10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on June 14, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended APRIL 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
62,240,887 shares of Common Stock, $0.01 par value, as of May 28, 1999
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FORM 10-Q
INTUIT INC.
INDEX
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PART I FINANCIAL INFORMATION
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(1) Includes $4.4 million and $1.6 million due from Checkfree at July 31,
1998 and April 30, 1999, respectively, and $3.4 million due from Excite
at July 31, 1998. (see Note 10).
(2) Includes balances due of $7.3 million and $6.0 million on a note
receivable from Venture Finance Software Corp. at July 31, 1998 and
April 30, 1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Includes $0.2 million and $12.9 million of revenue from Checkfree for
the three and nine months ended April 30, 1998 and $1.6 million and $4.0
million of revenue for the three and nine months ended April 30, 1999,
respectively. Includes $3.1 million and $6.9 million of revenue from
Excite for the three and nine months ended April 30, 1998 and $5.9
million and $17.6 million of revenue for the three and nine months ended
April 30, 1999, respectively (see Note 10).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), and Internet products and
services for individuals and small businesses. Our products and services are
designed to automate commonly performed financial tasks and to simplify the way
individuals and small businesses manage their finances. We sell our products
throughout North America and in many international markets. Sales are made
through retail distribution channels, traditional direct sales to customers and
the Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the nine months ended April 30, 1999 do not necessarily
indicate the results to be expected for the fiscal year ending July 31, 1999 or
any other future period. The July 31, 1998 balance sheet was derived from
audited financial statements but does not include all disclosures required for
audited financial statements by generally accepted accounting principles. These
statements and accompanying notes should be read together with the audited
consolidated financial statements for the fiscal year ended July 31, 1998
included in Intuit's Form 10-K filed with the Securities and Exchange
Commission.
Principles of Consolidation
The condensed consolidated financial statements include all of our accounts and
those of our wholly-owned subsidiaries. We have eliminated all significant
intercompany accounts and transactions. Investments in which management intends
to maintain more than a temporary 20% to 50% interest, or otherwise has the
ability to exercise significant influence, are accounted for under the equity
method. Investments in which we have less than a 20% interest and/or do not have
the ability to exercise significant influence are carried at the lower of cost
or estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectibility of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of return
reserves based on
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historical experience. To recognize revenue, it must also be probable that we
will collect the accounts receivable from our customers. Reserves are provided
for excess quantities of current product versions, as well as previous versions
of products still in the distribution channel when new versions are launched. In
some situations, we receive advance payments from our customers. Revenue
associated with these advance payments is deferred until the products are
shipped or services are provided. We also reduce revenue by the estimated cost
of rebates when products are shipped. Warranty reserves are provided at the time
revenue is recognized for the estimated cost of replacing defective products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provided or delivered at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a
payment (such as the sale of insurance through our InsureMarket website),
revenue is recognized upon completion of the transaction, assuming there are no
remaining obligations on our part.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides free telephone support service to customers. This free service, also
referred to as post-contract customer support, is included in this expense
category. We do not defer the recognition of any revenue associated with sales
of these products, since the cost of providing this free support is
insignificant. The support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and require us
to use a significant amount of the cash investments held as available-for-sale
securities.
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The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
For information about our restricted investments, see Note 7. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
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Marketable Securities
Our marketable securities are carried at fair value and include unrealized gains
and losses, net of tax, in stockholders' equity. We held the following
marketable securities at July 31, 1998 and April 30, 1999:
We acquired the marketable securities described above in connection with the
establishment of ongoing strategic business relationships with the companies in
question, and, in the case of the Checkfree Corporation ("Checkfree") shares, as
the purchase price for a subsidiary we sold to Checkfree in January 1997.
We account for the investment in Checkfree as an available-for-sale equity
security, which accordingly is carried at market value. Checkfree common stock
is quoted on the Nasdaq Stock Market under the symbol CKFR. The closing price of
Checkfree common stock at April 30, 1999 was $48.00 per share. The closing price
on June 7, 1999 was $39.875. At April 30, 1999, we held 10,175,000 shares, or
approximately 19.7%, of Checkfree's outstanding common stock.
During the third fiscal quarter, we sold 125,000 shares of Verisign, 450,000
shares of Excite, and 90,600 shares of Concentric. In connection with these
sales we recognized realized gains of $12.3 million, $39.3 million, and $7.0
million, respectively.
In June 1997, we purchased 5.8 million shares (as adjusted for a two-for-one
stock split) of common stock of Excite. At the same time, we entered into an
agreement with Excite that provides for the joint development, promotion and
distribution of an online financial channel. As of April 30, 1999, Excite's
common stock was quoted on the Nasdaq Stock Market under the symbol XCIT. The
closing price of Excite common stock at April 30, 1999 was $146.00 per share. On
January 19, 1999, Excite and At Home Corporation ("At Home") announced a
proposed merger in which At Home would acquire all of the outstanding stock of
Excite and on May 28, 1999 the merger was completed ( with the combined company
now doing business as Excite@Home). In May 1999, we entered into a forward sale
arrangement with respect to 4,350,000 shares of our Excite common stock. See
Note 11 for more information about these transactions.
Checkfree and At Home are high technology companies whose stocks are subject to
substantial volatility. Accordingly, it is possible that the market price of one
or more of these companies' stocks could decline substantially and quickly,
which could result in a material reduction in the carrying value of these
assets.
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Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
Balances presented above are net of total accumulated amortization of $103.6
million and $176.2 million at July 31, 1998 and April 30, 1999, respectively.
Concentration of Credit Risk
Almost all of Intuit's operations are concentrated in the personal computer
software industry, which is highly competitive and rapidly changing. Many
circumstances could have an unfavorable impact on Intuit's operating results.
Examples include significant technological changes in the industry, changes in
customer requirements or the emergence of competitive products or services with
new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At April 30,
1999, we held shares of Checkfree common stock representing approximately 19.7%
of Checkfree's outstanding common stock. We also held approximately 9.9% of
Excite's outstanding common stock as of April 30, 1999. Our ability to dispose
of these securities is limited by trading volume and other legal and contractual
restrictions. If there is a permanent decline in the value of these securities
below cost, we will need to report this decline in our statement of operations.
See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. See Note 11 for information regarding
subsequent dispositions of certain shares of Excite common stock. Our remaining
portfolio is diversified and consists primarily of short-term investment-grade
securities.
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
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Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating segments in
financial statements. It also sets standards for related disclosures about
products and services, geographic areas and major customers. The disclosures
prescribed by SFAS 131 will be adopted for the fiscal year ending July 31, 1999.
Change in Estimate of Goodwill Amortization
Our statements of operations reflect a change in estimate for the amortization
life of remaining goodwill related to the June 1998 acquisition of Lacerte from
three years to five years, commencing with the first quarter of fiscal 1999. The
change resulted in a $28.5 million decrease in amortization expense and an
increase in net income by approximately $17.1 million, or $0.27 per share, for
the nine months ended April 30, 1999 but will result in continuing amortization
expenses (with a corresponding decrease in net income) during fiscal 2002 and
2003.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
3. COMPREHENSIVE NET INCOME
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
4. ACQUISITIONS
In June 1998, we acquired substantially all of the assets of Lacerte Software
Corporation and Lacerte Educational Services Corporation (together, "Lacerte"),
for cash. Lacerte is a leading developer and marketer of tax preparation
software and services for tax professionals. The purchase price was
approximately $400 million. In addition, we
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assumed liabilities of $31.8 million. We funded the acquisition by a public
offering of 10.0 million shares of common stock, completed in the fourth quarter
of fiscal 1998.
The acquisition of Lacerte was treated as a purchase for accounting purposes. We
allocated approximately $358.2 million of the purchase price to identified
intangible assets and goodwill. These assets are being amortized over periods of
two to five years. We also expensed approximately $53.8 million of in-process
research and development in the quarter ended July 31, 1998. The following table
shows pro forma net revenue, net income and diluted net income per share of
Intuit and Lacerte as if we had acquired Lacerte at the beginning of fiscal
1998, excluding the impact of the one-time charge for in-process research and
development:
On April 7, 1999, we acquired the customer list and intellectual property rights
of TaxByte, Inc., for approximately $11 million in cash. TaxByte was a
professional tax preparation software company with a customer base of
approximately 3,600 professional tax preparation firms. The acquisition was
treated as a purchase for accounting purposes and the entire purchase price was
allocated to identified intangible assets and goodwill to be amortized over five
years. No tangible assets were acquired or liabilities assumed in connection
with the purchase.
On March 2, 1999, we announced that we had reached a definitive agreement to
acquire Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of
payroll services. The transaction was completed on May 3, 1999. See Note 11.
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer software and direct marketing
subsidiary, to Broderbund Software, Inc. for approximately $31 million. As a
result of the sale, Broderbund acquired net assets of approximately $17 million
and we incurred direct costs of approximately $9.5 million. We also recorded a
pre-tax gain of $4.3 million and a related tax provision of $2.7 million in the
quarter ended October 31, 1997.
6. OTHER ACCRUED LIABILITIES
7. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting purposes. The interest rate is variable based on the Tokyo
inter-bank offered rate or the short-term prime rate offered in Japan.
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At April 30, 1999, the rate was approximately 0.5%. The fair value of the loan
approximates cost as the interest rate on the borrowings is adjusted
periodically to reflect market rates (which are currently significantly lower in
Japan than in the United States). We have guaranteed the loan and pledged
approximately $34.6 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings at April 30, 1999.
We are obligated to pay interest only until March 2000.
8. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
9. LITIGATION
Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 24, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the last 9 months, a suit was filed in
the Contra Costa County, California Superior Court by an individual consumer
against various retailers, including Circuit City Stores, CompUSA, Fry's
Electronics, Office Depot, The Good Guys and others, alleging that these
retailers have sold software and hardware products which are not Year 2000
compliant, including at least one product published by Intuit. Intuit has
received information indicating that one of the defendants in this action, Fry's
Electronics, may have filed a cross-complaint against various software
publishers and hardware manufacturers, including Intuit, asserting a claim for
indemnity in the main action. Intuit has not been served with or received a copy
of any such cross-complaint.
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On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleged that Checkfree was not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement agreement
by which all claims asserted by each party were dismissed with prejudice. The
arbitration was dismissed with prejudice on May 24, 1999, and Intuit's suit
against Checkfree was dismissed with prejudice on May 25, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
10. RELATED PARTY TRANSACTIONS
We held approximately 9.9% of Excite's outstanding common stock as of April 30,
1999. We reported revenue from Excite for shared advertising activities of $ 3.1
million and $6.9 million for the three and nine months ended April 30, 1998 and
$5.9 million and $17.6 million for the three and nine months ended April 30,
1999, respectively.
As of April 30, 1999, we held approximately 19.7% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported revenues of
$0.2 million and $12.9 million from Checkfree for the three and nine months
ended April 30, 1998 and $1.6 million and $4.0 million for the three and nine
months ended April 30, 1999, respectively. The revenue from Checkfree for the
nine months ended April 30, 1998 includes a royalty payment of $10 million
received in October 1997. We held a receivable due from Checkfree for $4.4
million and $1.6 million at July 31, 1998 and April 30, 1999, respectively.
As of April 30, 1999, we held a 49% equity interest, and an option to purchase
the remaining equity interests, in Venture Finance Software Corporation
("VFSC"). We have entered into an agreement with VFSC to provide them with
services related to on-going development of Web-oriented finance products. We
held a note receivable from VFSC with outstanding balances of $7.3 million and
$6.0 million at July 31, 1998 and April 30, 1999, respectively, representing
amounts due to us from VFSC for development and administrative services we
provided to VFSC.
11. SUBSEQUENT EVENTS
On May 3, 1999, we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services. Since October 1998,
Intuit has been offering payroll services through CRI to its QuickBooks small
business customers. These payroll services include payroll tax filing, tax
deposit services and direct deposit of employee wage payments. CRI is one of the
country's largest payroll services companies and a leader in providing payroll
services to small businesses. The purchase price for privately-held CRI was
approximately $200 million, consisting of approximately $100 million in cash and
approximately $25 million of Intuit stock to be paid at the closing, and
approximately $75 million in cash to be paid in three annual installments of
approximately $25 million each.
On May 5, 1999, we entered into definitive agreements (including a Securities
Contract and Pledge Agreement) with Credit Suisse Financial Products ("CSFP")
for the forward sale of 4,350,000 shares of Excite Common Stock. On May 28,
1999, our shares of Excite Common Stock were converted into shares of At Home as
a result of a merger between Excite and At Home Corporation. In June 1999, we
expect to settle the forward sale arrangement. At settlement, we will receive
approximately $451.4 million from CSFP (representing the proceeds from prior
sales
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by CSFP of 4.350,000 shares of Excite's Common Stock), less a negotiated fee,
and to deliver stock certificates to CSFP for 4,350,000 shares of Excite Common
Stock, which now represent 4,532,273 shares of Class A Common Stock of At Home.
As a result of this transaction, we expect to record a realized gain of
approximately $253.2 million, net of tax, in the fourth quarter of fiscal 1999.
Pursuant to an agreement entered into on May 17, 1999, we completed a $50
million investment in Security First Technologies ("Security First") on May 27,
1999. Security First delivers enterprise-wide Internet applications for
financial institutions. We purchased 970,813 shares of common stock at a price
of $51.50 per share, which represents approximately 3.8% of Security First's
outstanding common stock. In connection with this agreement, we also received an
option to purchase 3,629,187 additional shares of Security First common stock,
which will become exercisable if Security First completes its planned
acquisition of Edify Corporation (a publicly held California-based provider of
Internet and voice electronic commerce solutions), and an option to purchase an
additional 1,800,000 shares of common stock if Security First completes its
planned acquisition of FICS Group, N.V. (a privately held Belgium-based provider
of regulatory financial reporting and remote electronic banking software). These
options are exercisable at a per share purchase price of $51.50. Our investment
in Security First was made in connection with establishing a strategic
relationship to deliver online financial software and services to financial
institutions. The common stock of Security First is quoted on the Nasdaq Stock
Market under the symbol "SONE." The closing price of Security First common stock
on June 7, 1999 was $40,625.
On June 11, 1999, we acquired the customer list and intellectual property rights
of Compucraft Tax Services, LLC, for approximately $8 million in cash with a
provision that could increase the overall purchase price if certain performance
targets are met. Compucraft was a professional tax preparation service bureau
company with an active customer base of approximately 3,400 professional tax
preparation firms. The acquisition will be treated as a purchase for accounting
purposes.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements including
terms such as we "expect" or "anticipate" are forward-looking statements.
Investors should be aware that our actual results may differ materially from
Intuit's expressed expectations because of risks and uncertainties about the
future. We will not necessarily update the information in this Form 10-Q if and
when any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect future results and performance include, but are
not limited to the following: intense competition and pricing pressures,
particularly in the personal tax software market; potentially slower market
growth rates in the small business area and our ability to leverage our existing
small business customer base to take advantage of any market growth and to
increase the number of small business customers using our payroll processing
service; our strategy and implementation with respect to the Internet and our
Internet-based businesses, including but not limited our ability to timely adapt
and expand our product, service and content offerings for the Internet
environment, our ability to operationally support and manage these new Internet
businesses, the success of our business relationships with Excite@Home, AOL, and
others in continuing to increase traffic to Quicken.com, the costs of
implementing our Internet strategy, the impact of interest rate fluctuations on
our online mortgage business, and the uncertainty as to the timing and amount of
future Internet-related revenue and profits; the timing of availability for
future products and services; market growth, sales and upgrade rates for our
QuickBooks multi-user product; the value, size and market volatility of our
equity investments in other companies, including Checkfree Corporation, At Home
Corporation and Security First Technologies; our ability to achieve Year 2000
readiness in our business operations, our products and our dealings with
significant third parties; the expected impact of our recent acquisition of
Computing Resources, Inc. ("CRI") and our ability to successfully manage and
operate the payroll processing business acquired from CRI, which is a new type
of business for Intuit; the impact of acquisitions generally; our relationships
with retailers and other issues with respect to our distribution channels;
results for our international operations; and risks associated with regulated
businesses such as insurance and mortgage lending. Additional information about
factors that could affect future results and events is included our fiscal 1998
Form10-K, our Form 10-Qs for the first and second quarters of fiscal 1999, and
other reports filed with the Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal, we create, sell and support small
business accounting, tax preparation and consumer finance software products,
financial supplies (such as computer checks, invoices and envelopes), and
Internet products for individuals and small businesses. Our revenues come
primarily from the United States, Japan, Germany, Canada and the United Kingdom,
through retail distribution channels, direct customer sales and via the
Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet commerce revenue is growing rapidly. The Internet is a
pervasive force that has fundamentally changed the way we do business. It is
becoming increasingly important to all of our business divisions, both as the
platform for new products and services, and as an incremental, cost-effective
distribution channel. For example, the Internet is the foundation for our
insurance and mortgage marketspaces, the online payroll service for small
businesses that we recently introduced through our QuickBooks product and our
Quicken Store website, where customers can purchase and download desktop
software products and obtain customer service. We also use the Internet to host
our technical support website where we can quickly and cost-effectively provide
patches for product bugs and provide customers with answers to frequently asked
questions.
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We use the term "Internet commerce" to refer to all of our Internet-based
business activities. Internet commerce has two components: Internet products and
electronic distribution. Internet products include activities in which the
customer realizes the value of the goods or services directly on the Internet or
an Intuit server. Internet product revenues include, for example, advertising
revenues generated on our Quicken.com website, online tax preparation and
electronic filing revenues, on-line payroll service revenues and transaction and
processing fees from our online insurance and online mortgage marketspaces.
Electronic distribution activities include the electronic ordering and/or
electronic delivery of traditional desktop software products and financial
supplies through the Internet.
While we have made significant progress in our Internet commerce activities,
investors should be aware that initial success achieved in these areas will not
necessarily result in improved financial results. We believe that the dramatic
growth of the Internet will give us significant opportunities to grow our
revenue over the next several years. However, revenue from Internet commerce was
only approximately 14% of total revenue for the nine months ending April 30,
1999 (approximately 8% for Internet products and 6% for electronic
distribution). It should be noted that Internet revenues are not reported
separately in our financial statements; instead, each of our business divisions
reports Internet commerce revenues that are specific to its operations and are
included in its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred during these periods. These seasonal trends can result in
significant operating losses, particularly in the July 31 and October 31
quarters when our revenues are lower. The seasonality of our revenue patterns
has been further intensified by our June 1998 acquisition of Lacerte, a
professional tax software company. Operating results can also fluctuate for
other reasons, such as changes in product release dates, non-recurring events
such as acquisitions and dispositions, and product price cuts in quarters that
have relatively high fixed expenses. Acquisitions and dispositions in particular
can have a significant impact on the comparability of both our quarterly and
yearly results.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and nine-month periods ended April 30, 1998 and 1999. Investors should
note that results for the three and nine-month periods ended April 30, 1999
include activity for our Lacerte subsidiary, which was acquired in June 1998.
The corresponding year ago periods did not include results for Lacerte.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes. The following revenue discussion is categorized by our
business divisions, which is how we examine results internally. Our domestic
supplies business is considered a part of our small business division while the
international supplies business is considered part of our international
division.
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NET REVENUE
Small Business Division. Small business division revenues come primarily from
the following sources:
o QuickBooks product line
o Supplies products (including checks, envelopes and invoices)
o Tax table services
o Support fees for the QuickBooks Support Network
o Payroll processing fees
Overall, revenue for the division was up 93% and 52% for the three and
nine-month periods ended April 30, 1999, respectively, compared to the same
periods a year ago. The increases were primarily a result of the timing of
recent QuickBooks releases that occurred in June 1998 (version 6.0) and January
1999 (QuickBooks '99). Prior to these releases, we had not launched a new
version of QuickBooks since December 1996 (version 5.0). As a result, the
current three and nine-month periods compare favorably to the same periods of
the prior year, which did not realize the benefit of a recent QuickBooks product
launch. Current fiscal year revenues also benefited from an increase in revenue
per customer, due primarily to an improvement in the mix of QuickBooks sales
toward higher priced, greater functionality products.
Domestic supplies revenues, which are part of the small business division, grew
by 17% and 13% for the three and nine-month periods ended April 30, 1999,
respectively, as a result of our increasing base of small business customers who
use QuickBooks and Quicken. Though they are a smaller component of small
business division revenues, tax tables service revenue and fees charged for
telephone support also grew substantially in the three and nine months ended
April 30, 1999 compared to the same periods of the prior year.
In October 1998, we introduced our new payroll processing service. The service
is offered through our QuickBooks products (version 6.0 and QuickBooks '99) and
handles all aspects of payroll processing, including calculation and electronic
depositing of federal and state payroll tax withholdings, electronic direct
deposit of paychecks, preparation and filing of quarterly and annual payroll tax
returns and creation of employee W-2 forms. While payroll processing provides us
with a significant opportunity to generate revenues, it also introduces new
risks. For example, we are managing the new customer activation process at a
measured rate in order to provide high quality service levels and to minimize
the impact of any potential service disruptions during the initial phases of the
service. In addition, the payroll processing business has been unprofitable in
its initial stages as we make systems and infrastructure investments required
for this new business and incur acquisition, activation and set-up costs for new
payroll service customers. We expect the QuickBooks payroll processing business
to remain unprofitable until we are able to accumulate a large number of
subscribers who have used the service long enough for us to recover these
up-front costs. Though initial customer reaction to this service has been
positive, it has not been a significant contributor to our financial performance
in fiscal 1999.
In connection with this new payroll service business and consistent with our
strategy to expand products and service offerings to our small business
customers, we completed our acquisition of Computing Resources, Inc. ("CRI") on
May 3, 1999 (see Note 11). CRI has been our payroll processing service provider
since October 1998. This acquisition will result in significant future
acquisition related costs, as well as new business risks and integration
challenges common in all acquisitions. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who we believe will have
a low tolerance for payroll processing errors. Our ability to successfully
operate CRI will depend in part on retaining their existing customers and
maintaining relationships with certain banks and other third parties who we will
rely on to retain existing
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customers and attract new customers outside of our QuickBooks customer base. If
we are unable to do so, it could result in a negative impact on our consolidated
results.
Tax Division. Tax division revenues come primarily from the following sources:
o TurboTax and MacInTax personal tax preparation products
o Professional tax preparation products (ProSeries and Lacerte
product lines)
o Electronic tax return preparation and filing fees
Overall, tax division revenues for the three and nine months ended April 30,
1999 grew 100% and 84% respectively, compared to the same periods last year.
Fiscal 1999 includes operating results for our Lacerte subsidiary which was
acquired in June 1998, while fiscal 1998 results do not include Lacerte.
Excluding Lacerte from our fiscal 1999 results, tax division revenues would have
increased by 48% and 36% over the same periods. Growth in our tax business was
driven by our TurboTax product line which experienced significantly higher unit
sales due in part to an increasing number of taxpayers using personal computers
to prepare tax returns. This unit sales growth was partially offset by lower
average selling prices due to a higher percentage of customers buying our lower
priced regular products compared to deluxe versions and increased price
competition, primarily from H&R Block's aggressively priced TaxCut product.
TurboTax results benefited from strong growth in industry-wide retail sales of
personal tax products, though TurboTax growth was lower than the industry growth
rate, resulting in a slight decline in retail market share. We will not be able
to determine final TurboTax sales until retailers return unsold products during
the next two quarters. While we believe our reserves for returned product are
adequate to cover actual returns, higher than expected returns could have a
negative impact on revenue for the season.
Though they are a smaller component of tax division revenues, we also
experienced significant revenue increases for our Web TurboTax product and
electronic filing service compared to last year as a greater number of customers
gained Internet access and became more accustomed to processing transactions
on-line. While we believe that the increasing popularity of the Internet will
provide future revenue growth opportunities for these Internet-based tax
offerings, there are also risks. For example, with lower barriers to entry, we
expect a greater number of competitors offering Internet-based products and
services than we experience with our traditional desktop software business. In
addition, service interruptions can have significant negative financial and
public relations consequences. We experienced an interruption in our electronic
filing services in February 1999 due to a power outage, which was not
significant because it was early in the tax season. However, the heavy volume
of, and peak filings periods for, electronically filed returns caused our
routine server maintenance procedures to take longer than expected, and the
procedures caused the electronic filing service to be unavailable for 14 hours
on April 11-12, 1999. We do not believe this service outage had a material
financial impact, prevented customers from completing and filing their returns
in a timely manner or posed a risk that customer data would be lost or
corrupted. However, we did experience negative publicity. The exact level of
future demand for Web TurboTax and electronic filing will be very difficult to
predict, and in future tax seasons we could experience adverse financial and
public relations consequences if these services are unavailable due to technical
difficulties or other reasons.
Though Microsoft Corporation did not release a competing product for this tax
season, we believe they will enter the personal tax preparation software market
next year. If Microsoft enters the market, their superior financial resources
and strong presence in retail distribution channels could result in an
increasingly competitive environment next tax season and beyond. If the average
selling price of our tax products were to decrease, or if we were to lose
significant market share as a result of increased future competition, our
operating results would suffer.
Excluding Lacerte from fiscal 1999 operating results, our professional tax
(ProSeries) product sales increased by 30% and 14% for the three and nine months
ended April 30, 1999, respectively, compared to the same periods a year ago.
This growth occurred primarily because we have been successful in retaining our
customers from prior years and in many cases have upgraded them to higher priced
products. Revenue from Lacerte products also grew compared to last year (though
Lacerte's prior year revenues are not reported in our operating results) due in
part to price increases and a high customer retention rate.
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Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
o Quicken product line
o Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
o Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
Overall, consumer finance division revenues were up 34% and 11% for the three
and nine-month periods ended April 30, 1999 compared to the same periods a year
ago. Excluding the impact of a nonrecurring $10 million royalty fee from
Checkfree in the first quarter of fiscal 1998, revenue growth would have been
24% for the nine months ended April 30, 1999. Quicken revenue was roughly flat
for the three months ended April 30, 1999 compared to the same period in fiscal
1998. For the nine months ended April 30, 1999, Quicken revenue grew 4% compared
to the same year-ago period due primarily to an approximately 5 week earlier
release of Quicken this year and higher unit sales resulting from our
Quicken/TurboTax bundle promotion. This was partially offset by a higher
percentage of customers purchasing our lower priced Quicken Basic products
compared to our Quicken Deluxe versions and increased rebate incentives offered
to customers who purchased the Quicken/TurboTax bundle.
While we expect Quicken revenue to remain roughly flat for fiscal 1999, there is
a risk that it will decline in future periods. In fiscal 1997, Quicken
experienced over a 20% decline in revenues and there is no assurance that
similar declines will not occur in the future. For example, sales could suffer
if customers become less inclined to make upgrade purchases, if our competitors
were to lower their prices or if the demand for personal finance desktop
software declines significantly.
Consumer division revenue growth was primarily the result of increased
Internet-based revenues which grew by 69% and 77% for the three and nine months
ended April 30, 1999, respectively, compared to the same periods last year. This
increase was largely due to higher advertising, sponsorship and
transaction-related revenue through Quicken.com and Quicken. However, revenue
growth was not uniform across all Internet product and service offerings. For
example, advertising revenue and transaction fees from our QuickenMortgage
marketspace have grown relatively rapidly while fees from our InsureMarket
marketspace have grown at a slower pace. Total Quicken.com page views for the
month of April 1999 were up approximately 130% compared to April 1998. While
page view growth has been strong, traffic volumes can vary significantly from
month to month due to seasonal trends, site performance, the timing of launches,
competitor's activities, and other factors.
The rapid growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as Excite and AOL, which have helped to increase traffic
to our Quicken.com website. The Excite agreement calls for us to share revenue
generated from our Quicken.com site and the AOL agreement calls for us to make
significant guaranteed payments to AOL over the term of the agreement. While the
Internet provides a significant opportunity for revenue growth, our financial
commitments to these and other third party providers are significant and we must
continue to increase traffic and revenue in order to be profitable. If our
website traffic and revenue expectations aren't met, there could be a
significant negative impact on our operating results.
We currently expect the recently completed merger between Excite and At Home
(see Note 1) to have a neutral or positive impact on our business relationship
with Excite. Since the newly merged company (doing business under the name
Excite@Home) is expected to offer increased opportunities for distribution of
Excite's online financial content, we believe this should benefit Intuit.
However, our diminished ownership interest in the larger, combined company and
our divestiture of a significant portion of Excite stock (see Note 11) could
have a negative impact on our future relationship with Excite@Home.
-20-
International Division. International division revenues come primarily from the
following sources:
o Japanese small business products
o German Quicken, QuickBooks and Tax products
o Canadian Quicken, QuickBooks and Tax products
o United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues were down 23% and 12%
for the three and nine-month periods ended April 30, 1999, respectively,
compared to the same periods last year. This decrease is a result of lower sales
in Germany and the U.K, which is largely due to later releases of Quicken and
QuickBooks in those countries compared to prior year periods. This was partially
offset by increased revenues in Canada across all product lines. In Japan, our
largest international subsidiary, sales were roughly flat reflecting lower sales
of small business products for the high-end market that we acquired in
connection with our acquisitions of Milky Way and Nihon Micom, offset by sales
of our Japanese QuickBooks product which was introduced in September 1998. The
launch of QuickBooks in Japan is intended to target a lower priced market than
our other Japanese small business products currently reach. Though we have
increased our retail market share in Japan since the launch of QuickBooks, the
overall market for small business products and services in Japan continues to
suffer due primarily to poor economic conditions.
As part of our business strategy, we have refocused our European operations
towards small businesses in selected larger markets. As a result, we have
devoted fewer resources to consumer finance and tax products and to smaller
geographic markets during fiscal 1999. While we expect that international
revenues will be slightly down for the entire fiscal year 1999, there is a risk
that revenues in future periods could be significantly lower if our strategic
initiatives are not effective.
COST OF GOODS SOLD
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products, offering Internet-based products and
services, providing our fee for support programs and offering our payroll
service. The second component is the amortization of purchased software, which
is the cost of products obtained through acquisitions. Total cost of goods sold
increased to 22% and 23% of revenue for the three and nine months ended April
30, 1999 respectively, compared to 21% for the same periods of the prior year.
This increase is primarily attributable to two factors. First, consistent with
our growing Internet-based business, we are experiencing a significant increase
in related hardware and infrastructure costs as we purchase equipment to
increase our Internet capability. These costs are classified as cost of goods
sold and, as a percentage of revenue, are significantly higher than the costs of
goods sold for our traditional desktop software business. These infrastructure
costs tend to result from the depreciation of capital assets which are generally
expensed evenly over the estimated useful lives of the assets. As a result, cost
of goods sold as a percentage of revenue may fluctuate significantly,
particularly on a quarterly basis, as they become more fixed in nature and less
connected to the direct cost of manufacturing and shipping software products.
For example, although in a quarter with low revenues we will
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usually have a proportionately lower cost of goods sold because we ship fewer
products, the cost of goods sold from our Internet infrastructure will not
decrease proportionately and thus will inflate the cost of goods sold as a
percentage of revenue for that quarter. Second, we have also experienced
significant increases in our revenues from fee for support programs. The cost of
goods sold associated with these programs is also larger as a percentage of
revenue than cost of goods sold for our traditional desktop software business.
Consequently, as revenues from our Internet-related businesses and fee for
support programs become a larger portion of our overall revenue, our cost of
goods sold as a percentage of revenue is likely to increase.
Due to expected growth in higher cost of goods sold businesses such as our
Internet-based initiatives, fee for support programs and our online payroll
service, we believe cost of goods sold as a percentage of revenue for fiscal
1999 will exceed what we experienced in fiscal 1998. If we experience errors in
current or future products, there could be incremental increases in cost of
goods sold that could adversely effect our operating results.
OPERATING EXPENSES
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 12% and 14% of revenue for the three and nine months ended
April 30, 1999, respectively, compared to 19% for the same periods of the prior
year. These improvements reflect the continuing benefit from cost reductions
resulting from the restructuring and consolidation of our technical support
facilities in the United States and Europe in the fourth quarter of fiscal 1997
and a greater proportion of expenses shifting into cost of sales as a result of
our expanding Internet related and fee for support initiatives. We have also
benefited from our efforts to provide customer service and technical support
less expensively through websites and other electronic means. During the second
and third quarters of fiscal 1999, many customers experienced unusually long
hold times for customer service calls. We may need to increase customer service
and technical support expenses as a percentage of revenue in the fourth quarter
of fiscal 1999 and in fiscal 2000, in order to improve customer service levels
and also to handle customer questions relating to Year 2000 compliance issues.
In addition, if we experience product errors, poor service levels or service
outages for our web-based products, it may result in significant additional
customer service and technical support expenses or customer dissatisfaction.
Selling and Marketing. Selling and marketing expenses were 18% and 22% of
revenue for the three and nine months ended April 30, 1999, respectively,
compared to 39% and 28% for the same periods of the prior year. Prior year
selling and marketing expenses included a $16.2 million charge for the AOL
agreement entered into in February 1998. Excluding this charge, selling and
marketing expenses would have been 27% and 25% of revenue
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for the three and nine months ended April 30, 1998. This decrease is primarily
the result of our acquisition of Lacerte, which experiences comparatively lower
selling and marketing expenses as a percentage of revenue. The positive impact
of Lacerte was partially offset by increased TV and radio advertising for our
Quicken product line and additional costs related to the promotion of QuickBooks
and the payroll product launch. We expect selling and marketing costs as a
percentage of revenue to decline slightly in fiscal 1999 compared to fiscal
1998.
Research and Development. Research and development expenses decreased to 14% and
15% of revenue for the three and nine months ended April 30, 1999, respectively,
compared to 18% and 16% for the same periods of the prior year. This decrease is
due in part to our acquisition of Lacerte which experiences comparatively lower
research and development expenses as a percentage of revenue. We expect research
and development expenses to remain roughly flat as a percentage of revenue for
fiscal year 1999 compared to fiscal 1998. However, if these expenses exceed our
current expectations, they may have an adverse effect on operating results. This
could occur, for example, if we were to undertake a costly product development
venture in response to competitive pressures or other market conditions.
General and Administrative. General and administrative expenses were flat at 6%
of revenue for the three and nine months ended April 30, 1999 and 1998. For
fiscal 1999, we expect general and administrative expenses to remain roughly
flat as a percentage of revenue for fiscal year 1999 compared to fiscal 1998.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
These costs increased to $22.8 and $68.4 million for the three and nine months
ended April 30, 1999, respectively, compared to $4.0 and $14.2 million for the
same periods of the prior year. This increase was primarily attributable to the
amortization of intangibles associated with our acquisition of Lacerte in June
1998.
In connection with our acquisition of Lacerte, we used a third party appraiser's
estimate to determine the value of two in-process projects under development for
which technological feasibility had not been established. These projects were
identified for products being developed under separate operating systems (DOS
and Windows). The value of the projects was determined by estimating the costs
to develop the in-process technology into commercially feasible products,
estimating the net cash flows we believed would result from the products and
discounting these net cash flows back to their present value. As of April 30,
1999, actual results to date have been consistent with assumptions made when we
initially appraised the value of these in-process projects. Specifically,
revenues, development costs and completion dates as they relate to the two
projects are consistent with our expectations. Both projects were released on
schedule in January 1999.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Excluding the impact of our acquisition of CRI which closed
after our quarter end (see Note 11) and assuming no additional acquisitions and
no impairment of value resulting in an acceleration of amortization, future
amortization will reduce net income by approximately $56.3 million, $51.4
million, $44.6 million and $41.5 million for the years ending July 31, 1999
through 2002, respectively. If we complete additional acquisitions or accelerate
amortization in the future, there would be an incremental negative impact on
operating results.
OTHER INCOME
For the three and nine months ended April 30, 1999, interest and other income
and expense, net, increased to $5.3 and $12.6 million respectively compared to
$3.1 and $7.4 million for the same year ago periods reflecting increased cash
and short-term investment balances. The $4.3 million gain on disposal of
business in the nine-month period ended April 30, 1998 resulted from the sale of
Parsons, our direct marketing subsidiary, in August 1997. Our $58.6 and $68.7
million gains on the sale of marketable securities for the three and nine months
ended April 30, 1999 were the result of our sale of Excite, Verisign and
Concentric common stock (see Note 1).
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INCOME TAXES
For the three and nine months ended April 30, 1999, we recorded income tax
provisions of $37.1 and $51.3 million on pretax income of $109.6 and $164.6
million, respectively. This compares to income tax provisions (benefit) of
($2.0) and $17.5 million on pretax income (loss) of ($4.2) and $44.4 million for
the same periods of the prior year. At April 30, 1999, there was a valuation
allowance of $9.6 million for tax assets of our international subsidiaries based
on management's assessment that we may not receive the benefit of certain loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, our unrestricted cash and cash equivalents totaled $330.2
million, a $192.1 million increase from July 31, 1998. The increase was the
result of net cash generated by operations and financing activities, partially
offset by cash used for investing activities. Increase in cash reflects the
seasonality of our business which typically results in the majority of net
revenues and cash receipts occurring in the January and April quarters, though
operating expenses are incurred more consistently throughout the year.
Our operating activities generated $237.1 million in cash for the nine months
ended April 30, 1999, driven by net income of $113.2 million. Additional sources
of cash were net income adjustments made for non-cash expenses such as
acquisition charges and depreciation and significant increases in accounts
payable and other accrued liabilities. These increases in accounts payable and
other accrued liabilities are the result of the seasonality of our business and
the resulting increase in accruals for product returns, customer rebates and
accrued technical support expenses. These increases were partially offset by
higher accounts receivable balances due from retailers and distributors for
large volumes of seasonal product shipments that occur in our second and third
fiscal quarters. We also used cash to increase our prepaid assets, due in part
to a large federal quarterly tax prepayment.
Investing activities resulted in the use of $105.4 million in cash for the nine
months ended April 30, 1999. This was driven by net purchases of short-term
investments and property and equipment. Property and equipment purchases were
made to support our ongoing operations, information system upgrades and our
growing Internet-based businesses. We also used cash to make significant
strategic investments, primarily in private companies. Due to our substantial
investments in marketable securities, such as Checkfree, At Home and Security
First, there is a risk that market value declines may have a significant
negative impact on our liquidity. If such declines were deemed to be permanent,
they would result in a charge to our statements of operations.
Financing activities provided $60.4 million for the nine months ended April 30,
1999 primarily attributable to proceeds from the exercise of employee stock
options.
In connection with our May 3, 1999 acquisition of CRI, we are making significant
cash payments (see Note 11) in our fiscal fourth quarter and beyond. In
addition, in May 1999 we made a $50 million cash investment in Security First
Technologies (see Note 11), which also negatively impacted our liquidity. In the
normal course of business, we enter into leases for new or expanded facilities
in both domestic and international locations. We also evaluate the merits of
acquiring technology or businesses, or establishing strategic relationships with
and investing in other companies. Accordingly, it is possible that we may decide
to use cash and cash equivalents to fund such activities in the future. For
example, if we exercise our option to purchase VFSC (see Note 10) and elect to
pay all or a significant portion of the exercise price in cash, this would have
a negative impact on our liquidity.
Though we are likely to require cash for future strategic initiatives, our
short-term liquidity will improve during the fourth quarter when we receive the
proceeds from the forward sale of a significant portion of our Excite common
stock (see Note 11). We believe that our unrestricted cash, cash equivalents and
short-term investments will be sufficient to meet anticipated seasonal working
capital and capital expenditure requirements for at least the next twelve
months.
-24-
YEAR 2000
The Company has established a Year 2000 Project Office to address the impact of
the year 2000 date transition on its operations, products and services globally.
In 1998, the Company established this office to coordinate a number of existing
projects and put in place a formal, structured year 2000 process moving forward.
The Project Office has a dedicated Program Manager and team who report directly
to Intuit's senior management, and status is reported regularly to the Audit
Committee of the Company's Board of Directors.
The Company has adopted a five-phase approach that it believes follows standard
industry practices for reviewing and preparing the significant elements of
operations, products and services for the Year 2000 date transition. Phase One
(initiation) involves increasing company awareness by educating and involving
all appropriate levels of management regarding the need to address Year 2000
issues. Phase Two (inventory) consists of identifying all of our systems,
products and relationships that may be impacted by Year 2000. Phase Three
(assessment) involves determining our current state of Year 2000 readiness for
those areas identified in the inventory phase and prioritizing areas that need
to be fixed. Phase Four (action) consists of developing Year 2000 solutions
where required, and completing a comprehensive test cycle for all appropriate
inventoried items. Phase Five (implementation) consists of rolling out Year 2000
solutions for affected products, services and technologies and implementing
maintenance and support processes to maintain ongoing compliance.
As a software developer, we have three key areas of focus: (1) our products and
services; (2) our internal systems (including information technology systems
such as financial and order entry systems and non-information technology systems
such as phones and facilities); and (3) the readiness of third parties with whom
we have significant business relationships. The majority of our efforts in the
product area have now completed the action phase and our efforts are primarily
focused on providing our customer base with confirmation of product compliance
or remediation options. We are currently in the action phase for our internal
systems, and in either the assessment phase or the action phase with respect to
third party relationships. We continue to expect that our remediation and
implementation efforts will be substantially complete by the end of the fiscal
year (July 1999), with ongoing maintenance and support activity continuing
throughout calendar year 1999 and into early calendar year 2000.
Costs directly attributed to our Year 2000 project are currently estimated at
approximately $6.5 million for fiscal 1999. This estimate is comprised primarily
of hardware, software, internal resources and consulting fees necessary to
undertake our Year 2000 testing activities during this fiscal year. We currently
anticipate direct costs in the range of $10 to $16 million for fiscal year 2000,
resulting from the completion of the project phases and the transition into an
ongoing maintenance and support activity in fiscal year 2000. We believe that
the nature of our products and the size and profile of our customer base is
likely to lead to a significant increase in the calls to our customer support
centers throughout the remainder of calendar 1999 and early 2000. These support
operations may experience call volumes not experienced to date and we are
developing plans that will allow us to handle the anticipated increase in calls
in a manner that will not lead to material incremental costs. Additionally,
there will be costs associated with the manufacture and distribution of free
solutions for products that are not Year 2000 ready or that will not be tested
for Year 2000 readiness. We believe the provision of free solutions may result
in lost revenue for new product upgrades to within a range of $10 to $17
million, although the exact amount will depend on customer response to the Year
2000 issue.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures.
Despite our efforts, there can be no assurance that all contingencies can be
anticipated or adequately provided for.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that we will be successful in our efforts to
address Year 2000 issues. If we are not successful, there could be significant
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adverse effects on our operations. For example, failure to achieve Year 2000
readiness for our internal systems could delay our ability to manufacture and
ship products, disrupt our customer service and technical support facilities, or
interrupt customer access to our online products and services. If our products
are not Year 2000 ready, we could suffer lost sales or other negative
consequences resulting from customer dissatisfaction, including additional
litigation (see discussion below). We also rely heavily on third parties such as
manufacturing suppliers, service providers, financial institutions and a large
retail distribution channel. If these or other third parties experience Year
2000 failures or malfunctions, there could be a material negative impact on our
ability to conduct ongoing operations. Many of our products are significantly
interconnected with heavily regulated financial institutions. Our relationships
with financial institutions could be adversely impacted if we do not achieve
Year 2000 readiness in a manner and on a time schedule that permits them to
comply with regulatory requirements. We may also incur additional costs if we
are required to accelerate our Year 2000 readiness to meet financial institution
requirements. As with all companies, we also rely on other more widely used
entities such as government agencies, public utilities and other external forces
common to business and industry. Consequently, if such entities were to
experience Year 2000 failures, this could disrupt our ability to conduct ongoing
operations.
Several class action lawsuits have been filed against Intuit in California and
New York, alleging Year 2000 issues with the online banking functionality in
certain versions of our Quicken products, and it is possible that we will face
additional lawsuits. We do not believe the pending lawsuits have merit and
intend to defend them vigorously. We have been working with financial
institutions to provide solutions to their current online banking customers and
are planning to make such solutions available before customers experience any
Year 2000 problems. See "Legal Proceedings" for more information about this
litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of April
30, 1999. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities and Note 11
for information regarding the forward sale of Excite common stock.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of April 30, 1999, the currency of our
Japanese subsidiary has strengthened and the currency of our other subsidiaries
have remained essentially stable since the end of our 1998 fiscal year. Because
we translate foreign currencies into U.S dollars for reporting purposes,
currency fluctuations can have an impact, though generally immaterial, on our
results. We believe that our exposure to currency exchange fluctuation risk is
insignificant primarily because our international subsidiaries invoice
customers and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended April 30, 1999, there was an immaterial
currency exchange impact from our intercompany transactions. Currency exchange
risk is also minimized since foreign debt is due almost exclusively in local
foreign currencies. As of April 30, 1999, we did not engage in foreign currency
hedging activities.
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PART II
ITEM 1
LEGAL PROCEEDINGS
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Intuit is currently a defendant in the following two consolidated class action
lawsuits alleging that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 24, for a
discussion of Intuit's status and plans with respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaint on October 9, 1998. Intuit filed a demurrer to
the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1,
1998, the court granted our motion to dismiss all the New York actions with
prejudice. Plaintiffs have filed a Notice of Appeal.
Intuit also understands that, sometime in the last 9 months, a suit was filed in
the Contra Costa County, California Superior Court by an individual consumer
against various retailers, including Circuit City Stores, CompUSA, Fry's
Electronics, Office Depot, The Good Guys and others, alleging that these
retailers have sold software and hardware products which are not Year 2000
compliant, including at least one product published by Intuit. Intuit has
received information indicating that one of the defendants in this action, Fry's
Electronics, may have filed a cross-complaint against various software
publishers and hardware manufacturers, including Intuit, asserting a claim for
indemnity in the main action. Intuit has not been served with or received a copy
of any such cross-complaint.
On March 3, 1999, Intuit filed a complaint against Checkfree Corporation in the
Santa Clara County, California Superior Court, seeking damages and injunctive
relief. The complaint alleged that Checkfree was not complying with the terms of
its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement
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agreement by which all claims asserted by each party were dismissed with
prejudice. The arbitration was dismissed with prejudice on May 24, 1999, and
Intuit's suit against Checkfree was dismissed with prejudice on May 25, 1999.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
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(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
(b) Reports on Form 8-K:
The Company filed the following report on Form 8-K:
1. A Report under items 2 and 7 was filed on May 7, 1999 to report the
Company's acquisition of Computing Resources, Inc. ("CRI") on May 3,
1999. An amendment to Form 8-K was filed on June 14, 1999 to include
CRI's audited financial statements for its fiscal year ended
December 31, 1998 and required pro-forma financial information with
respect to the acquisition.
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(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: June 14, 1999 By: /s/ Greg J. Santora
-------------------------------------
Greg J. Santora
Senior Vice President
and Chief Financial Officer
(Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
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(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.