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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended JULY 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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, including zip code)
(650) 944-6000
(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 October 5, 1999, there were 189,389,242 shares of the Registrant's common
stock, $0.01 par value, outstanding (as adjusted for a three-for-one stock
split, effected as a stock dividend, with a payment date of September 30, 1999).
This 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 $30.38 for
the common stock as quoted by the Nasdaq National Market on such date), was
approximately $5,164,541,002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in November 1999 are incorporated by reference into
Part III of this report on Form 10-K.
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FISCAL 1999 FORM 10-K
INTUIT INC.
INDEX
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ITEM Page
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PART I
ITEM 1: Business.................................................................. 3
ITEM 2: Properties................................................................ 19
ITEM 3: Legal Proceedings......................................................... 19
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........................................ 23
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................ 38
ITEM 8: Financial Statements and Supplementary Data............................... 39
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 66
PART III
ITEM 10: Directors and Executive Officers of the Registrant........................ 66
ITEM 11: Executive Compensation.................................................... 66
ITEM 12: Security Ownership of Certain Beneficial Owners
and Management......................................................... 66
ITEM 13: Certain Relationships and Related Transactions............................ 66
PART IV
ITEM 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................................ 66
Signatures .............................................................................. 70
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Intuit, the Intuit logo, Quicken, QuickBooks, QuickBooks Pro, TurboTax,
ProSeries, InsureMarket and Pocket Quicken, among others, are registered
trademarks and/or registered service marks of Intuit Inc. or one of its
subsidiaries. Quicken.com, QuickenStore, QuickenMortgage and Lacerte, among
others, are trademarks and/or service marks of Intuit Inc. or one of its
subsidiaries. Other parties' trademarks or service marks are the property of
their respective owners and should be treated as such.
Explanatory note: This Form 10K/A, Amendment No. 1, amends and restates Intuit
Inc.'s Annual Report on 10K for the fiscal year ended July 31, 1999. The purpose
of this amendment is to correct typographical errors and other
immaterial inaccuracies in Items 4A, and 6-8.
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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 and include the following (with details on
the referenced pages): Our revenue and earnings are highly seasonal, and our
quarterly and annual financial results can fluctuate significantly for other
reasons as well (page 27). We face intense competition from many companies in
all of our business areas, both domestically and internationally (page 14). We
expect Microsoft to enter the personal tax preparation market in the 1999 tax
year, and we may also face competition from the Internal Revenue Service and
state tax agencies (pages 14-16 and 30). Our Internet-based products and
services require us to successfully adopt, refine and operationally support a
new business model (page 5). We must continue to maintain important
distribution and website content relationships for our Internet businesses
(such as our relationship with Excite) and successfully market and promote our
Internet-based products and services (page 5). Internet businesses face risks
relating to customer privacy and security and increasing regulation (page 6).
Our Internet businesses require significant research and development and
marketing expenditures, and we expect that these expenses will increase
significantly as a percentage of revenue in fiscal 2000 (pages 26, 34 and 35).
The expansion of our Internet-based products has had a significant impact on
our development process (page 12). We hold significant investments that are
very volatile, and some of the volatility may impact our quarterly earnings
(pages 35-36 and 48-49). In order to succeed in the payroll business, we must
continue to improve the integration of the operations of our recently acquired
payroll processing service provider and expand availability for our online
payroll processing service (page 28). Our web-based tax preparation and
electronic filing services must handle extremely heavy customer demand during
the peak tax season (pages 29-30). Our online mortgage business is subject to
interest rate fluctuations (pages 10 and 31). Our recent acquisitions have
resulted in significant acquisition-related expenses (pages 6 and 34-35).
Problems related to the Year 2000 could have a significant adverse effect on
our operations (page 36). Business conditions in international markets, other
risks inherent in international operations, and changes in our business model
in Europe, may negatively impact our financial performance (pages 11 and 31).
The market price of our common stock has been volatile (page 23). Product
returns and product rebate redemptions might exceed reserves (pages 14 and 27).
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.
On September 8, 1999, Intuit's Board of Directors authorized a three-for-one
split of the outstanding Common Stock. This was accomplished by distributing a
stock dividend of two shares of Common Stock for each outstanding share to
stockholders of record on September 20, 1999. The stock dividend was paid on
September 30, 1999. All share and per share numbers in this Form 10-K have been
adjusted to reflect the stock split.
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BUSINESS OVERVIEW
ELECTRONIC FINANCE - CREATING A CONNECTED FINANCIAL WORLD
Intuit's mission is to revolutionize how people manage their financial
activities. As we execute our mission, we have embarked on a strategy to greatly
expand the world of electronic finance. "Electronic finance" encompasses three
types of products and services: (1) desktop software products, such as
Quicken(R), QuickBooks(R) and TurboTax(R), that operate on customers' personal
computers to automate financial tasks; (2) products and services, such as
Quicken.com(SM), QuickenMortgage(SM) and WebTurboTax(SM), that are delivered via
the Internet; and (3) products and services, such as QuickBooks Online
Payroll(SM) service, that connect Internet-based services with desktop software
to enable customers to integrate their financial activities.
BUSINESS STRATEGY
Intuit is uniquely positioned to deliver a connected vision of electronic
finance. We have proven expertise in creating technologies that simplify complex
financial matters for consumers and small businesses. In addition, we have a
large and loyal base of financially sophisticated customers, strong brand name
recognition and a strong financial position.
Following are some specific components of our electronic finance strategy and
examples of our progress in implementing our strategy during fiscal 1999:
1. CREATE AND EXPAND WEB-BASED BUSINESSES.
o In October 1998, we launched our QuickBooks Online Payroll
service, which gives QuickBooks small business customers a
convenient, quick and cost-effective payroll processing
alternative.
o During fiscal 1999, we significantly expanded our online
mortgage and insurance businesses as we broadened the scope and
depth of our Quicken.com personal finance website.
2. USE THE POWER OF THE INTERNET TO DELIVER ROBUST PRODUCTS AND SERVICES.
o For the 1998 tax year, our WebTurboTax online tax preparation
service offered the full features of our TurboTax desktop
software. Combined with electronic tax filing for federal and
most state returns, WebTurboTax provided customers a
fully-connected tax preparation solution.
o Our QuickBooks Online Payroll service interconnects with banks
and federal and state tax agencies to enable efficient payroll
processing. The service also interconnects with recent versions
of our QuickBooks software to automatically update the user's
QuickBooks records with the completed payroll data, creating a
compelling customer experience.
3. EXPAND OUR CUSTOMER BASE, AND INCREASE REVENUE PER CUSTOMER THROUGH
INCREMENTAL REVENUE SOURCES.
o During fiscal 1999, our Quicken customer base grew from 10
million to 11 million users, our QuickBooks customer base
expanded from approximately 2.1 million to 2.7 million small
businesses, and our personal tax customer base for federal form
1040 returns (including both desktop and online users) increased
by over 35%.
o Demand for our electronic tax filing service increased
dramatically, solidifying a new source of revenue for our
personal and professional tax businesses.
o During fiscal 1999, revenue for QuickBooks Support Network, our
fee-for-support service for QuickBooks customers, more than
doubled, while the service also helped us to control our
technical support costs.
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4. CONTINUE MARKET LEADERSHIP IN ACCOUNTING, TAX AND PERSONAL FINANCE
DESKTOP SOFTWARE.
o Our QuickBooks, TurboTax and Quicken desktop products all
continued to be the leaders in their respective retail desktop
software categories, despite increased competitive pressures.
Although fiscal 1999 was a successful year for Intuit in many respects, we
continue to face significant challenges and risks. For example, our
international operations are going through major transitions, and our Internet
businesses continue to require significant levels of investment. In addition,
competition is intensifying, particularly for our personal tax products, and for
many of our Internet-based businesses, where we face a wide range of potential
competitors, including banks and other financial institutions, financial portals
and narrowly focused competitors in mortgage and insurance. Our Quicken business
continues to be a good source of new customers, but is not directly contributing
to revenue growth. We encourage you to read this entire Form 10-K carefully to
better understand our business and our financial results, and the risks and
uncertainties we face.
OVERVIEW OF PRODUCTS AND SERVICES
For a number of years, we have provided a range of small business accounting,
tax preparation and consumer finance desktop software and financial supplies
(such as computer checks, envelopes and invoices) for individuals and small
businesses. Our traditional products include QuickBooks, TurboTax, Quicken,
ProSeries(R) and Lacerte(R) desktop software products. With the widespread
adoption of the Internet, we recognized that the intangible nature of financial
products and services make them uniquely suited for Internet distribution and
delivery. Accordingly, we have expanded our strategic focus to encompass
Internet-based products and services, including QuickBooks Online Payroll
service, WebTurboTax, QuickenMortgage and Quicken InsureMarket(SM). Details
about our products and services are provided beginning on page 7.
SPECIAL RISKS FOR INTERNET-BASED PRODUCTS AND SERVICES
We believe that the dramatic growth of the Internet will give us significant
opportunities to grow our revenue over the next several years. However,
Internet-based revenue (including Internet products and services and electronic
distribution) was only 15% of our total revenue during fiscal 1999. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations (also called "MD&A"), page 26. As we grow our Internet-based
businesses, related expenses have been, and will continue to be, significant,
and the financial resources of recently public competitors will continue to
increase. We face a number of risks that are unique to our Internet-based
businesses, including the following:
Our Internet-based products and services require us to successfully adopt,
refine and operationally support a new business model. The business model for
our Internet-based businesses contemplates revenues coming from advertising,
marketing, transaction and processing fees, rather than from software sales. Our
Internet businesses require different approaches to product development (see
"Product Development," pages 11-12) and marketing (see "Marketing, Sales and
Distribution," on pages 12-14). These businesses also depend on a different
operational infrastructure than our desktop software businesses, and we must
continue to develop new and continually evolving internal systems and procedures
to support these businesses and the complex 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. During fiscal 1999, due in part to the rapid growth in some of
these businesses, we had some operational performance issues, including issues
with our electronic tax filing service and the portfolio feature on our
Quicken.com website. See page 10, and MD&A, pages 29-30 and 33, for details
about these issues. We expect that we will face additional operational
challenges as we continue to expand our online businesses, and these could have
a significant impact on the success of these businesses.
We must continue to maintain important distribution and website content
relationships and successfully market and promote our products and services.
Website traffic is an important foundation for our Internet business model. We
have established important distribution relationships, such as our relationships
with Excite@Home, America Online and others, to help us continue to increase
traffic and related revenue. We also have important relationships with a number
of third parties to provide content on our websites to attract customers.
However, increased traffic may not
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necessarily result in increased revenue (primarily advertising revenue and
transaction fees) for our online businesses. In addition, our distribution
relationships require us to make significant financial commitments to these
companies. For example, the Excite@Home agreement currently calls for us to
share certain revenue generated from our Quicken.com site and the America Online
agreement calls for us to make significant guaranteed payments to America Online
over the term of the agreement. Also, due to the constantly evolving business
environment in which our Internet businesses operate, we may be required to
adapt some of our important business relationships in order to continue
benefiting from those relationships. We believe that to increase website
traffic, we may also be required to independently market and promote our
Internet-based products and services, in addition to relying on distribution
relationships. These marketing efforts may require significant additional
financial resources, given the intensely competitive environment, the increasing
financial resources and marketing efforts of some of our competitors, and the
low barriers to entry for many Internet-based businesses.
Internet businesses face risks relating to customer privacy and security and
increasing regulation. A significant risk for our Internet businesses is that
customers may refuse to transact business over the Internet due to privacy or
security concerns. 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, even by another
company, could have serious consequences for our Internet-based businesses.
Consumers' use of the Internet, particularly for commercial transactions, may
not 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, the growth of our Internet-based businesses would be hindered. In
addition, 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. To the extent that states or foreign countries are
generally successful in their efforts to impose taxes on Internet commerce, the
growth of the use of the Internet could slow substantially, which could slow the
growth of our Internet-based businesses. If Internet activity becomes heavily
regulated in other respects, that could have major negative consequences for the
growth of our Internet-based businesses.
RECENT TRANSACTIONS
During the past few years we made several acquisitions and investments to expand
our business more rapidly in selected areas, we have liquidated certain
investments to strengthen our cash position, and we have sold businesses that no
longer support our corporate strategy. Some of the most significant transactions
are described below. See the notes to the financial statements for more
information about these and other transactions.
Acquisitions. On October 7, 1999, we announced that we had reached a definitive
agreement to acquire Rock Financial Corporation, a leading provider of online
consumer mortgages through Rockloans.com. The acquisition is subject to a
variety of closing conditions, including approval by Rock's shareholders. See
pages 9 and 31, and Note 19 of the financial statements.
On May 3, 1999 we acquired Computing Resources, Inc. ("CRI"), a privately held
company based in Reno, Nevada, that had been the payroll processing service
provider for our online payroll business since it was launched in October 1998.
CRI was one of the country's largest payroll service companies and a leader in
providing payroll services to small businesses. The acquisition is resulting in
significant acquisition-related costs, as well as business integration
challenges common in all acquisitions, and risks unique to the payroll
processing business. See MD&A, on page 29, for a discussion of these issues and
Note 3 of the financial statements.
In June 1998, we purchased Lacerte Software Corporation, a leading provider of
tax preparation software and services for tax professionals. In August 1999, we
acquired SecureTax.com, Inc., a provider of online personal tax preparation and
electronic filing services. See Notes 3 and 19 of the financial statements.
Investments. In fiscal 1999, we invested $50 million in Security First
Technologies, which delivers enterprise-wide Internet applications for financial
institutions. In fiscal 1998, we participated in the formation of a joint
venture that is developing Web-oriented financial products and services. See
Note 5 of the financial statements. We have also made smaller strategic
investments in a number of other companies with technologies that may be
relevant to our businesses. See Notes 1 and 5 of the financial statements.
Divestitures. During fiscal 1999, we liquidated a significant portion of our
investment in Excite Common Stock, realizing a pre-tax gain of $549.9 million
(including $88.5 million in net gain from conversion of our remaining shares to
Excite@Home shares). See Note 1 of the financial statements. During fiscal 1997,
we sold our direct
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marketing consumer software subsidiary (Parsons) to allow us to increase our
focus in strategically important areas. See Note 4 of the financial statements.
Impact of Recent Transactions. Many of these transactions have had, and some of
them will continue to have, a significant impact on our financial results, which
may make period-to-period comparisons of our financial results less meaningful.
See MD&A, pages 26 and 34-36. In addition, our investments may experience
significant price volatility. See MD&A, page 35. 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.
Integrating and organizing these new businesses creates challenges for our
operational, financial and management information systems, and we must continue
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
goodwill and purchased intangibles (reflected in operating expenses), as well as
charges for in-process research and development. Acquisition-related expenses
were $39.0 million in fiscal 1997, $80.9 million in fiscal 1998 and $100.7
million in fiscal 1999. Additional acquisitions could have an incremental
negative impact on operating results. See MD&A, pages 34-36, for more
information on acquisition-related charges.
PRODUCTS AND SERVICES
Intuit offers products and services through four principal business divisions:
o SMALL BUSINESS DIVISION: Accounting software, financial
supplies, employer services (such as online payroll), technical
support consulting services and other related services.
o TAX DIVISION: Personal, professional and small business tax
preparation software, web-based tax preparation services and
electronic tax return filing.
o CONSUMER FINANCE DIVISION: Personal finance software, websites
and marketspaces and related services.
o INTERNATIONAL DIVISION: Small business, tax and consumer finance
products and services in selected foreign markets, with the
primary focus on small business customers.
SMALL BUSINESS DIVISION
QuickBooks and QuickBooks Pro(R) 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 products address the needs of small businesses in the
U.S. that are project, job or time based, that require a multi-user product
and/or that want more features (such as integration with Microsoft Office). In
June 1998, we launched the first multi-user version of QuickBooks Pro, which
addressed one of the most frequent customer requests for additional
capabilities. QuickBooks Pro 99, which was launched in January 1999, offers
seamless integration with Microsoft Excel and Microsoft Word software and
increased connectivity to online resources for small businesses through
QuickBooks.com.
Payroll Services. In October 1998, we introduced our QuickBooks Online Payroll
processing service. The service is offered through our newer QuickBooks products
and handles all aspects of payroll processing, including calculation and
electronic depositing of federal and state payroll tax withholdings, preparation
and filing of quarterly and annual payroll tax returns and creation of employee
W-2 forms, as well as electronic direct deposit of paychecks (sold separately).
The payroll service uses payroll data entered by customers into their QuickBooks
files and transmitted to Intuit electronically, and also transmits completed
payroll information back to the customers' QuickBooks files, so customer data
entry is minimized.
In connection with our online payroll service business, in May 1999 we completed
our acquisition of Computing Resources, Inc. ("CRI"), which had been our payroll
processing service provider since October 1998. CRI continues to provide
traditional payroll processing services for its customer base. While the payroll
processing business provides us with a significant opportunity to generate
revenues, it also introduces new risks. See Note 3 of the financial statements
for more details about the CRI acquisition, and MD&A, pages 28-29 for more about
the risks
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associated with the online payroll business.
In June 1999, we introduced QuickPayroll, a subscription-based payroll service
for customers who do not use QuickBooks. In addition, we offer a payroll tax
table subscription service for small business customers that need current tax
tables to prepare their own payroll.
Small Business Internet. Our Small Business channel on the Quicken.com website
addresses the specific needs of small businesses. We provide information, tools
and community discussion opportunities to QuickBooks customers as well as other
small businesses. The site is accessible from the Excite website and is also
accessible directly from QuickBooks 6.0 and QuickBooks 99 products. Small
business website revenues, which come primarily from advertising and sponsorship
fees, are not expected to be significant, or to offset expenses of the site, for
the foreseeable future.
The Internet is strategically important to the Small Business Division as a
vehicle for eventually delivering a range of small business services that have
connectivity with QuickBooks. Our QuickBooks Online Payroll service (discussed
above) is our first example of an Internet-delivered, accounting-connected
service. We expect to offer additional Internet-delivered services to our
QuickBooks customers during the next 12 months, working collaboratively with a
number of other companies to do so.
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 while helping us to control
technical support costs. During fiscal 1999, we continued to expand and improve
the quality of the services provided, and as a result it has become a growing
source of incremental recurring revenue for the Small Business Division.
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. During fiscal 1998, we launched a supplies
website to enable customers to order supplies online, which has reduced order
fulfillment costs and increased customer satisfaction. During fiscal 1999,
approximately 18% of supplies orders were generated by the website.
In September 1995, we entered into an exclusive five-year contract with John H.
Harland Co. to print all of our checks and other imprinted products. These
products accounted for about 60% of our supplies revenue in fiscal 1999. We
believe our relationship with Harland is strong, and the financial terms of the
contract are favorable to Intuit. However, if there are any problems with
Harland's performance, it could have a material negative impact on sales of
supplies and on Intuit as a whole. In addition, since the contract will
terminate in September 2000, Intuit will need to either renegotiate terms with
Harland or enter into a relationship with another vendor during the next year.
TAX DIVISION
Personal Tax Software. Our TurboTax (for Windows) and MacInTax(R) (for the
Macintosh) desktop products 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.
Web-Based Personal Tax Preparation and Electronic Filing Services. Our
WebTurboTax interactive tax preparation solution allows individual taxpayers to
prepare their federal and state income tax returns entirely online, with
essentially all of the functionality of our TurboTax desktop software. During
the 1998 tax season, WebTurboTax was offered directly by Intuit, as well as on a
co-branded basis by over 100 financial institutions. Users of our desktop and
web-based tax preparation software can file their federal (and many state) tax
returns electronically through our proprietary electronic filing center. Demand
for online tax preparation and electronic filing increased dramatically during
fiscal 1999. While we believe that the increasing popularity of the Internet
will provide future revenue growth opportunities for these Internet-based tax
offerings, there are also risks. See MD&A, page 29 for details about some of
these risks.
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During the 1998 tax year, we initiated the Quicken Tax Freedom Project, a
philanthropic public service initiative under which we provided online tax
preparation and electronic filing services at no charge to federal and state tax
filers with adjusted gross incomes of $20,000 or less. We plan to expand the
scope of this program during the 1999 tax year to include anyone who files a
Form 1040EZ.
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. 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. ProSeries and Lacerte customers can
electronically file their returns through our proprietary filing services. We
believe our ProSeries and Lacerte 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 Note
3 of the financial statements for more details about our June 1998 acquisition
of Lacerte.
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. Quicken
enables customers to reconcile bank accounts, record credit card transactions,
and track cash, investments, mortgages and other assets and liabilities. Our
Quicken 2000 products, which were launched in August 1999, incorporate a number
of Web integration features, such as direct links to 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. The product
line includes a bundled product called Quicken Financial Suite, which includes
Quicken Deluxe, TurboTax Deluxe federal, TurboTax state and Quicken Family
Lawyer products.
Quicken.com, QuickenMortgage and Quicken InsureMarket. Quicken.com is our
personal finance website. It enables customers to automate financial management
tasks and make better financial decisions by giving them software tools,
resources and objective information about a variety of personal finance topics,
in a single online destination. Quicken.com includes "channels" for
Home/Mortgage, Insurance, Investments, Taxes, Banking and Credit and other
financial areas, and includes prominent links to our online mortgage and
insurance marketspaces (described below). Quicken.com content is created by
Intuit as well as 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.
Our QuickenMortgage site provides a variety of tools and services relating to
home mortgages and allows consumers to shop for mortgages online. Users can
currently pre-qualify and apply for mortgages from 17 lenders nationwide. We
receive initial implementation fees, ongoing annual participation fees and
transaction-based fees (for origination services) from participating lenders.
Some lenders also pay us fees for data processing and other administrative
services. On October 7, 1999, we announced that we had reached a definitive
agreement to acquire Rock Financial Corporation, a leading provider of online
consumer mortgages through Rockloans.com. If completed, this acquisition will
allow us to provide customers the speed, efficiency and convenience of
Internet-based mortgage lending, as well as the ability to work directly with
an experienced lending team during every step of the process. Rock will perform
loan processing functions similar to those that are currently provided by
Mortgage.com under a Distribution, Marketing, Facilities and Services Agreement
with Intuit. This agreement with Mortgage.com will be terminated and phased out
over the next twelve months. The acquisition is subject to a variety of closing
conditions, including approval by Rock's shareholders. See MD&A, page 31, and
Note 19 of the financial statements.
Our Quicken InsureMarket site enables customers to educate themselves about, and
shop for, insurance products online. Users can currently receive real-time
quotes and apply for term life insurance from 10 national carriers. Real-time
auto insurance quotes are currently available in 33 states (about 80% of the
U.S. population), and on-line purchase for auto insurance is available from 3
carriers in 24 states (51% of the population). Quicken InsureMarket is currently
the only online insurance site that allows customers to purchase from multiple
auto insurance carriers online. We receive initial implementation fees, ongoing
annual participation fees and transaction-based fees (for referrals and
purchases) from participating carriers, and some carriers also pay us fees for
data processing and other administrative services.
We believe the long-term success of Quicken.com will depend on our ability 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 participation by
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financial institutions, since it tends to attract relatively more affluent,
financially savvy consumers that financial institutions are targeting for their
products and services. Accordingly, expansion of the investments channel
content, both through internal development and the acquisition of third party
content and technology, has been and will continue to be a high priority.
Although we have devoted significant resources to expanding our marketspaces,
our investments channel and other areas of Quicken.com (both through internal
development efforts and through acquisitions and strategic relationships), we
still face many risks and challenges. For example, we have established important
distribution relationships, such as our relationships with Excite@Home, America
Online and others, to help us continue to increase traffic and related revenue.
We also have important relationships with a number of third parties to provide
content on our websites to attract customers. Our distribution relationships
require us to make significant financial commitments to these companies. In
addition, due to the constantly evolving business environment in which our
Internet businesses operate, we may be required to adapt some of our important
business relationships in order to continue benefiting from those relationships.
As another example of risks we face, we rely on a single third party technology
provider to facilitate the electronic communications among lenders, customers
and our QuickenMortgage site. Failure by that party to perform these services
would require us to discontinue certain aspects of our mortgage service until an
alternative service provider could be located. This would have a serious
negative impact on the performance of the QuickenMortgage marketspace. In
addition, although we experienced a significant increase in our volume of closed
loans during fiscal 1999, the mortgage business is interest-rate sensitive. As
interest rates have risen during the past six months, the number of closed loans
per month has declined about 25% from its peak and the number of applications
per month has declined about 15% from its peak. If interest rates continue to
rise, this will most likely continue to impact the volume of closed loans and
applications. This impact could be exacerbated if we complete our proposed
acquisition of Rock Financial. See MD&A, page 31, and Note 19 of the financial
statements. The progress of auto insurance offerings on our InsureMarket site
has been hampered by the complexity of connecting to multiple insurance carriers
with various computer systems, the complexity of dealing with insurance
regulations in 50 states, and other challenges involved in working with large
insurance companies.
Total Quicken.com page views for the month of July 1999 were up approximately
78% compared to July 1998. While page view growth has been strong, traffic
volumes can vary significantly from month to month due to seasonal trends, site
performance, the timing of launches, competitors' activities and other factors.
The continued expansion and customer utilization of Quicken.com will require
improvements in site performance, and in the scalability and reliability of the
underlying technology. Like almost all companies doing business on the Internet,
we experience occasional system outages. For example, during July 1999,
customers were unable to access the portfolio tracking features on the site for
several days. Lengthy and/or frequent service interruptions may cause us to lose
a significant number of customers in the short-term, and damage our reputation
over the longer-term. In order to continue expanding our Quicken.com customer
base, we may need to significantly increase our marketing expenses, particularly
given the competitive environment and the resources and marketing efforts of
some of our competitors.
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
Corporation or participating financial institutions. During fiscal 1999, we
began offering a beta test version of online bill payment and presentment
through Quicken.com. The service was developed and is owned by a joint venture
in which Intuit is a participant, and is offered on Quicken.com through a
licensing arrangement with the joint venture. See Note 5 of the financial
statements for more information about the joint venture. Online transaction
revenues come primarily from advertising and marketing fees paid by
participating financial institutions.
In addition to these revenue-generating activities, one of the primary goals of
our online transactions business is to promote the adoption of an Internet-based
electronic communications link between our software products and financial
institutions. This link is based on a communications standard called Open
Financial Exchange(TM), which we refer to as "OFX." While we believe that OFX
is the right strategic approach for us, we face risks and challenges in
implementing it. Financial institutions may not implement OFX as rapidly as we
would like, or they may adopt alternative connectivity standards that do not
support interoperability with OFX. If competing standards are adopted and
supported by financial institutions, we may need to incur significant expenses
to alter our products.
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INTERNATIONAL DIVISION
Our International Division is divided into three regions: Japan, Europe and
Asia/Pacific. The performance of our international operations during the past
several years has been disappointing. In response, we have restructured certain
operations to make them more efficient, we have narrowed our strategic focus to
fewer products (primarily small business products) in fewer markets, and we
recently entered into a comprehensive third party development, marketing and
distribution arrangement in Germany. 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. See MD&A, page 31,
for a discussion of the potential impact of these changes on the financial
performance of our international operations.
Japan Region. Our Japanese subsidiary currently offers small business products
developed by Milkyway KK (acquired in January 1996) and Nihon Micom (acquired in
March 1997) that address the upper and middle segments of the small business
market in Japan, as well as a localized version of QuickBooks, which we launched
in fiscal 1999, that is targeted at the lower end of the small business market.
Europe Region. We serve selected European markets and South Africa with
localized versions of our products through our office in the United Kingdom, and
through a distribution relationship in Germany. During fiscal 1999, we entered
into a localization, manufacturing, licensing and distribution arrangement with
Lexware (a subsidiary of Rudolf Haufe Publishing), a leading business software
company in Germany, under which Lexware will develop and market products and
services for Intuit in Germany under the Intuit brand beginning in fiscal 2000.
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.
Special Risks for International Operations. Conducting business internationally
involves many risks, including longer accounts receivable collection cycles;
difficulties in managing operations in different locations; unanticipated
changes in foreign regulatory requirements; potential volatility in the
political and economic conditions of foreign countries; fluctuations in foreign
currency exchange rates; and additional challenges in the product development
process. For example, the economic situation in Japan had a negative impact on
international revenue and profits during fiscal 1998 and 1999. We introduced our
first release of QuickBooks in Japan in September 1998 in an effort to target a
lower-priced market than our other small business products reach in Japan.
However, the overall market for small business products and services in Japan
continues to suffer. Also, developing and localizing products for foreign
markets involves more risk, and is more time-consuming and costly than
developing products for the U.S. market. Delays or other problems in product
launches may be more likely because of these factors, and they can impact our
financial performance. For example, we experienced product launch delays in
Germany in fiscal 1998 and fiscal 1999, which contributed to revenue declines in
certain quarters.
PRODUCT DEVELOPMENT
We seek to design products and services that will appeal to our large existing
customer bases as well as to new customers. For existing customers we focus on
both upgrades of products they already own, as well as complementary products
and services that can drive additional, and often recurring revenue, from our
core products. Examples of incremental revenue sources include financial
supplies and online payroll services for our QuickBooks customers, electronic
filing and state tax products for our TurboTax customers, and supplies and
Quicken.com marketspaces for our Quicken customers. 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.
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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, the QuickenMortgage and Quicken InsureMarket marketspaces, the
QuickBooks Online Payroll service, and online tax preparation and electronic tax
filing. Our total research and development expenses as a percentage of net
revenue were approximately 16% in fiscal 1997, 18% in fiscal 1998 and 17% in
fiscal 1999.
The development process for our products and services is complex and involves
some risks. 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. 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 expansion of our Internet-based products and services 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. In addition, Internet-based products and services
must incorporate technology to address customer concerns about privacy and
security. 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.
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 changes also affect our tax table service and our
online payroll service. We can't predict how complex the tax law changes will be
each year, when the changes will be made, or when the tax forms that we include
in our products will be available from the IRS and state tax agencies. The rigid
development timetable increases the risk of errors in the products. Although tax
product quality has been high in recent years, any major defects could lead to
negative publicity, customer dissatisfaction and incremental operating expenses.
We guarantee the accuracy of the tax calculations performed by all of our
personal tax products and we reimburse any penalties and interest paid by
consumer customers to the Internal Revenue Service or any state tax agency
solely as a result of miscalculation on a form prepared using our personal tax
products. If 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.
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. Although we have
been successful in recent years in getting products to market in a timely
manner, a late release in any year could cause our current and prospective
customers to choose a competitive product for that year's tax season. This would
result in lost revenue in the current year and would make 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. In particular, the Internet has greatly
enhanced the ability of customers to make product and price comparisons,
shifting more power to consumers. Market and industry changes can quickly render
existing products and services obsolete, so our marketing success depends on our
ability to respond
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rapidly to these changes with new or enhanced products and services, new
distribution methods, different competitive strategies and other appropriate
changes to the way we do business.
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. 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. (12% in fiscal 1997, 15% in fiscal 1998 and 16% in fiscal 1999). As part of
our retail sales efforts, we often offer rebates to distributors and retailers,
as well as to consumers, to stimulate demand.
During fiscal 1998 and 1999, our personal tax business benefited from
particularly strong relationships with 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 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 2000 and beyond, particularly given Microsoft's expected entrance into
the personal tax market. See "Competition," on pages 14-16.
There is an increasing number 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 result in a significant decline in our net revenue. 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 expenses if uncollectable amounts exceed the bad debt reserves we have
established.
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 often 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. We have historically used OEM arrangements extensively for our
Quicken software. We began selling QuickBooks through OEM channels during fiscal
1999, and expect to expand our OEM distribution channel for the small business
accounting market.
In Japan, Europe and other international markets, we rely on distributors,
value-added resellers ("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.
DIRECT DISTRIBUTION
We believe that direct sales campaigns are an effective way to generate software
orders, stimulate retail demand and generally increase consumer awareness of our
products. We use targeted direct-mail and telephone solicitations,
direct-response newspaper and magazine advertising, and television and radio
advertising to encourage direct sales and to boost overall product launch
results. 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. During
fiscal 1999 we developed a corporate/franchise direct sales program for our
QuickBooks product line to make QuickBooks products available to many individual
users under a corporate or franchise license.
Direct marketing campaigns are one of the most effective ways to encourage
software upgrades and the purchase of new products and services by existing
customers. Our customer database is one of our most valuable assets, providing a
powerful tool for cross-selling products and services and driving traffic to our
Internet marketspaces.
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Almost 50% of our registered Quicken and QuickBooks customers have also
purchased other products and services from us.
Direct sales make up a significant portion of total desktop software revenue. In
addition, some of our products and services, including financial supplies,
QuickBooks Support Network and payroll services, are sold only through direct
channels.
ELECTRONIC ORDERING AND DISTRIBUTION
Electronic ordering is quickly becoming a preferred way of buying software for
many of our customers. Electronic ordering and delivery are convenient for
customers and more cost-efficient for Intuit. Currently we have a consumer store
(QuickenStore.(SM)com), a site devoted to small businesses (IntuitMarket.com)
and a service web site linked to both commerce sites. Electronic delivery has
been a particularly effective method of distribution for our TurboTax state tax
preparation products. Customers can also order financial supplies through
IntuitMarket.com. During fiscal 1999, approximately 6% of our total net revenue
was generated by products ordered and/or delivered electronically, compared to
only 2% in fiscal 1998, and we expect this percentage to increase substantially
in fiscal 2000.
ADVERTISING AND SPONSORSHIP SALES
A small but increasing portion of our revenue comes from the sale of advertising
and sponsorships on Quicken.com, as well as advertising within our desktop
products. These types of revenue require skills associated with media and
services sales, which have not historically been a core competency of Intuit,
and which are different from the skills required for sales of desktop software
through traditional retail and direct distribution channels.
PRODUCT RETURNS
Like most 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 cause
our net revenue to decline. 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
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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 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
Intuit customers), and release new products before we do. Any of these events
(particularly any prolonged price competition) could result in lower net revenue
and/or lower profitability. 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, which was recently acquired by Sage Group PLC, a
major accounting software competitor in the United Kingdom and Germany. We also
face potential competition from web-based accounting software being developed by
competitors. Despite competitive pressures, according to statistics published by
PC Data, QuickBooks accounted for more than 80% of retail dollar sales of small
business accounting software from August 1998 through July 1999.
Our QuickBooks Online Payroll service, as well as CRI's payroll service, compete
with traditional payroll services offered by a number of companies, including
Paychex and ADP, as well as with online payroll services. Because of the
efficiency of Intuit's Internet-delivered, accounting software-connected payroll
service, we can sell payroll services for significantly less than the price of
traditional services. If more competitors begin offering online payroll
services, we would expect increasing price competition.
Our financial supplies business competes with a number of business forms
companies, such as New England Business Services and Deluxe Business Systems, as
well as with direct mail check printers and banks and, more recently, a number
of small-scale Internet-based printing companies. In addition, our QuickBooks
products have some 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, continuing price pressures could negatively
affect revenue and profitability for our supplies business.
TAX DIVISION
In desktop personal tax software, our major domestic competitor is currently H&R
Block, the makers of TaxCut software. Competition has been intense, and
increasing, over the past several years. Our share of retail sales declined
during fiscal 1999, to approximately 70%. However, our decision to compete less
aggressively on price allowed us to improve the profitability of our personal
tax business. We expect competition to remain fierce during fiscal 2000,
particularly with Microsoft's expected entrance into this market during the
upcoming tax season. Microsoft is a formidable competitor. Although its presence
in the personal tax market may stimulate overall growth in the market, it may
also lead to intense pricing pressures, and could adversely impact our ability
to negotiate advantageous terms with major retailers.
The web-based tax preparation market is a new market, and we expect the
competitive landscape to shift rapidly as more competitors enter the market. In
August 1999, we acquired SecureTax.com, which provides online tax preparation
and electronic filing services. There may be further consolidation as
competitors seek to establish solid positions quickly.
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
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have seen substantial consolidation. We believe our acquisition of Lacerte in
June 1998 improves our competitive position in professional tax.
Federal and state tax agencies have taken an increasingly active role in
encouraging taxpayers to use electronic tax preparation and filing services.
These services are increasingly available through the private sector. For
example, during the 1998 tax year, Intuit's Quicken Tax Freedom Project donated
online tax preparation and filing for taxpayers with $20,000 or less of income,
and we expect to expand the program for the 1999 tax year. However, the Internal
Revenue Service and various state tax agencies may still take additional steps
to provide government-subsidized tax preparation and filing services. Future
regulatory and legislative activity in this area may impact Intuit's competitive
position, as well as others in the tax preparation industry.
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 and 1999, Quicken revenue and
profitability have 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 30). 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 1998 through July 1999, 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 are able to expand their
businesses onto the Internet because of the low barriers to entry in many areas.
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 Microsoft's Money Central. We also face
increasing competition from financial institutions that are developing their own
financial software and websites - including companies that currently purchase
advertising from us. Our mortgage and insurance marketspaces compete primarily
with smaller companies with a very narrow product focus, although Microsoft is
also a competitor in the mortgage area. For example, QuickenMortgage competes
with E-LOAN, Mortgage.com and IOwn, and Quicken InsureMarket competes with
Insweb and Quotesmith. Several of our marketspace competitors have recently
raised capital in initial public offerings and have funds to expand and
accelerate their product development and marketing efforts. This could increase
the competitive environment. 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 until May 2008. See "Special Risks for Internet-Based
Products and Services," on pages 5-6, 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 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
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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 cannot respond promptly to all customer requests for assistance.
During fiscal 1999, certain customers experienced significantly longer than
expected "hold" times for customer service and/or technical support because our
staffing was inadequate to handle higher than anticipated call volume. 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 our
products have bugs. When we experience customer service and support problems,
they can adversely affect customer relationships and our financial performance.
See MD&A, pages 33-34.
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 33.
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
the past three fiscal years, eliminating support for older versions of some
products and, in fiscal 2000, charging for support on current products (other
than for installation or product bug issues). Revenues from our fee-for-support
programs have grown rapidly but they have not been a significant portion of
total net revenue to date. However, the programs have helped to control
technical support costs. In addition, 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 an
important source of recurring revenue.
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. In August 1999 we entered into a manufacturing and distribution
agreement with Modus Media International, Inc. that will cover all outsourced
aspects of the fiscal 2000 retail launches of Quicken, QuickBooks and TurboTax.
Modus has provided similar services to us on a more limited scale in the past,
and has operations in multiple locations to provide redundancy. While we believe
that using a single vendor for our three primary retail product launches will
improve the efficiency and reliability of our product launches, reliance on one
vendor can have severe negative consequences if the vendor fails to perform for
any reason.
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 believe that backlog is not an important measure of
future sales.
GOVERNMENT REGULATION
Some of our products and services are regulated businesses under federal or
state laws that do not apply to most software companies. We offer several
regulated products and services through separate subsidiary corporations.
Intuit's Quicken Investment Services, Inc. subsidiary (or "QISI") is registered
as an investment adviser with the SEC 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. The business activities of Interactive Insurance
Services, Inc. ("IIS"), which operates the Quicken InsureMarket website, are
subject to state insurance regulations. Intuit's QuickenMortgage
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service is offered by a subsidiary called Intuit Lender Services, Inc. (or
"ILSI"), which is subject to state mortgage and loan broker regulations.
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. In addition, federal and state
regulations may restrict the business practices of these subsidiaries in a
variety of areas, including advertising and distribution arrangements.
Our Quicken products allow customers of participating brokerages to trade
securities through their broker's website. Quicken InsureMarket may expand our
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 does not subject Intuit to direct
government regulation. However, it is 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
harm 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.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark and trade secret laws,
and employee and third-party nondisclosure and license 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 do not have
significant copy-protection mechanisms in our software because we do not believe
they are practical or effective at this time. Current U.S. laws that prohibit
copying give us only limited practical protection from software "pirates," and
the laws of many other countries provide very little protection for our
copyright 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 desktop and 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 perpetually at 10-year intervals.
We do not own all of the software and other technologies used in our products
and services, but we have the licenses from third parties that we believe are
necessary for using that technology in our current products. It may be necessary
to renegotiate with such third parties for inclusion in any new versions of our
current products or any new products. Such third party licenses may not be
available on reasonable terms, or at all. We do not 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
our products, or our use of certain trademarks, may infringe their propriety
rights. Past claims have not resulted in any significant litigation, settlement
or licensing expenses, but future claims could. Third parties may assert
infringement claims against us in the future, and claims could result in costly
litigation or require us to obtain a license to intellectual property rights of
third parties. Third party licenses may not be available on reasonable terms, or
at all.
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<PAGE> 19
EMPLOYEES
As of September 30, 1999, Intuit and its domestic subsidiaries had about 3,675
full-time employees, and our international subsidiaries had about 350 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 occupying about 270,000 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 is expected to be completed over
the next year. In June 1996, we relocated our San Diego operations to new
offices (approximately 140,000 square feet) under a "build-to-suit" lease.
During fiscal 1999, a 71,000 square foot second building (including a computer
center) was constructed under the San Diego build-to-suit lease. Intuit also has
a 60,000 square foot manufacturing and distribution facility in San Diego. See
Note 8 of the financial statements for information about our lease commitments.
We also own facilities in Fredericksburg, Virginia, and we lease or own
facilities in a number of other locations, including Tucson, Arizona (for
customer service call centers), Alexandria, Virginia (where our IIS subsidiary
is located), Dallas, Texas (where our Lacerte subsidiaries are located), Reno,
Nevada (where the headquarters for our CRI subsidiary are located) and in
Canada, England and Japan. During fiscal 1999, two buildings were completed
under a "build-to-suit" lease totaling approximately 135,000 square feet on
property located in Tucson, Arizona. In fiscal 1999, a 45,000 square foot
customer service and technical support facility was constructed 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 facilities as needed.
ITEM 3
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 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. The plaintiffs seek compensatory damages, disgorgement of profits, and (in
some cases) attorneys' fees. See MD&A, page 36, for a discussion of Intuit's
status and plans with respect to Year 2000 compliance.
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<PAGE> 20
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs filed a Third Amended Complaint and Intuit filed a demurrer in
response to it, seeking dismissal of the complaint. We believe we have good and
valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the past year, a suit was filed in the
Contra Costa County, California Superior Court by an individual consumer against
various retailers, including Circuit City Stores, CompUSA, Fry's Electronics,
Office Depot, The Good Guys and others, alleging that these retailers have sold
software and hardware products which are not Year 2000 compliant, including at
least one product published by Intuit. One of the defendants in this action,
Fry's Electronics, filed a cross-complaint against various software publishers
and hardware manufacturers, including Intuit, asserting a claim for indemnity in
the main action. In September 1999, Fry's Electronics reached a settlement with
the plaintiffs. The cross-complaint is still pending. The response to the
cross-complaint is due on October 11, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows our current executive officers and their areas of
responsibility. Biographies are included after the table. On September 27, 1999,
William H. Harris, Jr. resigned as President and Chief Executive Officer, and
Intuit's current Chairman and former President and Chief Executive Officer,
William V. Campbell, assumed the role of Acting Chief Executive Officer. Mr.
Campbell will assume day-to-day operations of Intuit pending selection of a new
Chief Executive Officer. Mr. Harris will remain on the Board of Directors, and
will assist Mr. Campbell and the Board in the search for a new Chief Executive
Officer.
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<PAGE> 21
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
--------------------
William V. Campbell 59 Chairman of the Board of Directors; Acting Chief Executive
Officer
Scott D. Cook 47 Chairman of the Executive Committee of the Board of Directors
Eric C.W. Dunn 41 Senior Vice President and Chief Technology Officer
Alan A. Gleicher 46 Senior Vice President, Sales and International Division
Mark R. Goines 46 Senior Vice President, Consumer Finance Division
James J. Heeger 43 Senior Vice President, Small Business Division
David A. Kinser 48 Senior Vice President, Operations
Greg J. Santora 48 Senior Vice President, Finance and Corporate Services; Chief
Financial Officer
Raymond G. Stern 38 Senior Vice President, Strategy, Corporate Development &
Administration
Larry J. Wolfe 48 Senior Vice President, Tax Products Division
Catherine L. Valentine 47 Vice President, General Counsel and Corporate Secretary
Linda Fellows 51 Treasurer and Director of Investor Relations
</TABLE>
Mr. Campbell was elected to Intuit's Board of Directors in May 1994 and
currently serves as Chairman of the Board. He has served as Acting Chief
Executive Officer since September 27, 1999, and he also 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) and
Apple Computer, Inc. (a computer 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. Mr. Cook also serves on the board of directors of Amazon.com, Inc. (an
online merchant) 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. 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 and
assumed responsibility for the International Division in September 1999. 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. 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
21
<PAGE> 22
that was acquired by Intuit in 1993). 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 was also responsible for the International Division from November
1997 to September 1999. 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. Mr. Heeger received a Bachelor of Science degree in 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. 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. Santora became a Senior Vice President, Finance and Corporate Services in
March 1999. He has served as Intuit's Chief Financial Officer since July 1997.
He served as Vice President of Finance from November 1996 to March 1999. 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. 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.
Mr. Stern became Intuit's Senior Vice President, Strategy, Corporate Development
and Administration in March 1999. He 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 legal and other administrative 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. Mr. Wolfe holds a Bachelor of Science degree in business administration
from the University of Southern California and is a certified public accountant.
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 holds
Bachelor of Arts degrees in finance and economics from the University of
Illinois and a Juris Doctorate from the University of Chicago.
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.
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<PAGE> 23
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 October 5, 1999, the closing price of Intuit's Common Stock was
$30.38. All prices have been adjusted to reflect a three-for-one stock split
effective September 30, 1999.
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 27), 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.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1998
First quarter.................. $11.92 $ 7.96
Second quarter................. 13.75 9.04
Third quarter.................. 17.79 13.04
Fourth quarter................. 22.17 15.00
FISCAL YEAR ENDED JULY 31, 1999
First quarter.................. $17.04 $11.40
Second quarter................. 32.77 16.63
Third quarter.................. 36.75 25.69
Fourth quarter................. 32.75 24.25
</TABLE>
STOCKHOLDERS
As of October 1, 1999, we had approximately 740 record holders of our common
stock, and about 36,600 beneficial holders.
ANNUAL MEETING OF STOCKHOLDERS
We recently announced that we have moved up the date of our next Annual Meeting
of Stockholders, which generally is held in January, to November 30, 1999. Any
stockholder who wishes to bring a proposal before the November 30, 1999, Annual
Meeting of Stockholders was required to provide written notice of the proposal
to our Corporate Secretary, at Intuit's principal executive offices, by October
1, 1999.
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<PAGE> 24
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, and
do not anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On May 3, 1999 we issued 866,418 shares of our common stock as partial
consideration for our acquisition of Computing Resources, Inc., a leading
payroll services company based in Reno, Nevada. Intuit issued these shares to
CRI's two founders in connection with the merger transaction in which CRI became
a wholly-owned subsidiary of Intuit. The shares issued by Intuit in this
transaction were offered and sold solely to the two founders of CRI in exchange
for the transfer of their entire ownership interests in CRI in the merger. The
shares of Intuit common stock issued in the CRI merger were issued without
registration under the Securities Act of 1933, as amended (the "1933 Act") in
reliance on the exemptions afforded by Section 4(2) of the 1933 Act and/or Rule
506 of Regulation D promulgated under the 1933 Act. In relying upon the these
exemptions, Intuit took into account the limited number of only two CRI
shareholders, the limitation of Intuit's offering to these shareholders, the
information regarding CRI, Intuit and the merger furnished to the shareholders,
the representation of CRI and the two shareholders by legal counsel in
connection with the transaction and representations and warranties made by CRI
and its shareholders to Intuit in connection with the transaction. Intuit has
filed a Registration Statement on Form S-3 covering the resale of these
securities.
On August 2, 1999 we issued 299,940 shares of our common stock as partial
consideration for our acquisition of Boston Light Software Corporation, a
Massachusetts corporation that provides electronic commerce tools for small
businesses. Intuit issued these shares to five principal stockholders in
connection with the merger transaction in which Boston Light became a
wholly-owned subsidiary of Intuit. The shares issued in this transaction were
issued without registration under the 1993 Act in reliance on an exemption under
Section 3(a)(10) of the 1933 Act, after a hearing on the fairness of the
transaction. The California Department of Corporations issued a Permit for
Qualification of the Securities under Section 25121 of the California Corporate
Securities Law of 1968.
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<PAGE> 25
- --------------------------------------------------------------------------------
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 acquisitions and dispositions of businesses
and sales of marketable securities. 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 40. This table has
been restated to reflect the impact of a three-for-one stock split, which became
effective on September 30, 1999. See Notes 9 and 19.
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenue ..................................... $ 419,160 $ 538,608 $ 598,925 $ 592,736 $ 847,568
Income (loss) from continuing operations ........ (44,296) (14,355) (2,932) (12,157) 376,549
Net income (loss) ............................... (44,296) (20,699) 68,308 (12,157) 376,549
Basic income (loss) per share from continuing
operations .................................. (0.36) (0.11) (0.02) (0.08) 2.06
Basic net income (loss) per share ............... (0.36) (0.15) 0.49 (0.08) 2.06
Diluted net income (loss) per share from
continuing operations ....................... (0.36) (0.11) (0.02) (0.08) 1.97
Diluted net income (loss) per share ............. $ (0.36) $ (0.15) $ 0.48 $ (0.08) $ 1.97
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments ...................... $ 197,775 $ 198,018 $ 205,099 $ 382,832 $ 823,430
Marketable securities ........................... -- -- -- 499,285 431,319
Working capital ................................. 164,281 169,724 243,195 605,456 804,650
Total assets .................................... 398,605 418,020 663,676 1,498,596 2,328,248
Long term obligations ........................... 8,770 5,583 36,444 35,566 36,308
Total stockholders' equity ...................... $ 280,399 $ 299,235 $ 415,061 $ 1,088,361 $ 1,510,810
</TABLE>
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<PAGE> 26
- --------------------------------------------------------------------------------
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 and include the risks identified in the
first paragraph on page 3.
OVERVIEW
In this 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 40.
Revenue for fiscal 1999 was $847.6 million, compared to $592.7 million in fiscal
1998-an increase of 43%. Excluding the impact of our Lacerte and CRI
acquisitions, revenue growth in fiscal 1999 would have been 27%. We reported net
income of $376.5 million for fiscal 1999, including $579.2 million in pre-tax
net gains from marketable securities. In fiscal 1998 we had a net loss of $12.2
million. Excluding net gains from marketable securities, discontinued
operations, gains from divestitures, acquisition-related costs and restructuring
charges, net income would have been $88.9 million in fiscal 1999 and $46.7
million in fiscal 1998.
While desktop software and financial supplies continued to provide most of our
revenue in fiscal 1999, our Internet-based revenue grew rapidly. As the Internet
has continued to change the way we do business, we have increased our investment
in Internet initiatives. Intuit's mission is to revolutionize how people manage
their financial activities. As we execute our mission, we have embarked on a
strategy to greatly expand the world of electronic finance. "Electronic finance"
encompasses three types of products and services: (1) desktop software products,
such as Quicken, QuickBooks and TurboTax, that automate financial tasks; (2)
products and services, such as Quicken.com, QuickenMortgage and WebTurboTax,
that are delivered via the Internet; and (3) products and services, such as
QuickBooks Online Payroll service, that connect Internet-based services with
desktop software to enable customers to integrate their financial activities.
See "Overview" in Item 1, Part I of this Form 10-K (page 4) for additional
information on our business strategy. Within our electronic finance framework,
we use the term Internet-based revenue to include revenue from both
Internet-enabled products and services as well as revenue from electronic
distribution. Internet products and services 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, online payroll service revenue 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.
While we believe the Internet provides an opportunity to increase revenue in
fiscal 2000, we also anticipate increased spending in an effort to capitalize on
new business opportunities. In particular, we expect increased research and
development expenses due to investments in Internet-based initiatives. We also
anticipate increased selling and marketing expenses related to these initiatives
and as a result of more intense competition in the personal tax market during
fiscal 2000. Internet-based revenue was approximately 15% of total revenue for
fiscal 1999 (approximately 9% for Internet products and services, and 6% for
electronic distribution). Internet-based revenues
26
<PAGE> 27
cut across all of our business divisions. As a result, we do not report
Internet-based revenues separately in our financial statements; instead, each of
our business divisions reports Internet-based 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 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
operating expenses to develop and manage products and services continue during
these periods. This can result in significant operating losses in the July 31
and October 31 quarters. Operating results can also fluctuate for other reasons
such as changes in product release dates, non-recurring events such as
acquisitions, dispositions, gains and losses from marketable securities, and
product price cuts in quarters with relatively high fixed expenses.
Acquisitions and dispositions in particular have a significant impact on the
comparability of both our quarterly and yearly results, and our acquisitions
have had a negative impact on earnings. Acquisition-related charges were $100.7
million in fiscal 1999, $80.9 million in fiscal 1998 and $39.0 million in fiscal
1997, and will continue to impact earnings for the next several years.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for
fiscal years 1999, 1998 and 1997. Results for 1997 exclude all revenues and
expenses for 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 when comparing fiscal 1997 to fiscal 1998. Fiscal 1999
and fiscal 1998 results are being presented and compared on a generally accepted
accounting principles ("GAAP") basis, since neither year includes operating
activity from our divested Parsons subsidiary. Fiscal 1999 results include
operating activity from our Lacerte subsidiary which was acquired in June 1998
and three months of activity from our CRI subsidiary which was acquired in May
1999. CRI's operating activities are not included in either our fiscal 1998 or
1997 results. Fiscal 1998 results include approximately six weeks of Lacerte's
operations representing activity from the date of acquisition through our fiscal
year end in July 1998. Lacerte's operating activities are not included in our
fiscal 1997 results.
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 or rebate redemptions are
significantly higher than our estimated reserves, this could have a material
negative impact on our revenue and operating results. See Note 1 for additional
information regarding net revenue.
NET REVENUE
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, as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 CHANGE 1998 CHANGE 1999
-------------------------------------------------------------------------
(Excluding Parsons) (GAAP) (GAAP)
<S> <C> <C> <C> <C> <C>
Software and related services ..... $ 438.6 14% $ 498.3 49% $ 741.4
% of net revenue .................. 83% 84% 87%
Supplies .......................... $ 86.9 9% $ 94.4 12% $ 106.2
% of net revenue .................. 17% 16% 13%
Total ............................. $ 525.5 13% $ 592.7 43% $ 847.6
</TABLE>
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<PAGE> 28
The following revenue discussion is categorized by our business divisions, which
is how we examine results internally. Our domestic supplies business is
considered a part of our Small Business Division while the international
supplies business is considered part of our International Division. Each
business division's percentage of total consolidated revenue for fiscal 1999 is
as follows:
<TABLE>
<CAPTION>
BUSINESS DIVISION % OF REVENUE
----------------- -------------
<S> <C>
Small Business 35%
Tax 40%
Consumer Finance 16%
International 9%
---
Total 100%
===
</TABLE>
For more information regarding our business segments, see Note 6.
During the fiscal year ended July 31, 1999, our overall revenue increased by 43%
compared to fiscal 1998. A large portion of this growth is the result of our
acquisition of Lacerte Software in June 1998 and the inclusion of a full year of
Lacerte's operations in our results for fiscal 1999, compared to the inclusion
of approximately six weeks of Lacerte operating results for fiscal 1998. In
addition, fiscal 1999 revenue included three months of operating results from
our acquisition of CRI in May 1999. If, for comparison purposes, we were to
exclude the impact of Lacerte in fiscal 1999 and 1998 results, and also exclude
the impact of CRI from fiscal 1999 results, overall revenue growth would have
been 27% in fiscal 1999 compared to fiscal 1998. This reflects continued growth
in our Small Business Division, a successful year of tax product sales and the
growth of Internet initiatives across the company in fiscal 1999. For 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, our revenue in fiscal 1998 would have been 13%
higher than in fiscal 1997.
Small Business Division. Small Business Division revenues come primarily from
the following sources:
o QuickBooks product line
o Supplies products (including checks, envelopes and invoices)
o Payroll related transaction and subscription fees
o Support fees for the QuickBooks Support Network
Overall, revenue for the division increased 40% in fiscal 1999 compared to
fiscal 1998. This increase was largely due to the timing of recent QuickBooks
releases that occurred in June 1998 (version 6.0) and January 1999 (QuickBooks
99), and the inclusion of three months of revenue from CRI in fiscal 1999
results. Prior to the QuickBooks releases, we had not launched a new version of
QuickBooks since December 1996 (version 5.0). As a result, fiscal 1999 compares
favorably to fiscal 1998, which did not realize the benefit of a new QuickBooks
product release for the majority of the fiscal year. Fiscal 1999 revenues also
benefited from an increase in revenue per customer, due primarily to an
improvement in the mix of QuickBooks sales toward higher priced, greater
functionality products.
Domestic supplies revenues, which are part of the Small Business Division, grew
by 13% in fiscal 1999 compared to fiscal 1998 as a result of our increasing base
of small business customers who use QuickBooks and Quicken. Though they are a
smaller component of Small Business Division revenues, when compared to domestic
supplies revenues, tax tables service revenue and QuickBooks Support Network
revenues also increased substantially in fiscal 1999 compared to fiscal 1998.
In October 1998, we introduced QuickBooks Online Payroll service. The service is
offered through our QuickBooks Pro products (version 6.0 and QuickBooks 99) and
performs all aspects of payroll processing. To support the payroll service we
have made significant systems and infrastructure investments and have incurred
activation and set-up costs for new payroll service customers. We expect the
QuickBooks Online Payroll service to remain unprofitable until we are able to
accumulate a large number of subscribers who have used the service long enough
for us to recover up-front costs related to the service.
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<PAGE> 29
In connection with this new payroll service business and consistent with our
strategy to expand products and service offerings to our small business
customers, we completed our acquisition of Computing Resources, Inc. ("CRI") on
May 3, 1999 (see Note 3). CRI has been our payroll processing service provider
since October 1998. CRI's operating activity from the acquisition date forward
is included in our results. The acquisition of CRI will result in significant
future acquisition related costs, as well as new business risks and integration
challenges common in all acquisitions. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who we believe will have
a low tolerance for payroll processing errors. Our ability to successfully
operate CRI will depend in part on retaining their existing customers and
maintaining relationships with certain banks and other third parties who we will
rely on to retain existing customers and attract new customers outside of our
QuickBooks customer base. If we are unable to do so, it could result in a
negative impact on our revenue.
Small Business Division revenues increased by 13% in 1998 compared to 1997.
These results were affected by the timing of the QuickBooks product release
which did not occur until June 1998. Despite the release date late in the fiscal
year, QuickBooks revenues benefited from a favorable shift in consumer buying
patterns to higher-priced, increased functionality QuickBooks products in fiscal
1998 compared to fiscal 1997. Supplies net revenue increased by 9% in fiscal
1998 over fiscal 1997 as the result of 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 for the
division.
Tax Division. Tax Division revenues come primarily from the following sources:
o Turbo Tax and MacInTax personal tax preparation products
o Professional tax preparation products (ProSeries and Lacerte
product lines)
o Electronic tax return preparation and filing fees
Overall, revenue for the division increased 75% in fiscal 1999 compared to
fiscal 1998. Fiscal 1999 included operating results for our Lacerte subsidiary
which was acquired in June 1998, while fiscal 1998 results did not include
Lacerte prior to June 1998. If we were to exclude Lacerte from our fiscal 1999
results, Tax Division revenues would have increased by 30%. Growth in our tax
business was driven by our TurboTax product line which experienced significantly
higher unit sales due in part to an increasing number of taxpayers using
personal computers to prepare tax returns. This unit sales growth was partially
offset by lower average selling prices due to a higher percentage of customers
buying our lower priced regular products compared to deluxe versions, and
increased price competition, primarily from H&R Block's aggressively priced
TaxCut product. TurboTax results benefited from strong growth in industry-wide
retail sales of personal tax products, though TurboTax growth was lower than the
industry growth rate, resulting in a slight decline in retail market share.
Though they are a smaller component of Tax Division revenues, we also
experienced significant revenue increases for our WebTurboTax product and
electronic filing service compared to last year as a greater number of customers
gained Internet access and became more accustomed to processing transactions
on-line. Through our Quicken Tax Freedom Program, we also offered free online
tax preparation and electronic filing for taxpayers with $20,000 or less of
income. This program did not have a material impact on our fiscal 1999 tax
revenues, as the average income of our current customers and their clients is
above the $20,000 income threshold. In August 1999, we acquired SecureTax.com,
another provider of online tax preparation and electronic filing services, for
approximately $52 million. See Note 19 of the financial statements for
additional information about this acquisition.
While we believe that the increasing popularity of the Internet will provide
future revenue growth opportunities for these Internet-based tax offerings,
there are also risks, such as the significant negative financial and public
relations consequences which can result from service interruptions. We
experienced a brief interruption in our electronic filing services in February
1999 and on April 11-12, routine server maintenance procedures took longer than
expected, resulting in a 14-hour outage for the electronic filing service. We do
not believe this service outage had a
29
<PAGE> 30
material financial impact, prevented customers from completing and filing their
returns in a timely manner, or posed a risk that customer data would be lost or
corrupted. However, we did experience negative publicity. The exact level of
future demand for Web TurboTax and electronic filing will be very difficult to
predict, and in future tax seasons we could experience adverse financial and
public relations consequences if these services are unavailable due to technical
difficulties or other reasons.
Though Microsoft Corporation did not release a competing product for this tax
season, we believe they will enter the personal tax preparation software market
next year. If Microsoft enters the market, their superior financial resources
and strong presence in retail distribution channels could result in an
increasingly competitive environment next tax season and beyond. If the average
selling price of our tax products were to decrease, or if we were to lose
significant market share as a result of increased future competition, our
revenues and operating income would suffer. See also "Business - Competition,"
on page 14.
Excluding Lacerte from fiscal 1999 operating results, our professional tax
(ProSeries) product sales increased by 13% in fiscal 1999 compared to fiscal
1998. This growth occurred primarily because we were successful in retaining our
customers from prior years and in many cases have upgraded them to higher priced
products. Revenue from Lacerte products also grew compared to last year (though
Lacerte's prior year revenues are not reported in our operating results prior to
their June 1998 acquisition) due in part to price increases and a high customer
retention rate.
Tax Division revenues increased 13% in fiscal 1998 compared to fiscal 1997. This
growth reflected higher sales of our TurboTax products in fiscal 1998 and a
sales mix improvement to higher-priced deluxe products. The personal tax market
was more competitive in fiscal 1998 than fiscal 1997 because our primary
competitor lowered its prices earlier in the tax software sales season in fiscal
1998. 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 and
experienced growth in Internet commerce revenues as a result of increases in
electronic filing and state tax product downloads compared to fiscal 1997. Our
professional tax (Pro Series) products also experienced a 10% revenue increase
for fiscal 1998 compared to fiscal 1997 as a result of high customer retention
rates and transitioning customers to higher-priced, greater functionality
products.
Consumer Finance Division. Consumer Finance Division revenues come primarily
from the following sources:
o Quicken product line
o Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
o Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
Overall, revenue for the division increased 14% in fiscal 1999 compared to
fiscal 1998. Excluding the impact of a nonrecurring $10 million royalty fee from
Checkfree in fiscal 1998, revenue growth would have been 24% in fiscal 1999.
Quicken revenue grew by 5% in fiscal 1999 compared to fiscal 1998 reflecting an
approximately 5 week earlier product release in fiscal 1999 and higher unit
sales resulting from our Quicken/TurboTax bundle promotion. This was partially
offset by a higher percentage of customers purchasing our lower-priced Quicken
Basic products compared to our Quicken Deluxe versions, the fact that we did not
introduce a new Quicken for Mac product in fiscal 1999, and increased rebate
incentives offered to customers who purchased the Quicken/TurboTax bundle.
Our Quicken product line faces many challenges in the desktop personal financial
software market. For example, there is increasing competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the Internet at no cost, which has a negative
impact on desktop product sales. There is also an increasing emphasis on
packaging desktop software with original equipment manufacturers' personal
computers, which results in lower revenues per unit shipped. 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, revenue could
suffer if customers become less inclined to make upgrade purchases, if our
30
<PAGE> 31
competitors were to lower their prices, or if personal finance software
functionality becomes increasingly available at no cost via the internet.
Consumer Finance Division revenue growth was primarily the result of increased
Internet-based revenues which approximately doubled in fiscal 1999, compared to
fiscal 1998. This increase was largely due to higher advertising, sponsorship
and transaction-related revenue through Quicken.com and Quicken. However,
revenue growth was not uniform across all Internet product and service
offerings. For example, advertising revenue and transaction fees from our
QuickenMortgage marketspace increased relatively rapidly while revenue from our
InsureMarket marketspace was roughly flat for fiscal 1999 compared to fiscal
1998. On October 7, 1999, we announced the proposed acquisition of Rock
Financial Corporation, a provider of consumer mortgages. If completed, this
acquisition would allow us to facilitate the application, approval and closing
process. Rock will perform loan processing functions similar to those that are
currently provided by Mortgage.com under a Distribution, Marketing, Facilities
and Services Agreement with Intuit. This agreement with Mortgage.com will be
terminated and phased out over the next twelve months (see Note 19). Growth in
mortgage transaction fees may be adversely impacted if interest rates continue
to rise. The negative impact of interest rate increases could be exacerbated by
the acquisition of Rock because of our increased fixed cost infrastructure.
The rapid growth we've experienced in our Internet products and services has
been generated in part by distribution agreements we entered into with third
party online service and content providers such as Excite@Home and AOL, which
have helped to increase traffic to our Quicken.com website. Our agreement with
Excite@Home (see Note 5) calls for us to share certain revenue generated from
our Quicken.com site and our agreement with AOL (see Note 5) calls for us to
make significant guaranteed payments to AOL over the term of the agreement.
While the Internet provides a significant opportunity for revenue growth, our
financial commitments to these and other third party providers are significant
and we must continue to increase traffic and revenue in order to be profitable.
If our website traffic expectations aren't met, there could be a significant
negative impact on our revenue. Our ability to maintain important relationships
with distributors and content providers will also have an impact on traffic and
revenues. See "Special Risks for Internet Products and Services," on page 5.
Overall, Consumer Finance Division revenues increased 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. Growth for the division was driven by
increasing Internet product revenues, which approximately doubled in fiscal 1998
compared to fiscal 1997. This growth was generated in part by collaborating with
third party online service and content providers such as Excite@Home and AOL,
which helped to increase traffic to our Quicken.com website.
International Division. International Division revenues come primarily from the
following sources:
o Japanese small business products
o German Quicken, QuickBooks and Tax products
o Canadian Quicken, QuickBooks and Tax products
o United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, revenue for the division increased approximately 12%
in fiscal 1999 compared to fiscal 1998, reflecting strong fiscal 1999 fourth
quarter revenues in Canada, Japan and Germany. This increase was attributable to
increased revenues in Canada across all product lines, with particular strength
in our QuickBooks and Quicken product lines. In Germany, we experienced strong
sales in the fourth quarter due to new releases of our Quicken and QuickBooks
products. Finally, while the overall market for small business products and
services in Japan, our largest international subsidiary, continues to suffer due
primarily to poor economic conditions, we experienced higher sales in the fourth
quarter due to higher sales of our QuickBooks and Yayoi product lines, and more
favorable currency exchange rates.
As part of our business strategy, we have refocused our European operations
toward small business customers in selected larger markets and towards improving
profitability. In June 1999, we entered into an agreement with Lexware (a
subsidiary of Rudolf Haufe Publishing), a leading business software company in
Germany, under which Lexware will develop, market and distribute Intuit's
products and services in Germany under the Intuit brand. Under this agreement,
Lexware will receive all revenues from the distribution of Intuit's products,
and we will receive royalty payments as compensation. We believe that Lexware's
local expertise will result in more effective
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<PAGE> 32
development and delivery of customized products and services to our customers in
Germany. As a result, we expect reduced revenues from our European operations in
fiscal 2000, but also expect increased profitability.
International Division revenues were down approximately 4% in fiscal 1998
compared to fiscal 1997. This reflected lower revenues in Europe, which were
offset by 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
an 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 (see Note 3).
In Canada, we experienced significant revenue growth from our QuickTax, Quicken
and QuickBooks products.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
(Dollars in millions) 1997 CHANGE 1998 CHANGE 1999
------------------------------------------------------------------------
(Excluding Parsons) (GAAP) (GAAP)
<S> <C> <C> <C> <C> <C>
Product $119.3 1% $120.5 67% $201.4
% of revenue 23% 20% 24%
Amortization of purchased
software and other $ 1.5 93% $ 2.9 169% $ 7.8
% of revenue 0% 0% 1%
</TABLE>
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and delivering products and services. The second component is
the amortization of purchased technology, which is the cost of products or
services obtained through acquisitions. Total cost of goods sold increased to
25% of revenue in fiscal 1999, compared to 20% for 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 goods sold and, as a
percentage of revenue, are significantly higher than the costs of goods sold for
our traditional desktop software business. These infrastructure costs tend to
result from the depreciation of capital assets which are generally expensed
evenly over the estimated useful lives of the assets. As a result, cost of goods
sold as a percentage of revenue may fluctuate significantly, particularly on a
quarterly basis, as costs become more fixed in nature. For example, in a quarter
with low revenues we will usually have a proportionately lower cost of goods
sold because we ship fewer products, the cost of goods sold from our Internet
infrastructure will not decrease proportionately and thus will result in higher
cost of goods sold as a percentage of revenue for that quarter. Second, we have
also experienced significant increases in our service costs for fee for support
programs and our payroll business. The cost of goods sold associated with these
programs is also larger as a percentage of revenue than cost of goods sold for
our traditional desktop software business. Consequently, as revenues from our
Internet and service-related programs become a larger portion of our overall
revenue, our cost of goods sold as a percentage of revenue is likely to
increase. If we experience errors in current or future products, there could be
incremental increases in cost of goods sold that could adversely affect our
operating results. During fiscal 1999, we improved the efficiency of our
order-taking process in the financial supplies business, which reduced re-order
expenses and partially offset the increases to cost of goods sold described
above.
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 CD ROM products, which were less expensive to manufacture and ship than
disk-based products that were also offered in fiscal 1998. We also improved the
efficiency of our order-taking process in the financial supplies business, which
reduced re-order expenses.
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<PAGE> 33
OPERATING EXPENSES
<TABLE>
<CAPTION>
(Dollars in millions) 1997 CHANGE 1998 CHANGE 1999
---------------------------------------------------------------------------
(Excluding Parsons) (GAAP) (GAAP)
<S> <C> <C> <C> <C> <C>
Customer service and technical support $112.4 5% $117.7 11% $130.8
% of revenue 21% 20% 15%
Selling and marketing $129.8 27% $164.8 16% $191.6
% of revenue 25% 28% 23%
Research and development $ 85.8 27% $108.6 32% $143.4
% of revenue 16% 18% 17%
General and administrative $ 35.0 5% $ 36.7 63% $ 59.8
% of revenue 7% 6% 7%
Charge for purchased research and development $ 11.0 389% $ 53.8 (100)% --
% of revenue 2% 9% --
Other acquisition costs, including amortization
of goodwill and purchased intangibles $ 21.5 13% $ 24.2 284% $ 92.9
% of revenue 4% 4% 11%
Restructuring costs $ 10.4 (100)% -- N/A --
% of revenue 2% --
</TABLE>
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 15% of revenue for fiscal 1999 compared to 20% for fiscal
1998. These improvements reflect the continuing benefit from cost reductions
resulting from the restructuring and consolidation of our technical support
facilities in the United States and Europe in the fourth quarter of fiscal 1997.
In addition, certain costs that were categorized as customer service and
technical support costs in fiscal 1998 are reflected in fiscal 1999 as cost of
sales for our expanding fee for support programs. We have also benefited from
our efforts to provide customer service and technical support less expensively
through websites and other electronic means. During our peak season in the
second and third quarters of fiscal 1999, many customers experienced unusually
long hold times for customer service calls. We may need to increase customer
service and technical support expenses as a percentage of revenue in fiscal
2000, in order to improve customer service levels and also to handle customer
questions relating to Year 2000 compliance issues. In addition, during July
1999, due to site performance issues, customers were unable to access the
portfolio tracking features on the Quicken.com site for several days. If we
experience product errors, poor service levels or additional service outages for
our web-based products, it may result in significant additional customer service
and technical support expenses and/or customer dissatisfaction.
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. This was primarily the
result of cost reductions achieved from the restructuring and consolidation of
our technical support facilities in the United States and Europe in the fourth
quarter of fiscal 1997.
Selling and Marketing. Selling and marketing expenses decreased to 23% of
revenue for fiscal 1999 compared to 28% for fiscal 1998. Fiscal 1998 selling and
marketing expenses included a $16.2 million charge for the AOL agreement entered
into in February 1998. Excluding this charge, selling and marketing expenses
would have been 25% of revenue for fiscal 1998. The fiscal 1999 decrease, net of
the AOL charge, is primarily the result of our acquisition of Lacerte, which
experiences comparatively lower selling and marketing expenses as a percentage
of revenue. This positive impact from Lacerte was partially offset by increased
television and radio advertising for our
33
<PAGE> 34
Quicken product line and additional costs related to the promotion of
QuickBooks, our Internet-based products and services, and the QuickBooks Online
Payroll service launch. We expect that selling and marketing expenses will
increase as a percentage of revenue in fiscal 2000 compared to fiscal 1999 as a
result of our promotion of Internet-based initiatives and increased competition
due to Microsoft's expected entry into the personal tax market.
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 increase was due to the $16.2 million
AOL charge. Excluding the AOL charge, selling and marketing expenses would have
been roughly flat for fiscal 1998.
Research and Development. Research and development expenses decreased to 17% of
revenue for fiscal 1999 compared to 18% for fiscal 1998. This decrease is due in
part to our acquisition of Lacerte which experiences comparatively lower
research and development expenses as a percentage of revenue. The positive
impact of the Lacerte results were partially offset by increased development
expenses for our Internet related initiatives. We expect our Internet-based
businesses will continue to result in significant development expenses in fiscal
2000. If such expenses exceed our current expectations, they may have an adverse
effect on our operating results. This could occur, for example, if we were to
undertake a costly product development venture in response to competitive
pressures or other market conditions.
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.
General and Administrative. General and administrative expenses increased to 7%
of revenue for fiscal 1999 compared to 6% of revenue for fiscal 1998. 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.
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 $92.9 million in fiscal 1999 compared to $24.2 million
in fiscal 1998 and $21.5 million in fiscal 1997. The increase for fiscal 1999
reflects additional amortization resulting from our acquisition of Lacerte in
June 1998 and the acquisition of CRI in May 1999. We also incurred a $53.8
million charge relating to Lacerte's in-process research and development in
fiscal 1998 and $11.0 million in-process charges for our acquisition of Galt
Technologies in fiscal 1997.
In connection with our acquisition of Lacerte, we used a third party appraiser's
estimate to determine the value of two in-process projects under development for
which technological feasibility had not been established. These projects were
identified for products being developed under separate operating systems (DOS
and Windows). The value of the projects was determined by estimating the costs
to develop the in-process technology into commercially feasible products,
estimating the net cash flows we believed would result from the products and
discounting these net cash flows back to their present value. Both projects were
released on schedule and actual results to date have been consistent with
assumptions made when we initially appraised the value of these in-process
projects. Specifically, revenues, development costs and completion dates as they
relate to the two projects were consistent with our expectations. Based on a
third party's appraisal of our CRI acquisition, there were no values assigned to
in-process projects under development, so there were no up-front charges for
in-process research and development in fiscal 1999 relating to the CRI
acquisition.
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. As of July 31, 1999, and assuming no additional acquisitions and
no impairment of value resulting in an acceleration of amortization, future
amortization will reduce net income by approximately $123 million, $112 million
and $107 million for the years ending July 31, 2000 through 2002, respectively.
We expect these expenses to increase as a result of acquisitions completed after
July 31, 1999 (see
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<PAGE> 35
Note 19). If we complete additional acquisitions or accelerate amortization in
the future, there would be an incremental negative impact on operating expenses.
OTHER INCOME AND EXPENSE, NET
For fiscal 1999, interest and other income and expense, net, increased to $18.3
million compared to $12.4 million in fiscal 1998 and $9.8 million in fiscal
1997. This reflects increased cash and short-term investment balances over those
periods. Interest earned on customer payroll deposits is reported as revenue and
is not included in other income. The $4.3 million gain on disposal of business
in fiscal 1998 resulted from the sale of Parsons, our direct marketing
subsidiary, in August 1997. Our $579.2 million pre-tax gain from marketable
securities in fiscal 1999 was primarily the result of our sales of Excite,
Verisign and Concentric common stock and the gain from converting our Excite
common stock to Excite@Home. We have elected to report our converted Excite@Home
common stock as a trading security. As a result, market fluctuations are marked
to market and reported in our earnings. If we were to experience a significant
decline in these securities, there could be a negative impact on our earnings
(see Note 1).
INCOME TAXES
For fiscal 1999, we recorded an income tax provision of $240.8 million on pretax
income of $617.3 million resulting in an effective income tax rate of
approximately 39%. This compares to income tax provisions (benefit) of ($7.7)
and $12.7 million on pretax income (loss) of ($19.8) and $9.8 million for the
same periods of the prior years. At July 31, 1999, there was a valuation
allowance of $11.6 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 July 31, 1999, our unrestricted cash and cash equivalents totaled $518.3
million, a $380.2 million increase from July 31, 1998.
Our operations provided $73.2 million in cash during the twelve months ended
July 31, 1999. 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 primarily by increased income taxes payable from our realized gains on
the disposition of marketable securities. We also experienced increased
liabilities due to increased reserves for rebates and returns resulting from the
overall growth in revenues not only when comparing fiscal 1999 to fiscal 1998,
but also when comparing the strong revenue growth of the last two quarters of
fiscal 1999 to fiscal 1998. Partially offsetting the contributors to cash was
the increase in prepaid and other assets due in part to tax prepayments and
short-term loans.
Investing activities provided $180.4 million in cash for the twelve months
ended July 31, 1999. The primary source of cash was from our sale of 4.8 million
shares of our investment in Excite, primarily during the fourth quarter of 1999,
which provided $493.8 million. Additional sources of cash were from the sale of
investments in Checkfree, Verisign, and Concentric from which we had proceeds of
$7.4 million, $19.7 million, and $10.6 million. Our sources of cash were
partially offset by a number of acquisitions during the year. Our acquisition of
CRI was partially funded in fiscal 1999 by the payment of $100 million in cash.
We also acquired customer lists and intellectual property rights of TaxByte,
Inc. and Compucraft Tax Services, LLC, for $11 million and $8 million. We also
completed a $50 million equity investment in Security First Technologies. Other
uses of cash included net purchases of both short and long-term investments for
$96.4 million and purchases of property and equipment for $80 million. Capital
expenditures are primarily for equipment and facilities to support our ongoing
and expanding operations and information systems.
We currently hold investments in a number of publicly traded companies (see Note
1). The volatility of the stock market and the potential risk of fluctuating
stock prices may have an impact on our future liquidity. For example, prior to
year end, we experienced a decline in the market value of our remaining
investment in Excite@Home. Due to our reporting of the Excite@Home shares as a
trading security, future fluctuations in the carrying value of
35
<PAGE> 36
Excite@Home will impact our earnings (see Note 1). If future declines in our
other marketable securities are deemed to be permanent, they will also impact
our earnings.
Financing activities provided $126.6 million in cash for fiscal 1999
attributable to proceeds from the issuance of common stock from employee stock
options and our employee stock purchase plan.
In connection with our acquisition of CRI (see Note 3), we are required to pay
three annual installments of $25 million in each of the next three fiscal years.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. See Note 8 and the
"Properties" section of the business section (page 19) for more information on
lease commitments. We also evaluate the merits of acquiring technology or
businesses, or establishing strategic relationships with and investing in other
companies. Accordingly, it is possible that we may decide to use cash and cash
equivalents to fund such activities in the future. For example, if we exercise
our option to purchase VFSC (see Note 5) and elect to pay all or a significant
portion of the exercise price in cash, this would have a negative impact on our
liquidity.
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
Intuit has established a Year 2000 Project Office to address the impact of the
year 2000 date transition on its operations, products and services globally. In
1998, we established this office to coordinate a number of existing projects and
put in place a formal, structured year 2000 process moving forward. The Project
Office has a dedicated Program Manager who reports directly to Intuit's senior
management, and status is reported regularly to the Audit Committee of Intuit's
Board of Directors.
We have adopted a five-phase approach that we believe follows standard industry
practices for reviewing and preparing the significant elements of operations,
products and services for the Year 2000 date transition. Phase One (initiation)
involves increasing company awareness by educating and involving all appropriate
levels of management regarding the need to address Year 2000 issues. Phase Two
(inventory) consists of identifying all of our systems, products and
relationships that may be impacted by Year 2000. Phase Three (assessment)
involves determining our current state of Year 2000 readiness for those areas
identified in the inventory phase and prioritizing areas that need to be fixed.
Phase Four (action) consists of developing Year 2000 solutions where required,
and completing a comprehensive test cycle for all appropriate inventoried items.
Phase Five (implementation) consists of rolling out Year 2000 solutions for
affected products, services and technologies and implementing maintenance and
support processes to maintain ongoing compliance.
As a software developer, we have three key areas of focus: (1) our products and
services; (2) our internal systems (including information technology systems
such as financial and order entry systems and non-information technology systems
such as phones and facilities); and (3) the readiness of third parties with whom
we have significant business relationships. The majority of our efforts in the
product area have now completed the action phase and our efforts are primarily
focused on providing our customer base with confirmation of product compliance
and remediation options, where required. Customers can find Intuit's Year 2000
Readiness Disclosure about our products, and order free solutions, where
required, on our Corporate Year 2000 website at www.intuit.com/y2k. The
remediation and implementation efforts for the majority of our internal systems
were substantially completed during fiscal 1999. As most companies are
experiencing, there is now an on-going maintenance effort required to review the
compliance statements of our vendors and to verify that our technology remains
compliant. We will continue to work with our third party vendors to review the
status of their efforts and have dedicated considerable time and effort on
testing activities with our key vendors.
Costs directly attributed to our Year 2000 project were approximately $6.5
million in fiscal 1999. This estimate is comprised primarily of hardware,
software, internal resources and consulting fees necessary for our Year 2000
testing activities during fiscal 1999. We currently anticipate direct costs in
the range of $10 to $16 million for fiscal
36
<PAGE> 37
year 2000, resulting from the completion of the project phases and the
transition into an ongoing maintenance and support activity in fiscal year 2000.
We believe that the nature of our products and the size and profile of our
customer base is likely to lead to a significant increase in the calls to our
customer support centers throughout the remainder of calendar 1999 and early
2000. These support operations may experience call volumes not experienced to
date and we are developing plans that should allow us to handle the anticipated
increase in calls in a manner that will not lead to material incremental costs.
Additionally, there will be costs associated with the manufacture and
distribution of free solutions for products that are not Year 2000 compliant or
in certain cases that will not be tested for Year 2000 compliance. We believe
the provision of free solutions may result in lost revenue for new product
upgrades to within a range of $10 to $17 million, although the exact amount will
depend on customer response to the Year 2000 issue.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures.
Despite our efforts, we may not anticipate or adequately provide for all
contingencies.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that we will be successful in our efforts to
address Year 2000 issues. If we are not successful, there could be significant
adverse effects on our operations. For example, failure to achieve Year 2000
readiness for our internal systems could delay our ability to manufacture and
ship products, disrupt our customer service and technical support facilities, or
interrupt customer access to our online products and services. If our products
are not Year 2000 ready, we could suffer lost sales or other negative
consequences resulting from customer dissatisfaction, including additional
litigation (see discussion below). We also rely heavily on third parties such as
manufacturing suppliers, service providers, financial institutions and a large
retail distribution channel. If these or other third parties experience Year
2000 failures or malfunctions, there could be a material negative impact on our
ability to conduct ongoing operations. Many of our products are significantly
interconnected with heavily regulated financial institutions. Our relationships
with financial institutions could be adversely impacted if we do not achieve
Year 2000 readiness in a manner and on a time schedule that permits them to
comply with regulatory requirements. We may also incur additional costs if we
are required to accelerate our Year 2000 readiness to meet financial institution
requirements. As with all companies, we also rely on other more widely used
entities such as government agencies, public utilities and other external forces
common to business and industry. Consequently, if such entities were to
experience Year 2000 failures, this could disrupt our ability to conduct ongoing
operations.
Several class action lawsuits have been filed against Intuit in California and
New York, alleging Year 2000 issues with the online banking functionality in
certain versions of our Quicken products, and it is possible that we will face
additional lawsuits. We do not believe the pending lawsuits have merit and
intend to defend them vigorously. We have been working with financial
institutions to provide solutions to their current online banking customers and
are planning to make such solutions available before customers experience any
Year 2000 problems. See "Legal Proceedings" for more information about this
litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
37
<PAGE> 38
- --------------------------------------------------------------------------------
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.
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates)
<TABLE>
<CAPTION>
FAIR
YEARS ENDING JULY 31, VALUE
------------------------------------------------------- JULY 31,
2000 2001 2002 2003 2004 TOTAL 1999
----------- ------- ------ ---- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents $ 497,682 -- -- -- -- $ 497,682 $497,682
Average Interest Rate 4.86% 4.86%
Investments $ 206,787 $94,691 $3,452 -- -- $ 304,930 $305,125
Average Interest Rate 4.10% 3.76% 3.81% 4.01%
Total Portfolio $ 704,469 $94,691 $3,452 -- -- $ 802,612 $802,807
Average Interest Rate 4.60% 3.76% 3.81% 4.50%
</TABLE>
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of July
31, 1999. These securities are subject to considerable market risk due to their
volatility. Fluctuations in the carrying value of our shares of Excite@Home will
impact our earnings because we report these shares as trading security. See Note
1 of the financial statement notes for more information regarding risks related
to our investments in marketable securities and Note 1 for information regarding
the impact of our Excite@Home common stock on reported net income.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal 1999, the currency of our Japanese subsidiary has strengthened
while the currencies 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
fiscal 1999 year end, 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 July
31, 1999, we did not engage in foreign currency hedging activities.
38
<PAGE> 39
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, independent auditors ......................................... 40
Consolidated Balance Sheets as of July 31, 1998 and 1999 .................................. 41
Consolidated Statements of Operations for the three years ended July 31, 1999 ............. 42
Consolidated Statements of Stockholders' Equity for the three years ended July 31, 1999 ... 43
Consolidated Statements of Cash Flows for the three years ended July 31, 1999 ............. 44
Notes to Consolidated Financial Statements ................................................ 45
</TABLE>
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:
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C> <C>
II Valuation and Qualifying Accounts............................................... 65
</TABLE>
39
<PAGE> 40
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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 1999. 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, 1998 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 31,
1999, 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 24, 1999, except for paragraph 4 of Note 19, as to which the date is
September 9, 1999.
40
<PAGE> 41
INTUIT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
(In thousands, except par value) 1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 138,133 $ 518,305
Payroll tax deposits .......................................................... -- 131,148
Short-term investments ........................................................ 244,699 305,125
Marketable securities ......................................................... 499,285 431,319
Accounts receivable, net of allowance for doubtful accounts
of $5,335 and $10,739, respectively (1) ..................................... 59,417 63,045
Deferred income taxes ......................................................... -- 64,925
Inventories ................................................................... 3,695 4,931
Prepaid expenses and other current assets (2) ................................. 34,896 66,982
----------- -----------
Total current assets .................................................. 980,125 1,585,780
Property and equipment, net ..................................................... 69,413 108,851
Purchased intangibles, net ...................................................... 85,797 98,004
Goodwill, net ................................................................... 285,793 382,888
Other assets .................................................................... 10,937 7,549
Long-term deferred income taxes ................................................. 21,006 63,675
Investments ..................................................................... 17,009 45,473
Restricted investments .......................................................... 28,516 36,028
----------- -----------
Total assets .................................................................... $ 1,498,596 $ 2,328,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 44,035 $ 63,003
Accrued compensation and related liabilities .................................. 23,728 37,414
Payroll tax obligations ....................................................... -- 131,148
Deferred revenue .............................................................. 58,560 65,994
Income taxes payable .......................................................... 3,044 146,847
Deferred income taxes ......................................................... 120,482 136,694
Other accrued liabilities ..................................................... 124,820 200,030
----------- -----------
Total current liabilities ............................................. 374,669 781,130
Long-term notes payable ......................................................... 35,566 36,308
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 - 177,960 and 187,626 shares, respectively ........... 593 625
Additional paid-in capital .................................................... 1,080,554 1,229,880
Accumulated other comprehensive income (loss) ................................. 182,602 79,144
Retained earnings (deficit) ................................................... (175,388) 201,161
Total stockholders' equity ............................................ 1,088,361 1,510,810
----------- -----------
Total liabilities and stockholders' equity ...................................... $ 1,498,596 $ 2,328,248
=========== ===========
</TABLE>
(1) Includes $3.4 and $0.1 million due from Checkfree as of July 31, 1998
and 1999, respectively (see Note 17).
(2) Includes a $7.3 and $6.7 million note receivable from Venture Finance
Software Corporation as of July 31, 1998 and 1999, respectively (see
Note 17).
See accompanying notes.
41
<PAGE> 42
INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------
1997 1998 1999
--------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenue (1) ......................................................... $ 598,925 $ 592,736 $ 847,568
Costs and expenses:
Cost of goods sold:
Product ............................................................ 137,281 120,538 201,368
Amortization of purchased software and other ....................... 1,489 2,905 7,775
Customer service and technical support ................................ 119,762 117,714 130,759
Selling and marketing ................................................. 162,047 164,834 191,628
Research and development .............................................. 93,018 108,604 143,437
General and administrative ............................................ 37,460 36,719 59,798
Charge for purchased research and development ......................... 11,009 53,800 --
Other acquisition costs, including amortization of goodwill and
purchased intangibles .............................................. 26,543 24,204 92,917
Restructuring costs ................................................... 10,356 -- --
--------- --------- ---------
Total costs and expenses ...................................... 598,965 629,318 827,682
--------- --------- ---------
Income (loss) from operations ................................. (40) (36,582) 19,886
Interest and other income and expense, net .............................. 9,849 12,438 18,252
Net gain on marketable securities ....................................... -- -- 579,211
Gain on disposal of business ............................................ -- 4,321 --
--------- --------- ---------
Income (loss) from continuing operations before
income taxes .......................................................... 9,809 (19,823) 617,349
Provision (benefit) for income taxes ................................... 12,741 (7,666) 240,800
--------- --------- ---------
Income(loss) from continuing operations ................................. (2,932) (12,157) 376,549
Gain from sale of discontinued operations, net of
income tax provision of $52,617 ....................................... 71,240 -- --
--------- --------- ---------
Net income (loss) ....................................................... $ 68,308 $ (12,157) $ 376,549
========= ========= =========
Basic net income (loss) per share from continuing operations ............ $ (0.02) $ (0.08) $ 2.06
Basic net income per share from sale of discontinued operations ........ 0.51 -- --
--------- --------- ---------
Basic net income (loss) per share ....................................... $ 0.49 $ (0.08) $ 2.06
========= ========= =========
Shares used in per share amounts ........................................ 139,272 149,028 182,688
========= ========= =========
Diluted net income (loss) per share from continuing operations .......... $ (0.02) $ (0.08) $ 1.97
Diluted net income per share from sale of discontinued operations ....... 0.50 -- --
--------- --------- ---------
Diluted net income (loss) per share ..................................... $ 0.48 $ (0.08) $ 1.97
========= ========= =========
Shares used in per share amounts ........................................ 142,344 149,028 191,088
========= ========= =========
</TABLE>
(1) Includes $11.6, $14.1, and $6.1 million in revenue from Checkfree for
the years ended July 31, 1997, 1998 and 1999, respectively, and $10.3
and $26.3 million in revenue from Excite@Home for the years ended July
31, 1998 and 1999, respectively (see Note 17).
See accompanying notes.
42
<PAGE> 43
INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL
------------------- PAID -IN COMPREHENSIVE EARNINGS STOCKHOLDERS'
(Dollars in thousands) SHARES AMOUNT CAPITAL INCOME (DEFICIT) EQUITY
----------- ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996 ............................ 137,420,808 $458 $530,818 $(502) $(231,539) $299,235
Comprehensive income (loss):
Unrealized gains on marketable securities .......... 20,668
Foreign currency translation adjustments ........... (734)
---------
Total comprehensive income, net of tax ............ 19,934 19,934
Issuance of common stock pursuant to
GALT acquisition ................................... 636,159 2 8,709 -- -- 8,711
Issuance of common stock upon
exercise of options and other ...................... 2,480,454 8 7,540 -- -- 7,548
Issuance of common stock pursuant to
Employee Stock Purchase Plan ....................... 288,903 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 income .......................................... -- -- -- -- 68,308 68,308
- ------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 ............................ 140,826,324 469 558,391 19,432 (163,231) 415,061
Comprehensive income (loss):
Unrealized gains on marketable securities .......... 160,403
Foreign currency translation adjustments ........... 2,767
---------
Total comprehensive income, net of tax ............ 163,170 163,170
Issuance of common stock upon
exercise of options and other ...................... 6,690,774 22 41,222 -- -- 41,244
Issuance of common stock pursuant to
Employee Stock Purchase Plan ....................... 443,928 2 3,757 -- -- 3,759
Issuance of common stock pursuant to
public offering .................................... 30,000,000 100 455,950 -- -- 456,050
Tax benefit from employee stock
option transactions ................................ -- -- 21,234 -- -- 21,234
Net loss ............................................ -- -- -- -- (12,157) (12,157)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 ............................ 177,961,026 593 1,080,554 182,602 (175,388) 1,088,361
Comprehensive income (loss):
Unrealized losses on marketable securities ......... (99,450)
Foreign currency translation adjustments ........... (4,008)
---------
Total comprehensive loss, net of tax .............. (103,458) (103,458)
Issuance of common stock upon
exercise of options and other ...................... 8,400,849 28 64,654 -- -- 64,682
Issuance of common stock pursuant to
Employee Stock Purchase Plan ........................ 396,546 1 6,325 -- -- 6,326
Issuance of common stock pursuant to
CRI acquisition .................................... 866,448 3 22,797 -- -- 22,800
Tax benefit from employee stock
option transactions ................................ -- -- 55,550 -- -- 55,550
Net income .......................................... -- -- -- -- 376,549 376,549
- -----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1999 ............................ 187,624,869 $625 $1,229,880 $79,144 $201,161 $1,510,810
=============================================================================================================================
</TABLE>
See accompanying notes.
43
<PAGE> 44
INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------------
(In thousands) 1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 68,308 $ (12,157) $ 376,549
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) --
Gains on sale of marketable securities ...................... -- -- (490,757)
Gain from conversion of marketable securities ............... -- -- (88,454)
Gain on sale of facility .................................... -- (1,501) --
Charge for purchased research and development ............... 11,009 53,800 --
Amortization of goodwill and other purchased intangibles .... 29,715 24,330 100,692
Depreciation ................................................ 28,952 28,908 40,611
Changes in assets and liabilities:
Accounts receivable ...................................... 7,482 (17,055) (3,027)
Inventories .............................................. 1,445 (1,044) (1,236)
Prepaid and other current assets ......................... (4,090) (14,104) (31,763)
Deferred income tax assets and liabilities ............... (14,501) (39,221) (25,081)
Accounts payable ......................................... (26) 8,206 18,054
Accrued compensation and related liabilities ............. 6,441 1,403 12,861
Deferred revenue ......................................... 58 6,320 7,434
Accrued acquisition liabilities .......................... 1,445 (29,185) (12,229)
Other accrued liabilities ................................ 22,931 43,491 25,767
Income taxes payable ..................................... 2,888 17,767 143,803
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 81,149 68,337 73,224
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of facility ................................... -- 9,025 --
Purchase of property and equipment ............................... (27,597) (33,561) (80,049)
Sale of marketable securities .................................... 29,500 -- 531,426
Acquisitions and dispositions, net of cash acquired .............. (34,224) (350,288) (117,608)
Decrease in other assets ......................................... (970) (1,276) (6,977)
Purchase of short-term investments ............................... (258,892) (293,306) (346,574)
Liquidation and maturity of short-term investments ............... 215,338 213,176 278,636
Purchase of marketable securities ................................ -- -- (50,000)
Purchase of long-term investments ................................ (41,150) (17,009) (28,464)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................. (117,995) (473,239) 180,390
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt ............................. (661) (4,798) --
Proceeds from issuance of long-term debt ......................... 30,277 -- --
Net proceeds from issuance of common stock ....................... 9,426 501,053 126,558
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 39,042 496,255 126,558
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 2,196 91,353 380,172
Cash and cash equivalents at beginning of period ................... 44,584 46,780 138,133
--------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 46,780 $ 138,133 $ 518,305
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .................................................... $ 652 $ 432 $ 140
========= ========= =========
Income taxes paid ................................................ $ 31,906 $ 6,054 $ 64,849
========= ========= =========
</TABLE>
See accompanying notes.
44
<PAGE> 45
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-based 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
via the Internet.
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 collectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that we will collect the accounts receivable from our customers.
Reserves are provided for excess quantities of current product versions, as well
as previous versions of products still in the distribution channel when new
versions are launched. In some situations, we receive advance payments from our
customers. Revenue associated with these advance payments is deferred until the
products are shipped or services are provided. We also reduce revenue by the
estimated cost of rebates when products are shipped. Warranty reserves are
provided at the time revenue is recognized for the estimated cost of replacing
defective products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provided or delivered at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that
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<PAGE> 46
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 and enhancements are minimal and infrequent. The estimated
cost of providing this free support is accrued upon product shipment.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
Advertising
We expense advertising costs as incurred. Advertising expense for the years
ended July 31, 1997, 1998 and 1999 was approximately $35.3 million, $27.0
million and $ 42.0 million, respectively.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and require us
to use a significant amount of the cash investments held as available-for-sale
securities.
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<PAGE> 47
The following schedule summarized the estimated fair value of our cash, cash
equivalents, and short-term investments:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash .................................. $ 22,382 $ 20,623
Money market funds .................... 6,972 294,190
Commercial paper ...................... -- 156,037
Municipal bonds ....................... 81,927 37,455
U.S. Government securities ............ 26,852 10,000
--------- ---------
$ 138,133 $ 518,305
========= =========
Short-term investments:
Certificates of deposit ............... $ 5,043 $ 9,901
Corporate notes ....................... 2,000 19,482
Municipal bonds ....................... 256,297 284,057
U.S. Government securities ............ 9,875 27,713
Restricted short-term investments ..... (28,516) (36,028)
--------- ---------
$ 244,699 $ 305,125
========= =========
</TABLE>
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Due within one year ................... $ 225,241 $ 735,349
Due within two years .................. 163,317 101,784
Due within three years ................ 408 1,702
Restricted short-term investments ..... (28,516) (36,028)
--------- ---------
$ 360,450 $ 802,807
========= =========
</TABLE>
For information about our restricted investments, see Note 8. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
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<PAGE> 48
Marketable Securities
Our available for sale marketable securities are carried at fair value and
include unrealized gains and losses, net of tax, in stockholders' equity. We
have designated our investment in Excite@Home as a trading security and
fluctuations in the market value of these shares are reported in net income. We
held the following marketable securities at July 31, 1998 and 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------------- NET REALIZED
1998 COST GAIN LOSS LOSS FAIR VALUE
- ---- -------- -------- ------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Checkfree Corporation common stock $156,350 $106,000 $ -- $ -- $262,350
Excite, Inc. common stock 39,150 187,050 -- -- 226,200
Verisign, Inc. common stock 2,000 5,750 -- -- 7,750
Concentric Network Corporation common stock -- 2,985 -- -- 2,985
-------- -------- ------- -------- --------
$197,500 $301,785 $ -- $ -- $499,285
======== ======== ======= ======== ========
1999
- ----
(In thousands)
Checkfree Corporation common stock $150,081 $152,177 $ -- $ -- $302,258
Security First Technologies common stock 49,997 -- 16,140 -- 33,857
Excite@Home, Inc. common stock 132,060 -- -- 36,856 95,204
-------- -------- ------- -------- --------
$332,138 $152,177 $16,140 $ 36,856 $431,319
======== ======== ======= ======== ========
</TABLE>
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 National Market under the symbol CKFR. The closing price
of Checkfree common stock at July 31, 1999 was $29.56 per share. At July 31,
1999, we held 10.2 million shares, or approximately 19%, of Checkfree's
outstanding common stock.
During fiscal 1999, we sold 425,000 shares of Checkfree, 250,000 shares of
Verisign, 4,800,000 shares of Excite, and 217,640 shares of Concentric. In
connection with these sales we recognized realized total gains of $1.1 million,
$17.7 million, $461.4 million, and $10.6 million, respectively.
In connection with At Home Corporation's acquisition of Excite in May 1999, our
shares of Excite were converted into Excite@Home common stock. At the time of
the conversion of our existing Excite shares into Excite@Home shares, we
recorded a realized gain of approximately $125.3 million. We have elected to
report these converted Excite@Home shares as a trading security. As a result, we
are reporting both positive and negative fluctuations in the market value of
this stock in net income. At July 31, 1999, we owned 2.1 million shares (or
approximately 0.6%) of Excite@Home common stock and reported a realized
valuation loss of approximately $36.9 million for these securities for the
period between the time of conversion of the shares to July 31, 1999. The
closing price of Excite@Home (symbol ATHM) at July 31, 1999, was $45.69 per
share. The average price of Excite@Home between May 28, 1999 and July 31, 1999
was $50.55 per share.
In May 1999, we purchased 970,813 shares of common stock of Security First
Technologies ("Security First"). See Note 5 for more information about this
purchase. We account for the investment in Security First as an
available-for-sale-equity security, which accordingly is carried at market
value. Security First common stock is quoted on the Nasdaq National Market under
the symbol SONE. The closing price of Security First common stock at July 31,
1999 was $34.88 per share. At July 31, 1999, we held 970,813 shares, or
approximately 3.5%, of Security First's outstanding common stock.
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<PAGE> 49
Checkfree, Excite@Home, and Security First 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.
Inventories
Our inventories consist 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 the straight-line
method over the lesser of the estimated useful lives or remaining lease terms.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Machinery and equipment ............................ $ 96,780 $ 138,231
Furniture and fixtures ............................. 12,514 15,216
Leasehold improvements ............................. 22,278 39,168
Land and buildings ................................. 3,193 9,049
Construction in progress ........................... 763 2,639
--------- ---------
135,528 204,303
Less accumulated depreciation and amortization ..... (66,115) (95,452)
--------- ---------
$ 69,413 $ 108,851
========= =========
</TABLE>
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 ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
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<PAGE> 50
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
LIFE IN NET BALANCE AT
YEARS JULY 31, 1998 JULY 31, 1999
------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Goodwill 3-5 $ 285,793 $ 382,888
Customer lists 3-5 53,517 66,907
Covenant not to compete 3-5 2,211 2,492
Purchased technology 1-5 18,763 17,751
Assembled Workforce 2-5 5,596 3,972
Trade names and logos 1-10 5,710 6,882
</TABLE>
Balances presented above are net of total accumulated amortization of $103.6
million and $210.1 million at July 31, 1998 and July 31, 1999, respectively.
Concentration of Credit Risk
Intuit operates in an 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 July 31,
1999, we held shares of Checkfree common stock representing approximately 19% of
Checkfree's outstanding common stock. We also held approximately 0.6% of
Excite@Home's Common Stock and 3.5% of Security First's outstanding common stock
outstanding as of July 31, 1999. 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. Fluctuations in the market value of our shares in
Excite@Home are treated as realized gains and losses in our statement of
operations on an ongoing basis, since this investment is treated as a trading
security. 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.
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.
Comprehensive Income (Loss)
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards 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. The only items of
comprehensive income (loss) that the Company currently reports are unrealized
gains (losses) on marketable securities and foreign currency translation
adjustments.
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<PAGE> 51
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, the FASB delayed
implementation of FAS 133, so that implementation is now required for fiscal
years beginning after June 15, 2000. Upon adoption, transition adjustments will
be reported in net income or other comprehensive income, as appropriate,
reflecting the effect of a change in accounting principle. We have not yet
determined whether adoption of FAS 133 will have a material impact on our
consolidated financial position, results of operations, or cash flows.
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. All
share and per share amounts shown in this table have been restated to reflect a
three for one stock split effective September 30, 1999 (see Notes 9 and 19). The
following table shows the computation of basic and diluted income per share for
the years ended July 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------
1997 1998 1999
-------- ---------- --------
(In thousands, except share and per share data)
<S> <C> <C> <C>
BASIC:
Weighted average common shares outstanding ...... 139,272 149,028 182,688
======== ========== ========
Net income (loss) ............................... $ 68,308 $ (12,157) $376,549
======== ========== ========
Per share amount ................................ $ 0.49 $ (0.08) $ 2.06
======== ========== ========
DILUTED:
Weighted average common shares outstanding ...... 139,272 149,028 182,688
Equivalent shares issuable upon exercise of
options ...................................... 3,072 -- 8,400
-------- ---------- --------
Shares used in per share amounts ................ 142,344 149,028 191,088
======== ========== ========
Net income (loss) ............................... $ 68,308 $ (12,157) $376,549
======== ========== ========
Per share amount ................................ $ 0.48 $ (0.08) $ 1.97
======== ========== ========
</TABLE>
3. ACQUISITIONS
In September 1996, we acquired GALT Technologies, Inc. ("GALT") 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
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<PAGE> 52
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 the terms of the agreement, we
issued 636,159 shares of Intuit common stock and options to purchase
approximately 101,058 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 of in-process research and development in the quarter ended April
30, 1997. Under the terms of the agreement, we issued options to purchase
267,510 shares of Intuit common stock to employees of Nihon Micom on the date of
acquisition and an additional 284,700 shares in March of 1999.
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 30.0 million shares
of common stock. Note 9 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 at the time of the acquisition. 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
for the fiscal years ending July 31, 1997 and 1998 as if we had acquired Lacerte
at the beginning of fiscal 1997:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Net revenue ....................................................... $ 668,077 $ 598,925 $ 668,244 $ 592,736
Net loss from continuing operations ............................... (88,067) (2,932) (56,689) (12,157)
Basic and diluted net loss per share from continuing operations ... $ (0.51) $ (0.02) $ (0.32) $ (0.08)
</TABLE>
On April 7, 1999, we acquired the customer list and intellectual property rights
of TaxByte, Inc., for approximately $11 million in cash. TaxByte was a
professional tax preparation software company with a customer base of
approximately 3,600 professional tax preparers. The acquisition was treated as a
purchase for accounting purposes and the entire purchase price was allocated to
identified intangible assets and goodwill to be amortized over five years. No
tangible assets were acquired or liabilities assumed in connection with the
purchase.
On May 3, 1999, we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services for cash. CRI is one
of the country's largest payroll services companies and a leader in providing
payroll services to small businesses. The purchase price for privately-held CRI
was approximately $200 million, consisting of approximately $100 million cash
and approximately $25 million of Intuit stock that was paid at closing, and $75
million in cash to be paid in three annual installments of $ 25 million each.
We accounted for the acquisition of CRI as a purchase for accounting purposes
and allocated approximately $187 million to identified intangible assets and
goodwill. These assets are being amortized over a period of three to five years.
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 CRI as if we had acquired CRI at the beginning of fiscal 1998:
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<PAGE> 53
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, YEAR ENDED JULY 31,
1998 1999
--------------------------- --------------------------
INCLUDING AS INCLUDING AS
CRI REPORTED CRI REPORTED
--------- --------- --------- ---------
(In thousands, except per share data; unaudited)
<S> <C> <C> <C> <C>
Net revenue ...................................... $ 624,636 $ 592,736 $ 873,316 $ 847,568
Net income (loss) from continuing operations ..... (44,098) (12,157) 350,212 376,549
Diluted net income (loss) per share
from continuing operations ...................... $ (0.29) $ (0.08) $ 1.83 $ 1.97
</TABLE>
On June 11, 1999, we acquired the customer list and intellectual property rights
of Compucraft Tax Services, LLC, for approximately $8 million in cash with a
provision that could increase the overall purchase price if certain performance
targets are met. Compucraft was a professional tax preparation service bureau
company with an active customer base of approximately 3,400 professional tax
preparers. The acquisition was accounted for as a purchase for accounting
purposes. The entire purchase price was allocated to identified intangible
assets. No liabilities were assumed in connection with the purchase.
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. 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. The
losses incurred for the period noted above were netted against the gain on sale
of discontinued operations.
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.
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
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<PAGE> 54
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 remaining capitalized amount of $8.1 million is being
amortized ratably over the remainder of the term. AOL will also be eligible for
additional revenue sharing payments once Intuit has recovered certain advances
and other amounts.
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 $34.5 million through the sale of equity
interests to private investors and obtained conditional commitments to receive
up to an additional $11.5 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 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 17).
On May 27, 1999, we completed a $50 million investment in Security First
Technologies ("Security First"). Security First delivers enterprise-wide
Internet applications for financial institutions. We purchased 970,813 shares of
common stock at a price of $51.50 per share, which represents approximately 3.8%
of Security First's outstanding common stock. In connection with this agreement,
we also received an option to purchase 3,629,187 additional shares of Security
First common stock, which will become exercisable if Security First completes
its planned acquisition of Edify Corporation (a publicly held California-based
provider of Internet and voice electronic commerce solutions), and an option to
purchase an additional 1,800,000 shares of common stock if Security First
completes its planned acquisition of FICS Group, N.V. (a privately held
Belgium-based provider of regulatory financial reporting and remote electronic
banking software). These options are exercisable at a per share purchase price
of $51.50. Our investment in Security First was made in connection with
establishing a strategic relationship to deliver online financial software and
services to financial institutions. The common stock of Security First is quoted
on the Nasdaq National Market under the symbol "SONE."
6. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Intuit has adopted Statement of Financial Accounting No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS 131
establishes standards for the way in which public companies disclose certain
information about operating segments in the Company's financial reports.
Consistent with SFAS 131, we have determined our operating segments based on
factors such as how our operations are managed and how results are viewed by
management. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. Intuit does
not track assets by operating segments. Consequently, we do not disclose assets
by operating segments. The following results are broken out by our operating
segments for the fiscal years ending July 31, 1999, 1998, and 1997:
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<TABLE>
<CAPTION>
1999 SMALL CONSUMER
- ---- BUSINESS FINANCE TAX INTERNATIONAL
(IN THOUSANDS) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- --------- -------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue .................................. $292,707 $ 137,681 $337,734 $ 79,446 $ -- $ 847,568
Segment operating
income/(loss) .............................. 95,924 (6,621) 148,464 (2,252) -- 235,515
Common expenses .............................. -- -- -- -- (114,938) (114,938)
-------- --------- -------- -------- --------- ---------
Sub-total operating income (loss) ............ 95,924 (6,621) 148,464 (2,252) (114,938) 120,577
-------- --------- -------- -------- --------- ---------
Realized gains/(losses)
on marketable securities ................... -- -- -- -- 579,211 579,211
Acquisition costs ............................ -- -- -- -- (100,692) (100,692)
Interest income/expense
and other items ............................ -- -- -- -- 18,253 18,253
-------- --------- -------- -------- --------- ---------
Net income before tax ........................ $ 95,924 $ (6,621) $148,464 $ (2,252) $ 381,834 $ 617,349
======== ========= ======== ======== ========= =========
1998
Net revenue .................................. $208,349 $ 120,860 $192,789 $ 70,738 -- $ 592,736
Segment operating
income/(loss) .............................. 75,770 (16,414) 79,373 (11,472) -- 127,257
Common expenses .............................. -- -- -- -- (66,776) (66,776)
-------- --------- -------- -------- --------- ---------
Sub-total operating income (loss) ............ 75,770 (16,414) 79,373 (11,472) (66,776) 60,481
-------- --------- -------- -------- --------- ---------
Realized gains/(losses)
on marketable securities ................... -- -- -- -- -- --
Acquisition costs ............................ -- -- -- -- (80,909) (80,909)
Interest income/expense
and other items ............................ -- -- -- -- 605 605
-------- --------- -------- -------- --------- ---------
Net income before tax ........................ $ 75,770 $ (16,414) $ 79,373 $(11,472) $(147,080) $ (19,823)
======== ========= ======== ======== ========= =========
1997
Net revenue .................................. $184,169 $ 97,572 $170,223 $ 73,537 $ 73,424 $ 598,925
Segment operating
income/(loss) .............................. 55,323 (17,487) 60,360 (1,560) 6,745 103,381
Common expenses .............................. -- -- -- -- (54,024) (54,024)
-------- --------- -------- -------- --------- ---------
Sub-total operating
income (loss) ................................ 55,323 (17,487) 60,360 (1,560) (47,279) 49,357
-------- --------- -------- -------- --------- ---------
Realized gains/(losses)
on marketable securities ................... -- -- -- -- -- --
Acquisition costs ............................ -- -- -- -- (39,041) (39,041)
Interest income/expense
and other items ............................ -- -- -- -- (507) (507)
-------- --------- -------- -------- --------- ---------
Net income before tax ........................ $ 55,323 $ (17,487) $ 60,360 $ (1,560) $ (86,827) $ 9,809
======== ========= ======== ======== ========= =========
</TABLE>
(1) Reconciling items include acquisition and other common costs not
allocated to specific segments. Fiscal 1997 results include activity
from our divested Parsons subsidiary.
55
<PAGE> 56
7. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Reserve for returns and exchanges ............... $ 60,343 $ 73,955
Future payments due for CRI acquisition ......... -- 66,314
Other acquisition and disposition related items.. 19,181 10,824
Rebates ......................................... 16,870 18,002
Post-contract customer support .................. 4,433 3,418
Other accruals .................................. 23,993 27,517
-------- --------
$124,820 $200,030
======== ========
</TABLE>
8. 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, 1999, the rate was approximately 0.4%. 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 $36.0 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at July 31, 1999. 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:
<TABLE>
<CAPTION>
YEARS ENDING JULY 31, COMMITMENTS
- --------------------- -----------
(In thousands)
<S> <C>
2000 ................................... $ 19,456
2001 ................................... 20,195
2002 ................................... 17,357
2003 ................................... 17,489
2004 ................................... 14,067
Thereafter ............................. 42,862
--------
$131,426
========
</TABLE>
Total rent expense for the years ended July 31, 1997, 1998 and 1999 was
approximately $10.1 million, $10.3 million and $11.5 million, respectively.
9. 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 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.
56
<PAGE> 57
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
granted through January 1999 vest over a four-year period. All subsequent
options have been immediately vested at the time of grant. All options expire
after ten years.
On November 11, 1998, we adopted the 1998 Option Plan for Mergers and
Acquisitions (the "1998 Plan"). Under the 1998 Plan, we may grant non-qualified
stock options to individuals who are hired by Intuit as a result of acquisitions
of, or mergers with, other companies by Intuit. The 1998 Plan has been designed
to meet the "broadly based plans" exemption from the stockholder approval
requirement for stock option plans under the Nasdaq National Market listing
requirements and, accordingly, has not been submitted to Intuit stockholders for
approval. Options under the 1998 Plan can only be granted to eligible
individuals within 18 months following the completion of the relevant
acquisition or merger. Options granted under the 1998 Plan have an exercise
price not less than the fair market value of Intuit's Common Stock on the date
of grant. They will generally become exercisable over a four-year period based
on continued service and expire ten years after the grant date. Options granted
to officers hired as a result of a merger or acquisition cannot exceed 45% of
all shares reserved for grant under the 1998 Plan.
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 purchases of
GALT and Intuit Insurance Services, Inc. ("IIS").
A summary of activity under all option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE NUMBER OF PRICE PER EXERCISE PRICE
FOR GRANT SHARES SHARE PER SHARE
----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at July 31, 1996 ................... 5,905,419 19,697,919 $ 0.02 - $28.00 $ 9.25
GALT Plan assumed ......................... 101,058 -- -- --
Options converted in GALT acquisition ..... (101,058) 101,058 0.76 - 12.46 7.79
Additional shares authorized .............. 9,360,000 -- -- --
Options granted outside of option plans ... -- 336,018 7.29 - 28.00 11.03
Options granted ........................... (13,164,561) 13,164,561 7.25 - 12.67 9.25
Options exercised ......................... -- (2,480,349) 0.02 - 19.21 3.15
Options canceled or expired ............... 3,720,621 (3,974,901) 0.76 - 28.00 9.88
----------- ----------- ---------------- ------
Balance at July 31, 1997 ................... 5,821,479 26,844,306 0.02 - 28.00 7.54
Additional shares authorized .............. 6,450,000 -- -- --
Options granted ........................... (9,235,791) 9,235,791 8.21 - 18.83 12.73
Options exercised ......................... -- (6,690,774) 0.02 - 14.67 6.28
Options canceled or expired ............... 3,424,584 (3,555,504) 0.76 - 28.00 8.56
----------- ----------- ---------------- ------
Balance at July 31, 1998 ................... 6,460,272 25,833,819 0.02 - 26.00 9.57
Additional shares authorized .............. 14,010,000 -- -- --
Options granted ........................... (15,129,414) 15,129,414 13.04 - 31.21 23.22
Options exercised ......................... -- (8,400,849) 0.02 - 31.21 8.12
Options canceled or expired ............... 2,208,099 (2,208,843) 0.76 - 31.21 15.47
----------- ----------- ---------------- ------
Balance at July 31, 1999 ................... 7,548,957 30,353,541 $ 0.02 - $31.21 $16.35
=========== =========== ================ ======
</TABLE>
There were 5,793,057, 7,597,860 and 7,513,713 options exercisable under the
various plans at July 31, 1997, 1998 and 1999, respectively. At July 31, 1999,
there were 3,676,731 shares available for grant under the 1993 Plan, 180,000
shares available for grant under the 1996 Directors Stock Option Plan, and
3,692,226 shares available for grant under the 1998 Plan.
On September 18, 1996, we repriced 5,363,238 options to reflect an exercise
price of $10.92, the fair market value on the date of repricing. As a condition
of the repricing, employees agreed that repriced options would not be
57
<PAGE> 58
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 9,454,335 options to reflect an exercise price of
$7.92, 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, 532,800 options
held by employees of a Japanese subsidiary were also repriced to $7.92.
Stock Split
Intuit's Board of Directors authorized a three-for-one stock split on September
8, 1999. This was effected by distributing a 200% stock dividend on September
30, 1999 to stockholders of record on September 20, 1999. We have restated all
share and per share amounts referred to in the financial statements and notes to
reflect this 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 900,000 shares of common stock for
future issuance. In January 1998, an additional 600,000 shares of common stock
were reserved for future issuance, and in January 1999, an additional 900,000
shares 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 1998 and 1999,
employees purchased 443,928 and 396,546 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 1997, 1998 and 1999 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:
<TABLE>
<CAPTION>
OPTIONS EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------- ------------------------------------
1997 1998 1999 1997 1998 1999
---------- --------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) ...... 1.17-4.61 1.61-4.61 1.61-4.61 0.5 0.5 0.5
Expected volatility ........ 0.60% 0.60% 0.69% 0.60% 0.60% 0.69%
Risk-free interest rate .... 5.50%-6.88% 5.34%-6.0% 4.10%-6.31% 5.61% 5.25%-5.45% 4.59%-4.93%
</TABLE>
58
<PAGE> 59
Our pro forma net income (loss) and net income (loss) per share would have been:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------------
1997 1998 1999
----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss)
As reported ............................ $ 68,308 $ (12,157) $ 376,549
Pro forma .............................. $ 46,409 $ (34,194) $ 336,944
Diluted net income (loss) per share
As reported ............................ $ 0.48 $ (0.08) $ 1.97
Pro forma .............................. $ 0.32 $ (0.23) $ 1.76
</TABLE>
The weighted average fair value of options granted during fiscal 1997, 1998 and
1999 was approximately $4.00, $5.54 and $11.06 per share, respectively.
The following table summarizes information about stock options outstanding at
July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICE NUMBER LIFE (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- --------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.02 - $ 7.92 5,195,319 6.45 $ 7.25 3,374,613 $ 6.98
7.98 - 8.67 3,352,959 7.89 8.22 1,505,763 8.19
8.82 - 11.50 3,062,553 7.89 10.00 1,164,063 9.95
11.67 - 15.60 3,254,379 8.68 14.20 742,626 14.17
15.67 - 16.13 3,272,925 8.79 15.80 321,150 15.84
16.38 - 23.33 3,479,133 9.06 17.92 345,633 17.05
24.00 - 26.31 4,732,287 9.76 26.27 4,083 26.12
26.75 - 30.58 2,441,532 9.52 27.49 55,512 29.45
31.00 - 31.00 532,446 9.92 31.00 0 0.00
31.21 - 31.21 1,030,008 9.62 31.21 270 31.21
-------------- ---------- ---- ------ --------- -------
$0.02 - $31.21 30,353,541 8.48 $16.35 7,513,713 $ 9.41
============== ========== ==== ====== ========= =======
</TABLE>
Stock Offering
In May and June 1998, we sold 30.0 million shares of our Common Stock in a
registered underwritten public offering at a price to the public of $15.792 per
share, providing us with net proceeds of approximately $455.7 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.
10. 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 1997, 1998 and
1999 was approximately $4.2 million, $9.1 million and $12.4 million,
respectively.
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<PAGE> 60
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, at July 31, 1998, the match was 75%, up to
$1,500, and at July 31, 1999, the match was 75%, up to $2,500. Matching
contributions were approximately $1.6 million, $3.0 million and $5.8 million,
respectively, for the years ended July 31, 1997, 1998 and 1999. Our wholly owned
subsidiary Lacerte currently maintains its own separate 401(k)-retirement plan
for participating employees. The Lacerte plan will be merged with the existing
Intuit plan on January 1, 2000.
11. 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 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 1/3000th of a share of a newly designated Series B Junior
Participating Preferred stock at an exercise price of approximately $83.33. The
preferred stock has been structured so that the value of 1/3000th 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. The plan was amended in October 1998 to
remove "continuing director" provisions, which had allowed the Intuit Board of
Directors to take certain actions following a 20% acquisition of Intuit's shares
provided that a majority of directors in office after the acquisition event had
been in office immediately prior to the acquisition event.
12. INCOME TAXES
Income (loss) before income taxes includes income (loss) from foreign operations
of approximately $(8,365,000), ($14,512,000) and ($8,972,000) for the years
ended July 31, 1997, 1998 and 1999, respectively. The provision for income taxes
consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------------
(In thousands) 1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal ..................................... $ 29,117 $ 23,051 $ 210,799
State ....................................... 5,843 3,694 45,527
Foreign ..................................... 651 390 --
--------- --------- ---------
35,611 27,135 256,326
Deferred:
Federal ..................................... (18,144) (27,999) (15,313)
State ....................................... (4,726) (6,802) (213)
--------- --------- ---------
(22,870) (34,801) (15,526)
--------- --------- ---------
Total provision (benefit) for income taxes .... $ 12,741 $ (7,666) $ 240,800
========= ========= =========
</TABLE>
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<PAGE> 61
Differences between income taxes calculated using the federal statutory income
tax rate of 35% and the provision (benefit) for income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------------
(In thousands) 1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes . .......... $ 9,809 $ (19,823) $ 617,349
========= ========= =========
Statutory federal income tax .................. $ 3,433 (6,938) 216,073
State income tax, net of federal benefit ...... 785 (1,812) 29,454
Federal research and experimental credits ..... (4,100) (2,700) (4,500)
Non-deductible merger related charges ......... 10,637 3,814 980
Tax exempt interest ........................... (1,633) (2,627) (4,398)
Foreign losses not benefited .................. 3,533 5,396 3,074
Other, net .................................... 86 (2,799) 117
--------- --------- ---------
Total ............................... $ 12,741 $ (7,666) $ 240,800
========= ========= =========
</TABLE>
Tax savings from deductions associated with our various stock option plans are
not reflected in the current federal and state provisions. Savings were
approximately $6.7 million in fiscal 1997, $21.2 million in fiscal 1998 and
$55.6 million in fiscal 1999. These amounts were credited to stockholders'
equity.
Significant deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
(In thousands) 1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently deductible ................. $ 43,061 $ 50,229
Deferred foreign taxes ......................................... 8,081 9,976
State income taxes ............................................. -- 15,296
Merger charges ................................................. 24,860 47,078
Fixed asset adjustments ........................................ 8,044 11,788
Other, net ..................................................... 5,012 5,848
--------- ---------
Total deferred tax assets .............................. 89,058 140,215
Deferred tax liabilities:
Deferred gain on discontinued operations ....................... 55,688 51,421
Unrealized gain on marketable securities ....................... 120,714 85,273
State income taxes ............................................. 2,488 --
--------- ---------
Total deferred tax liabilities ......................... 178,890 136,694
--------- ---------
Total net deferred tax liabilities ............................... (89,832) 3,521
Valuation reserve due to foreign losses ........................ (9,644) (11,615)
--------- ---------
Total net deferred tax liabilities, net of valuation reserve ..... $ (99,476) $ (8,094)
========= =========
</TABLE>
We have provided a valuation reserve related to the benefit of losses in our
foreign subsidiaries that we believe are unlikely to be realized.
13. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income and changes thereto consist of:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
---------------------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance gain (loss), net of tax............. $ (502) $ 19,432 $ 182,602
Unrealized gain (loss) on marketable securities....... 34,450 267,335 (165,752)
Tax benefit (effect) on unrealized gain............... (13,782) (106,932) 66,302
Translation adjustment gain (loss), net of tax........ (734) 2,767 (4,008)
--------- --------- ---------
Ending balance gain (loss), net of tax................ $ 19,432 $ 182,602 $ 79,144
========= ========= =========
</TABLE>
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<PAGE> 62
14. SIGNIFICANT CUSTOMER INFORMATION
One distributor accounted for 12% of net revenue in fiscal 1997, 15% of net
revenue in fiscal 1998 and 16% of net revenue in fiscal 1999.
15. 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. 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, 1999, there were no remaining balances related to these restructuring
charges.
16. 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 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. The plaintiffs seek compensatory damages, disgorgement of profits, and (in
some cases) attorneys' fees.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs filed a Third Amended Complaint and Intuit filed a demurrer in
response to it, seeking dismissal of the complaint. We believe we have good and
valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the year, a suit was filed in the
Contra Costa County, California Superior Court by an individual consumer against
various retailers, including Circuit City Stores, CompUSA, Fry's Electronics,
Office Depot, The Good Guys and others, alleging that these retailers have sold
software and hardware products which are not Year 2000 compliant, including at
least one product published by Intuit. One of the defendants in this action,
Fry's Electronics, filed a cross-complaint against various software publishers
and hardware manufacturers, including Intuit, asserting a claim for indemnity in
the main action. In September 1999, Fry's
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<PAGE> 63
Electronics reached a settlement with the plaintiffs. The cross-complaint is
still pending. The response to the cross-complaint is due on October 11, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
17. RELATED PARTY TRANSACTIONS
On April 30 1998, we provided Excite, a predecessor company of Excite@Home, 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 $26.3 million from Excite@Home for the year ended July 31,
1999. See Note 5 for more information regarding our acquisition of Excite@Home
common stock.
At July 31, 1999, 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 $6.1 million, $14.1 million, and $11.6 million from
Checkfree for the years ended July 31, 1999, 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 $0.1, $3.4 and $1.0
million at July 31, 1999, 1998, and 1997, respectively. See Note 4 for more
information regarding our acquisition of Checkfree common stock.
As of July 31, 1999, we held a 49% non-voting 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. We received cost reimbursements of approximately
$17.1 and $2.1 million in fiscal 1999 and 1998 respectively, for development and
administrative services provided in connection with this agreement. At July 31,
1999, we held a receivable due from VFSC for $6.7 million. See Note 5 for more
information regarding VFSC.
18. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
---------------------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31(1)
---------- ---------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
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 ........... (0.09) 0.29 (0.02) (0.23)
Diluted net income (loss) per share ......... (0.09) 0.28 (0.02) (0.23)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED
---------------------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31(2)
----------- ---------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenue ................................. $ 111,968 $ 345,951 $ 239,701 $ 149,948
Cost of goods sold .......................... 37,019 67,712 51,955 52,457
All other costs and expenses ................ 143,020 172,592 142,077 160,850
Income (loss) from continuing operations .... (49,190) 89,857 72,555 263,327
Net income (loss) ........................... (49,190) 89,857 72,555 263,327
Basic net income (loss) per share ........... (0.28) 0.50 0.39 1.41
Diluted net income (loss) per share ......... (0.28) 0.47 0.37 1.35
</TABLE>
63
<PAGE> 64
64
(1) Includes a charge of $53.8 million related to purchased research and
development at the time of the Lacerte acquisition.
(2) Includes a realized pre-tax gain of $422.1 million from the sale of
Excite shares, a realized pre-tax gain of $125.3 million from the
conversion of Excite common shares to common shares of Excite@Home, and
a realized pre-tax valuation loss of $36.7 million at July 31, 1999.
19. SUBSEQUENT EVENTS (UNAUDITED)
On August 2, 1999, we completed a purchase of all of the outstanding common and
Series A preferred stock of Boston Light Software Corp. ("Boston Light") for
approximately $33.5 million in stock. In connection with the agreement, Intuit
assumed 482,910 of Boston Light's outstanding employee stock options. Boston
Light is a developer of software and web based products for small businesses and
is based in Boston, MA. The acquisition will be treated as a purchase for
accounting purposes and will be recorded in the first quarter of fiscal 2000.
On August 9, 1999, we completed a purchase of all of the outstanding common
stock of SecureTax.com, for approximately $52 million in cash. Secure Tax is a
developer of online tax preparation and electronic filing services and is based
in Rome, GA. The acquisition will be treated as a purchase for accounting
purposes and will be recorded in the first quarter of fiscal 2000.
On August 10, 1999, we completed a purchase of all of the outstanding common
stock of Hutchison Avenue Software Corporation ("Hutchison"), for approximately
$7.5 million in cash. In connection with the agreement, Intuit assumed 395,058
of Hutchison's outstanding employee stock options. Hutchison is a developer of
software and web based products and is based in Ontario, Canada. The acquisition
will be treated as a purchase for accounting purposes and will be recorded in
the first quarter of fiscal 2000. We believe the total purchase price, including
the price associated with the assumption of Hutchison's stock options, will be
approximately $18.5 million.
On September 8, 1999, our Board of Directors declared a three-for-one stock
split, to be effected as a stock dividend of two shares of common stock for each
share of Intuit's common stock outstanding. Stockholders of record on September
20, 1999 were issued two additional shares of common stock for each share of
Intuit's common stock held on that date. The payment date for the stock dividend
was September 30, 1999. We have restated all share and per share amounts
referred to in the financial statements and notes to reflect this stock split.
On September 27, 1999, William H. Harris, Jr. resigned as Chief Executive
Officer. The Board of Directors named current Chairman and former Chief
Executive Officer William V. Campbell as the acting Chief Executive Officer.
Campbell will assume day-to-day operations of Intuit pending selection of a new
Chief Executive Officer to replace Harris, who will remain on the Board of
Directors.
On October 7, 1999, we announced the proposed acquisition of all of the
outstanding common stock of Rock Financial Corporation ("Rock"), for
approximately $370 million to be paid by the issuance of Intuit common shares.
In addition, Intuit will assume Rock's outstanding stock options. Rock is a
provider of consumer mortgages and is based in Michigan. We expect to account
for the acquisition as a pooling of interests. The acquisition is subject to
various closing conditions including regulatory approval and approval of Rock's
Stockholders. We expect the acquisition to close in our second quarter of fiscal
2000.
On October 7, 1999, Mortgage.com notified us that it intends to cancel its
Distribution, Marketing, Facilities and Services Agreement with us. The loan
paperwork processing services that Mortgage.com provides for our QuickenMortgage
online mortgage service will be phased out over the next twelve months. We do
not believe that the cancellation of this agreement will have a material impact
on our online mortgage business in the long term, particularly in light of our
pending acquisition of Rock Financial Corporation. Rock will perform similar
functions to those currently performed by Mortgage.com.
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<PAGE> 65
SCHEDULE II
INTUIT INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO AT END OF
Classification PERIOD EXPENSE WRITE-OFFS PERIOD
- -------------- ------------ ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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
Year ended July 31, 1999
Allowance for doubtful accounts....... $ 5,335 $ 6,411 $ (1,007) $ 10,739
Reserve for returns and exchanges..... $ 60,343 $ 89,093 $(75,481) $ 73,955
</TABLE>
65
<PAGE> 66
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 November 1999 Annual Meeting of
Stockholders. Information about executive officers that is required by this Item
can be found in Item 4A on page 21.
ITEM 11
EXECUTIVE COMPENSATION
This information is incorporated by reference to our Proxy Statement for our
November 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
November 1999 Annual Meeting.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our Proxy Statement for our
November 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) 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)
2.02(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
2.03(3) Amended and Restated Checkfree Corporation Stock Restriction Agreement
dated September 15, 1996 between Intuit and Checkfree Corporation
2.04(2) Amended and Restated Registration Rights Agreement dated as of
September 15, 1996 between Intuit and Checkfree Corporation
2.05(4) Asset Purchase Agreement by and among Lacerte Software Corporation,
Lacerte Educational Services Corporation, Intuit Inc. and IL
Acquisition Corporation, dated May 18, 1998
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<PAGE> 67
2.06(5) Exchange Agreement dated as of March 2, 1999 by and among Intuit Inc.,
Computing Resources, Inc., Ranson W. Webster and Harry D. Hart and
Amendment No. 1 thereto dated April 30, 1999
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(9) Certificate of Designations of Series B Junior Participating Preferred
Stock dated May 1, 1998
3.05(10) Amended and Restated Rights Agreement, dated October 5, 1998
3.06(10) Certificate of Retirement of Series A Preferred Stock dated
September 16, 1998
3.07(11) Bylaws of Intuit, as amended and restated effective April 29, 1998
4.01(10) Form of Specimen Certificate for Intuit's Common Stock
4.02(10) Form of Right Certificate for Series B Junior Participating Preferred
Stock (included in Exhibit 3.05)
4.03(5) Registration Rights Agreement dated as of May 3, 1999 by and among
Intuit Inc., Ranson W. Webster and Norma J. Webster and Harry D. and
Carla J. Hart
10.01(6)+ Intuit 1988 Stock Option Plan and related documents
10.02(12)+ 1992 Stock Option Plan of ChipSoft and related documents
10.03*+ Intuit Inc. 1993 Equity Incentive Plan and related documents,
as amended through February 19, 1999
10.04(13)+ Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 15, 1999
10.05*+ Intuit Inc. 1996 Directors Stock Option Plan, and related documents,
as amended through February 19, 1999
10.06(6)+ Intuit's form of Non-Plan Non-Qualified Stock Option Agreement
10.07(14)+ Intuit Inc. 1998 Option Plan for Mergers and Acquisitions, as amended
through April 28, 1999 and related documents
10.08*+ Intuit Inc. Form Of Amendment To All Stock Options Outstanding At
February 19, 1999
10.09(7)+ Letter Agreement of Employment dated March 30, 1994 between Intuit and
William V. Campbell
10.10(6) Form of Indemnification Agreement entered into by Intuit with each of
its directors and certain executive officers
10.11 [INTENTIONALLY OMITTED]
10.12(15) Supply Agreement dated August 23, 1995 by and between Intuit Inc. and
John H. Harland Company
10.13(16) 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)
10.14(17) Securities Contract, dated as of May 5, 1999 between Lacerte Software
Corporation, a wholly-owned subsidiary of Intuit and Credit Suisse
Financial Products
10.15(17) Pledge Agreement, dated as of May 5, 1999, among Lacerte Software
Corporation, Credit Suisse Financial Products and Credit Suisse First
Boston
10.16.(18) Stock Purchase and Option Agreement by and between Security First
Technologies Corporation and Intuit Inc., dated as of May 16, 1999
10.17* Master Agreement between Intuit Inc. and Modus Media International,
Inc., dated as of August 31, 1999
10.18(19) 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
10.19(19) 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
10.20(19) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2475 Garcia Drive, Mountain View, California
10.21(19) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2525 Garcia Drive, Mountain View, California
10.22(19) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2535 Garcia Drive, Mountain View, California
10.23(20) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2500 Garcia Drive, Mountain View, California
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<PAGE> 68
10.24(20) Lease Agreement dated as of November 30, 1994 between Intuit and
Charleston Properties for 2550 Garcia Drive, Mountain View, California
10.25(10) Lease Agreement dated as of January 7, 1998 between Intuit and
Charleston Properties for 2650 Casey Drive, Mountain View, California
10.26(21) 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
10.27(21) Lease Agreement dated as of August 31, 1995 between Intuit and Airport
Business Center Associates Limited Partnership, an Arizona limited
partnership
10.28(10) 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)
10.29(10) Build-to-Suit 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
10.30(10) 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
10.31* Deed of Lease dated as of July 27, 1999 between Intuit and Waterfront
I Corporation for 44 Canal Center Plaza, Alexandria, Virginia
10.32* Lease Agreement dated as of January 1, 1994 between Intuit as
successor in interest to Computing Resources, Inc. and 1285 Financial
Boulevard, Inc. for 1285 Financial Boulevard, Reno, Nevada
10.33* Lease Agreement dated as of June 1, 1993 between Intuit as successor
in interest to Computing Resources, Inc. who is successor in interest
to Pioneer Bank and Dermody Properties for 5400 Equity Avenue, Reno,
Nevada
10.34* Lease Agreement dated as of January 1, 1996 between Intuit as
successor in interest to Computing Resources, Inc. and 565 Rio Vista
Drive, Inc. for 565 Rio Vista Drive, Fallon, Nevada
10.35* Office Space Lease dated as of May 5, 1999 between Intuit as successor
in interest to Computing Resources, Inc. and Starwood/SVP L.L.C. for
21061 S. Western Avenue, Torrance, California
10.36* Standard Industrial/Commercial Multi-Tenant Lease - Gross dated
February 5, 1999 between Intuit as successor in interest to Computing
Resources, Inc. and Powell Electronics, Inc. for 2240 Lundy Avenue,
San Jose, California
10.37* Sublease Agreement and Amendments between Lacerte Software Corporation
and Oryx Energy Company for 13155 Noel Road, Suite 2200, Dallas, Texas
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)
- ----------------
+ Indicates a management contract or compensatory plan or arrangement
* Previously filed with the original Form 10-K
** Filed with this Form 10K/A, Amendment No. 1
(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) 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
(5) Filed as an Exhibit to Intuit's Form 8-K filed with the Commission on May
7, 1999 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
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<PAGE> 69
(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 Intuit's Registration Statement on Form 8-A filed
with the Commission on May 5, 1998 and incorporated by reference
(10) Filed as an Exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1998, filed with the Commission on October 6, 1998 and incorporated by
reference
(11) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on May
2, 1998 and incorporated by reference (12) 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
(13) Filed as an Exhibit to Intuit's Registration Statement on Form S-8, filed
with the Commission on January 25, 1999 and incorporated by reference
(14) Filed as an Exhibit to Intuit's Registration Statement on Form S-8, filed
with the Commission on May 7, 1999 and incorporated by reference
(15) 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
(16) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
August 22, 1997 and incorporated by reference
(17) Filed as an Exhibit to Intuit's Schedule 13D/Amendment No. 3, filed with
the Commission on May 6, 1999 and incorporated by reference
(18) Filed as an Exhibit to Intuit's Form 10-Q for the quarter ended April 30,
1999 and incorporated by reference
(19) 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
(20) 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
(21) 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
(b) Reports on Form 8-K
1. On May 7, 1999, Intuit filed a report on Form 8-K to report, under Items 2
and 7, the Company's acquisition of Computing Resources, Inc. ("CRI") on
May 3, 1999.
2. On June 14, 1999, Intuit filed an Amendment No. 1 to the Form 8-K referred
to in (3) above to file under Item 7 CRI's audited financial statements
for its fiscal year ended December 31, 1998 and required pro forma
financial information with respect to the acquisition.
3. On September 14, 1999, Intuit filed a report on Form 8-K to report under
Item 5 that on September 9, 1999, its Board of Directors had declared a
three-for-one stock split, to be effected as a stock dividend.
4. On September 24, 1999, Intuit filed a report on Form 8-K to report under
Item 5 that its President and Chief Executive Officer had resigned, and
that its current Chairman had been named as Acting Chief Executive Officer
pending selection of a new Chief Executive Officer.
(c) Exhibits
See Item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
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<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K/A, Amendment No. 1
to be signed on its behalf by the undersigned, thereunto duly authorized.
INTUIT INC.
Dated: October 25, 1999 By: /s/ GREG J. SANTORA
-------------------------------------
Greg J. Santora
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10K/A, Amendment No. 1 has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
* WILLIAM V. CAMPBELL Acting Chief Executive Officer October 25, 1999
and Chairman of the Board of
Directors
PRINCIPAL FINANCIAL/ACCOUNTING OFFICER:
/s/ GREG J. SANTORA Senior Vice President and October 25, 1999
- ----------------------------- Chief Financial Officer
Greg J. Santora
ADDITIONAL DIRECTORS:
* SCOTT D. COOK Director October 25, 1999
* CHRISTOPHER W. BRODY Director October 25, 1999
* L. JOHN DOERR Director October 25, 1999
* DONNA L. DUBINSKY Director October 25, 1999
* MICHAEL R. HALLMAN Director October 25, 1999
* WILLIAM H. HARRIS, JR. Director October 25, 1999
* BURTON J. MCMURTRY Director October 25, 1999
* By: /s/ GREG J. SANTORA
- -------------------------------------
Greg J. Santora
Attorney-in-Fact
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------ ----------- ----
<S> <C> <C>
23.01 Consent of Ernst & Young LLP, Independent Auditors..................................
</TABLE>
71
<PAGE> 1
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-59458, 33-73222, 33-95040, 333-06889, 333-14715, 333-16827,
333-16829, 333-20361, 333-45285, 333-45277, 333-45287, 333-68851, 333-71099,
333-71101, 333-71103, 333-78041, 333-84385 and 333-85349; Form S-3 Nos.
33-50417, 333-63739 and 333-78019; and Form S-4 Nos. 333-71097) pertaining to
the Intuit Inc. 1993 Equity Incentive Plan, the 1996 Directors Stock Option
Plan, the 1996 Employee Stock Purchase Plan, other Intuit Inc. equity
compensation plans and the Common Stock, Preferred Stock and/or Debt Securities
of Intuit Inc., of our report dated August 24, 1999, with respect to the
consolidated financial statements and schedule of Intuit Inc. included in this
Annual Report (Form 10-K/A) for the year ended July 31, 1999.
ERNST & YOUNG LLP
Palo Alto, California
October 21, 1999
