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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 (Fee Required)
For the fiscal year ended JULY 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
Commission File Number 0-21180
INTUIT INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of Incorporation) (IRS Employer Identification No.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
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(Address of Principal Executive Offices, including zip code)
(415) 944-6000
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(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, 1996, there were 46,245,474 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 $1,120,469,364.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in November 1996 are incorporated by reference into
Part III of this Form 10-K.
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FISCAL 1996 FORM 10-K
INTUIT INC.
INDEX
ITEM PAGE
PART I
ITEM 1: Business.......................................................... 3
ITEM 2: Properties........................................................ 22
ITEM 3: Legal Proceedings................................................. 23
ITEM 4: Submission of Matters to a Vote of Security Holders............... 25
Executive Officers and Key Employees of the Registrant............ 25
PART II
ITEM 5: Market for Registrant's Common Equity
and Related Stockholder Matters............................... 28
ITEM 6: Selected Consolidated Financial Data.............................. 29
ITEM 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 30
ITEM 8: Financial Statements and Supplemental Data........................ 43
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 62
PART III
ITEM 10: Directors and Executive Officers of the Registrant................ 62
ITEM 11: Executive Compensation............................................ 62
ITEM 12: Security Ownership of Certain Beneficial Owners
and Management................................................ 62
ITEM 13: Certain Relationships and Related Transactions.................... 62
PART IV
ITEM 14: Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................... 63
Signatures .............................................................. 67
Intuit, the Intuit logo, IntelliCharge, MacInTax, Quicken, QuickBooks,
QuickVerse, TurboTax, Announcements, QuickSteuer and ProSeries, among others,
are registered trademarks and/or registered service marks of Intuit Inc. or one
of its subsidiaries. OpenExchange, QFN, NETworth, Quicken Live, InsureMarket,
Kobanto, Family Lawyer, Investor Insight, Personal Tax Edge, QuickBooks Pro,
QuickPay, QuickEntry and QuickTax, among others, are trademarks and/or service
marks of Intuit Inc. or one of its subsidiaries. Other brands or products
contained in this document are trademarks, service marks, registered trademarks
or registered service marks of their respective holders and should be treated as
such.
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PART I
ITEM 1
BUSINESS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This Form 10-K of Intuit
Inc. ("Intuit" or the "Company") contains forward-looking statements that are
subject to risks and uncertainties. Statements indicating that the Company
"expects," "estimates" or "believes" are forward-looking, as are all other
statements concerning future financial results, product offerings or other
events that have not yet occurred. There are several important factors that
could cause actual results or events to differ materially from those anticipated
by the forward-looking statements contained in this Form 10-K. Such factors
include, but are not limited to: the growth rates of the Company's market
segments; the positioning of the Company's products in those segments; the
Company's ability to effectively manage its various businesses, and the growth
of its businesses, in a rapidly changing environment; the timing of new product
introductions; retail sell-through of the Company's products; the emergence of
the Internet, resulting in new competition and unclear consumer demands; the
Company's ability to adapt and expand its product offerings for the Internet
environment; variations in the cost of, and demand for, customer service and
technical support; price pressures and the competitive environment in the
consumer and small business software and supplies industry; the possibility of
calculation errors or other "bugs" in the Company's software products; the
emergence of the electronic financial services marketplace; the cost of
implementing the Company's electronic financial services strategy; consumer
acceptance of online financial service offerings; the Company's ability to
establish successful strategic relationships with financial institutions and
processors of financial information; changing alliances among financial
institutions and other strategic partners; the emergence of competition from
these entities as well as from other software companies; changes in laws that
may govern any of the Company's products or services; the timing and consumer
acceptance of new product releases and services (including current users'
willingness to upgrade from older versions of the Company's products); the
consummation of possible acquisitions; the Company's ability to integrate
acquired operations into its existing business; the Company's ability to
successfully transition its online banking and bill payment operations to
CheckFree Corporation; possible fluctuations in value of the Company's
investment in CheckFree Corporation; and the Company's ability to penetrate
international markets and manage its international operations. Additional
information on these and other risk factors is included elsewhere in this Form
10-K.
OVERVIEW
COMPANY BACKGROUND
Intuit's mission is to improve the way individuals and small businesses manage
their financial affairs. To that end, Intuit develops, markets and supports
personal finance, small business accounting, tax preparation and other consumer
software products, and related supplies and electronic financial services that
enable individuals, professionals and small businesses to automate commonly
performed financial tasks and better organize, understand, manage and plan their
financial lives. Intuit employs a variety of consumer marketing research
techniques to define and design its products and services so that they will be
easy to use and responsive to customers' needs. The Company's product
development strategy focuses on products that give new and existing customers
added value and provide Intuit with opportunities for follow-on sales and
recurring revenue. For example, the Company has developed several complementary
products that share financial information, so that customers can use several
Intuit products in conjunction with one another. This provides the Company with
the opportunity to cross-sell additional products to its existing customer base.
The Company recently announced several Internet-related strategic initiatives
that are intended to facilitate communications between the Company's customers
and their financial service providers, and to support the Company's goal of
offering an expanding range of financial services to its customers. See
"Overview - Internet Strategic Initiatives."
Intuit's primary product and service offerings are in the following areas:
personal finance products, including Quicken(R) and Quicken Financial Planner;
small business accounting products, including QuickBooks(R) and QuickPay(TM);
personal and professional tax preparation products, including TurboTax(R) and
TurboTax ProSeries(R); other consumer software products offered by the Company's
Parsons Technology, Inc. subsidiary ("Parsons"), including Quicken Family
Lawyer(TM), Personal Tax Edge(TM) and Announcements(R); electronic financial
services,
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including online banking and bill payment services, Investor Insight(TM), the
NETworth: The Internet Investor Network web site ("NETworth"(TM)) offered by the
Company's GALT Technologies, Inc. subsidiary ("GALT"), and the InsureMarket(SM)
web site offered by the Company's Interactive Insurance Services Corp.
subsidiary ("IIS"); and supplies, such as checks, invoice forms, envelopes and
deposit slips, for use in conjunction with the Company's software products.
Quicken Financial Network ("QFN"(TM)), which is Intuit's World Wide Web site,
serves as a vehicle for offering some of the Company's electronic financial
services as well as a source of other financial information and services. The
Company's principal products and services are described below under "Products
and Services."
Intuit commenced operations in March 1983 and was incorporated in California in
March 1984. In March 1993, the Company was reincorporated in Delaware. The
Company's principal executive offices are located at 2535 Garcia Avenue,
Mountain View, California, 94043, and its telephone number is (415) 944-6000.
Unless otherwise indicated herein, the "Company" and "Intuit" refer to Intuit
Inc., a Delaware corporation, its California predecessor, and its subsidiaries.
INTERNET STRATEGIC INITIATIVES
On September 16, 1996, the Company announced three Internet-related strategic
initiatives designed to accelerate the adoption of electronic financial data
exchange and communication among individuals and small businesses and their
financial service providers. First, the Company announced plans to "open" the
architecture of its software products to financial service providers so that
such providers can connect directly through the Internet to their customers who
use Intuit products. By contrast, communications and exchange of data between
Intuit customers and their financial institutions are currently routed through
the Company's private network. This opening of the connectivity capability of
the Company's products will be introduced in stages, with Internet connections
for investment activities and online banking and bill payment activities
expected during calendar 1997.
Second, the Company announced that it would coordinate efforts with several
third parties to develop a comprehensive framework for exchanging financial data
over the Internet in an integrated collection of specifications and protocols
called OpenExchange(TM). OpenExchange is intended to make it easier and less
expensive for a wide range of financial service providers to build links for
electronic financial data exchange and communications using the Internet.
OpenExchange is expected to allow any front-end software or interface that uses
OpenExchange to connect with any back-end processing system that uses
OpenExchange, giving financial service providers significant flexibility in
providing services to their customers. OpenExchange is also intended to support
a wide range of financial activities involving many types of financial service
providers, including banks, brokerage firms, mutual fund companies and insurance
companies, and to support multiple PC platforms and other electronic devices.
The Company expects that OpenExchange will also incorporate protocols designed
to provide end-to-end security for financial data, including industry protocols
such as Secure Sockets Layer (SSL) v.3.0. The Company expects that OpenExchange
will be licensed for free and without restriction to financial service
providers, although technology providers such as Intuit may seek to charge
customers and/or financial service providers for the use of specific
implementations within their own products.
Third, the Company announced the signing of an agreement pursuant to which it
plans to sell its banking and bill payment processing subsidiary, Intuit
Services Corporation ("ISC"), to CheckFree Corporation ("CheckFree"), in
exchange for 12.6 million shares of the common stock of CheckFree (representing
approximately 23% of the resulting CheckFree shares outstanding). CheckFree is a
leading home banking and electronic bill payment processor. The Company expects
that the transaction will allow the Company to reallocate management and
financial resources to its core businesses and to other emerging business
opportunities (particularly those involving the Internet and electronic
financial services), while still participating indirectly in the banking and
bill payment processing business through its investment in CheckFree. The
closing of this transaction, which is expected to occur by early calendar 1997,
is subject to numerous conditions, including regulatory approval and the
approval of CheckFree's stockholders. See also "Overview - Pending Sale of ISC"
and Note 12 of Notes to Consolidated Financial Statements.
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EXPANSION OF ELECTRONIC FINANCIAL SERVICES
The Company believes that it may be able to improve its competitive position by
extending its business into the emerging electronic financial services market.
The Company defines electronic financial services as electronically-enabled
financial transactions and electronically-enabled marketing and sales of
financial products. Intuit has recently invested significant resources to
develop and acquire products and services for this market, including its
acquisitions of IIS, a developer of an Internet-based system that allows
consumers to obtain insurance information from national insurance carriers, and
GALT, a provider of mutual fund information through its NETworth web site. The
Company's recently announced Internet strategic initiatives (described above)
are designed to facilitate expansion of the Company's electronic financial
services business. Intuit currently works with financial institutions to offer a
number of online services, including online banking, electronic bill payment and
online tools, such as Investor Insight and NETworth for evaluating investments,
that extend the capabilities of Intuit's software products and increase the
automation of financial tasks. The Company is evaluating additional
opportunities related to electronic financial services, including products that
will enable users of Quicken to download brokerage account statements and
execute securities trades through participating financial institutions. The
Company expects to invest significant resources in developing and enhancing its
electronic financial service offerings during fiscal 1997.
EXPANSION INTO INTERNATIONAL MARKETS
During fiscal 1996, Intuit took several steps to increase its presence in
international markets. The Company introduced several additional international
products in the UK, Canada, Germany, France, Spain and Mexico. In addition, in
April 1996, Milkyway KK ("Milkyway"), Intuit's subsidiary in Japan acquired in
January 1996, released Kobanto(TM), its first small business accounting software
product for Windows. Although the Company did experience significant growth in
its international operations during fiscal 1996, its German subsidiary
experienced delays in executing two critical product launches in the second
quarter of fiscal 1996. See "Business - International" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - Twelve Months Ended July 31, 1996 and 1995." There can
be no assurance that sales of international products will continue to grow at
the rate experienced during fiscal 1996, or that other product launch
difficulties will not be encountered in the future.
RECENT CORPORATE TRANSACTIONS
The Company has historically pursued a strategy of acquiring other businesses in
order to obtain complementary products and technologies and to obtain a presence
in new markets. During the past three years, the Company completed several such
acquisitions. In December 1993, the Company acquired ChipSoft, Inc.
("ChipSoft"), a publicly-held developer and marketer of tax preparation software
products. In April 1994, the Company purchased certain assets of the
professional tax preparation software business of Best Programs, Inc. ("Best").
In July 1994, the Company acquired National Payment Clearinghouse, Inc., a
privately-held provider of automated bill payment services, which is now the
Company's ISC subsidiary. (See "Overview - Pending Sale of ISC.") In September
1994, the Company acquired Parsons, a privately-held consumer software publisher
that emphasizes direct sales and marketing. In March 1995, the Company formed
Quicken Investment Services, Inc. ("QISI"), a wholly-owned subsidiary and
registered investment adviser that offers the Company's financial planning
products. In June 1995, the Company acquired Personal News, Inc. ("PNI"), a
privately-held provider of online investment research data. In June 1995, the
Company purchased certain assets of Mysterious Pursuit Pty. Ltd. ("Mysterious
Pursuit"), a privately-held Australian company that develops tax software. In
January 1996, the Company acquired Milkyway, a provider of PC-based financial
software in Japan. In June 1996, the Company acquired IIS, developer of an
Internet-based system that allows consumers to obtain insurance information from
national insurance carriers. In September 1996, the Company completed its
acquisition of GALT, a provider of mutual fund information through its NETworth
web site. See Notes 2 and 12 of Notes to Consolidated Financial Statements for
additional discussion of the transactions described above. Although the Company
believes these transactions were in the best interests of the Company and its
stockholders, there are significant risks associated with such transactions. See
"Management of Growth" and "Products and Services - Electronic Financial
Services."
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PENDING SALE OF ISC
On September 15, 1996 the Company and ISC signed an Agreement and Plan of Merger
(the "Plan") with CheckFree and a wholly-owned CheckFree subsidiary pursuant to
which the Company agreed to sell ISC to CheckFree in a tax-free merger
transaction in exchange for 12.6 million shares of CheckFree common stock (the
"CheckFree Shares"). Based on the closing price of CheckFree's common stock on
September 13, 1996 (the last business day before the transaction was announced),
the CheckFree Shares have a value of approximately $227.6 million and will
represent approximately 23% of CheckFree's outstanding common stock after
issuance, based on CheckFree's current outstanding shares. (The Company expects
to reduce its holdings to under 20% in order to account for its investment under
the cost method of accounting. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.") The Plan provides that, under
certain conditions, the Company will indemnify CheckFree for certain losses
arising from breaches of the Company's representations, warranties and covenants
in the Plan in an amount of up to 35% of the value of the CheckFree Shares, and
that 10% of the CheckFree Shares will be withheld in escrow for one year
following closing of the transaction to secure CheckFree's indemnity rights. In
addition, the Company has agreed to pay CheckFree the amount (if any) by which
ISC's revenues for the 12-month period ending July 31, 1997 are less than $46
million.
It is expected that the CheckFree Shares to be issued to the Company in exchange
for ISC will be registered with the Securities and Exchange Commission on a Form
S-4 registration statement and, in addition, CheckFree will grant the Company
certain demand and piggyback registration rights with respect to the CheckFree
Shares. The Company and CheckFree have also entered into a Stock Restriction
Agreement that restricts the Company's ability to increase its ownership of
CheckFree stock and to effect certain sales of CheckFree stock, and restricts
the manner in which the Company may deal with CheckFree and its stockholders in
connection with certain corporate proceedings and transactions.
Pursuant to the Plan, the Company, ISC and CheckFree expect to entered into
ancillary agreements addressing certain support, licensing and transition
issues, providing for certain payments by CheckFree to the Company in exchange
for certain license rights, and ensuring the Company's access to certain
technologies. Pursuant to the Plan, the Company will not compete with certain
electronic payment processing businesses for up to five years.
The consummation of these proposed transactions is subject to the satisfaction
of several conditions, including without limitation the approval of CheckFree's
stockholders and the absence of objection to the transaction by federal
antitrust authorities under the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
FISCAL YEAR CHANGE
As a result of the Company's change in its fiscal year effective August 1, 1994,
comparative financial information contained in this Form 10-K for the twelve
months ended July 31, 1994 is unaudited. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Fiscal Year Change."
PRODUCTS AND SERVICES
Intuit's primary product and service offerings are in the following areas:
personal finance products; small business accounting products; tax preparation
products; other consumer software products; electronic financial services; and
supplies such as checks and invoice forms. The Company's principal offerings in
each area are described below. For a discussion of revenues contributed by
software products and services and supplies, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PERSONAL FINANCE PRODUCTS
Intuit develops, markets and supports personal finance software products for
several personal computer operating environments, including Windows 3.1, Windows
95 and Macintosh OS. Quicken was introduced in October 1984 and has since been
enhanced and upgraded a number of times. Quicken allows users to organize,
understand and manage their personal finances. Designed to look and work like a
checkbook, Quicken provides users with an easy-
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to-use method for recording and categorizing their financial transactions. Once
entered, the financial information can be analyzed and displayed using a broad
set of reports and graphs. Quicken also allows users to reconcile their bank
accounts and track credit card purchases, investments, cash and other assets and
liabilities. Online banking features in Quicken ease data entry by allowing
users to download bank transaction information directly from participating
financial institutions. Quicken also enables users to schedule bill payments,
using either the online payment services of participating financial institutions
or directly through ISC. The online service processes payment requests by
printing and mailing computer checks or by initiating electronic payments. The
Investor Insight feature in Quicken (which is also available as a stand-alone
product) gives users online access to a variety of investment research tools.
See "Electronic Financial Services" for more details on these banking and
investment services. During fiscal 1996, the Company took steps to implement its
Internet strategy by incorporating into Quicken a version of Netscape Navigator,
free access to QFN (Intuit's World Wide Web site) and low-cost full Internet
access through service provider Concentric Network Corp. During the first
quarter of fiscal 1997, the Company plans to release new versions of Quicken,
including Quicken Deluxe 6 for Windows on CD-ROM and an enhanced version of
Quicken for the Macintosh, which will include a variety of new online features.
The Company also offers certain personal finance products through its QISI
subsidiary, which is a registered investment adviser under the Investment
Advisers Act of 1940. See "Regulated Businesses." Quicken Financial Planner
assists the user in creating a personal financial and retirement plan, based on
the user's current financial profile and financial and retirement goals. It
provides sample asset allocation guidelines to help the user determine how to
invest based on the desired rate of return. Mutual Fund Finder, which is a
feature of Quicken Financial Planner, provides the user with historical mutual
fund data from a Morningstar, Inc. database. This information can be updated on
a quarterly basis. Mutual Fund Finder also identifies specific funds for the
user based on designated criteria relating to risk and return, expenses and
other factors. In September 1996, the Company announced Fidelity QFP, which is a
specific version of Quicken Financial Planner designed for customers who have
401(k) retirement plans with Fidelity Investments ("Fidelity"). The product will
allow information from a user's retirement account with Fidelity to be
transferred to the software. This will simplify incorporation of the user's
individual financial information into the financial plan created by the
software.
SMALL BUSINESS ACCOUNTING PRODUCTS
Recognizing the widespread customer use of Quicken products for small business
applications, Intuit developed a similar family of products for small business
owners that provide the more extensive functions they require while maintaining
ease of use.
QuickBooks, which was first introduced in April 1992, was developed to address
the needs of the small business user but shares many of Quicken's most popular
features, including an easy-to-use design that does not require the user to be
familiar with traditional double-entry accounting concepts. For example,
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. In addition, QuickBooks offers automation
of payroll tasks, flexible invoicing, including printing on pre-printed forms,
letterhead or plain paper, full tracking and aging of invoices, inventory
tracking and audit trail creation. During 1996, Intuit introduced a version of
QuickBooks for the German accounting market, and Milkyway introduced Kobanto,
the Company's first Windows-based small business accounting software product for
the Japanese market.
QuickBooks Pro(TM) is an enhanced version of QuickBooks developed to address the
needs of small businesses in the U.S. that are project, job or time based, such
as contractors, consultants, lawyers, accountants and subcontractors. Many of
these businesses currently use manual methods or general purpose software
systems (including spreadsheets and word processors) to do time tracking and job
estimating, but these systems generally are not integrated with the businesses'
accounting programs. QuickBooks Pro allows users to integrate time tracking, job
estimating and project costing with accounting and payroll.
Payroll functionality is integrated into the Windows and Macintosh versions of
QuickBooks and QuickBooks Pro. QuickPay is an add-on product for Quicken and the
DOS version of QuickBooks that calculates and tracks gross salary and payroll
deductions and is targeted to small businesses that do not use an outside
payroll service. A related
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service offering is Intuit's Payroll Tax Table Update Service, a disk-based data
service that provides customers with new tax table files when relevant federal,
state or local payroll tax rates change.
TAX PREPARATION PRODUCTS
Intuit develops, markets and supports tax preparation software products
(including TurboTax, MacInTax(R), Personal Tax Edge and TurboTax ProSeries) for
individual consumers and small business owners for use in preparing their own
tax returns and for professional tax preparers for use in preparing their
clients' tax returns. Intuit's tax preparation software allows both individual
taxpayers and professional tax preparers to automate the process of preparing
tax returns. This software simplifies the process of preparing tax returns by
reducing calculation time and errors, automatically transferring data between
forms, checking for missing and incomplete information, and aiding in the
organization of tax records.
Tax preparation software must be rewritten each year to reflect annual changes
in tax laws and forms, and customers must purchase new versions each year in
order to file accurate tax returns using such software. As a result, tax
preparation software generates recurring revenues that historically have been
more regular and predictable than upgrade revenues typical of other types of
personal computer software. A change in this pattern could have a material
adverse effect on Intuit's operating results and financial condition. In
addition, the government's late release of federal and state tax forms and laws
requires rapid development and release of these products, thus creating some
risk of product errors and the costs associated therewith. During fiscal 1995
the Company identified calculation errors in certain tax products that
necessitated a charge of $1.3 million to cover the cost of revisions and other
remedial actions. A similar occurrence during fiscal 1996 resulted in a charge
of approximately $1.2 million. See "Product Development and Marketing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Twelve Months Ended July 31, 1996 and
1995."
Consumer Tax Preparation Products. Intuit's TurboTax and MacInTax tax
preparation software products for consumers are designed to be easy to use for
computer users of all skill levels, yet sufficiently sophisticated to prepare
complex returns. The programs also help users to identify tax deductions that
might otherwise be missed, as well as entries that might trigger an IRS 1040
audit. For its consumer products, Intuit currently provides 45 state tax
preparation products (one for the District of Columbia and each state that
imposes an individual income tax) for both Macintosh and Windows-based
computers. Intuit has recently expanded its consumer tax preparation products to
include products for certain international markets. See "International."
Intuit generally releases a "HeadStart" preliminary edition of its federal
TurboTax product and a generic "HeadStart" state tax return program in October
or November of each year. These preliminary editions enable customers to
organize their tax records and to make tax-planning decisions. Intuit generally
releases final editions in January or February after all of the relevant forms
have been made available by the IRS and various state tax agencies. Final
editions, which are available at no charge to purchasers of the HeadStart
edition, automatically transfer data previously entered into preliminary
editions.
Personal Tax Edge and Personal Tax Edge Preparer's Edition are consumer and
professional tax preparation products, respectively, that are designed for less
complex federal income tax returns. State Tax Edge(TM) is available for 45
states. A planning version of Personal Tax Edge is made available in advance of
release of the final version. The Company acquired Personal Tax Edge products
through its acquisition of Parsons in September 1994, and the products continue
to be marketed by Parsons primarily through direct sales efforts.
Small Business Tax Preparation Products. TurboTax for Business and MacInTax for
Business are tax return preparation products that enable small business owners
to prepare their own business tax returns. Intuit develops, markets and supports
separate programs for preparing federal and certain state S corporation, C
corporation and partnership returns, as well as programs that enable individuals
with sole proprietorships to complete their federal and state tax returns.
Professional Tax Preparation Products. Intuit's professional tax preparation
products are designed for use by tax preparers and accountants who prepare tax
returns for individuals and small businesses. Intuit believes that small to
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mid-size independent tax preparers currently comprise the largest segment of its
professional tax customer base. Intuit's TurboTax ProSeries includes a broad
suite of products that prepare individual income, corporate, partnership,
fiduciary and not-for-profit federal tax returns, as well as many state
equivalents. A number of add-on modules are provided, including client
organizer, practice management, networking, asset management and electronic
filing capabilities. Certain of the Company's professional tax products are also
sold bundled under the Power Tax name. For the 1997 tax season, the Company
plans to introduce QuickEntry(TM), a feature designed to improve the
productivity of tax professionals by reducing the time required to enter client
data.
Electronic Filing. In fiscal 1996, the Company was awarded several government
contracts totaling approximately $4 million to develop and support software for
the Internal Revenue Service. This software was part of a $17 million IRS
project called CyberFile that was designed to allow individual taxpayers to
electronically file their federal income tax returns from their home computers.
While the Company delivered its contractual components of the project and
received payment under the contracts, CyberFile has not been activated due to
concerns raised by other government agencies relating to the security of
electronically transmitted tax information.
OTHER CONSUMER SOFTWARE PRODUCTS
Intuit and the Company's Parsons subsidiary offer a product called Quicken
Financial Suite, which combines the Quicken Deluxe, Quicken Financial Planner
and Quicken Family Lawyer software products into a single product. In addition,
through Parsons, Intuit utilizes direct marketing techniques to sell software
products that assist consumers in managing various aspects of their personal
affairs. These products, which are distributed primarily through Parsons'
substantial direct distribution channel, include Quicken Family Lawyer, which
enables consumers to prepare legal forms and documents such as wills, powers of
attorney and promissory notes; Personal Tax Edge (see "Consumer Tax Products"
above); Announcements, which enables consumers to create personalized greeting
cards, banners, posters and other documents; and QuickVerse(R), a computerized
digest that enables users to quickly locate Biblical references. The Company
develops, licenses or acquires software products such as these in order to
leverage its direct-mail customer base.
ELECTRONIC FINANCIAL SERVICES
As a complement to its personal financial software products, Intuit offers
value-added services that further automate financial transactions for its users.
In addition to the services described below, the Company is developing
additional electronic financial service offerings that it expects to make
available during fiscal 1997. Revenues from these services have not been
significant during the past three years. The Company's recently announced
Internet strategic initiatives are expected to facilitate the longer-term
expansion of this business by streamlining electronic financial data exchange
and communications among individuals, small businesses and their financial
service providers. See "Overview - Internet Strategic Initiatives" above.
Although the Company expects that electronic financial services such as
InsureMarket and NETworth will become an increasingly significant portion of the
Company's business during the next several years (see "Other Electronic
Financial Services"), there can be no assurance that this will be the case.
Furthermore, the Company's recently announced agreement to sell its ISC
subsidiary to CheckFree will leave the Company with only an indirect
participation in the banking and bill payment processing business (through its
investment in CheckFree). See "Overview - Pending Sale of ISC."
Online Banking and Bill Payment Services. The Company offers a variety
of online banking and bill payment services in conjunction with participating
financial institutions. Fees charged to customers for these services are set by
each financial institution, with the Company receiving monthly per-subscriber
fees from the financial institutions.
Online banking is a service available through Quicken that was introduced in the
first quarter of fiscal 1996. The online banking services allow users with
accounts at participating financial institutions to download, and automatically
categorize into Quicken accounts, data from bank accounts, brokerage cash
accounts or charge accounts, thereby eliminating the need for customers to
manually enter this data into Quicken files. Online banking also enables users
to check on current account balances, transfer funds between accounts, determine
whether a given transaction has cleared and reconcile accounts. Intuit's ISC
subsidiary is currently responsible for online
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connections between the financial institutions and end users. See "Overview -
Pending Sale of ISC" and the discussion below regarding the recently announced
agreement to sell ISC to CheckFree.
In connection with its online banking services, Intuit currently has
relationships with approximately 40 financial institutions, including six of the
ten largest domestic banks and American Express, which is the largest U.S.
proprietary charge card issuer. In addition, in May 1996, the Company announced
plans to work with two of the financial service industry's leading processing
companies (Electronic Payment Services, Inc. and M&I Data Services) to enable
the financial institutions that are customers of these processing companies to
offer online banking, online bill payment and other online financial services
through their existing processor or service provider connections.
Online bill payment, a feature also available through Quicken, enables users to
pay bills by transmitting payment instructions via modem to ISC. Intuit began to
provide electronic bill payment service for Quicken through its ISC subsidiary
during the first quarter of fiscal 1996. Payments are processed electronically
through the automated clearing house system for merchants that have made
arrangements through their financial institutions for electronic payment
(approximately 3% of merchants currently). All other payments are made via paper
checks through the U.S. mail. This service is offered primarily through
financial institutions with which the Company has relationships, but for its
customers who do not bank at participating institutions, Intuit makes online
bill payment (referred to as "retail bill payment") available for a monthly fee.
Retail bill payment accounts represent approximately 10% of current bill payment
customers.
Intuit introduced its new BankNOW software product in September 1996. This
product allows PC users who are subscribers to America Online to perform basic
online banking functions such as checking account balances, transferring funds
between accounts, and scheduling bill payments. BankNOW is designed for
consumers who want fast, simple online banking but who do not require the more
complete financial organization and tracking functions offered in personal
financial management software such as Quicken.
If the sale of ISC to CheckFree is consummated, the Company will no longer
receive revenue directly from currently participating financial institutions in
connection with online banking and bill payment services, as these revenues will
be paid to CheckFree. However, Intuit expects that it will market and resell
bill payment services (performed by CheckFree) to end users. In addition, if the
sale of ISC is completed, Intuit expects to receive significant royalty payments
from CheckFree in exchange for, among other things, Intuit enabling a direct
electronic link between Quicken customers and CheckFree's back-end processing
services. See "Overview - Pending Sale of ISC." As part of the proposed sale of
ISC to CheckFree, Intuit and CheckFree have agreed that, following the
expiration of Intuit's current contracts with financial institutions (which will
be assumed by CheckFree), Intuit will allow CheckFree to access Quicken
customers only on behalf of financial institutions that have been authorized by
Intuit to connect to Quicken customers. Intuit expects that it will negotiate
with financial institutions to receive a connectivity fee for allowing the
financial institutions to connect to users of Intuit products using the
OpenExchange Protocol. See "Overview - Internet Strategic Initiatives." However,
there can be no assurance that these arrangements will generate significant
revenue for Intuit. If the proposed agreement to sell ISC to CheckFree is not
consummated as currently anticipated, Intuit expects that, in the near term, it
would continue to operate its banking and bill payment services as currently
operated.
Other Electronic Financial Services. Investor Insight is an online service
accessible both through a stand-alone software product and certain versions of
Quicken. Investor Insight gives users access to investment research tools,
including stock price quotes, recent financial market news, analysts' ratings
and research reports, analyses of price movements over five years and the
ability to chart and analyze individual securities or groups of securities.
Users are charged a monthly fee for the Investor Insight service. Investor
Insight can be accessed through Quicken and QFN. ISC currently operates the
servers that provide the Investor Insight service. If CheckFree's proposed
purchase of ISC is completed as expected, Intuit will continue to receive all
revenues generated by Investor Insight and CheckFree will continue to operate
the servers, with Intuit reimbursing CheckFree for its direct costs in
connection with such operation.
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Quicken Financial Network, or QFN, is an Intuit web site that serves as a
vehicle for offering some of Intuit's financial services (such as Investor
Insight, Quicken InsureMarket and NETworth), as well as a source for other
information and services relating to financial topics. The goal of QFN is to
provide a location on the World Wide Web where consumers can access a variety of
news, information, products and services to help them better manage their
financial lives. Users can access QFN through versions of Quicken that include
Netscape Navigator. In addition, users can access QFN by using any standard
Internet connection and browser. There is no fee for accessing QFN except for
telecommunications charges through phone companies and Internet service
providers. The Company receives advertising revenue from companies that offer
their services through QFN, but such revenues have not been material to date.
Quicken InsureMarket, offered by the Company's IIS subsidiary, provides an
interactive Internet link between consumers and national insurance carriers and
their agents, to enable consumers to obtain information about insurance.
InsureMarket became available in a "preview" version in June 1996 and, as of
October 1996, consumers in selected states can obtain quotes and other
information concerning term life insurance from participating insurance
carriers, contact agents for certain participating carriers, and purchase
certain policies online. In the future, the Company expects that consumers will
also be able to obtain similar services for auto, home owners' and small
business insurance. IIS expects to derive revenue from these services through
initial and ongoing annual participation fees from insurance companies that
offer policies, as well as commissions on policies sold. IIS must provide these
services in accordance with applicable state insurance regulations. See
"Regulated Businesses."
NETworth is a mutual fund service available through Intuit's subsidiary, GALT.
It provides investment resources for individual investors, including online
presentations from approximately 60 mutual fund families, integrated with free
mutual fund performance information from Morningstar, Inc.'s database of more
than 7,500 mutual funds, net asset value and stock price graphs, quotes and the
ability to keep track of a personal portfolio. NETworth can be accessed through
QFN, or directly from the Internet. Intuit receives initial and ongoing annual
participation fees from mutual fund companies that participate in the NETworth
site, as well as flat monthly fees from such funds for some services.
Intuit's IntelliCharge(R) credit card service combines credit card use with
software and communications technology to provide users of the Quicken Affinity
Card (a credit card offered through Travelers' Bank) with an electronically
transmitted statement from which data can be transferred to and categorized by
Quicken. Customers who receive data via modem are not charged for this service.
Intuit receives a fee from Travelers for each customer that signs up for a
Quicken Affinity Card, as well as a portion of any interest charges paid by the
customer. ISC currently performs certain processing functions in connection with
the Intellicharge service. If CheckFree's proposed purchase of ISC is completed
as expected, Intuit will continue to market the Intellicharge service and
receive all revenues generated by it, and will pay CheckFree to continue
providing processing services.
The market for electronic financial services is relatively new. Although demand
for the Company's personal finance, small business accounting, tax preparation
and other consumer software products and related supplies and electronic
services has grown in recent years, the Company believes it must extend its
business into electronic financial services in order to remain competitive. If
this market fails to grow or grows more slowly than anticipated, or if the
Company, despite an investment of significant resources, is unable to establish
services that achieve a significant degree of acceptance in this new market, the
Company's business, operating results and financial condition could be
materially adversely affected. Further, entry into the electronic financial
market carries with it additional liability risks. For example, errors in
transactions or misdirection of funds can result in significant liability and,
in certain cases, penalties may be mandated by federal law. In addition, certain
software that is essential to communications among customers, financial
institutions and the hub for online banking and bill payment services is
provided and maintained by a single third party under a license agreement with
Intuit. It is anticipated that, in connection with the proposed sale of ISC, the
hub and the license for such software will be transferred to CheckFree. Although
Intuit believes that it currently has a satisfactory contractual and business
relationship with this third party, termination of this relationship could
interrupt Intuit's ability to make available certain services. There can be no
assurance that the Company's efforts to expand its electronic financial services
will be effective, will reduce costs or will be accepted by consumers and
merchants.
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SUPPLIES
Intuit develops and markets a range of supplies designed to be used in
conjunction with its personal and business finance software products to further
automate transaction execution and record keeping. Intuit's line of supplies,
which includes paper checks, invoice forms, envelopes, deposit slips and address
stamps, enables users to save time and utilize professional-quality forms.
Supplies generate recurring revenue and add value and functionality to Intuit's
software products. Because virtually all of the supplies products involve
printing to the customers' specifications, these products are sold directly to
users. Customers receive supplies catalogs and order forms with most Intuit
software products to encourage supplies sales. Users may also order
electronically at any time using the Intuit Marketplace feature in Intuit's
software products. Revenue from supplies products increased 21% from the twelve
months ended July 31, 1994 to fiscal 1995, and 28% from fiscal 1995 to fiscal
1996, due to the growth of the Company's small business financial products, as
well as enhanced direct marketing efforts that have enabled customers to
purchase products directly by telephone. However, supplies revenue has declined
as a percentage of total net revenue over the past three years. The Company
faces increased competition and price pressure in its supplies business. The
supplies business can also be negatively affected by changes in paper check
printing and formatting requirements. In addition, demand for supplies may be
negatively impacted as some of the Company's customers shift to electronic bill
payment services.
In September 1995, the Company entered into an exclusive five-year contract with
John H. Harland Co. ("Harland") to produce all of its computer checks, invoice
forms and deposit slips. Harland is thus the sole source for Intuit's supplies
products. Accordingly, Intuit's ability to provide its supplies products is
dependent on continued good relations with this vendor, and the failure of
Harland to continue to provide supplies on a timely basis would have a material
adverse effect on Intuit's operating results and financial condition.
PRODUCT DEVELOPMENT AND MARKETING
Intuit believes that successful products must be easy to use and responsive to
the specific needs and use patterns of its customers, and the Company strives to
develop its products in accordance with these consumer marketing principles.
Accordingly, Intuit attempts to define desirable new products and enhancements
to existing products by conducting market research and working closely with its
current and prospective customers to determine their needs and requirements and
to obtain their input regarding desired product functions. New products and
enhancements are then designed based on this consumer input and, when possible,
field-tested by actual users who further critique the product and suggest
modifications. Once a product is released, customer reactions and input continue
to be monitored to assist in the development of product enhancements and
upgrades.
In addition, Intuit strives to define and develop products and upgrades that
will stimulate ongoing sales to repeat customers. For example, Intuit has
developed certain complementary products that can share information when used in
conjunction with other Intuit products. These integrated products provide added
value and functionality to new and existing customers and expand Intuit's sales
opportunities. Intuit also attempts to exploit new technologies such as CD-ROM
and the Internet to expand the features and functions of its products and
generate revenue from sales of upgrades.
The development of tax preparation software is unique in the personal computer
software industry because a rigorous annual development cycle is mandated by the
adoption of new tax laws and forms by the federal and state governments each
year. The uncertain timing of the release of tax forms by the IRS and state
government agencies and the complexity of the tax laws create a need for
flexible, highly sophisticated development management schedules. Intuit uses the
same development architectures for both its consumer and professional tax
software products. This gives the Company increased operating leverage compared
to tax preparation software companies that produce only consumer tax products or
only professional tax products.
Intuit's research and development expenses for the twelve months ended July 31,
1994 were $28.7 million, compared to $57.3 million in fiscal 1995 and $75.6
million in fiscal 1996 (not including charges of $151.9 million, $52.5 million
and $8.0 million, respectively, for purchased in-process research and
development). Intuit substantially increased actual spending on research and
development during fiscal 1995 in order to develop new
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products, as well as to adapt existing products for international markets. This
pattern continued through fiscal 1996, as the Company devoted significant
research and development resources to its electronic financial services,
including the integration of Internet access, QFN and online banking and bill
payment features into Quicken, as well as to developing products for the Windows
95 platform. The Company intends to continue to increase research and
development spending in absolute dollars during fiscal 1997.
Software products such as those offered by the Company often contain errors or
"bugs" that can adversely affect the performance of the products, produce
incorrect results and/or damage a user's data. If products are released that
contain errors, the Company may lose customer acceptance of its products, as
well as market share, and may be required to issue maintenance releases or pay
refunds or other compensation to users. Any of such steps, if taken, could have
a material adverse effect on Intuit's operating results. In the past, the
Company has discovered significant software defects in its products that have
adversely affected its business and operating results. For example, during 1995
the Company notified its customers that several of its tax products for the 1994
tax year had defects and released revised versions of the software at no charge.
These defects resulted in negative publicity, customer dissatisfaction and a
$1.3 million expense in the second quarter of fiscal 1995. Less serious defects
were discovered during fiscal 1996 and although the defects did not have a
serious impact on customer satisfaction, the Company incurred expenses of
approximately $1.2 million to correct the problem. In addition, as the Company
expands its participation in the electronic financial services markets, software
reliability and security demands will increase. The Company is working to
improve its quality assurance and test procedures, and with the fall 1996
introduction of its Quicken Live(TM) feature in its Quicken line of products,
the Company will be able to provide "patches" for software defects to online
customers more quickly via electronic delivery. However, there can be no
assurance that errors or omissions will not be found in new products or releases
after commencement of commercial shipments, resulting in substantial costs,
negative publicity, customer dissatisfaction, loss of market share or failure to
achieve any significant degree of market acceptance. Any such occurrence could
have a material adverse effect upon the Company's business, operating results
and financial condition.
Intuit currently has a number of new product development efforts under way or
planned to commence in the future. There can be no assurance that the Company
will be successful in developing, introducing and marketing product
enhancements, new products and services, or versions of existing products and
services for other platforms, or will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of these
products and services, or that its new or enhanced products and services will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. Delays in the commencement of commercial
availability of new or enhanced products and services may result in customer
dissatisfaction and delay or loss of revenue. If the Company is unable, for
technological or other reasons, to develop and introduce new or enhanced
products or services in a timely manner in response to changing market
conditions or customer requirements, or if such new or existing products and
services do not achieve a significant degree of market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected.
Since its inception, Intuit has relied on a variety of marketing approaches and
has applied consumer mass marketing concepts from other industries to the
marketing of software products. Examples include Intuit's use of direct-response
TV and radio advertising and consumer public relations and its early penetration
of emerging low-price retail channels such as computer superstores, discount
chains, and warehouse and club stores.
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards, changing customer requirements and
new competitors. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices,
including changes in tax laws, regulations or procedures, can render existing
products obsolete and unmarketable. The Company's future success depends upon
its ability to enhance its existing products and services, develop new products
and services that address the changing requirements of its customers, develop
additional products and services for new or other platforms and environments
(such as the Internet) and anticipate or respond to technological advances,
emerging industry standards and practices and changes in tax laws, regulations
and procedures in a timely, cost-effective manner. In response to major industry
changes reflected by the increasing popularity of the Internet among consumers
and financial service providers, the Company has
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expanded its Internet strategy. See "Overview - Internet Strategic Initiatives."
There can be no assurance that such initiatives can be successfully implemented
or that they will result in increased revenue or profits for the Company.
Conversely, there can be no assurance that consumers' use of the Internet,
particularly for commercial transactions, will continue to increase as rapidly
as it has during the past few years.
SALES AND DISTRIBUTION
Intuit markets its products through distributors and retailers, by direct sales
to new and existing customers and to OEMs. A small but increasing proportion of
direct sales are made via the Internet. Certain foreign markets are also
addressed by developer-distributors that both produce and distribute products
locally and pay royalties to Intuit. The Company's electronic financial services
are currently sold to end users primarily through banks and other financial
institutions, with a smaller proportion sold directly to Intuit customers.
Revenue generated from sales to retailers and distributors accounted for 68% of
total revenue during the ten months ended July 31, 1994, compared to 59% during
fiscal 1995 and 58% during fiscal 1996. Intuit's products are carried broadly by
retail software outlets, computer superstores, office and warehouse clubs and
general mass merchandisers. North American sales to the retail channel are made
both by Intuit directly to retailers such as Best Buy, Egghead, Price Costco and
Sam's, and by distributors, including Ingram, and GT Interactive, to such
dealers as CompUSA, Office Depot, Computer City, Staples, Office Max and
Walmart. In the ten months ended July 31, 1994, fiscal 1995 and fiscal 1996,
sales to Ingram accounted for 14%, 12% and 13% of the Company's net revenue,
respectively, and sales to Merisel accounted for 14%, 8% and 5% of net revenue,
respectively. No other customer accounted for more than 10% of net revenue
during these periods. See Note 8 of Notes to Consolidated Financial Statements.
To augment its retail sales efforts, Intuit from time to time has participated
in creating bundled product offerings with other hardware and software
manufacturers in OEM relationships. To date, the majority of bundles have been
for special editions of Quicken for Windows that have more limited feature sets
than the standard version of the product. In some cases, OEMs purchase
fully-assembled products directly from Intuit, although recently the trend has
been towards "diskless" bundles, under which the OEM pre-installs the software
on personal computers or included CD-ROMs and includes only documentation. The
prices that Intuit receives for OEM sales are typically significantly lower than
distributor or direct sale prices, and in certain instances, OEMs receive the
products at no cost. While this practice generates little revenue and reduces
Intuit's operating margins in the short term, the Company believes that this
channel is strategically important because it allows the Company to acquire
large numbers of new customers with the potential to generate future sales of
software upgrades, electronic financial services and other Intuit products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Twelve Months Ended July 31, 1996 and
1995." The practice is also important in responding to the current competitive
environment for personal finance software. See "Competition."
Direct sales continue to be an important sales channel for Intuit, particularly
for small business and tax products and products offered through Parsons. For
example, during fiscal 1996, all of Intuit's professional tax and supplies
products and tax table service revenues, approximately 37% of its small business
accounting product revenues, and approximately 39% of its personal tax software
product revenues were from sales directly by Intuit to end users utilizing
targeted direct-mail solicitations and direct-response advertising in selected
magazines and newspapers. In addition, almost all Parsons sales are made through
direct-mail offers and outbound telemarketing. Intuit believes that direct-mail
advertising, in addition to generating orders, stimulates retail demand and
increases general consumer awareness of Intuit's products. Accordingly, during
fiscal 1996, the Company expanded its direct marketing activities in order to
sell products directly to its growing registered customer base and to reach
potential new customers.
Payment terms for retailers and distributors are generally net 30 to 45 days.
The Company has a liberal return policy for its distributors and retailers,
although they are encouraged to make returns within certain time periods,
particularly for tax products. The Company generally has an unconditional return
policy for consumers who purchase products directly from the Company.
Historically, the Company's returns have not materially varied from reserves
established for such returns.
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INTERNATIONAL
Intuit has developed versions of Quicken for sale in Australia, Canada, France,
Germany, Spain, the United Kingdom, Austria, South Africa and certain Latin
American countries, and versions of QuickBooks for the United Kingdom, Germany,
Australia and South Africa. Milkyway, the Company's Japanese subsidiary, now
offers a Windows 95 version of Kobanto, a small business software product, as
well as other products. Intuit also produces personal tax preparation products
for certain international markets: QuickTax in Canadian and Australian markets
and QuickSteuer(R) in Germany. In June 1995, the Company purchased the tangible
assets and intellectual property of Mysterious Pursuit, an outside developer of
tax software for the Australian, German, New Zealand and United Kingdom markets.
During fiscal 1996, the Company closed its operations in Australia and has
integrated certain of these products into the Intuit product line. Intuit may
introduce versions of its products in other countries based on customer demand
and available resources.
The development of products for foreign markets requires substantial additional
time, effort and expense because of the large differences among countries'
financial practices and cultures. Although international revenue has been
limited to date, Intuit believes that it may increase substantially over the
next several years. The Company intends to establish additional international
operations, hire additional personnel and recruit additional international
resellers in order to attempt to increase international revenue. Although the
Company did experience significant growth in international operations in fiscal
1996, its German subsidiary had experienced delays in two critical product
launches in the second quarter of fiscal 1996, resulting in late delivery of
products to retail channels and excess inventory levels in the distribution
channel. In addition, international growth slowed from the first half of fiscal
1996 to the second half of fiscal 1996, due to general weakness in European
consumer software markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations - Twelve
Months Ended July 31, 1996 and 1995" and Note 8 of Notes to Consolidated
Financial Statements. To the extent that the Company is unable to expand
international revenue in a timely and cost-effective manner, the Company's
business, operating results and financial condition could be materially
adversely affected. There can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products.
The Company's international revenue is currently denominated in a variety of
foreign currencies and the Company does not currently engage in any hedging
activities. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse effect on the
Company's business, operating results and financial condition. See Note 1 of
Notes to Consolidated Financial Statements. Additional risks inherent in the
Company's international business activities include unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs of localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, fluctuations in
foreign currency values, difficulties in collecting payment, difficulties in
managing international operations, compliance with a wide variety of financial
reporting requirements and systems, which can result in accounting and
forecasting errors, potentially adverse tax consequences including repatriation
of earnings, reduced protection for the Company's intellectual property rights
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international revenue and, consequently, the Company's
business, operating results and financial condition.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Intuit provides technical support and customer service for its products by
telephone, mail, facsimile, electronic bulletin boards and modem. Intuit has
installed sophisticated call-handling and facsimile processing equipment to
improve the efficiency of its support and customer service operations. The
Company operates major telephone support centers in Tucson, Arizona;
Fredericksburg, Virginia; Hiawatha, Iowa; Downers Grove and Aurora, Illinois
(where ISC is currently located); and Rio Rancho, New Mexico. In addition, the
Company's supplies business has a telesales and service center in Mountain View,
California. During periods of peak call volumes, Intuit hires substantial
numbers of temporary employees, and also outsources part of its customer service
function, to assist the
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full-time staff in serving customers. Despite its efforts to staff and equip its
customer service and support functions appropriately, from time to time during
peak periods Intuit's ability to respond to customer orders and support calls in
a timely manner may be temporarily impaired due to constraints on available
personnel or internal systems. In addition, delays in order fulfillment, and
events such as the occurrence of unexpected product errors, may result in
unusually high volumes of customer calls that temporarily exceed Intuit's
response capacity. For example, the Company experienced significant operational
problems as a result of inadequacies in certain of its systems, procedures and
controls when, during the quarter ended January 31, 1995 and following weeks,
Intuit's existing direct order entry systems were unable to process all of the
orders received on a timely basis. This resulted in a number of problems,
including adverse publicity, lost business and customer dissatisfaction. During
fiscal 1996, the Company's online banking and bill payment customers experienced
difficulties in connecting to these services, requiring the Company to invest in
correcting certain operational problems during the fiscal year. Such occurrences
in the future can be expected to adversely affect Intuit's customer
relationships and sales.
In the future, Intuit will be required to continue to improve its management
controls and reporting systems and procedures on a timely basis as well as to
expand, train and manage its employee work force. These tasks are made more
difficult as a result of the seasonal nature of the Company's business, and the
challenges these tasks pose will require substantial time and attention from
management. To address these areas, during fiscal 1996, the Company made
significant investments in facilities and infrastructure related to customer
service and technical support, devoted significant resources to increase
staffing and training of customer service and support personnel in order to
increase capacity and improve service levels, and invested in correcting
operational problems relating to its network services. Although the Company is
taking steps to improve its internal systems, procedures and controls, there can
be no assurance that the Company will be successful in doing so. Failure to do
so would have a material adverse effect upon the Company's business, operating
results and financial condition.
In the past, the Company has generally not charged customers for technical
support and customer services. However, during fiscal 1996 it began charging its
QuickBooks and QuickBooks Pro customers for telephone support. The Company
believes that this step is consistent with industry trends in the small business
products market. The Company also began charging for support on older DOS
versions of Quicken during fiscal 1996. The Company's primary competitors in the
personal finance market do not currently charge customers for support services.
The Company may institute support fees for other products in the future. The
Company will evaluate its recent decisions to implement support fees in light of
customer reaction, and will consider adjusting its policies if there is
significant unfavorable customer reaction. There has been no significant adverse
customer reaction to date with respect to QuickBooks and Quicken for DOS support
fees. However, there can be no assurance that these new policies will not have a
material adverse impact on customer relations.
MANUFACTURING AND SHIPPING; BACKLOG
Intuit outsources the majority of its software manufacturing and distribution,
including diskette purchase and duplication, printing of manuals and boxes,
assembly of final product, and shipping. Outsourcers are contractually required
to adhere to strict quality guidelines defined and measured by Intuit. Intuit
maintains a small in-house manufacturing and distribution facility to ship a
large number of products that have a relatively small volume, predominantly to
direct customers. Customer returns for direct sales are primarily handled
in-house, while returns from the retail distribution channel are handled
primarily by a third party. Intuit normally ships products within one week after
receipt of an order, with the exception of tax preparation software. Orders for
tax software are usually taken beginning in late April (for professional tax
products) and in late September (for consumer tax products) and the tax products
are shipped when available, typically between October and March. Intuit has
relatively little backlog at any time and does not consider backlog to be a
significant indicator of future performance.
SEASONALITY; QUARTERLY FLUCTUATIONS IN REVENUE AND OPERATING RESULTS
The Company's business has experienced, and is expected to continue to
experience, substantial seasonality, due principally to the timing of the tax
return preparation season, the timing of product launches for new or updated
versions of products and, to a lesser extent, to consumer software buying
patterns. Sales of the Company's tax products are concentrated in the period
from November, when certain professional tax products are released,
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through March, when consumers purchase the products in advance of the April 15
tax return filing deadline. Sales of the Company's Quicken product are typically
strongest during the year-end holiday buying season. As a result of these
seasonal patterns, the Company generated income from operations before
acquisition-related charges during its fiscal quarters ended January 31, 1995
and 1996 and April 30, 1995 and 1996. Intuit normally experiences significant
losses from operations before acquisition-related charges during its July and
October fiscal quarters because lower seasonal revenues are more than offset by
continuing operating expenses necessary to support direct marketing campaigns,
research and development and infrastructure requirements, among other items. See
Note 11 of Notes to Consolidated Financial Statements. The Company's
historically reported quarters have not reflected the full effect of this
seasonal pattern, principally because, with the exception of Milkyway, all of
the Company's business acquisitions were accounted for using the purchase method
of accounting, and therefore included the revenues and expenses of the acquired
companies only from the closing dates of the acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's quarterly operating results have fluctuated significantly in the
past, and are likely to fluctuate significantly in the future, based upon a
number of factors. In addition to seasonal factors described above, the
Company's quarterly operating results can be affected significantly by the
number and timing of new product or version releases by the Company, the timing
of product announcements or introductions by the Company's competitors,
discretionary marketing and promotional expenditures, research and development
expenditures and a variety of non-recurring events, such as acquisitions.
Products are generally shipped as orders are received, so the Company's backlog
at any given time is not material. Consequently, quarterly sales and operating
results depend primarily on the volume and timing of orders received during the
quarter, which are difficult to forecast. A significant portion of the Company's
operating expenses are relatively fixed, and planned variable expenditures are
based on sales forecasts. If revenue levels are below expectations, operating
results are likely to be materially adversely affected. In particular, net
income, if any, may be disproportionately affected because only a small portion
of the Company's expenses varies with revenue in the short term. In response to
competition, the Company may also choose to reduce prices or increase spending,
which may adversely affect the Company's operating results and financial
condition.
Although the Company has experienced significant growth in revenue in recent
years, there can be no assurance that the Company will sustain such revenue
growth in the future or be profitable on an operating basis in any specific
future period. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
The unpredictability of the Company's financial results may have a significant
impact on the market value of the Company's common stock. For example, following
the second quarter of fiscal 1996, the Company announced that its net income for
fiscal 1996 would not increase from fiscal 1995. This projection was below the
expectations of public market analysts and investors and the price of the
Company's common stock was materially adversely affected. It is possible that in
future periods, the Company's revenue or operating results may differ from
expectations and that the price of the Company's common stock may fluctuate as a
result. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" and "- Certain Factors that May Affect Future
Results."
COMPETITION
The markets for the Company's products, both domestic and international, are
intensely competitive, subject to rapid change and characterized by constant
pressures to reduce prices, incorporate new product features and accelerate the
release of new products and product enhancements. Intuit believes that the
principal competitive factors in the software industry are product features and
quality, reliability, ease of use, brand name, access to distribution channels,
quality of support services, and price. The Company encounters competition from
a number of sources, and many of the Company's competitors or potential
competitors, notably Microsoft Corporation ("Microsoft"), have significantly
greater financial, technical and marketing resources and broader product lines
than the Company. A variety of potential actions by any of the Company's
competitors, including reduction of product prices, increased promotion,
announcement or accelerated introduction of new or enhanced products, product
giveaways or product bundling could have a material adverse effect on the
Company's business, operating results and financial condition. The software
industry, including the Company, has experienced a significant platform shift
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from DOS to Windows, and more recently to Windows 95. There is increased
competition on the Windows and Windows 95 platforms, including lower-priced
products or free promotional products that compete with the Company's software.
In order to respond to these competitive factors, the Company may use price
reductions and/or other promotional offers, resulting in reduced gross margins.
Prolonged price competition would have a material adverse effect on Intuit's
business, operating results and financial condition. As platform shifts and
other technological changes continue to occur, there are risks that competitors
may respond more quickly than the Company to new or emerging technologies or
changes in customer requirements such as the introduction of new personal
computer software or hardware platforms or changes in online or financial
telecommunications technology. Accordingly, it is possible that current or
potential competitors could rapidly acquire significant market share.
Conversely, it is possible that customers may not accept a platform that the
Company has chosen or will choose to pursue. Further consolidation of the
software industry or changes in the personal computer industry could lead to
increased competition in technological innovation and pricing strategies.
Only a small percentage of products introduced in the consumer software market
achieves any degree of sustained market acceptance. There can be no assurance
that the Company will be able to successfully compete against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect upon its business, operating results and financial
condition.
The Company expects that Microsoft will be a formidable competitor in the
markets in which the Company currently competes and will compete in the future.
In connection with the Company's proposed merger with Microsoft that was
announced in October 1994 and terminated in May 1995, the Company shared
business information with Microsoft. Although the Company believes only a
limited amount of confidential information was disclosed to Microsoft, there can
be no assurance that Microsoft will not use information made available to it to
compete with the Company. Microsoft's Money products are being aggressively
promoted with free product offers through various distribution channels,
including the Internet. Microsoft also includes Money in its Home Essentials
software package, and can be expected to take additional actions to distribute
its products to a wide customer base. These actions will create additional
competitive pressure for the Company's Quicken products.
In addition to Microsoft, the Company's products and services also compete with
products and services offered by a number of other companies, many of which have
greater resources and/or broader product lines than the Company. In the market
for personal finance products, the Company also competes with MECA Software,
Inc. (a company owned by a consortium of banks, including Bank of America and
NationsBank), among others. In addition, the Company faces increasing
competition from financial institutions, such as Citibank, Charles Schwab and
others, that are developing their own financial software and web sites. Such
institutions could opt to support only their internally developed products, both
Quicken as well as proprietary products, or a wide variety of software
solutions. The Company's small business products compete with Peachtree
accounting software from ADP, as well as products from Sage and BestWare, among
others. In the personal tax area, the Company competes with Block Financial
Corporation and Computer Associates, Inc., among others. The professional tax
preparation market is highly fragmented. Intuit's principal competition includes
Arthur Andersen, Lacerte Software Corporation, Commerce Clearing House/Computax,
SCS/Compute, Creative Solutions, Pencil Pushers, Inc. and CLR Fasttax. Because
there are relatively low barriers to entry, the Company expects competition to
increase from both established and emerging companies to the extent the markets
addressed by the Company continue to develop and expand.
In the area of electronic financial services, the online banking and bill
payment services provided to financial institutions customers by the Company are
in competition with Visa Interactive, as well as a number of banks such as Wells
Fargo, NationsBank, Bank of America and Citibank. It is possible that some or
all of the financial institutions that currently have contractual arrangements
with the Company will begin to offer their own online banking and/or bill
payment services. If the Company's sale of ISC to CheckFree is completed as
expected, the Company will no longer be competing directly in the "back-end"
bill pay processing market. Investor Insight and NETworth compete with large,
established online financial publishers such as Dow Jones, ValueLine and
Morningstar. The principal competitors for the Company's QFN web site are the
financial areas on online services, as well as standalone financially-oriented
web sites like Quote.com.
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Intuit's supplies products compete with those of a number of business forms
companies, such as Deluxe Business Systems, New England Business Services and
Moore Business Forms. In addition, several direct mail check printers have begun
offering computer checks and forms in addition to their personal check lines.
Intuit believes that its success in the supplies business results from a number
of factors, including its direct access to its software user base through in-box
advertising, price, service, product quality, speed of delivery and guaranteed
compatibility with Intuit software products. There can be no assurance, however,
that these factors will continue to allow Intuit to maintain its existing level
of, or generate additional, supplies revenue.
MANAGEMENT OF GROWTH
The Company has experienced significant growth during the past three years, both
internally generated and through mergers and acquisitions. Since September 1993,
Intuit has acquired ChipSoft, Best's professional tax product line, ISC,
Parsons, Mysterious Pursuit's tax software technology, PNI, IIS and GALT, and
has added support centers in Tucson, Arizona; Fredericksburg, Virginia;
Hiawatha, Iowa; Downers Grove and Aurora, Illinois; and Rio Rancho, New Mexico.
These acquisitions and additions have expanded the Company's size and number of
product lines, increased the number of its employees and resulted in the Company
having a number of geographically dispersed domestic offices and operations, in
addition to expanding international offices and operations. There are
significant risks associated with this growth. Certain of the Company's
acquisitions have involved issuances of equity securities, the incurrence of
debt and contingent liabilities, and amortization expenses related to goodwill
and other intangible assets, which have adversely affected the Company's
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations." The Company's ability to integrate and organize its new businesses
and to successfully predict and manage its growth will require improvements in
its operational, financial and management information systems. Although the
Company 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. See "Customer Service
and Technical Support." It has also experienced excess capacity at certain call
centers due to rapid expansion. There can be no assurance that similar problems
will not occur in the future or that they will not have a material adverse
effect on the Company's results of operations. In particular, the process of
integrating acquired companies' operations, technologies and products into the
Company's operations has in the past, and may in the future, result in
unforeseen operating difficulties and expenditures, requiring significant
management attention that would otherwise be available for the ongoing
development of the Company's business. Moreover, there can be no assurance that
the anticipated benefits of any specific acquisition will be realized.
The Company may in the future pursue new technologies or businesses, some of
which may be accomplished internally and some of which may be accomplished
through joint ventures or acquisitions of complementary product lines,
technologies or businesses. Future acquisitions by the Company involve the risks
described above, as well as the risks of entering markets in which the Company
has no or limited direct prior experience, the potential loss of key employees
of the acquired company and of Intuit, and the possibility of additional
regulatory burdens. In the event that the Company pursues such new businesses or
technologies, either through internal generation or through joint ventures or
acquisitions, there can be no assurance that the Company's business, operating
results and financial condition would not be materially adversely affected.
REGULATED BUSINESSES
Certain aspects of the Company's current products and services are subject to
federal and state regulation, either directly or indirectly, as described below.
It is possible that these products and services will become more heavily
regulated in the future, or that other existing or new products and services
will become subject to government regulation.
Quicken Investment Services, Inc. ("QISI"), the Company's subsidiary that offers
Quicken Financial Planner and certain investment-related features of other
Intuit products, is registered as an investment adviser under the federal
Investment Advisers Act of 1940, and QISI and certain of its officers are
registered under the investment adviser laws in certain states. As a result of
this registration, QISI is subject to a variety of regulatory requirements that
do not typically apply to software companies. Compliance with these regulatory
requirements imposes restrictions on
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QISI's business practices in a variety of areas, including advertising and
distribution arrangements, and also requires allocation of material financial,
legal and management resources. QISI could also be subject to liability and/or
injunctive actions for failure to comply with investment adviser regulatory
requirements.
The Company's IIS subsidiary, which runs the InsureMarket web site, is required
to be licensed as an insurance producer by the insurance regulator of each state
in which IIS engages in the solicitation, negotiation or effectuation of
insurance policies. IIS is currently in the process of obtaining the necessary
licenses in all fifty states. Until IIS is licensed as an insurance producer by
a state, IIS will be unable to engage in any activities requiring such
licensing. In addition to requiring an insurance producer license, state
insurance laws regulate other business activities of IIS, including advertising,
handling of fiduciary funds, information practices, record keeping and sharing
of compensation with unlicensed parties. Failure to comply with such regulations
could expose IIS to administrative penalties and sanctions. Compliance with the
requirements of state insurance laws will require allocation of material
financial, legal and management resources of IIS.
Certain bill payment services that the Company provides directly to consumers
are subject to the Electronic Funds Transfer Act and regulations promulgated by
the Federal Reserve Board and implemented by the Federal Trade Commission.
Banking and bill payment services that the Company provides to financial
institutions and, indirectly, to their customers, are not directly subject to
regulation under certain laws and regulations applicable to banks and other
financial institutions. However, the Company's provision of such services may
indirectly be affected as a result of limitations that such laws and regulations
may impose on financial institutions in their contractual arrangements with the
Company. In addition, the Company has made changes in certain of its products to
facilitate regulatory compliance by financial institutions. Moreover, to the
extent that the Company serves as a third-party processor or service provider to
banks and other financial institutions, the Company is directly subject to
Federal Reserve Board regulations and to regulation by federal or state
regulators of each such bank or financial institution, including the Office of
the Comptroller of the Currency, the Office of Thrift Supervision, the Federal
Reserve Bank for the district in which the given bank or financial institution
is located, the Federal Deposit Insurance Corporation, the National Credit Union
Administration and state banking regulators. Failure to comply with such
regulations could expose the Company to penalties and sanctions, and compliance
with such regulatory requirements requires allocation of material financial,
legal and management resources of the Company. Certain of these regulatory
requirements will become inapplicable following the planned sale of ISC.
The Company is currently evaluating additional electronic financial services,
including investment account statement download and online trading capabilities.
Although the Company will attempt to structure these services in a manner that
minimizes regulatory burdens, it is possible that these services, or other
investment-related services offered in the future, may require regulatory
compliance, such as registration as a broker-dealer under federal and/or state
securities or other applicable laws, or other regulation by state regulators.
Even if the Company is not required to register as a broker-dealer, it may be
impacted by broker-dealer regulations indirectly, as a result of limitations
such regulations may impose on financial and investment institutions in their
contractual arrangements with the Company.
PROPRIETARY RIGHTS
Intuit regards its software as proprietary and relies primarily on a combination
of copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements, and other intellectual property protection methods to
protect its products and technology. Intuit also has been granted seven patents
and has eight patent applications pending with respect to methods of processing
financial data and other processes used in certain of the Company's products.
However, Intuit believes that the ownership of patents is not presently a
significant factor in its business and that its success does not depend on the
ownership of patents, but primarily on the innovative skills, technical
competence and marketing abilities of its personnel. Intuit may not always own
the software and related technologies used in its product and service offerings.
For example, Intuit engaged an outside software development house to develop
system software that routes data between Quicken users and banks. Ownership of
this software was retained by the developer and is licensed to Intuit. Although
Intuit believes that it currently has satisfactory contractual and business
relationships with this developer, termination of this relationship could
interrupt Intuit's ability to provide certain services.
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Intuit generally has no signed license agreements with the end users of its
products and does not copy-protect its software. In addition, existing copyright
laws afford only limited protection, and it may be possible for unauthorized
third parties to copy Intuit's products or to reverse engineer or obtain and use
information that Intuit regards as proprietary. There can be no assurance that
Intuit's competitors will not independently develop technologies that are
substantially equivalent to, or superior to, Intuit's technologies. Policing
unauthorized use of Intuit's products is difficult and, while Intuit is unable
to determine the extent to which software piracy of its products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of certain countries in which Intuit's products are or may be distributed
do not protect Intuit's products and intellectual property rights to the same
extent as the laws of the United States.
Intuit believes that its products, trademarks and other proprietary rights do
not infringe upon the proprietary rights of third parties. From time to time,
however, Intuit has received communications from third parties asserting that
features or content of certain of its products, or its use of certain
trademarks, may infringe upon intellectual property rights of such parties. To
date, no such claim has resulted in currently pending litigation except as
described in "Legal Proceedings" or in the payment of any claims. However,
Intuit cannot predict whether the impact of any known claims will be material.
As the number of software products in the industry increases and the
functionality of these products further overlaps, Intuit believes that software
products increasingly will become the subject of claims that they infringe the
rights of others. There can be no assurance that third parties will not assert
infringement claims against Intuit in the future or that any such assertion will
not result in costly litigation or require Intuit to obtain a license to
intellectual property rights of third parties. There can be no assurance that
such licenses will be available on reasonable terms, or at all.
EMPLOYEES
As of September 30, 1996, Intuit and its domestic subsidiaries had approximately
3,184 full-time domestic employees, and its international subsidiaries had an
aggregate of 290 full-time employees. Intuit and its employees are not parties
to any collective bargaining agreements, and Intuit believes that its relations
with its employees are good. The Company has an employment agreement with
William V. Campbell (the Company's President and Chief Executive Officer) that
is terminable at will by either party. Intuit believes its future success and
growth will depend in large measure upon its ability to attract and retain
qualified technical, management, marketing, product development and sales
personnel. Although the Company believes it offers competitive compensation,
there is intense competition in the software industry for qualified personnel
and the Company, like many of its competitors, has experienced difficulty hiring
and retaining employees. In particular, employee morale and retention have been
hindered by recent significant declines in the price of the Company's common
stock, which reduced or eliminated the value of stock options held by many
employees. To address this problem, in September 1996, the Company offered to
lower the exercise prices on existing options to the fair market value of the
Company's common stock on September 18, 1996 for all outstanding options with a
higher exercise price (except options held by the Company's Chief Executive
Officer and Senior and Executive Vice Presidents). Any option holder electing to
reprice an option will not be permitted to exercise the repriced option, even if
it is vested, for a certain period of time. See Note 12 of Notes to Consolidated
Financial Statements.
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ITEM 2
PROPERTIES
The Company's principal offices are located in Mountain View, California, with
additional leased office and manufacturing space in Palo Alto and San Diego,
California. The Mountain View facilities are occupied pursuant to long-term
leases entered into in November 1994. These facilities will replace the
Company's facilities in Palo Alto in a staged move that began in December 1995
and is currently expected to be completed during calendar 1997. Intuit has
committed to spend approximately $47.2 million for the Mountain View leases over
their remaining terms (which range from seven to eight years). Two of the
Mountain View buildings are not currently occupied but are subleased by Intuit
in their entirety. In June 1995, the Company entered into a build-to-suit lease
for approximately 140,000 square feet of new office space in San Diego to
replace existing facilities. The relocation to this new facility was completed
in June 1996. Intuit has committed to spend approximately $15.2 million for the
new San Diego lease over its eight-year term.
In addition to the facilities noted above, Intuit leases property in Tucson,
Arizona and Fredericksburg, Virginia (where two of the Company's call centers
are located); Hiawatha, Iowa (where its Parsons subsidiary, as well as a new
call center, are located); Downers Grove and Aurora, Illinois (where its ISC
subsidiary and a call center are located); Pittsburgh, Pennsylvania (where GALT
is located); Alexandria, Virginia (where IIS is located); and in Canada,
England, France, Germany, Japan and the Netherlands (where foreign subsidiaries
are located). Intuit occupies its call center facilities in Rio Rancho, New
Mexico, pursuant to a long-term financing arrangement under which the Company
will take title to the property for a nominal sum in September 2014. See Note 4
of Notes to Consolidated Financial Statements. Intuit also owns two additional
properties in Hiawatha, Iowa, which are occupied by its Parsons subsidiary.
Intuit believes that its facilities are adequate for its current and near-term
needs and that additional space is available to provide for anticipated growth.
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ITEM 3
LEGAL PROCEEDINGS
On March 29, 1994, Joann McGovern filed a class action lawsuit against ChipSoft
(which was subsequently merged into the Company) in the Chancery Division,
Circuit Court of Cook County, Illinois, on behalf of the plaintiff and other
purchasers of the 1993 HeadStart version of the Company's TurboTax tax
preparation software (the "Product"). The plaintiff asserts claims for breach of
express and implied warranties and violation of the Illinois Consumer Fraud Act
and seeks, on behalf of herself and purported class members, refund of the
purchase price as well as consequential and punitive damages. The plaintiff
claims that the packaging of the Product was false and misleading in that it did
not adequately apprise purchasers of the need to obtain the final version of
TurboTax (which the plaintiff admits was available free of charge) in order to
prepare final tax forms for filing with the IRS. In October 1995, the Company
obtained summary judgment on the plaintiff's claims for breach of express and
implied warranties. On January 4, 1996 the plaintiff's motion for class
certification for the Illinois Consumer Fraud Act claim was denied. The
plaintiff is seeking judicial review of an issue relating to this determination.
On September 19, 1996 the Company filed a motion for summary judgment on the
plaintiff's Illinois Consumer Fraud Act claim, with a hearing currently
scheduled for December 12, 1996. The Company believes that the plaintiff's
claims are without merit and intends to defend the litigation vigorously.
On August 23, 1995, Interactive Gift Express, Inc. filed a patent infringement
suit in the United States District Court for the Southern District of New York
against the Company and seventeen other defendants alleging infringement of U.S.
Patent No. 4,528,643 and seeking unspecified damages. Interactive Gift Express
subsequently changed its name to E-Data Corp. The complaint did not specify
which products of the Company allegedly infringed the patent, and did not
indicate which claims of the patent are allegedly infringed. On August 26, 1996,
the plaintiff filed a report identifying which claims of the patent were
allegedly infringed and providing its interpretation of the claims, and also
stating that the Company was infringing the subject patent by "selling software
online." The parties have not yet begun to engage in discovery, which the
Company believes may be material. Although discovery has not yet commenced,
based on the investigation conducted by the Company to date and a review of its
products, the Company believes that the complaint is without merit and intends
to defend the litigation vigorously.
On June 26, 1996, Barbara Hubbard, a former corporate controller of the Company,
filed a lawsuit against the Company and its Chairman, its President and its
former Chief Financial Officer, in the Santa Clara County, California, Superior
Court, alleging sex discrimination, wrongful discharge, breach of contract,
defamation and violations of the California Labor Code. The complaint seeks
damages in an unspecified amount. The Company has answered the complaint,
denying all material allegations, with the individual defendants demurring.
Intuit believes that the complaint is without merit and intends to defend the
litigation vigorously.
On July 31, 1996, Trio Systems L.L.C. ("Trio") filed a lawsuit against the
Company in the U.S. District Court, Central District of California (Los Angeles)
alleging copyright infringement and violation of a license agreement. The
complaint seeks declaratory relief, rescission and $60 million in damages. Trio
alleges that the Company infringed Trio's copyrights in certain software by,
among other things, allegedly violating the license that was attached to the
software in various forms, and by allegedly making copies of the software
without the authorization of Trio, or in violation of various terms of the
license. Trio also contends that the Company has violated the terms of the
license by publishing software that contains software belonging to Trio under
conditions that allegedly violate the terms of the license. The Company answered
the complaint on September 3, 1996, denying all material allegations, and
discovery is proceeding. On September 30, 1996, Trio filed a motion for a
preliminary injunction seeking to prevent the Company from shipping any Intuit
products containing Trio software, including Quicken products. The Company has
filed a response to this motion and a hearing on the motion is scheduled for
October 28, 1996. The Company intends to oppose the motion vigorously and
expects that its new Quicken products will be available for purchase on October
24, 1996. Although discovery has just begun, based on the investigation
conducted by the Company to date and a review of its products, the Company
believes that the complaint is without merit and intends to defend the
litigation vigorously.
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Financial Courseware Ltd. ("FCL"), an Irish company, has a software product
named "Intuition" that is used for teaching financial terminology within
institutions. FCL has opposed the Company's application to register "Intuit" as
a trademark in Canada, Germany, Switzerland and the United Kingdom. In
Switzerland, the Company's application was rejected, and the Company has
appealed. The oppositions remain pending in the other three countries. In
December 1995, FCL initiated proceedings against Intuit Ltd. (the Company's
United Kingdom subsidiary) in Ireland seeking to enjoin use of the Intuit mark
in Ireland and accounting for damages. A response and counterclaim have been
filed denying all claims and seeking to restrict FCL's rights under its
registration. Direct negotiations among the principals of FCL and the Company
have commenced, but it is too soon to determine how the matter will be resolved.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. Management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions,
either individually or in the aggregate, will not materially affect the
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact could be material. Furthermore, any litigation,
regardless of outcome, can have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.
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ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
quarter ended July 31, 1996.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The executive officers and key employees of Intuit are as follows:
NAME AGE POSITION
- ---- --- --------
Scott D. Cook 44 Chairman of the Board of Directors
William V. Campbell 56 President, Chief Executive Officer and Director
Michael A. Ahearn 49 Vice President, Human Resources
Mari J. Baker 31 Vice President and General Manager, Personal Finance Group
Eric C.W. Dunn 38 Senior Vice President, Consumer/International Division
Alan A. Gleicher 44 Vice President, Sales
Mark R. Goines 43 Vice President and General Manager, International Group
William H. Harris, Jr. 40 Executive Vice President, Financial Services and Tax Division
James J. Heeger 40 Chief Financial Officer and Senior Vice President, Finance,
Customer Services and Operations
Virginia L. Miller 45 Treasurer and Director of Investor Relations
John Monson 41 Senior Vice President, Small Business Division
Carl J. Reese 39 Vice President, Tax Software Engineering
Daniel N. Rudolph 39 Vice President and General Manager, Banking Services
Greg J. Santora 45 Corporate Controller
William C. Shepard 53 Vice President and General Manager, Professional Products Group
William L. Strauss 38 Vice President, Customer Services
Catherine L. Valentine 44 General Counsel and Corporate Secretary
Larry J. Wolfe 45 Vice President and General Manager, Personal Tax Products Group
- --------------------------
Mr. Cook, a founder of Intuit, has been a director of the Company since March
1984 and 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 Broderbund
Software, Inc. 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 and a
director in April 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. Mr. Campbell holds both a
Bachelors and a Masters degree in economics from Columbia University.
Mr. Ahearn joined Intuit as its Vice President of Human Resources in September
1993. From 1987 to 1993, he held a variety of human resources roles within Apple
Computer, Inc., including Vice President Worldwide Human Resources for Claris
Corp., Apple's wholly-owned software subsidiary, from 1991 to 1993. Mr. Ahearn
holds a Bachelor of Arts degree in economics from Amherst College and a Masters
in Business Administration from Boston College.
Ms. Baker became Intuit's Vice President and General Manager of the Personal
Finance Group in July 1996. From April to July 1996, she served as Vice
President of the Company's Financial Supplies Group, and she served as Vice
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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 the Company 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 Senior Vice President of the Consumer/International Division in
July 1996. He served as Vice President and General Manager of Intuit's Personal
Finance Group from May 1994 to July 1996, and served as the Company'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 joined Intuit as Vice President of Sales in December 1993. From
September 1990 until Intuit's acquisition of ChipSoft in December 1993, Mr.
Gleicher served as ChipSoft's President, Personal Tax Division. Mr. Gleicher has
a Bachelors degree in economics and business finance from San Diego State
University. He also earned a certificate from the Marketing Management Program
at Stanford University.
Mr. Goines became Vice President and General Manager of the International Group
in April 1996. He initially joined Intuit as Vice President and General Manager
of Personal Tax Products in December 1993 in connection with the Company's
acquisition of ChipSoft. 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. Harris became an Executive Vice President of Intuit in December 1993, in
connection with the Company's acquisition of ChipSoft. He has been head of the
Financial Services and Tax Division 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 Executive Vice President
and Chief Operating Officer of ChipSoft. 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.
Mr. Heeger became Chief Financial Officer of the Company in April 1996, and has
been Senior Vice President in charge of the Finance, Customer Services and
Operations functions since July 1996. He served as Vice President and General
Manager of the Company'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.
Ms. Miller joined the Company as Treasurer and Director of Investor Relations in
March 1996. From 1985 through 1995, Ms. Miller was Treasurer of The Vons
Companies, Inc., a retail supermarket company. Ms. Miller holds a Bachelor of
Arts degree in liberal arts from the University of Illinois and a Masters in
Business Administration from DePaul University.
Mr. Monson became Senior Vice President of the Small Business Division in July
1996. He 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. Reese became the Vice President of Tax Software Engineering in December 1993
in connection with the Company's acquisition of ChipSoft. Mr. Reese joined
ChipSoft in October 1992 as its Vice President of Tax Software Engineering.
Prior to joining ChipSoft, Mr. Reese was employed by Jostens Learning
Corporation, an
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educational software company, where he served as Director of Instructional
Management Systems from May 1990 to October 1992. Mr. Reese holds a Bachelor of
Science degree from Lehigh University.
Mr. Rudolph became Vice President of the Banking Business Division in August
1996. He has served as General Manager of the division since February 1996. From
June 1993 to February 1996, he served as Director of Marketing for the Company's
Business Products Group. Prior to joining Intuit, Mr. Rudolph was employed by
Mark Products, Inc., a manufacturer of pressurization and leak locating
equipment, software and services for the telecommunications industry, where he
served as Executive Vice President and Chief Operating Officer from 1987 to
1993. Mr. Rudolph holds a Bachelor of Arts degree in economics from Williams
College and a Masters in Business Administration from Stanford University.
Mr. Santora 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.
Mr. Shepard became Intuit's Vice President of the Professional Products Group in
December 1993 in connection with the Company's acquisition of ChipSoft. Mr.
Shepard joined ChipSoft in February 1993 as its Director of Development, GUI
Income Tax Applications and became Vice President and General Manager of its
Professional Products Group in July 1993. Prior to joining ChipSoft, Mr. Shepard
was employed by SCS/Compute & Accountants Microsystems, Inc., where he served in
various capacities, including Executive Vice President, Product Development and
Support from May 1990 through January 1993. Mr. Shepard holds a Bachelor of
Science in mathematics from the University of Washington.
Mr. Strauss has been Intuit's Vice President of Customer Services since December
1993. He also served as Vice President of Operations from December 1993 to May
1995. Mr. Strauss was the Director of Operations at ChipSoft from August 1992
until the Company's acquisition of ChipSoft in December 1993. From July 1989
until August 1992, Mr. Strauss was Senior Vice President of Customer Service and
Credit at Hanover Direct, a direct marketing catalog company. Mr. Strauss holds
a Bachelors degree in accounting from Syracuse University.
Ms. Valentine joined Intuit as General Counsel in September 1994 and has served
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.
Mr. Wolfe became Vice President and General Manager of the Company's Personal
Tax Group in April 1996. He had been the director of technical support and sales
for the Company'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 in
March 1993. ChipSoft was subsequently acquired by the Company 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.
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PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
On July 20, 1995, the Company's Board of Directors authorized a two-for-one
stock split in the form of a stock dividend of one share of common stock paid
for each share of the Company's common stock that was issued and outstanding at
the close of business on August 4, 1995. The stock dividend was distributed on
August 21, 1995. All share prices provided below have been adjusted to reflect
the stock split.
Intuit's common stock began trading over the counter in March 1993 and is quoted
on the Nasdaq National Market under the symbol "INTU." The following table sets
forth, for the periods indicated, the range of high and low closing sale prices
per share as reported on the Nasdaq National Market:
High Low
---- ---
FISCAL 1995
First quarter 35-9/32 17-1/2
Second quarter 34-7/8 32-3/8
Third quarter 41-7/8 31-3/8
Fourth quarter 43-3/4 31
FISCAL 1996
First quarter 72 40-5/8
Second quarter 87 53-1/4
Third quarter 67-5/8 43
Fourth quarter 55-1/2 33-1/2
HOLDERS
As of September 30, 1996, there were approximately 1,000 holders of record of
the Company's common stock, representing approximately 30,000 beneficial
holders.
DIVIDENDS
The Company has not paid any cash dividends on its capital stock to date. The
Company currently anticipates that it will retain all future earnings, if any,
for use in its business and does not anticipate paying any cash dividends on its
capital stock in the foreseeable future.
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ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected condensed consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Form 10-K. In August 1994, the Company
changed its fiscal year end to July 31 from September 30.
FIVE-YEAR SUMMARY TEN MONTHS
YEARS ENDED ENDED YEARS ENDED
SEPTEMBER 30, JULY 31, JULY 31,
------------------------- ---------- --------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: 1992 1993 1994 1995 1996
--------- --------- ---------- --------- ---------
(in thousands, except per share data)
Net revenue ................................. $ 97,683 $ 132,792 $ 210,376 $ 419,160 $ 538,608
Costs and expenses:
Cost of goods sold:
Product ............................... 31,401 41,493 55,151 110,322 136,470
Amortization of purchased software
and other (1) ....................... -- -- 18,558 11,369 1,399
Customer service and technical
support ............................... 16,216 23,425 36,664 75,113 106,872
Selling and marketing .................... 27,304 33,047 51,381 109,382 142,319
Research and development ................. 10,631 14,290 26,125 57,332 75,558
General and administrative ............... 4,255 6,227 12,861 26,437 33,153
Charge for purchased research and
development (1) ....................... -- -- 151,888 52,471 8,043
Other acquisition costs, including
amortization of goodwill and
purchased intangibles (1) ............. -- -- 40,412 41,775 40,570
--------- --------- --------- --------- ---------
Income (loss) from operations ............... 7,876 14,310 (182,664) (65,041) (5,776)
Microsoft merger termination fee, net (2) ... -- -- -- 41,293 --
Interest and other income and expense, net .. 151 460 1,171 3,748 7,646
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes ....................... 8,027 14,770 (181,493) (20,000) 1,870
Provision for income taxes .................. 2,930 5,350 2,481 24,296 16,225
--------- --------- --------- --------- ---------
Income (loss) from continuing operations.... 5,097 9,420 (183,974) (44,296) (14,355)
Loss from operations of discontinued
operations, net of income tax benefit
of $3,725 (3) ............................. -- -- -- -- (6,344)
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ 5,097 $ 9,420 $(183,974) $ (44,296) $ (20,699)
========= ========= ========= ========= =========
Income (loss) per share from continuing
operations ............................... $ 0.24 $ 0.40 $ (5.34) $ (1.07) $ (0.32)
Loss per share from discontinued
operations ............................... -- -- -- -- (0.14)
--------- --------- --------- --------- ---------
Net income (loss) per share ................. $ 0.24 $ 0.40 $ (5.34) $ (1.07) $ (0.46)
========= ========= ========= ========= =========
Shares used in computing net income
(loss) per share ......................... 21,666 23,350 34,454 41,411 45,149
========= ========= ========= ========= =========
SEPTEMBER 30, JULY 31,
----------------------- --------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands)
Cash, cash equivalents and short-term $ 9,608 $ 41,622 $ 87,185 $197,775 $198,018
investments .........................
Working capital ........................ 9,924 41,990 68,675 164,281 169,724
Total assets ........................... 41,097 97,120 257,593 398,605 418,020
Notes payable and other long-term
liabilities........................... -- 689 3,715 8,770 5,583
Total stockholders' equity ............. 21,055 54,896 183,872 280,399 299,235
- --------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a discussion of
the Company's material acquisitions.
(2) See Note 9 of Notes to Consolidated Financial Statements for an explanation
of the Microsoft merger termination fee.
(3) See Note 12 of Notes to Consolidated Financial Statements for an explanation
of discontinued operations.
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ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following discussion
contains forward-looking statements that are subject to risks and uncertainties.
Statements indicating that the Company "expects," "estimates" or "believes" are
forward-looking, as are all other statements concerning future financial
results, product offerings or other events that have not yet occurred. There are
several important factors that could cause actual results or events to differ
materially from those anticipated by the forward-looking statements contained in
this discussion and other sections of this Form 10-K. Such factors include, but
are not limited to: the growth rates of the Company's market segments; the
positioning of the Company's products in those segments; the Company's ability
to effectively manage its various businesses, and the growth of its businesses,
in a rapidly changing environment; the timing of new product introductions;
retail sell-through of the Company's products; the emergence of the Internet,
resulting in new competition and unclear consumer demands; the Company's ability
to adapt and expand its product offerings for the Internet environment;
variations in the cost of, and demand for, customer service and technical
support; price pressures and the competitive environment in the consumer and
small business software and supplies industry; the possibility of calculation
errors or other "bugs" in the Company's software products; the emergence of the
electronic financial services marketplace; the cost of implementing the
Company's electronic financial services strategy; consumer acceptance of online
financial service offerings; the Company's ability to establish successful
strategic relationships with financial institutions and processors of financial
information; changing alliances among financial institutions and other strategic
partners; the emergence of competition from these entities as well as from other
software companies; changes in laws that may govern any of the Company's
products or services; the timing and consumer acceptance of new product releases
and services (including current users' willingness to upgrade from older
versions of the Company's products); the consummation of possible acquisitions;
the Company's ability to integrate acquired operations into its existing
business; the Company's ability to successfully transition its online banking
and bill payment operations to CheckFree Corporation; possible fluctuations in
value of the Company's investment in CheckFree Corporation; and the Company's
ability to penetrate international markets and manage its international
operations. Additional information on these and other risk factors is included
elsewhere in this Form 10-K.
OVERVIEW
The Company experienced significant growth during the twelve months ended July
31, 1996. Fiscal 1996 net revenue increased 28% to $538.6 million as compared to
$419.2 million for the twelve months ended July 31, 1995. Acquisitions occurring
during the twelve months ended July 31, 1996 and 1995 and the ten months ended
July 31, 1994 are described by transaction below. Due to the pending sale of
Intuit Services Corporation (ISC), as described below and in Note 12 of Notes to
Consolidated Financial Statements, the results for fiscal year 1996 have been
adjusted to account for ISC as discontinued operations. With respect to
quarterly results, it should be noted that the Company's net revenue varies
significantly by quarter due to seasonality in consumer buying patterns,
particularly in sales of the personal and professional tax return preparation
products, which mostly occur in the November through March time frame, as well
as the timing of new and upgrade product releases.
The Company's earnings and stock price have been and may continue to be subject
to significant volatility, particularly on a quarterly basis. The Company has
previously experienced shortfalls in revenue and earnings from levels expected
by securities analysts, which has had an immediate and significant adverse
effect on the trading price of the Company's common stock. This may occur again
in the future. Additionally, the Company participates in a highly dynamic
industry, which often results in significant volatility of the Company's common
stock price. In particular, the impact of, and investors' assessment of the
impact of, the market's acceptance and adoption rate of electronic financial
services, on the Company's business may result in significant increases in the
volatility of the Company's stock price. In addition, the trend towards
Internet-based products and services could have a material adverse effect on
sales of the Company's products which may not be offset by sales of the
Company's software products.
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In September 1996, the Company announced three Internet-related strategic
initiatives designed to accelerate the adoption of electronic financial data
exchange and communication by individuals, small businesses and their financial
service providers. First, the Company announced plans to "open" the architecture
of its software products to financial service providers so that such providers
can connect directly through the Internet to their customers who use Intuit
products. Second, the Company announced that it would coordinate efforts with
several third parties to develop a comprehensive framework for exchanging
financial data over the Internet in an integrated collection of specifications
and protocols called OpenExchange. Thirdly, the Company announced the signing of
an agreement pursuant to which it plans to sell its banking and bill payment
processing subsidiary, ISC, to CheckFree. See "Business - Internet Strategic
Initiatives" and Note 12 of Notes to Consolidated Financial Statements for
further discussion.
FISCAL YEAR CHANGE
Effective August 1, 1994, the Company changed its fiscal year end from September
30 to July 31 in order to better align its financial reporting cycle with the
business cycles of its tax and finance software products. Consequently, the
Company's audited consolidated financial statements included herein reflect the
ten months ended July 31, 1994, and the twelve months ended July 31, 1995, and
July 31, 1996. Unaudited financial information for the twelve months ended July
31, 1994 is presented below under "Results of Operations - Twelve Months Ended
July 31, 1995 and 1994" for comparative purposes.
ACQUISITIONS AND DIVESTITURE
In December 1993, the Company completed its acquisition of ChipSoft, which was
treated as a purchase for accounting purposes. The total purchase price of
$306.4 million in common stock, stock options, and acquisition costs ($255.3
million net of tangible assets acquired) and approximately $11.0 million
relating to the tax effecting of identified intangibles were allocated as
follows: $150.5 million to in-process research and development, $33.5 million to
intangible assets, and $82.3 million to goodwill.
In April 1994, the Company acquired certain assets of Best's professional tax
preparation business for an initial purchase price of $6.5 million in cash. The
purchase agreement calls for a cash "earnout" payment based on the amount of
revenue derived by the Company from former Best customers and the number of Best
customers who purchased the Company's professional tax products by April 1996.
The Company is currently negotiating this payment with Best and believes the
obligation is insignificant. Of the purchase price, $5.8 million was allocated
to intangible assets.
In July 1994, the Company completed its acquisition of National Payment
Clearinghouse, Inc., which subsequently changed its name to ISC, for
consideration of $7.6 million in common stock and cash. ISC currently provides
electronic banking back-end processing services, bill payment, stock quote
retrieval services and access to Intuit's web site for consumers via their
modems and personal computers. The acquisition was treated as a purchase for
accounting purposes. Of the purchase price, $1.4 million was allocated to
in-process research and development, $6.0 million to intangible assets, and $2.1
million to goodwill.
On September 16, 1996, the Company announced plans to sell ISC to CheckFree
Corporation in exchange for 12.6 million shares of CheckFree common stock,
approximately 23% of the resulting 54.0 million CheckFree shares outstanding. As
of September 13, 1996, the CheckFree stock to be exchanged in the transaction
was valued at approximately $227.6 million. The Company intends to account for
its investment in CheckFree using the cost method of accounting. Accordingly,
the Company plans to sell approximately two million shares of CheckFree acquired
in the transaction. Subject to regulatory and CheckFree stockholder approval, as
well as other conditions, the transaction is expected to be finalized by early
calendar year 1997. ISC's revenue accounted for less than 3% of Intuit's total
net revenue in fiscal 1996. The Company is accounting for the sale of ISC as
discontinued operations for fiscal year 1996. ISC's results in 1995 and 1994
were immaterial. See Note 12 of Notes to Consolidated Financial Statements.
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32
In September 1994, the Company completed its acquisition of Parsons, which was
treated as a purchase for accounting purposes. Under the terms of the agreement,
the Company paid approximately $28.8 million in cash and issued approximately
1,800,000 shares of the Company's common stock to Parsons' stockholders at the
date of the acquisition. In the first quarter of fiscal 1996, the Company paid
an additional $2.7 million in cash as deferred consideration. The total purchase
price of approximately $67.3 million which, in addition to the above amounts,
included 138,038 shares of common stock to be paid for certain non-competition
agreements, was allocated as follows: $44.0 million to in-process research and
development, $14.0 million to intangible assets and $9.9 million to goodwill.
In June 1995, the Company completed its acquisition of PNI, 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 charged to the Company's operations at the time of the
acquisition. In addition to the in-process research and development charge, the
Company incurred acquisition-related charges of $1.6 million in fiscal 1995
related to the termination of a conflicting license agreement.
In June 1995, the Company acquired certain assets of Mysterious Pursuit for
consideration of approximately $1.1 million. Mysterious Pursuit, an Australian
company, was the Company's outside developer of tax software for the Australian,
German and United Kingdom markets. The purchase price of $1.1 million was
allocated to identified intangible assets. Mysterious Pursuit's operations were
discontinued during fiscal 1996.
In January 1996, the Company completed its acquisition of Milkyway, which was
treated as a pooling of interests for accounting purposes. Milkyway is a
provider of PC-based financial software in Japan. In addition to the issuance of
650,000 shares of common stock, the Company recorded acquisition related
expenses of $0.6 million for legal and other professional fees.
In June 1996, the Company completed its acquisition of IIS, a developer of an
Internet based system designed to allow consumers to obtain personalized
insurance information from national insurance carriers via the World Wide Web.
The acquisition, which was treated as a purchase for accounting purposes, had a
purchase price of approximately $9.0 million. Under the terms of the agreement,
the Company issued 169,181 shares of Intuit common stock and 3,255 options to
purchase Intuit common stock to IIS stockholders at the date of acquisition.
Approximately $8.0 million of in-process research and development was expensed.
Subsequent to year end, in September 1996 the Company completed its acquisition
of GALT, a provider of mutual fund information on the Internet. The acquisition
will be treated as a purchase for accounting purposes. Under the terms of the
agreement, GALT's stockholders received a combination of common stock and stock
options valued at approximately $9.0 million. The purchase price of
approximately $9.0 million will be allocated to identified intangible assets and
goodwill.
Consistent with the Company's test for internally developed software, for each
of these acquisitions the Company determined the amounts allocated to developed
and in-process research and development based on whether technological
feasibility had been achieved and whether there was any alternative future use
for the technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the existence of a completed
working model at which point functions, features and technical performance
requirements can be demonstrated. As of the respective dates of the
acquisitions, the Company concluded that the in-process research and development
had no alternative future use after taking into consideration the potential for
usage of the software in different products, resale of the software and internal
usage.
Acquisition-related costs reduced net income by approximately $97.7 million and
$53.5 million for the twelve months ended July 31, 1995 and July 31, 1996,
respectively, including charges in these periods of $52.5 million and $8.0
million, respectively, for purchased research and development. Assuming no
additional acquisitions, other than those discussed above, and no impairment of
value causing an acceleration of amortization, the net income effect of
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33
future amortization, not including amortization related to the GALT acquisition,
is anticipated to be approximately $18.4 million, $3.4 million, $1.2 million,
and $0.4 million for the years ended July 31, 1997 through 2000, respectively.
Because of the high levels of non-cash amortization expense arising from the
various acquisitions discussed above, the Company may report losses in future
periods including the fiscal year ending July 31, 1997.
Although the Company believes the above transactions were in the best interests
of the Company and its stockholders, there are significant risks associated with
these transactions. The acquisitions have expanded the Company's size, product
lines, personnel and geographic locations. The Company's ability to integrate
and organize these new businesses and successfully manage its growth will
necessitate improvements in its operational, financial and management
information systems. Although the Company 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 the
Company's results of operations. The divestiture of ISC, if consummated, will
result in the elimination of the Company's direct participation in the online
banking and bill payment processing business. If the divestiture of ISC to
CheckFree is concluded, the Company's planned investment in the share of
CheckFree common stock to be issued to the Company in that transaction could
decrease in value due to market fluctuations and the success or failure of
CheckFree. If such decline was determined to be other than temporary, charges to
earnings would result. There is also a risk that the Company will be unable to
divest the CheckFree common stock shares quickly because of contractual and
legal restrictions on the sale of such shares and the relatively large
percentage of proposed ownership of CheckFree common stock by the Company.
RESULTS OF OPERATIONS
Management believes that a comparison of the twelve months ended July 31, 1995
to the ten months ended July 31, 1994 is not meaningful because of the
difference in the length of reported periods. Therefore, this discussion and
analysis of results of operations compares the audited twelve-month period ended
July 31, 1996 to the audited twelve-month period ended July 31, 1995, and the
audited twelve-month period ended July 31, 1995 to the unaudited twelve-month
period ended July 31, 1994. Due to the favorable timing of the acquisition of
ChipSoft, the results for the twelve months ended July 31, 1994 include
substantially all of ChipSoft's 1994 tax season revenue. However, ChipSoft's
seasonally low revenue and high operating expenses for the period prior to
December 13, 1993 are not reflected in the Company's reported results for the
entire twelve months and, thus, the period is not representative of business
results anticipated for the Company after the ChipSoft acquisition. Results of
operations include Milkyway for all periods presented, but include other
acquisitions only from their respective acquisition dates.
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TWELVE MONTHS ENDED JULY 31, 1996 AND 1995
Set forth below are certain consolidated statement of operations data as a
percentage of revenue for the twelve months ended July 31, 1996 and 1995:
TWELVE MONTHS ENDED JULY 31,
---------------------------------------------------------
1995 1996
-------------------------- --------------------------
(dollars in thousands) Dollars % of Revenue Dollars % of Revenue
--------- ------------ --------- ------------
Net revenue:
Software ......................................... $ 360,032 85.9% $ 462,972 86.0%
Supplies ......................................... 59,128 14.1 75,636 14.0
--------- ----- --------- -----
419,160 100.0 538,608 100.0
Costs and expenses:
Cost of goods sold:
Product ...................................... 110,322 26.3 136,470 25.3
Amortization of purchased software and other . 11,369 2.7 1,399 0.3
Customer service and technical support ........... 75,113 17.9 106,872 19.8
Selling and marketing ............................ 109,382 26.1 142,319 26.4
Research and development ......................... 57,332 13.7 75,558 14.0
General and administrative ....................... 26,437 6.3 33,153 6.2
Charge for purchased research and development .... 52,471 12.5 8,043 1.5
Other acquisition costs, including amortization
of goodwill and purchased intangibles ........ 41,775 10.0 40,570 7.5
--------- ----- --------- -----
Total costs and expenses ................. 484,201 115.5 544,384 101.0
--------- ----- --------- -----
Loss from operations ................................. (65,041) (15.5) (5,776) (1.1)
Microsoft merger termination fee, net ................ 41,293 9.8 -- --
Interest and other income and expense, net ........... 3,748 0.9 7,646 1.4
--------- ----- --------- -----
Income (loss) from continuing operations before
income taxes ....................................... (20,000) (4.8) 1,870 0.3
Provision for income taxes ........................... 24,296 5.8 16,225 3.0
--------- ----- --------- -----
Loss from continuing operations ...................... (44,296) (10.6) (14,355) (2.7)
Loss from operations of discontinued operations,
net of income tax benefit of $3,725 ............... -- -- (6,344) (1.1)
--------- ----- --------- -----
Net loss ............................................. $ (44,296) (10.6)% $ (20,699) (3.8)%
========= ===== ========= =====
NET REVENUE increased approximately 28% to $538.6 million for the twelve months
ended July 31, 1996, compared to $419.2 million for the twelve months ended July
31, 1995. This increase resulted primarily from higher sales of both personal
and professional versions of the Company's tax preparation products and, to a
lesser extent, the release of new and upgraded versions of small business
finance products such as QuickBooks 4.0, QuickBooks Pro and Kobanto in Japan,
including "deluxe" and CD-ROM versions of certain products, which have higher
average selling prices. Many of the Company's ProTax customers have also
upgraded to higher priced Power Tax products, which contributed to the increase
in net revenue over the prior year. In addition, net revenue from Parsons'
operations increased to approximately $96.4 million in fiscal 1996 from $62.0
million in the period from September 27, 1994 (date of acquisition) to July 31,
1995. Unit sales of personal finance products (predominantly Quicken) increased
in fiscal 1996 over fiscal 1995; however, since the majority of this increase
resulted from higher volumes of OEM sales, which generate substantially lower
per unit average selling prices, net revenue from these products remained flat
in fiscal 1996 as compared to fiscal 1995. While the Company receives little
revenue from these OEM sales in the short run, the Company believes this channel
is strategically important because it allows the Company to acquire large
numbers of new customers with the potential to generate future sales of software
upgrades, electronic financial services and related software.
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Also contributing to the increase in net revenue for fiscal 1996, as compared to
fiscal 1995, was the introduction of additional international products,
particularly in the UK, Canada and France. Net revenue from European operations
was $20.2 million or 4% of net revenue in fiscal 1996, compared to $14.8 million
or 4% of total net revenue in fiscal 1995. Net revenue from Asian operations
(Milkyway) was $28.1 million or 5% of net revenue in fiscal 1996, compared to
$23.4 million or 6% of net revenue in fiscal 1995. In April 1996, Milkyway
released Kobanto, its first small business accounting software product for
Windows. Although the Company did experience significant growth in its
international operations, its German subsidiary had difficulty executing two
critical product launches in the second quarter of fiscal 1996, resulting in
late delivery of products to retail channels and excess inventory in the
distribution channel. Because of this, net revenue generated by sales in Germany
for fiscal 1996 was significantly lower than anticipated by the Company. There
can be no assurance that sales of new versions of personal and small business
finance products or international products will continue at the rate experienced
in the past or that other such product launch difficulties will not be
encountered in the future.
Software net revenue increased approximately 29% to $463.0 million for the
twelve months ended July 31, 1996 from $360.0 million in the prior year,
principally due to the increased product volumes and new product introductions
discussed above.
Supplies net revenue increased by approximately 28% to $75.6 million for fiscal
1996, as compared with $59.1 million in the prior year, due to order increases
in small business check, envelope and invoice products as the Company's customer
base continues to grow. The gradual increase in upgrade sales as a percentage of
total software revenue generally causes the growth of potential supplies
customers to be slightly slower than the growth in software revenues. In fiscal
1997, supplies net revenue may be negatively impacted as some of the Company's
software users may shift to electronic bill payment services. The Company is
unable to quantify the effect, if any, of this potential shift on future net
revenue.
Revenue is generally recognized at the time of shipment, net of allowances for
estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collections of
accounts receivable are probable. Reserves are provided for quantities of
current product versions that are considered excess, and for inventories of all
previous versions of products at the time new product versions are introduced.
Advance payments are recorded as deferred revenue until the products are shipped
or services are provided. Rebate costs are provided at the time revenue is
recognized. The Company provides warranty reserves at the time revenue is
recognized for the estimated cost of replacing defective products. There can be
no assurance that the reserves established by the Company will be sufficient to
cover future returns of product, warranty, and rebate obligations.
The software industry, including the Company, is selling increasingly through
alternative channels, such as OEM, or "bundling" products for a single low
price. While this strategy introduces new customers to products, it also
significantly reduces average selling prices. The software industry, including
the Company, has experienced significant platform shifts in the past, such as
from DOS to Windows and, more recently, to Windows 95. There is increased
competition on the Windows and Windows 95 platforms, including lower priced
products and free promotional products that compete with the Company's software.
In order to respond to these competitive pressures, the Company may use price
reductions and/or other promotional offers which would negatively impact net
revenue and income from operations. As platform shifts continue to occur, there
are risks that competitors could introduce new products before the Company's
products are available on a particular platform or that customers may not accept
a platform that the Company has chosen or will choose to pursue. Further
consolidation of the software industry or changes in the personal computer
industry could lead to increased competition in innovation and pricing
strategies. The Company cannot quantify how much these factors have affected or
will affect its business. In addition, a number of the Company's competitors
have greater financial resources than the Company, potentially giving them a
competitive advantage.
Although the Company believes there are opportunities in international markets,
there can be no assurance that the Company's products will be accepted in these
markets. Furthermore, there can be no assurance that the Company's new or
upgraded products will be accepted, will not be delayed or canceled, or will not
contain errors or "bugs" that could affect the performance of the product or
cause damage to a user's data. If any of these events occurs, the
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Company may experience reduced net revenue, loss of market share, increased
maintenance release costs and higher technical support costs.
COST OF GOODS SOLD decreased to approximately 26% of net revenue for the year
ended July 31, 1996 versus 29% for the prior year. Decreased amortization of
purchased software resulting from the Company's acquisitions accounted for the
majority of this decline. Excluding acquisition-related amortization costs, cost
of goods sold would have been 25% of net revenue for fiscal 1996 and 26% for
fiscal 1995.
Software cost of goods sold, excluding acquisition-related amortization costs,
was approximately 23% of software net revenue for the year ended July 31, 1996
versus 24% for the previous twelve-month period. Supplies cost of goods sold was
approximately 42% of supplies net revenue for the year ended July 31, 1996
compared to 43% for the year ended July 31, 1995. The Company has negotiated a
long-term contract on the pricing of checks and plans to continually take
actions to reduce the materials cost of all of its supplies products. However,
there can be no assurance that margin improvements will be achieved or that
current margins will be sustained.
In March 1995, the Company announced the identification of some calculation
errors in certain circumstances in the consumer versions of the TurboTax and
MacInTax products. During the quarter ended January 31, 1995 the Company
recorded an expense of $1.3 million to cover the estimated cost of the free
revisions and other associated costs. During the quarter ended January 31, 1996,
a different set of less serious calculation errors were identified, and actions
were taken during the quarter to notify users and provide fixes, resulting in
approximately $1.2 million in warranty and related costs. There can be no
assurance that such bugs will be identified prior to shipment of products in the
future. Such bugs could have a material adverse effect on the Company's results
of operations.
OPERATING EXPENSES. During fiscal 1995, the Company experienced significant
operational problems as a result of inadequacies in certain of its systems,
procedures and controls. For example, during the quarter ended January 31, 1995
and the weeks following, the Company's direct order entry systems were unable to
process all of the orders received by the Company on a timely basis, which
resulted in a number of problems including adverse publicity, lost business and
customer dissatisfaction. These operational problems affected technical support
and customer service expenses, selling and marketing expenses, and cost of goods
sold in fiscal 1995. As described above, the Company identified calculation
errors in some of its 1995 and 1996 tax products. The Company has guaranteed
calculations in its tax products and will pay any penalties and interest due the
IRS as a result of the calculation errors. As of July 31, 1996, claims made for
such errors have been insignificant; however, additional claims may be received
in the future.
The Company is unable to quantify the effect, if any, on future revenues of the
adverse publicity the Company received regarding its operational problems or the
identification of bugs. The Company has taken steps to correct and mitigate
these problems; however, there can be no assurance that these or other problems
will not occur in the future.
CUSTOMER SERVICE AND TECHNICAL SUPPORT costs were approximately 20% and 18% of
net revenue, respectively, for the years ended July 31, 1996 and 1995. Customer
service and technical support costs were higher during the year ended July 31,
1996, as compared to the prior year, partially due to a growing number of
QuickBooks small business customers placing greater demands on customer support,
and a significant increase in capacity, staffing, and training to improve
service levels to address the problems encountered in fiscal 1995 discussed
above. In addition, the Company has significantly increased spending in building
customer and technical support capabilities to provide higher quality service to
its electronic financial services customer base. During the second and third
quarters of fiscal 1996, the Company invested in correcting operational problems
that were causing its online service customers difficulty in connecting to
network services. In addition, the year ended July 31, 1996 included technical
support costs for Parsons for the full year, while the previous year included
such costs for Parsons only from the acquisition date of September 27, 1994.
Post-contract customer support costs are accrued at the time revenue is
recognized, are included in customer service and technical support expenses and
are not included in cost of goods sold.
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The Company incurs a fixed base of support costs, which is augmented by seasonal
staffing and third-party services during periods of seasonally higher sales. The
Company previously offered customer service and technical support without
charge. However, during fiscal 1996 the Company began charging QuickBooks
customers for support. The Company will evaluate its decision to implement
support fees and will consider adjusting its policies if there is significant
unfavorable customer reaction. There can be no assurance that these policies
will not have a material adverse effect on customer relations. See "Business -
Customer Service and Support" for a discussion of risks associated with charging
customers for support.
As discussed above, the Company received a large volume of customer calls in the
period from January through March 1995 regarding shipping delays and calculation
errors experienced in that period. Many customers called to inquire about their
orders, resulting in overloaded phone lines and long hold times. The Company has
significantly increased its capacity in this area, which has resulted in higher
costs. However, even with the increased capacity, there can be no assurance that
such delays and hold times will not occur in the future.
SELLING AND MARKETING expenses remained constant at approximately 26% of net
revenue for the years ended July 31, 1996 and 1995. Selling and marketing costs
increased in absolute dollars primarily as a result of new product launches,
concentrated marketing efforts to support business initiatives for electronic
financial services, and continued efforts to expand international market
penetration, particularly in the United Kingdom, Germany, Canada, Japan, and
France. The year ended July 31, 1996 included Parsons' sales and marketing costs
for the full year while the year ended July 31, 1995, included such costs for
Parsons only from the acquisition date of September 27, 1994. The Company
expects selling and marketing expenses to continue to increase in the future as
the Company releases and promotes new products and expands internationally;
however, there can be no assurance that increased marketing spending will result
in increased net revenue.
RESEARCH AND DEVELOPMENT expenses remained constant at approximately 14% of net
revenue for the years ended July 31, 1996 and 1995. However, these expenses
increased in absolute dollars in fiscal 1996 as the Company incurred significant
research and development costs related to integration of Internet access, and
Quicken Financial Network into its products. The Company expects to experience
significant growth of research and development expenses for development efforts
related to new and existing products and services, including foreign versions of
its products.
Because online financial services is an emerging market with different
competitors than the Company's core product offerings, there can be no assurance
that the Company's products and services will be accepted in the market, will
not be delayed or will compete effectively with competitors' products and
services.
GENERAL AND ADMINISTRATIVE expenses were 6% of net revenue for each of the years
ended July 31, 1996 and 1995. General and administrative expenses increased in
absolute dollars by $6.7 million in fiscal 1996 due to merger expenses related
to Milkyway and additional personnel and infrastructure to support the Company's
growth. In addition, bad debt expense increased by approximately $2.6 million,
primarily resulting from the increase in net revenue and higher collections
risks.
MICROSOFT TERMINATION FEE. On May 20, 1995, the Company announced that its
merger agreement with Microsoft had been terminated. 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 quarter
of fiscal 1995, the Company received a $46.3 million termination fee from
Microsoft ($41.3 million net of related expenses). The after-tax benefit to the
Company of this termination payment was approximately $25.6 million.
INTEREST AND OTHER INCOME AND EXPENSE, NET was approximately $7.6 million and
$3.7 million for the years ended July 31, 1996 and 1995, respectively. The
increase in net interest income in fiscal 1996 was primarily due to net proceeds
of $80.1 million resulting from the Company's follow-on public offering and the
Microsoft termination fee of $41.3 million, both of which were received in the
fourth quarter of fiscal 1995, and to the increase in interest rates during
fiscal 1996 as compared to fiscal 1995. Interest expense increased by $73,000 in
the year ended July 31, 1996, as compared to the prior year, as a result of a
loan entered into in fiscal 1995 for a new support facility built by the Company
in Rio Rancho, New Mexico.
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INCOME TAXES. For the year ended July 31, 1996, the Company recorded an income
tax provision of $16.2 million for continued operations on pre-tax income of
$1.9 million and a tax benefit of $3.7 million for discontinued operations on a
pre-tax loss of $10.1 million. The tax provision on the total loss arose because
of the non-deductible status of both the in-process research and development
charges and the amortization of goodwill. There was no valuation allowance for
net deferred tax assets of $23.6 million at July 31, 1996, based on management's
assessment that current levels of anticipated taxable income will be sufficient
to realize the net deferred tax assets.
TWELVE MONTHS ENDED JULY 31, 1995 AND 1994
Set forth below are certain consolidated statement of operations data as a
percentage of revenue for the twelve months ended July 31, 1995 and 1994:
TWELVE MONTHS ENDED JULY 31,
----------------------------------------------------------
1994 1995
-------------------------- ---------------------------
(unaudited)
(dollars in thousands) Dollars % of Revenue Dollars % of Revenue
--------- ------------ --------- ------------
Net revenue:
Software ......................................... $ 190,920 79.7% $ 360,032 85.9%
Supplies ......................................... 48,778 20.3 59,128 14.1
--------- ----- --------- -----
239,698 100.0 419,160 100.0
Costs and expenses:
Cost of goods sold:
Product ...................................... 63,080 26.3 110,322 26.3
Amortization of purchased software and other . 18,558 7.7 11,369 2.7
Customer service and technical support ........... 40,876 17.1 75,113 17.9
Selling and marketing ............................ 59,069 24.6 109,382 26.1
Research and development ......................... 28,657 12.0 57,332 13.7
General and administrative ....................... 14,834 6.2 26,437 6.3
Charge for purchased research and development .... 151,888 63.4 52,471 12.5
Other acquisition costs, including amortization
of goodwill and purchased intangibles ........ 40,412 16.9 41,775 10.0
--------- ----- --------- -----
Total costs and expenses ................. 417,374 174.2 484,201 115.5
--------- ----- --------- -----
Loss from operations ................................. (177,676) (74.2) (65,041) (15.5)
Microsoft merger termination fee, net ................ -- -- 41,293 9.8
Interest and other income and expense, net ........... 1,329 0.6 3,748 0.9
--------- ----- --------- -----
Loss before income taxes ............................. (176,347) (73.6) (20,000) (4.8)
Provision for income taxes ........................... 4,558 1.9 24,296 5.8
--------- ----- --------- -----
Net loss ............................................. $(180,905) (75.5)% $ (44,296) (10.6)%
========= ===== ========= =====
NET REVENUE increased approximately 75% to $419.2 million for the twelve months
ended July 31, 1995, compared to $239.7 million for the twelve months ended July
31, 1994. The increase resulted in part from the inclusion of approximately
$62.0 million in net revenue from Parsons' operations subsequent to September
27, 1994, and net revenue from ChipSoft's operations which increased to $104.5
million for the twelve months ended July 31, 1995, compared to $67.8 million
from the date of the ChipSoft acquisition to July 31, 1994. Net revenue from
European operations was 3% and 4% of total net revenue in 1994 and 1995,
respectively. Net revenue from Asian operations was 7% and 6% of total net
revenue in 1994 and 1995, respectively. Asian operations were the result of the
Milkyway merger in January 1996. This was accounted for as a pooling of
interests and, therefore, all reported periods have been restated to include
Milkyway.
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Software net revenue increased approximately 89% to $360.0 million for the
twelve months ended July 31, 1995 from $190.9 million in the same period of the
prior year, principally due to increased volumes, new product introductions and
acquisitions. The release of new and upgraded finance products, including
"deluxe" and CD-ROM versions of certain products, resulted in greater unit
sales. Increases in average selling prices from "deluxe" products were partially
offset by lower average selling prices on certain products sold through the OEM
channel and a greater proportion of upgrade sales as compared with new product
sales as the Company's core product lines mature.
Supplies net revenue increased approximately 21% to $59.1 million for the fiscal
1995 period as compared with $48.8 million in the prior year due to order
increases in small business check, envelope and invoice products as the
Company's customer base continued to grow.
COST OF GOODS SOLD decreased to approximately 29% of net revenue for the twelve
months ended July 31, 1995 versus 34% for the prior twelve-month period.
Decreased amortization of purchased software resulting from the Company's
acquisitions accounted for the majority of this decline. Excluding
acquisition-related amortization costs, cost of goods sold would have been
approximately 26% of net revenue for both of the twelve-month periods ended July
31, 1995 and 1994.
Software cost of goods sold, excluding acquisition-related amortization costs,
increased to approximately 24% of software net revenue for the twelve months
ended July 31, 1995, as compared to approximately 21% in the twelve months ended
July 31, 1994. Margin declines resulted from product and freight costs
associated with expediting delayed orders and maintenance releases for consumer
tax products and upgrade revenues. In addition, Parsons' lower priced product
offerings included for the period after September 29, 1994 had higher
cost-to-net-revenue ratios than other Intuit products. The Company achieved
supplies margin improvements from a shift in product mix to business supplies
and a reduction in materials costs, including a one-time price concession on
previously purchased materials in the first quarter of fiscal 1995.
OPERATING EXPENSES. As previously discussed, during fiscal 1995, the Company
experienced significant operational problems as a result of inadequacies in
certain of its systems, procedures and controls. These operational problems
affected technical support and customer service expenses, selling and marketing
expenses, and cost of goods sold in fiscal 1995.
CUSTOMER SERVICE AND TECHNICAL SUPPORT costs were approximately 18% and 17% of
net revenue, respectively, for the twelve-month periods ended July 31, 1995 and
1994. Customer service and technical support costs were higher during the twelve
months ended July 31, 1995, as compared to the prior twelve month period,
primarily as a result of increased customer calls regarding both the shipping
delays in January 1995, discussed above, and tax product calculation errors. In
addition, due to the favorable timing of the ChipSoft acquisition, ChipSoft's
seasonally low revenues and high costs of operations from August 1 through
December 12, 1993 are not reflected in the Company's results for the twelve
months ended July 31, 1994. During fiscal 1995, the Company substantially
completed the relocation of certain support functions to lower cost locations;
however, there can be no assurance that future cost savings will be achieved.
Post-contract customer support costs are accrued at the time revenue is
recognized, are included in customer service and technical support expenses and
are not included in cost of goods sold.
SELLING AND MARKETING expenses increased to approximately 26% of net revenue in
fiscal 1995 compared to approximately 25% in fiscal 1994. Selling and marketing
costs increased both in absolute dollars and as a percentage of net revenue
primarily as a result of the inclusion of Parsons' operations from September 27,
1994, new product launches and continued efforts to expand international market
penetration. In addition, because of the seasonality of the tax business and the
timing of the 1993 ChipSoft acquisition, the Company experienced increased costs
during the first four months of fiscal 1995 without a corresponding increase in
net revenue during that period.
RESEARCH AND DEVELOPMENT expenses increased to 14% of net revenue for the twelve
months ended July 31, 1995 from 12% of net revenue in the twelve months ended
July 31, 1994. The significant increase, both in absolute dollars and as a
percentage of revenue, was due to development efforts on new and existing
products, including
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international versions of products, and investment in electronic banking service
features. In addition, research and development expenses include Parsons'
operations from September 27, 1994 and ChipSoft's operations from December 13,
1993. Because of the seasonality of the ChipSoft business, expenses are
typically higher in the October quarter without corresponding net revenue during
the same period. Because of the timing of the ChipSoft acquisition, the twelve
months ended July 31, 1994 included the seasonally high net revenue of ChipSoft,
but did not include its operating expenses prior to December 13, 1993.
GENERAL AND ADMINISTRATIVE expenses were 6% of net revenue during each of the
twelve-month periods ended July 31, 1995 and 1994. However, general and
administrative expenses increased in absolute dollars by $11.6 million in fiscal
1995 because of the inclusion of Parsons' and ChipSoft's operations from the
dates of their respective acquisitions, as well as additional senior management
personnel and infrastructure to support revenue growth. In particular, the
Company significantly increased administrative support in its international
offices, and increased its in-house legal and finance departments domestically.
In addition, bad debt expense increased by approximately $1.4 million in
relation to the increase in net revenue.
INTEREST AND OTHER INCOME AND EXPENSE, NET was $3.7 million and $1.3 million for
the twelve months ended July 31, 1995 and 1994, respectively. The increase in
net interest income was the result of higher cash balances arising from net
proceeds of $80.1 million from a follow-on public offering of 2,200,000 shares
of the Company's common stock in June 1995, the receipt of a $46.3 million
($25.6 million net of related expenses and income taxes) merger termination fee
from Microsoft Corporation in May 1995 and cash generated from operations,
partially offset by $28.8 million in cash paid for Parsons in September 1994.
Interest expense increased by $203,237 in the twelve months ended July 31, 1995
as a result of a loan entered into in fiscal 1995 for a new support facility
built by the Company.
INCOME TAXES. For the year ended July 31, 1995, the Company recorded an income
tax provision of $24.3 million on a pretax loss of $20.0 million. The tax
provision on the operating loss arose because of the non-deductible status of
both the in-process research and development charges and goodwill amortization.
There was no valuation allowance for net deferred tax assets of $21.6 million at
July 31, 1995 based on management's assessment that current levels of taxable
income would be sufficient to realize the net deferred tax assets.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business has experienced, and is expected to continue to
experience, substantial seasonality, due principally to the timing of the tax
return preparation season, timing of production launches for new or updated
versions of products and, to a lesser extent, consumer software buying patterns.
Sales of the Company's tax products are concentrated in the period from
November, when certain professional tax products are released, through March,
when consumers purchase the products in advance of the April 15 tax return
filing deadline. Sales of the Company's Quicken products are typically strongest
during the year end holiday buying season. As a result of these seasonal
patterns, the Company generated significant income from operations before
acquisition-related charges during its fiscal quarter ended January 31, 1996,
with the quarter ended April 30, 1996 following as the second largest revenue
generating quarter of the fiscal year. Because of these seasonal factors and a
significantly increased level of operating expenses to support the Company's
expanded infrastructure and development efforts, the Company incurred
significant losses from operations before acquisition-related charges during its
fiscal quarters ended July 31, 1995 and October 31, 1995. The Company expects to
continue to report seasonal losses before acquisition-related costs and
amortization in the July and October quarters of future fiscal years.
The Company's quarterly operating results have varied in the past, and are
likely to vary in the future, significantly based upon a number of factors. In
addition to seasonal factors, the Company's quarterly operating results can be
affected significantly by the number and timing of new product or version
releases by the Company, as well as a number of other factors including the
timing of product announcements or introductions by the Company's competitors,
discretionary marketing and promotional expenditures, research and development
expenditures and a variety of non-recurring events such as acquisitions.
Products are generally shipped as orders are received and, consequently,
quarterly sales and operating results depend primarily on the volume and timing
of orders received during the quarter, which are difficult to forecast. A
significant portion of the Company's operating expenses are
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relatively fixed and planned expenditures are based on sales forecasts. Thus, if
net revenue levels are below expectations, operating results are likely to be
materially adversely affected. In particular, net income, if any, may be
disproportionately affected because only a small portion of the Company's
expenses vary with revenue in the short term. In response to competition, the
Company may also choose to reduce prices or increase spending, which may
adversely affect the Company's operating results and financial condition.
Although the Company has experienced significant growth in revenue in recent
quarters, there can be no assurance that the Company will sustain such revenue
growth in the future or be profitable in any future period. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards, changing customer requirements and
new competitors. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices,
including changes in tax laws, regulations or procedures, can render existing
products obsolete and unmarketable. The Company's future success depends upon
its ability to enhance its existing products and services, develop new products
and services that address the changing requirements of its customers, develop
additional products and services for new or other platforms and environments
(such as the Internet) and anticipate or respond to technological advances,
emerging industry standards and practices and changes in tax laws, regulations
and procedures in a timely, cost-effective manner. In response to major industry
changes reflected by the increasing popularity of the Internet among consumers
and financial service providers, the Company has expanded its Internet strategy.
See "Overview - Internet Strategic Initiatives." There can be no assurance that
such initiatives can be successfully implemented or that they will result in
increased revenue or profits for the Company. Conversely, there can be no
assurance that consumers' use of the Internet, particularly for commercial
transactions, will continue to increase as rapidly as it has during the past few
years.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had $198.0 million in cash and short-term
investments, a $0.2 million increase from the July 31, 1995 balance of $197.8
million.
FISCAL 1996. Operating activities provided $61.5 million in cash during the year
ended July 31, 1996, principally from $55.7 million generated from net income
after adjustment for charges for purchased research and development,
amortization of goodwill and other purchased intangibles, and depreciation. The
Company's investing activities during fiscal 1996 consisted principally of $69.3
million in purchases of property and equipment and net purchases of short-term
investments of $32.0 million. The Company's financing activities during fiscal
1996 provided $9.7 million due primarily to proceeds from the exercise of stock
options.
FISCAL 1995. Operating activities provided $77.5 million in cash during the year
ended July 31, 1995, principally from $72.6 million generated from net income
after adjustment for charges for purchased research and development,
amortization of goodwill and other purchased intangibles, depreciation and a
$25.6 million (net of related expenses and income taxes) merger termination fee
from Microsoft. The Company's investing activities during fiscal 1995 consisted
principally of $59.4 million in purchases of property and equipment and payments
for acquisitions, including $28.8 million in cash paid as partial consideration
for Parsons in September 1994. In addition, the Company had net purchases of
short-term investments of $57.1 million. The Company's financing activities
during fiscal 1995 provided $91.5 million due primarily to $80.1 million in
proceeds from a follow-on public offering of 2,200,000 shares of the Company's
common stock in June 1995, and $6.9 million from stock option exercises.
The Company derives significant portions of its revenue from certain
distributors and resellers. The Company performs credit evaluations of its
customers and to date has not experienced any significant losses. However,
bankruptcy of a distributor or retailer could materially adversely affect the
Company's future revenue streams for a period of time.
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The Company enters into leases for facilities in the normal course of its
business. Refer to Note 4 of Notes to Consolidated Financial Statements for a
summary of these commitments. The Company has no other significant expenditure
commitments, although additional cash may be used to acquire technology through
purchases and strategic acquisitions.
Due to the seasonal nature of its businesses, the Company generally earns more
than 100% of its operating income before acquisition-related charges during the
January and April quarters. The Company believes its cash and short-term
investments will be sufficient to meet the Company's anticipated seasonal
working capital and capital expenditure requirements for at least the next
twelve months.
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ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, independent auditors........................ 44
Consolidated Balance Sheets as of July 31, 1995 and 1996................. 45
Consolidated Statements of Operations for the
ten months ended July 31, 1994 and the twelve months ended
July 31, 1995 and July 31, 1996.................................... 46
Consolidated Statements of Stockholders' Equity for the
ten months ended July 31, 1994 and the twelve months ended
July 31, 1995 and July 31, 1996.................................... 47
Consolidated Statements of Cash Flows for the
ten months ended July 31, 1994 and the twelve months ended
July 31, 1995 and July 31, 1996.................................... 48
Notes to Consolidated Financial Statements............................... 49
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Intuit Inc. is filed as
part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Intuit Inc.:
SCHEDULE DESCRIPTION PAGE
-------- ----------- ----
II Valuation and Qualifying Accounts for the ten months
ended July 31, 1994 and the twelve months ended July
31, 1995 and July 31, 1996 61
Other schedules are not filed due to being immaterial or not applicable.
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44
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, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the ten months ended July
31, 1994 and the twelve months ended July 31, 1995 and July 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intuit Inc. at
July 31, 1995 and 1996, and the consolidated results of its operations and its
cash flows for the ten months ended July 31, 1994 and the twelve months ended
July 31, 1995 and July 31, 1996, 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
September 6, 1996,
except for Note 12, as to which the date is
September 18, 1996
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INTUIT INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, JULY 31,
1995 1996
--------- ---------
(in thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 76,298 $ 44,584
Short-term investments ............................................ 121,477 153,434
Accounts receivable, net of allowance for doubtful accounts
of $2,408 and $4,951, respectively ............................. 38,975 49,473
Inventories ....................................................... 6,576 4,448
Prepaid expenses .................................................. 4,416 9,269
Deferred income taxes ............................................. 23,785 19,205
--------- ---------
Total current assets ...................................... 271,527 280,413
Property and equipment, net ......................................... 49,877 95,611
Purchased intangibles ............................................... 28,267 16,449
Goodwill ............................................................ 46,111 15,194
Long-term deferred income tax asset ................................. -- 6,892
Other assets ........................................................ 2,823 3,461
--------- ---------
Total assets ........................................................ $ 398,605 $ 418,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 21,507 $ 33,972
Accrued compensation and related liabilities ...................... 15,426 15,473
Deferred revenue .................................................. 9,251 18,974
Income taxes payable .............................................. 9,607 --
Other accrued liabilities ......................................... 51,455 42,270
--------- ---------
Total current liabilities ................................. 107,246 110,689
Deferred income taxes ............................................... 2,190 2,513
Long-term notes payable ............................................. 8,770 5,583
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized -- 3,000 shares
Issued and outstanding -- none .................................. -- --
Common stock, $0.01 par value
Authorized -- 250,000 shares
Issued and outstanding -- 44,517 and 45,807 shares, respectively 445 458
Additional paid-in capital ........................................ 490,698 530,818
Deferred compensation ............................................. (30) (1)
Cumulative translation adjustment and other ....................... 126 (501)
Accumulated deficit ............................................... (210,840) (231,539)
--------- ---------
Total stockholders' equity ................................ 280,399 299,235
--------- ---------
Total liabilities and stockholders' equity .......................... $ 398,605 $ 418,020
========= =========
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TEN MONTHS TWELVE MONTHS
ENDED JULY 31, ENDED JULY 31,
1994 1995 1996
--------- --------- ---------
(in thousands, except per share data)
Net revenue ........................................... $ 210,376 $ 419,160 $ 538,608
Costs and expenses:
Cost of goods sold:
Product .......................................... 55,151 110,322 136,470
Amortization of purchased software and other ..... 18,558 11,369 1,399
Customer service and technical support .............. 36,664 75,113 106,872
Selling and marketing ............................... 51,381 109,382 142,319
Research and development ............................ 26,125 57,332 75,558
General and administrative .......................... 12,861 26,437 33,153
Charge for purchased research and development ....... 151,888 52,471 8,043
Other acquisition costs ............................. 20,434 1,600 778
Amortization of goodwill and purchased intangibles .. 19,978 40,175 39,792
--------- --------- ---------
Total costs and expenses .................... 393,040 484,201 544,384
--------- --------- ---------
Loss from operations ........................ (182,664) (65,041) (5,776)
Microsoft merger termination fee, net ................. -- 41,293 --
Interest and other income and expense, net ............ 1,171 3,748 7,646
--------- --------- ---------
Income (loss) from continuing operations before
income taxes ........................................ (181,493) (20,000) 1,870
Provision for income taxes ............................ 2,481 24,296 16,225
--------- --------- ---------
Loss from continuing operations ....................... (183,974) (44,296) (14,355)
Loss from operations of discontinued operations, net of
income tax benefit of $3,725 ....................... -- -- (6,344)
--------- --------- ---------
Net loss .............................................. $(183,974) $ (44,296) $ (20,699)
========= ========= =========
Loss per share from continuing operations ............. $ (5.34) $ (1.07) $ (0.32)
Loss per share from discontinued operations ........... -- -- (0.14)
--------- --------- ---------
Net loss per share .................................... $ (5.34) $ (1.07) $ (0.46)
========= ========= =========
Shares used in computing net loss per share ........... 34,454 41,411 45,149
========= ========= =========
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Cumulative
Common Stock Additional Translation
--------------------------- Paid Deferred Adjustment
Shares Amount In Capital Compensation and Other
---------- ---------- ---------- ------------ -----------
(dollars in thousands)
Balance at September 30, 1993 ............. 23,060,040 $ 118 $ 37,703 $ (100) $ (251)
Stock dividend shares canceled ........... -- -- (4) -- --
Issuance of common stock pursuant to
ChipSoft merger and ISC acquisition ... 14,887,522 74 302,019 -- --
Issuance of common stock upon exercise
of options ............................. 1,173,950 6 1,463 -- --
Tax benefit from option transactions ..... -- -- 9,281 -- --
Amortization of deferred compensation .... -- -- -- 37 --
Translation adjustment ................... -- -- -- -- 70
Net loss ................................. -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 .................. 39,121,512 198 350,462 (63) (181)
Issuance of common stock pursuant to
Parsons Technology Inc. acquisition .... 1,799,464 9 33,022 -- --
Issuance of common stock pursuant to
Personal News, Inc. acquisition ........ 216,982 1 7,202 -- --
Sale of common stock pursuant to
secondary offering, net of issuance
costs of $4,582.......................... 2,200,000 11 80,107 -- --
Issuance of common stock upon exercise
of options ............................. 1,178,950 6 6,908 -- --
Stock split .............................. -- 220 (220) -- --
Tax benefit from option transactions ..... -- -- 13,217 -- --
Amortization of deferred compensation .... -- -- -- 33 --
Translation adjustment and other ......... -- -- -- -- 307
Net loss ................................. -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 .................. 44,516,908 445 490,698 (30) 126
Issuance of common stock pursuant to
IIS acquisition ......................... 169,181 2 8,431 -- --
Issuance of common stock upon exercise
of options ............................. 1,120,847 11 12,824 -- --
Tax benefit from option transactions ..... -- -- 18,865 -- --
Amortization of deferred compensation .... -- -- -- 29 --
Translation adjustment and other ......... -- -- -- -- (627)
Net loss ................................. -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 .................. 45,806,936 $ 458 $ 530,818 $ (1) $ (501)
===============================================================================================================================
Earnings Total
(Accumulated Stockholders'
Deficit) Equity
------------ -------------
(dollars in thousands)
Balance at September 30, 1993 ............. $ 17,426 $ 54,896
Stock dividend shares canceled ........... 4 --
Issuance of common stock pursuant to
ChipSoft merger and ISC acquisition ... -- 302,093
Issuance of common stock upon exercise
of options ............................. -- 1,469
Tax benefit from option transactions ..... -- 9,281
Amortization of deferred compensation .... -- 37
Translation adjustment ................... -- 70
Net loss ................................. (183,974) (183,974)
- ------------------------------------------------------------------------------
Balance at July 31, 1994 .................. (166,544) 183,872
Issuance of common stock pursuant to
Parsons Technology Inc. acquisition .... -- 33,031
Issuance of common stock pursuant to
Personal News, Inc. acquisition ........ -- 7,203
Sale of common stock pursuant to
secondary offering, net of issuance
costs of $4,582.......................... -- 80,118
Issuance of common stock upon exercise
of options ............................. -- 6,914
Stock split .............................. -- --
Tax benefit from option transactions ..... -- 13,217
Amortization of deferred compensation .... -- 33
Translation adjustment and other ......... -- 307
Net loss ................................. (44,296) (44,296)
- ------------------------------------------------------------------------------
Balance at July 31, 1995 .................. (210,840) 280,399
Issuance of common stock pursuant to
IIS acquisition ......................... -- 8,433
Issuance of common stock upon exercise
of options ............................. -- 12,835
Tax benefit from option transactions ..... -- 18,865
Amortization of deferred compensation .... -- 29
Translation adjustment and other ......... -- (627)
Net loss ................................. (20,699) (20,699)
- ------------------------------------------------------------------------------
Balance at July 31, 1996 .................. $ (231,539) $ 299,235
==============================================================================
See accompanying notes.
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48
INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
TEN MONTHS TWELVE MONTHS
ENDED JULY 31, ENDED JULY 31,
1994 1995 1996
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................... $(183,974) $ (44,296) $ (20,699)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Charge for purchased research and development ........... 151,888 52,471 8,043
Amortization of goodwill and purchased
intangibles .......................................... 38,536 51,544 44,502
Depreciation ............................................ 5,396 12,890 23,853
--------- --------- ---------
Net income before charges for purchased research
and development, amortization and depreciation... 11,846 72,609 55,699
Changes in assets and liabilities:
Accounts receivable .................................. 20,216 (23,781) (10,498)
Inventories .......................................... 2,962 (3,108) 2,128
Prepaid expenses ..................................... (892) 4,269 (4,817)
Deferred income tax assets and liabilities ........... (9,479) (16,536) (1,989)
Accounts payable ..................................... (2,546) 4,543 12,281
Accrued compensation and related liabilities ......... 3,335 6,010 47
Deferred revenue ..................................... (9,324) 118 9,723
Accrued acquisition liabilities ...................... 6,772 (5,074) (5,733)
Other accrued liabilities ............................ (11,822) 15,586 (4,624)
Income taxes payable ................................. (4,431) 22,842 9,258
--------- --------- ---------
Net cash provided by operating activities .......... 6,637 77,478 61,475
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ........................... (11,779) (33,087) (69,321)
Payment for acquisitions, net of cash acquired ............... (413) (26,323) 40
(Increase) decrease in other assets .......................... 1,173 1,024 (1,628)
Purchase of short-term investments ........................... (72,571) (144,651) (197,003)
Liquidation and maturity of short-term investments ........... 86,106 87,515 165,046
--------- --------- ---------
Net cash provided by (used in) investment
activities ....................................... 2,516 (115,522) (102,866)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ..................... 3084 5,211 --
Principal payments on long-term debt ......................... -- (727) (3,187)
Decrease in other liabilities ................................ (615) -- --
Net proceeds from issuance of common stock ................... 1,469 87,015 12,864
--------- --------- ---------
Net cash provided by financing activities .......... 3,938 91,499 9,677
Net increase (decrease) in cash and cash equivalents ........... 13,091 53,455 (31,714)
Cash and cash equivalents at beginning of period ............... 9,752 22,843 76,298
--------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 22,843 $ 76,298 $ 44,584
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ................................................ $ 10 $ 232 $ 305
========= ========= =========
Income taxes paid ............................................ $ 8,870 $ 14,468 $ 5,791
========= ========= =========
See accompanying notes.
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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 personal
finance, small business accounting, and tax preparation software. The Company
develops, markets, and supports software products and services that enable
individuals, professionals, and small businesses to automate commonly performed
financial tasks and better organize, understand, manage, and plan their
financial lives. Principal products include personal and small business
financial software, personal and corporate tax software, online banking and bill
payment software and services, and supplies such as invoice forms and checks.
The Company markets its products through distributors and retailers and by
direct sales to OEMs and individual users. The Company's customers are located
primarily in North America, Europe, and Asia.
Principles of Consolidation and Fiscal Year Change
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Effective August 1, 1994, the Company changed
its fiscal year end from September 30 to July 31.
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 the collectibility of accounts
receivable, reserves for returns and exchanges and in assessing the carrying
value of goodwill and purchased intangibles.
Actual results could differ from those estimates.
Net Revenue
Revenue is generally recognized at the time of shipment, net of allowances for
estimated future returns and for excess quantities in distribution channels,
provided that no significant vendor obligations exist and collections of
accounts receivable are probable. Reserves are provided for quantities of
current product versions that are considered excess and for inventories of all
previous versions of products at the time new product versions are introduced.
Advance payments are recorded as deferred revenue until the products are shipped
or services are provided. Rebate costs are provided at the time revenue is
recognized. The Company provides warranty reserves at the time revenue is
recognized for the estimated cost of replacing defective products.
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.
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Advertising
Advertising costs are expensed as incurred. Advertising expense for the ten
months ended July 31, 1994 and the twelve months ended July 31, 1995 and July
31, 1996 was approximately $9.1 million, $18.4 million and $21.0 million,
respectively.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with a maturity of
three months or less at date of acquisition to be cash equivalents. The
available-for-sale securities are carried at amortized cost which approximates
fair value. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based on specific identification. The following is a
summary of the estimated fair value of available-for-sale securities at July 31,
1995 and 1996:
1995 1996
-------- --------
(in thousands)
Certificates of deposit ............. $ 4,171 $ 10,003
Corporate notes ..................... -- 15,875
Money market funds .................. -- 10,767
Municipal bonds ..................... 82,842 77,487
Commercial paper .................... 32,546 13,866
U.S. Government securities........... 5,954 51,288
-------- --------
$125,513 $179,286
======== ========
The estimated fair value of available-for-sale securities by contractual
maturity at July 31, 1995 and 1996 is as follows:
1995 1996
-------- --------
(in thousands)
Due within one year ................. $109,129 $169,573
Due after one year .................. 16,384 9,713
-------- --------
$125,513 $179,286
======== ========
Both gross unrealized gains and losses as of July 31, 1995 and 1996, and
realized gains and losses on sales of each type of security for the years ended
July 31, 1995 and 1996, were immaterial.
Total cash, cash equivalents and short-term investments at July 31, 1995 and
1996 were $197,775 and $198,018, respectively.
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.
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 three to eight years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives or remaining
lease terms.
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51
Property and equipment consist of:
JULY 31, JULY 31,
1995 1996
--------- ---------
(in thousands)
Machinery and equipment ............................. $ 55,991 $ 97,300
Furniture and fixtures .............................. 9,315 17,173
Leasehold improvements .............................. 5,792 18,634
Land and buildings .................................. 8,241 12,588
--------- ---------
79,339 145,695
Less accumulated depreciation and amortization ...... (29,462) (50,084)
--------- ---------
$ 49,877 $ 95,611
========= =========
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired (goodwill) is
generally amortized on a straight-line basis over periods generally not
exceeding three years. The cost of identified intangibles is generally amortized
on a straight-line basis over periods from 1 to 10 years. The carrying value of
goodwill and intangible assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that may suggest
impairment. To date no such impairment has been indicated. Should there be an
impairment in the future, the Company will measure the amount of the impairment
based on undiscounted expected future cash flows from the impaired assets. The
cash flow estimates that will be used will contain management's best estimates,
using appropriate and customary assumptions and projections at the time.
LIFE IN NET BALANCE AT
YEARS JULY 31, 1995 JULY 31, 1996
----- ------------- -------------
(in thousands)
Goodwill............................. 3 $46,111 $15,194
Customer lists....................... 3-5 13,286 6,952
Covenant not to complete............. 4-5 6,058 4,248
Purchased technology................. 1-5 3,028 857
Other intangibles.................... 1-10 5,895 4,392
Other intangibles include items such as trade names, logos, and other identified
intangible assets. The intangible asset balances presented above are net of
total accumulated amortization of $80.6 million and $125.1 million at July 31,
1995 and 1996, respectively.
Concentration of Credit Risk
The Company's product revenues are concentrated in the personal computer
software industry which is highly competitive and rapidly changing. Significant
technological changes in the industry or customer requirements, or the emergence
of competitive products with new capabilities or technologies, could adversely
affect the Company's operating results.
Financial investments that potentially subject the Company to concentration of
credit risk consist principally of short-term investments and trade accounts
receivable. The Company's investment portfolio is diversified and generally
consists of short-term investment grade securities. The credit risk in the
Company's accounts receivable is mitigated by the fact that the Company performs
ongoing credit evaluations of its customers' financial condition and that
accounts receivable are primarily derived from customers in North America.
Generally, no collateral is required. The Company maintains reserves for
estimated credit losses and such losses have historically been within
management's expectations.
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Loss Per Share
Loss per share has been computed using the weighted average number of common
shares outstanding during each period. As discussed in Note 5, all share and per
share data in the Financial Statements and notes thereto have been adjusted
retroactively to give effect to the Company's two-for-one stock split in August
1995.
Foreign Currency Translation
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
During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"), which requires the review for
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. The Company does not believe
that adoption of SFAS No. 121, which will become effective for the Company's
1997 fiscal year, will have a material impact on its financial condition or
operating results.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This
standard, which establishes a fair value based method for stock-based
compensation plans, also permits an election to continue following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
with disclosures of pro forma net income and earnings per share under the new
method. The Company will continue following the requirements of APB Opinion No.
25 with disclosure of pro forma information. The disclosure requirements of SFAS
No. 123 will be effective for the Company's 1997 fiscal year.
2. ACQUISITIONS
In December 1993, the Company completed its acquisition of ChipSoft, which was
treated as a purchase for accounting purposes. The total purchase price of
$306.4 million in common stock, stock options, and acquisition costs ($255.3
million net of tangible assets acquired) and approximately $11.0 million
relating to the tax effecting of identified intangibles were allocated as
follows: $150.5 million to in-process research and development, $33.5 million to
intangible assets, and $82.3 million to goodwill.
In April 1994, the Company acquired certain assets of Best's professional tax
preparation business for an initial purchase price of $6.5 million in cash. The
purchase agreement calls for a cash "earnout" payment based on the amount of
revenue derived by the Company from former Best customers and the number of Best
customers who purchased the Company's professional tax products by April 1996.
The Company is currently negotiating this payment with Best and believes the
obligation is insignificant. Of the purchase price, $5.8 million was allocated
to intangible assets.
In July 1994, the Company completed its acquisition of ISC for consideration of
$7.6 million in common stock and cash. ISC currently provides electronic banking
back-end processing services, bill payment, stock quote retrieval services and
access to Intuit's web site for consumers via their modems and personal
computers. The acquisition was treated as a purchase for accounting purposes. Of
the purchase price, $1.4 million was allocated to in-process research and
development, $6.0 million to intangible assets, and $2.1 million to goodwill. As
further discussed in Note 12 of Notes to Consolidated Financial Statements, the
Company has entered into an agreement to sell ISC.
In September 1994, the Company completed its acquisition of Parsons, which was
treated as a purchase for accounting purposes. Under the terms of the agreement,
the Company paid approximately $28.8 million in cash and
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issued approximately 1,800,000 shares of the Company's common stock to Parsons'
stockholders at the date of the acquisition. In the first quarter of fiscal
1996, the Company paid an additional $2.7 million in cash as deferred
consideration. The total purchase price of approximately $67.3 million, which,
in addition to the above amounts, included 138,038 shares of common stock to be
paid for certain non-competition agreements, was allocated as follows: $44.0
million to in-process research and development, $14.0 million to intangible
assets and $9.9 million to goodwill.
In June 1995, the Company completed its acquisition of PNI, 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 charged to the Company's operations at the time of the
acquisition. In addition to the in-process research and development charge, the
Company incurred acquisition-related charges of $1.6 million in fiscal 1995
related to the termination of a conflicting license agreement.
In June 1995, the Company acquired certain assets of Mysterious Pursuit for
consideration of approximately $1.1 million. Mysterious Pursuit, an Australian
company, was the Company's outside developer of tax software for the Australian,
German and United Kingdom markets. The purchase price of $1.1 million was
allocated to identified intangible assets. Mysterious Pursuit's operations were
discontinued during fiscal 1996.
On January 2, 1996, the Company completed its acquisition of Milkyway, which was
treated as a pooling of interests for accounting purposes. Milkyway is a
provider of PC-based financial software in Japan. In addition to the issuance of
650,000 shares of Intuit common stock, the Company recorded acquisition related
expenses of $0.6 million. The accompanying consolidated financial statements are
presented on a combined basis for all periods. The following information shows
revenue and net income (loss) of the separate companies during the periods
preceding the combination:
TEN MONTHS TWELVE MONTHS PERIOD
ENDED JULY 31, ENDED JULY 31, ENDED JAN. 2,
1994 1995 1996
--------- --------- ---------
(in thousands)
Net revenue:
Intuit...................................... $ 194,126 $ 395,729 $ 164,696
Milkyway ................................... 16,250 23,431 14,510
--------- --------- ---------
$ 210,376 $ 419,160 $ 179,206
========= ========= =========
Net income (loss):
Intuit...................................... $(176,313) $ (45,363) $ (34,037)
Milkyway ................................... (7,661) 1,067 1,312
--------- --------- ---------
$(183,974) $ (44,296) $ (32,725)
========= ========= =========
In June 1996, the Company completed its acquisition of IIS, a developer of an
Internet based system designed to allow consumers to obtain personalized
insurance information from national insurance carriers via the World Wide Web.
The acquisition, which was treated as a purchase for accounting purposes, had a
purchase price of approximately $9.0 million. Under the terms of the agreement,
the Company issued 169,181 shares of Intuit common stock and 3,255 options to
purchase Intuit common stock to IIS stockholders at the date of acquisition.
Approximately $8.0 million of in-process research and development was expensed.
Pro forma information has not been presented due to immateriality.
Consistent with the Company's test for internally developed software, for each
of these acquisitions the Company determined the amounts allocated to developed
and in-process research and development based on whether technological
feasibility had been achieved and whether there was any alternative future use
for the technology. Due to the absence of detailed program designs, evidence of
technological feasibility was established through the
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54
existence of a completed working model at which point functions, features and
technical performance requirements can be demonstrated. As of the respective
dates of the acquisitions, the Company concluded that the in-process research
and development had no alternative future use after taking into consideration
the potential for usage of the software in different products, resale of the
software and internal usage.
3. OTHER ACCRUED LIABILITIES
JULY 31, JULY 31,
1995 1996
------- -------
(in thousands)
Reserve for returns and exchanges ............................. $29,197 $24,203
Acquisition-related items, including deferred acquisition costs 9,009 3,677
Rebates ....................................................... 1,974 2,787
Post-customer contract support ................................ 2,796 3,500
Other accruals ................................................ 8,479 8,103
------- -------
$51,455 $42,270
======= =======
4. NOTES PAYABLE AND COMMITMENTS
Notes Payable
In March 1995, the Company entered into a 20-year loan for $4.0 million for its
site in New Mexico. The interest rate is variable with a maximum rate of 10%. At
July 31, 1996, the interest rate was 8-1/4%. The fair value of the loan
approximates cost, as the interest rate on the borrowings is adjusted
periodically to reflect market rates.
Leases
The Company 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:
YEARS ENDING
(in thousands) JULY 31,
------------
1997 .................................... $10,110
1998 .................................... 9,809
1999 .................................... 8,652
2000 .................................... 9,114
2001 .................................... 8,843
Thereafter .............................. 28,898
-------
$75,426
=======
Total rent expense for the ten months ended July 31, 1994 and the twelve months
ended July 31, 1995 and July 31, 1996 was approximately $5.4 million, $7.6
million and $9.2 million, respectively.
5. STOCKHOLDERS' EQUITY
Stock Option Plans
On January 31, 1993, the Company 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 the Company.
Exercisability, option price and other terms are determined by the Board of
Directors, but the option price will not be 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.
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55
In addition, the Company has several discontinued option plans pursuant to which
there are still outstanding options, including the ChipSoft option plans which
were assumed by the Company on December 12, 1993. The options have a seven-year
term and generally become exercisable over a five-year period. A summary of
activity under the Plans is as follows:
OPTIONS OUTSTANDING
SHARES ---------------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
---------- ---------- ---------------
Balance at September 30, 1993 ................ 1,474,910 3,122,538 $ 0.05 - $18.88
Additional shares authorized for issuance... 1,000,000
Options assumed from ChipSoft acquisition... -- 1,676,376 $ 0.45 - $18.50
Options assumed from ISC acquisition ....... (24,610) 24,610 $ 0.11
Options granted ............................ (1,284,828) 1,284,828 $15.13 - $23.50
Options exercised .......................... -- (1,173,950) $ 0.05 - $18.50
Options canceled or expired ................ 82,476 (218,942) $ 0.45 - $23.50
---------- ----------
Balance at July 31, 1994 ..................... 1,247,948 4,715,460 $ 0.05 - $23.50
Additional shares authorized ............... 5,000,000
Options granted ............................ (3,114,974) 3,114,974 $19.75 - $43.13
Options exercised .......................... -- (1,178,950) $ 0.05 - $31.00
Options canceled or expired ................ 291,396 (388,118) $ 0.45 - $43.13
---------- ----------
Balance at July 31, 1995 ................... 3,424,370 6,263,366 $ 0.05 - $43.13
Options assumed from the IIS acquisition ... (3,255) 3,255 $ 0.44 - $ 8.30
Options granted ............................ (2,001,495) 2,001,495 $35.00 - $84.00
Options exercised .......................... -- (1,120,847) $ 0.05 - $56.63
Options canceled or expired ................ 548,853 (581,296) $ 3.00 - $84.00
---------- ----------
Balance at July 31, 1996 ..................... 1,968,473 6,565,973 $ 0.05 - $84.00
========== ==========
At July 31, 1994, 1995 and 1996, options under the various plans for 1,459,886,
1,480,588 and 1,894,320 shares, respectively, were exercisable. At July 31,
1996, all 1,968,473 shares available for grant were under the 1993 Plan.
On May 22, 1995, all non-officer employee grants of stock options under the
Company's 1993 Equity Incentive Plan issued between the date the proposed merger
with Microsoft Corporation ("Microsoft") 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.
Stock Split
On July 20, 1995, the Company'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 the Company's common stock have been restated.
6. PROFIT-SHARING AND BENEFIT PLANS
Profit-Sharing Plans
The Company 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 the ten months
ended July 31, 1994 and the twelve months ended July 31, 1995 and July 31, 1996
was approximately $3,144,000, $5,044,000 and $1,415,000, respectively.
Benefit Plans
At July 31, 1996, the Company maintained three 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.
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The Company, at its discretion, may make contributions to any plan. Such
contributions were approximately $300,000 for the year ended July 31, 1996.
7. INCOME TAXES
The components of the provision for income taxes consist of the following:
TEN MONTHS TWELVE MONTHS
ENDED JULY 31, ENDED JULY 31,
1994 1995 1996
-------------- -------- --------
(in thousands)
Current:
Federal ...................... $ 8,510 $ 31,899 $ 15,732
State ........................ 2,067 7,157 3,116
Foreign ...................... 1,124 1,583 1,302
-------- -------- --------
11,701 40,639 20,150
Deferred:
Federal ...................... (7,976) (13,638) (3,378)
State ........................ (1,244) (2,705) (547)
-------- -------- --------
(9,220) (16,343) (3,925)
-------- -------- --------
Total provision for income taxes $ 2,481 $ 24,296 $ 16,225
======== ======== ========
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to loss before income taxes. The sources and
tax effects of the differences are as follows:
TEN MONTHS TWELVE MONTHS
ENDED JULY 31, ENDED JULY 31,
1994 1995 1996
-------------- --------- ---------
(in thousands)
Loss before income taxes ................... $(181,493) $ (20,000) $ 1,870
--------- --------- ---------
Statutory federal income tax at 35% ........ (63,523) (7,000) 654
State income tax, net of federal benefit.... 187 2,950 1,670
Federal research and experimental credits... (350) (1,000) --
Non-deductible merger related charges ...... 63,665 29,742 13,531
Tax exempt interest ........................ (884) (630) (1,400)
Other, net ................................. 3,386 234 1,770
--------- --------- ---------
Total ............................ $ 2,481 $ 24,296 $ 16,225
========= ========= =========
The current federal and state provisions do not reflect the tax savings
resulting from deductions associated with the Company's various stock option
plans. This savings was approximately $18,865,000 in fiscal 1996 and $13,217,000
in fiscal 1995. These amounts were credited to stockholders' equity.
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Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
JULY 31, JULY 31,
1995 1996
------- -------
(in thousands)
Deferred tax assets:
Accruals and reserves not currently deductible... $19,942 $20,317
Deferred foreign taxes .......................... -- 1,641
State income taxes .............................. 878 1,390
Merger charges .................................. -- 2,458
Fixed asset adjustments ......................... 2,313 --
Other, net ...................................... 1,376 576
------- -------
Total deferred tax assets ............... 24,509 26,382
Deferred tax liabilities:
Fixed asset adjustments ......................... -- 285
Merger charges .................................. 2,914 2,513
------- -------
Total deferred tax liabilities .................... 2,914 2,798
------- -------
Total net deferred tax assets ..................... $21,595 $23,584
======= =======
There was no valuation allowance for deferred tax assets at July 31, 1995 or
July 31, 1996 based on management's assessment that current levels of
anticipated taxable income will be sufficient to realize the net deferred tax
asset.
8. SIGNIFICANT CUSTOMER AND GEOGRAPHIC AREA INFORMATION
One distributor accounted for 14% of net revenue in fiscal 1994, 12% of net
revenue in fiscal 1995 and 13% of net revenue in fiscal 1996. A second
distributor accounted for 14%, 8% and 5% of net revenue in 1994, 1995, and 1996,
respectively.
Net revenues from European and Asian (Milkyway) operations were not significant
in any period presented.
9. MICROSOFT MERGER TERMINATION
On May 20, 1995, the Company announced that its merger agreement with Microsoft
had been terminated. 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 quarter of fiscal 1995, the Company
received a $46.3 million termination fee from Microsoft ($41.3 million net of
related expenses). The after-tax benefit to the Company was approximately $25.6
million.
10. LITIGATION
On March 29, 1994, Joann McGovern filed a class action lawsuit against ChipSoft
(which was subsequently merged into the Company) in the Chancery Division,
Circuit Court of Cook County, Illinois, on behalf of the plaintiff and other
purchasers of the 1993 HeadStart version of the Company's TurboTax tax
preparation software (the "Product"). The plaintiff asserts claims for breach of
express and implied warranties and violation of the Illinois Consumer Fraud Act
and seeks, on behalf of herself and purported class members, refund of the
purchase price as well as consequential and punitive damages. The plaintiff
claims that the packaging of the Product was false and misleading in that it did
not adequately apprise purchasers of the need to obtain the final version of
TurboTax (which the plaintiff admits was available free of charge) in order to
prepare final tax forms for filing with the IRS. In October 1995, the Company
obtained summary judgment on the plaintiff's claims for breach of express and
implied warranties. On January 4, 1996 the plaintiff's motion for class
certification for the Illinois Consumer Fraud Act claim was denied. The
plaintiff is seeking judicial review of an issue relating to this determination.
On September 19, 1996 the Company filed a motion for summary judgment on the
plaintiff's Illinois Consumer Fraud Act claim, with a hearing currently
scheduled for December 12, 1996. The Company believes that the plaintiff's
claims are without merit and intends to defend the litigation vigorously.
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On August 23, 1995, Interactive Gift Express, Inc. filed a patent infringement
suit in the United States District Court for the Southern District of New York
against the Company and seventeen other defendants alleging infringement of U.S.
Patent No. 4,528,643 and seeking unspecified damages. Interactive Gift Express
subsequently changed its name to E-Data Corp. The complaint did not specify
which products of the Company allegedly infringed the patent, and did not
indicate which claims of the patent are allegedly infringed. On August 26, 1996,
the plaintiff filed a report identifying which claims of the patent were
allegedly infringed and providing its interpretation of the claims, and also
stating that the Company was infringing the subject patent by "selling software
online." The parties have not yet begun to engage in discovery, which the
Company believes may be material. Although discovery has not yet commenced,
based on the investigation conducted by the Company to date and a review of its
products, the Company believes that the complaint is without merit and intends
to defend the litigation vigorously.
On June 26, 1996, Barbara Hubbard, a former corporate controller of the Company,
filed a lawsuit against the Company and its Chairman, its President and its
former Chief Financial Officer, in the Santa Clara County, California, Superior
Court, alleging sex discrimination, wrongful discharge, breach of contract,
defamation and violations of the California Labor Code. The complaint seeks
damages in an unspecified amount. The Company has answered the complaint,
denying all material allegations, with the individual defendants demurring.
Intuit believes that the complaint is without merit and intends to defend the
litigation vigorously.
On July 31, 1996, Trio Systems L.L.C. ("Trio") filed a lawsuit against the
Company in the U.S. District Court, Central District of California (Los Angeles)
alleging copyright infringement and violation of a license agreement. The
complaint seeks declaratory relief, rescission and $60 million in damages. Trio
alleges that the Company infringed Trio's copyrights in certain software by,
among other things, allegedly violating the license that was attached to the
software in various forms, and by allegedly making copies of the software
without the authorization of Trio, or in violation of various terms of the
license. Trio also contends that the Company has violated the terms of the
license by publishing software that contains software belonging to Trio under
conditions that allegedly violate the terms of the license. The Company answered
the complaint on September 3, 1996, denying all material allegations, and
discovery is proceeding. On September 30, 1996, Trio filed a motion for a
preliminary injunction seeking to prevent the Company from shipping any Intuit
products containing Trio software, including Quicken products. The Company has
filed a response to this motion and a hearing on the motion is scheduled for
October 28, 1996. The Company intends to oppose the motion vigorously and
expects that its new Quicken products will be available for purchase on October
24, 1996. Although discovery has just begun, based on the investigation
conducted by the Company to date and a review of its products, the Company
believes that the complaint is without merit and intends to defend the
litigation vigorously.
Financial Courseware Ltd. ("FCL"), an Irish company, has a software product
named "Intuition" that is used for teaching financial terminology within
institutions. FCL has opposed the Company's application to register "Intuit" as
a trademark in Canada, Germany, Switzerland and the United Kingdom. In
Switzerland, the Company's application was rejected, and the Company has
appealed. The oppositions remain pending in the other three countries. In
December 1995, FCL initiated proceedings against Intuit Ltd. (the Company's
United Kingdom subsidiary) in Ireland seeking to enjoin use of the Intuit mark
in Ireland and accounting for damages. A response and counterclaim have been
filed denying all claims and seeking to restrict FCL's rights under its
registration. Direct negotiations among the principals of FCL and the Company
have commenced, but it is too soon to determine how the matter will be resolved.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. Management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions,
either individually or in the aggregate, will not materially affect the
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact could be material. Furthermore, any litigation,
regardless of outcome, can have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.
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11. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
FISCAL 1995 QUARTER ENDED (1)
-----------------------------
OCTOBER 31 (2) JANUARY 31 APRIL 30 JULY 31 (3) & (4)
-------------- ---------- -------- -----------------
(in thousands, except per share data)
Net revenue..................................... $ 73,505 $ 168,453 $ 104,798 $ 72,404
Cost of goods sold.............................. 22,993 46,041 28,450 24,207
All other costs and expenses.................... 106,259 95,169 78,792 82,290
Net income (loss)............................... (53,633) 14,563 (3,795) (1,431)
Net income (loss) per share..................... (1.34) 0.33 (0.09) (0.03)
FISCAL 1996 QUARTER ENDED
-------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 (5)
----------- ---------- -------- -----------
(in thousands, except per share data)
Net revenue..................................... $ 102,250 $ 218,996 $ 132,069 $ 85,293
Cost of goods sold.............................. 28,091 49,482 35,269 25,027
All other costs and expenses.................... 101,411 115,788 96,850 92,466
Income (loss) from continuing operations........ (18,684) 24,067 1,273 (21,011)
Loss from discontinued operations, net of
tax........................................... (1,638) (2,157) (1,581) (968)
Net income (loss)............................... (20,322) 21,910 (308) (21,979)
Net income (loss) per share..................... (0.46) 0.46 (0.01) (0.48)
(1) Includes the results of Parsons from September 27, 1994 and the results of
PNI from June 8, 1995.
(2) Includes a charge of $44.0 million related to purchased research and
development at the time of the Parsons acquisition.
(3) Includes a charge of $8.5 million related to purchased research and
development at the time of the PNI acquisition.
(4) Net loss includes proceeds of $41.3 million net of related expenses ($25.6
million net of related expenses and income taxes) relating to the Microsoft
merger termination fee.
(5) Includes a charge of $8.0 million related to purchased research and
development at the time of the IIS acquisition.
12. SUBSEQUENT EVENTS
Discontinued Operations and Divestitures
On September 16, 1996, the Company announced plans to sell ISC in exchange for
12.6 million shares of CheckFree common stock, approximately 23% of the
resulting 54.0 million CheckFree shares outstanding. As of September 13, 1996,
the CheckFree stock to be exchanged in the transaction was valued at $227.6
million. Subject to regulatory and CheckFree stockholder approval, the
transaction is expected to be finalized by early calendar year 1997.
The divested online banking and bill payment business has been accounted for as
a discontinued operation and, accordingly, its operating results have been
segregated for fiscal year 1996. Segregated operating results for fiscal years
1995 and 1994 have not been presented due to immateriality. Revenue for
discontinued operations was $14.3 million for fiscal year 1996. Liabilities of
discontinued operations consist of accounts payable and other accrued
compensation and liabilities totaling $3.0 million at July 31, 1996. Assets of
discontinued operations consist of fixed assets, accounts receivable, cash,
prepaids and intangibles totaling $21.4 million at July 31, 1996.
Other Matters
On September 3, 1996, the Company completed its acquisition of GALT, a provider
of mutual fund information on the Internet. The acquisition will be treated as a
purchase for accounting purposes. Under the terms of the agreement, GALT's
stockholders received a combination of the Company's common stock and stock
options valued at
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approximately $9.0 million. The purchase price of $9.0 million will be allocated
to identified intangible assets and goodwill.
On September 18, 1996, employee grants (except for Chief Executive Officer and
Senior and Executive Vice Presidents) of stock options under the Company's 1993
Equity Incentive Plan issued between June 1, 1995 and September 17, 1996 (a
total of 1,787,924 options) were repriced to reflect an exercise price of
$32.75, the fair market value on the date of repricing. Any option holder who
elected to reprice an option will not be permitted to exercise the repriced
option, even if vested, for a certain period of time.
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SCHEDULE II
INTUIT INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BEGINNING ADDITIONS BALANCE
BEGINNING BALANCE IN CHARGED TO AT END OF
CLASSIFICATION PERIOD ACQUIRED COMPANIES EXPENSE WRITE-OFFS PERIOD
- -------------- ---------- ------------------ ---------- ---------- ---------
(in thousands)
Ten months ended July 31, 1994
Allowance for doubtful accounts....... $ 1,883 $ 254 $ 753 $ (370) $ 2,520
Reserve for returns and exchanges..... $ 7,141 $ 5,936 $ 31,316 $(33,054) $ 11,339
Year ended July 31, 1995
Allowance for doubtful accounts....... $ 2,520 $ 71 $ 2,105 $ (2,288) $ 2,408
Reserve for returns and exchanges..... $11,339 $ 521 $ 61,853 $(44,516) $ 29,197
Year ended July 31, 1996
Allowance for doubtful accounts....... $ 2,408 -- $ 4,728 $ (2,185) $ 4,951
Reserve for returns and exchanges..... $29,197 -- $ 57,128 $(62,122) $ 24,203
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ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to Directors may be found in
the section captioned "Election of Intuit Directors" appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders scheduled to be held in November 1996 (the "Proxy
Statement"). Such information is incorporated herein by reference. Information
required by this Item with respect to executive officers may be found in Part I
hereof in the section captioned "Executive Officers and Key Employees of
Registrant."
ITEM 11
EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Proxy Statement. Such information is incorporated herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned
"Executive Compensation - Certain Transactions" appearing in the Proxy
Statement. Such information is incorporated herein by reference.
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PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements - See Index to Consolidated Financial
Statements in Part II, Item 8.
2. Financial Statement Schedules - See Index to Consolidated
Financial Statements in Part II, Item 8.
3. Exhibits
Exhibit 2.01* Exchange Agreement between the Company and
Kabushiki Kaisha Milkyway and its stockholders
dated December 26, 1995 (schedules and similar
attachments will be furnished to the Commission
upon request)
Exhibit 2.02* Agreement and Plan of Reorganization by and
between the Company and GALT Technologies, Inc.
dated as of September 3, 1996 and the related
Agreement of Merger (other schedules and
similar attachments will be furnished to the
Commission upon request)
Exhibit 2.03* Agreement and Plan of Merger among CheckFree
Corporation, CheckFree Acquisition Corporation
II, the Company and Intuit Services Corporation
dated September 15, 1996 (schedules and similar
attachments will be furnished to the Commission
upon request)
Exhibit 3.01(1) Certificate of Incorporation of the Company
dated February 1, 1993
Exhibit 3.02(4) Certificate of Amendment to the Company's
Certificate of Incorporation dated December 14,
1993
Exhibit 3.03(12) Certificate of Amendment to the Company's
Certificate of Incorporation dated January 18,
1996
Exhibit 3.04(1) Bylaws of the Company
Exhibit 4.01(1) Form of Specimen Certificate for the Company's
Common Stock
Exhibit 4.02(1) Investor Rights Agreement, dated as of August
21, 1990, as amended on July 7, 1992, between
the Company and various investors
Exhibit 4.03(2) Amendment to Investor Rights Agreement, dated
as of December 10, 1993, among the Company and
various investors
Exhibit 4.04(2) Registration Rights Agreement, dated as of
December 8, 1989, among ChipSoft and various
investors
Exhibit 4.05(2) Amendment to Registration Rights Agreement,
dated December 10, 1993, among ChipSoft and
various investors
Exhibit 10.01(1)+ The Company's 1988 Stock Option Plan and
related documents.
Exhibit 10.02(1)+ The Company's form of Non-Plan Non-Qualified
Stock Option Agreement
Exhibit 10.03*+ The Company's 1993 Equity Incentive Plan, as
amended through July 20, 1995
Exhibit 10.4(1) Distribution Agreement by and between the
Company and Softsel Computer Products, Inc.
(now Merisel, Inc.), dated July 1, 1986, as
amended to date
Exhibit 10.5(1) Form of Indemnification Agreement entered into
by the Company with each of its directors and
certain executive officers
Exhibit 10.6(13)+ 1992 Stock Option Plan of ChipSoft
Exhibit 10.7(13)+ Form of Non-Qualified Stock Option Agreement
under the 1992 Stock Option Plan of ChipSoft
Exhibit 10.8(13)+ 1989 Stock Option Plan of ChipSoft
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Exhibit 10.9(13)+ Form of Non-Qualified Stock Option Agreement
under the 1989 Stock Option Plan of ChipSoft
Exhibit 10.10(13)+ Softview Acquisition Stock Option Plan of
ChipSoft
Exhibit 10.11(13)+ Form of Incentive Stock Option Agreement under
the Softview Acquisition Plan of ChipSoft
Exhibit 10.12(13)+ Restricted Stock Purchase Agreement dated as of
March 28, 1991, between ChipSoft and Alan A.
Gleicher
Exhibit 10.13(13)+ Non-Transferable, Non Qualified Stock Option
Agreement dated as of March 28, 1991, between
ChipSoft and Alan A. Gleicher
Exhibit 10.14(13)+ Non-Transferable, Non Qualified Stock Option
Agreement dated as of August 1, 1991, between
ChipSoft and William H. Harris Jr.
Exhibit 10.15(4)+ Letter Agreement of Employment dated March 30,
1994 between the Company and William V.
Campbell
Exhibit 10.16(4) Contract for Purchase of Land dated July 25,
1994 between the Company and Amrep Southwest,
Inc.
Exhibit 10.17(4) Owner and Design/Builder Agreement dated July
18, 1994 between the Company and Reid &
Elliott, Inc.
Exhibit 10.18(7)+ Severance Agreement dated September 30, 1994
between the Company and Charles H. Gaylord, Jr.
Exhibit 10.19(7) Indenture dated as of September 1, 1994 among
the City of Rio Rancho, New Mexico ("Rio
Rancho"), the Company and Sunwest Bank of
Albuquerque, N.A. ("Sunwest Bank")
Exhibit 10.20(7) Lease and Purchase Agreement dated as of
September 1, 1994 between the Company and Rio
Rancho
Exhibit 10.21(7) Bond Purchase Agreement dated October 12, 1994
among ChipSoft, Inc., Rio Rancho and the
Company
Exhibit 10.22(7) Construction Loan Agreement effective September
29, 1994 between Sunwest Bank and the Company
and the related Collateral Assignments
Exhibit 10.23(7) Mortgage dated July 24, 1994 between the
Company and Sunwest Bank, as amended September
29, 1994
Exhibit 10.24(7) Amended and Restated Real Estate Mortgage Note
dated September 29, 1994 issued by the Company
to Sunwest Bank
Exhibit 10.25(8) Option Agreement dated as of November 30, 1994
between the Company and Charleston Properties
Exhibit 10.26(8) Lease Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2700 Coast Drive, Mountain View, California
Exhibit 10.27(8) Lease Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2750 Coast Drive, Mountain View, California
Exhibit 10.28(8) Lease Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2475 Garcia Drive, Mountain View,
California
Exhibit 10.29(8) Lease Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2525 Garcia Drive, Mountain View,
California
Exhibit 10.30(8) Lease Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2535 Garcia Drive, Mountain View,
California
Exhibit 10.31(8) Option Agreement dated as of November 30, 1994
between the Company and Charleston Properties
for 2650 Casey Drive, Mountain View, California
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65
Exhibit 10.32(10) Build-to-Suit Lease Agreement dated as of June
5, 1995 between the Company and UTC Greenwich
Partners, a California limited partnership
Exhibit 10.33(10) Lease Agreement dated as of August 31, 1995
between the Company and Airport Business Center
Associates Limited Partnership, an Arizona
limited partnership
Exhibit 10.34(11) Supply Agreement dated August 23, 1995 by and
between Intuit Inc. and John H. Harland Company
Exhibit 10.35(12)+ Letter Agreement dated December 11, 1995
between the Company and William H. Lane III
Exhibit 11.01* Computation of Net Loss Per Share
Exhibit 21.01* List of the Company's Subsidiaries
Exhibit 23.01* Consent of Ernst & Young LLP, Independent
Auditors
Exhibit 24.01* Power of Attorney (see signature page)
Exhibit 27.01* Financial Data Schedule (filed only in
electronic format)
- ----------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1,
filed February 3, 1993, as amended (File No. 33-57884) and incorporated by
reference
(2) Filed as an exhibit to the Company's Registration Statement on Form S-4,
filed September 20, 1993, as amended (File No. 33-69018) and incorporated
by reference
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
December 31, 1993 and incorporated by reference
(4) Filed as an exhibit to the Company's Form 10-K as originally filed on
October 31, 1994, as amended, and incorporated by reference
(5) Filed as an exhibit to the Company's Form 8-K filed October 11, 1994 and
incorporated by reference
(6) Filed as Annex A to the preliminary proxy materials filed on November 21,
1994 by the Company and Microsoft for the Company's special meeting of
stockholders held 1995 and incorporated by reference
(7) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
October 31, 1994, filed on December 13, 1994 and incorporated by reference
(8) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
January 31, 1995, filed on March 17, 1995 and incorporated by reference
(9) Filed as an exhibit to the Company's Form 10-Q for the quarter ended April
30, 1995, filed on June 14, 1995 and incorporated by reference
(10) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
July 31, 1995 and incorporated by reference
(11) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
October 31, 1995 and incorporated by reference
(12) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
January 31, 1996 and incorporated by reference
(13) 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
(14) Filed as an exhibit to the ChipSoft 1992 Form 10-K and incorporated by
reference
(15) Filed as an exhibit to the ChipSoft 1993 Form 10-K and incorporated by
reference
+ Indicates a management contract or compensatory plan or arrangement
* Filed herewith
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(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1996.
(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 17, 1996 By: /s/ JAMES J. HEEGER
-------------------------------
James J. Heeger
Senior Vice President and Chief
Financial Officer
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William V. Campbell and James J. Heeger,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intends and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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 in
the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------------ ---------------------------- -------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ WILLIAM V. CAMPBELL President, Chief Executive October 17, 1996
- ------------------------------------ Officer and Director
William V. Campbell
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES J. HEEGER Senior Vice President and October 17, 1996
- ------------------------------------ Chief Financial Officer
James J. Heeger
PRINCIPAL ACCOUNTING OFFICER:
/s/ GREG J. SANTORA Corporate Controller October 17, 1996
- ------------------------------------
Greg J. Santora
ADDITIONAL DIRECTORS:
/s/ SCOTT D. COOK Chairman of the Board October 17, 1996
- ------------------------------------ of Directors
Scott D. Cook
/s/ CHRISTOPHER W. BRODY Director October 17, 1996
- ------------------------------------
Christopher W. Brody
/s/ L. JOHN DOERR Director October 17, 1996
- ------------------------------------
L. John Doerr
/s/ MICHAEL R. HALLMAN Director October 17, 1996
- ------------------------------------
Michael R. Hallman
/s/ BURTON J. MCMURTRY Director October 17, 1996
- ------------------------------------
Burton J. McMurtry
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