<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended JANUARY 31, 1999 or
[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period
from ____________ to ____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
61,144,930 shares of Common Stock, $0.01 par value, as of February 26, 1999
<PAGE> 2
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FORM 10-Q
INTUIT INC.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1998 and January 31, 1999........................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended January 31, 1998 and 1999..... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended January 31, 1998 and 1999............... 5
Notes to Condensed Consolidated Financial
Statements................................................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 15
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 27
ITEM 4: Submission of Matters to a Vote of Security Holders............. 28
ITEM 5: Other Information............................................... 29
ITEM 6: Exhibits and Reports on Form 8-K................................ 29
Signatures...................................................... 30
</TABLE>
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<PAGE> 3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1999
---------- -----------
<S> <C> <C>
(In thousands, except par value) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 138,133 $ 163,030
Short-term investments ....................................................... 244,699 282,300
Marketable securities ........................................................ 499,285 1,110,919
Accounts receivable, net(1) .................................................. 59,417 241,276
Inventories .................................................................. 3,695 5,865
Prepaid expenses and other current assets(2) ................................. 34,896 50,713
----------- -----------
Total current assets ................................................. 980,125 1,854,103
Property and equipment, net .................................................... 69,413 77,545
Purchased intangibles, net ..................................................... 85,797 73,993
Goodwill, net .................................................................. 285,793 255,227
Long-term deferred income taxes ................................................ 21,006 21,006
Investments .................................................................... 17,009 17,483
Restricted investments ......................................................... 28,516 35,454
Other assets ................................................................... 10,937 9,984
----------- -----------
Total assets ................................................................... $ 1,498,596 $ 2,344,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 44,035 $ 69,825
Accrued compensation and related liabilities ................................. 23,728 28,611
Deferred revenue ............................................................. 58,560 45,979
Income taxes payable ......................................................... 3,044 575
Deferred income taxes ........................................................ 120,482 366,112
Other accrued liabilities .................................................... 124,820 229,739
----------- -----------
Total current liabilities ............................................ 374,669 740,841
Long-term deferred income taxes ................................................ -- 883
Long-term notes payable ........................................................ 35,566 39,276
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized -- 3,000 shares total; 145 shares designated Series A; 200 shares
designated Series B Junior Participating
Issued and outstanding - none; none ........................................ -- --
Common stock, $0.01 par value
Authorized -- 250,000 shares
Issued and outstanding - 59,320 and 61,108 shares, respectively ........... 593 611
Additional paid-in capital ................................................... 1,080,554 1,148,013
Net unrealized gain on marketable securities ................................. 181,071 552,413
Cumulative translation adjustment and other .................................. 1,531 (2,521)
Accumulated deficit .......................................................... (175,388) (134,721)
----------- -----------
Total stockholders' equity ........................................... 1,088,361 1,563,795
----------- -----------
Total liabilities and stockholders' equity ..................................... $ 1,498,596 $ 2,344,795
=========== ===========
</TABLE>
(1) Includes $4.4 million and $1.3 million due from Checkfree and $3.4 million
and $4.0 million due from Excite at July 31, 1998 and January 31, 1999,
respectively (see Note 10).
(2) Includes balances due of $7.3 million and $6.1 million on a note
receivable from Venture Finance Software Corp. at July 31, 1998 and January
31, 1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts; unaudited)
Net revenue(1) ....................................... $237,513 $345,951 $333,471 $457,919
Costs and expenses:
Cost of goods sold:
Product .......................................... 45,479 65,815 67,875 101,030
Amortization of purchased software and other ..... 650 1,897 1,353 3,701
Customer service & technical support ................ 37,511 39,932 65,432 69,755
Selling & marketing ................................. 46,990 62,544 78,939 107,636
Research & development .............................. 26,634 36,353 52,778 70,021
General & administrative ............................ 9,698 12,801 18,207 26,268
Amortization of goodwill and purchased intangibles... 4,920 20,962 8,861 41,932
-------- -------- -------- --------
Total costs & expenses ..................... 171,882 240,304 293,445 420,343
-------- -------- -------- --------
Income from operations ..................... 65,631 105,647 40,026 37,576
Interest and other income and expense, net ........... 2,241 3,950 4,271 7,298
Realized gain on sale of marketable securities ....... -- 10,088 -- 10,088
Gain on disposal of business ......................... -- -- 4,321 --
-------- -------- -------- --------
Income from continuing operations before income tax... 67,872 119,685 48,618 54,962
Income tax provision ................................. 26,028 29,828 19,533 14,295
-------- -------- -------- --------
Net income ........................................... $ 41,844 $ 89,857 $ 29,085 $ 40,667
======== ======== ======== ========
Basic net income per share ........................... $ 0.88 $ 1.49 $ 0.61 $ 0.68
======== ======== ======== ========
Shares used in per share amounts ..................... 47,560 60,262 47,322 59,837
======== ======== ======== ========
Diluted net income per share ......................... $ 0.85 $ 1.42 $ 0.59 $ 0.65
======== ======== ======== ========
Shares used in per share amounts ..................... 49,438 63,350 48,929 62,379
======== ======== ======== ========
</TABLE>
(1) Includes $1.0 million and $11.8 million of revenue from Checkfree for the
three and six months ended January 31, 1998 and $1.3 million and $2.4
million of revenue for the three and six months ended January 31, 1999,
respectively. Includes $2.0 million and $3.7 million of revenue from Excite
for the three and six months ended January 31, 1998 and $8.1 million and
$12.1 million of revenue for the three and six months ended January 31,
1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
1998 1999
--------- ---------
<S> <C> <C>
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................... $ 29,085 $ 40,667
Adjustments to reconcile net income to net cash used in
operating activities:
Gain on disposal of business, net of tax .................. (1,621) --
Gain on sale of facility .................................. (1,501) --
Amortization of goodwill and other purchased intangibles... 9,466 45,633
Depreciation .............................................. 14,969 16,801
Realized gain on sale of marketable securities ............ -- (10,088)
Changes in assets and liabilities:
Accounts receivable .................................... (128,087) (181,859)
Inventories ............................................ (2,291) (2,170)
Prepaid expenses ....................................... (1,262) (15,817)
Deferred income tax assets and liabilities ............. (290) (1,048)
Accounts payable ....................................... 23,847 25,790
Accrued compensation and related liabilities ........... (1,727) 4,883
Deferred revenue ....................................... 15,907 (12,581)
Accrued acquisition liabilities ........................ (31,476) (19,181)
Other accrued liabilities .............................. 78,261 128,711
Income taxes payable ................................... 16,314 25,404
--------- ---------
Net cash provided by operating activities ............ 19,594 45,145
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility ................................. 9,025 --
Proceeds from sale of marketable securities .................... -- 17,356
Purchase of property and equipment ............................. (23,506) (24,933)
Proceeds from business sold .................................... 26,350 --
(Increase) decrease in other assets ............................ 2,398 (7,262)
Purchase of short-term investments ............................. (89,057) (145,086)
Purchase of long-term investments .............................. (2,000) (474)
Liquidation and maturity of short-term investments ............. 106,470 100,547
--------- ---------
Net cash provided by (used in) investing activities... 29,680 (59,852)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ........................... (3,797) --
Net proceeds from issuance of common stock ..................... 13,275 39,604
--------- ---------
Net cash provided by financing activities ............ 9,478 39,604
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 58,752 24,897
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 46,780 138,133
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 105,532 $ 163,030
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), and Internet products and
services for individuals and small businesses. Our products and services are
designed to automate commonly performed financial tasks and to simplify the way
individuals and small businesses manage their finances. We sell our products
throughout North America and in many international markets. Sales are made
through retail distribution channels, traditional direct sales to customers and
the Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the six months ended January 31, 1999 do not necessarily
indicate the results to be expected for the fiscal year ending July 31, 1999 or
any other future period. The July 31, 1998 balance sheet was derived from
audited financial statements but does not include all disclosures required for
audited financial statements by generally accepted accounting principles. These
statements and accompanying notes should be read together with the audited
consolidated financial statements for the fiscal year ended July 31, 1998
included in Intuit's Form 10-K filed with the Securities and Exchange
Commission.
Principles of Consolidation
The consolidated financial statements include all of our accounts and those of
our wholly-owned subsidiaries. We have eliminated all significant intercompany
accounts and transactions. Investments in which management intends to maintain
more than a temporary 20% to 50% interest, or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.
Investments in which we have less than a 20% interest and/or do not have the
ability to exercise significant influence are carried at the lower of cost or
estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectibility of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill and purchased
intangibles. Despite our intention to establish accurate estimates and
assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that we will collect the accounts receivable from our customers.
Reserves are provided for excess quantities of current product versions, as well
as previous
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<PAGE> 7
versions of products still in the distribution channel when new versions are
launched. In some situations, we receive advance payments from our customers.
Revenue associated with these advance payments is deferred until the products
are shipped or services are provided. We also reduce revenue by the estimated
cost of rebates when products are shipped. Warranty reserves are provided at the
time revenue is recognized for the estimated cost of replacing defective
products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provided or delivered at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a
payment (such as the sale of insurance through our InsureMarket website),
revenue is recognized upon completion of the transaction, assuming there are no
remaining obligations on our part.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides free telephone support service to customers. This free service, also
referred to as post-contract customer support, is included in this expense
category. We do not defer the recognition of any revenue associated with sales
of these products, since the cost of providing this free support is
insignificant, the support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and require us
to use a significant amount of the cash investments held as available-for-sale
securities.
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<PAGE> 8
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1999
-------- -----------
(In thousands) (Unaudited)
<S> <C> <C>
Cash and cash equivalents:
Cash ................................. $ 22,382 $ 40,860
Money market funds ................... 6,972 88,828
Corporate notes ...................... -- 12,000
Commercial paper ..................... -- 10,042
Municipal bonds ...................... 81,927 11,300
U.S. Government securities ........... 26,852 --
-------- --------
$138,133 $163,030
======== ========
</TABLE>
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1999
--------- -----------
(In thousands) (Unaudited)
<S> <C> <C>
Short-term investments:
Certificates of deposit .............. $ 5,043 $ 5,041
Corporate notes ...................... 2,000 21,235
Municipal bonds ...................... 256,297 291,478
U.S. Government securities ........... 9,875 --
Restricted short-term investments .... (28,516) (35,454)
--------- ---------
$ 244,699 $ 282,300
========= =========
</TABLE>
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1999
--------- -----------
(In thousands) (Unaudited)
<S> <C> <C>
Due within one year .................... $ 225,241 $ 318,984
Due within two years ................... 159,324 111,436
Due within three years ................. 4,401 9,504
Restricted short-term investments ...... (28,516) (35,454)
--------- ---------
$ 360,450 $ 404,470
========= =========
</TABLE>
For information about our restricted investments, see Note 7. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
-8-
<PAGE> 9
Marketable Securities
Our marketable securities are carried at fair value and include unrealized gains
and losses, net of tax, in stockholders' equity. We held the following
marketable securities at July 31, 1998 and January 31, 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
------------------------
COST GAIN LOSS FAIR VALUE
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
JULY 31, 1998
(In thousands)
Checkfree Corporation common stock ........ $156,350 $106,000 $ -- $262,350
Excite, Inc. common stock ................. 39,150 187,050 -- 226,200
Verisign, Inc. common stock ............... 2,000 5,750 -- 7,750
Concentric Network Corporation common stock -- 2,985 -- 2,985
-------- -------- -------- --------
$197,500 $301,785 $ -- $499,285
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------------------
COST GAIN LOSS FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
JANUARY 31, 1999
(In thousands; unaudited)
Checkfree Corporation common stock ......... $ 150,081 $ 262,007 $ -- $ 412,088
Excite, Inc. common stock .................. 39,150 648,150 -- 687,300
Verisign, Inc. common stock ................ 1,000 10,531 -- 11,531
---------- ---------- ---------- ----------
$ 190,231 $ 920,688 $ -- $1,110,919
========== ========== ========== ==========
</TABLE>
We acquired the marketable securities described above in connection with the
establishment of ongoing strategic business relationships with the companies in
question, and, in the case of the Checkfree shares, as the purchase price for a
subsidiary we sold to Checkfree in January 1997.
We account for the investment in Checkfree Corporation ("Checkfree") as an
available-for-sale equity security, which accordingly is carried at market
value. Checkfree common stock is quoted on the Nasdaq Stock Market under the
symbol CKFR. The closing price of Checkfree common stock at January 31, 1999 was
$40.50 per share. At January 31, 1999, we held 10,175,000 shares, or
approximately 19.9%, of Checkfree's outstanding common stock.
During the second fiscal quarter, we sold 425,000 shares of Checkfree, 125,000
shares of Verisign, and 127,040 shares of Concentric Network Corporation. In
connection with these sales we recognized realized gains of $1.1 million, $5.4
million and $3.6 million respectively.
In June 1997, we purchased 5.8 million shares (as adjusted for a two-for-one
stock split) of common stock of Excite, Inc. ("Excite"). At the same time, we
entered into an agreement with Excite that provides for the joint development,
promotion and distribution of an online financial channel. Excite's common stock
is quoted on the Nasdaq Stock Market under the symbol XCIT. The closing price of
Excite common stock at January 31, 1999 was $118.50 per share. On January 19,
1999, Excite and At Home Corporation announced a proposed merger in which At
Home would acquire all of the outstanding stock of Excite. Intuit entered into a
Voting Agreement with At Home (the "Voting Agreement") in which we agreed to
vote our Excite shares in favor of the proposed merger and to not transfer our
Excite shares unless the transferee agrees to be bound by the terms of the
Voting Agreement. In February 1999, we sold 450,000 shares of Excite common
stock and made a financial investment decision to dispose of the remaining
Excite shares over time, as appropriate opportunities become available. In March
1999, we entered into a forward sale arrangement with respect to an additional
4,350,000 shares. See Note 11 for more information about these transactions.
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<PAGE> 10
Checkfree, Excite and Verisign 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.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
LIFE IN NET BALANCE AT
YEARS JULY 31, 1998 JANUARY 31, 1999
------ ----------- --------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Goodwill ..................... 3-5 $285,793 $255,227
Customer lists ............... 3-5 53,517 47,498
Covenant not to compete ...... 3-5 2,211 1,678
Purchased technology ......... 1-5 18,763 15,702
Assembled workforce .......... 2-5 5,596 4,406
Trade names and logos ........ 1-10 5,710 4,709
</TABLE>
Balances presented above are net of total accumulated amortization of $103.6
million and $154.2 million at July 31, 1998 and January 31, 1999, respectively.
Concentration of Credit Risk
Almost all of Intuit's operations are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Many
circumstances could have an unfavorable impact on Intuit's operating results.
Examples include significant technological changes in the industry, changes in
customer requirements or the emergence of competitive products or services with
new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At January 31,
1999, we held shares of Checkfree common stock representing approximately 19.9%
of Checkfree's outstanding common stock. We also held approximately 11% of
Excite's outstanding common stock as of January 31, 1999. Our ability to dispose
of these securities is limited by trading volume and other legal and contractual
restrictions. If there is a permanent decline in the value of these securities
below cost, we will need to report this decline in our statement of operations.
See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. See Note 11 for information regarding
subsequent dispositions of certain shares of Excite common stock. Our remaining
portfolio is diversified and consists primarily of short-term investment-grade
securities.
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<PAGE> 11
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating segments in
financial statements. It also sets standards for related disclosures about
products and services, geographic areas and major customers. The disclosures
prescribed by SFAS 131 will be adopted for the fiscal year ending July 31, 1999.
Change in Estimate of Goodwill Amortization
Our statements of operations reflect a change in estimate for the amortization
life of remaining goodwill related to the June 1998 acquisition of Lacerte from
three years to five years, commencing with the first quarter of fiscal 1999. The
change resulted in a $19.0 million decrease in amortization expense and an
increase in net income by approximately $14.5 million, or $0.24 per share, for
the six months ended January 31, 1999 but will result in continuing amortization
expenses (with a corresponding decrease in net income) during fiscal 2002 and
2003.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
3. COMPREHENSIVE NET INCOME
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1998 1999
--------- ---------
<S> <C> <C>
(In thousands; unaudited)
Net income ................................ $ 29,085 $ 40,667
Unrealized gain on marketable securities .. 97,261 371,342
Change in cumulative translation adjustment 875 (4,052)
--------- ---------
Comprehensive net income .................. $ 127,221 $ 407,957
========= =========
</TABLE>
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<PAGE> 12
4. ACQUISITIONS
In June 1998, we acquired substantially all of the assets of Lacerte Software
Corporation and Lacerte Educational Services Corporation (together, "Lacerte"),
for cash. Lacerte is a leading developer and marketer of tax preparation
software and services for tax professionals. The purchase price was
approximately $400 million. In addition, we assumed liabilities of $31.8
million. We funded the acquisition by a public offering of 10.0 million shares
of common stock, completed in the fourth quarter of fiscal 1998.
The acquisition of Lacerte was treated as a purchase for accounting purposes. We
allocated approximately $358.2 million of the purchase price to identified
intangible assets and goodwill. These assets are being amortized over periods of
two to five years. We also expensed approximately $53.8 million of in-process
research and development in the quarter ended July 31, 1998. The following table
shows pro forma net revenue, net income and diluted net income per share of
Intuit and Lacerte as if we had acquired Lacerte at the beginning of fiscal
1998, excluding the impact of the one-time charge for in-process research and
development:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JANUARY 31, 1998
--------------------------
AS
PRO FORMA REPORTED
--------- --------
(In thousands, except per share data; unaudited)
<S> <C> <C>
Net revenue .......................................... $381,183 $333,471
Net income ........................................... 19,006 29,085
Diluted net income per share ......................... $ 0.32 $ 0.59
</TABLE>
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer software and direct marketing
subsidiary, to Broderbund Software, Inc. for approximately $31 million. As a
result of the sale, Broderbund acquired net assets of approximately $17 million
and we incurred direct costs of approximately $9.5 million. We also recorded a
pre-tax gain of $4.3 million and a related tax provision of $2.7 million in the
quarter ended October 31, 1997.
6. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1999
---------- -----------
(In thousands) (Unaudited)
<S> <C> <C>
Reserve for returns and exchanges .......... $ 60,343 $110,835
Acquisition and disposition related items... 19,181 10,928
Rebates .................................... 16,870 49,061
Post-contract customer support ............. 4,433 10,758
Other accruals ............................. 23,993 48,157
-------- --------
$124,820 $229,739
======== ========
</TABLE>
7. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting purposes. The interest rate is variable based on the Tokyo
inter-bank offered rate or the short-term prime rate offered in Japan. At
January 31, 1999, the rate was approximately 1.0%. The fair value of the loan
approximates cost as the interest rate on the borrowings is adjusted
periodically to reflect market rates (which are currently significantly lower in
Japan than in the United States). We have guaranteed the loan and pledged
approximately $35.5 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at January 31, 1999.
We are obligated to pay interest only until March 2000.
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<PAGE> 13
8. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
9. LITIGATION
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 23, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. 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.
On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleges that Checkfree is not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. Intuit owns 19.9% of
Checkfree's outstanding Common Stock (see Note 1).
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
10. RELATED PARTY TRANSACTIONS
We held approximately 11% of Excite's outstanding common stock as of January 31,
1999. We reported revenue from Excite for shared advertising activities of $2.0
million and $3.7 million for the three and six months ended
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<PAGE> 14
January 31, 1998 and $8.1 million and $12.1 million for the three and six months
ended January 31, 1999, respectively. We held a receivable due from Excite for
$3.4 million and $4.0 million at July 31, 1998 and January 31, 1999,
respectively.
As of January 31, 1999, we held approximately 19.9% 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
$1.0 million and $11.8 million from Checkfree for the three and six months ended
January 31, 1998 and $1.3 million and $2.4 million for the three and six months
ended January 31, 1999, respectively. The revenue from Checkfree for the six
months ended January 31, 1998 includes a royalty payment of $10 million received
in October 1997. We held a receivable due from Checkfree for $4.4 million and
$1.3 million at July 31, 1998 and January 31, 1999, respectively. In March 1999,
we filed a lawsuit against Checkfree alleging a breach of an agreement between
Intuit and Checkfree related to bill presentment services (see Note 9).
As of January 31, 1999, we held a 49% equity interest in Venture Finance
Software Corporation (VFSC). We have entered into an agreement with VFSC to
provide them with services related to on-going development of Web-oriented
finance products. We held a note receivable from VFSC with outstanding balances
of $7.3 million and $6.1 million at July 31, 1998 and January 31, 1999,
respectively, representing amounts due to us from VFSC for development and
administrative services we provided to VFSC.
11. SUBSEQUENT EVENTS
In February 1999, we sold 450,000 shares of our Excite Common Stock at an
average price of $94.13 per share (net of brokers' commissions), generating
proceeds of $42.4 million. As a result of this sale, we will record a pre-tax
realized gain on the sale of marketable securities of approximately $36.3
million in our fiscal third quarter. In February 1999, we also made a financial
investment decision to dispose of the remaining Excite shares over time, as
appropriate opportunities become available. Consistent with this decision,
effective March 11, 1999, Intuit and Credit Suisse Financial Products ("CSFP")
entered into a term sheet outlining the terms of a forward sale arrangement with
respect to 4,350,000 shares of Excite's Common Stock (the "Term Sheet"). If the
transactions contemplated by the Term Sheet are completed, Intuit will deliver
the 4,350,000 shares to CSFP after the restrictions imposed by the Voting
Agreement have terminated, and in any event on or before September 30, 1999 (the
"Settlement Date"). On the Settlement Date, CSFP will pay Intuit for the
4,350,000 shares, with the price equal to the proceeds from prior sales by CSFP
of the same number of shares of Excite's Common Stock, less a negotiated fee.
The Term Sheet contemplates that the parties will enter into definitive
agreements with respect to the forward sale (including a Securities Contract and
Pledge Agreement), and that Intuit will deposit 4,350,000 shares of Excite
Common Stock into a collateral account and enter into the Pledge Agreement to
secure its obligations under the forward sale arrangement.
On March 2, 1999, we announced that we had reached a definitive agreement to
acquire Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of
payroll services. Since October 1998, Intuit has been offering payroll services
through CRI to its QuickBooks small business customers. These payroll services
include payroll tax filing, tax deposit services and direct deposit of employee
wage payments. CRI is one of the country's largest payroll services companies
and a leader in providing payroll services to small businesses. Under the terms
of the agreement, Intuit will acquire the privately-held CRI for approximately
$200 million, consisting of $100 million in cash and $25 million of Intuit stock
to be paid at the closing, and $75 million in cash to be paid in three annual
installments of $25 million each. The acquisition, which has been approved by
the boards of directors of both companies and the shareholders of CRI, is
subject to regulatory approval and other closing conditions, including the
expiration or waiver of certain rights of refusal. The acquisition is expected
to close in the second calendar quarter of 1999.
In March 1999, we filed a lawsuit against Checkfree alleging a breach of an
agreement between Intuit and Checkfree related to bill presentment services
(see Note 9).
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<PAGE> 15
- --------------------------------------------------------------------------------
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements including
terms such as we "expect" or "anticipate" are forward-looking statements.
Investors should be aware that our actual results may differ materially from
Intuit's expressed expectations because of risks and uncertainties about the
future. We will not necessarily update the information in this Form 10-Q if and
when any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect our future results and performance include, but
are not limited to, the following: intense competition and pricing pressures,
particularly in the personal tax software market; potentially slower market
growth rates in the small business area and our ability to leverage our existing
small business customer base to take advantage of any market growth; whether our
general strategy with respect to the Internet and Internet-based businesses and
our implementation of that strategy will correctly anticipate key trends in the
Internet environment; our ability to adapt and expand our product, service and
content offerings for the Internet environment; our ability to operationally
support and manage these new businesses; the success of our business
relationships with Excite, AOL, and others in continuing to increase traffic to
Quicken.com; the possible impact on our relationship with Excite of Excite's
proposed merger with At Home; the potential impact on our business of our
lawsuit against Checkfree Corporation; the costs of implementing our Internet
strategy; the uncertainty as to the timing and amount of future Internet-related
revenue and profits; the timing of availability for future products and
services, including wider availability for our online payroll service; our
ability to attract and retain payroll service customers; market growth, sales
and upgrade rates for our QuickBooks multi-user product; the value and size of
our equity investments in other companies, including Checkfree Corporation and
Excite, Inc.; our ability to achieve Year 2000 readiness in our business
operations, our products and our dealings with significant third parties, such
as key suppliers and customers; the expected impact of our recent acquisitions
of Lacerte Software Corporation and Lacerte Educational Services Corporation;
the effect or our recently announced proposed acquisition of Computing
Resources, Inc., and our efforts, if that acquisition is consummated, to manage
a new line of business; the impact of acquisitions generally; our relationships
with retailers and other issues with respect to our distribution channels;
results for our international operations; and risks associated with regulated
businesses such as insurance and mortgage lending. Additional information about
factors that could affect future results and events is included elsewhere in
this Form 10-Q, in our fiscal 1998 Form 10-K and our Form 10-Q for the first
quarter of fiscal 1999, and in other reports filed with the Securities and
Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal, we create, sell and support small
business accounting, tax preparation and consumer finance software products,
financial supplies (such as computer checks, invoices and envelopes), and
Internet products for individuals and small businesses. Our revenues come
primarily from the United States, Japan, Germany, Canada and the United Kingdom,
through retail distribution channels, direct customer sales and via the
Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet commerce revenue is growing rapidly. The Internet is a
pervasive force that has fundamentally changed the way we do business. It is
becoming increasingly important to all of our business divisions, both as the
platform for new products and services, and as an incremental, cost-effective
distribution channel. For example, the Internet is the foundation for our
insurance and mortgage marketspaces, the online payroll service for small
businesses that we recently introduced through our QuickBooks product and our
Quicken Store website, where customers can purchase and download desktop
software products and obtain customer service. We also use the Internet to host
our technical
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<PAGE> 16
support website where we can quickly and cost-effectively provide patches for
product bugs and provide customers with answers to frequently asked questions.
We use the term "Internet commerce" to refer to all of our Internet-based
business activities. Internet commerce has two components: Internet products and
electronic distribution. Internet products include activities in which the
customer realizes the value of the goods or services directly on the Internet or
an Intuit server. Internet product revenues include, for example, advertising
revenues generated on our Quicken.com website, online tax preparation and
electronic filing revenues, on-line payroll service revenues and transaction and
processing fees from our online insurance and online mortgage marketspaces.
Electronic distribution activities include the electronic ordering and/or
electronic delivery of traditional desktop software products and financial
supplies through the Internet.
While we have made significant progress in our Internet commerce activities,
investors should be aware that initial success achieved in these areas will not
necessarily result in improved financial results. We believe that the dramatic
growth of the Internet will give us significant opportunities to grow our
revenue over the next several years. However, revenue from Internet commerce was
only approximately 10% of total revenue during the second quarter of fiscal 1999
(approximately 5% for Internet products and 5% for electronic distribution). It
should be noted that these percentages do not necessarily indicate the amount of
Internet commerce revenues we will experience for the full fiscal year. Internet
revenues are not reported separately in our financial statements; instead each
of our business divisions reports Internet commerce revenues that are specific
to its operations and are included in its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred during these periods. This can result in significant operating
losses, particularly in the July 31 and October 31 quarters when our revenues
are lower. The seasonality of our revenue patterns has been further intensified
by our June 1998 acquisition of Lacerte, a professional tax software company.
Operating results can also fluctuate for other reasons, such as changes in
product release dates, non-recurring events such as acquisitions and
dispositions, and product price cuts in quarters that have relatively high fixed
expenses. Acquisitions and dispositions in particular can have a significant
impact on the comparability of both our quarterly and yearly results.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and six-month periods ended January 31, 1998 and 1999. Investors should
note that results for the three and six-month periods ended January 31, 1999
include activity for our Lacerte subsidiary, which was acquired in June 1998.
The corresponding year ago periods do not include results for Lacerte.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes. The following revenue discussion is categorized by our
business divisions, which is how we examine results internally. Our domestic
supplies business is considered a part of our small business division while the
international supplies business is considered part of our international
division.
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<PAGE> 17
NET REVENUE
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Software ....................... $211.2 50% $316.4 $285.3 42% $404.7
% of revenue ................... 89% 91% 86% 88%
Supplies ....................... $ 26.3 13% $ 29.6 $ 48.2 10% $ 53.2
% of revenue ................... 11% 9% 14% 12%
Total .......................... $237.5 46% $346.0 $333.5 37% $457.9
</TABLE>
Small Business Division. Small business division revenues come primarily from
the following sources:
- QuickBooks product line
- Supplies products (including checks, envelopes and invoices)
- Tax table services
- Support fees charges to customers for telephone assistance
- Payroll processing fees
Overall, revenue for the division was up 48% and 34% for the three and six-month
periods ended January 31, 1999, respectively, compared to the same periods a
year ago. The increases were a result of the timing of recent QuickBooks
releases that occurred in June 1998 (version 6.0) and December 1998 (QuickBooks
'99). Prior to these releases, we had not launched a new version of QuickBooks
since December 1996 (version 5.0). As a result, the current three and six-month
periods compare favorably to the same periods of the prior year, which did not
realize the benefit of a recent QuickBooks product launch. These increases were
also driven by higher average selling prices for our QuickBooks product line due
primarily to a more favorable sales mix toward higher priced products with
greater functionality.
Domestic supplies revenues, which are part of the small business division, grew
by 13% and 11% for the three and six-month periods ended January 31, 1999,
respectively, as a result of our increasing customer base of small business
owners who use QuickBooks and Quicken to run their small businesses. Our
supplies business is a more consistent source of recurring revenue than our
software business, and is derived primarily from our existing customer base.
Though they are a smaller component of Small Business Division revenues, tax
tables service revenue and fees charged for telephone support also grew
substantially in the three and six months ended January 31, 1999 compared to the
same periods of the prior year.
In October 1998, we introduced our new payroll processing service. The service
is offered through our QuickBooks products (version 6.0 and QuickBooks '99) and
handles all aspects of payroll processing, including calculation and electronic
depositing of federal and state payroll tax withholdings, electronic direct
deposit of paychecks, preparation and filing of quarterly and annual payroll tax
returns and creation of employee W-2 forms. While payroll processing provides us
with a significant opportunity to generate revenues, it also introduces new
risks.
On March 3, 1999 we entered into an agreement to acquire Computing Resources,
Inc. ("CRI"), the company that has been the payroll processing service provider
for this new business since October 1998 (see Note 11). This acquisition, which
is subject to regulatory approval and other closing conditions (including waiver
of a right of first refusal), will result in significant acquisition related
costs, as well as business integration challenges common in all acquisitions. 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. In addition,
we expect this service to be unprofitable in its initial stages until we are
able to accumulate a large number of subscribers from our
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<PAGE> 18
QuickBooks customer base to offset the fixed costs of providing the payroll
service. We are managing the new customer activation process at a measured rate
in order to insure high quality service levels and to minimize the impact of any
potential service disruptions during the initial phases of the service. Though
initial customer reaction to this service has been positive, it has not been a
significant contributor to our financial performance in fiscal 1999, and there
is no assurance that it will be widely accepted. If subscriptions to this
service don't meet expectations, future operating results could suffer.
Tax Division. Tax division revenues come primarily from the following sources:
- TurboTax and MacInTax personal tax preparation products
- Professional tax preparation products (ProSeries and Lacerte product
lines)
- Electronic tax return preparation and filing fees
Overall, tax division revenues for the three and six months ended January 31,
1999 grew 67% and 76% respectively, compared to the same periods last year.
Fiscal 1999 includes operating results for our Lacerte subsidiary which was
acquired in June 1998. Excluding Lacerte from our fiscal 1999 results, tax
division revenues would have increased by 25% and 31% over the same periods.
This growth was driven by our TurboTax product line which experienced higher
unit sales due in part to a growing market for tax-preparation software because
an increasing number of taxpayers have access to personal computers. The
year-over-year revenue increase was also due to the fact that most of our
TurboTax state tax products were released in January (second quarter) this year,
but in February (third quarter) of fiscal 1998. TurboTax unit sales growth was
partially offset by lower average selling prices in response to increased price
competition, primarily from H&R Block's aggressively priced TaxCut product.
We also experienced higher revenues from Web TurboTax (our web-based tax
preparation product) and electronic filing fees compared to last year as an
increasing number of customers gain Internet access and become more accustomed
to processing transactions on-line. In the past we have not experienced any
significant technical problems with Web TurboTax or electronic filing. However,
the risk of such problems increases with increased demand for these services.
During January and February 1999, we experienced higher than expected demand for
Web TurboTax, and as the tax filing deadline nears, we expect to experience a
dramatic incremental increase in demand. We have increased our capacity in
anticipation of this increased demand and have developed a contingency plan to
provide additional capacity if necessary. However, the exact level of demand is
very difficult to predict, and we could experience significant financial and
public relations consequences if our capacity to handle Web TurboTax customers
is insufficient during the peak filing period, or if the service is unavailable
for other reasons such as technical difficulties at our data center. We expect
that the demand for electronic filing will also increase dramatically as the tax
filing deadline approaches. We experienced an interruption in electronic filing
service in February, which was not material because it was fairly early in the
tax season. Although we believe we have addressed the issues that caused that
service outage, a similar interruption in service during the peak tax filing
period could cause significant financial and public relations consequences.
While we believe our new TurboTax product line is selling well through retail
channels, it's too early to predict results for the entire tax season. We expect
our reserves for returned products will be adequate to cover retailers' returns
of unsold products during the next two quarters, though higher than expected
returns could have a negative impact on revenue for the season. As the end of
the tax season nears, it is possible that TaxCut will further reduce the sales
price of its products. If this occurs, our TurboTax product sales could suffer
and/or we might need to reduce our prices to remain competitive. Though
Microsoft Corporation did not release a competing product for this tax season,
we expect them to enter the tax preparation software market next year. If
Microsoft enters the market, their superior financial resources and strong
presence in retail distribution channels could result in an increasingly
competitive environment next tax season and beyond. If the average selling price
of our tax products were to decrease, or if we were to lose significant market
share as a result of increased future competition, our operating results would
suffer.
Excluding Lacerte from our fiscal 1999 operating results, our professional tax
(ProSeries) product sales increased by 10% for the three and six months ended
January 31, 1999 compared to the same periods last year. This growth was
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<PAGE> 19
primarily because we have been successful in retaining our customers from prior
years and in many cases have upgraded them to higher priced products. Revenue
from Lacerte products also grew compared to last year (though Lacerte's prior
year revenues are not reported in our operating results) due to a high customer
retention rate.
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
- Quicken product line
- Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
- Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing services
through Quicken and Quicken.com
Overall, consumer finance division revenues were up 6% and 5% for the three and
six-month periods ended January 31, 1999 compared to the same periods a year
ago. Excluding the impact of a nonrecurring $10 million royalty fee from
Checkfree in the first quarter of fiscal 1998, revenue growth would have been
18% for the six months ended January 31, 1999. Quicken sales were down slightly
for the three months ended January 31, 1999 compared to the same period in
fiscal 1998, due primarily to the fact that the timing of product shipments into
the retail channel were more concentrated in the second quarter of fiscal 1998
compared to fiscal 1999. For the six months ended January 31, 1999 Quicken sales
were slightly higher compared to the same year-ago period due primarily to an
approximately 5 week earlier release of Quicken this year and to a more
favorable sales mix toward our higher-priced products. This was partially offset
by increased rebate incentives offered to customers who purchase both Quicken
and TurboTax products this year. While we expect Quicken sales to remain roughly
flat for fiscal 1999, there is a risk that they will decline in future periods.
In fiscal 1997, Quicken experienced over a 20% decline in revenues and there is
no assurance that similar declines will not occur in the future. For example,
sales could suffer if customers become less inclined to make upgrade purchases,
if our competitors were to lower their prices or if the growth rate in the
market for desktop personal finance software declines.
We have also experienced significant growth in consumer Internet-based revenues
compared to the same quarter last year, primarily due to increased advertising,
sponsorship and transaction-related revenue through Quicken.com and Quicken.
Specifically, advertising revenue and transaction fees from our QuickenMortgage
marketspace have grown relatively rapidly while fees from our InsureMarket
marketspace have grown at a slower pace. Total page views more than tripled for
the month of January 1999 compared to January 1998, though they can vary
significantly from month to month. The rapid growth we've experienced in our
Internet products and services has been generated in part by collaborating with
third party online service and content providers such as Excite and AOL, which
have helped to increase traffic to our Quicken.com website. The Excite agreement
calls for us to share revenue generated from our Quicken.com site and the AOL
agreement calls for us to make significant guaranteed payments to AOL over the
term of the agreement.
While the Internet provides a significant opportunity for revenue growth, we
have also made significant financial commitments to these and other third party
providers and must continue to increase traffic and revenue in order to become
profitable. If our website traffic and revenue expectations aren't met, there
could be a significant negative impact on our operating results.
We currently expect the proposed merger between Excite and At Home (see Note 1)
to have a neutral or positive impact on our business relationship with Excite
because At Home is expected to offer increased opportunities for distribution of
Excite's online financial content, which will benefit Intuit. However, it is
possible that the merger could have a negative impact on our relationship with
Excite.
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<PAGE> 20
International Division. International division revenues come primarily from the
following sources:
- Japanese small business products
- German Quicken, QuickBooks and Tax products
- Canadian Quicken, QuickBooks and Tax products
- United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues were down 3% and 5%
for the three and six-month periods ended January 31, 1999, respectively,
compared to the same periods last year. This decrease is largely the result of
lower sales in Germany and the U.K. partially offset by increased sales in
Canada. In Japan, our largest international subsidiary, sales were roughly flat.
As part of our business strategy, we have refocused our product development in
Europe towards small business products in selected larger markets. As a result,
we expect to devote fewer resources to consumer finance and tax products and to
smaller geographic markets. We also introduced our first release of QuickBooks
in Japan in September 1998 in an effort to target a lower-priced market than our
current small business products reach in Japan. Though we have increased our
retail market share in Japan since the launch of QuickBooks, the overall market
for small business products and services in Japan continues to suffer due
primarily to poor economic conditions. While we expect that international
revenues will be flat or slightly down for fiscal year 1999, there is a risk
that they could be significantly lower if our strategic initiatives are not
effective.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Product .................................. $ 45.5 45% $ 65.8 $ 67.9 49% $101.0
% of revenue ............................. 19% 19% 20% 22%
Amortization of purchased software & other $ 0.7 171% $ 1.9 $ 1.4 164% $ 3.7
% of revenue ............................. 0% 1% 1% 1%
Total .................................... $ 46.2 47% $ 67.7 $ 69.3 51% $104.7
% of revenue ............................. 19% 20% 21% 23%
</TABLE>
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products, offering Internet-based products and
services, providing our fee for support programs and offering our payroll
service. The second component is the amortization of purchased software, which
is the cost of products obtained through acquisition. Total cost of goods sold
increased to 20% and 23% of revenue for the three and six months ended January
31, 1999 respectively, compared to 19% and 21% for the same periods of the prior
year. This increase is primarily attributable to two factors. First, consistent
with our growing Internet-based business, we are experiencing a significant
increase in related hardware and infrastructure costs as we purchase equipment
to increase our Internet capability. These costs are classified as cost of goods
sold and, as a percentage of revenue, are significantly higher than the costs of
goods sold for our traditional desktop software business. These infrastructure
costs tend to result from the depreciation of capital assets which are generally
expensed evenly over the estimated useful lives of the assets. As a result, cost
of goods sold as a percentage of revenue may fluctuate significantly,
particularly on a quarterly basis, as they become more fixed in nature and less
connected to the direct cost of manufacturing and shipping software products.
For example, although in a quarter with low revenues we will usually have a
proportionately lower cost of goods sold because we ship fewer products, the
cost of goods sold from our Internet infrastructure will not decrease
proportionately and thus will inflate the cost of goods sold as a percentage of
revenue for that quarter. Second, we have also experienced significant increases
in our revenues from fee for support programs. The cost of goods sold associated
with these programs is also larger as a percentage of revenue than cost of goods
sold for our traditional desktop software business. Consequently, as revenues
from our Internet-related businesses and fee for support programs become a
larger portion of our overall revenue, our cost of
-20-
<PAGE> 21
goods sold as a percentage of revenue is likely to increase. These upward
pressures on cost of goods sold were partially offset by a continuing shift of
consumer preferences toward higher-priced deluxe products, which result in lower
cost of goods sold as a percentage of their sales price. Due to expected growth
in higher cost of goods sold businesses such as our Internet-based initiatives,
fee for support programs and our online payroll service, we believe cost of
goods sold as a percentage of revenue for fiscal 1999 will exceed what we
experienced in fiscal 1998. If we experience errors in current or future
products, there could be incremental increases in cost of goods sold that could
adversely effect our operating results.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Customer service & technical support $ 37.5 6% $ 39.9 $ 65.4 7% $ 69.8
% of revenue ......................... 16% 12% 20% 15%
Selling & marketing .................. $ 47.0 33% $ 62.5 $ 78.9 36% $107.6
% of revenue ......................... 20% 18% 24% 23%
Research & development ............... $ 26.6 37% $ 36.4 $ 52.8 33% $ 70.0
% of revenue ......................... 11% 11% 16% 15%
General and administrative ........... $ 9.7 32% $ 12.8 $ 18.2 44% $ 26.3
% of revenue ......................... 4% 4% 5% 6%
Other acquisition costs, including
amortization of goodwill and purchased
intangibles .......................... $ 4.9 329% $ 21.0 $ 8.9 371% $ 41.9
% of revenue ........................ 2% 6% 3% 9%
</TABLE>
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 12% and 15% of revenue for the three and six months ended
January 31, 1999, respectively, compared to 16% and 20% for the same periods of
the prior year. These improvements reflect the continuing benefit from cost
reductions resulting from the restructuring and consolidation of our technical
support facilities in the United States and Europe in the fourth quarter of
fiscal 1997. We have also benefited from expanding our fee for support programs
and our initiatives to provide customer service and technical support less
expensively through websites and other electronic means. While we anticipate
that service and support expenses will decrease as a percentage of revenue for
fiscal 1999 compared to fiscal 1998, there is no assurance that they will remain
at current rates for the remainder of the fiscal year. For instance, if we
experience product errors, poor service levels or service outages for our
web-based products, it may result in significant additional customer service and
technical support expenses.
Selling and Marketing. Selling and marketing expenses were 18% and 23% of
revenue for the three and six months ended January 31, 1999, respectively,
compared to 20% and 24% for the same periods of the prior year. This decrease is
primarily the result of our acquisition of Lacerte which experiences
comparatively lower selling and marketing expenses as a percentage of revenue.
While we expect these costs as a percentage of revenue to remain roughly flat in
fiscal 1999 compared to fiscal 1998, it is possible that they will increase. For
example, there is a risk that these costs could increase in response to
competitive pressures from H&R Block (TaxCut tax preparation software),
Microsoft (Microsoft Money financial software) or other competitors.
Research and Development. Research and development expenses were 11% and 15% of
revenue for the three and six months ended January 31, 1999, respectively,
compared to 11% and 16% for the same periods of the prior year. Though our
research and development expenses have increased in absolute dollars as we have
continued to invest in Internet products, software and other initiatives, we
expect these expenses to remain roughly flat as a
-21-
<PAGE> 22
percentage of revenue for fiscal year 1999 compared to fiscal 1998. However, if
research and development expenses exceed our expectations, they may have an
adverse effect on operating results. For example, it is possible that we could
undertake a costly product development venture in response to competitive
pressures or other market conditions.
General and Administrative. General and administrative expenses were at 4% and
6% of revenue for the three and six months ended January 31, 1999 compared to 4%
and 5% for the same periods of the prior year. For fiscal 1999, we expect
general and administrative expenses to remain roughly flat compared to fiscal
1998.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
These costs increased to $22.9 and $45.6 million for the three and six months
ended January 31, 1999, respectively, compared to $5.6 and $10.2 million for the
same periods of the prior year. This increase was primarily attributable to the
amortization of intangibles associated with our acquisition of Lacerte in June
1998. In the first quarter of fiscal 1999, we changed the estimated life of
goodwill for Lacerte from three to five years to reflect our revised estimate of
the period of time we expect to benefit from the purchased assets of the
acquired business. We began accounting for this change in estimate in the first
quarter of fiscal 1999. This change results in different estimates of the net
income effect of future amortization compared to estimates previously provided
in the Company's fiscal 1998 Form 10-K. Revised estimates are provided below.
For more information regarding this change in estimate see Note 1 of the
financial statements.
In connection with our acquisition of Lacerte, we used 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 believe will result from the products and
discounting these net cash flows back to their present value. As of January 31,
1999, actual results to date have been consistent with assumptions made when we
initially appraised the value of these in-process projects. Specifically,
revenues, development costs and completion dates as they relate to the two
projects are consistent with our expectations. Both projects were released on
schedule in January 1999.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Excluding the impact of our pending acquisition of CRI (see Note
11) and assuming no additional acquisitions and no impairment of value resulting
in an acceleration of amortization, future amortization will reduce net income
by approximately $55.9 million, $50.0 million, $43.3 million and $40.1 million
for the years ending July 31, 1999 through 2002, respectively. If we complete
additional acquisitions or accelerate amortization in the future, there would be
an incremental negative impact on operating results.
OTHER INCOME
For the three and six months ended January 31, 1999, interest and other income
and expense, net, remained essentially flat as a percentage of revenue compared
to the same periods of the prior year. The $4.3 million gain on disposal of
business in the six-month period ended January 31, 1998 resulted from the sale
of Parsons, our direct marketing subsidiary, in August 1997. Our $10.1 million
gain on the sale of marketable securities for the three and six months ended
January 31, 1999 was the result of our sale of Checkfree, Verisign and
Concentric common stock (see Note 1).
INCOME TAXES
For the three and six months ended January 31, 1999, we recorded income tax
provisions of $29.8 and $14.3 million on pretax income of $119.7 and $55.0
million, respectively. This compares to income tax provisions of $26.0 and $19.5
million on pretax income of $67.9 and $48.6 million for the same periods of the
prior year. At January 31, 1999, there was a valuation allowance of $9.6 million
for tax assets of our international subsidiaries based on management's
assessment that we may not receive the benefit of certain loss carryforwards.
-22-
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, our unrestricted cash and cash equivalents totaled $163.0
million, a $24.9 million increase from July 31, 1998. The increase was the
result of net cash generated by operations and financing activities, partially
offset by cash used for investing activities. This reflects the seasonality of
our business which typically results in the majority of net revenues and cash
receipts occurring in the January and April quarters, though operating expenses
are incurred more consistently throughout the year.
Our operating activities generated $45.1 million in cash for the six months
ended January 31, 1999, driven by net income of $40.7 million. Additional
sources of cash were adjustments made for non-cash expenses such as acquisition
charges and depreciation in addition to significant increases in accounts
payable and accrued liabilities. The increases in accrued liabilities and
accounts payable are the result of the seasonality of our business and the
resulting increase in accruals for product returns, customer rebates and accrued
technical support expenses. These increases were partially offset by higher
accounts receivable balances due from retailers and distributors for large
volumes of seasonal product shipments that typically occur in our fiscal second
quarter. We also used cash to pay for accrued liabilities resulting from
previous acquisitions and divestitures.
Investing activities resulted in the use of $59.9 million in cash for the six
months ended January 31, 1999. This included net purchases of short-term
investments and property and equipment. Property and equipment purchases were
made to support our ongoing operations, information system upgrades and our
growing Internet-based businesses. Due to our substantial investments in
marketable securities, there is a risk that market value declines may have a
significant negative impact on our liquidity. If such declines were deemed to be
permanent, they would result in a charge to our statements of operations.
Financing activities provided $39.6 million for the six months ended January 31,
1999 primarily attributable to proceeds from the exercise of employee stock
options.
As of January 31, 1999, we had a remaining balance of approximately $9.0 million
related to our three-year agreement with AOL. In connection with our pending
acquisition of CRI, we will be making significant cash payments (see Note 11).
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. We also evaluate the
merits of acquiring technology or businesses, or establishing strategic
relationships with other companies. Accordingly, it is possible that we may
decide to use cash and cash equivalents to fund such activities in the future.
For example, if we exercise our option to purchase VFSC (see Note 5 of the Form
10-K financial statement notes) and elect to pay all or a significant portion of
the exercise price in cash, it would require a significant cash expenditure.
Though we are likely to require cash for future strategic initiatives, we
anticipate that our short-term liquidity will improve with the expected sale of
a portion of our Excite common stock (see Note 11). We believe that our
unrestricted cash, cash equivalents and short-term investments will be
sufficient to meet anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
YEAR 2000
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference in a year that begins with "20" instead of "19." This, as well as
other date related processing issues, may cause systems to fail or malfunction
unless corrected.
We are currently taking steps to address Year 2000 issues in the following three
areas: (1) our internal systems (including information technology such as
financial and order entry systems and non-information technology systems such as
phones and facilities); (2) our products; and (3) the readiness of third parties
with whom we have business relationships. We have assigned a dedicated Year 2000
project team to develop and implement a
-23-
<PAGE> 24
comprehensive five-phase Year 2000 readiness plan for our world-wide operations
relating to all of these areas. This plan has executive sponsorship, is
regularly reviewed by senior management and includes progress reports to the
board of directors on a regular basis.
Phase One (initiation) involves increasing company awareness by educating and
involving all appropriate levels of management regarding the need to address
Year 2000 issues. Phase Two (inventory) consists of identifying all of our
systems, products and relationships that may be impacted by Year 2000. Phase
Three (assessment) involves determining our current state of Year 2000 readiness
for those areas identified in the inventory phase and prioritizing areas that
need to be fixed. Phase Four (action) will consist of developing a plan for
those areas identified as needing correction in the assessment phase. Phase Five
(implementation) will consist of executing our action plan and completing the
steps identified to attain Year 2000 readiness. We are currently in the
assessment phase of the plan for both our internal systems and third party
relationships. For our products, we are in either the assessment or action phase
of our plan. We currently expect to substantially complete implementation for
all of the targeted areas by the end of our 1999 fiscal year (July 1999).
While Year 2000 costs incurred to date (including litigation costs) have not
been material, we will incur additional costs as we complete the project phases.
Based on preliminary assessments resulting from the early phases of our plan in
each of the targeted areas, we are currently unable to determine whether
additional costs to achieve Year 2000 readiness will be material. Additional
costs incurred may include but are not limited to: the cost of manufacturing and
distributing free solutions for products that are not Year 2000 ready; the
impact of lost sales due to distribution of free Year 2000 ready solutions for
affected products; the administrative costs of completing the Year 2000 project;
the cost of correcting or replacing our internal systems; and the cost of
implementing necessary contingency plans.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that we will be successful in our efforts to
address all Year 2000 issues. If we are not successful, there could be
significant adverse effects on our operations. For example, failure to achieve
Year 2000 readiness for our internal systems could delay our ability to
manufacture and ship products, disrupt our customer service and technical
support facilities, or interrupt customer access to our online products and
services. If our products are not Year 2000 ready, we could suffer lost sales or
other negative consequences resulting from customer dissatisfaction, including
additional litigation (see discussion below). We also rely heavily on third
parties such as manufacturing suppliers, service providers, financial
institutions and a large retail distribution channel. If these or other third
parties experience Year 2000 failures or malfunctions, there could be a material
negative impact on our ability to conduct ongoing operations. For example, our
ability to manufacture and ship products into the retail channel, to receive
retail sales information necessary to maintain proper inventory levels, or to
complete online transactions dependent upon third party service providers, could
all be affected. Many of our products are significantly interconnected with
heavily regulated financial institutions. Our relationships with financial
institutions could be impacted if we do not achieve Year 2000 readiness in a
manner and on a time schedule that permits them to comply with regulatory
requirements. We may also incur additional costs if we are required to
accelerate our Year 2000 readiness to meet financial institution requirements.
As with all companies, we also rely on other more widely used entities such as
government agencies, public utilities and other external forces common to
business and industry. Consequently, if such entities were to experience Year
2000 failures, this could disrupt our ability to conduct ongoing operations.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures. For
example, we have contracted with multiple suppliers to better ensure that our
products can be manufactured if a particular supplier experiences system
failures. We are building a second data center facility that will give us an
opportunity to develop back-up systems. We have also contracted with multiple
transportation companies to provide product delivery alternatives. While we
believe these contingency plans will reduce certain risks, we are still
assessing the need for additional contingency plans in areas where we believe
there may be significant exposure. Despite our efforts, there can be no
assurance that contingencies can be anticipated or adequately provided for.
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<PAGE> 25
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 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.
-25-
<PAGE> 26
- --------------------------------------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of January
31, 1999. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of January 31, 1999, the currency of our
Japanese subsidiary has strengthened and the currency of our other subsidiaries
have remained essentially stable since the end of our 1998 fiscal year. Because
we translate foreign currencies into U.S dollars for reporting purposes,
currency fluctuations can have an impact, though generally immaterial, on our
results. We believe that our exposure to currency exchange fluctuation risk is
insignificant primarily because our international subsidiaries invoice
customers, and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended January 31, 1999, there was an
immaterial currency exchange impact from our intercompany transactions. Currency
exchange risk is also minimized since foreign debt is due almost exclusively in
local foreign currencies. As of January 31, 1999, we did not engage in foreign
currency hedging activities.
-26-
<PAGE> 27
- --------------------------------------------------------------------------------
PART II
ITEM 1
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 23, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. 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.
On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleges that Checkfree is not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. Intuit owns 19.9% of
Checkfree's outstanding Common Stock (see Note 1).
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.
-27-
<PAGE> 28
- --------------------------------------------------------------------------------
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
At the Company's Annual Meeting of Stockholders on January 15, 1999, Intuit's
stockholders approved the following proposals:
1. Proposal for the election of directors:
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Christopher W. Brody 52,539,611 968,305
William V. Campbell 52,539,615 968,301
Scott D. Cook 52,539,615 968,301
L. John Doerr 52,539,615 968,301
Michael R. Hallman 52,539,615 968,301
William H. Harris, Jr 51,648,003 1,859,913
Burton J. McMurtry 52,539,615 968,301
</TABLE>
2. Proposal to amend the Company's 1993 Equity Incentive Plan to
increase the number of shares of common stock available for issuance
thereunder by 2,640,000 shares:
<TABLE>
<S> <C>
For 35,916,888
Against 17,454,810
Abstain 48,001
Unvoted 87,920
</TABLE>
3. Proposal to amend the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares of common stock available for issuance
thereunder by 300,000 shares:
<TABLE>
<S> <C>
For 52,898,276
Against 568,248
Abstain 41,392
</TABLE>
4. Proposal to amend the Company's 1996 Directors Stock Option Plan to
increase the number of shares of common stock available for issuance
thereunder by 30,000 shares:
<TABLE>
<S> <C>
For 39,467,813
Against 13,989,678
Abstain 50,425
</TABLE>
5. Proposal to ratify the selection of Ernst & Young LLP as the Company's
independent auditors for fiscal 1999.
<TABLE>
<S> <C>
For 53,449,390
Against 24,044
Abstain 34,482
</TABLE>
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<PAGE> 29
- --------------------------------------------------------------------------------
ITEM 5
OTHER INFORMATION
- --------------------------------------------------------------------------------
On February 24, 1999, we increased the size of our Board of Directors to eight
members and appointed Donna L. Dubinsky to fill the vacancy on the Board. Ms.
Dubinsky is the Chief Executive Officer and a co-founder of Handspring, Inc.,
which creates handheld computers targeted at consumers. Prior to the formation
of Handspring, Ms. Dubinsky was President of Palm Computing, the 3Com
Corporation subsidiary that created the PalmPilot family of handheld computing
products. Dubinsky had joined Palm Computing as Chief Executive Officer in June
1992. Before Palm, Dubinsky was a co-founder of Claris Corporation. Previously,
she had been a senior manager in a variety of logistics, sales and marketing
positions at Apple Computer.
- --------------------------------------------------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended
through January 15, 1999 (1)
10.02 Intuit Inc. 1996 Directors Stock Option Plan, as amended
through January 15, 1999, and form of Stock Option Grant
Agreement for use thereunder (2)
10.03 Intuit Inc. 1993 Equity Incentive Plan, as amended through
January 15, 1999, and form of Stock Option Grant Agreement
for use thereunder (3)
10.04 Term Sheet for Forward Sale of Excite Common Stock, dated
March 11, 1999, by and between Intuit and Credit Suisse
Financial Products (4)
27.01 Financial Data Schedule (filed in electronic version only)
-----------------------------------------------------------------------
(1) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71103) filed with the
Commission on January 25, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71101) filed with the
Commission on January 25, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71099) filed with the
Commission on January 25, 1999.
(4) Incorporated by reference to Intuit's Schedule 13D, Amendment
No. 2 with respect to Excite, Inc. Common Stock, filed with
the Commission on March 11, 1999.
(b) REPORTS ON FORM 8-K:
The Company has not filed any reports on Form 8-K since the beginning
of the fiscal quarter ended January 31, 1999.
-29-
<PAGE> 30
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: March 12, 1999 By: /s/ Greg J. Santora
--------------------------------------------
Greg J. Santora
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 31
EXHIBIT INDEX
Exhibit # Description
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 15, 1999 (1)
10.02 Intuit Inc. 1996 Directors Stock Option Plan, as amended through
January 15, 1999, and form of Stock Option Grant Agreement for use
thereunder (2)
10.03 Intuit Inc. 1993 Equity Incentive Plan, as amended through January
15, 1999, and form of Stock Option Grant Agreement for use thereunder
(3)
10.04 Term Sheet for Forward Sale of Excite Common Stock, dated
March 11, 1999, by and between Intuit and Credit Suisse Financial
Products (4)
27.01 Financial Data Schedule (filed in electronic version only)
(1) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71103) filed with the
Commission on January 25, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71101) filed with the
Commission on January 25, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71099) filed with the
Commission on January 25, 1999.
(4) Incorporated by reference to Intuit's Schedule 13D, Amendment
No. 2 with respect to Excite, Inc. Common Stock, filed with
the Commission on March 11, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 163,030
<SECURITIES> 1,393,219
<RECEIVABLES> 247,797
<ALLOWANCES> (6,521)
<INVENTORY> 5,865
<CURRENT-ASSETS> 1,854,103
<PP&E> 156,555
<DEPRECIATION> (79,010)
<TOTAL-ASSETS> 2,344,795
<CURRENT-LIABILITIES> 740,841
<BONDS> 39,276
0
0
<COMMON> 611
<OTHER-SE> 1,563,184
<TOTAL-LIABILITY-AND-EQUITY> 2,344,795
<SALES> 345,951
<TOTAL-REVENUES> 345,951
<CGS> 65,815
<TOTAL-COSTS> 67,712
<OTHER-EXPENSES> 172,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,950
<INCOME-PRETAX> 119,685
<INCOME-TAX> (29,828)
<INCOME-CONTINUING> 89,857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,857
<EPS-PRIMARY> 1.49<F1>
<EPS-DILUTED> 1.42
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
