<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended OCTOBER 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
59,815,700 shares of Common Stock, $0.01 par value, as of November 30, 1998
<PAGE> 2
FORM 10-Q
INTUIT INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1998 and October 31, 1998......................................... 3
Condensed Consolidated Statements of Operations for
the three months ended October 31, 1997 and 1998........................... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended October 31, 1997 and 1998........................... 5
Notes to Condensed Consolidated Financial
Statements................................................................. 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 14
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk..................... 23
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................................. 24
ITEM 6: Exhibits and Reports on Form 8-K............................................... 25
Signatures..................................................................... 26
</TABLE>
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<PAGE> 3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1998
----------- -----------
(In thousands, except par value) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 138,133 $ 96,275
Short-term investments .............................................. 244,699 257,255
Marketable securities ............................................... 499,285 401,034
Accounts receivable, net(1) ......................................... 59,417 64,725
Income taxes receivable ............................................. -- 15,208
Prepaid expenses and other current assets(2) ........................ 38,591 34,386
----------- -----------
Total current assets ........................................ 980,125 868,883
Property and equipment, net ........................................... 69,413 73,803
Purchased intangibles, net ............................................ 85,797 80,458
Goodwill, net ......................................................... 285,793 271,694
Other assets .......................................................... 10,937 10,305
Long-term deferred income taxes ....................................... 21,006 21,006
Investments ........................................................... 17,009 21,483
Restricted investments ................................................ 28,516 35,516
----------- -----------
Total assets .......................................................... $ 1,498,596 $ 1,383,148
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 44,035 $ 48,459
Accrued compensation and related liabilities ........................ 23,728 22,340
Deferred revenue .................................................... 58,560 68,216
Income taxes payable ................................................ 3,044 --
Deferred income taxes ............................................... 120,482 81,182
Other accrued liabilities ........................................... 124,820 140,946
----------- -----------
Total current liabilities ................................... 374,669 361,143
Long-term deferred income taxes ....................................... -- 891
Long-term notes payable ............................................... 35,566 39,333
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 - 59,320 and 59,522 shares, respectively .. 593 595
Additional paid-in capital .......................................... 1,080,554 1,086,520
Net unrealized gain on marketable securities ........................ 181,071 122,121
Cumulative translation adjustment and other ......................... 1,531 (2,877)
Accumulated deficit ................................................. (175,388) (224,578)
----------- -----------
Total stockholders' equity .................................. 1,088,361 981,781
----------- -----------
Total liabilities and stockholders' equity ............................ $ 1,498,596 $ 1,383,148
=========== ===========
</TABLE>
(1) Includes $4.4 million and $5.3 million due from Checkfree at July
31, 1998 and October 31, 1998, respectively (see Note 10).
(2) Includes a balance due of $7.3 million and $5.3 million on a note
receivable from Venture Finance Software Corporation at July 31, 1998
and October 31, 1998, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1997 1998
--------- ---------
<S> <C> <C>
(In thousands, except per share amounts; unaudited)
Net revenue(1) ....................................... $ 95,958 $ 111,968
Costs and expenses:
Cost of goods sold:
Product ......................................... 22,396 35,215
Amortization of purchased software .............. 703 1,804
Customer service and technical support ............. 27,921 29,823
Selling and marketing .............................. 31,949 45,092
Research and development ........................... 26,144 33,668
General and administrative ......................... 8,509 13,467
Amortization of goodwill and purchased intangibles.. 3,941 20,970
--------- ---------
Total costs and expenses ................... 121,563 180,039
--------- ---------
Loss from operations ....................... (25,605) (68,071)
Interest and other income and expense, net ........... 2,030 3,348
Gain on disposal of business ......................... 4,321 --
--------- ---------
Loss before income taxes ............................. (19,254) (64,723)
Income tax benefit ................................... (6,495) (15,533)
--------- ---------
Net loss ............................................. $ (12,759) $ (49,190)
========= =========
Basic and diluted net loss per share ................. $ (0.27) $ (0.83)
========= =========
Shares used in per share amounts ..................... 47,085 59,412
========= =========
</TABLE>
(1) Includes $10.8 and $1.1 million from Checkfree for the quarters ended
October 31, 1997 and 1998, respectively, and $1.7 and $4.0 million from
Excite for the quarters ended October 31, 1997 and 1998 respectively
(See Note 10).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1997 1998
--------- ---------
<S> <C> <C>
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (12,759) $ (49,190)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on disposal of business, net of tax ............................. (1,621) --
Amortization of goodwill and other purchased intangibles ............. 4,573 27,813
Depreciation ......................................................... 7,346 9,221
Changes in assets and liabilities:
Accounts receivable ............................................... (46,557) (5,308)
Income taxes receivable ........................................... -- (15,208)
Prepaid expenses and other current assets ......................... 1,365 4,205
Deferred income tax assets and liabilities ........................ (5,479) 892
Accounts payable .................................................. 1,805 4,424
Accrued compensation and related liabilities ...................... (2,780) (1,388)
Deferred revenue .................................................. 1,523 9,656
Accrued acquisition liabilities ................................... (15,396) (1,559)
Other accrued liabilities ......................................... 19,504 17,044
Income taxes payable .............................................. (4,387) (1,520)
--------- ---------
Net cash used in operating activities ........................... (52,863) (918)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................ (8,694) (13,611)
Proceeds from business sold ............................................... 26,350 --
(Increase) decrease in other assets ....................................... 759 (7,743)
Purchase of short-term investments ........................................ (17,797) (82,874)
Purchase of long-term investments ......................................... (2,000) (4,474)
Liquidation of short-term investments ..................................... 66,626 63,318
--------- ---------
Net cash provided by (used in) investing activities ............. 65,244 (45,384)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ...................................... (865) --
Net proceeds from issuance of common stock ................................ 5,654 4,444
--------- ---------
Net cash provided by financing activities ....................... 4,789 4,444
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 17,170 (41,858)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ 46,780 138,133
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 63,950 $ 96,275
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), and Internet products and
services for individuals and small businesses. Our products and services are
designed to automate commonly performed financial tasks and to simplify the way
individuals and small businesses manage their finances. We sell our products
throughout North America and in many international markets. Sales are made
through retail distribution channels, traditional direct sales to customers and
the Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary (such as normal recurring adjustments) to give a fair presentation of
our operating results for the periods shown. Results for the three months ended
October 31, 1998 will not necessarily indicate the results to be expected for
the fiscal year ending July 31, 1999 or any other future period. The July 31,
1998 balance sheet was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
These statements and accompanying notes should be read together with the audited
consolidated financial statements for the fiscal year ended July 31, 1998
included in Intuit's Form 10-K filed with the Securities and Exchange
Commission.
Principles of Consolidation
The consolidated financial statements include all of our accounts and those of
our wholly-owned subsidiaries. We have eliminated all significant intercompany
accounts and transactions. Investments in which management intends to maintain
more than a temporary 20% to 50% interest, or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.
Investments in which we have less than a 20% interest and/or do not have the
ability to exercise significant influence are carried at the lower of cost or
estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectibility of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill and purchased
intangibles. Despite our intention to establish accurate estimates and
assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that we will collect the accounts receivable from our customers.
Reserves are provided for excess quantities of current product versions, as well
as previous versions of products still in the distribution channel when new
versions are launched. In some situations, we receive advance payments from our
customers. Revenue associated with these advance payments is deferred until the
products are shipped or services are provided. We also reduce revenue by the
estimated cost of rebates when products are
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<PAGE> 7
shipped. Warranty reserves are provided at the time revenue is recognized for
the estimated cost of replacing defective products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided. However, where the Internet
product or service is to be provided or delivered at one point in time, revenue
is recognized immediately upon completion or delivery of the product or service,
rather than over time. For example, we earn advertising revenues from third
parties that advertise on certain of our websites and contract to run such
advertisements for a particular period of time. In that case, the associated
advertising revenue is recognized ratably over the contractual time period
during which the advertising is to be placed. By contrast, for on-line
transactions for which we receive a payment (such as the sale of insurance
through our InsureMarket website), revenue is recognized upon completion of the
transaction, assuming there are no remaining obligations on our part.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides free telephone support service to customers. This free service, also
referred to as post-contract customer support, is included in this expense
category. We do not defer the recognition of any revenue associated with sales
of these products, since the cost of providing this free support is
insignificant, the support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment.
Intuit also offers several plans that charge customers for technical support
assistance. Fees charged for these plans are collected in advance and are
recognized as revenue over a period of time (generally one year) at a rate that
is based on historical call volumes for support, which approximates when these
services are performed. Costs incurred for fee for support plans are included in
cost of goods sold.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and require us
to use a significant amount of the cash investments held as available-for-sale
securities.
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1998
-------- ----------
(In thousands) (Unaudited)
<S> <C> <C>
Cash and cash equivalents:
Cash ......................... $ 22,382 $ 28,408
Money market funds ........... 6,972 17,229
Corporate notes .............. -- 10,400
Commercial paper ............. -- 13,953
Municipal bonds .............. 81,927 21,304
U.S. Government securities.... 26,852 4,981
-------- --------
$138,133 $ 96,275
======== ========
</TABLE>
-7-
<PAGE> 8
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1998
--------- ---------
(In thousands) (Unaudited)
<S> <C> <C>
Short-term investments:
Certificates of deposit ............ $ 5,043 $ 5,040
Corporate notes .................... 2,000 7,001
Municipal bonds .................... 256,297 268,766
U.S. Government securities ......... 9,875 11,964
Restricted short-term investments... (28,516) (35,516)
--------- ---------
$ 244,699 $ 257,255
========= =========
</TABLE>
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1998
--------- ---------
(In thousands) (Unaudited)
<S> <C> <C>
Due within one year ................ $ 225,241 $ 240,124
Due within two years ............... 159,324 114,990
Due within three years ............. 4,401 5,524
Restricted short-term investments... (28,516) (35,516)
--------- ---------
$ 360,450 $ 325,122
========= =========
</TABLE>
For information about our restricted investments, see Note 7. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
Marketable Securities
Our marketable securities are carried at fair value and include unrealized gains
and losses, net of tax, in stockholders' equity. We held the following
marketable securities at July 31, 1998 and October 31, 1998:
<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------
COST GAIN LOSS FAIR VALUE
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
JULY 31, 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
======== ======== ======== ========
OCTOBER 31, 1998
(In thousands; unaudited)
Checkfree Corporation common stock.............. $156,350 $10,269 $ -- $166,619
Excite, Inc. common stock....................... 39,150 184,512 -- 223,662
Verisign, Inc. common stock..................... 2,000 5,672 -- 7,672
Concentric Network Corporation common stock..... -- 3,081 -- 3,081
-------- -------- -------- --------
$197,500 $203,534 $ -- $401,034
======== ======== ======== ========
</TABLE>
We account for the investment in Checkfree Corporation ("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 October 31, 1998 was
$15.72 per share. At October 31, 1998, we held 10.6 million shares, or
approximately 21%, of Checkfree's outstanding common stock. Subsequent to
October 31, 1998, we began the gradual sale of shares in order to reduce our
ownership in Checkfree to below 20%. We expect our ownership in Checkfree to be
below 20% by the end of our second fiscal quarter ending January 31, 1999.
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<PAGE> 9
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"). At the same time, we
entered into an agreement with Excite that provides for the joint development,
promotion and distribution of an online financial channel. Since we were
restricted from selling the shares until December 12, 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 would
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
October 31, 1998 was $38.56 per share. At October 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 (as occurred during
August and September 1998), which could result in a material reduction in the
carrying value of these assets.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate the carrying value of the asset cannot be recovered. No
such impairment has been indicated to date. If, in the future, management
determines the existence of impairment indicators, we would use undiscounted
cash flows to initially determine whether impairment should be recognized. If
necessary, we would perform a subsequent calculation to measure the amount of
the impairment loss based on the excess of the carrying value over the fair
value of the impaired assets. If quoted market prices for the assets are not
available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
LIFE IN NET BALANCE AT
YEARS JULY 31, 1998 OCTOBER 31, 1998
------- ------------- ----------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Goodwill........................................... 3-5 $285,793 $271,694
Customer lists..................................... 3-5 53,517 50,449
Covenant not to compete............................ 3-5 2,211 1,944
Purchased technology............................... 1-5 18,763 17,655
Assembled workforce................................ 2-5 5,596 5,106
Trade names and logos.............................. 1-10 5,710 5,304
</TABLE>
Balances presented above are net of total accumulated amortization of $103.6
million and $131.4 million at July 31, 1998 and October 31, 1998, respectively.
Concentration of Credit Risk
Almost all of Intuit's operations are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Many
circumstances could have an unfavorable impact on Intuit's operating results.
Examples include significant technological changes in the industry, changes in
customer requirements or the emergence of competitive products or services with
new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At October 31,
1998, we held shares of Checkfree common stock representing approximately 21% of
Checkfree's outstanding common stock. Subsequent to October 31, 1998 we began
the gradual sale of shares in order to reduce our ownership in Checkfree to
below 20%. We also held approximately 11% of Excite's outstanding common stock
as of October 31, 1998. Our ability to dispose of these securities is
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<PAGE> 10
limited by volume trading and other restrictions. The Excite shares could not be
sold until December 12, 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. See "Marketable Securities," above in Note 1 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.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating segments in
financial statements. It also sets standards for related disclosures about
products and services, geographic areas and major customers. The disclosures
prescribed by SFAS 131 will be adopted for the fiscal year ending July 31, 1999.
Change in Estimate of Goodwill Amortization
Our statements of operations reflect a change in estimate for the amortization
life of remaining goodwill related to the June 1998 acquisition of Lacerte from
three years to five years, commencing with the first quarter of fiscal 1999. The
change resulted in a $9.5 million decrease in amortization expense and a
reduction of net loss by approximately $7.2 million, or $0.12 per share, for the
quarter ended October 31, 1998.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
3. COMPREHENSIVE NET INCOME
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1997 1998
---- ----
<S> <C> <C>
(In thousands; unaudited)
Net loss................................................. $(12,759) $(49,190)
Unrealized gain (loss) on marketable securities.......... 58,133 (58,950)
Change in cumulative translation adjustment.............. 41 (4,409)
------- ---------
Comprehensive net income (loss).......................... $45,415 $(112,549)
======= =========
</TABLE>
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<PAGE> 11
4. ACQUISITIONS
In June 1998, we acquired substantially all of the assets of Lacerte Software
Corporation and Lacerte Educational Services Corporation (together, "Lacerte"),
for cash. Lacerte is a leading developer and marketer of tax preparation
software and services for tax professionals. The purchase price was
approximately $400 million. In addition, we assumed liabilities of $31.8
million. We funded the acquisition by a public offering of 10.0 million shares
of common stock, completed in the fourth quarter of fiscal 1998.
The acquisition of Lacerte was treated as a purchase for accounting purposes. We
allocated approximately $358.2 million of the purchase price to identified
intangible assets and goodwill. These assets are being amortized over a periods
of two to five years. We also expensed approximately $53.8 million of in-process
research and development in the quarter ended July 31, 1998. The following table
shows pro forma net revenue, net loss and diluted net loss per share of Intuit
and Lacerte as if we had acquired Lacerte at the beginning of fiscal 1998,
excluding the impact of the one-time charge for in-process research and
development:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED OCTOBER 31, 1997
----------------------
AS
PRO FORMA REPORTED
--------- --------
(In thousands, except per share data; unaudited)
<S> <C> <C>
Net revenue.............................................. $99,408 $95,958
Net loss................................................. (27,115) (12,759)
Diluted net loss per share............................... $ (0.47) $ (0.27)
</TABLE>
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer software and direct marketing
subsidiary, to Broderbund Software, Inc. for approximately $31 million. As a
result of the sale, Broderbund acquired net assets of approximately $17 million
and we incurred direct costs of approximately $9.5 million. We also recorded a
pre-tax gain of $4.3 million and a related tax provision of $2.7 million in the
quarter ended October 31, 1997. Pro forma information for the three months ended
October 31, 1997 is not shown as it is not materially different from that
presented in our statements of operations.
6. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1998
-------- --------
(In thousands) (Unaudited)
<S> <C> <C>
Reserve for returns and exchanges......................... $60,343 $66,937
Acquisition and disposition related items................. 19,181 17,622
Rebates................................................... 16,870 16,950
Post-contract customer support............................ 4,433 4,367
Other accruals............................................ 23,993 35,070
-------- --------
$124,820 $140,946
======== ========
</TABLE>
7. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting purposes. The interest rate is variable based on the Tokyo
inter-bank offered rate or the short-term prime rate offered in Japan. At
October 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 $35.5 million, or 110% of the
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<PAGE> 12
loan balance, of short-term investments to be restricted as security for the
borrowings at October 31, 1998. We are obligated to pay interest only until
March 2000.
8. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
9. LITIGATION
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 21, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court is expected to rule on the
motion in January 1999. If the demurrer is overruled, we believe we have good
and valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions. However,
plaintiffs in these cases may seek leave to amend their complaints or appeal the
dismissal ruling and the ultimate outcome of any litigation is uncertain.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
Discovery is ongoing in the California actions. Discovery was stayed in the New
York actions pending hearings on the motions.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, as noted above, the ultimate outcome of any litigation is uncertain,
and either unfavorable or favorable outcomes could have a material negative
impact.
10. RELATED PARTY TRANSACTIONS
We held approximately 11% of Excite's outstanding common stock as of October 31,
1998. We reported revenue of $1.7 million and $4.0 million received from Excite
for shared advertising activities for the quarters ended October 31, 1997 and
1998, respectively.
As of October 31, 1998, we held approximately 21% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported
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<PAGE> 13
revenues of $10.8 million and $1.1 million from Checkfree for the quarters ended
October 31, 1997 and 1998, respectively. This includes a royalty payment of $10
million received in October 1997. We held a receivable due from Checkfree for
$4.4 million and $5.3 million at July 31, 1998 and October 31, 1998,
respectively.
As of October 31, 1998, we held a 49% equity interest in Venture Finance
Software Corporation (VFSC). We have entered into an agreement with VFSC to
provide them with services related to on-going development of Web-oriented
finance products. We held a note receivable from VFSC with outstanding balances
of $7.3 million and $5.3 million at July 31, 1998 and October 31, 1998,
respectively, representing amounts due to us from VFSC for development and
administrative services we provided to VFSC.
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<PAGE> 14
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements including
terms such as we "expect" or "anticipate" are forward-looking statements.
Investors should be aware that our actual results may differ materially from
Intuit's expressed expectations because of risks and uncertainties about the
future. We will not necessarily update the information in this Form 10-Q if and
when any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect our future results and performance include, but
are not limited to, the following: intense competition and pricing pressures;
the viability of our strategy with respect to the Internet and our
Internet-based businesses; our success in implementing that strategy, including
but not limited to our ability to adapt and expand our product, service and
content offerings for the Internet environment; our ability to operationally
support and manage these new businesses; the success of our business
relationships with Excite, AOL and others in continuing to increase customer
traffic to Quicken.com; the costs of implementing our Internet strategy, and the
uncertainty as to the timing and amount of future Internet-related revenue and
profits; the timing of our release for future products and services, including
wider availability of our online payroll service; our ability to increase the
number of subscribers to the online payroll service; market growth, sales levels
for new products and customer upgrade rates, including but not limited to sales
and upgrade rates for our QuickBooks multi-user product and other desktop
products; the value and size of our equity investments in other companies,
including Checkfree Corporation and Excite, Inc.; our ability to achieve Year
2000 readiness in our business operations, our products and our dealings with
significant third parties; the impact of our recent acquisition of Lacerte, and
the impact of acquisitions generally; our relationships with retailers and other
issues with respect to our distribution channels; results for our international
operations; and risks associated with regulated businesses such as insurance and
mortgage lending. Additional information about factors that could affect our
future results and events is included elsewhere in this Form 10-Q and in
Intuit's fiscal 1998 Form 10-K and other reports filed with the Securities and
Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal, we create, sell and support small
business accounting, tax preparation and consumer finance software products,
financial supplies (such as computer checks, invoices and envelopes), and
Internet products for individuals and small businesses. Our revenues come
primarily from the United States, Japan, Germany, Canada and the United Kingdom,
through retail distribution channels, direct customer sales and via the
Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet commerce revenue is growing rapidly. The Internet is a
pervasive force that has fundamentally changed the way we do business. It is
becoming increasing 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 through our QuickBooks product and our
Quicken Store website, where customers can purchase and download desktop
software products and obtain customer service. We also use the Internet to host
our technical support website where we can quickly and cost-effectively provide
patches for product bugs and provide customers with answers to frequently asked
questions.
We use the term "Internet commerce" to refer to all of our Internet-based
business activities. Internet commerce has two components: Internet products and
electronic distribution. Internet products include activities in which the
customer realizes the value of the goods or services directly on the Internet or
an Intuit server. Internet product revenues include, for example, advertising
revenues generated on our Quicken.com website, online tax preparation and
electronic filing revenues, and transaction and processing fees from our online
insurance and online mortgage marketspaces. Our primary sources of Internet
product revenue are fees from companies who advertise on Quicken.com and from
certain financial service providers, such as mortgage lenders and insurance
brokers, who
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<PAGE> 15
obtain customers through Quicken.com. Electronic distribution activities include
the electronic ordering and/or electronic delivery of traditional desktop
software products and financial supplies through the Internet.
While we have made significant progress in our Internet commerce activities,
investors should be aware that initial success achieved in these areas will not
necessarily result in improved financial results. We believe that the dramatic
growth of the Internet will give us significant opportunities to grow our
revenue over the next several years. However, revenue from Internet commerce was
11% of total revenue during the first quarter of fiscal 1999 (8% for Internet
products and 3% for electronic distribution). It should be noted that these
percentages are not necessarily indicative of what we will experience for the
full fiscal year. Internet revenues are not reported separately in our financial
statements; instead each of our business divisions reports Internet commerce
revenues that are specific to its operations and are included in its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred during these periods. This can result in significant operating
losses, particularly in the July 31 and October 31 quarters when our revenues
are lower. The seasonality of our revenue patterns will be exacerbated by our
June 1998 acquisition of Lacerte, a professional tax software company. Operating
results can also fluctuate for other reasons, such as changes in product release
dates, non-recurring events such as acquisitions and dispositions, and product
price cuts in quarters that have relatively high fixed expenses. Acquisitions
and dispositions in particular can have a significant impact on the
comparability of both our quarterly and yearly results.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
quarters ended October 31, 1997 and 1998. Investors should note that results for
the quarter ended October 1998 are impacted by activity for our Lacerte
subsidiary, which was acquired in June 1998. Lacerte's operations often
contribute to comparatively higher operating expenses as a percentage of revenue
in the current quarter as compared to the quarter ended October 31, 1997, when
we did not own Lacerte.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes. The following revenue discussion is categorized by our
business divisions, which is how we examine 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.
NET REVENUE
<TABLE>
<CAPTION>
Three Months Ended October 31,
1997 Change 1998
----------------------------------
<S> <C> <C> <C>
(Dollars in millions)
Software and other....................... $74.1 19% $ 88.4
% of revenue............................ 77% 79%
Supplies................................. $21.9 8% $ 23.6
% of revenue............................ 23% 21%
Total $96.0 17% $112.0
</TABLE>
Small Business Division. Small Business Division revenues come primarily from
the following sources:
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<PAGE> 16
- QuickBooks product line
- Supplies products (including checks, envelopes and invoices)
- Tax table services
- Support fees charged to customers for telephone assistance
Overall, Small Business Division revenues were up 15% for the first quarter of
fiscal year 1999 compared to the same quarter of fiscal 1998. The increase was
driven by our QuickBooks product line, which experienced approximately 10% sales
growth over the same quarter of the prior year. This was the result of higher
average selling prices and the impact of product release timing in fiscal 1998
compared to fiscal 1997. In fiscal 1997, we launched QuickBooks 5.0 in the
second quarter (December 1996), whereas in fiscal 1998 we launched our
QuickBooks 6.0 products (including the QuickBooks Pro multi-user product) in the
fourth quarter (June 1998). As a result, the current quarter compares favorably
to the same quarter of the prior year, which did not realize the benefit of a
recent Quickbooks product launch.
Supplies revenues grew by 8% compared to the same quarter a year ago. 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 recurring revenue than our
software business, and is derived primarily from our existing customer base.
Though they are a smaller component of Small Business Division revenues, tax
tables service revenue and fees charged for telephone support also grew
substantially in the first quarter of fiscal 1999 compared to the same quarter a
year ago.
In October 1998, we introduced our new payroll processing service. The service
is offered through our QuickBooks 6.0 products and handles all aspects of
payroll processing, including calculation and electronic depositing of federal
and state payroll tax withholdings, electronic direct deposit of paychecks,
preparation and filing of quarterly and annual payroll tax returns and creation
of employee W-2 forms. While payroll processing provides us with a significant
opportunity to generate revenues, it also introduces new risks. For example, we
have contracted with a third party service provider to perform the processing
related to this service. If that outside provider fails to provide accurate and
timely payroll information, cash deposits or tax return filings, that failure
could be costly to correct and could have a significant negative impact on our
ability to attract and retain customers, who we believe will have a low
tolerance for payroll processing errors. In addition, we expect this service to
be unprofitable in its initial stages until we are able to accumulate a large
number of subscribers from our QuickBooks customer base to offset the fixed
costs of providing the payroll service. Though initial reaction to this service
has been positive, it was not a significant contributor to this past quarter's
financial performance, and there is no assurance that it will be widely
accepted. If subscriptions to this service don't meet expectations, future
operating results could suffer.
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
Due to the highly seasonal nature of the tax business, the first quarter
normally generates very little revenue from tax products. The majority of tax
division sales generally occur in our second quarter. While we believe the
approaching tax season presents an opportunity to experience revenue growth,
there are also risks. We have undertaken product development and marketing
efforts to take advantage of revenue growth opportunities for this tax year, but
the impact these efforts will have on our revenues and operating results will be
unknown until the second fiscal quarter and beyond. In addition, the rapid
development of high-quality tax products is particularly difficult in light of
changing tax laws and competitive pressures to get products to market quickly.
Tax product errors can be particularly costly because of both the negative
impact they can have on customer brand loyalty and the expense incurred to
replace defective products. In the coming tax year, we continue to face intense
competition from H&R Block's aggressively priced TaxCut product and others. If
our competitors significantly reduce the selling prices of their products, this
could have a significant negative impact on our operating results. In addition,
though Microsoft Corporation is not releasing a competing product for this tax
season, there is a risk that our long-term operating results could suffer if
Microsoft enters the tax preparation software market in future tax seasons.
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<PAGE> 17
We expect the acquisition of Lacerte to significantly expand our professional
tax operations during fiscal 1999 and beyond. 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, we will
incur significant future amortization costs as a result of the transaction.
There is also a risk that our operating results could suffer if we experience a
delay in Lacerte product releases or are unsuccessful in retaining Lacerte
customers. See Notes 1 and 4 of the financial statement notes for a discussion
of future amortization costs.
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 were up slightly in the first
quarter of fiscal 1999 compared to the same quarter of the prior year. Quicken
sales were higher than the same quarter a year ago due primarily to an
approximately 5 week earlier release of Quicken this year and to a more
favorable sales mix toward our higher-priced products. We also experienced
significant growth in consumer Internet-based revenues compared to the same
quarter last year, primarily due to increased advertising, sponsorship and
transaction-driven revenue through Quicken.com and Quicken. The increase in
Consumer Finance Division revenues over the comparable year ago quarter occurred
despite the fact that the Company received a $10 million royalty fee from
Checkfree Corporation in the first quarter of fiscal 1998, whereas no such
payment from Checkfree was received in the current quarter.
While we expect Quicken sales will remain roughly flat in fiscal 1999, there is
a risk that they will decline. In fiscal 1997, Quicken experienced over a 20%
decline in revenues and there is no assurance that similar declines will not
occur in the future. For example, sales could suffer if customers become less
inclined to make upgrade purchases or if our competitors were to lower their
prices. There are also risks associated with our Internet products and services.
The rapid growth we've experienced in our Internet products and services have
been generated in part by collaborating with third party online service and
content providers such as Excite and AOL, which have helped to increase traffic
to our Quicken.com website. The Excite agreement calls for us to share revenue
generated from our Quicken.com site and the AOL agreement calls for us to make
significant guaranteed payments to AOL over the term of the agreement. While the
Internet provides a significant opportunity for revenue growth, we have also
made significant financial commitments to these and other third party providers
and must continue to increase traffic and revenue in order to become profitable.
If our website traffic and revenue expectations aren't met, there could be a
significant negative impact on our operating results.
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. In the first quarter of fiscal 1999, revenue for the
International division decreased 9% compared to the same quarter of the prior
year. As part of our strategy to provide more growth and profitability, 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 our first release of QuickBooks in Japan in September 1998 in an
effort to target a lower-priced market than our current small business products
reach in Japan. While we expect that international revenues will be flat or
slightly down for fiscal year 1999, there is a risk that they could be
significantly lower if our initiatives are not effective, particularly if
customer acceptance of QuickBooks in Japan doesn't meet our expectations.
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<PAGE> 18
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended October 31,
1997 Change 1998
-----------------------------------
<S> <C> <C> <C>
(Dollars in millions)
Product................................. $22.4 57% $35.2
% of revenue............................ 23% 31%
Amortization of purchased software & other $ 0.7 157% $ 1.8
% of revenue............................ 1% 2%
</TABLE>
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products, offering Internet-based products and
services and providing our fee for support program. The second component is the
amortization of purchased software, which is the cost of products obtained
through acquisition. Total cost of goods sold increased to 33% of net revenue
for the first quarter of fiscal 1999 compared to 24% for the first quarter of
fiscal 1998. This increase is primarily attributable to two factors. First,
consistent with our growing Internet-based business, we are experiencing a
significant increase in related hardware and infrastructure costs as we purchase
equipment to increase our Internet capability. These costs are classified as
cost of sales and, as a percentage of revenue, are significantly higher than the
costs of sales for our traditional desktop software business. These
infrastructure costs tend to result from the depreciation of capital assets
which are generally expensed evenly over the estimated useful lives of the
assets. As a result, cost of sales as a percentage of revenue may fluctuate
significantly, particularly on a quarterly basis, as they become more fixed in
nature and less connected to the direct cost of manufacturing and shipping
software products. For example, although in a quarter with low revenues we will
usually have a proportionately lower cost of sales because we ship fewer
products, the cost of sales from our Internet infrastructure will not decrease
proportionately and thus will inflate the cost of sales as a percentage of
revenue for that quarter. Second, we have also experienced significant increases
in our fee for support program revenues. The cost of sales associated with this
program is also larger as a percentage of revenue than our traditional desktop
software business. Consequently, as revenues from our Internet-related
businesses and fee for support programs become a larger portion of our overall
revenue, our cost of sales as a percentage of revenue is likely to increase.
These upward pressures on cost of sales were partially offset by a continuing
shift of consumer preferences toward CD ROM products, which cost less to
manufacture and ship than disk-based products. Due to expected growth in higher
cost of sales businesses such as our Internet-based initiatives, fee for support
programs and our online payroll service, we believe cost of goods sold as a
percentage of revenue for fiscal 1999 will exceed what we experienced in fiscal
1998. If we experience errors in current or future products, there could be
incremental increases in cost of goods sold that could adversely effect our
operating results.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended October 31,
1997 Change 1998
----------------------------------
<S> <C> <C> <C>
(Dollars in millions)
Customer service & technical support....... $27.9 7% $29.8
% of revenue.............................. 29% 27%
Selling & marketing........................ $32.0 41% $45.1
% of revenue.............................. 33% 40%
Research & development..................... $26.1 29% $33.7
% of revenue.............................. 27% 30%
General and administrative................. $8.5 59% $13.5
% of revenue.............................. 9% 12%
Other acquisition costs, including
amortization of goodwill and purchased
intangibles.............................. $3.9 438% $21.0
% of revenue.............................. 4% 19%
</TABLE>
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<PAGE> 19
Customer Service and Technical Support. In the first quarter of fiscal 1999,
customer service and technical support expenses decreased to 27% of revenue
compared to 29% in the same quarter of the prior year. This improvement reflects
the continuing benefit from cost reductions resulting from the restructuring and
consolidation of our technical support facilities in the United States and
Europe in the fourth quarter of fiscal 1997. We have also benefited from
expanding our fee for support programs and our initiatives to provide customer
service and technical support less expensively through websites and other
electronic means. While we anticipate that service and support expenses will
decrease as a percentage of revenue for fiscal 1999 compared to fiscal 1998,
there is no assurance that they will not stay flat or increase. For instance, if
we experience product errors, it may result in significant additional customer
service and technical support expenses.
Selling and Marketing. In the first quarter of fiscal 1999, selling and
marketing expenses increased to 40% of revenue compared to 33% in the prior year
quarter. This increase reflects additional spending associated with our early
release of Quicken 99, aggressive selling efforts related to our direct channel
sales of tax products, continued promotion of our QuickBooks product which
launched in June 1998, initial selling expenses related to our new payroll
service and higher selling and marketing costs related to Quicken.com. Selling
and marketing expenses as a percentage of revenue are unusually high this
quarter due to the nature and timing of recent promotional activities combined
with our seasonally lower revenue for this quarter. While we expect these costs
as a percentage of revenue to decrease slightly in fiscal 1999 compared to
fiscal 1998, there is no assurance that they will not increase. For example,
there is a risk that these costs could increase in response to competitive
pressures from H&R Block (TaxCut tax preparation software), Microsoft (Microsoft
Money financial software) or other competitors.
Research and Development. In the first quarter of fiscal 1999, research and
development expenses increased to 30% of net revenue compared to 27% in the
prior year quarter. This is attributable in part to increased expenses resulting
from our Lacerte subsidiary, acquired in June 1998. Since our first quarter of
fiscal 1999 included significant research and development expenses for Lacerte
and the comparable year ago quarter did not, this difference negatively impacts
our current quarter results on a comparative basis. The negative impact is
magnified by the fact that, as a seasonal tax preparation software business,
Lacerte recognized very little revenue in the first fiscal quarter to offset
these development costs. We have also experienced significant incremental
research and development expenditures in the current fiscal quarter related to
our new payroll service and other Internet products and services. We expect that
research and development expenses will be roughly flat as a percentage of
revenue for fiscal year 1999 compared to fiscal 1998. However, if research and
development expenses exceed our expectations, they may have an adverse effect on
operating results, particularly if revenue from related products and services
does not meet expectations.
General and Administrative. In the first quarter of fiscal 1999, general and
administrative expenses increased to 12% of net revenue compared to 9% in the
prior year quarter. This increase was due in part to general and administrative
expenses incurred for our newly acquired Lacerte subsidiary in the current
quarter and the absence of such expenses in the same quarter last year. Also
contributing to this increase were expenses related to the relocation of
customer service and technical support facilities in Tucson, Arizona. For fiscal
1999, we expect general and administrative expenses to remain roughly flat
compared to fiscal 1998.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
These costs increased to $21.0 million in the first quarter of fiscal 1999
compared to $3.9 million in the first quarter of fiscal 1998. This increase was
primarily attributable to the amortization of intangibles associated with our
acquisition of Lacerte in June 1998. In the first quarter of fiscal 1999, we
changed the estimated life of goodwill for Lacerte from three to five years to
reflect our revised estimate of the period of time we expect to benefit from the
purchased assets of the acquired business. We are accounting for this change in
estimate prospectively, commencing with the first quarter of fiscal 1999. This
change results in different estimates of the net income effect of future
amortization compared to estimates previously provided in the Company's fiscal
1998 Form 10-K. Revised estimates are provided below. For more information
regarding this change in estimate see Note 1 of the financial statements.
In connection with our acquisition of Lacerte, we used an independent
appraiser's estimate to determine the value of two in-process projects under
development for which technological feasibility had not been established. These
projects were identified for products being developed under separate operating
systems (DOS and Windows). The
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<PAGE> 20
value of the projects was determined by estimating the costs to develop the
in-process technology into commercially feasible products, estimating the net
cash flows we believe will result from the products and discounting these net
cash flows back to their present value. As of the quarter ended October 31,
1998, we believe that actual results to date have been consistent with
assumptions made when we initially appraised the value of these in-process
projects. Specifically, projected revenues, development costs to date, expected
costs to complete and expected completion dates as they relate to the two
projects are consistent with our expectations. We believe the risk is low that
the products associated with these projects will not be released as scheduled in
January 1999. However, if these products are not successfully developed, or are
delayed, it could have a significant negative impact on our operating results.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Assuming no additional acquisitions and no impairment of value
resulting in an acceleration of amortization, future amortization will reduce
net income by approximately $56.1 million, $50.4 million, $43.7 million and
$40.5 million for the years ending July 31, 1999 through 2002, respectively. If
we complete additional acquisitions or accelerate amortization in the future,
there could be an incremental negative impact on operating results.
OTHER INCOME
For the first quarter of fiscal 1999, interest and other income and expense,
net, improved to 3% as a percentage of revenue compared to 2% in the prior year
quarter. This increase was due to greater interest earnings from higher cash,
cash equivalent and short term investment balances held by the Company at the
end of the current quarter compared to the prior year quarter. The $4.3 million
gain on disposal of business in the prior year fiscal quarter resulted from the
sale of Parsons, Intuit's direct marketing subsidiary, in August 1997.
INCOME TAXES
For the quarter ended October 31, 1998, we recorded an income tax benefit of
$15.5 million on a pretax loss of $64.7 million. This compares to the quarter
ended October 31, 1997 which resulted in an income tax benefit of $6.5 million
on a pretax loss of $19.3 million. The benefit for the quarter ended October 31,
1997 was partially offset by a provision resulting from the gain on disposal of
Parsons. At October 31, 1998, there was a valuation allowance of $9.6 million
for tax assets of our international subsidiaries based on management's
assessment that we may not receive the benefit of certain loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, our unrestricted cash and cash equivalents totaled $96.3
million, a $41.9 million decrease from July 31, 1998. The decrease was a result
of net cash used by operations and investing activities, partially offset by
cash provided by financing activities. It was driven by the seasonality of our
business, which typically results in the majority of net revenues and cash
receipts occurring in the January and April quarters though operating expenses
are incurred throughout the year.
Our operations used $0.9 million in cash during the three months ended October
31, 1998. Primary uses of cash included the net loss of $49.2 million as well as
a significant increase in income taxes receivable resulting from the net loss.
Uses of cash were offset by adjustments made for non-cash expenses such as
acquisition charges and depreciation in addition to significant increases in
accrued liabilities and deferred revenue. The increase in accrued liabilities
was driven by the September 1998 launch of Quicken, which resulted in increased
reserves for product returns, and by accruals for the relocation of our customer
service and technical support facilities in Tucson, Arizona.
Investing activities resulted in a use of $45.4 million in cash for the three
months ended October 31, 1998. Uses of cash included net purchases of both
short-term and long-term investments, in addition to purchases of property and
equipment. Property and equipment purchases during the quarter were made to
support our ongoing operations,
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<PAGE> 21
information system upgrades and our growing Internet-based businesses. Due to
our substantial investments in marketable securities, there is a risk that
market value declines (such as those that occurred during August and September
1998) may have a significant negative impact on our liquidity. If such declines
were deemed to be permanent, they would result in a charge to our statements of
operations.
Financing activities provided $4.4 million in the first quarter primarily
attributable to proceeds from the exercise of employee stock options.
Our agreement with AOL obligates us to pay a minimum of $30 million over the
term of the three-year agreement. We currently do not have any other significant
capital expenditure commitments, though we may require additional cash for
strategic projects in the future. In the normal course of business, we enter
into leases for new or expanded facilities in both domestic and international
locations. We also evaluate the merits of acquiring technology or businesses, or
establishing strategic relationships with other companies. Accordingly, it is
possible that we may decide to use cash and cash equivalents to fund such
expenses in the future. For example, if we exercise our option to purchase VFSC
(see note 5 of the Form 10-K 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.
We believe that our unrestricted cash, cash equivalents and short-term
investments will be sufficient to meet anticipated seasonal working capital and
capital expenditure requirements for at least the next twelve months.
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.
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 substantially 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.
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<PAGE> 22
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 planning to make such solutions available before customers experience any
Year 2000 problems. See "Legal Proceedings" for more information about this
litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
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<PAGE> 23
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of October
31, 1998. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of October 31, 1998, the currency of our
Japanese subsidiary has strengthened and the currency of our other subsidiaries
have remained essentially stable since the end of our 1998 fiscal year. Because
we translate foreign currencies into U.S dollars for reporting purposes,
currency fluctuations can have an impact, though generally immaterial, on our
results. We believe that our exposure to currency exchange fluctuation risk is
insignificant primarily because our international subsidiaries invoice
customers, and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended October 31, 1998, there was an
immaterial currency exchange impact from our intercompany transactions. Currency
exchange risk is also minimized since foreign debt is due almost exclusively in
local foreign currencies. As of October 31, 1998, we did not engage in foreign
currency hedging activities.
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<PAGE> 24
PART II
ITEM 1
LEGAL PROCEEDINGS
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 21, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court is expected to rule on the
motion in January 1999. If the demurrer is overruled, we believe we have good
and valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions. However,
plaintiffs in these cases may seek leave to amend their complaints or appeal the
dismissal ruling and the ultimate outcome of any litigation is uncertain.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
Discovery is ongoing in the California actions. Discovery was stayed in the New
York actions pending hearings on the motions.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, as noted above, the ultimate outcome of any litigation is uncertain,
and either unfavorable or favorable outcomes could have a material negative
impact.
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<PAGE> 25
PART II: OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
Exhibit 10.01 Intuit Inc. 1998 Option Plan for Mergers and
Acquisitions, as adopted on November 11, 1998
(incorporated by reference to Exhibit 4.01 to Intuit's
Form S-8 registration statement filed on or about
December 14, 1998)
Exhibit 27.01 Financial Data Schedule (filed only in electronic
format)
(b) REPORTS ON FORM 8-K:
(i) On September 8, 1998, Intuit filed a Form 8-KA, Amendment No.
1, amending a Form 8-K initially filed on July 6, 1998, to
provide, under Item 7, pro forma financial information
relating to Intuit's acquisition of Lacerte.
(ii) On October 9, 1998, Intuit filed a Form 8-K to report, under
Item 5, certain amendments to Intuit's Stockholder Rights
Plan. No financial statements were filed.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: December 14, 1998 By: /s/ GREG J. SANTORA
--------------------------------------------
Greg J. Santora
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 27
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------- -----------
Exhibit 10.01 Intuit Inc. 1998 Option Plan for Mergers and Acquisitions, as
adopted on November 11, 1998 (incorporated by reference to
Exhibit 4.01 to Intuit's Form S-8 registration statement filed
on or about December 14, 1998)
Exhibit 27.01 Financial Data Schedule (filed only in electronic format)
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