- --------- ---------
Diluted net income (loss) per share ...................... $ (0.46) $ 1.44 $ (0.24)
========= ========= =========
Shares used in per share amounts ......................... 45,149 47,448 49,676
========= ========= =========
(1) Includes $11.6 and $14.1 million from Checkfree for the years ended July 31,
1997 and 1998, respectively, and $10.3 million from Excite for the year ended
July 31, 1998. (See Note 15.)
See accompanying notes.
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41
INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED CUMULATIVE
COMMON STOCK ADDITIONAL GAIN ON TRANSLATION EARNINGS TOTAL
---------------- PAID-IN MARKETABLE ADJUSTMENT (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SECURITIES AND OTHER DEFICIT) EQUITY
(Dollars in thousands) ------ ------ ------- ---------- --------- -------- ------
Balance at July 31, 1995 .............. 44,516,908 $ 445 $ 490,698 $-- $ 96 $ (210,840) $ 280,399
Issuance of common stock pursuant
to Intuit KK acquisition ............ 650,000 7 473 -- -- -- 480
Issuance of common stock pursuant
to Intuit Insurance Services
acquisition ......................... 169,181 2 8,431 -- -- -- 8,433
Issuance of common stock upon
exercise of options ................. 470,847 4 12,351 -- -- -- 12,355
Tax benefit from option transactions... -- -- 18,865 -- -- -- 18,865
Amortization of deferred
compensation ........................ -- -- -- -- 29 -- 29
Translation adjustment and other ...... -- -- -- -- (627) -- (627)
Net loss .............................. -- -- -- -- -- (20,699) (20,699)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 .............. 45,806,936 458 530,818 -- (502) (231,539) 299,235
Issuance of common stock pursuant to
GALT acquisition .................... 212,053 2 8,709 -- -- -- 8,711
Issuance of common stock upon
exercise of options and other ....... 826,818 8 7,540 -- -- -- 7,548
Issuance of common stock pursuant to
Employee Stock Purchase Plan ........ 96,301 1 1,877 -- -- -- 1,878
Release of stock from escrow pursuant
to Parsons Technology, Inc.
acquisition ......................... -- -- 2,743 -- -- -- 2,743
Tax benefit from employee stock
option transactions ................. -- -- 6,704 -- -- -- 6,704
Net unrealized gain on marketable
securities .......................... -- -- -- 20,668 -- -- 20,668
Translation adjustment and other ...... -- -- -- -- (734) -- (734)
Net income ............................ -- -- -- -- -- 68,308 68,308
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 .............. 46,942,108 469 558,391 20,668 (1,236) (163,231) 415,061
Issuance of common stock upon
exercise of options and other ...... 2,230,258 22 41,222 -- -- -- 41,244
Issuance of common stock pursuant to
Employee Stock Purchase Plan ........ 147,976 2 3,757 -- -- -- 3,759
Issuance of common stock pursuant to
public offering ..................... 10,000,000 100 455,950 -- -- -- 456,050
Tax benefit from employee stock
option transactions ................. -- -- 21,234 -- -- -- 21,234
Net unrealized gain on marketable
securities .......................... -- -- -- 160,403 -- 160,403
Translation adjustment and other ...... -- -- -- -- 2,767 -- 2,767
Net loss .............................. -- -- -- -- -- (12,157) (12,157)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 .............. 59,320,342 $ 593 $ 1,080,554 $ 181,071 $ 1,531 $ (175,388) $ 1,088,361
===================================================================================================================================
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED JULY 31,
--------------------
1996 1997 1998
(In thousands) --------- --------- ---------
Cash flows from operating activities:
Net income (loss) ..................................... $ (20,699) $ 68,308 $ (12,157)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: .................. --
Net gain on sale of discontinued operations ...... -- (71,240) --
Discontinued operations loss offset against gain . -- (9,668) --
Gain on disposal of business, net of tax ......... -- -- (1,621)
Gain on sale of facility ......................... -- -- (1,501)
Charge for purchased research and development .... 8,043 11,009 53,800
Amortization of goodwill and other purchased 44,502 29,715 24,330
intangibles....................................
Depreciation ..................................... 23,853 28,952 28,908
Changes in assets and liabilities:
Accounts receivable ........................... (10,498) 7,482 (17,055)
Inventories ................................... 2,128 1,445 (1,044)
Prepaid expenses .............................. (4,817) (4,090) (14,104)
Deferred income tax assets and liabilities .... (1,989) (14,501) (39,221)
Accounts payable .............................. 12,281 (26) 8,206
Accrued compensation and related liabilities .. 47 6,441 1,403
Deferred revenue .............................. 9,723 58 6,320
Accrued acquisition liabilities ............... (5,733) 1,445 (29,185)
Other accrued liabilities ..................... (4,624) 22,931 43,491
Income taxes payable .......................... 9,258 2,888 17,767
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ... 61,475 81,149 68,337
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of facility ........................ -- -- 9,025
Purchase of property and equipment .................... (69,321) (27,597) (33,561)
Sale of marketable securities ......................... -- 29,500 --
Acquisitions and dispositions, net of cash acquired ... 40 (34,224) (350,288)
Increase in other assets .............................. (1,628) (970) (1,276)
Purchase of short-term investments .................... (197,003) (258,892) (293,306)
Liquidation and maturity of short-term investments .... 165,046 215,338 213,176
Purchase of long-term investments ..................... -- (41,150) (17,009)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ....... (102,866) (117,995) (473,239)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt .................. (3,187) (661) (4,798)
Proceeds from issuance of long-term debt .............. -- 30,277 --
Net proceeds from issuance of common stock ............ 12,864 9,426 501,053
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ... 9,677 39,042 496,255
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .... (31,714) 2,196 91,353
Cash and cash equivalents at beginning of period ........ 76,298 44,584 46,780
--------- --------- ---------
Cash and cash equivalents at end of period .............. $ 44,584 $ 46,780 $ 138,133
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ......................................... $ 305 $ 652 $ 432
========= ========= =========
Income taxes paid ..................................... $ 5,791 $ 31,906 $ 6,054
========= ========= =========
See accompanying notes.
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43
INTUIT INC.
NOTES TO 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 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Intuit and its
wholly-owned subsidiaries. We have eliminated all significant intercompany
accounts and transactions. Investments in which we have a 20% to 50% interest or
otherwise have the ability to exercise significant influence, are accounted for
under the equity method. Investments in which we have less than a 20% interest
and do not have significant influence are carried at cost or estimated
realizable value, if less.
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 the collectibility of accounts receivable, reserves for product
returns and exchanges and reserves for rebates. We also use estimates to
determine the carrying value of goodwill and purchased intangibles. Actual
results may differ from our estimates.
Net Revenue
Intuit recognizes revenue from sales of desktop software products when products
are shipped, less reserves for expected returns from both the retail and direct
channels. To recognize revenue, it must 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 channel when new versions are launched. In some situations, we
receive advance payments from our customers. Revenue associated with these
payments must be 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 Internet
product revenue (such as subscription revenues, Internet advertising and
transaction revenue) as such fees are earned or services are provided.
Research and Development
Research and development expenses are expensed as incurred. The expenses are
primarily the costs incurred to develop software and Internet products.
Customer Service and Technical Support
Customer service and technical support costs include order processing, customer
inquiries and telephone assistance. We also include the costs of post-contract
customer support in this expense category.
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44
Advertising
We expense advertising costs as incurred. Advertising expense for the years
ended July 31, 1996, 1997 and 1998 was approximately $24.6 million, $35.3
million and $27.0 million, respectively.
Cash, Cash Equivalents and Short-Term Investments
We consider 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. The following schedule
summarizes the estimated fair value of our cash, cash equivalents and short-term
investments:
JULY 31, JULY 31,
1997 1998
--------- ---------
(In thousands)
Cash and cash equivalents:
Cash ................................. $ 20,188 $ 22,382
Money market funds ................... 3,369 6,972
Commercial paper ..................... 4,292 --
Municipal bonds ...................... -- 81,927
U.S. Government securities ........... 18,931 26,852
--------- ---------
$ 46,780 $ 138,133
========= =========
Short-term investments:
Certificates of deposit .............. $ 5,075 $ 5,043
Corporate notes ...................... 37,811 2,000
Municipal bonds ...................... 140,245 256,297
U.S. Government securities ........... 9,954 9,875
Restricted short-term investments .... (34,766) (28,516)
--------- ---------
$ 158,319 $ 244,699
========= =========
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
JULY 31, JULY 31,
1997 1998
--------- ---------
(In thousands)
Due within one year ................... $ 155,832 $ 225,241
Due after one year .................... 63,845 163,725
Restricted short-term investments ..... (34,766) (28,516)
--------- ---------
$ 184,911 $ 360,450
========= =========
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.
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45
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, 1997 and 1998:
GROSS UNREALIZED
COST GAIN LOSS FAIR VALUE
-------- -------- -------- ----------
1997
(In thousands)
Checkfree Corporation common stock ............. $156,350 $ 34,450 $ -- $190,800
======== ======== ======== ========
1998
(In thousands)
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
======== ======== ======== ========
In January 1997, we sold our online banking and bill payment transaction
processing business to Checkfree Corporation. We obtained marketable securities
in Checkfree as a result of this sale. Note 4 provides more information on this
sale.
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 July 31, 1998 was $24.75 per share. At July 31, 1998,
we held 10.6 million shares, or approximately 19%, of Checkfree's outstanding
common stock.
In June 1997, we purchased 5.8 million shares (as adjusted for a two-for-one
stock split) of common stock of Excite, Inc. ("Excite") as part of an agreement
we entered into with Excite. The agreement provides for the joint development,
promotion and distribution of an online financial channel. Since we are
restricted from selling the shares until December 1998, we initially valued the
shares at cost, or $39.2 million. Beginning in January 1998, these shares were
adjusted to market value, as remaining restrictions on the shares expire within
12 months. Excite's common stock is quoted on the Nasdaq Stock Market under the
symbol XCIT. The closing price of Excite common stock at July 31, 1998 was
$39.00 per share. At July 31, 1998, we held approximately 11% of Excite's
outstanding common stock.
Checkfree, Excite, Verisign, Inc. and Concentric Network Corporation 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. See Note 17 for
information regarding significant declines in market prices that occurred
subsequent to July 31, 1998.
Inventories
Our inventory consists primarily of materials used in software products and
related supplies and packaging materials. We value them at the lower of cost
(first-in, first-out) or market (net realizable value or replacement cost).
Property and Equipment
Property and equipment are stated at cost. We calculate depreciation using the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 30 years. Leasehold improvements are amortized using
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46
the straight-line method over the lesser of the estimated useful lives or
remaining lease terms. Property and equipment consisted of the following:
JULY 31, JULY 31,
1997 1998
--------- ---------
(In thousands)
Machinery and equipment ............................ $ 102,241 $ 96,780
Furniture and fixtures ............................. 17,739 12,514
Leasehold improvements ............................. 18,659 22,278
Land and buildings ................................. 15,365 3,193
Construction in progress ........................... -- 763
--------- ---------
154,004 135,528
Less accumulated depreciation and amortization ..... (70,600) (66,115)
--------- ---------
$ 83,404 $ 69,413
========= =========
Goodwill and 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 of 3 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 the assets is impaired. The reviews look for
the existence of facts or circumstances, either internal or external, which
indicate the carrying value of the asset cannot be recovered. No such impairment
has been indicated to date. If there is impairment in the future, Intuit will
measure the amount of the loss based on undiscounted expected future cash flows
from the impaired assets. The cash flow calculations would be based on
management's best estimates, using appropriate assumptions and projections at
the time. Intangible assets consisted of the following:
LIFE IN NET BALANCE AT
YEARS JULY 31, 1997 JULY 31, 1998
----- ------------- -------------
(In thousands)
Goodwill ............................ 3 $ 26,935 $285,793
Customer lists ...................... 3-5 3,144 53,517
Covenant not to compete ............. 3-5 2,125 2,211
Purchased technology ................ 1-5 7,517 18,763
Other intangibles ................... 1-10 7,050 11,306
Included in the other intangibles category are items such as trade names, logos
and other identified intangible assets. Balances presented above are net of
total accumulated amortization of $147.1 million and $103.6 million at July 31,
1997 and July 31, 1998, respectively. The accumulated amortization balance at
July 31, 1997 included $67.8 million relating to assets acquired as part of the
purchase of Parsons Technology, Inc. in September 1994. We subsequently sold
Parsons in August 1997. See Note 4.
Concentration of Credit Risk
The personal computer software industry 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 July 31,
1998, we held shares of Checkfree common stock representing approximately 19% of
Checkfree's outstanding common stock. We also held approximately 11% of Excite's
outstanding common stock as of July 31, 1998. Our ability to dispose of these
securities is limited by volume trading and other restrictions. The Excite
shares cannot be sold until December 1998. 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.
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47
See "Marketable Securities," above in Note 1 and Note 17 for a discussion of
risks associated with our marketable securities. 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.
Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue, costs and expenses are
translated at average rates of exchange in effect during the year. We report
translation gains and losses as a separate component of stockholders' equity.
Net gains and losses resulting from foreign exchange transactions were
immaterial in all periods presented.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 sets standards for reporting comprehensive income in financial
statements. Comprehensive income items include changes in equity (net assets)
that are not included in net income. Examples are foreign currency translation
adjustments and unrealized gains and losses on available-for-sale securities. We
are required to report the disclosures set forth in SFAS 130 beginning with the
quarter ending October 31, 1998.
In June 1997, FASB issued 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 required beginning in fiscal year 1999.
In October 1997, FASB approved the American Institute of Certified Public
Accountants Statement of Position, "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 will be effective for Intuit beginning in the first quarter of fiscal
1999. We do not believe the adoption of SOP 97-2 will have a significant impact
on our revenue recognition policy.
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. All
share and per share data in the financial statements and notes have been
adjusted retroactively to give effect to Intuit's two-for-one stock split in
August 1995. The following table shows the computation of basic and diluted
income per share for the years ended July 31, 1996, 1997 and 1998:
YEARS ENDED JULY 31,
-----------------------------------------
1996 1997 1998
-------- -------- --------
(In thousands, except per share data)
BASIC:
Weighted average common shares outstanding ...... 45,149 46,424 49,676
======== ======== ========
Net income (loss) ............................... $(20,699) $ 68,308 $(12,157)
======== ======== ========
Per share amount ................................ $ (0.46) $ 1.47 $ (0.24)
======== ======== ========
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DILUTED:
Weighted average common shares outstanding ...... 45,149 46,424 49,676
Equivalent shares issuable upon exercise of
options ...................................... -- 1,024 --
-------- -------- --------
Shares used in per share amounts ................ 45,149 47,448 49,676
======== ======== ========
Net income (loss) ............................... $(20,699) $ 68,308 $(12,157)
======== ======== ========
Per share amount ................................ $ (0.46) $ 1.44 $ (0.24)
======== ======== ========
3. ACQUISITIONS
In January 1996, we acquired Milkyway KK, a provider of PC-based financial
software in Japan. Milkyway KK's name was changed to Intuit KK in February 1997.
We treated the acquisition as a pooling of interests for accounting purposes. We
issued 650,000 shares of Intuit common stock and recorded merger-related
expenses of $0.6 million related to the acquisition. The accompanying
Consolidated Financial Statements are presented on a combined basis for all
periods prior to the acquisition.
Revenue and net income (loss) of Intuit and Milkyway from August 1, 1995 to
January 2, 1996 were as follows:
PERIOD ENDED
JAN. 2, 1996
------------
(In thousands; unaudited)
Net revenue:
Intuit ........................................... $ 164,696
Milkyway ......................................... 14,510
---------
$ 179,206
=========
Net income (loss):
Intuit ........................................... $ (34,037)
Milkyway ......................................... 1,312
---------
$ (32,725)
=========
In June 1996, we acquired Interactive Insurance Services Corp. for approximately
$9.0 million. The name was changed to Intuit Insurance Services, Inc. ("IIS") in
June 1998. IIS is a developer of an Internet-based system that allows users to
get insurance information and quotes from participating insurance carriers via
the World Wide Web. The acquisition was treated as a purchase for accounting
purposes. We expensed approximately $8.0 million of in-process research and
development in the quarter ended July 31, 1996. Under terms of the agreement, we
issued 169,181 shares of Intuit common stock and options to purchase 3,255
shares of Intuit common stock to IIS stockholders and option holders,
respectively, at the date of acquisition.
In September 1996, we acquired GALT Technologies, Inc. for $14.6 million. GALT
was a provider of mutual fund information on the World Wide Web. The acquisition
was treated as a purchase for accounting purposes. We allocated approximately
$8.5 million of the purchase price to identified intangible assets and goodwill.
These assets are being amortized over a period of three years or less. We also
expensed approximately $4.9 million of in-process research and development at
the time of acquisition. Under terms of the agreement, we issued 212,053 shares
of Intuit common stock and options to purchase approximately 33,686 shares of
Intuit common stock to GALT stockholders and option holders, respectively, at
the date of acquisition.
In March 1997, Intuit KK, a wholly-owned subsidiary of Intuit, acquired Nihon
Micom Co. Ltd., a Japanese small business accounting software company, for cash.
The purchase price was approximately $39.9 million. In addition, we assumed
liabilities of approximately $9.6 million. The acquisition was treated as a
purchase for accounting purposes. We allocated approximately $32.8 million of
the purchase price to identified intangible assets and goodwill. These assets
are being amortized over a period not to exceed three years. We also expensed
$6.1 million
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of in-process research and development in the quarter ended April 30, 1997.
Under terms of the agreement, we issued options to purchase 89,170 shares of
Intuit common stock to employees of Nihon Micom on the date of acquisition. We
also agreed to issue options to purchase up to an additional 89,170 shares on or
before the second anniversary of the date of the acquisition. Pro forma
information for Nihon Micom has not been presented because it is not material.
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 assumed liabilities of $31.8
million. We funded the acquisition by a public offering of 9.0 million shares of
common stock, completed on May 28, 1998 and 1.0 million shares on June 3, 1998.
Note 8 provides more information on this public offering.
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 a period
of three 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 loss from continuing operations
and diluted net loss per share from continuing operations of Intuit and Lacerte
as if we had acquired Lacerte at the beginning of fiscal 1997:
YEAR ENDED JULY 31, 1997 YEAR ENDED JULY 31, 1998
--------------------------- ---------------------------
INCLUDING AS INCLUDING AS
LACERTE REPORTED LACERTE REPORTED
--------- --------- --------- ---------
(In thousands, except per share data; unaudited)
Net revenue .................................... $ 668,077 $ 598,925 $ 668,244 $ 592,736
Net loss from continuing operations ............ (88,067) (2,932) (56,689) (12,157)
Diluted net loss per share from continuing
operations .................................... $ (1.53) $ (0.06) $ (0.95) $ (0.24)
For acquisitions treated as a purchase for accounting purposes, we must
determine the allocation between developed and in-process research and
development. This allocation is based on whether or not technological
feasibility has been achieved and whether there is an alternative future use for
the technology. SFAS 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," sets guidelines for establishing
technological feasibility. Technological feasibility can be achieved through the
existence of either a detailed program design or a completed working model. As
of the respective dates of the acquisitions discussed above, we concluded that
the purchased in-process research and development had no alternative future use
and expensed it according to the provisions of SFAS 86.
4. DISCONTINUED OPERATIONS AND DIVESTITURES
On January 27, 1997, we sold Intuit Services Corporation ("ISC"), our online
banking and bill payment transaction-processing subsidiary, to Checkfree. In
exchange, we received 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 transaction, we recorded
a gain on sale of discontinued operations of $71.2 million, net of tax, in the
quarter ended January 31, 1997. The gain was recorded net of certain conditional
items relating to the business sold. In addition to the gain on sale, Checkfree
agreed to pay us $20 million in service and license fees for providing
connectivity between Intuit's Quicken software and Checkfree's bill payment
processing services. Of this $20 million, $10 million of revenue was received
and recorded in January 1997, and $10 million was received and recorded in
October 1997. We accounted for the sale of ISC as a discontinued operation. As
such, its operating results for fiscal 1996 have been segregated into a single
line on our statement of operations. Revenue and net loss from discontinued
operations were $14.3 million and $6.3 million, respectively, for the fiscal
year ended 1996. We deferred operating results for the discontinued operations
for the period beginning August 1, 1996 until the close of the sale on January
27, 1997. These losses were netted against the gain on sale of discontinued
operations.
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In February 1997, Intuit sold two million shares of the Checkfree common stock.
This reduced our investment in Checkfree to approximately 19.6% of the 54.2
million shares of Checkfree common stock outstanding after the sale was
completed. We are accounting for our investment in Checkfree using the cost
method of accounting.
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.
The following information shows pro forma net revenue, net loss from continuing
operations and diluted net loss per share from continuing operations of Intuit
as if we had sold Parsons at the beginning of fiscal 1997:
YEAR ENDED JULY 31, 1997
---------------------------
EXCLUDING AS
PARSONS REPORTED
--------- ---------
(In thousands, except per share data; unaudited)
Net revenue ............................................. $ 525,482 $ 598,925
Net loss from continuing operations ..................... (3,647) (2,932)
Diluted net loss per share from continuing operations ... $ (0.08) $ (0.06)
5. SIGNIFICANT TRANSACTIONS
In June 1997, we entered into an agreement with Excite Inc. to jointly develop,
promote and distribute a new online financial channel now called Excite Money
and Investing by Quicken.com. The channel debuted in early fiscal 1998. We are
the exclusive provider and aggregator of personal financial content for all of
Excite's Internet services. Excite provides hosting, advertising sales and
software services and is the exclusive search and navigation service promoted in
our QuickBooks, TurboTax and Quicken products. We are entitled to receive all
revenue associated with the channel, but we're required to pay certain portions
of the revenue to Excite. As part of the agreement, we made a significant equity
investment in Excite. Note 1 provides more information on this investment.
On February 17, 1998, we announced a three-year agreement with America Online,
Inc. ("AOL"). Under terms of the agreement, subject to certain limited
exceptions, we are the exclusive provider of tax preparation and filing,
multi-carrier life and auto insurance, and multi-lender mortgage services on
both the AOL service and AOL.com, which is AOL's default site for Internet
access by AOL members. In addition, on AOL.com, we are the primary source of
financial content for the Personal Finance Web Channel. We have guaranteed
payments to AOL totaling $30 million over three years, of which $16.2 million
was paid upon signing. The remainder of the guaranteed payments will be made
ratably over the term of the agreement. AOL will also be eligible for additional
revenue sharing payments once Intuit has recovered certain advances and other
amounts.
We recorded a charge to selling and marketing expense of $16.2 million in the
third quarter of fiscal 1998 in connection with the agreement. This expense
represents the excess of guaranteed payments over the expected future net
revenues from the agreement during the agreement term. We calculated future net
revenues using estimated gross revenues less the estimated future costs related
to the agreement. The remaining capitalized amount of $13.8 million is being
amortized ratably over the remainder of the term.
In May 1998, we participated in the formation of a company, Venture Finance
Software Corp. ("VFSC") to focus on the development of certain Web-oriented
finance products. VFSC has received $23 million through the sale of equity
interests to private investors and obtained conditional commitments to receive
up to an additional $23 million in capital contributions from these investors.
Of the $46 million potential funding for VFSC, venture capital funds managed by
Kleiner Perkins Caufield & Byers, of which L. John Doerr, a director of Intuit,
is a general partner, have agreed to invest up to $1 million. In exchange for
its equity interest in VFSC, Intuit has granted VFSC licenses to certain
technology and intellectual property rights related to certain Web-oriented
finance products and
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has agreed not to compete with VFSC in certain areas of server-based personal
finance for a period of ten years. Intuit is managing the development of the new
products and the commercialization efforts of VFSC and has been granted the
option to purchase the equity interests of the other investors in VFSC during a
period of time beginning two years after the formation of VFSC at a price to be
determined by a formula. (See Note 15.)
6. OTHER ACCRUED LIABILITIES
JULY 31, JULY 31,
1997 1998
-------- --------
(In thousands)
Reserve for returns and exchanges .............. $ 36,310 $ 60,343
Acquisition and disposition related items ...... 38,866 19,181
Rebates ........................................ 2,876 16,870
Post-contract customer support ................. 4,233 4,433
Other accruals ................................. 17,298 23,993
-------- --------
$ 99,583 $124,820
======== ========
7. NOTES PAYABLE AND COMMITMENTS
Notes Payable
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 interest rate is variable based on the Tokyo
inter-bank offered rate or the short-term prime rate offered in Japan. At July
31, 1998, the 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 (which are currently significantly lower in
Japan than in the United States). We have guaranteed the loan and pledged
approximately $28.5 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at July 31, 1998. We
are obligated to pay interest only until March 2000.
Leases
Intuit leases its office facilities and some equipment under various operating
lease agreements. The leases provide for annual rent increases of up to 10%.
Annual minimum commitments under these leases are as follows:
YEARS ENDING JULY 31, COMMITMENTS
--------------------- -----------
(In thousands)
1999 ............................................... $ 9,919
2000 ............................................... 9,463
2001 ............................................... 8,095
2002 ............................................... 7,868
2003 ............................................... 7,548
Thereafter ......................................... 12,808
-------
$55,701
=======
Total rent expense for the years ended July 31, 1996, 1997 and 1998 was
approximately $9.2 million, $10.1 million and $10.3 million, respectively.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
On January 31, 1993, we adopted the 1993 Equity Incentive Plan (the "1993
Plan"). Under the 1993 Plan, we may grant incentive and non-qualified stock
options, restricted stock awards and stock bonuses to employees, directors,
consultants, and independent contractors of and advisors to Intuit. The Board of
Directors or its delegees determine
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who will receive grants, exercisability, option price and other terms. The
option exercise price is usually the fair market value at the date of grant. The
options generally vest over a four-year period and expire after ten years.
On October 7, 1996, we adopted the 1996 Directors Stock Option Plan. This plan
provides for non-qualified stock options for a specified number of shares to be
granted to non-employee directors of Intuit on an annual basis. The option
exercise price equals the fair market value at the date of grant. Options
generally vest over a four-year period and expire after ten years.
In addition, we have several discontinued option plans with outstanding options.
For example, we assumed options in connection with our purchase of ChipSoft,
Inc. on December 12, 1993. The options vest over a five-year period and expire
after seven years. We also assumed options in connection with our purchase of
GALT and IIS.
A summary of activity under all option plans is as follows:
OPTIONS OUTSTANDING
---------------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE NUMBER OF PRICE PER EXERCISE PRICE
FOR GRANT SHARES SHARE PER SHARE
---------- ---------- --------------- ----------------
Balance at July 31, 1995 ......................... 3,424,370 6,263,366 $0.05 - $43.13 $18.20
Options converted in IIS acquisition ............ (3,255) 3,255 $0.44 - $ 8.30 $ 7.62
Options granted ................................. (2,001,495) 2,001,495 $35.00 - $84.00 $50.54
Options exercised ............................... -- (1,120,847) $0.05 - $56.63 $11.98
Options canceled or expired ..................... 548,853 (581,296) $3.00 - $84.00 $34.01
---------- ----------
Balance at July 31, 1996 ......................... 1,968,473 6,565,973 $0.05 - $84.00 $27.74
GALT Plan assumed ............................... 33,686 -- -- --
Options converted in GALT acquisition ........... (33,686) 33,686 $2.27 - $37.37 $23.37
Additional shares authorized .................... 3,120,000 -- -- --
Options granted outside of option plans ......... -- 112,006 $21.88 - $84.00 $33.10
Options granted ................................. (4,388,187) 4,388,187 $21.75 - $38.00 $27.74
Options exercised ............................... -- (826,783) $0.05 - $57.63 $ 9.44
Options canceled or expired ..................... 1,240,207 (1,324,967) $2.27 - $84.00 $29.65
---------- ----------
Balance at July 31, 1997 ......................... 1,940,493 8,948,102 $0.05 - $84.00 $22.61
Additional shares authorized .................... 2,150,000 -- -- --
Options granted ................................. (3,078,597) 3,078,597 $24.63 - $56.50 $38.18
Options exercised ............................... -- (2,230,258) $0.05 - $44.00 $18.85
Options canceled or expired ..................... 1,141,528 (1,185,168) $2.27 - $84.00 $25.68
---------- ----------
Balance at July 31, 1998 ......................... 2,153,424 8,611,273 $0.05 - $78.00 $28.70
========== ==========
There were 1,894,320, 1,931,019 and 2,532,620 options exercisable under the
various plans at July 31, 1996, 1997 and 1998, respectively. At July 31, 1998,
there were 2,078,424 shares available for grant under the 1993 Plan and 75,000
shares available for grant under the 1996 Directors Stock Option Plan.
On September 18, 1996, we repriced 1,787,746 options to reflect an exercise
price of $32.75, the fair market value on the date of repricing. As a condition
of the repricing, employees agreed that repriced options would not be
exercisable, even if vested, until September 17, 1997. Officers at the level of
senior vice president and above were not eligible for the repricing.
On March 27, 1997, we repriced 3,151,445 options to reflect an exercise price of
$23.75, the fair market value on the date of repricing. As a condition of the
repricing, employees agreed that repriced options would not be exercisable, even
if vested, until March 27, 1998. Officers at the level of senior vice president
and above were not eligible for the repricing. On June 30, 1997, 177,600 options
held by employees of a Japanese subsidiary were also repriced to $23.75.
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Stock Split
Intuit's Board of Directors authorized a two-for-one stock split on July 20,
1995. This was accomplished by distributing a 100% stock dividend on August 21,
1995 to stockholders of record on August 4, 1995. We have restated all share and
per share amounts referred to in the financial statements and notes to reflect
the stock split.
Employee Stock Purchase Plan
In October 1996, Intuit adopted an Employee Stock Purchase Plan under Section
423 of the Internal Revenue Code and reserved 300,000 shares of common stock for
future issuance. In January 1998, an additional 200,000 shares of common stock
were reserved for future issuance. The plan allows eligible employees to
purchase Intuit's stock at 85% of the lower of the fair market value at the
beginning or end of each six-month offering period. During fiscal 1997 and 1998,
employees purchased 96,301 and 147,976 shares, respectively.
Stock-Based Compensation
We follow Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation.
Accordingly, we are not required to record compensation expense when stock
options are granted to employees, as long as the exercise price is not less than
the fair market value of the stock when the option is granted, and we are not
required to record compensation expense in connection with the Employee Stock
Purchase Plan as long as the purchase price is not less than 85% of the lower of
the fair market value at the beginning or end of each six-month offering period.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock Based
Compensation." Although SFAS 123 allows us to continue to follow the present APB
25 guidelines, we are required to disclose pro forma net income (loss) and net
income (loss) per share as if we had adopted the new statement. The pro forma
impact of applying SFAS 123 in fiscal 1996, 1997 and 1998 is not likely to be
representative of the pro forma impact in future years.
We have elected to use the Black-Scholes model to estimate the fair value of
options granted. This valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. This model requires the input of highly subjective assumptions
including the expected stock price volatility. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect this estimate, we believe the Black-Scholes model does not necessarily
provide a reliable single measure of the fair value of our employee stock
options. Inputs used for the valuation model are as follows:
OPTIONS EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------------- ----------------------------------------------
1996 1997 1998 1996 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
Expected life (years) ........ 1.33-4.61 1.17-4.61 1.61-4.61 -- 0.50 0.5
Expected volatility .......... 0.60% 0.60% 0.60% -- 0.60% 0.60%
Risk-free interest rate ...... 4.83%-6.92% 5.50%-6.88% 5.34%-6.0% -- 5.61% 5.25-5.45%
Our pro forma net income (loss) and net income (loss) per share would have been:
YEARS ENDED JULY 31,
1996 1997 1998
---------- ---------- ----------
(In thousands, except per share data)
Net income (loss)
As reported .............................. $ (20,699) $ 68,308 $ (12,157)
Pro forma ................................ $ (27,638) $ 46,409 $ (34,194)
Diluted net income (loss) per share
As reported .............................. $ (0.46) $ 1.44 $ (0.24)
Pro forma ................................ $ (0.61) $ 0.97 $ (0.69)
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The weighted average fair value of options granted during fiscal 1996, 1997 and
1998 was approximately $23.19, $11.99 and $16.61 per share, respectively.
The following table summarizes information about stock options outstanding at
July 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICE NUMBER LIFE (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- --------- --------------------- -------------- --------- --------------
$ 0.05 - $21.75 1,100,719 5.61 $ 16.35 874,829 $ 15.04
$21.88 - $22.94 641,541 7.23 $ 22.30 315,357 $ 22.32
$23.00 - $23.75 1,933,883 7.73 $ 23.69 652,521 $ 23.70
$23.94 - $24.50 1,184,417 8.87 $ 24.48 471,874 $ 24.47
$24.63 - $30.25 1,165,402 9.07 $ 27.62 110,013 $ 27.39
$31.00 - $36.00 868,288 8.63 $ 32.61 100,907 $ 33.09
$36.50 - $78.00 911,911 9.70 $ 43.75 738 $ 39.43
$46.81 - $78.00 805,112 9.32 $ 49.25 6,381 $ 58.46
--------------- --------- --------- --------- --------- ---------
$ 0.05 - $78.00 8,611,273 8.21 $ 28.70 2,532,620 $ 21.29
=============== ========= ========= ========= ========= =========
Stock Offering
On May 28, 1998, we sold 9.0 million shares of our Common Stock in a registered
underwritten public offering at a price to the public of $47.375 per share,
providing us with net proceeds of approximately $410 million after underwriting
commissions and estimated expenses. As stated in Note 3, $400 million of these
net proceeds were used to fund the acquisition of Lacerte. On June 3, 1998, the
underwriters of the public offering exercised their over-allotment option to
purchase an additional 1 million shares of Intuit common stock at a price of
$47.375 per share, providing us with additional net proceeds of $45.7 million,
net of underwriting commissions.
9. PROFIT SHARING AND BENEFIT PLANS
Profit Sharing Plans
Full-time employees are eligible to participate in Intuit's profit-sharing
plans. The Compensation Committee of the Board of Directors determines amounts
to be contributed to the plans. Profit-sharing expense for fiscal 1996, 1997 and
1998 was approximately $1.4 million, $4.2 million and $9.1 million,
respectively.
Benefit Plans
We provide two 401(k)-retirement savings plans for full-time employees.
Participating employees may contribute up to 15% of pretax salary to the plan,
subject to IRS limitations. Intuit matches a specified portion of the employee
contributions up to a maximum amount per employee per year. The amount is
subject to change on an annual basis. At July 31, 1997, the match was 25% of the
employee contribution, up to $1,000, and at July 31, 1998, the match was 75%, up
to $1,500. Matching contributions were approximately $0.3 million, $1.6 million
and $3.0 million, respectively, for the years ended July 31, 1996, 1997 and
1998.
10. SHAREHOLDER RIGHTS PLAN
On April 29, 1998, the Board of Directors adopted a shareholder rights plan
designed to protect the long-term value of the Company for its shareholders
during any future unsolicited acquisition attempt. In connection with the plan,
the Board declared a dividend of one preferred share purchase right for each
share of Intuit's common stock outstanding on May 11, 1998 (the "Record Date")
and further directed the issuance of one such right with respect to each share
of Intuit's common stock that is issued after the Record Date, except in certain
circumstances. If a
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person or a group (an "Acquiring Person") acquires 20 percent or more of
Intuit's common stock, or announces an intention to make a tender offer for
Intuit's common stock, the consummation of which would result in a person or
group becoming an Acquiring Person, then the rights will be distributed (the
"Distribution Date"). After the Distribution Date, each right may be exercised
for 1/1000th of a share of a newly designated Series B Junior Participating
Preferred stock at an exercise price of $250. The preferred stock has been
structured so that the value of 1/1000th of a share of such preferred stock will
approximate the value of one share of common stock. The rights will expire on
May 1, 2008.
11. INCOME TAXES
Income (loss) before income taxes includes income (loss) from foreign operations
of approximately $10,000, ($8,365,000) and ($14,512,000) for the years ended
July 31, 1996, 1997 and 1998, respectively. The provision for income taxes
consisted of the following:
YEARS ENDED JULY 31,
(In thousands) 1996 1997 1998
-------- -------- --------
Current:
Federal ........................................ $ 15,732 $ 29,117 $ 23,051
State .......................................... 3,116 5,843 3,694
Foreign ........................................ 1,302 651 390
-------- -------- --------
20,150 35,611 27,135
Deferred:
Federal ........................................ (3,378) (18,144) (27,999)
State .......................................... (547) (4,726) (6,802)
-------- -------- --------
(3,925) (22,870) (34,801)
-------- -------- --------
Total provision (benefit) for income taxes ....... $ 16,225 $ 12,741 $ (7,666)
======== ======== ========
Differences between income taxes calculated using the federal statutory income
tax rate of 35% and the provision for income taxes were as follows:
YEARS ENDED JULY 31,
(In thousands) 1996 1997 1998
-------- -------- --------
Income (loss) before income taxes ............. $ 1,870 $ 9,809 $(19,823)
======== ======== ========
Statutory federal income tax ................... $ 654 $ 3,433 (6,938)
State income tax, net of federal benefit ....... 1,670 785 (1,812)
Federal research and experimental credits ...... -- (4,100) (2,700)
Non-deductible merger related charges .......... 13,531 10,637 3,814
Tax exempt interest ............................ (1,400) (1,633) (2,627)
Foreign losses not benefited ................... -- 3,533 5,396
Other, net ..................................... 1,770 86 (2,799)
-------- -------- --------
Total ................................ $ 16,225 $ 12,741 $ (7,666)
======== ======== ========
Tax savings from deductions associated with our various stock option plans are
not reflected in the current federal and state provisions. Savings were
approximately $18.9 million in fiscal 1996, $6.7 million in fiscal 1997 and
$21.2 in fiscal 1998. These amounts were credited to stockholders' equity.
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Significant deferred tax assets and liabilities were as follows:
JULY 31, JULY 31,
(In thousands) 1997 1998
--------- ---------
Deferred tax assets:
Accruals and reserves not currently deductible ............... $ 27,275 $ 43,061
Deferred foreign taxes ....................................... 4,247 8,081
State income taxes ........................................... 1,742 --
Merger charges ............................................... 439 24,860
Restructuring charges ........................................ 2,165 --
Fixed asset adjustments ...................................... 6,903 8,044
Other, net ................................................... 2,353 5,012
--------- ---------
Total deferred tax assets ............................ 45,124 89,058
Deferred tax liabilities:
Deferred gain on discontinued operations ..................... 54,993 55,688
Unrealized gain on marketable securities ..................... 13,782 120,714
State income taxes ........................................... -- 2,488
--------- ---------
Total deferred tax liabilities ....................... 68,775 178,890
--------- ---------
Total net deferred tax liabilities ............................. (23,651) (89,832)
Valuation reserve due to foreign losses ...................... (4,248) (9,644)
--------- ---------
Total net deferred tax liabilities, net of valuation reserve ... $ (27,899) $ (99,476)
========= =========
We have provided a valuation reserve related to the benefit of losses in our
foreign subsidiaries that we believe are unlikely to be realized.
12. SIGNIFICANT CUSTOMER INFORMATION
One distributor accounted for 13% of net revenue in fiscal 1996, 12% of net
revenue in fiscal 1997 and 15% of net revenue in fiscal 1998.
13. LITIGATION
Intuit is currently a defendant in the following six class action lawsuits
alleging that certain of our Quicken products have on-line banking functions
that are not Year 2000 compliant: Alan Issokson v. Intuit Inc. (filed April 29,
1998 in the Santa Clara County, California Superior Court); Rocco Chilelli v.
Intuit Inc. (filed May 13, 1998 in the New York Supreme Court, New York County,
New York); Glenn Faegenburg v. Intuit Inc. (filed May 27, 1998 in the New York
Supreme Court, New York County, New York); 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 Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the
New York Supreme Court, New York County, New York). All of the lawsuits are
substantively very similar. The lawsuits assert breach of implied warranty
claims, violations of federal and/or state consumer protection laws, 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 34, for a discussion of Intuit's status and plans with respect to
Year 2000 compliance.
On June 23, 1998, Intuit moved to dismiss the Issokson complaint. In August
1998, our motion was granted but the plaintiff still has an opportunity to amend
the complaint to allege injury. We believe this will be difficult in light of
the remedies that we are providing to our Quicken customers. However, if the
complaint is amended in a manner that is satisfactory to overcome another motion
to dismiss, we believe we have good and valid defenses to the claims asserted,
and we intend to vigorously defend against the lawsuit.
We have filed motions to dismiss the complaints in every other case except the
Colburn action. We plan on filing a demurrer in the Colburn action in the
future. Discovery is stayed in the New York actions pending hearings on the
motions. Discovery is ongoing in the Issokson and Stein actions. Given the
outcome of the motion to dismiss in the Issokson case, we believe we may prevail
on these motions as well. However, the ultimate outcome of any
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litigation is uncertain, and regardless of outcome, litigation can have an
adverse impact on Intuit because of defense costs, diversion of management
resources and other factors.
We are subject to other legal proceedings and claims that arise in the 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, as
noted above, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
14. RESTRUCTURING COSTS
In fiscal 1997, we restructured our U.S. technical support operations. We closed
our technical support facility in Rio Rancho, New Mexico and consolidated the
operations of that facility within our Tucson, Arizona technical support
location. We also reorganized our European region to consolidate management
operations for our core European markets in our German headquarters in Munich.
All European customer service, technical support, manufacturing and order
fulfillment functions were outsourced to third party vendors. As a result of
these actions and concurrent staff reductions in Northern California, Intuit's
worldwide workforce was reduced by approximately 270 employees, or approximately
9%. As a result, we incurred a $10.4 million restructuring charge in the fourth
quarter of fiscal 1997. At July 31, 1998 the remaining restructuring reserve is
approximately $1.8 million. This balance is expected to be used by July 31,
1999.
15. RELATED PARTY TRANSACTIONS
We held approximately 11% of Excite's outstanding common stock as of July 31,
1998. On April 30 1998, we provided Excite with a short-term unsecured loan in
the amount of $50 million. The loan bore interest at 5.9% per year and was due
no later than October 30, 1998. In June 1998, Excite repaid the loan in full. As
part of shared advertising activities, we reported revenue of $10.3 million from
Excite for the year ended July 31, 1998. (See Note 5.)
At July 31, 1998 and 1997, we held approximately 19% 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
$14.1 million and $11.6 million from Checkfree for the years ended July 31, 1998
and 1997, respectively. These totals include royalty payments of $10 million
received in January 1997 and October 1997. We held a receivable due from
Checkfree for $3.4 and $1.0 million at July 31, 1998 and 1997, respectively.
(See Note 4.)
As of July 31, 1998, we held a 49% equity interest in Venture Finance Software
Corporation (VFSC). (See Note 5.) We have entered into agreements with VFSC to
provide them with services related to on-going development of Web-oriented
finance products. At July 31, 1998, we held a receivable due from VFSC for $7.3
million as a result of development and administrative services provided to VFSC.
16. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
FISCAL 1997 QUARTER ENDED
OCTOBER 31(1) JANUARY 31 APRIL 30(2) JULY 31
------------- ---------- ----------- ---------
(In thousands, except per share data)
Net revenue .................................. $ 102,506 $ 265,978 $ 136,326 $ 94,115
Cost of goods sold ........................... 27,085 58,735 29,443 23,507
All other costs and expenses ................. 114,511 133,634 108,730 103,320
Income (loss) from continuing operations ..... (28,304) 44,700 488 (19,816)
Gain on sale of discontinued operations,
net of tax ................................. -- 71,240 -- --
Net income (loss) ............................ (28,304) 115,940 488 (19,816)
Basic net income (loss) per share ............ (0.61) 2.50 0.01 (0.42)
Diluted net income (loss) per share .......... (0.61) 2.44 0.01 (0.42)
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FISCAL 1998 QUARTER ENDED
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31(3)
---------- ---------- -------- ----------
(In thousands, except per share data)
Net revenue .................................. $ 95,958 $ 237,513 $ 141,996 $ 117,269
Cost of goods sold ........................... 23,099 46,129 29,919 24,296
All other costs and expenses ................. 98,464 125,753 119,386 162,272
Income (loss) from continuing operations ..... (12,759) 41,844 (2,206) (39,036)
Net income (loss) ............................ (12,759) 41,844 (2,206) (39,036)
Basic net income (loss) per share ............ (0.27) 0.88 (0.05) (0.70)
Diluted net income (loss) per share .......... (0.27) 0.85 (0.05) (0.70)
(1) Includes a charge of $4.9 million related to purchased research and
development at the time of the GALT acquisition.
(2) Includes a charge of $6.1 million related to purchased research and
development at the time of the Nihon Micom acquisition.
(3) Includes a charge of $53.8 million related to purchased research and
development at the time of the Lacerte acquisition.
17. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, our marketable securities are subject to substantial
volatility. Subsequent to year-end, the price of Checkfree common stock declined
from $24.75 per share as of July 31, 1998 to $9.875 per share as of September
30, 1998, resulting in a decrease of $157.7 million in the estimated fair value
of our holdings in Checkfree. We own 10.6 million shares of Checkfree at a cost
of $14.75 per share. In addition, our investment in Excite common stock has been
subject to significant volatility. We own 5.8 million shares of Excite at a cost
of $6.75 per share. Although these fluctuations are not considered to be
permanent declines in value at this time, any declines deemed to be permanent
would be reported in our statement of operations.
In March 1998, we announced a memorandum of understanding ("MOU") with Bank of
America, TCI and @Home to form a venture to develop a system designed to deliver
financial services to consumers on their television sets. The establishment of
the venture was subject to negotiation and execution of definitive agreements.
Subsequent to our fiscal year end, negotiations pursuant to the MOU were
terminated, and we do not expect to sign definitive agreements as contemplated
by the MOU.
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SCHEDULE II
INTUIT INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO AT END OF
Classification PERIOD EXPENSE WRITE-OFFS PERIOD
- -------------- ------------ --------- ---------- ---------
(In thousands)
Year ended July 31, 1996
Allowance for doubtful accounts ....... $ 2,408 $ 4,728 $ (2,185) $ 4,951
Reserve for returns and exchanges ..... $ 29,197 $ 57,128 $(62,122) $ 24,203
Year ended July 31, 1997
Allowance for doubtful accounts ....... $ 4,951 $ 3,308 $ (3,760) $ 4,499
Reserve for returns and exchanges ..... $ 24,203 $ 73,775 $(61,668) $ 36,310
Year ended July 31, 1998
Allowance for doubtful accounts ....... $ 4,499 $ 3,380 $ (2,544) $ 5,335
Reserve for returns and exchanges ..... $ 36,310 $ 80,602 $(56,569) $ 60,343
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ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about directors that is required by this Item is incorporated by
reference to our Proxy Statement for our January 1999 Annual Meeting of
Stockholders. Information about executive officers that is required by this Item
can be found in Item 4A on page 20.
ITEM 11
EXECUTIVE COMPENSATION
This information is incorporated by reference to our Proxy Statement for our
January 1999 Annual Meeting.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to our Proxy Statement for our
January 1999 Annual Meeting.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our Proxy Statement for our
January 1999 Annual Meeting.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements - See Index to Consolidated Financial
Statements in Part II, Item 8.
2. Financial Statement Schedules - See Index to Consolidated
Financial Statements in Part II, Item 8.
3. Exhibits
2.01(1) Exchange Agreement between Intuit and Kabushiki Kaisha Milkyway
and its stockholders dated December 26, 1995 (schedules and
similar attachments will be furnished to the Commission upon
request)
2.02(1) Agreement and Plan of Merger among Checkfree Corporation,
Checkfree Acquisition Corporation II, Intuit and Intuit Services
Corporation dated September 15, 1996 (schedules and similar
attachments will be furnished to the Commission upon request)
2.03(2) Amendment No. 1 to Agreement and Plan of Merger dated as of
September 15, 1996 by and among Intuit Inc., Intuit Services
Corporation, Checkfree Corporation and Checkfree Acquisition
Corporation II
2.04(3) Amended and Restated Checkfree Corporation Stock Restriction
Agreement dated September 15, 1996 between Intuit and Checkfree
Corporation
2.05(4) Stock Purchase Agreement, dated as of June 11, 1997, between
Excite, Inc. and Intuit
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2.06(5) Stock Purchase Agreement dated as of August 6, 1997 by and among
Intuit, Broderbund Software, Inc. and Parsons Technology, Inc.
(schedules and similar attachments to be furnished to the
Commission upon request)
2.07(2) Amended and Restated Registration Rights Agreement dated as of
September 15, 1996 between Intuit and Checkfree Corporation
2.08(4) Nomination and Observer Agreement, dated as of June 25, 1997,
between Excite, Inc. and Intuit
2.09(4) Registration Rights Agreement, dated as of June 25, 1997, between
Excite, Inc. and Intuit
2.10(4) Right of First Refusal Agreement, dated as of June 25, 1997,
between Excite, Inc. and Intuit
2.11(4) Amendment to Restated and Amended Investors' Rights Agreement,
dated as of June 25, 1997, among Excite, Inc., Institutional
Venture Partners VI, Institutional Venture Management VI, IVP
Founders Fund I, L.P., Kleiner Perkins Caufield & Byers VII, KPCB
VII Founders Fund, KPCB Information Sciences Zaibatsu Fund II and
Intuit
2.12(19) Asset Purchase Agreement by and among Lacerte Software
Corporation, Lacerte Educational Services Corporation, Intuit
Inc. and IL Acquisition Corporation, dated May 18, 1998
3.01(6) Certificate of Incorporation of Intuit dated February 1, 1993
3.02(7) Certificate of Amendment to Intuit's Certificate of Incorporation
dated December 14, 1993
3.03(8) Certificate of Amendment to Intuit's Certificate of Incorporation
dated January 18, 1996
3.04(18) Certificate of Designations of Series B Junior Participating
Preferred Stock dated May 1, 1998
3.05* Amended and Retated Rights Agreement, dated October 5, 1998
3.06* Certificate of Retirement of Series A Preferred Stock dated
September 16, 1998
3.07(17) Bylaws of Intuit, as amended and restated effective April 29,
1998
4.01* Form of Specimen Certificate for Intuit's Common Stock
4.02* Form of Right Certificate for Series B Junior Participating
Preferred Stock (included in Exhibit 3.05)
10.01(6)+ Intuit 1988 Stock Option Plan and related documents
10.02(16)+ Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 16, 1998
10.03(16)+ Intuit Inc. 1996 Directors Stock Option Plan, as amended through
January 16, 1998
10.04(6)+ Intuit's form of Non-Plan Non-Qualified Stock Option Agreement
10.05(20)+ Intuit Inc. 1993 Equity Incentive Plan, as amended through April
29, 1998
10.06(6) Form of Indemnification Agreement entered into by Intuit with
each of its directors and certain executive officers
10.07(9)+ 1992 Stock Option Plan of ChipSoft and related documents
10.08(9)+ 1989 Stock Option Plan of ChipSoft and related documents
10.09(9)+ Softview Acquisition Stock Option Plan of ChipSoft and related
documents
10.10(9)+ Restricted Stock Purchase Agreement dated as of March 28, 1991,
between ChipSoft and Alan A. Gleicher
10.11(9)+ Non-Transferable, Non Qualified Stock Option Agreement dated as
of March 28, 1991, between ChipSoft and Alan A. Gleicher
10.12(9)+ Non-Transferable, Non Qualified Stock Option Agreement dated as
of August 1, 1991, between ChipSoft and William H. Harris Jr.
10.13(7)+ Letter Agreement of Employment dated March 30, 1994 between
Intuit and William V. Campbell
10.14(10)+ Severance Agreement dated September 30, 1994 between Intuit and
Charles H. Gaylord, Jr.
10.15(11) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2700 Coast Drive, Mountain View,
California to commence on January 1, 1999
10.16(11) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2750 Coast Drive, Mountain View,
California to commence on January 1, 1998
10.17(11) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2475 Garcia Drive, Mountain View,
California
10.18(11) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2525 Garcia Drive, Mountain View,
California
10.19(11) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2535 Garcia Drive, Mountain View,
California
10.20(15) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2500 Garcia Drive, Mountain View,
California
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10.21(15) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2550 Garcia Drive, Mountain View,
California
10.22* Lease Agreement dated as of January 7, 1998 between Intuit and
Charleston Properties for 2650 Casey Drive, Mountain View,
California
10.23(12) Build-to-Suit Lease Agreement dated as of June 9, 1995 between
Intuit and Kilroy Realty Corporation, successor to UTC Greenwich
Partners, a California limited partnership
10.24(12) Lease Agreement dated as of August 31, 1995 between Intuit and
Airport Business Center Associates Limited Partnership, an
Arizona limited partnership
10.25* Offer to Purchase Real Estate Agreement dated as of October 14,
1997, as amended on December 5, 1997, between Intuit Inc. and
General American Life Insurance Company, for property located at
110 Juliad Court, Fredericksburg, Virginia (purchase and sale
agreement)
10.26* Build-to-Suite lease Agreement dated as of April 8, 1998, between
Intuit and TACC Investors, LLC for property located at 2800 East
Commerce Center Place, Tucson, Arizona
10.27* Amendment to Lease Agreement dated as of June 9, 1995, dated
April 14, 1998 between Intuit and Kilroy Realty Corporation, a
successor to UTC Greenwich Partners, a California Limited
Partnership
10.28(13) Supply Agreement dated August 23, 1995 by and between Intuit Inc.
and John H. Harland Company
10.29(5) Distribution, Assumption and Assignment Agreement dated as of
August 7, 1997 between Intuit and Parsons Technology, Inc.
(schedules and attachments thereto to be furnished to the
Commission upon request)
12.01* Computation of Ratio of Earnings to Fixed Charges
21.01* List of Intuit's Subsidiaries
23.01* Consent of Ernst & Young LLP, Independent Auditors
23.02(21) Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.01* Power of Attorney (see signature page)
27.01* Financial Data Schedule (filed only in electronic format)
- ----------
+ Indicates a management contract or compensatory plan or arrangement
* Filed with this Form 10-K
(1) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1996, filed with the Commission on October 24, 1996 and incorporated by
reference
(2) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1997, filed with the Commission on March 14, 1997 and incorporated by
reference
(3) Incorporated by reference from Intuit's report on Schedule 13D with respect
to its beneficial ownership of shares of Checkfree Corporation filed with
the Commission on February 6, 1997
(4) Incorporated by reference from Intuit's report on Schedule 13D filed with
the Commission on July 7, 1997
(5) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
August 22, 1997 and incorporated by reference
(6) Filed as an exhibit to Intuit's Registration Statement on Form S-1, filed
with the Commission on February 3, 1993, as amended (File No. 33-57884) and
incorporated by reference
(7) Filed as an exhibit to Intuit's Form 10-K as originally filed with the
Commission on October 31, 1994, as amended, and incorporated by reference
(8) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1996, filed with the Commission on March 15, 1996 and incorporated by
reference
(9) Filed as an exhibit to the ChipSoft Form S-1 registration statement filed
with the Commission on February 24, 1993 (file No. 33-57692) and
incorporated by reference
(10) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1994, filed with the Commission on December 13, 1994 and incorporated by
reference
(11) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1995, filed with the Commission on March 17, 1995 and incorporated by
reference
(12) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1995, filed with the Commission on October 30, 1995 and incorporated by
reference
(13) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1995, filed with the Commission on December 14, 1995 and incorporated by
reference
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(14) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
September 3, 1996 and incorporated by reference
(15) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1997, filed with the Commission on October 15, 1997 and incorporated by
reference
(16) Filed as an exhibit to Intuit's Form 10-Q, Amendment No. 1, for the quarter
ended January 31, 1998, filed with the Commission on May 18, 1998 and
incorporated by reference
(17) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on May
2, 1998 and incorporated by reference
(18) Filed as an exhibit to Intuit's Registration Statement on Form 8-A filed
with the Commission on May 5, 1998 and incorporated by reference
(19) Filed as an exhibit to Intuit's Form 8-K, Amendment No. 1, filed with the
Commission on May 19, 1998 and incorporated by reference
(20) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended April 30,
1998, filed with the Commission on June 12, 1998 and incorporated by
reference
(21) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
July 6, 1998 and incorporated by reference
(b) Reports on Form 8-K
1. On May 5, 1998, Intuit filed a report on Form 8-K to report under
Item 5 the adoption of a Shareholder Rights Plan and amendment of
Intuit's Bylaws
2. On May 18, 1998, Intuit filed a report on Form 8-K to report under
Items 5 and 7 (i) certain management changes; (ii) the results of
the third quarter of fiscal 1998; (iii) the proposed acquisition
of Lacerte Software Corporation and Lacerte Educational Services
Corporation; (iv) the formation of a joint venture company to
focus on the development of certain Web-oriented finance products;
and (v) certain SFAS 128 information and certain unaudited
financial information of Intuit and the historical and pro forma
financial statements of Lacerte Software Corporation and Lacerte
Educational Services Corporation
3. On May 19, 1998, Intuit filed an Amendment No. 1 to the Form 8-K
referred to in (2) above to file under Item 7 as Exhibit 2.01 a
copy of the Asset Purchase Agreement
4. On May 22, 1998, Intuit filed an Amendment No. 2 to the Form 8-K
referred to in (2) above to file under Item 7 as Exhibit 99.04 a
copy of the Amended Intuit Inc./Lacerte Software
Corporation/Lacerte Educational Services Corporation pro forma
financial statements to reflect the larger secondary offering size
5. On May 22, 1998, Intuit filed a report on Form 8-K to report under
Item 5 that Intuit had entered into an Underwriting Agreement with
Deutsche Morgan Grenfell Inc. and the other underwriters named
therein (the "Agreement"), and to file as Exhibits 1.01 and 99.01,
respectively, a copy of the Agreement and certain press releases
6. On July 6, 1998, Intuit filed a report on Form 8-K to report under
Item 2 the closing of the acquisition of Lacerte Software
Corporation and Lacerte Educational Services Corporation
7. On September 8, 1998, Intuit filed an Amendment No. 1 to the Form
8-K referred to in (6) above to file under Item 7 as Exhibit 99.04
the pro forma financial information with respect to the
acquisition of Lacerte Software Corporation and Lacerte
Educational Services Corporation.
(c) Exhibits
See Item 14(a)(3) above.
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(d) Financial Statement Schedules
See Item 14(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTUIT INC.
Dated: October 6, 1998 By: /s/ GREG J. SANTORA
-----------------------------------
Greg J. Santora
Vice President and Chief Financial
Officer
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POWER OF ATTORNEY
By signing this Form 10-K below, I hereby appoint each of William H. Harris, Jr.
and Greg J. Santora, as my attorney-in-fact to sign all amendments to this Form
10-K on my behalf, and to file this Form 10-K (including all exhibits and other
documents related to the Form 10-K) with the Securities and Exchange Commission.
I authorize each of my attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions that he believes are
necessary or appropriate to carry out the intention and purpose of this Power of
Attorney. I ratify and confirm all lawful actions taken directly or indirectly
by my attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------------ ---------------------------------- ------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ WILLIAM H. HARRIS, JR President, Chief Executive Officer October 6, 1998
- ------------------------------------ and Director
William H. Harris, Jr.
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ GREG J. SANTORA Vice President and October 6, 1998
- ------------------------------------ Chief Financial Officer
Greg J. Santora
ADDITIONAL DIRECTORS:
/s/ WILLIAM V. CAMPBELL Chairman of the Board of Directors October 6, 1998
- ------------------------------------
William V. Campbell
/s/ SCOTT D. COOK Director October 6, 1998
- ------------------------------------
Scott D. Cook
/s/ CHRISTOPHER W. BRODY Director October 6, 1998
- ------------------------------------
Christopher W. Brody
/s/ L. JOHN DOERR Director October 6, 1998
- ------------------------------------
L. John Doerr
/s/ MICHAEL R. HALLMAN Director October 6, 1998
- ------------------------------------
Michael R. Hallman
/s/ BURTON J. MCMURTRY Director October 6, 1998
- ------------------------------------
Burton J. McMurtry
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EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3.05 Amended and Retated Rights Agreement, dated October 5, 1998...............................
3.06 Certificate of Retirement of Series A Preferred Stock dated September 16, 1998............
4.01 Form of Specimen Certificate for Intuit's Common Stock....................................
4.02 Form of Right Certificate for Series B Junior Participating Preferred Stock (included in
Exhibit 3.05).............................................................................
10.22 Lease Agreement dated as of January 7, 1998 between Intuit and Charleston Properties
for 2650 Casey Drive, Mountain View, California...........................................
10.25 Offer to Purchase Real Estate Agreement dated as of October 14, 1997, as amended on
December 5, 1997, between Intuit Inc. and General American Life Insurance Company,
for property located at 110 Juliad Court, Fredericksburg, Virginia (purchase and sale
agreement)................................................................................
10.26 Build-to-Suite lease Agreement dated as of April 8, 1998, between Intuit and TACC
Investors, LLC for property located at 2800 East Commerce Center Place, Tucson, Arizona...
10.27 Amendment to Lease Agreement dated as of June 9, 1995, dated April 14, 1998 between
Intuit and Kilroy Realty Corporation, a successor to UTC Greenwich Partners, a
California Limited Partnership............................................................
12.01 Computation of Ratio of Earnings to Fixed Charges.........................................
21.01 List of Intuit's Subsidiaries.............................................................
23.01 Consent of Ernst & Young LLP, Independent Auditors........................................
24.01 Power of Attorney (see signature page)....................................................
27.01 Financial Data Schedule (filed only in electronic format).................................
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