10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 14, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of incorporation (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(415) 944-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
46,515,147 shares of Common Stock, $.01 par value, as of February 28, 1997
FORM 10-Q
INTUIT INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
NUMBER
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1996 and January 31, 1997......................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended January 31, 1996 and 1997... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended January 31, 1996 and 1997............. 5
Notes to Condensed Consolidated Financial
Statements................................................. 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 21
ITEM 4: Submission of Matters to a Vote of Security Holders............ 22
ITEM 6: Exhibits and Reports on Form 8-K............................... 23
Signatures..................................................... 24
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. ("Intuit" or the "Company") is a leading developer of personal
finance, small business accounting, and tax preparation software. The Company
develops, markets, and supports software products and services that enable
individuals, professionals, and small businesses to automate commonly performed
financial tasks and better organize, understand, manage, and plan their
financial lives. Principal products include personal finance products and small
business accounting software, personal and professional tax software, online
financial services, and supplies such as invoice forms and checks. The Company
markets its products through distributors and retailers and by direct sales to
OEMs and individual users. The Company's customers are located primarily in
North America, Europe, and Asia.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company for the three and six months ended January 31, 1996 and 1997 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for those periods. Results of operations for
the three and six months ended January 31, 1997 are not necessarily indicative
of the results to be expected for the year ending July 31, 1997 or any future
period. These condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ended July 31, 1996 included in the Company's Annual Report
on Form 10-K dated October 24, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining both the collectibility of
accounts receivable and reserves for returns and exchanges, and in assessing the
carrying value of goodwill and purchased intangibles. Actual results could
differ from those estimates.
Net Revenue
Revenue is generally recognized at the time of shipment, net of allowances for
estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collections of
accounts receivable are probable. Reserves are provided for quantities of
current product versions that are considered excess and for inventories of all
previous versions of products at the time new product versions are introduced.
Advance payments are recorded as deferred revenue until the products are shipped
or services are provided. Rebate costs are provided at the time revenue is
recognized. The Company provides warranty reserves for the estimated cost of
replacing defective products at the time revenue is recognized.
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Customer Service and Technical Support
Customer service and technical support costs include order processing, customer
inquiries and telephone assistance. The costs of post-contract customer support
are included in customer service and technical support expenses and are not
included in cost of goods sold.
Cash, Cash Equivalents, Short-Term Investments and Marketable Securities
The Company considers all highly liquid investments purchased with a maturity of
three months or less at date of acquisition to be cash equivalents.
Available-for-sale securities are carried at amortized cost which approximates
fair value. Marketable securities are carried at fair value. Unrealized gains
and losses on marketable securities are included in stockholders' equity. The
following is a summary of cash, cash equivalents, short-term investments and
marketable securities at January 31, 1997:
Cash, cash equivalents, short-term investments and marketable securities totaled
$455.4 million at January 31, 1997. The gross unrealized loss of $6.3 million on
marketable securities at January 31, 1997 is before a tax benefit of $2.3
million. Marketable securities in Checkfree Corporation ("Checkfree") were
obtained as a result of the Company's sale of its online banking and bill
payment transaction processing business to Checkfree. See Note 3 of Notes to
Condensed Consolidated Financial Statements.
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired (goodwill) is
generally amortized on a straight-line basis over periods generally not
exceeding three years. The cost of identified intangibles is generally amortized
on a straight-line basis over periods from 1 to 10 years. The carrying value of
goodwill and intangible assets is reviewed on a regular basis for the existence
of facts or circumstances, both internal and external, that may suggest
impairment. To date no such impairment has been indicated. Should there be an
impairment in the future, the Company will measure the amount of the impairment
based on undiscounted expected future cash flows from the impaired assets. The
cash flow estimates that will be used will reflect management's best estimates,
using
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appropriate and customary assumptions and projections at the time. Components of
goodwill and intangible assets are as follows:
Other intangibles include items such as trade names, logos, and other identified
intangible assets. The balances presented above are net of total accumulated
amortization of $125.1 million and $135.0 million at July 31, 1996 and January
31, 1997, respectively.
Concentration of Credit Risk
The Company's product revenues are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Significant
technological changes in the industry or customer requirements, or the emergence
of competitive products with new capabilities or technologies, could adversely
affect the Company's operating results.
Financial investments that potentially subject the Company to concentration of
credit and/or valuation risk consist principally of short-term investments,
marketable securities and trade accounts receivable. The Company holds shares of
Checkfree common stock as marketable securities, representing approximately
19.6% of Checkfree's outstanding common stock. The Company's ability to dispose
of these securities is restricted by volume trading limitations and other
contractual arrangements. Subsequent declines in fair value below cost that are
deemed to be other than temporary will be reported in earnings. The Company's
remaining investment portfolio is diversified and generally consists of
short-term investment grade securities. The credit risk in the Company's
accounts receivable is mitigated by the fact that the Company performs ongoing
credit evaluations of its customers' financial condition and that accounts
receivable are primarily derived from customers in North America. Generally, no
collateral is required. The Company maintains reserves for estimated credit
losses and such losses have historically been within management's expectations.
New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes a fair value method of
accounting for stock options and other equity instruments. The Company adopted
SFAS No. 123 beginning in fiscal year 1997 and will use the disclosure method as
described in the statement. The required disclosure will be included in the
Company's Annual Report on Form 10-K for the year ending July 31, 1997.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. ACQUISITIONS
In January 1996, the Company completed its acquisition of Milkyway KK
("Milkyway"), a provider of PC-based financial software in Japan. The
acquisition was treated as a pooling of interests for accounting purposes. In
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addition to the issuance of 650,000 shares of Intuit common stock, the Company
recorded acquisition related expenses of $0.6 million. The accompanying
condensed consolidated financial statements are presented on a combined basis
for all periods.
In June 1996, the Company completed its acquisition of Interactive Insurance
Services Corp. ("IIS"), a developer of an Internet based system designed to
allow consumers to obtain personalized insurance information from national
insurance carriers via the World Wide Web. The acquisition, which was treated as
a purchase for accounting purposes, had a purchase price of approximately $9.0
million. Under the terms of the acquisition agreement, the Company issued
169,181 shares of Intuit common stock and options to purchase 3,255 shares of
Intuit common stock to IIS stock and option holders, respectively, at the date
of acquisition. Approximately $8.0 million of in-process research and
development was expensed in the quarter ended July 31, 1996. Pro forma
information for this acquisition has not been presented due to immateriality.
In September 1996, the Company completed its acquisition of GALT Technologies,
Inc. ("GALT"), a provider of mutual fund information on the World Wide Web. The
acquisition was treated as a purchase for accounting purposes. Under the terms
of the acquisition agreement, the Company issued 212,053 shares of Intuit common
stock and options to purchase approximately 33,686 shares of Intuit common stock
to GALT stock and option holders, respectively, at the date of acquisition. Of
the purchase price of $14.6 million, approximately $8.5 million was allocated to
identified intangible assets and goodwill, which will be amortized over a period
not to exceed three years. Approximately $4.9 million of in-process research and
development was expensed in the quarter ended October 31, 1996.
The following information shows the pro forma net revenue, net income (loss) and
net income (loss) per share of Intuit and GALT combined as if the acquisition
had taken place as of the beginning of fiscal 1996:
The unaudited pro forma results of operations for the six months ended January
31, 1996 reflect a charge for in-process research and development of $4.9
million. Both periods reflect the amortization of intangible assets related to
the GALT acquisition. Pro forma information for the six months ended January 31,
1997 is not being presented due to immateriality.
Consistent with the guidelines established by Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" ("SFAS No. 86"), for each acquisition accounted
for as a purchase, the Company determined the amounts allocated to developed and
in-process research and development based on whether technological feasibility
had been achieved and whether there was an alternative future use for the
technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage. Accordingly, no amounts were capitalized on the basis of future
alternative use.
3. DISCONTINUED OPERATIONS AND DIVESTITURE
On January 27, 1997, the Company completed the sale of its online banking and
bill payment transaction processing subsidiary, Intuit Services Corporation
("ISC"), to Checkfree in exchange for 12.6
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million shares of Checkfree common stock. The closing price of Checkfree common
stock was $14.75 per share on January 24, 1997. As a result of the divestiture,
the Company recorded a gain on sale of discontinued operations of $71.2 million,
net of tax, in the quarter ended January 31, 1997. This gain has been recorded
net of certain contingent items relating to the divested business which are
anticipated to be resolved by fiscal year end. In addition to this gain, the
Company recorded a $10 million service and license fee in January 1997 received
from Checkfree for providing connectivity to Quicken for Checkfree customers. In
February 1997, the Company sold two million shares of the acquired Checkfree
common stock, bringing its investment in Checkfree to approximately 19.6% of the
resulting 54.2 million shares of Checkfree common stock outstanding following
consummation of the transaction. The Company will account for its investment in
Checkfree using the cost method of accounting. See Notes 1 and 7 of Notes to
Condensed Consolidated Financial Statements.
The divested online banking and bill payment business of ISC has been accounted
for as a discontinued operation and, accordingly, its operating results have
been segregated for fiscal 1996. Revenue and net loss from discontinued
operations were $14.3 million and $6.3 million, respectively, for the fiscal
year ended 1996. Operating results for discontinued operations for the period
beginning August 1, 1996 until the close of the sale on January 27, 1997 were
deferred. The net loss from discontinued operations for the six month period
ended January 31, 1997 was approximately $5.8 million net of a tax benefit of
approximately $3.9 million. This loss was netted against the gain on sale of
discontinued operations.
4. OTHER ACCRUED LIABILITIES
5. INCOME TAXES
The provision for income taxes was computed by applying the estimated annual
effective tax rate to recurring operations and amortization of intangible
assets, exclusive of the write-off of in-process research and development and
the amortization of goodwill.
6.LITIGATION
On March 29, 1994, Joann McGovern filed a class action lawsuit against ChipSoft
Inc. (which was subsequently merged into the Company) in the Chancery Division,
Circuit Court of Cook County, Illinois, on behalf of the plaintiff and other
purchasers of the 1993 HeadStart version of the Company's TurboTax tax
preparation software (the "Product"). The plaintiff asserts claims for breach of
express and implied warranties and violation of the Illinois Consumer Fraud Act
and seeks, on behalf of herself and purported class members, refund of the
purchase price as well as consequential and punitive damages. On September 19,
1996 the Company filed a motion for summary judgment on the plaintiff's Illinois
Consumer Fraud Act claim. The motion was granted on December 12, 1996, and the
plaintiff has indicated her intention to appeal this decision. The Company
believes that the plaintiff's claims are without merit and will continue to
defend the litigation vigorously. Additional details of the lawsuit are
contained in Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996.
On July 31, 1996, Trio Systems L.L.C. ("Trio") filed a lawsuit against the
Company in the U.S. District Court, Central District of California (Los Angeles)
alleging copyright infringement and violation of a license agreement. The
Company answered the complaint on September 3, 1996, denying all material
allegations. On October 28,
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1996, the court denied Trio's motion for a preliminary injunction seeking to
prevent the Company from shipping any Intuit products containing Trio software,
including Quicken products. On February 19, 1997, the parties entered into a
settlement agreement and mutual release pursuant to which the Company purchased
a non-exclusive perpetual worldwide license from Trio to use, develop and
distribute Intuit and Intuit-related products containing certain Trio
technology. Additional details of the lawsuit are contained in Item 3 of the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1996.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions will
not materially affect the financial position, results of operations or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. If an
unfavorable outcome were to occur, the impact could be material. Furthermore,
any litigation, regardless of outcome, can have an adverse impact on the Company
as a result of defense costs, diversion of management resources and other
factors. See Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996.
7. SUBSEQUENT EVENTS
In February 1997, the Company completed the planned sale of two million shares
of Checkfree common stock at a price of $14.625 per share. The shares were
acquired from Checkfree as a result of the Company's sale of its online banking
and bill payment processing subsidiary, ISC. The sale of the two million shares
reduced the Company's ownership interest in Checkfree to approximately 19.6% of
Checkfree's outstanding common stock. Net proceeds of the sale were $29.2
million and the realized loss on the sale was approximately $160,000, net of
tax. The Company continues to hold an investment in Checkfree Corporation of
10.6 million shares.
In February 1997, Intuit's Japanese subsidiary, Milkyway KK, signed an agreement
to acquire Nihon Micom Co. Ltd., a Japanese small business accounting software
company, for cash. The price of the planned acquisition, which is currently
expected to close in March 1997, is approximately $39 million. Under the
proposed acquisition agreement, options to purchase up to 200,000 shares of
Intuit common stock are to be granted to employees of Nihon Micom on or after
consummation of the acquisition. The Company intends to treat the acquisition as
a purchase for accounting purposes.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that include risks
and uncertainties. Statements that indicate that the Company "expects,"
"anticipates" or "believes" are forward-looking, as are all other statements
concerning future financial results, product offerings or other events that have
not yet occurred. There are several important factors that could cause actual
results to differ materially from those anticipated by the statements contained
in the following discussion. Such factors include, but are not limited to, the
growth rates of certain of the Company's market segments, the positioning of the
Company's products in those segments, the retail sell-through of tax preparation
products, personal finance and other products, particularly the leveling off or
decline of retail sales of the Company's Quicken product, the competitive
environment in the consumer and small business software industry, the emergence
of the electronic financial services marketplace, the cost of implementing the
Company's electronic financial services strategy, the possibility of calculation
errors or other "bugs" in the Company's software products, variations in the
cost of and demand for customer service and technical support, the Company's
ability to establish strategic relationships with financial institutions and
processors of financial information, the emergence of competition from these
entities as well as from software companies, the acceptance of online offers of
financial services by both financial institutions and prospective customers, the
Company's ability to manage its businesses in a rapidly changing environment,
and the timing and consumer acceptance of new Intuit product releases and
services including current users' willingness to upgrade from older versions of
the Company's products. Additional risks include the successful transition of
the Company's online banking and bill payment operations to Checkfree
Corporation, possible fluctuations in the value of the Company's investment in
Checkfree Corporation, the Company's ability to consummate planned acquisitions
and to integrate acquired operations into its existing business and the
Company's ability to penetrate international markets and manage its
international operations. Additional information on these and other factors
which could affect the Company's financial results are included in the Company's
Form 10-K for the fiscal year ended July 31, 1996 and its form 10-Q for the
fiscal quarter ended October 31, 1996 on file with the Securities and Exchange
Commission.
OVERVIEW
The Company experienced revenue growth of 21% and 15% for the three and six
months ended January 31, 1997 over the comparable periods of fiscal year 1996.
With respect to quarterly results, it should be noted that the Company's net
revenue varies significantly by quarter due to seasonality in consumer buying
patterns as well as the timing of new and upgraded product releases. Seasonality
is particularly strong for the Company's personal and professional tax return
preparation products, the sales of which are mostly compressed into the November
through March time frame. The second fiscal quarter has historically been and
continues to be the Company's strongest quarter in terms of both revenue and
profitability because of the seasonal shipments of tax return preparation
products during this period.
In January 1997, the Company completed the sale of its banking and bill payment
processing subsidiary, ISC, to Checkfree, pursuant to an agreement announced in
September 1996. As a result of this divestiture, the Company recorded a gain on
sale of discontinued operations, net of tax, of $71.2 million, for the three and
six months ended January 31, 1997.
In September 1996, the Company announced Internet-related strategic initiatives
designed to accelerate the adoption of electronic financial data exchange and
communication by individuals, small businesses and their financial service
providers. These initiatives included plans to "open" the architecture of the
Company's software products to financial service providers so that such
providers can connect directly through the Internet to their customers who
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use Intuit products. In February 1997, the Company made a joint announcement
with Microsoft Corporation and Checkfree introducing a communication standard
with a single, unified technical specification, called Open Financial
Exchange(TM). Open Financial Exchange will enable financial institutions to
exchange financial data over the Internet with Web users and users of personal
finance, accounting and tax software.
The Company's earnings and stock price have been and may continue to be subject
to significant volatility, particularly on a quarterly basis. The Company has
previously experienced shortfalls in revenue and earnings from levels expected
by securities analysts, which has had an immediate and significant adverse
effect on the trading price of the Company's common stock. There can be no
assurance that this will not recur in the future. Additionally, the Company
participates in a highly dynamic industry which often results in significant
volatility of the Company's common stock price. In particular, the impact on the
Company's business of the adoption rate and degree of market acceptance of
electronic financial services, the introduction of competing electronic
financial services and investors' assessment of the Company's position in the
electronic financial services market, may result in significant increases in the
volatility of the Company's stock price. In addition, the trend towards
Internet-based products and services could have a material adverse effect on
sales of some of the Company's existing products.
ACQUISITIONS AND DIVESTITURE
In January 1996, the Company completed its acquisition of Milkyway KK
("Milkyway"), a provider of PC-based financial software in Japan. The
acquisition was treated as a pooling of interests for accounting purposes. In
addition to the issuance of 650,000 shares of Intuit common stock, the Company
recorded acquisition related expenses of $0.6 million. The accompanying
condensed consolidated financial statements, and discussion thereof, are
presented on a combined basis for all periods.
In June 1996, the Company completed its acquisition of Interactive Insurance
Services Corp. ("IIS"), a developer of an Internet based system designed to
allow consumers to obtain personalized insurance information from national
insurance carriers via the World Wide Web. The acquisition, which was treated as
a purchase for accounting purposes, had a purchase price of approximately $9.0
million. Under the terms of the acquisition agreement, the Company issued
169,181 shares of Intuit common stock and options to purchase 3,255 shares of
Intuit common stock to IIS stock and option holders, respectively, at the date
of acquisition. Approximately $8.0 million of in-process research and
development was expensed in the quarter ended July 31, 1996.
In September 1996, the Company completed its acquisition of GALT Technologies,
Inc. ("GALT"), a provider of mutual fund information on the World Wide Web. The
acquisition was treated as a purchase for accounting purposes. Under the terms
of the acquisition agreement, the Company issued 212,053 shares of Intuit common
stock and options to purchase approximately 33,686 shares of Intuit common stock
to GALT stock and option holders, respectively, at the date of acquisition. Of
the purchase price of $14.6 million, approximately $8.5 million was allocated to
identified intangible assets and goodwill which will be amortized over a period
not to exceed three years. Approximately $4.9 million of in-process research and
development was expensed in the quarter ended October 31, 1996.
Consistent with the guidelines established by Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" ("SFAS No. 86"), for each acquisition accounted
for as a purchase, the Company determined the amounts allocated to developed and
in-process research and development based on whether technological feasibility
had been achieved and whether there was an alternative future use for the
technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage. Accordingly, no amounts were capitalized on the basis of future
alternative use.
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Acquisition-related costs reduced net income by approximately $6.3 million and
$21.6 million for the three and six month periods ended January 31, 1997,
respectively, compared to $10.8 million and $21.4 million for the three and six
month periods ended January 31, 1996, respectively. Assuming no acquisitions in
addition to those discussed above and no impairment of value resulting in an
acceleration of amortization, the net income effect of future amortization is
anticipated to be approximately $25.5 million, $6.0 million, $3.6 million, and
$0.5 million for the fiscal years ending July 31, 1997 through 2000,
respectively. Because of the high levels of non-cash amortization expense
arising from the acquisitions discussed above, the Company may report
significant operating losses in the fiscal year ending July 31, 1997 and future
periods. In addition, if the Company completes additional acquisitions in the
future that are accounted for as purchases, operating results could be
materially adversely affected by future amortization relating to such
acquisitions.
On January 27, 1997, the Company completed the sale of its online banking and
bill payment transaction processing subsidiary, Intuit Services Corporation
("ISC"), to Checkfree Corporation ("Checkfree") in exchange for 12.6 million
shares of Checkfree common stock. The closing price of Checkfree common stock
was $14.75 per share on January 24, 1997. As a result of the divestiture, the
Company recorded a gain on sale of discontinued operations of $71.2 million, net
of tax, in the quarter ended January 31, 1997. This gain has been recorded net
of certain contingent items relating to the divested business which are
anticipated to be resolved by fiscal year end. In February 1997, the Company
sold two million shares of the acquired Checkfree common stock, bringing its
investment in Checkfree to approximately 19.6% of the resulting 54.2 million
shares of Checkfree common stock outstanding following consummation of the
transaction. The Company will account for its investment in Checkfree using the
cost method of accounting. See Notes 1, 3 and 7 of Notes to Condensed
Consolidated Financial Statements.
Although the Company believes the transactions discussed above were in the best
interests of the Company and its stockholders, there are significant risks
associated with these transactions. The acquisitions have expanded the Company's
size, product lines, personnel and geographic locations. The Company's ability
to integrate and organize these new businesses and successfully manage its
growth will necessitate improvements in its operational, financial and
management information systems. The Company is continually taking steps to
improve its internal processes, but there can be no assurance that problems in
these processes will not occur in the future. The divestiture of ISC has
resulted in the elimination of the Company's direct participation in the online
banking and bill payment processing business. The Company's investment in the
shares of Checkfree common stock could decrease in value due to market
fluctuations and the success or failure of Checkfree. If such decline was
determined to be other than temporary, charges to earnings would result. There
is also a risk that the Company will be unable to divest the Checkfree common
stock shares quickly because of contractual and legal restrictions on the sale
of such shares and the relatively large percentage of ownership of Checkfree
common stock by the Company.
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RESULTS OF OPERATIONS
Set forth below are certain condensed consolidated statement of operations data
as well as such data as a percentage of net revenue for the three and six month
periods ended January 31, 1996 and 1997.
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NET REVENUE for the three and six month periods ended January 31, 1997 increased
over the comparable periods of fiscal 1996 by 21% and 15%, respectively. This
increase resulted primarily from higher sales of both personal and professional
versions of the Company's tax preparation products, and the release of new and
upgraded versions of small business finance products including QuickBooks
version 5.0 and QuickBooks Pro version 5.0 (including CD-ROM versions), which
resulted in increased unit sales. Also contributing to revenue growth were
increased financial supplies revenue over comparable periods in fiscal 1996
resulting primarily from an increasing QuickBooks user base. Due to the
seasonality of the Company's software sales, the proportion of net revenue
represented by supplies, which is a less seasonal business, will vary
considerably throughout the year. Overall net revenue increases were offset in
part by a decrease in Quicken net revenue resulting from a decrease in average
selling prices, a decrease in units shipped into the retail channel and
increasing OEM unit sales, which generate minimal revenue, during the three and
six month periods ended January 31, 1997, as compared with the three and six
month periods of the prior year. Net revenue for the three and six month periods
ended January 31, 1997 includes a $10 million service and license fee from
Checkfree for providing connectivity to Quicken for Checkfree customers.
While the initial sell-through of personal tax products for the first six months
of fiscal 1997 is encouraging, the Company cautions that it will be several
months before the financial results for the current tax season can be
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determined. As in previous years, to assure wide availability of the tax return
preparation products at retail as tax filing deadlines approach, the Company
ships more tax product into the retail channel than is expected to sell through.
Consistent with prior years, a significant reserve is established at the time of
initial shipment for estimated product returns. However, there can be no
assurance that these reserves will be adequate to cover actual product returns.
Revenue is generally recognized at the time of product shipment or delivery of
electronic or other services, net of allowances for estimated future returns and
for excess quantities in distribution channels, provided that no significant
vendor obligations exist and collections of accounts receivable are probable.
Reserves are provided for quantities of current product versions that are
considered excess and for inventories of all previous versions of products at
the time new product versions are introduced. Advance payments are recorded as
deferred revenue until the products are shipped or services are provided. Rebate
costs are incurred at the time revenue is recognized. The Company provides
warranty reserves at the time revenue is recognized for the estimated cost of
replacing defective products. There can be no assurance that the reserves
established by the Company will be sufficient to cover future obligations.
The software industry, including the Company, is selling increasingly through
alternative channels, such as OEM, or "bundling" products for a single low
price. While this strategy introduces new customers to products, it also
significantly reduces average selling prices. The consumer software industry,
including the Company, has experienced significant platform shifts in the past,
such as from DOS to Windows and Windows 95. There is increased competition on
the Windows and Windows 95 platforms, including lower priced products and, at
times, free promotional products that compete with the Company's software. In
order to respond to these competitive pressures, the Company may use price
reductions and/or other promotional offers which could negatively impact net
revenue and income from operations. Alternatively, the Company could maintain
prices and risk losing market share. As platform shifts continue to occur, there
are risks that competitors could introduce new products before the Company's
products are available on a particular platform or that customers may not accept
a platform that the Company has chosen or will choose to pursue. Further
consolidation of the software industry or changes in the personal computer
industry could lead to increased competition in innovation and pricing
strategies. The Company cannot quantify the degree to which these factors have
affected or will affect its business and results of operations. In addition, a
number of the Company's competitors have greater financial resources than the
Company, potentially giving them a competitive advantage.
There can be no assurance that the Company's new or upgraded products will be
accepted, will not be delayed or canceled, or will not contain errors or "bugs"
that could affect the performance of the products or cause damage to a user's
data. If any of these events occurs, the Company may experience reduced net
revenue, loss of market share, increased maintenance release costs and higher
technical support costs. The Company derives significant portions of its
revenues from certain distributors and resellers. Bankruptcy or insolvency of a
distributor or retailer could materially adversely affect the Company's future
revenue streams for a period of time.
COST OF GOODS SOLD decreased to 22.1% and 23.3% of net revenue for the three and
six month periods ended January 31, 1997, respectively, from 22.6% and 24.2% of
net revenue for the three and six month periods ended January 31, 1996,
respectively. The Company anticipates that cost of goods sold will be affected
by approximately $0.6 million of acquisition-related amortization costs for the
full fiscal year 1997. Excluding acquisition related amortization costs, cost of
goods sold would have been 22.0% and 23.3% of net revenue for the three and six
month periods ended January 31, 1997, respectively, and 22.5% and 23.9% of net
revenue for the three and six month periods ended January 31, 1996,
respectively.
Software and services cost of goods sold, excluding acquisition-related
amortization costs, was 20.1% and 20.8% of software and services net revenue for
the three and six month periods ended January 31, 1997, compared to 20.4% and
21.6% in the three and six month periods ended January 31, 1996. This decrease
resulted primarily from a shift in the mix of product sales to higher margin
deluxe CD-ROM versions, reductions in the cost of materials and improved
inventory management. Supplies cost of goods sold decreased to 41.1% and 41.9%
of supplies net revenue for the three and six month periods ended January 31,
1997, compared to 41.5% and 42.6% in the three and six month periods ended
January 31, 1996, respectively. This decrease is primarily due to increased
efficiency in
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the order taking process resulting in lower costs and fewer re-orders. The
Company plans to continue to take actions to improve efficiency and reduce the
materials costs of all its products. However, there can be no assurance that
margin improvements will be achieved or that current margins will be sustained.
During the three months ended January 31, 1996, a few minor calculation errors
were identified in the consumer versions of the TurboTax and MacInTax products,
and actions were taken during the quarter to notify users and provide fixes.
There can be no assurance that additional errors will not be discovered in the
future. Such errors could have a material adverse effect on the Company's
results of operations. The Company has guaranteed the calculations of its tax
products and will pay any penalties and interest due the IRS from its customers
as a result of calculation errors. As of January 31, 1997, claims made for such
errors have been insignificant, although significant claims may be received in
the future.
CUSTOMER SERVICE AND TECHNICAL SUPPORT expenses were 15.3% and 18.5% of net
revenue for the three and six month periods ended January 31, 1997,
respectively, compared to 15.8% and 18.5% of net revenue for the three and six
month periods ended January 31, 1996. The Company incurs a fixed base of support
costs, which is increased by seasonal staffing and third-party services during
periods of seasonally higher sales. Customer service and technical support costs
were slightly lower as a percentage of net revenue in the three month period
ended January 31, 1997 as compared to the same period a year ago, due in part to
decreased outsourcing and improved management of existing facilities and
resources. Customer service and technical support costs represented the same
percentage of net revenue for the six month periods ended January 31, 1997 and
1996. Post-contract customer support costs are accrued at the time revenue is
recognized, are included in customer service and technical support expenses and
are not included in cost of goods sold.
SELLING AND MARKETING expenses were 20.0% and 24.6% of net revenue for the three
and six month periods ended January 31, 1997, respectively, compared to 19.5%
and 24.6% of net revenue for the three and six month periods ended January 31,
1996, respectively. Selling and marketing expenses for the quarter increased as
a percentage of net revenue compared to the same period of the prior fiscal year
primarily as a result of increased marketing of key products and support of
international product launches in the quarter ended January 31, 1997. Year to
date selling and marketing expenses remained flat as a percentage of net revenue
compared to the same period in the prior year.
RESEARCH AND DEVELOPMENT expenses were 8.6% and 12.3% of net revenue for the
three and six month periods ended January 31, 1997, respectively and 8.2% and
11.9% of net revenue for the three and six month periods ended January 31, 1996,
respectively. The increases are due primarily to continued development of new
versions and upgrades of software products and development of electronic
commerce services in the insurance and investments areas. The Company has
experienced, and expects to continue to experience, significant growth in
research and development expenses, both in absolute dollars and as a percentage
of net revenue, for development efforts on new and existing products, including
foreign versions of its products.
GENERAL AND ADMINISTRATIVE expenses were 4.0% and 6.1% of net revenue for the
three and six month periods ended January 31, 1997, respectively, and 4.6% and
6.2% of net revenue for the three and six month periods ended January 31, 1996,
respectively.
INTEREST AND OTHER INCOME AND EXPENSE, NET, was $1.8 million and $3.8 million
for the three and six month periods ended January 31, 1997, respectively. This
compares to $1.3 million and $3.4 million, respectively, for the corresponding
periods in the prior year. This increase is primarily the result of increased
interest income due to higher average cash and short-term investment balances in
the current year.
INCOME TAXES. For the three months ended January 31, 1997, the Company recorded
an income tax provision of $30.7 million on pretax income of $75.4 million. The
tax rate differs from the statutory rate primarily because of the nondeductible
status of goodwill amortization. There was no valuation allowance for deferred
tax assets of $28.2 million at January 31, 1997 based on management's assessment
that current anticipated levels of taxable income will be sufficient to realize
the net deferred tax assets.
-18-
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business has experienced and is expected to continue to experience
substantial seasonality, due principally to the timing of the tax return
preparation season, timing of launches for new or updated versions of products
and, to a lesser extent, consumer software buying patterns. Sales of the
Company's tax products are concentrated in the period from November, when
certain professional tax products are released, through March, when consumers
purchase tax preparation products in advance of the April 15 filing deadline. In
addition, sales of the Company's Quicken products are typically strongest during
the year-end holiday buying season. As a result of these seasonal patterns, the
Company typically generates more than 100% of its income from operations before
acquisition-related charges during its fiscal quarters ending January 31 and
April 30. Because of these seasonal factors and a significantly increased level
of operating expenses to support the Company's expanded infrastructure and
development efforts, the Company incurred significant losses from operations
before acquisition-related charges during its fiscal quarters ended July 31,
1996 and October 31, 1996. The Company expects to continue to report seasonal
losses before acquisition-related costs and amortization in the July and October
quarters of future fiscal years. In addition, the Company expects to incur
significant amortization expenses relating to historical and future acquisitions
which may be accounted for as purchases. Such amortization charges will
adversely affect operating income and net income in future quarters.
The Company's quarterly operating results have varied significantly in the past,
and are likely to vary significantly in the future, based upon a number of
factors. In addition to seasonal factors, the Company's quarterly operating
results can be affected significantly by the number and timing of new product or
version releases by the Company as well as the timing of product announcements
or introductions by the Company's competitors, discretionary marketing and
promotional expenditures, research and development expenditures and a variety of
non-recurring events such as acquisitions or claims relating to calculation
errors in the Company's tax products. Products are generally shipped as orders
are received and, consequently, quarterly sales and operating results depend
primarily on the volume and timing of orders received during the quarter, which
are difficult to forecast. A significant portion of the Company's operating
expenses are relatively fixed and planned expenditures are based on sales
forecasts. Thus, if net revenue levels are below expectations, operating results
are likely to be materially adversely affected. In particular, net income, if
any, may be disproportionately affected because only a small portion of the
Company's expenses varies with revenue in the short term. In response to
competition, the Company may also choose to reduce prices or increase spending,
which may adversely affect the Company's operating results and financial
condition. There can be no assurance that the Company will sustain revenue
growth in the future or be profitable in any future period. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards, changing customer requirements and
new competitors. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices,
including changes in tax laws, regulations or procedures, can render existing
products obsolete and unmarketable. The Company's future success depends upon
its ability to enhance its existing products and services, develop new products
and services that address the changing requirements of its customers, develop
additional products and services for new or other platforms and environments
(such as the Internet) and anticipate or respond to technological advances,
emerging industry standards and practices and changes in tax and other laws,
regulations and procedures in a timely, cost-effective manner. In response to
major industry changes reflected by the increasing popularity of the Internet
among consumers and financial service providers, the Company has expanded its
Internet strategy. There can be no assurance that such initiatives can be
successfully implemented or that they will result in increased revenue or
profits for the Company. Conversely, there can be no assurance that consumers'
use of the Internet, particularly for commercial transactions, will continue to
increase as rapidly as it has during the past few years.
-19-
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company had $275.8 million in cash and short-term
investments excluding $179.6 million in marketable securities of Checkfree
common stock (see Notes 3 and 7 of Notes to Condensed Consolidated Financial
Statements), a $77.8 million increase from July 31, 1996. The increase was
primarily due to the seasonality of the Company's business which generally
results in the majority of net revenues and cash receipts occurring in the
January and April quarters. During the six months ended January 31, 1997,
operating activities provided $94.3 million in cash, compared with $41.5 million
in the six months ended January 31, 1996. The Company's investing activities
used $37.9 million in cash in the six months ended January 31, 1997 compared to
$72.0 million in the comparable period of the prior year. Investing activities
consisted primarily of net purchases of short-term investments and purchases of
property and equipment in both six month periods. The decrease in cash used for
investing activities in the six month period of the current year compared to the
six month period of the prior year is due primarily to higher fixed asset
expenditures in the prior year resulting from moving company headquarters to
Mountain View, California and relocating its San Diego, California operations to
a new facility. The Company's financing activities provided $3.9 million and
$11.5 million of cash in the six months ended January 31, 1997 and 1996,
respectively, due primarily to proceeds from the exercise of stock options.
The Company enters into leases for new or expanded facilities in the normal
course of its business. During fiscal 1996, the Company began moving its
headquarters from Menlo Park, California to larger facilities in Mountain View,
California. The move is expected to be completed in calendar year 1999. The
Company also relocated its operations in San Diego, California to a new office
facility in June 1996. The Company leases various other properties throughout
the world. Aside from the proposed Nihon Micom acquisition (see Note 7 of Notes
to Condensed Consolidated Financial Statements), the Company has no other
significant capital expenditure commitments, although additional cash may be
used for strategic acquisitions in the future.
The Company believes cash and short-term investments will be sufficient to meet
the Company's anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
-20-
PART II:OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
On March 29, 1994, Joann McGovern filed a class action lawsuit against ChipSoft
(which was subsequently merged into the Company) in the Chancery Division,
Circuit Court of Cook County, Illinois, on behalf of the plaintiff and other
purchasers of the 1993 HeadStart version of the Company's TurboTax tax
preparation software (the "Product"). The plaintiff asserts claims for breach of
express and implied warranties and violation of the Illinois Consumer Fraud Act
and seeks, on behalf of herself and purported class members, refund of the
purchase price as well as consequential and punitive damages. On September 19,
1996 the Company filed a motion for summary judgment on the plaintiff's Illinois
Consumer Fraud Act claim. The motion was granted on December 12, 1996, and the
plaintiff has indicated her intention to appeal this decision. The Company
believes that the plaintiff's claims are without merit and will continue to
defend the litigation vigorously. Additional details of the lawsuit are
contained in Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996.
On July 31, 1996, Trio Systems L.L.C. ("Trio") filed a lawsuit against the
Company in the U.S. District Court, Central District of California (Los Angeles)
alleging copyright infringement and violation of a license agreement. The
Company answered the complaint on September 3, 1996, denying all material
allegations. On October 28, 1996, the court denied Trio's motion for a
preliminary injunction seeking to prevent the Company from shipping any Intuit
products containing Trio software, including Quicken products. On February 19,
1997, the parties entered into a settlement agreement and mutual release
pursuant to which the Company purchased a non-exclusive perpetual worldwide
license from Trio to use, develop and distribute Intuit and Intuit-related
products containing certain Trio technology. Additional details of the lawsuit
are contained in Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1996.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions will
not materially affect the financial position, results of operations or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. If an
unfavorable outcome were to occur, the impact could be material. Furthermore,
any litigation, regardless of outcome, can have an adverse impact on the Company
as a result of defense costs, diversion of management resources and other
factors. See Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996.
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ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 25, 1996, at the Company's Annual Meeting of Stockholders, Intuit's
stockholders approved the following proposals. Proxies were solicited by the
Company pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended. As of October 15, 1996, the record date for the Annual Meeting, there
were approximately 46,251,414 shares of Intuit Common Stock outstanding and
entitled to vote, of which 41,138,931 shares were present in person or by proxy
and voted at the meeting.
1. Proposal to elect six directors of the Company, each to serve until the
next Annual Meeting of Stockholders and until his successor is duly
elected and qualified or until his earlier resignation or removal.
2. Proposal to amend the Company's 1993 Equity Incentive Plan to increase
the number of shares of common stock available for issuance pursuant to
awards thereunder by 3,000,000 shares.
3. Proposal to approve the adoption of the 1996 Employee Stock Purchase
Plan and authorization of the issuance of 300,000 shares of common
stock thereunder.
4. Proposal to approve the adoption of the 1996 Directors Stock Option
Plan and authorization of the issuance of 120,000 shares of common
stock pursuant to stock options granted thereunder.
5. Proposal to ratify the selection of Ernst & Young LLP as independent
auditors for the Company for the current fiscal year ending July 31,
1997.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
- ----------
(1) Incorporated by reference to the Company's report on Schedule 13D
with respect to its beneficial ownership of shares of Checkfree
Corporation filed on February 6, 1997.
(B) REPORTS ON FORM 8-K:
(i) On October 17, 1996, the Company filed a Form 8-K to report under
Item 5 its proposed sale of Intuit Services Corporation subsidiary
to Checkfree Corporation. No financial statements were filed.
(ii) On November 15, 1996, the Company filed a Form 8-K/A (amending a Form
8-K filed on September 18, 1996) relating to its acquisition of GALT
Technologies, Inc. ("GALT"). This amendment was filed in order to
include under Item 7 (a) the audited financial statements of GALT for
the year ended December 31, 1995 and the period from September 1, 1993
through December 31, 1994, and (b) unaudited pro forma condensed
combining financial information to give effect to the acquisition of
GALT by the Company as if the merger had taken place at July 31, 1996
(for balance sheet purposes) and July 31, 1995 (for statement of
operations purposes).
-23-
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 14, 1997 By: /s/ JAMES J. HEEGER
-------------------------------------
James J. Heeger
Senior Vice President and Chief
Financial Officer
Date: March 14, 1997 By: /s/ GREG J. SANTORA
-------------------------------------
Greg J. Santora
Vice President of Finance
-24-
EXHIBIT INDEX
- ----------
(1) Incorporated by reference to the Company's report on Schedule 13D
with respect to its beneficial ownership of shares of Checkfree
Corporation filed on February 6, 1997.