10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on October 15, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21180
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INTUIT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 944-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 30, 1997, there were 47,192,154 shares of the Registrant's
common stock, $0.01 par value, outstanding, which is the only outstanding class
of common or voting stock of the Registrant. As of that date, the aggregate
market value of the shares of common stock held by non-affiliates of the
Registrant (based on the closing price for the common stock as quoted by the
Nasdaq National Market on such date), was approximately $1,274,222,898.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held in January 1998 are incorporated by reference
into Part III of this report on Form 10-K.
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FISCAL 1997 FORM 10-K
INTUIT INC.
INDEX
Intuit, the Intuit logo, Quicken, QuickBooks, QuickBooks Pro, TurboTax,
MacInTax, ProSeries and NETworth, among others, are registered trademarks and/or
registered service marks of Intuit Inc. in the United States and other
countries. Quicken.com, BankNOW, Quicken Financial Planner, Quicken
InsureMarket, QuickenMortgage, QuickTax, Obanto, Kobanto and Yayoi, among
others, are trademarks and/or service marks of Intuit Inc. or one of its
subsidiaries in the United States and other countries.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We have written our fiscal 1997 Form 10-K in "plain English." This is consistent
with Intuit's mission to revolutionize the way people manage their financial
lives. One of the ways we accomplish this is by helping people eliminate the
unnecessary complexity of financial information. While we can't eliminate all of
the complexity of Intuit's business and finances, we think the ordinary words
used in our Form 10-K will enable readers to understand Intuit more easily than
the complicated language normally found in 10-Ks. Please let us know your
reactions by contacting our Investor Relations Department at (650) 944-2713.
OVERVIEW OF INTUIT'S BUSINESS
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 desktop software
products, financial supplies (such as computer checks, invoices and envelopes),
and Internet-based products and services. We sell our products throughout North
America and in many international markets. Our fiscal year ends on July 31 of
each year.
Fiscal 1997 was a year of transition for Intuit. Although our mission remains
unchanged, the ways we accomplish it are changing. Industry-wide retail sales of
personal finance software are declining. Customer demands are changing rapidly.
Competition is intensifying. The Internet is a pervasive force that is reshaping
our business and providing new challenges and opportunities. During fiscal 1997,
we made some major changes to our business strategy in response to these trends.
During the past few years we made several acquisitions and investments to expand
our business and sold two businesses that no longer support our corporate
strategy. In January 1996 we acquired Milkyway KK, a provider of PC-based small
business accounting software in Japan. In June 1996 we acquired Interactive
Insurance Services Corp. (or "IIS"), developer of our Quicken InsureMarket(SM)
website. In September 1996 we acquired GALT Technologies Inc. developer of the
mutual fund information service now incorporated in our Quicken.com(TM) website.
In March 1997 we acquired Nihon Micom Co. Ltd., a Japanese small business
accounting software company. In June 1997 we made a $39.2 million strategic
investment in Excite, Inc. In January 1997 we sold Intuit Services Corporation
(or "ISC"), our banking and bill payment processing subsidiary, to Checkfree
Corporation. In August 1997 (after the end of fiscal 1997) we sold Parsons
Technology, Inc., our direct marketing consumer software subsidiary, to
Broderbund Software, Inc. These transactions have had, and will continue to
have, a significant impact on our financial results. For more details about
these transactions and their impact, see Notes 2, 3 and 15 to our financial
statements beginning on page 29 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (also called "MD&A") beginning on
page 40.
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements about future financial
results, future products and other events that have not yet happened. For
example, statements like "we expect" or "we anticipate" are forward-looking
statements, and most of the information in the paragraphs in the Business
section labeled "Fiscal 1998 Plans" is forward-looking. Investors should be
aware that actual results may differ materially from our expectations because of
risks and uncertainties about the future. In addition, we will not necessarily
update the information in this Form 10-K if any forward-looking statement later
turns out to be inaccurate. Details about risks affecting various aspects of our
business are included throughout this Form 10-K. Investors should read all of
these risks carefully, and should pay particular attention to risks affecting
the following areas: Timing of product launches (pages 4-5). Our Internet-based
businesses (page 3). Customer service and technical support (page 12).
Competition (page 10). The business model for online financial services (page
6). Regulatory changes (page 13). Acquisitions (page 41). International
operations (page 7). The
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value and size of our equity investments in other companies (Note 1 of the
financial statements, page 27, and MD&A, page 45). Market growth and sales of
new products and upgraded products (pages 8-10).
CORPORATE BACKGROUND
Intuit began operations in March 1983 and was incorporated in California in
March 1984. In March 1993 we reincorporated in Delaware. Our principal executive
offices are located at 2535 Garcia Avenue, Mountain View, California, 94043, and
our telephone number is (650) 944-6000. When we refer to "we," "Intuit" or the
"Company" in this Form 10-K, we mean the current Delaware corporation (Intuit
Inc.) and its California predecessor, as well as all of our consolidated
subsidiaries.
BUSINESS AND PRODUCTS
PRODUCTS AND SERVICES OVERVIEW
We offer products and services in the following areas:
- Small business accounting software, financial supplies and related
services
- Personal, professional and small business tax preparation software and
related services
- Consumer finance software and related services
- International (selected small business, tax and consumer finance products
in more than 20 countries)
INTERNET STRATEGY
Overview. During fiscal 1997, we have been focusing our efforts in three
strategic directions. Two of these directions -- expanding our small business
offerings, and adding online connectivity to our tax and personal finance
desktop software -- are extensions of the businesses that have historically
represented the majority of our revenue. Our third strategic effort is to
establish a "community" of new Internet-based resources and businesses. We
believe that the dramatic growth of the Internet and the World Wide Web will
eventually give us significant opportunities to grow our business over the next
several years -- although it also presents major risks and challenges. Our
current Internet strategy includes integrating online, Web-based resources into
many of our desktop software products, putting desktop software functionality
onto the Internet, investing in new, entirely Web-based businesses in the
financial services area, and establishing strategic relationships, such as our
relationship with Excite, Inc. (see page 7). Given the rapidly changing nature
of the Internet, we expect to update our strategy over time. Fiscal 1997
Internet-based revenue was well under 5% of our total revenue, but we made
significant progress during fiscal 1997 in refining and implementing our
Internet strategy.
In September 1996 we took an important step in implementing our Internet
strategy when we announced that we would move from a proprietary electronic
communications link between our software and financial institutions, to an
Internet-based link. This means that financial service providers could
electronically connect directly through the Internet to their customers who use
Intuit products, instead of through our private data network operated by our
former ISC subsidiary. As part of this strategic step, we sold ISC to Checkfree
in January 1997 (see Note 3 of the financial statements, page 31). In February
1997, we announced we would collaborate with several other parties (including
Microsoft Corporation and Checkfree) to merge our efforts in a jointly developed
standard called Open Financial Exchange. Open Financial Exchange is an
integrated collection of technical specifications and protocols designed to make
it easier and less expensive for a wide range of financial service providers,
such as banks, brokerage firms, mutual fund companies, insurance companies and
mortgage brokers, to build links for electronic financial data exchange and
communications with their customers using the Internet. While we believe that
Open Financial Exchange is the right strategic approach for Intuit, we face
risks and challenges in implementing it. Open Financial Exchange is a new,
unproven technology. Financial institutions may not accept and implement Open
Financial Exchange as rapidly as we would like, or they may adopt alternative
connectivity standards that may or may not support interoperability with Open
Financial Exchange. In October 1997, we announced a joint development effort
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with Integrion Financial Network (a consortium of retail banks that developed
the Gold Standard connectivity specification) to develop technology that will
allow users of Intuit software to connect to financial institutions that support
the Integrion platform.
Internet-Based Products and Services. The growth of the Internet and the World
Wide Web provides us opportunities in three areas. First, more households are
now connected to the Internet, so we have a greater market for online financial
services such as banking and downloading of financial account information. When
we talk about Internet-based financial services, we're including online banking,
even though some of our online banking currently operates through a private data
network rather than through the Internet. Second, we can create "marketspaces"
that bring together buyers and sellers of complex financial products and
services in a way that benefits buyers and sellers, and that can generate
revenue for us through advertising and marketing service fees. Third, we can
leverage the "community" nature of online services to help consumers share ideas
and information and give them greater confidence in making financial decisions.
During fiscal 1996 and 1997, we invested significant resources to lay some of
the groundwork for establishing these new businesses. We worked on Open
Financial Exchange (see page 2) and we are integrating it into our products
beginning in the fall of 1997. Several desktop products we plan to release in
fiscal 1998 will have imbedded Web "browser" software to make Web access easier.
We have formed relationships with financial institutions to allow our customers
to receive data from them electronically. We made progress in our marketspaces
effort through our acquisitions of IIS and GALT (see page 1). We expect to
launch QuickenMortgage(SM), our consumer mortgage service, in fiscal 1998. We
expanded the software products and financial information available on our
Quicken.com website, and we negotiated distribution arrangements with Excite and
Microsoft to enable our Web-based offerings to reach a broader audience. Our Web
offerings are described in more detail beginning on page 6.
Risks for Our Internet-Based Businesses. In spite of our progress, investors
should be aware that fiscal 1997 Internet-based revenue was well under 5% of our
total revenue. We expect these businesses to grow in absolute dollars, but we
can't predict if or when they will generate significant revenue or profits. We
face many risks and challenges in this area, including the following: The
Internet represents a new business model for Intuit, where revenues are expected
to come from advertising and marketing service fees instead of software product
sales. In order to generate significant revenue from these sources, at a minimum
we need to dramatically increase consumer traffic to our websites. This may
require establishing additional strategic relationships, such as our
relationship with Excite. We may not be able to establish these relationships,
and if we do, they may not bring significant increased traffic to our websites.
We also need to quickly and successfully build new skills as a website content
provider and publisher, which are somewhat different from our traditional
desktop software development skills. Customers may refuse to transact business
over the Internet due to privacy or security concerns. A major breach of
customer privacy or security, even by another company, could have a significant
negative effect on Intuit. We can't be certain that consumers' use of the
Internet, particularly for commercial transactions, will continue to increase as
rapidly as it has during the past few years. If Internet activity becomes
heavily regulated, that could have major consequences for our Internet
businesses. We face intense competition in our Internet-based businesses. There
are very low barriers to entry, and the market is extremely fragmented, making
it difficult for any one company to acquire a "critical mass" of customers. Many
of Intuit's competitors can afford large investments in this business. We may be
unable to adapt our operational infrastructure to support our Internet-based
businesses and the complex operational requirements of our strategic
relationships. The operational requirements for online businesses are very
different from the requirements of our desktop software business.
SMALL BUSINESS ACCOUNTING SOFTWARE, FINANCIAL SUPPLIES AND RELATED SERVICES
QuickBooks(R). Our QuickBooks product brings extensive bookkeeping capabilities
to small business users in an easy-to-use design that does not require customers
to be familiar with debit/credit accounting. QuickBooks supports both cash-based
and accrual-based accounts payable, with separate entry of bills and automatic
generation of accounts payable checks based on outstanding vendor balances.
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QuickBooks Pro(R). QuickBooks Pro is an enhanced version of QuickBooks that
addresses the needs of small businesses in the U.S. that are project, job or
time based, such as contractors, consultants, lawyers, accountants and
subcontractors. QuickBooks Pro allows users to integrate time tracking, job
estimating and project costing with accounting and payroll functions.
Payroll Tax Table Update Service. Our Payroll Tax Table Update Service is a
disk-based data service that provides customers with new tax table files when
relevant federal, state or local payroll tax rates change.
Financial Supplies. We offer a range of financial supplies designed for use with
our small business and consumer finance desktop software products. Supplies
include professional-quality paper checks, invoice forms, envelopes, deposit
slips and return address stamps. These products help users to save time and
automate transactions and record keeping. In September 1995, we entered into an
exclusive five-year contract with John H. Harland Co. to print all of our check
products. We believe our relationship with Harland is good. However, if for any
reason Harland can't provide checks on a timely basis, it could have a material
negative impact on sales of supplies and on Intuit as a whole.
Fiscal 1997 Overview. During fiscal 1997, our QuickBooks business expanded its
installed customer base significantly. We expanded our fee-for-support program,
called the QuickBooks Support Network, to generate revenue from our technical
support services. We also introduced our QuickBooks "professional adviser"
program, in which preferred QuickBooks customers provide assistance and advice
to other QuickBooks users. These advisers have been a source of product
referrals for us, and we hope to expand this program during fiscal 1998.
Our financial supplies business benefited from the growth of our small business
customer base. During the year we improved order accuracy and transmitted a
higher percentage of orders to Harland (our check printer) electronically. These
steps allowed us to improve customer satisfaction and reduce costs because of
fewer errors and reorders, faster order turnaround, and lower order fulfillment
costs. At the end of fiscal 1997, we began developing a website that will enable
customers to order supplies on-line.
Fiscal 1998 Plans. We recently announced that we are working on a multi-user
version of QuickBooks. This new product will address an important customer need,
so we think it represents a good business opportunity. However, there are a
number of risks we face in capitalizing on this opportunity. We currently expect
that the product will be available by the end of fiscal 1998. However, if the
launch date slips (which is possible given the uncertainties of complex software
development), that could have a significant negative impact on our revenue and
net income for fiscal 1998. Providing technical support for this new product
will present challenges as we don't have experience supporting multi-user
products, and all new products have a risk of "bugs." Higher technical support
costs could negatively affect our operating results.
PERSONAL, PROFESSIONAL AND SMALL BUSINESS TAX PREPARATION SOFTWARE AND SERVICES
We offer a broad range of tax preparation software for individuals, tax
professionals and small businesses. Our tax business has been a fairly
predictable source of recurring revenue, because tax products must be updated
every year to reflect tax law changes, and customers generally buy the latest
version every tax year. Our tax business is also very seasonal, with almost all
revenue occurring during our fiscal quarters ending January 31 and April 30.
Personal Tax Products. Our TurboTax(R) products (for Windows) and MacInTax(R)
products (for the Macintosh) are designed for individual consumers who prepare
their own tax returns. We have products for federal tax returns as well as for
the 45 states that have a state income tax. Our tax products are designed to be
easy to use even for inexperienced computer users, but they're sophisticated
enough for more complicated tax returns. Our tax products also allow customers
to transmit federal tax returns and some state returns for electronic filing.
Professional Tax Products. Our ProSeries(R) products are designed for tax
professionals who prepare tax returns for their individual and business clients.
While they have many of the same ease-of-use features as our personal tax
products, our professional products have additional features that enhance the
productivity of tax
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professionals. Our ProSeries products can be used to prepare individual,
corporate, partnership, fiduciary and not-for-profit federal income tax returns,
as well as many comparable state returns.
Small Business Tax Products. For small business owners that prepare their own
business tax returns, we offer TurboTax for Business and MacInTax for Business.
We have separate products for federal and some state S corporations, C
corporations and partnerships, plus products for sole proprietors. TurboTax for
Business can import data directly from QuickBooks and other leading accounting
software programs.
Electronic Filing. Users of Intuit's personal and professional tax preparation
software can file their federal (and some state) tax returns electronically.
Total electronic filings for all of our tax products were about 600,000 in
fiscal 1997, and we expect that the number will increase over the next few
years. We currently provide electronic filing services through third party
vendors, and the fee we charge to customers essentially covers our costs.
However we are working on our own electronic filing technology that will reduce
our cost of providing this service. We used this internally-developed technology
on a test basis in fiscal 1997.
Other Internet-Based Tax Products and Services. In fiscal 1997 we introduced an
online personal tax product that allows customers to prepare and file their Form
1040EZ tax returns entirely online. Only a small number of customers used 1040EZ
online during fiscal 1997, but we think consumer demand for online tax
preparation will increase in the future. Our tax business is also making use of
the Internet to distribute tax products electronically for customers who buy
their tax software directly from Intuit. This reduces our distribution cost and
gets products to customers faster and more conveniently. We are also
increasingly using the Internet to provide customer service and technical
support and to deliver updates and corrections for tax products.
Fiscal 1997 Overview. During fiscal 1997, we improved the quality of our
products and of our technical support, and the demand for electronic filing
increased. Total fiscal 1997 tax revenue reflected strong growth in direct
sales. However, we encountered strong competition in the personal tax area from
H&R Block's TaxCut product, which hindered retail sales growth.
Fiscal 1998 Plans. The primary challenge for our tax business in fiscal 1998
will be to execute a timely launch of high-quality products that reflect all of
the federal tax changes passed by Congress in July 1997. Major tax law changes
have historically contributed to industry-wide growth in tax software sales, and
we hope that will occur with the July 1997 tax law changes. However,
incorporating extensive tax law changes into the software on a tight time
schedule can lead to errors in the software. Our development schedules depend on
timely availability of new IRS forms, instructions and publications, which we
cannot control. If we have major errors in our tax products, or if there are
major delays in our product launches, fiscal 1998 financial performance of the
tax business and of Intuit as a whole would be negatively affected. See page 9
for more information about developing tax products.
During fiscal 1998, we plan to expand use of our internally-developed electronic
filing service. However, as our electronic filing program expands, so will the
risks involved. For example, if we have technical problems that prevent
customers from filing their returns, particularly right before the April 15
filing deadline, we could face serious financial and public relations
consequences. During fiscal 1998, we also plan to expand our online tax
preparation software offerings.
CONSUMER FINANCE SOFTWARE AND SERVICES
During fiscal 1997 the Internet had a profound impact on our consumer finance
business as we shifted our focus to Internet-based products and
services -- including Internet-based features in our desktop software.
Quicken(R) -- Desktop Features. Our Quicken desktop software products help users
organize, understand and manage their personal finances by providing easy
methods for recording and categorizing various types of financial transactions.
For example, Quicken enables customers to reconcile checking and savings
accounts, record credit card purchases and payments, and track cash,
investments, mortgages and other assets and liabilities.
Quicken(R) -- Online Banking and Other Internet-Based Features. During the past
few years, we have been adding Internet-based features to Quicken. In 1995 and
1996, we added Internet navigation software to
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Quicken, gave customers access from within Quicken to what is now called our
Quicken.com website, and offered Quicken users low-cost Internet access through
a third-party Internet service provider. Quicken also allows customers to
schedule bill payments through online payment services. Although we no longer
provide online bill payment directly since we sold our ISC subsidiary, we
continue to market and resell bill payment services offered either by Checkfree
or directly by participating financial institutions.
In our fall 1995 launch of Quicken, we introduced online banking features in
Quicken, which allow users to download transaction and account information from
participating financial institutions directly into their Quicken accounts,
instead of inputting data manually. We currently have about 45 financial
institutions participating in our online banking service. During fiscal 1997,
the business model for our online banking business changed dramatically. Before
we sold our ISC subsidiary to Checkfree in January 1997, ISC performed all of
the data processing for our online banking services, and we received monthly
per-subscriber fees from participating financial institutions. With the sale of
ISC, we no longer provide processing services, so we no longer receive monthly
per-subscriber fees. What we now provide to participating financial institutions
is marketing services and the opportunity to acquire Quicken users as new
customers. Financial institutions can purchase advertising within Quicken and on
Quicken.com, and may also purchase other marketing services. We can't predict if
or when this new business model will generate significant revenue. In addition,
the transition of ISC's processing business to Checkfree is ongoing and we can't
be certain that the transition will be successfully completed.
BankNOW (TM). In September 1996 we introduced our BankNOW software, which
enables America Online subscribers to perform basic online banking functions,
such as checking account balances and transferring funds between accounts,
independently of any personal finance software (such as Quicken). In 1997 we
introduced an Internet-based version of BankNOW to reach a broader customer
base. We don't currently receive any subscriber or transaction fees from
customers or financial institutions who use BankNOW, but we offer BankNOW as
part of our effort to encourage banks to provide electronic connectivity for
Intuit customers.
Quicken Financial Planner (TM). With our Quicken Financial Planner product, a
customer can create a personal financial and retirement plan based on his or her
current financial profile and financial and retirement goals. We also offer a
simplified, online version of this product, called the Quicken Retirement
Planner, on Quicken.com. In 1997 we introduced Fidelity QFP, which was
specifically designed for customers who have 401(k) retirement plans with
Fidelity Investments. Our QFP products are offered by Quicken Investment
Services, Inc., which is a registered investment adviser subsidiary (see page
13).
Quicken.com. Quicken.com (formerly Quicken Financial Network) is our community
website, and it's designed to enable people to make better financial decisions
and perform financial tasks more easily by giving them useful tools, software
applications, resources and objective information about a variety of personal
finance topics in one location. Quicken.com also acts as a vehicle for
distributing many of our Internet-based products and services. Some of the
content on Quicken.com is created by Intuit, and some is provided for us by
third party publishers and financial experts. Users can access Quicken.com
through versions of Quicken that have Web navigation software, as well as
through any Internet service provider and Internet browser software. We do not
currently charge customers a fee to access Quicken.com, but we receive revenue
from companies that advertise and sell their products or services on
Quicken.com. We also receive fees relating to some of the specific services that
are available through Quicken.com, such as Quicken InsureMarket.
By the end of calendar 1997, we expect that Quicken.com will have "channels" for
Investments, Tax, Insurance, Home/Mortgage and other financial areas. The
Investments channel has evolved from the NETworth(R) site originally created by
GALT, which we acquired in 1996. It includes portfolio tracking, investment
research tools, stock and mutual fund quotes and information and other
investment-related content. Other channels will provide relevant information and
tools about other financial topics. Certain channels will have direct links to
related websites. For example, the Insurance channel will link to Quicken
InsureMarket (described below.) On each channel, consumers will be able to have
live interactive discussions with other Quicken.com users, post their comments
about financial topics on bulletin boards, and participate in discussions about
financial topics led by financial experts.
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Quicken InsureMarket. Quicken InsureMarket is a website that enables customers
to shop for term life insurance, contact insurance agents and learn about other
insurance products online. We receive initial implementation fees and ongoing
annual participation fees from insurance carriers who participate in the Quicken
InsureMarket site, and some carriers pay us fees for data processing and other
administrative services. As of October 1997, nine insurance carriers were
participating in the Quicken InsureMarket site. Quicken InsureMarket is offered
by our IIS subsidiary, which is subject to state insurance regulations (see page
13).
Fiscal 1997 Overview. Fiscal 1997 was a year of transition and refocus for our
consumer finance business. The market for traditional desktop personal finance
software is declining as customers are using the Internet for many personal
finance tasks. While our Quicken products have been negatively affected by this
trend, our Internet strategy is designed to take advantage of it. We made
progress in implementing our Internet strategy during fiscal 1997, but these
changes have not yet had a significant positive impact on our financial
performance. Investors should be aware that Internet-based revenue during fiscal
1997 was substantially less than 5% of our total revenue. Although we think this
will increase in fiscal 1998, we can't predict if or when these sources will
generate significant revenue.
In June 1997 we announced an agreement with Excite to jointly develop, promote
and distribute a new online financial channel. Excite is a leading provider of
Internet search and navigation services, with about 2.5 million users daily.
Intuit will be the exclusive provider and aggregator of personal financial
content for all of Excite's Internet services. Excite will provide hosting as
well as advertising sales services and software services, and will become the
exclusive search and navigation service promoted in our Quicken, QuickBooks and
TurboTax products. This channel is expected to include financial information and
services designed to help consumers organize and manage their personal financial
lives and make more informed financial decisions. We anticipate that the channel
will premiere during calendar 1997. We expect that this agreement with Excite
will help us increase the customer base for our Internet-based products and
services and will eventually generate revenue for Intuit and Excite from a
combination of advertising, transaction and subscription fees, but we can't be
certain if or when we will see these benefits. In addition, in June 1997 we
invested $39.2 million for a 19% equity interest in Excite. See Note 4 of the
financial statements, on page 31.
Fiscal 1998 Plans. Our fall 1997 Quicken products will have new
investment-related features, including a feature that will allow Quicken users
who are customers of participating brokerage firms to download brokerage account
data and execute securities trades through their broker's website. Quicken
customers will also have easier access to the World Wide Web, as Microsoft's
Internet Explorer Web browser will be imbedded in Quicken and other Intuit
desktop software. In addition, our Quicken.com site will be a "channel" on
Microsoft's new Active Desktop product. We will also be launching a new product
in fiscal 1998 called Quicken Home & Business, which is designed to serve small
business owners that currently use personal finance software, rather than
software designed specifically for small businesses. During fiscal 1998, we plan
to expand the products and services available on our Quicken.com "channels"
described above. We expect to launch QuickenMortgage, a mortgage service that
will enable consumers to shop for home mortgages online. We also expect to
expand Quicken InsureMarket to allow consumers to shop for additional types of
insurance, such as auto insurance. Our new businesses involve many uncertainties
(including possible delays in launching them), so we don't know if they will be
successful.
During the next few years, our primary goals for our Internet-based businesses
will be to increase customer traffic, establish strategic relationships and
achieve participation by a broad range of financial institutions in the
financial products and services we offer. Investors should be aware that any
initial success achieved in these areas will not necessarily be reflected in
successful financial performance. See page 3 for more information about the
risks related to our Internet-based businesses.
INTERNATIONAL
Our international operations are divided into three regions: Europe, Japan and
the Pacific. We believe our international operations will give us opportunities
to expand in existing markets and reach new markets over the next several years.
See MD&A, page 42 for financial information about our foreign operations.
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European Region. We serve selected European markets and South Africa with
localized versions of our products through our offices in Germany, France and
the United Kingdom. We currently offer Quicken in France, Germany, Spain, the
United Kingdom, Austria and South Africa, and we offer QuickBooks in Germany and
the United Kingdom. We also offer small business accounting products in France
that were developed by Somma France S.A.R.L., a small business accounting
software company that we acquired in February 1997 (see Note 2 of the financial
statements on page 31). We sell personal tax products in France, Germany and the
United Kingdom.
Most of our sales in the European region are through distributors, who sell into
the retail channel. In September 1997 we entered into an equity, localization,
manufacturing and distribution arrangement with Intuit Services Europe N.V., a
Dutch company with headquarters in Switzerland (not an Intuit subsidiary).
Intuit Services Europe will help us distribute Quicken through banking channels
in France, Germany and the United Kingdom, and will develop Quicken products for
several new European markets.
Japan Region. Our Japanese operations are now managed by our Intuit KK
subsidiary. Intuit KK combines the businesses of Milkyway KK (which we acquired
in January 1996) and Nihon Micom (which we acquired in March 1997), and it is
now the largest Windows-based small business accounting software company in
Japan. We currently offer products developed by Milkyway and Nihon Micom, and we
expect to eventually offer QuickBooks products in Japan also. We sell products
in Japan through both retail and direct channels.
Pacific Region. Our Pacific region includes Canada, Australia, Latin America,
Hong Kong and other parts of Southeast Asia. We offer Quicken in Canada,
Australia, Hong Kong, the Philippines and Singapore, as well as several Latin
American countries (including Mexico, Brazil, Colombia and Argentina). We offer
QuickBooks in Canada, Australia and Hong Kong. We also offer our QuickTax(TM)
personal tax product in Canada and Australia. We sell products in the Pacific
region through both retail and direct channels.
Fiscal 1997 Overview and Fiscal 1998 Plans. During 1997 our European region
launched new Quicken products in France, Germany and the United Kingdom, and a
new QuickBooks product in the United Kingdom. In June 1997 we announced that we
would reorganize our European region to consolidate management operations for
our core European markets (France, Germany and the United Kingdom) in our German
headquarters in Munich. We'll continue to have sales and marketing offices in
France and the United Kingdom. We also announced that we plan to outsource all
European customer service, technical support, manufacturing and order
fulfillment functions to third party vendors. We expect that these steps will
lead to more efficient operations in fiscal 1998. In fiscal 1997 we established
a presence in several key markets in Southeast Asia, including Hong Kong and the
Philippines, where we hope to benefit from increasing adoption of home
computers.
Special Risks for International Operations. We intend to continue expanding our
international operations, but we can't be certain that our efforts will lead to
increased revenue or profits in international markets or for Intuit as a whole.
Developing products for foreign markets is more time-consuming and costly than
developing products for the U.S. market. Delays or other problems in product
launches may be more likely because of these factors, and they can impact our
financial performance. For example, our German subsidiary experienced delays in
two critical product launches in fiscal 1996 that resulted in excess inventory
levels in the distribution channel. Economic conditions in international markets
can also negatively affect our business as they did in fiscal 1996 when there
was general weakness in European consumer software markets. Our international
revenue and expenses are currently denominated in a variety of foreign
currencies and we don't currently engage in any hedging activities. Although the
impact of currency fluctuations has not been significant in the past, this could
change in the future as our international operations grow, and it could have a
negative impact on our operating results and financial condition. Other risks in
our international operations could also have a negative impact on our business,
including unexpected changes in regulatory requirements, tariffs and other trade
barriers; longer accounts receivable payment cycles and collection difficulties;
the burden of complying with a wide variety of foreign laws (including financial
reporting and record-keeping requirements); possible adverse tax consequences
including repatriation of earnings; and potentially less protection for our
intellectual property rights under foreign laws.
8
PRODUCT DESIGN AND DEVELOPMENT
We believe that successful products must be easy to use and must respond to
customers' specific needs and use patterns. We design new products and
enhancements based on consumer input and then have actual users conduct field
tests and give us feedback. Once products are released, we continue to seek
customer input to incorporate in product enhancements and upgrades. A primary
goal of our desktop software product development efforts is to design products
that will stimulate additional sales to existing customers -- either upgrades of
products they already own or new products. We also develop products that
generate recurring revenue, such as our tax preparation products, which
customers generally buy every year. For our Web-based development efforts, a
major goal is to generate traffic to our websites, in order to generate
advertising revenue and customers for our marketspaces such as Quicken
InsureMarket. Our total research and development expenses were $57.3 million in
fiscal 1995, $76.5 million in fiscal 1996 and $93.0 million in fiscal 1997.
We remind investors that the software development process is complex and
involves some risks for Intuit. Our products may have "bugs" that hinder product
performance, give customers incorrect results and/or damage customer data. These
problems can be expensive to fix, particularly if we need to do a major
maintenance release or pay refunds to customers. Poor product quality can cause
us to lose revenue and customers, and incur higher technical support costs. Any
major product bugs could have a material negative effect on our financial
performance. In addition, investors should also keep in mind that only a small
percentage of new software products achieve any degree of sustained market
acceptance.
The development of tax preparation software presents a unique challenge because
of the demanding annual development cycle required to incorporate tax law
changes each year. We can't predict how complex the tax law changes will be each
year, or when tax forms will be available from the IRS and state tax agencies.
The rigid development timetable increases the risk of errors in the products.
Although fiscal 1997 tax product quality was high, in fiscal 1995 and 1996 we
had software defects that led to negative publicity, customer dissatisfaction
and incremental operating expenses.
As we expand our Internet-based businesses, we expect that customers will be
concerned about privacy and security of the personal information they provide
when using products and services. We currently incorporate extensive security
measures into our products and services, and we are developing a comprehensive
customer privacy policy. However, a major breach of customer privacy or
security, even by another company, could have a negative effect on Intuit.
MARKETING, SALES AND DISTRIBUTION
MARKETS
We use a variety of marketing approaches to sell our products and services into
the markets we serve through our retail and direct sales organizations. The
markets that we compete in, particularly in the Internet area, are characterized
by rapidly changing customer demands, continuous technological changes and
improvements, shifting industry standards and frequent new product introductions
by other companies. Changes in any of these areas can quickly render existing
products obsolete, so our marketing success depends on our ability to respond
rapidly to these changes with new products and services, as well as improvements
to existing products and services. One way that we're attempting to respond to
market changes is our Internet strategy (described on page 2).
RETAIL SALES
We market our desktop software in North America through traditional retail
software outlets, computer superstores, office and warehouse clubs and general
mass merchandisers. Retail sales revenue represented slightly less than half of
total gross revenues during fiscal 1995 and 1996. In fiscal 1997, the percentage
declined to about 40%, reflecting declines in retail sales of Quicken, as well
as a shift towards a higher percentage of direct sales for TurboTax. We sell
directly to some retailers and we also sell to distributors who then resell to
retailers. The only retailer or distributor that accounted for more than 10% of
our net revenue
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during the past three fiscal years was Ingram Micro Inc. (12% in 1995, 13% in
1996 and 14% in 1997). We also have retail distribution arrangements with banks
and other financial institutions for our electronic financial services, and for
our desktop software that includes these services. For example, our BankNOW,
Quicken and QuickBooks products are marketed through participating banks, and
Fidelity Investments markets Fidelity QFP financial planning software.
During the past few years, there has been increasing consolidation among
retailers. This trend has created a number of large retailers with significant
bargaining power, which makes it more difficult for us to negotiate financially
favorable terms. We expect this consolidation trend to continue in fiscal 1998.
An element of our retail sales efforts that has been important over the last
several years is our original equipment manufacturer, or "OEM," relationships
with hardware and software manufacturers. We sell our software to OEMs to be
combined with their products, which are then sold to consumers. Initially, most
of our OEM sales were special, limited feature editions of Quicken, but more
recently we have been selling regular full-feature Quicken to OEMs. The sale
prices we receive for OEM sales are much lower than retail or direct sale
prices. Although OEM sales generate little revenue for us and reduce operating
margins in the short term, they have been strategically important because they
have been a good source of new customers, with the potential for future sales of
more profitable products and services. OEM sales have been particularly
important for our Quicken business in responding to competitive pressures.
However, given the adverse impact of OEM sales on revenue and profitability, we
are also using other methods (such as our Web-based businesses) to acquire new
customers.
DIRECT SALES
We believe that direct sales campaigns stimulate retail demand and increase
consumer awareness of our products, while also generating orders and providing
opportunities for cross-selling. Direct sales frequently generate significantly
higher revenues and margins than retail sales, but this also means that
aggressive retail pricing can harm direct sales efforts. We use targeted
direct-mail and telephone solicitations, direct-response newspaper and magazine
advertising, and television and radio advertising to encourage direct sales.
During fiscal 1997, our Parsons subsidiary was a major source of direct sales
for us, since almost all of their products were sold direct to customers (see
MD&A, page 43).
Customers can order and receive products electronically through the Quicken
Store, which is accessible through Quicken.com and other Intuit websites.
Electronic ordering and delivery are convenient for customers and less expensive
for Intuit. We saw a significant increase in online orders and deliveries during
fiscal 1997. Although they accounted for less than 1% of revenue in fiscal 1997,
we anticipate that they will continue to increase.
PRODUCT RETURNS
Like most other software companies, we have a generous return policy for our
distributors and retailers, although we encourage them to make returns promptly.
We have an unconditional return policy for direct customers. In the past,
returns have not generally exceeded the reserves we have established for them in
our financial statements. However, if in the future retail sell-through of a
major product falls significantly below expectations, returns could exceed
reserves and could have a negative effect on our financial performance.
COMPETITION
OVERVIEW
We face intense competition from many companies in almost all of the markets in
which we compete -- both domestic and international. Some of our major
competitors (but not all of them) in each business area are identified below. We
think the most important competitive factors for desktop software are product
features, ease of use, quality and reliability, brand name, timing of product
launches compared to competitors, price, access to distribution channels and
quality of technical support services. In our Internet-based products and
services, our speed in getting new products and services out, and our ability to
distribute them effectively (by generating traffic on our websites) are the most
critical factors for competitive success, although our strong
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Quicken brand, product features and ease of use are also important to help
generate traffic. Strategic relationships are also important for generating and
distributing a wide variety of Web-based content to a large audience. We believe
we generally compete effectively on each of these competitive factors, although
our competitive position for any particular factor varies from product to
product and over time.
Some of our competitors have significantly greater financial, technical and
marketing resources and broader product lines than we do. Customer demands
change rapidly, and we have to respond quickly, with new products and
accelerated product release schedules, to remain competitive. This is
particularly true in our Internet-based businesses, where product and service
launches happen continuously. Actions taken by our competitors, such as cutting
prices, increasing advertising (especially advertising targeted at our
customers) and releasing new products before we do, can have a negative impact
on revenue and profitability, and can hinder our ability to keep existing
customers and acquire new customers.
SMALL BUSINESS ACCOUNTING SOFTWARE AND SERVICES
Our major competitors in small business accounting software are currently
Peachtree Software (a division of ADP) and The Sage Group PLC (based in the
United Kingdom). Because Peachtree's products use standard debit/credit
accounting principles, we think our QuickBooks products have a competitive
advantage in ease of use for customers unfamiliar with accounting principles.
Peachtree offers a multi-user accounting software product that will compete with
the new multi-user version of QuickBooks that we plan to release in late fiscal
1998. Sage is currently our major competitor in Europe. Microsoft recently
announced that it will offer versions of Microsoft Money targeted to the small
business market in Europe, so we expect that they will begin to be a major
competitor there in fiscal 1998.
Our financial supplies business competes with a number of business forms
companies, such as Deluxe Business Systems, New England Business Services and
Moore Business Forms. We're also seeing increased competition from the direct
mail check printers that now offer computer checks, as well from banks. Our
major competitive advantages in this market are our direct access to Intuit's
customer user base (through in-box advertising), product quality, speed of
delivery and guaranteed compatibility with Intuit software products, but we
can't guarantee continued competitive success.
PERSONAL, PROFESSIONAL AND SMALL BUSINESS TAX PREPARATION SOFTWARE AND SERVICES
In the personal tax area, our major competitor is currently Block Financial
Corporation, the makers of TaxCut software. During fiscal 1997, TaxCut was
priced very aggressively, and was released a little earlier than our personal
tax products. As a result, even though our total sales of TurboTax grew
significantly, our growth rate was lower than the growth rate of industry-wide
retail sales of personal tax software. We expect that TaxCut will continue to
offer aggressive competition in fiscal 1998. The professional tax preparation
market is highly fragmented. Competitors in the U.S. include Arthur Andersen,
Lacerte Software Corporation, Commerce Clearing House/Computax, RIA/Creative
Solutions, Pencil Pushers, Inc. and CLR Fast-Tax. Our competitors in
international tax include The Learning Company in Canada, Lexware and Viso in
Germany and TaxCalc in the United Kingdom.
CONSUMER FINANCE SOFTWARE AND SERVICES
In desktop consumer finance software, Microsoft is currently our primary
competition in both domestic and international markets. Quicken competes
directly with Microsoft Money, which is aggressively promoted with free product
offers through various distribution channels, and with advertising targeted to
Quicken users. These competitive pressures, as well as other factors, have
negatively affected Quicken revenue and profitability, as we have lowered prices
and concentrated on OEM sales in order to remain competitive. There are many
competitors for our other consumer finance products and services, and we expect
that competition will increase as we expand our consumer finance offerings, and
as more companies expand their businesses onto the Internet. There are
relatively low barriers to entry for Internet-based businesses, so we face
competition from new and relatively small companies as well as established
software companies. We also face competition from financial institutions that
are developing their own financial software and websites. Our
11
Web-based investment-related services and the Quicken.com website compete with
online financial publishers and the financial areas on numerous online services
such as America Online and Yahoo.com, as well as financially-oriented websites
such as MSN Investor.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support for our products primarily by
telephone and fax. For customers who are connected to the Internet, we can
answer questions by electronic mail and make corrected software available
electronically. These methods are less expensive for us and often more efficient
for customers. We currently operate major domestic telephone support centers in
Tucson, Arizona and Fredericksburg, Virginia, and a telephone sales and service
center in Mountain View, California. We currently have a full-time customer
service and technical support staff of about 1,000 employees, but during periods
of peak call volumes (such as during the tax return filing season, or shortly
after a major product launch), we hire many seasonal employees and outsource
some of the work.
During fiscal 1996, we began a fee-for-support program for QuickBooks and
QuickBooks Pro customers under which customers could elect to pay a fee for
expedited telephone support, and in fiscal 1997 we expanded the fee-for-support
program. We believe this is consistent with industry trends in the small
business products market. We also instituted a fee-for-support policy for older
versions of Quicken during fiscal 1996. Revenues from our fee-for-support
programs have been minimal, but we believe the policies have helped to control
technical support costs. During fiscal 1998 we plan to expand the
fee-for-support policy to other products. We have not experienced significant
negative customer reactions to fee-for-support in the past, but that may occur
in the future.
Despite our efforts to adequately staff and equip our customer service and
support operations, during peak periods we occasionally can't respond promptly
to all customer calls. We may also have an unusually high volume of calls, and
be unable to respond promptly, if large numbers of customer order shipments are
delayed or if we have product bugs. For example, in fiscal 1995 we had some
operational problems with our direct order entry system that resulted in a high
volume of calls, customer dissatisfaction, lost business and negative publicity.
During fiscal 1996, customers had difficulties connecting to our online banking
and bill payment services, and we incurred unexpected expenses for operational
improvements. If we experience customer service and support problems in the
future they could adversely affect customer relationships and financial
performance.
In June 1997 we decided to close a major technical support facility in Rio
Rancho, New Mexico and consolidate its operations with our Tucson, Arizona call
center. Even though we eliminated about 150 technical support positions, we
think the consolidation will allow us to provide better customer service because
it will be easier to shift resources to where they are most needed at any given
time. We also restructured our European technical support operations during
fiscal 1997 (see page 8). Our technical support and other restructuring
activities during fiscal 1997 resulted in a restructuring charge of $10.4
million (see Note 6 to the financial statements on page 32, and MD&A, page 45).
Although we expect that these changes will allow us to operate more efficiently,
we can't be certain that they will.
MANUFACTURING AND SHIPPING
The major steps involved in manufacturing desktop software are duplicating disks
and CDs, printing manuals and boxes, and assembling and shipping the final
products. We outsource most of these tasks to vendors who are required to follow
our strict quality guidelines. We have a small in-house manufacturing and
shipping facility to handle low-volume products, and to handle shipments for
direct sales. We have multiple sources for all of our raw materials and
availability has not been a problem for us. Prior to major product releases, we
tend to have significant levels of backlog, but at other times backlog is
minimal and we normally ship products within a week of receiving an order.
Because of this fluctuation in backlog, we don't think backlog is necessarily an
important measure of future sales.
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GOVERNMENT REGULATION
Some of our products and services are regulated businesses under federal or
state laws. We offer these regulated products and services through separate
subsidiary corporations. These subsidiaries must comply with a variety of
regulations that don't apply to most software companies. Establishing and
maintaining regulated subsidiaries requires significant financial, legal and
management resources. If the subsidiaries fail to comply with applicable
regulations, they could face liability to customers and/or penalties and
sanctions by government regulators.
Our Quicken Investment Services, Inc. subsidiary (or "QISI") is registered as an
investment adviser in many states and is subject to certain federal laws as
well. QISI is responsible for Quicken Financial Planner, Quicken Retirement
Planner on Quicken.com and some investment-related features in our Quicken
products. Investment adviser regulations restrict QISI's business practices in
several areas, including advertising and distribution arrangements. The business
activities of IIS, which operates the Quicken InsureMarket website, are subject
to state insurance regulations. IIS (or one of its officers) currently has an
insurance license in each state where we believe licensing is necessary. State
insurance laws regulate various aspects of the business operations of IIS and
participating insurance carriers, including advertising, record-keeping and
compensation. Our QuickenMortgage loan service scheduled to be launched during
fiscal 1998 will be offered by a subsidiary called Intuit Lender Services, Inc.
(or "ILSI"). We are in the process of registering or licensing ILSI as a
mortgage or loan broker in all states where registration or licensing is
required, and we won't be able to offer the full-feature QuickenMortgage service
in any state until registration or licensing is completed in that state. We
expect that this process will be completed in most states by the time the
service is launched, but we can't be certain that it will be.
Our fall 1997 Quicken products will allow customers of participating brokerages
to trade securities through their broker's website. Quicken InsureMarket may
expand its site to include other insurance products that are considered
"securities" under federal and state laws. We believe we have structured these
services in a way that avoids direct government regulation. However, it's
possible that these services, or other services we may offer in the future, may
be regulated under federal and/or state securities broker-dealer laws or other
regulations. We continually analyze new business opportunities, and any new
businesses that we pursue may require additional expenditures and investments in
regulatory compliance.
Various Intuit products contain powerful encryption technology. Government
regulations currently prohibit this technology from being exported outside of
the United States and Canada. Some agencies of the federal government are
seeking to relax export laws, but others are seeking to tighten export
restrictions on software containing encryption technology. These regulations may
affect international sales of our desktop software as well as our ability to
provide the level of security customers are seeking in Internet-based products
and services on a worldwide basis.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark and trade secret laws,
and employee and third-party nondisclosure agreements to protect our software
products and other proprietary technology. While our proprietary technology is
important, we believe our success depends more heavily on the innovative skills
and technical competency of our employees. We don't have any copy-protection
mechanisms in our software because we don't believe they are practical or
effective. Current U.S. laws that prohibit copying give us only limited
practical protection from software "pirates," and the laws of many other
countries provide almost no protection for our intellectual property. Policing
unauthorized use of our products is difficult, expensive and time-consuming and
we expect that software piracy will be a persistent problem for our desktop
software products. In addition the unique technology of the Internet may tend to
increase, and provide new methods for, illegal copying of the technology used in
our Internet-based products and services. We consider our principal trademarks
(including Intuit, Quicken, QuickBooks and TurboTax) to be important assets and
have registered these and other trademarks and service marks in the U.S. and
many foreign countries. The initial duration of trademark registrations varies
from country to country and is 10 years in the U.S. Most registrations can be
renewed repeatedly.
13
We don't necessarily own all of the software and other technologies used in our
products and services, but we have all licenses that we believe are necessary
for using that technology. We don't believe that our products, trademarks and
other proprietary rights infringe anyone else's proprietary rights. However,
other parties occasionally claim that features or content of certain of our
products, or our use of certain trademarks, may infringe their property rights.
Past claims have not resulted in any significant litigation, settlement or
licensing expenses in the past, but future claims could.
EMPLOYEES
As of August 31, 1997, Intuit and its domestic subsidiaries had about 2,500
full-time employees, and our international subsidiaries had about 500 full-time
employees. We don't have any collective bargaining agreements with our
employees, and we believe employee relations are generally good. We believe our
future success and growth will depend on our ability to attract and retain
qualified employees in all areas of our business. Although we believe we offer
competitive compensation and a good working environment, we face intense
competition for qualified employees. Like many of our competitors, we have had
difficulties during the past few years hiring and retaining employees. At
certain times during the past few years, employee morale and retention have been
hindered by declines in our stock price and the value of employee stock options.
To address this problem, we "repriced" certain stock options during fiscal 1997.
See Note 8 of the financial statements, on page 33.
In June 1997 we announced a corporate restructuring that included closing our
technical support facility in Rio Rancho, New Mexico, reorganizing European
administrative and technical support functions and eliminating some positions in
Northern California. These moves are reducing our worldwide workforce by
approximately 270 employees. Our sales of ISC in January 1997 and Parsons in
August 1997 reduced our workforce by about 900 employees. See Notes 3, 6 and 15
of the financial statements.
ITEM 2. PROPERTIES
Our principal offices are located in Mountain View, California. We also lease
office and manufacturing space in Palo Alto and San Diego, California. We lease
our Mountain View facilities (currently about 130,000 square feet) under leases
with staggered eight-year terms that we entered into in November 1994. Since
December 1995, we have been in the process of moving our Palo Alto operations to
Mountain View in stages. The move will be completed over the next several years.
In June 1996, we relocated our San Diego operations to new offices
(approximately 140,000 square feet) under a "build-to-suit" lease. See Note 7 of
the financial statements (page 32) for information about our lease commitments.
We also lease facilities in Tucson, Arizona and Fredericksburg, Virginia, for
customer service call centers; in Alexandria, Virginia, where our IIS subsidiary
is located; and in Canada, England, France, Germany and Japan. We have a call
center facility in Rio Rancho, New Mexico, but we recently consolidated its
operations into our Tucson location. We are currently attempting to dispose of
the Rio Rancho facility.
We believe our facilities are adequate for our current and near-term needs and
that we will be able to locate additional space to accommodate anticipated
growth.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the course of our
business. We currently believe that the ultimate amount of liability, if any,
for any pending actions (either alone or combined) will not materially affect
our financial position, results of operations or liquidity. However, the
ultimate outcome of any litigation is uncertain. An unfavorable outcome could
have a material negative impact. In addition, any litigation, regardless of
outcome, can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
These are our current officers and their areas of responsibility. Biographies of
our executive officers are included after the table.
EXECUTIVE OFFICERS
Mr. Cook, a founder of Intuit, has been a director of Intuit since March 1984
and has been Intuit's Chairman of the Board of Directors since March 1993. From
March 1984 to April 1994, he also served as President and Chief Executive
Officer of Intuit. Mr. Cook also serves on the board of directors of Amazon.com
and Broderbund Software, Inc. Mr. Cook is also a member of Broderbund's Audit
Committee. Mr. Cook holds a Bachelor of Arts degree in economics and mathematics
from the University of Southern California and a Masters in Business
Administration from Harvard University.
Mr. Campbell joined Intuit as its President and Chief Executive Officer in April
1994 and was elected to Intuit's Board of Directors in May 1994. Mr. Campbell
was President and Chief Executive Officer of GO Corporation, a pen-based
computing software company, from January 1991 to December 1993. He was President
and CEO of Claris Corporation, a software subsidiary of Apple Computer, Inc.,
from 1987 to January 1991. Mr. Campbell also serves on the board of directors of
SanDisk, Inc., Great Plains Software, Inc.
15
and Apple Computer, Inc. He is a member of SanDisk's Compensation Committee and
a member of Apple's Audit Committee. Mr. Campbell holds both a Bachelors and a
Masters degree in economics from Columbia University.
Mr. Harris became Executive Vice President of Intuit in December 1993, in
connection with Intuit's acquisition of ChipSoft, a tax preparation software
company. He has been responsible for Intuit's tax and consumer finance
businesses since July 1996. From January 1992 to December 1992, Mr. Harris
served as President and Chief Operating Officer of ChipSoft; and from June 1991
to January 1992, he was ChipSoft's Executive Vice President and Chief Operating
Officer. Mr. Harris earned a Bachelor of Arts degree in American Studies from
Middlebury College in Vermont and a Masters in Business Administration from
Harvard University.
Ms. Baker became Intuit's Senior Vice President of the Consumer Division in
March 1997. She served as Intuit's Vice President and General Manager of the
Personal Finance Group from July 1996 to March 1997. From April to July 1996,
she served as Vice President of Intuit's Financial Supplies Group, and she
served as Vice President of International from September 1994 to April 1996.
From January 1994 through September 1994, Ms. Baker was Vice President of
Marketing for Now Software, Inc., a personal and small business software
company. Ms. Baker first joined Intuit in April 1989 and served in various
marketing positions until she left Intuit in December 1993. Ms. Baker holds
Bachelor of Arts degrees in economics and sociology from Stanford University.
Ms. Baker also serves on the Board of Trustees for Stanford University.
Mr. Dunn became Intuit's Senior Vice President of the International/New Business
Division and Chief Technology Officer in March 1997. He served as Intuit's
Senior Vice President of the Consumer/International Division from July 1996 to
March 1997. He served as Vice President and General Manager of Intuit's Personal
Finance Group from May 1994 to July 1996, and served as Intuit's Chief Financial
Officer and a director from September 1986 to December 1993. He also served as
Intuit's Corporate Secretary from March 1991 to December 1993. From December
1993 to May 1994, Mr. Dunn was an Intuit Fellow. Mr. Dunn holds a Bachelor of
Arts degree in physics and a Masters in Business Administration from Harvard
University.
Mr. Gleicher became Intuit's Senior Vice President of Sales in March 1997. He is
responsible for retail, direct and OEM sales. He served as Intuit's Vice
President of Sales from December 1993 to March 1997. From September 1990 until
Intuit's acquisition of ChipSoft in December 1993, Mr. Gleicher served as
ChipSoft's President, Personal Tax Division. Prior to joining ChipSoft, Mr.
Gleicher was President and a co-founder of SoftKat, which was a leading
educational and consumer software distributor. Mr. Gleicher has a Bachelors
degree in economics and business finance from San Diego State University. He
also earned a certificate from the Marketing Management Program at Stanford
University.
Mr. Goines became Intuit's Senior Vice President and General Manager of the
International Group in August 1997. He served as Intuit's Vice President and
General Manager of the International Group from April 1996 to August 1997. He
initially joined Intuit in December 1993 as Director of Product Management for
Tax Products in connection with Intuit's acquisition of ChipSoft. He became Vice
President and General Manager of Personal Tax Products in March 1994. From April
1991 to December 1993, Mr. Goines served as the Director of Product Management
of ChipSoft. Mr. Goines holds a Bachelor of Science degree and a Masters in
Business Administration from the University of California at Berkeley.
Mr. Heeger became General Manager and Senior Vice President of Intuit's Small
Business Division in July 1997. He served as Chief Financial Officer of Intuit
from April 1996 to July 1997, and was Senior Vice President in charge of the
Finance, Customer Services and Operations functions from July 1996 until July
1997. He served as Vice President and General Manager of Intuit's Supplies Group
from December 1993 to April 1996 and served as Intuit's Vice President of
Operations from August 1993 to December 1993. From September 1982 to August
1993, Mr. Heeger served in a number of marketing and operations roles at
Hewlett-Packard Company. From 1987 to August 1993, he was responsible for
distribution of Hewlett-Packard's personal computer products. Mr. Heeger
received a Bachelor of Science degree in management from the Massachusetts
Institute of Technology and a Masters in Business Administration from Stanford
University.
16
Mr. Kinser joined Intuit as Senior Vice President of Operations in February
1997. Prior to that, Mr. Kinser served as a consultant to Intuit from July 1995
to February 1997. Mr. Kinser served as Chief Financial Officer and Vice
President of Operations for Collabra Software from 1994 to 1995. Mr. Kinser
served as Chief Financial Officer of EO Corp. from 1991 to 1993. He has also
held executive positions at Claris Corp. and Apple Computer, Inc. Mr. Kinser
holds a Bachelor of Arts degree from Humboldt State University.
Mr. Monson became an Intuit Fellow in July 1997 and also serves as a Senior Vice
President. He served as Senior Vice President of the Small Business Division
from July 1996 to July 1997. Mr. Monson served as Vice President and General
Manager of Intuit's Business Products Group from May 1994 to July 1996 and as
Intuit's Vice President of Marketing from January 1989 to May 1994. Mr. Monson
holds a Bachelor of Arts degree in mathematics from Whitman College and a
Masters of Management degree in marketing and finance from Northwestern
University.
Mr. Wolfe became Intuit's Senior Vice President of the Tax Products Group in May
1997. Prior to that, he served as Vice President and General Manager of Intuit's
Personal Tax Group from April 1996 to May 1997. He was the director of technical
support and sales for Intuit's Professional Tax Group from March 1994 to April
1996. From January 1990 to March 1994, Mr. Wolfe was Vice President of Direct
Link Software, Inc. ("DLS") and its successors. DLS was a privately held
software company from January 1990 to March 1993, when it was acquired by
ChipSoft. ChipSoft was subsequently acquired by Intuit in December 1993. Mr.
Wolfe holds a Bachelor of Science degree in business administration from the
University of Southern California and is a certified public accountant.
Mr. Santora became Intuit's Chief Financial Officer in July 1997 and has served
as Vice President of Finance since November 1996. He joined Intuit as Corporate
Controller in January 1996. From 1983 to 1995, Mr. Santora held a variety of
senior financial positions at Apple Computer, Inc., including Senior Finance
Director of Apple Americas from May 1992 to January 1996 and Director of
Internal Audit from May 1991 to May 1992. Mr. Santora, who is a certified public
accountant, holds a Bachelor of Science degree in accounting from the University
of Illinois and a Masters in Business Administration from San Jose State
University.
Ms. Fellows joined Intuit as Corporate Treasurer and Director of Investor
Relations in May 1997. Prior to that, Ms. Fellows served as Treasurer and
Director of Investor Relations of Bay Networks, Inc. from October 1990 to April
1997. Ms. Fellows holds a Bachelor of Arts degree from Stanford University and a
Masters in Business Administration from the University of Santa Clara.
Ms. Valentine joined Intuit as General Counsel in September 1994. She has served
as a Vice President of Intuit since August 1997 and as Corporate Secretary since
April 1996. From November 1993 to September 1994, she was General Counsel of
Macromedia, Inc., a multimedia software tools company. Ms. Valentine was General
Counsel of GO Corporation, a pen-based computing software company, from
September 1991 to November 1993. Ms. Valentine holds Bachelor of Arts degrees in
finance and economics from the University of Illinois and a Juris Doctorate from
the University of Chicago.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Intuit's common stock began trading over the counter in March 1993 at the time
of our initial public offering. It is quoted on the Nasdaq National Market under
the symbol "INTU." The following table shows the range of high and low closing
sale prices reported on the Nasdaq National Market for the periods indicated.
Prices reflect inter-dealer prices without retail markup, markdown or
commissions. The unpredictability of our quarter-to-quarter results may have a
significant impact on our stock price. See MD&A, page 40.
STOCKHOLDERS
As of September 30, 1997, we had approximately 1,000 record holders of our
common stock, and about 31,000 beneficial holders.
DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business, so
we don't anticipate paying any cash dividends in the foreseeable future.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
To better understand the following financial information, investors should also
read "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes. In August 1994,
Intuit changed its fiscal year end to July 31 from September 30. Consequently,
fiscal 1994 includes only ten months of operating results.
FIVE-YEAR SUMMARY
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See page 40, following the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Intuit Inc.
We have audited the accompanying consolidated balance sheets of Intuit Inc. as
of July 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 1997. Our audits also included the financial statement
schedule listed on the Index to Financial Statement Schedules on the preceding
page. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Intuit
Inc. at July 31, 1996 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
August 25, 1997
21
INTUIT INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
22
INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
23
INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes.
24
INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes.
25
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. ("Intuit" or the "Company") is a leading developer of small business
accounting, tax preparation and consumer finance software. Intuit 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 small business accounting software, personal and
professional tax preparation software, consumer finance and Internet-based
products and services and financial supplies, such as invoice forms and checks,
for use with certain of Intuit's products. Intuit markets its products through
distributors and retailers and by direct sales to OEMs (Original Equipment
Manufacturers) and individual users. Intuit's customers are located primarily in
North America, Europe and Asia.
Principles of Consolidation
The consolidated financial statements include the accounts of Intuit 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. Intuit provides warranty reserves for the estimated cost of
replacing defective products at the time revenue is recognized.
Research and Development
Research and development costs incurred to establish the technological
feasibility of computer software products are charged to operations as incurred.
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.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years
ended July 31, 1995, 1996 and 1997 was approximately $21.1 million, $24.6
million and $35.3 million, respectively.
26
Cash, Cash Equivalents, Short-Term Investments and Marketable Securities
Intuit considers all highly liquid investments purchased with a maturity of
three months or less at date of acquisition to be cash equivalents. Both cash
equivalents and short-term investments are considered available-for-sale
securities and are carried at amortized cost which approximates fair value. The
following is a summary of the estimated fair value of cash, cash equivalents and
short-term investments:
At July 31, 1997, Intuit held marketable securities in Checkfree Corporation
("Checkfree") with a cost of $156.4 million and a fair value of $190.8 million.
These securities are carried at fair value and unrealized gains and losses, net
of tax, are included in stockholders' equity. As of July 31, 1997, there was a
gross unrealized gain of $34.4 million before a tax provision of $13.8 million.
Marketable securities in Checkfree were obtained as a result of Intuit's sale of
its online banking and bill payment transaction processing business to Checkfree
in January 1997. For more information on this sale, see Note 3 of Notes to
Consolidated Financial Statements. No marketable securities were held at July
31, 1996. For information on Intuit's investment in Excite, Inc. ("Excite"), see
Note 4 of Notes to Consolidated Financial Statements. For information about
restricted short-term investments, see Note 7 of Notes to Consolidated Financial
Statements.
Realized gains and losses on sales of each type of security for the years ended
July 31, 1996 and 1997 were immaterial.
The estimated fair value of cash equivalents and short-term investments by
contractual maturity is as follows:
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist primarily of materials used in software products and related supplies
and packaging materials.
27
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from 3 to 30 years. Leasehold improvements are amortized using the straight-line
method over the lesser of the estimated useful lives or remaining lease terms.
Property and equipment consist of the following:
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 not exceeding 3 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, Intuit 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 appropriate
and customary assumptions and projections at the time. Components of 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 $147.1 million at July 31, 1996 and 1997,
respectively.
Concentration of Credit Risk
Intuit'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 Intuit's operating results.
Financial investments that potentially subject Intuit to concentration of credit
and/or valuation risk consist principally of short-term investments, marketable
securities and trade accounts receivable. Intuit holds shares of Checkfree
common stock as marketable securities, representing approximately 19.5% of
Checkfree's outstanding common stock at July 31, 1997. Intuit also holds
approximately 19% of Excite's outstanding common stock as of July 31, 1997. The
ability to dispose of both the Checkfree and Excite stock is restricted by
volume trading limitations and other contractual arrangements. The Excite shares
are subject to greater restrictions than the Checkfree shares and are therefore
currently accounted for as a long-term investment, rather than as marketable
securities. Subsequent declines in fair value below cost that are deemed to be
other than temporary will be reported in earnings. Intuit's remaining investment
portfolio is diversified and generally
28
consists of short-term investment grade securities. The credit risk in Intuit's
accounts receivable is mitigated by the fact that Intuit 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. Intuit maintains reserves for estimated credit losses and such
losses have historically been within management's expectations.
Income (Loss) Per Share
Income (loss) per share has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding during each period.
Dilutive common equivalent shares consist of stock options calculated using the
treasury method. As discussed in Note 8, all share and per share data in the
Financial Statements and notes thereto have been adjusted retroactively to give
effect to Intuit's two-for-one stock split in August 1995.
Foreign Currency
Gains and losses from the translation of foreign subsidiaries' financial
statements are reported as a separate component of stockholders' equity. Net
gains and losses resulting from foreign exchange transactions were immaterial in
all periods presented.
Recent Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 128, "Earnings per Share" ("FAS 128"), which will
require a change in the method used to compute earnings per share and the
restatement of all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact would have resulted in an increase in primary earnings per
share for the year ended July 31, 1997 of $0.03 per share. There would have been
no effect on primary earnings per share for the years ended July 31, 1996 or
1995. Intuit has not yet determined what the impact of FAS 128 will be on the
calculation of fully diluted earnings per share. The disclosure requirements of
FAS 128 will be effective for Intuit's 1998 fiscal year.
In June 1997, Financial Accounting Standard 130, "Reporting Comprehensive
Income" ("FAS 130"), was issued and is effective for fiscal years commencing
after December 15, 1997. Intuit will comply with the requirements of FAS 130 in
fiscal year 1999.
In June 1997, Financial Accounting Standard 131, "Disclosures About Segments of
an Enterprise and Related Information" ("FAS 131"), was issued and is effective
for fiscal years commencing after December 15, 1997. Intuit will comply with the
requirements of FAS 131 in fiscal year 1999.
2. ACQUISITIONS
In September 1994, Intuit completed its acquisition of Parsons Technology, Inc.
("Parsons"), which was treated as a purchase for accounting purposes. Under the
terms of the agreement, Intuit paid approximately $28.8 million in cash, issued
approximately 1,800,000 shares of Intuit's common stock to Parsons' stockholders
at the date of the acquisition and allocated 138,038 shares of common stock to
be paid for certain non-competition agreements. In the first quarter of fiscal
1996, Intuit paid an additional $2.7 million in cash as deferred consideration.
The total purchase price was approximately $67.3 million. In connection with the
acquisition, the following amounts were allocated to intangible assets: $44.0
million to in-process research and development, $14.0 million to intangible
assets and $9.9 million to goodwill. Intuit sold Parsons on August 7, 1997. See
Note 15.
In June 1995, Intuit completed its acquisition of Personal News Inc., a
developer of technology to provide online investment research data. The
acquisition, which was accounted for as a purchase, had an aggregate purchase
price of approximately $10.4 million in common stock and acquisition costs. Of
the purchase price, $8.5 million was allocated to in-process research and
development, $183,000 to identified intangible assets and $166,000 to goodwill.
The amount of the purchase price allocated to in-process research and
development was
29
charged to Intuit's operations at the time of the acquisition. In addition to
the in-process research and development charge, Intuit incurred
acquisition-related charges of $1.6 million in fiscal 1995 related to the
termination of a conflicting license agreement.
In January 1996, Intuit completed its acquisition of Milkyway KK, a provider of
PC-based financial software in Japan. In February 1997, Milkyway KK's name was
changed to Intuit KK. 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, Intuit recorded acquisition related expenses of $0.6 million. The
accompanying Consolidated Financial Statements are presented on a combined basis
for all periods.
The following information shows revenue and net income (loss) of Intuit and
Milkyway during the periods preceding the combination:
In June 1996, Intuit completed its acquisition of Interactive Insurance Services
Corp. ("IIS"), a developer of an Internet-based system designed to allow
consumers to obtain term life insurance information and quotes from
participating 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, Intuit 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 arising from the IIS acquisition was
expensed in the quarter ended July 31, 1996.
In September 1996, Intuit 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, Intuit 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. GALT was merged
into Intuit effective July 31, 1997.
The following information shows the pro forma net revenue, net loss and net loss
per share of Intuit and GALT combined as if the acquisition had taken place as
of the beginning of fiscal 1996:
The above pro forma results of operations for the year ended July 31, 1996
reflect a charge for in-process research and development of $4.9 million and the
amortization of intangible assets related to the GALT acquisition. Pro forma
information for the year ended July 31, 1997 is not shown as it is not
materially different from that presented in Intuit's statement of operations.
30
In February 1997, Intuit's French subsidiary completed its acquisition of Somma
France S.A.R.L. ("Somma"), a French small business accounting software company,
for a purchase price of approximately $2.3 million. In addition, assumed
liabilities were $0.8 million. The cash acquisition was treated as a purchase
for accounting purposes. Approximately $2.5 million was allocated to identified
intangible assets and goodwill, which will be amortized over a period not to
exceed three years. Pro forma information for Somma has not been presented due
to immateriality.
In March 1997, Intuit KK, a wholly owned subsidiary of Intuit, completed its
acquisition of Nihon Micom Co. Ltd. ("Nihon Micom"), a Japanese small business
accounting software company, for cash. The acquisition was treated as a purchase
for accounting purposes. The purchase price of the acquisition was approximately
$39.9 million. In addition, liabilities of approximately $9.6 million were
assumed. Approximately $32.8 million was allocated to identified intangible
assets and goodwill, which will be amortized over a period not to exceed three
years. An in-process research and development charge of $6.1 million was
expensed in the quarter ended April 30, 1997. Under the terms of the agreement,
Intuit issued options to purchase 89,170 shares of Intuit common stock to
employees of Nihon Micom on the date of acquisition. Pro forma information for
Nihon Micom has not been 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," for each acquisition accounted for as a purchase,
Intuit 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, Intuit 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.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
On January 27, 1997, Intuit completed the sale of its online banking and bill
payment transaction processing subsidiary, Intuit Services Corporation ("ISC"),
to 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, the last business day prior to closing. As a result of the divestiture,
Intuit 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. In addition to
this gain, Intuit recorded $10 million of net revenue in January 1997,
reflecting a service and license fee received from Checkfree for providing
connectivity between Intuit's Quicken software and Checkfree's processing
services. In February 1997, Intuit sold two million shares of the acquired
Checkfree common stock, reducing 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 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. Segregated operating results for the year ended July 31, 1995
have not been presented due to immateriality. Operating results for discontinued
operations for the period beginning August 1, 1996 until the close of the sale
on January 27, 1997 were deferred. These losses were approximately $5.8 million,
net of a tax benefit of approximately $3.9 million, and were netted against the
gain on sale of discontinued operations.
4. INVESTMENTS
In June 1997, Intuit purchased 2.9 million shares of Excite, Inc. common stock
for $13.50 per share, or approximately $39.2 million. The shares represented
approximately 19% of Excite's outstanding common stock after the transaction.
Based on terms in the agreement, Intuit may not sell any shares until
31
December 1998, and sales after December 1998 are restricted. Intuit is currently
using the cost method to account for its investment. As resale restrictions
lapse over time, unrestricted shares will be accounted for as marketable
securities.
5. OTHER ACCRUED LIABILITIES
6. RESTRUCTURING COSTS
In fiscal 1997, Intuit decided to restructure its U.S. technical support
operations. Intuit is closing its technical support facility in Rio Rancho, New
Mexico and consolidating the operations of that facility within its Tucson,
Arizona technical support location. Intuit also announced in fiscal 1997 that it
would reorganize its European region to consolidate management operations for
its core European markets in its German headquarters in Munich and to outsource
all European customer service, technical support, manufacturing and order
fulfillment functions to third party vendors. As a result of these actions and
concurrent staff reductions in Northern California, Intuit's worldwide workforce
is being reduced by approximately 270 employees, or approximately 9%, and Intuit
incurred $10.4 million in restructuring charges, consisting of approximately
$5.4 million for severance costs and approximately $5.0 million for facility
commitments and fixed assets in buildings to be vacated as part of the
restructuring. At July 31, 1997, Intuit has approximately $9.1 million of
accrued restructuring costs, representing estimated severance costs and facility
payments to be paid in fiscal 1998.
7. NOTES PAYABLE AND COMMITMENTS
Notes Payable
In March 1995, Intuit entered into a 20-year loan for $4.0 million for its
technical support site in New Mexico. This property is expected to be disposed
of in fiscal 1998. The interest rate is variable with a maximum rate of 10%. At
July 31, 1997, the interest rate was 8.25%. The fair value of the loan
approximates cost, as the interest rate on the borrowings is adjusted
periodically to reflect market rates.
In March 1997, Intuit's Japanese subsidiary, Intuit KK, entered into a three
year loan agreement with Japanese banks for approximately $30.3 million used to
fund its acquisition of Nihon Micom. The interest rate is variable based on the
Tokyo interbank offered rate ("TIBOR") or the short-term prime rate offered in
Japan. At July 31, 1997, the interest rate was approximately 0.9%. The fair
value of the loan approximates cost as the interest rate on the borrowings is
adjusted periodically to reflect market rates (which are currently significantly
lower in Japan than in the United States). The agreement calls for interest only
payments until maturity. The loan is guaranteed by Intuit and Intuit has pledged
approximately $34.8 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at July 31, 1997.
32
Leases
Intuit leases its office facilities and some equipment under various operating
lease agreements. The leases provide for annual rent increases up to 10%. Annual
minimum commitments under these leases are as follows:
Total rent expense for the years ended July 31, 1995, 1996 and 1997 was
approximately $7.6 million, $9.2 million and $10.1 million, respectively.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
On January 31, 1993, Intuit adopted the 1993 Equity Incentive Plan (the "1993
Plan"), which authorizes the granting of incentive and non-qualified stock
options, restricted stock awards and stock bonuses to employees, directors,
consultants, and independent contractors of and advisors to Intuit.
Exercisability, option price and other terms are determined by the Board of
Directors, but the option price is generally not less than the fair market value
of the stock at the date of grant. The options have a ten-year term and
generally become exercisable over a four-year period. Options assumed in the
acquisition of ISC were assumed under the 1993 Plan.
On October 7, 1996, Intuit adopted the 1996 Directors Stock Option Plan, which
authorizes the granting of non-qualified stock options to non-employee directors
of Intuit. Options are granted based on a formula prescribed by the plan at a
price equal to the fair market value of the shares at the time the option is
granted. The options have a ten-year term and become exercisable over a
four-year period.
33
In addition, Intuit has several discontinued option plans pursuant to which
there are still outstanding options, including option plans which were assumed
by Intuit on December 12, 1993 in connection with Intuit's acquisition of
ChipSoft, Inc. The options have a seven-year term and generally become
exercisable over a five-year period. A summary of activity under all option
plans is as follows:
At July 31, 1995, 1996 and 1997, options under the various plans for 1,480,588,
1,894,320 and 1,931,019 shares, respectively, were exercisable. At July 31,
1997, 1,880,493 shares were available for grant under the 1993 Plan and 60,000
shares were available for grant under the 1996 Directors Stock Option Plan.
On May 22, 1995, all non-officer employee grants of stock options under Intuit's
1993 Equity Incentive Plan issued between the date the proposed merger with
Microsoft Corporation was announced (October 13, 1994) and the date of
termination of the merger agreement (May 19, 1995) were repriced (a total of
928,150 options) to reflect an exercise price of $31.00, the fair market value
on the date of repricing.
On September 18, 1996, 1,787,746 options were repriced to reflect an exercise
price of $32.75, the fair market value on the date of repricing. As a condition
of the repricing, employees agreed that options which were repriced would not be
exercisable, even if vested, until September 17, 1997. Officers at the level of
senior vice president and above were not eligible for the repricing.
On March 27, 1997, 3,151,445 options were repriced to reflect an exercise price
of $23.75, the fair market value on the date of repricing. As a condition of the
repricing, employees agreed that options which were repriced would not be
exercisable, even if vested, until March 27, 1998. On June 30, 1997, 177,600
options held by employees of a Japanese subsidiary were also repriced to $23.75.
These were not repriced on March 27, 1997 because of filings required to meet
Japanese securities laws prior to repricing these options. There are no exercise
restrictions on these 177,600 repriced options. Officers at the level of senior
vice president and above were not eligible for the repricing.
34
Stock Split
On July 20, 1995, Intuit's Board of Directors authorized a two-for-one stock
split effected in the form of a 100% stock dividend distributed on August 21,
1995 to stockholders of record on August 4, 1995. All references in the
financial statements to number of shares, per share amounts, stock option data,
and market prices of Intuit's common stock have been restated to reflect this
stock split.
Employee Stock Purchase Plan
In October 1996, Intuit adopted an Employee Stock Purchase Plan under Section
423 of the Internal Revenue Code and reserved 300,000 shares of common stock for
issuance under the plan. Eligible employees may purchase Intuit's stock at 85%
of fair market value at the beginning or end of the six-month offering period,
whichever is less. In June 1997, 96,301 shares were purchased by employees
enrolled in the plan.
Stock-Based Compensation
Intuit follows Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees," in accounting for its stock-based compensation. Under this
opinion, Intuit is not required to record any compensation expense when stock
options are granted to employees, provided the exercise price of the options is
not less than the fair market value of the stock when the option is granted. In
October 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock Based Compensation" ("FAS 123"). This statement provides
an alternative, optional method of accounting for stock-based compensation that
involves reflecting a compensation expense when an option is granted. FAS 123
also requires companies that continue to account for stock-based compensation
under Accounting Principles Board Opinion 25 to provide pro forma net income
(loss) and net income (loss) per share information showing what the impact would
have been if the company had adopted the alternative accounting method described
in FAS 123 for options and other stock based compensation awards granted after
December 31, 1994. The pro forma impact of applying FAS 123 in fiscal 1996 and
1997 is not likely to be representative of the pro forma impact in future years.
Intuit has elected to use the Black-Scholes model to estimate the fair value of
options granted. This valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Intuit's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options. Inputs used for the
valuation model are as follows:
Intuit's pro forma net income (loss) and net income (loss) per share information
is as follows:
35
The weighted average fair value of options granted during fiscal 1996 was
approximately $23.19 per share. The weighted average fair value of new options
granted in fiscal 1997 was approximately $11.99 per share.
The following table summarizes information about stock options outstanding at
July 31, 1997:
9. PROFIT-SHARING AND BENEFIT PLANS
Profit-Sharing Plans
Intuit maintains profit-sharing plans for full-time employees. Amounts provided
are determined pursuant to criteria established by the Compensation Committee of
the Board of Directors. Profit-sharing expense for fiscal 1995, 1996 and 1997
was approximately $5.0 million, $1.4 million and $4.2 million, respectively.
Benefit Plans
At July 31, 1997, Intuit maintained two 401(k) retirement savings plans for its
full-time employees. Each participant may elect to contribute from 1% to 15% of
his or her annual salary to the plan, subject to IRS limitations. Intuit matches
a portion of employee contributions to a maximum amount per employee per year.
As of July 31, 1997, employee contributions were matched at 25%, up to $1,000,
but these matching amounts are subject to change. Matching contributions were
approximately $.3 million and $1.6 million respectively for the years ended July
31, 1996 and 1997.
10. INCOME TAXES
The components of the provision for income taxes consist of the following:
36
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income/(loss) before income taxes. The
sources and tax effects of the differences are as follows:
The current federal and state provisions do not reflect the tax savings
resulting from deductions associated with Intuit's various stock option plans.
This savings was approximately $13.2 million in fiscal 1995, $18.9 million in
fiscal 1996 and $6.7 million in fiscal 1997. These amounts were credited to
stockholders' equity.
Significant components of Intuit's deferred tax assets and liabilities for
federal, state and foreign income taxes are as follows:
11. SIGNIFICANT CUSTOMER INFORMATION
One distributor accounted for 12% of net revenue in fiscal 1995, 13% of net
revenue in fiscal 1996 and 14% of net revenue in fiscal 1997.
12. MICROSOFT MERGER TERMINATION
On October 13, 1994, Intuit announced a proposed merger agreement with
Microsoft, which was subsequently terminated on May 20, 1995. The proposed
merger had been opposed in a lawsuit brought by the U.S. Department of Justice,
and the two companies were unable to agree to pursue the litigation. In the
fourth
37
quarter of fiscal 1995, Intuit received a $46.3 million termination fee from
Microsoft ($41.3 million net of related expenses). The after-tax benefit to
Intuit was approximately $25.6 million.
13. LITIGATION
Intuit is subject to legal proceedings and claims that arise in the course of
its business. Management currently believes that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect the financial position, results of operations or liquidity of
Intuit. However, the ultimate outcome of any litigation is uncertain. An
unfavorable outcome could have a material negative impact. In addition, any
litigation, regardless of outcome, can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
14. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
- ---------------
(1) Includes a charge of $8.0 million related to purchased research and
development at the time of the IIS acquisition.
(2) Includes a charge of $4.9 million related to purchased research and
development at the time of the GALT acquisition.
(3) Includes a charge of $6.1 million related to purchased research and
development at the time of the Nihon Micom acquisition.
15. SUBSEQUENT EVENTS
On August 7, 1997, Intuit completed the sale of its consumer software and direct
marketing subsidiary, Parsons Technology Inc. to Broderbund Software, Inc. for
approximately $31 million. Parsons' revenue (excluding products not sold to
Broderbund) was approximately 14% and 12% of total net revenue in fiscal 1996
and 1997, respectively. Parsons' assets that were sold to Broderbund were
approximately $17 million at July 31, 1997. Intuit does not anticipate that
there will be a significant gain from this disposition, net of certain direct
costs relating to the sale. The sale will be recorded in the first quarter of
fiscal 1998.
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SCHEDULE II
INTUIT INC.
VALUATION AND QUALIFYING ACCOUNTS
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like Intuit "expects" or "anticipates" are forward-looking
statements. Investors should be aware that actual results may differ materially
from expectations because of risks and uncertainties about the future. In
addition, Intuit will not necessarily update the information in this Form 10-K
if any forward-looking statement later turns out to be inaccurate. Details about
risks affecting various aspects of Intuit's business are included throughout
this Form 10-K. Investors should read all of these risks carefully. See page 1
for more information about forward looking statements.
OVERVIEW
In this section, readers are given a more detailed assessment of Intuit's
operating results and changes in financial position over the past three years.
This section should be read in conjunction with the Consolidated Financial
Statements and related Notes.
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this, Intuit develops, sells and supports
small business accounting, tax preparation and consumer finance software
products and related supplies and services. Revenues come primarily from the
United States, Japan, Germany, Canada, the United Kingdom and France through
both retail distribution channels and direct customer sales. While substantially
all of Intuit's revenue now comes from its core desktop software and related
products and services, Internet-based services are expected to become a growing
part of Intuit's business. For purposes of the following discussion,
Internet-based services include online banking activities even though some of
Intuit's online banking currently operates through a private data network rather
than through the Internet. See page 2 for a discussion of Intuit's Internet
strategy. In fiscal 1997, Intuit devoted significant financial resources to
developing and acquiring Internet-based products and services, resulting in
increased research and development expenses both in absolute dollars and as a
percentage of net revenue. Despite these increasing costs and slower revenue
growth, Intuit has experienced improved overall operating results over the past
three years, primarily due to declining cost of sales and declining acquisition
related charges as a percentage of revenue.
There were a number of one-time, non-recurring events that affected results
during the past three years. In fiscal 1997, Intuit sold its electronic banking
and bill payment subsidiary, Intuit Services Corporation ("ISC"), to Checkfree
Corporation ("Checkfree"). The sale, which occurred in the second quarter,
resulted in a gain, net of tax, of $71.2 million. Results for fiscal 1996
account for ISC as discontinued operations. In the fourth quarter of fiscal
1997, Intuit recorded a $10.4 million charge from restructuring technical
support operations in the United States and Europe. Intuit's Japanese
subsidiary, Intuit KK, also acquired Nihon Micom Co. Ltd. ("Nihon Micom") in the
third fiscal quarter making the combined company the largest Windows-based PC
accounting software company in Japan. In the fourth fiscal quarter, Intuit
announced the sale of its consumer software and direct marketing subsidiary,
Parsons Technology, to Broderbund Software. The Parsons sale closed in August
1997 (after fiscal year end) and the results of this transaction will be
recorded in the first quarter of fiscal 1998. Results for fiscal 1995 include a
$41.3 million merger termination fee, net of tax, received from Microsoft
Corporation.
Intuit's business is highly seasonal. Sales of tax products are heavily
concentrated from November through March. Sales of consumer finance products are
typically strongest during the year-end holiday buying season, so major product
launches usually occur in the fall to take advantage of this consumer buying
pattern. These seasonal patterns mean that financial results are usually
strongest during the quarters ending January 31 and April 30, and that operating
losses are normal for the quarters ending July 31 and October 31. Operating
results can also fluctuate from quarter to quarter for other reasons, such as
changes in product launch dates,
40
non-recurring events such as acquisitions, and product price cuts in quarters
with relatively high fixed expenses. Because of these factors, Intuit believes
that consecutive quarter comparisons of operating results are not meaningful and
don't necessarily indicate future performance.
Intuit recognizes revenue at the time products are shipped, less reserves for
expected returns from both the retail and direct channels. These return reserves
are difficult to predict, especially for seasonal products. If at any point
returns are materially higher than reserved amounts, this could have a negative
impact on both revenue and operating results.
Intuit has acquired several businesses during the past three fiscal years. See
Note 2 of the financial statements. Although Intuit believes these transactions
were in the best interests of Intuit and its stockholders, there are significant
risks associated with these transactions. The acquisitions have expanded
Intuit's size, product lines, personnel and geographic locations. Intuit's
ability to integrate and organize these new businesses has required improvements
in its operational, financial and management information systems and further
improvements will be necessary. Although Intuit has taken steps to improve its
internal processes, it has experienced significant operational difficulties in
its order entry and shipping systems and in providing technical support to
customers in the past, and there is no assurance that similar problems will not
occur in the future or that they will not have a material adverse effect on
Intuit's results of operations.
RESULTS OF OPERATIONS
NET REVENUE
Small Business Revenue. Small business software product revenues were driven by
higher direct and retail sales during fiscal 1997, resulting in approximately
25% growth over fiscal 1996. This was primarily due to the QuickBooks product
family, which released version 5.0 in December 1996. QuickBooks sales increases
were the result of higher unit sales and a favorable shift in consumer buying
patterns to higher priced, increased functionality products compared to fiscal
1996. In addition, growth was attributable to higher Payroll Tax Table sales in
fiscal 1997 and an expanded fee-for-support program which charged users for
telephone assistance with their QuickBooks products beginning in fiscal 1997. In
fiscal 1996, small business products revenue grew significantly compared to 1995
due to higher unit sales of the QuickBooks product family as well as a positive
shift in consumer preference toward higher priced, increased functionality
products. Intuit plans to introduce a multi-user version of QuickBooks late in
the 1998 fiscal year. If the release of this multiuser version is delayed, there
could be an adverse effect on revenues and operating results for 1998.
Tax Revenue. Both personal and professional tax products experienced growth in
fiscal 1997. Personal tax product revenues for fiscal 1997 grew by approximately
13% over 1996 as a result of increases in both direct and retail channel sales
of Intuit's TurboTax and related products. Sales increases were attributable
both to higher unit sales and a favorable shift in buying patterns to the higher
priced business tax and CD ROM products. In addition, there were significant
increases in direct product sales distributed via the Internet and in tax
returns filed electronically in fiscal 1997 compared to 1996. Revenue growth
occurred despite increased competition, particularly from H&R Block's TaxCut
product, which was priced below the average selling price of Intuit's TurboTax
product line. In fiscal 1996, personal tax product revenues grew significantly
as a result of higher unit sales of the TurboTax product family compared to
1995. Professional tax product revenues grew by approximately 16% over the prior
year due to strong customer acceptance of Windows-based product offerings,
increased revenues for tax products that charge a fee for each return prepared,
and a shift in customer
41
preference to higher-priced "bundles" of professional tax products sold as one.
Professional tax also experienced revenue growth for fiscal 1996 over 1995
driven by customer upgrades to higher-priced bundled products. While Intuit
believes that recently passed tax legislation will bring new users to the
personal tax preparation market, there can be no guarantee that revenue growth
of its tax products will be maintained in the future, particularly in light of
increased competition from TaxCut and others.
Consumer Finance and Internet-Based Revenue. Partially offsetting overall fiscal
1997 revenue growth was the negative impact of consumer finance software net
revenues which declined by approximately 20% in fiscal 1997 from 1996. Fiscal
1997 software price reductions, combined with lower retail unit sales of
Intuit's Quicken product line, were primarily responsible for the decline. In
addition, a shift in consumer buying patterns away from the Deluxe versions of
products and toward lower-priced regular product versions had an adverse impact
on revenues. Consumer finance software product revenues were essentially flat in
fiscal 1996 compared to 1995, resulting from a combination of higher unit sales
and lower average selling prices, which was primarily attributable to an
increase in lower-margin OEM (Original Equipment Manufacturer) unit sales. OEM
agreements allow computer manufacturers to load Quicken onto their products in
exchange for a payment that is substantially lower than the average selling
price to the direct or traditional retail channel. Despite these lower selling
prices, Intuit increased its distribution through OEM channels in order to
acquire new customers. Intuit expects net revenue from the Quicken product line
to continue declining in fiscal 1998, although the impact or extent of such a
decline cannot be estimated.
In fiscal 1997, Intuit's Internet-based business generated participation fee,
advertising and marketing-based revenues through its Quicken.com site,
Interactive Insurance Services Corp. ("IIS"), mutual fund web sites and online
banking connectivity services. Online banking revenue included a $10 million fee
from Checkfree for connectivity to Checkfree's bill payment service through
Quicken. Though growth rates for Internet-based services were high, their
contribution to total revenue was insignificant in fiscal 1997. In the fourth
quarter of fiscal 1997, Intuit announced an agreement with Excite, Inc.
("Excite") making Intuit the exclusive provider of consumer financial content
for all of Excite's Internet services. While Intuit believes that current and
anticipated Internet-based offerings represent a significant opportunity for
future revenue growth, potential revenue growth for fiscal 1998 and beyond is
difficult to predict and may not be achieved.
International Revenue. Combined international product sales experienced
significant growth during fiscal 1997, led by gains in the Japan and European
regions. Combined international net revenue grew by approximately 28% (18%
excluding the impact of the March 1997 acquisition of Nihon Micom in Japan).
In the Japan region, growth resulted from increased unit sales of small business
accounting products across the Obanto(TM) and Kobanto(TM) product lines in
fiscal 1997 compared to 1996. Intuit's Japanese subsidiary, Intuit KK, is now
the largest Windows-based personal computer accounting software company in Japan
based on the third quarter release of Kobanto for Windows and Yayoi(TM), a
Windows-based product acquired from Nihon Micom. Intuit also plans to launch a
Windows version of its higher-end Obanto product in fiscal 1998. Sales in the
Japan region also improved in fiscal 1996 compared to 1995 due to the higher
unit sales of the Obanto and Kobanto product lines.
In the European region, sales improved during fiscal 1997 compared to 1996,
driven by Quicken product releases in Germany and the release of QuickBooks in
the U.K. The European region also improved sales in fiscal 1996 compared to 1995
despite difficulties in meeting key launch dates in Germany which resulted in
late deliveries into the retail channel and lower than anticipated net revenue.
In Canada, which is part of Intuit's Pacific region, fiscal 1997 and 1996 growth
were both attributable to an increase in sales of Canadian versions of Quicken,
QuickBooks and QuickTax products. In the Pacific region, revenues also grew as a
result of Intuit's entry into new markets in Southeast Asia and the initial
release of Quicken in Brazil in fiscal 1997. While these new markets may
represent areas of potential future growth, revenues generated in fiscal 1997
were not significant.
Supplies Revenue. Financial supplies net revenue increased by 15% in fiscal 1997
as the result of higher customized check, envelope and invoice orders from an
increasing small business customer base. As a percentage of total net revenue,
supplies revenue grew to 15% in fiscal 1997 from 14% in 1996 primarily as a
42
result of lower overall software revenue growth in fiscal 1997 compared to 1996.
While a substantial portion of supplies revenue is derived from customers who
use consumer finance software, rather than small business software, to run small
businesses, most of the fiscal 1997 supplies revenue growth was the result of
increased small business (QuickBooks) product sales. Since supplies generate
recurring revenues from Intuit's installed customer base, future growth is
primarily a function of obtaining new software product users. The gradual
increase in product upgrade sales as a percentage of total software revenue
generally causes the growth rate of supplies to slow as the growth rate of new
users declines. This, in addition to increased competition and the potential
shift of software users to electronic bill payment services (which reduces
demand for sales of check supplies) may have an adverse effect on the future
growth rate of supplies revenues. Supplies net revenue grew by 28% in fiscal
1996 compared to 1995 due to the acquisition of new small business customers
attained through the growth of QuickBooks product sales.
Parsons Revenue. In fiscal 1997, Parsons Technology, Intuit's consumer software
and direct marketing subsidiary, experienced a slight decrease in net revenues
reflecting general softness in the consumer software market. Intuit completed
the sale of Parsons to Broderbund Software, Inc. in August 1997. Parsons'
revenue (excluding products not sold to Broderbund) was approximately 12% and
14% of total net revenue in fiscal 1997 and 1996, respectively. The sale will be
recorded in the first quarter of fiscal 1998. Intuit does not anticipate that
there will be a significant gain from this disposition. See Note 15 to the
financial statements.
COST OF GOODS SOLD
Intuit has two categories of cost of goods sold. One is the direct cost of
manufacturing and shipping products (including warranty costs). The other is the
amortization of purchased software which is the cost of products obtained
through acquisition. Total cost of goods sold decreased as a percentage of net
revenue for fiscal 1997 compared to 1996. This was the result of improvements in
supplies order processing, a reduction of obsolete inventory write-offs in
Germany, lower materials costs, increasing sales of CD ROM products (which cost
less per product to manufacture and ship than disks) and a decrease in warranty
expenses in fiscal 1997 compared to 1996. Supplies cost of goods sold was
approximately 40% of supplies net revenue in fiscal 1997 compared to
approximately 42% in 1996 primarily due to more efficient order taking which
resulted in fewer re-orders. Inventory write-offs in Germany were down in fiscal
1997 compared to 1996 when product launch delays resulted in excess inventory
write-offs. Higher product quality led to lower warranty expenses in fiscal 1997
compared to 1996. While Intuit plans to take action to continue to decrease cost
of goods sold expenses as a percentage of net revenue, there can be no assurance
that this will occur or that margins will continue at their current rates. If
there are errors in Intuit's current or future products, there could be
significant increases in cost of goods sold and an adverse effect on operating
results. Specifically, new tax law changes that impact tax products and the
release of the QuickBooks multi-user product may increase the risk of product
errors in fiscal 1998. The cost of providing future telephone assistance to
customers (post-contract customer support) is accrued at the time revenue is
recognized and is included in customer service and technical support expenses,
rather than cost of goods sold.
Cost of goods sold also decreased as a percentage of net revenue for fiscal 1996
compared to 1995. In addition to a reduction in the amortization of purchased
software, efficiencies occurred primarily through supplies cost of goods sold
which decreased to 42% of supplies net revenue in fiscal 1996 compared to 43% in
1995. This improvement was driven by lower materials costs. Better product
quality also led to lower warranty expenses in fiscal 1996 compared to 1995.
43
OPERATING EXPENSES
Customer Service and Technical Support. Customer service and technical support
expenses remained constant at approximately 20% of net revenue for both fiscal
1997 and 1996. International technical support cost increases were offset by
improved management of domestic technical support facilities and resources and
higher product quality in fiscal 1997 compared to 1996. In the fourth quarter of
fiscal 1997, Intuit announced a restructuring and consolidation of its technical
support facilities in both the United States and Europe. While this
consolidation is expected to result in reduced technical support costs as a
percentage of revenue in fiscal 1998, there can be no assurance that such
reduction will occur. With the significant enhancements to Intuit's tax and
small business products planned for fiscal 1998, demands for customer service
and technical support could significantly increase in fiscal 1998.
Fiscal 1996 customer service and technical support costs increased to 20% of net
revenue compared to 18% in 1995. This increase was attributable to QuickBooks
small business customers placing greater than expected demands on customer
support and an increase in staffing and training personnel in fiscal 1996 in
order to improve service levels in response to fiscal 1995 product quality
issues. In fiscal 1996, Intuit increased spending in support capabilities to
provide service to Intuit's online banking and bill payment customer base.
Selling and Marketing. Selling and marketing expenses for fiscal 1997 grew to
27% of net revenue compared to 26% in 1996. This increase was due to higher
marketing expenses in response to increased tax product competition and the
support of several key international product launches. As a percentage of net
revenue, selling and marketing expenses remained flat at 26% for fiscal 1996
compared to 1995.
Research and Development. Research and development expenses grew to 16% of net
revenue in fiscal 1997 compared to 14% in 1996. This increase reflects Intuit's
investment in Internet-related initiatives as well as development efforts for
desktop software. Specifically, expenses rose as a result of development costs
related to IIS which allows customers to shop for term life insurance via the
Internet from participating insurance carriers, development work on Open
Financial Exchange (a specification for the exchange of financial information
over the Internet) and the development of other financially-related web sites.
Research and
44
development costs remained flat, at 14% of net revenue, for fiscal 1996 compared
to 1995. As part of the Excite agreement which was announced in the fourth
quarter of fiscal 1997, Intuit has agreed to become the exclusive provider of
consumer financial content for all of Excite's Internet services. Intuit
believes that this initiative as well as the ongoing development of both
existing and future Internet-based offerings will result in higher research and
development expenses as a percentage of net revenue for fiscal 1998. While the
degree of potential increases in research and development costs cannot be
estimated, they may have an adverse effect on operating results, particularly if
revenue from these services does not meet expectations.
General and Administrative. General and administrative expenses remained
essentially flat at 6% of net revenue for fiscal 1997, 1996 and 1995. Intuit
expects these costs to remain flat as a percentage of revenue in fiscal 1998
though there can be no assurance that these costs will not increase.
Charge for Purchased Research and Development. The charge for purchased research
and development was $11.0 million in fiscal 1997 compared to $8.0 million in
1996 and $52.5 million in 1995. These expenses represent one-time charges
incurred as part of an acquisition based on the amount of the purchase price
allocated to acquired products that are under development. Consistent with
applicable accounting standards, for each acquisition accounted for as a
purchase, Intuit 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. The
fiscal 1997 charge of $11.0 million was due to the acquisition of GALT
Technologies, Inc. ("GALT") ($4.9 million) and Nihon Micom ($6.1 million). The
fiscal 1996 charge of $8.0 million was attributable to the acquisition of IIS.
The fiscal 1995 charge of $52.5 million was the result of the acquisition of
Personal News Inc. ($8.5 million) and Parsons Technology ($44.0 million). Since
these charges are specific to a particular acquisition, Intuit is unable to
estimate what these charges may be in the future.
Other Acquisition Costs. Other acquisition costs, including amortization of
goodwill and purchased intangibles, decreased by $14.1 million to $26.5 million
in fiscal 1997 and remained roughly flat in absolute dollars for fiscal 1996
compared to 1995. These costs are primarily due to the amortization of goodwill
and purchased intangibles which are recorded as part of an acquisition under the
purchase method of accounting (See Note 1 of Notes to Consolidated Financial
Statements). The decrease in fiscal 1997 was primarily attributable to the
majority of the intangibles related to the fiscal 1994 acquisition of ChipSoft,
Inc. becoming fully amortized during the year. The high levels of non-cash
amortization expense related to completed acquisitions will continue to have a
negative impact on operating results in future periods. Assuming no additional
acquisitions and no impairment of value resulting in an acceleration of
amortization, future amortization will reduce net income by approximately $18.9
million, $15.9 million and $8.2 million for the years ending July 31, 1998
through 2000, respectively. If Intuit completes additional acquisitions in the
future, there could be an incremental negative impact on operating results from
future amortization relating to such acquisitions.
Restructuring Costs. Restructuring charges of $10.4 million were recorded in
Intuit's fourth quarter to account for its consolidation of technical support
operations in the U.S. and Europe. As part of the restructuring, Intuit is
closing its Rio Rancho, New Mexico customer support facility. This restructuring
is
45
expected to eventually result in improved operational efficiencies particularly
relating to technical support costs, but there can be no assurance that such
improvements will occur.
OTHER INCOME
The Microsoft termination fee was recorded in the fourth quarter of fiscal 1995,
upon the announcement that Intuit's October 1994 merger agreement with Microsoft
was terminated. The proposed merger was opposed in a lawsuit brought by the U.S.
Department of Justice, and the two companies were unable to agree to pursue the
litigation. As a result, Intuit received a $46.3 million termination fee from
Microsoft ($41.3 million net of related expenses). The after-tax benefit to
Intuit was approximately $25.6 million.
Interest and other income and expense, net, increased by $2.2 million in fiscal
1997 compared to 1996. This increase resulted from higher interest income due to
higher average cash and short-term investment balances generated primarily from
Intuit's operating activities during the year. Interest and other income and
expense, net, grew by $3.9 million in fiscal 1996 compared to 1995 as a result
of higher interest income since Intuit received the Microsoft merger termination
proceeds in the fourth quarter of fiscal 1995.
As of July 31, 1997, Intuit had significant investments in Checkfree and Excite
common stock. If these or other future investments become impaired (more than a
temporary decline in value), or if they are sold at a substantial loss, the
decline in value or loss would be reflected as other expense and there could be
a material adverse impact on net income.
INCOME TAXES
Income tax expense, excluding the tax effect of the gain on sale of ISC,
declined in fiscal 1997 compared to 1996. Fiscal 1996 tax expense, which
excluded the benefit of discontinued operations, was lower compared to 1995. The
tax provision reflects the non-deductible status of both the in-process research
and development charges and the amortization of goodwill. At July 31, 1997,
there was a valuation allowance of $4.2 million for tax assets of Intuit's
international subsidiaries based on management's assessment that Intuit may not
receive the benefit of certain loss carryforwards.
46
DISCONTINUED OPERATIONS
Discontinued operations accounting was implemented by Intuit for fiscal 1996 as
a result of the announced sale of ISC to Checkfree. This accounting method
requires that all activity for the disposed business be separated and
reclassified in one line item on the Consolidated Statement of Operations.
Consequently, a loss from operations of discontinued operations, net of tax, of
$6.3 million was reported for all of ISC's fiscal 1996 results. In Intuit's
second quarter of fiscal 1997, the sale of ISC was completed, and a gain of
$71.2 million was recorded, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, cash and cash equivalents were $46.8 million compared to
$44.6 million as of July 31, 1996. Unrestricted short-term investments were
$158.3 million and $153.4 million respectively. Liquidity improvements were the
result of net cash provided by operating and financing activities offset by net
cash used by investing activities. In fiscal 1997, $81.1 million in cash was
provided from operating activities driven by net income adjusted for
depreciation and acquisition-related expenses, higher accrued liabilities and
lower accounts receivable balances in fiscal 1997 compared to 1996. Accrued
liabilities rose by approximately $22.9 million in fiscal 1997 primarily as a
result of higher returns reserve and dealer advertising accruals. Accounts
receivable balances were down by approximately $7.5 million in fiscal 1997 due
in part to improved collection efforts both domestically and internationally.
Investing activities used $118 million in cash for fiscal 1997. This reflects
Intuit's purchase of approximately $27.6 million of property and equipment for
ongoing operations, the buildup of Internet-related infrastructure and the
relocation to new facilities in Mountain View and San Diego, California. In
addition, Intuit used approximately $39.2 million in cash to purchase its 19%
interest in Excite and approximately $34.2 million for acquisition and
disposition-related activity, most notably the acquisition of Nihon Micom.
Offsetting these uses of cash was the sale of two million shares of Intuit's
common stock investment in Checkfree which provided $29.5 million.
Financing activities provided Intuit with $39.0 million in cash in fiscal 1997.
This was primarily attributable to an increase in long term debt of
approximately $30.3 million issued by Intuit's subsidiary, Intuit KK, to fund
its cash payment to acquire Nihon Micom. Intuit has guaranteed this debt and at
July 31, 1997, approximately $34.8 million of Intuit's short-term investments
were restricted and pledged as security for these borrowings. Intuit also
received cash proceeds of approximately $9.4 million for common stock issued to
employees under its stock option and purchase plans.
Intuit enters into leases for new or expanded facilities in the normal course of
its business. During fiscal 1996, Intuit began moving its headquarters from
Menlo Park, California to larger facilities in Mountain View, California. The
move is expected to be complete by the end of calendar year 2000. Intuit also
relocated its operations in San Diego, California to a new office facility in
June 1996. Intuit leases various other properties throughout the world. Intuit
has no other significant capital expenditure commitments, although there may be
additional cash requirements for strategic acquisitions in the future.
Intuit believes that its cash and short-term investments will be sufficient to
meet anticipated seasonal working capital and capital expenditure requirements
for at least the next fiscal year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about directors that is required by this Item is incorporated by
reference to our Proxy Statement for our January 1998 Annual Meeting of
Stockholders. Information about executive officers that is required by this Item
can be found in Item 4A on page 15.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to our Proxy Statement for our
January 1998 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to our Proxy Statement for our
January 1998 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our Proxy Statement for
our January 1998 Annual Meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
Financial Statements -- See Index to Consolidated Financial Statements in
Part II, Item 8.
Financial Statement Schedules -- See Index to Consolidated Financial
Statements in Part II, Item 8.
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49
50
- ---------------
+ Indicates a management contract or compensatory plan or arrangement
* Filed with this Form 10-K
(1) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1996, filed on October 24, 1996 and incorporated by reference
(2) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1997, filed on March 14, 1997 and incorporated by reference
(3) Incorporated by reference from Intuit's report on Schedule 13D with respect
to its beneficial ownership of shares of Checkfree Corporation filed on
February 6, 1997
(4) Incorporated by reference from Intuit's report on Schedule 13D filed on
July 7, 1997
(5) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
August 22, 1997 and incorporated by reference
(6) Filed as an exhibit to Intuit's Registration Statement on Form S-1, filed
February 3, 1993, as amended (File No. 33-57884) and incorporated by
reference
(7) Filed as an exhibit to Intuit's Form 10-K as originally filed on October
31, 1994, as amended, and incorporated by reference
(8) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1996, filed on March 15, 1996 and incorporated by reference
(9) Filed as an exhibit to the ChipSoft Form S-1 registration statement filed
on February 24, 1993 (file No. 33-57692) and incorporated by reference
(10) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1994, filed on December 13, 1994 and incorporated by reference
(11) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1995, filed on March 17, 1995 and incorporated by reference
(12) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1995, filed on October 30, 1995 and incorporated by reference
(13) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1995, filed on December 14, 1995 and incorporated by reference
(14) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
September 3, 1996 and incorporated by reference
(15) Filed as an exhibit to Checkfree's Form 8-K filed with the Commission on
December 6, 1996
(b) REPORTS ON FORM 8-K
On June 11, 1997, Intuit filed a report on Form 8-K to report under Item 5
its investment in and strategic relationship with Excite, Inc.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTUIT INC.
Dated: October 15, 1997 By: /s/ GREG J. SANTORA
------------------------------------
Greg J. Santora
Vice President and Chief Financial
Officer
POWER OF ATTORNEY
By signing this Form 10-K below, I hereby appoint each of William V. Campbell
and Greg J. Santora as my attorney-in-fact to sign all amendments to this Form
10-K on my behalf, and to file this Form 10-K (including all exhibits and other
documents related to the Form 10-K) with the Securities and Exchange Commission.
I authorize each of my attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions that he believes are
necessary or appropriate to carry out the intention and purpose of this Power of
Attorney. I ratify and confirm all lawful actions taken directly or indirectly
by my attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
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EXHIBIT INDEX
53
54
- ---------------
+ Indicates a management contract or compensatory plan or arrangement
* Filed with this Form 10-K
(1) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1996, filed on October 24, 1996 and incorporated by reference
(2) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1997, filed on March 14, 1997 and incorporated by reference
(3) Incorporated by reference from Intuit's report on Schedule 13D with respect
to its beneficial ownership of shares of Checkfree Corporation filed on
February 6, 1997
(4) Incorporated by reference from Intuit's report on Schedule 13D filed on
July 7, 1997
(5) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
August 22, 1997 and incorporated by reference
(6) Filed as an exhibit to Intuit's Registration Statement on Form S-1, filed
February 3, 1993, as amended (File No. 33-57884) and incorporated by
reference
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(7) Filed as an exhibit to Intuit's Form 10-K as originally filed on October
31, 1994, as amended, and incorporated by reference
(8) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1996, filed on March 15, 1996 and incorporated by reference
(9) Filed as an exhibit to the ChipSoft Form S-1 registration statement filed
on February 24, 1993 (file No. 33-57692) and incorporated by reference
(10) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1994, filed on December 13, 1994 and incorporated by reference
(11) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1995, filed on March 17, 1995 and incorporated by reference
(12) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1995, filed on October 30, 1995 and incorporated by reference
(13) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1995, filed on December 14, 1995 and incorporated by reference
(14) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on
September 3, 1996 and incorporated by reference
(15) Filed as an exhibit to Checkfree's Form 8-K filed with the Commission on
December 6, 1996
(b) REPORTS ON FORM 8-K
On June 11, 1997, Intuit filed a report on Form 8-K to report under Item 5
its investment in and strategic relationship with Excite, Inc.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
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