1
                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                       ----------------------------------------------------


                                    FORM 10-Q

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 For the quarterly period ended JANUARYJanuary 31, 20002001 or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 For the transition period from ____________ to
     ____________.

                         COMMISSION FILE NUMBER 0-21180

                                   INTUIT INC.
                               ------------------
             (Exact name of registrant as specified in its charter)

       DELAWARE                                           77-0034661
--------                                           ----------- ------------------------                       ---------------------------------
(State of incorporation)                       (IRS employer identification no.)

                   2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
                    ------------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (650) 944-6000
              -------------------------------------------------------------------
              (Registrant's telephone number, including area code)

     Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

     Approximately 201,677,034208,633,563 shares of Common Stock, $0.01 par value, as of
February 29, 200028, 2001

   2

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FORM 10-Q
INTUIT INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE NUMBER ------ ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of July 31, 2000 and January 31, 2001............................... 3 Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2000 and 2001......... 4 Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2000 and 2001................... 5 Notes to Condensed Consolidated Financial Statements ............... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.......... 28 PART II OTHER INFORMATION ITEM 1: Legal Proceedings................................................... 30 ITEM 5: Other Matters....................................................... 30 ITEM 6: Exhibits and Reports on Form 8-K.................................... 31 Signatures.......................................................... 31 1999 and January 31, 2000........................... 3 Condensed Consolidated Statements of Operations for the three and six months ended January 31, 1999 and 2000.... 4 Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 1999 and 2000............... 5 Notes to Condensed Consolidated Financial Statements................................................... 6 - - - ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 18 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 29 PART II OTHER INFORMATION ITEM 1: Legal Proceedings............................................... 31 ITEM 2: Changes in Securities and Use of Proceeds....................... 32 ITEM 5: Other Matters................................................... 33 ITEM 6: Exhibits and Reports on Form 8-K................................ 34 Signatures...................................................... 35
-2- 3 INTUIT INC. CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, JANUARY 31, 1999(In thousands; Unaudited) 2000 ----------2001 ----------- ----------- (In thousands, except par value; unaudited) ASSETS Current assets: Cash and cash equivalents ......................................................... $ 554,230416,953 $ 377,685377,407 Short-term investments ................................... 305,125 412,918............................ 1,050,220 1,099,792 Marketable securities .................................... 431,319 1,046,170 Customer deposits ........................................ 145,836 135,456............................. 225,878 168,871 Accounts receivable, net(1) ............................. 63,677 249,146 Mortgage loans ........................................... 84,983 38,386 Deferred income taxes .................................... 64,925 65,002 Inventories .............................................. 4,931 9,351 Income taxes receivable .................................. -- 1,190net .......................... 67,420 253,659 Prepaid expenses and other current assets(2) ............ 67,859 34,803 ----------assets (1) ..... 368,323 414,783 ----------- ----------- Total current assets ............................. 1,722,885 2,370,107.......................... 2,128,794 2,314,512 Property and equipment, net ................................ 119,220 149,324 Purchased........................ 167,707 184,461 Goodwill and intangibles, net ................................. 98,049 97,275 Goodwill, net .............................................. 383,102 416,874...................... 438,878 542,744 Investments ........................................ 31,160 24,798 Other assets ............................................... 7,897 9,022 Long-term deferred income taxes ............................ 76,190 80,222 Investments ................................................ 45,704 39,569 Restricted investments ..................................... 36,028 38,416 ----------(2) ................................... 112,363 112,614 ----------- ----------- Total assets ............................................... $2,489,075....................................... $ 3,200,809 ==========2,878,902 $ 3,179,129 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit .......................................... $ 29,896 $ 3,283 Accounts payable ......................................... 66,436 121,110 Accrued compensation and related liabilities ............. 39,996 49,733 Payroll tax obligations .................................. 131,148 127,333$ 79,145 $ 118,234 Escrow liabilities ....................................... 14,857 9,821 Drafts payable ........................................... 49,169 15,344................................ 32,077 66,732 Deferred revenue ......................................... 65,994 106,395.................................. 107,578 143,215 Income taxestax payable ..................................... 143,181 --................................ 110,743 52,881 Deferred income taxes .................................... 136,694 384,484............................. 53,934 54,403 Other accruedcurrent liabilities ................................ 201,872 271,760 ----------......................... 423,360 509,644 ----------- ----------- Total current liabilities ........................ 879,243 1,089,263..................... 806,837 945,109 Long-term notes payable .................................... 36,614 37,862 Long-term deferred income taxes ............................ 11,615 11,919obligations .............................. 538 18,786 Minority interest .......................................... 215 224.................................. 238 385 Commitments and contingencies Stockholders' equityequity: Preferred stock $0.01 par value Authorized - 1,345 shares total; 145 shares designated Series A; 250 shares designated Series B Junior Participating Issued and outstanding - none; none ....................................................... -- -- Common stock $0.01 par value Authorized - 750,000 shares Issued and outstanding - 196,350 and 201,093 shares, respectively ........................................ 1,073 2,012 Additional paid-inadditional paid in capital ............................... 1,266,004 1,433,323 Acquisition related deferred....... 1,521,559 1,669,583 Deferred compensation ................ -- (30,063)............................. (26,522) (25,593) Accumulated other comprehensive income, ................... 77,680 448,207 Accumulated retainednet ....... 55,586 57,396 Retained earnings ............................ 216,631 208,062 ----------................................. 520,666 513,463 ----------- ----------- Total stockholders' equity ....................... 1,561,388 2,061,541 ----------.................... 2,071,289 2,214,849 ----------- ----------- Total liabilities and stockholders' equity ................. $2,489,075......... $ 3,200,809 ==========2,878,902 $ 3,179,129 =========== ===========
- ------------------------ (1) Includes $0.1$7.2 million and $2.3 million due from Checkfree at July 31, 1999 and January 31, 2000, respectively (see Note 11). (2) Includes $6.7 million and $10.6 million notenotes receivable from Venture Finance Software Corp. atas of July 31, 19992000. (2) Includes $6.5 million and $10.7 million loans due from affiliates as of July 31, 2000 and January 31, 2000 respectively (see Note 11).2001, respectively. See accompanying notes to condensed consolidated financial statements.notes. -3- 4 INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JANUARY 31, JANUARY 31, 1999 2000 19992001 2000 --------2001 --------- ----------------- --------- --------- (In thousands, except per share amounts; unaudited)data; Unaudited) Net revenue(1) .............................................. $373,733revenue .......................................... $ 425,499 $510,614$ 457,560 $ 602,427 $ 645,082 Costs and expenses: Cost of goods sold: Products and services ................................... 70,234 93,066 109,231 149,506 Amortization of purchased software and other ............ 1,897 2,489 3,701 4,921revenue ..................................... 95,555 107,677 154,427 177,558 Customer service &and technical support ....................... 41,144.............. 47,657 72,00446,134 81,958 78,530 Selling &and marketing ........................................ 71,203............................... 86,110 124,28285,567 156,015 146,667 Research &and development ..................................... 36,353............................ 44,038 70,02154,599 85,750 102,477 General &and administrative ................................... 19,625.......................... 23,327 38,93425,914 44,819 53,697 Charge for purchased research and development .............. --....... -- -- 1,312 Amortization of goodwill and purchased intangibles ......... 20,962 45,211 41,932 81,562-- Amortization of acquisition related deferred compensation .. -- 1,005 -- 1,744costs ................... 46,216 43,074 83,306 82,753 Reorganization costs ....................................... 2,000................................ -- 2,000-- 3,500 ---------- --------- ----------------- --------- --------- Total costs & expenses ............................ 263,418.............................. 342,903 462,105362,965 611,087 641,682 --------- --------- --------- --------- Income (loss) from operations ..................... 110,315........................ 82,596 48,50994,595 (8,660) 3,400 Interest and other income and expense, net .................. 3,950........... 6,988 7,29816,548 15,465 Gain (loss) from32,666 Losses on marketable securities ...................... 10,088and other investments, net .................................... (2,800) 10,088(71,935) (20,110) --------(75,803) Gain on divestiture .................................. -- 1,639 -- 1,639 --------- ----------------- --------- --------- Income (loss) before income taxes ........................... 124,353tax, minority interest and cumulative effect of accounting change ............. 86,784 65,89540,847 (13,305) (38,098) Income tax provision (benefit) .............................. 31,228....................... 29,582 17,66514,188 (4,587) (16,728) Minority interest ............................................................................... (90) 97 (149) 147 --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change ............................................. 57,292 26,562 (8,569) (21,517) Cumulative effect of accounting change, net of taxes . -- (90) -- (149) ---------- 14,314 --------- ----------------- --------- --------- Net income (loss) ........................................... $ 93,125.................................... $ 57,292 $ 48,23026,562 $ (8,569) ========$ (7,203) ========= ================= ========= ========= Basic net income (loss) per share ........................... $ 0.49before cumulative effect of accounting change ............. $ 0.29 $ 0.260.13 $ (0.04) ========$ (0.10) Cumulative effect of accounting change ............... -- -- -- 0.07 Basic net income (loss) per share .................... $ 0.29 $ 0.13 $ (0.04) $ (0.03) ========= ================= ========= ========= Shares used in per share amounts ............................ 188,813..................... 195,935 187,600207,594 192,285 ========206,661 ========= ================= ========= ========= Diluted net income (loss) per share ......................... $ 0.47before cumulative effect of accounting change ............. $ 0.27 $ 0.250.12 $ (0.04) ========$ (0.10) Cumulative effect of accounting change ............... -- -- -- 0.07 ========= ================= ========= ========= Diluted net income (loss) per share .................. $ 0.27 $ 0.12 $ (0.04) $ (0.03) ========= ========= ========= ========= Shares used in per share amounts ............................ 198,413..................... 209,566 195,561215,927 192,285 ========206,661 ========= ================= ========= =========
(1) Includes $1.3 million and $2.4 million from Checkfree for the three and six months ended January 31, 1999 and $1.8 million and $3.6 million from Checkfree for the three and six months ended January 31, 2000 respectively (see Note 11). See accompanying notes to condensed consolidated financial statements.notes. -4- 5 INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED JANUARY 31, (In thousands; unaudited) 1999Unaudited) 2000 --------- ---------2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) .............................................................loss ...................................................................... $ 48,230(8,569) $ (8,569)(7,203) Adjustments to reconcile net income (loss)loss to net cash provided by (used in) operating activities: Amortization of goodwill and other purchased intangibles ................. 45,633 86,483 Deferred compensation expense ............................................ -- 1,744acquisition costs .......................................... 89,539 79,440 Depreciation ............................................................. 18,002............................................................... 21,798 Charge for purchased research and development ............................ -- 1,312 (Gain)29,607 Net loss from marketable securities ................................... (10,088)........................................ 20,110 75,803 Cumulative effect of accounting change ..................................... -- (23,857) Deferred income tax benefit (provision) .................................... (3,805) 45,463 Gain on divestiture ........................................................ -- (1,639) Changes in operating assets and liabilities: Accounts receivable ................................................... (181,831)........................................................ (185,369) Inventories ........................................................... (2,170) (4,420) Mortgage loans ........................................................ (66,435) 46,597(185,794) Prepaid expenses and other current assets ............................. (16,544) 32,163 Customer deposits ..................................................... (8,514) 6,565 Deferred income tax assets and liabilities ............................ (1,428) (3,805).................................. 80,905 (43,544) Accounts payable ...................................................... 25,838........................................................... 54,620 Accrued compensation and related28,814 Escrow liabilities .......................... 4,877 9,572 Escrow funds payable .................................................. 8,362 (5,036)......................................................... (38,861) 34,809 Deferred revenue ...................................................... (12,581)........................................................... 40,401 Drafts payable ........................................................ 9,812 (33,825) Accrued acquisition liabilities ....................................... (19,181) (5,389) Other accrued liabilities ............................................. 130,558 63,93635,637 Income taxes payable ....................................................... (94,561) (57,862) Other current liabilities .................................................. 25,404 (94,561)68,119 58,858 Minority interest ..................................................... --.......................................................... 9 --------- ---------147 ----------- ----------- Net cash (used in) provided by operating activities ................. (2,056)................................ 44,336 --------- ---------68,679 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of marketable securities ................................... 17,263 --Other assets .................................................................. (14,851) (1,254) Purchase of property and equipment ............................................ (27,448) (51,901) Principal payments(45,964) Proceeds from the sale of long-term debt .......................................... (29)marketable securities ............................... -- (Increase) in other assets .................................................... (7,262) (14,851)24,855 Purchase of short-term investments ............................................ (145,086) (301,277) Acquisitions and dispositions, net of cash acquired ........................... -- (54,584) Purchase of long-term investments ............................................. (474) (11,115)(1,878,887) Liquidation and maturity of short-term investments ............................ 100,547 191,096 --------- ---------1,829,315 Acquisitions, net of cash acquired ............................................ (54,584) (94,130) Purchase of long-term investments ............................................. (11,115) (1,457) ----------- ----------- Net cash used inby investing activities ............................... (62,489).................................... (242,632) --------- ---------(167,522) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal proceeds on long-term debt .......................................... -- 2,446 Net borrowings (payments)payments under lineswarehouse line of credit ............................... 70,887................................... (26,613) Net borrowings under reverse repurchase agreement ............................. 9,135 -- Purchase of common stock ...................................................... (1,308) --(199) Net proceeds from issuance of common stock .................................... 39,627 48,364 Rock Financial and Title Source payments of dividends ......................... (177) -- --------- ---------57,050 ----------- ----------- Net cash provided by financing activities ........................... 118,164................................ 21,751 --------- ---------59,297 ----------- ----------- NET INCREASE (DECREASE)DECREASE IN CASH AND CASH EQUIVALENTS ............................ 53,619....................................... (176,545) (39,546) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................ 140,991 554,230 --------- ---------416,953 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................... $ 194,610377,685 $ 377,685 ========= =========377,407 =========== ===========
See accompanying notes to condensed consolidated financial statements.notes. -5- 6 - - -------------------------------------------------------------------------------- INTUIT INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(UNAUDITED) - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Intuit Inc. develops, sells and supports small business accounting and management, tax preparation and consumer finance desktop software products, financial supplies (such as computer checks, envelopes and invoices), mortgage loans and Internet-based products and services for individuals and small businesses. Our products and services are designed to automate commonly performed financial tasks and to simplify the way individuals and small businesses manage their finances.finances and businesses. We sell our products and services throughout North America and in many internationalglobal markets. Sales are made primarily through retail and OEM distribution channels, traditional direct sales to customers and via the Internet. Basis of Presentation Intuit has prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial statements. All intercompany balances and transactions have been eliminated in consolidation. Certain other previously reported amounts have been reclassified to conform to the current presentation format. We have included all normal recurring adjustments considered necessary to give a fair presentation of our operating results for the periods shown. Results for the three and six months ended January 31, 20002001 do not necessarily indicate the results to be expected for the fiscal year ending July 31, 20002001 or any other future period. All financial statements presented are restated to includereflect the combined results of Intuit and our Rock Financial Corporation ("Rock") and Title Source, Inc. ("Title Source") subsidiaries whichthat were acquired on December 8, 1999 in a transaction whichthat was accounted for as a pooling of interests. These statements and accompanying notes should be read together with the audited consolidated financial statements for the fiscal year ended July 31, 19992000 included in Intuit's Form 10K-A, Amendment No. 1,10-K, filed with the Securities and Exchange Commission. Principles of Consolidation The condensed consolidated financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated all significant intercompany accounts and transactions. Investments in which management intends to maintain more than a temporary 20% to 50% interest, or otherwise has the ability to exercise significant influence, are accounted for under the equity method. Investments in which we have less than a 20% interest and/or do not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. Use of Estimates To comply with generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. Our most significant estimates are related to reserves for product returns and exchanges, reserves for rebates and the collectability of accounts receivable. We also use estimates to determine the remaining economic lives and carrying value of goodwill, purchased intangibles, fixed assets and fixeddeferred tax assets. Despite our intention to establish accurate estimates and assumptions, actual results may differ from our estimates. Net Revenue Intuit recognizes revenue upon shipment of our shrink-wrapped software products based on "FOB shipping" terms. Because, underUnder FOB shipping terms, title and risk of loss are transferred, and we have no continuing obligations, -6- 7 once our products are delivered to the shipper, weshipper. We recognize revenue upon shipment, net of return reserves based on historical experience. To recognize revenue, it must also be probable that we will collect the accounts receivable from our customers. Reserves are provided for returns of excess quantities of current product versions, as well as previous versions of products still in the distribution channel when new versions are launched. In some situations, we receive advance payments from our customers. Revenue associated with these advance payments is deferred until the products are shipped or services are provided. We also reduce revenue by the estimated cost of rebates when products are shipped. Warranty reserves are provided at the time revenue is recognized for the estimated cost of replacing defective products.-6- 7 We recognize revenue from Internet products and services when that revenue is "earned" based on the nature of the particular product or service. For Internet products and services that are provided over a period of time, revenue is recognized pro rata based on the passage of the contractual time period during which the product or service is to be provided or in accordance with agreed upon performance criteria. However, where the Internet product or service is to be deliveredprovided or provideddelivered at one point in time, revenue is recognized immediatelyonce upon delivery of the product or completion of the service, rather than ratably over time. For example, we earn advertising revenues from third parties that advertise on certain of our websites and contract to run such advertisements for a particular period of time. In thatthis case, the associated advertising revenue is recognized ratably over the contractual time period during which the advertising is to be placed. By contrast, for on-line transactions for which we receive a payment (such as electronic tax filing), revenue is recognized upon completion of the transaction, assuming there arewe have no remaining obligations on our part.obligations. Intuit also offers several plans under which customers are charged for technical support assistance. Fees charged for these plans are collected in advance and are recognized as revenue over a period of time (generally one year) at a rate that is based on historical call volumes for support, which approximates when these services are performed.. Costs incurred for fee for support plans are included in cost of goods sold. We defer loan origination revenue and the associated incremental directcommissions and processing costs on loans held for sale until the related loan is sold. We recognize gains and losses on loans at the time we sell them, based upon the difference between the selling price and the carrying value of the related loans sold. We recognize loan servicing revenue as the related principal is collected. We recognize interest income on mortgage loans as it is earned, and we recognize interest expenses on related borrowings as we incur them. Customer Service and Technical Support Customer service and technical support costs include the costs associated with performing order processing, answering customer inquiries through websites and other electronic means and providing technical assistance by telephone fax, email, and the Internet.assistance. In connection with the sale of certain products, Intuit provides a limited amount of free telephonetechnical support service to customers. This free service, also referred to as post-contract customer support, is included in this expense category. We do not defer the recognition of any revenue associated with sales of these products, since the cost of providing this free support is insignificant. The support is provided within one year after the associated revenue is recognized and enhancements are minimal and infrequent. The estimated cost of providing this free support is accrued upon product shipment. Cash, Cash Equivalents and Short-Term Investments Intuit considers highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Both cash equivalents and short-termShort-term investments are considered available-for-sale debt securities and are carried at amortized cost, which approximates fair value. Available-for-sale debt securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our business. Based on our significant business seasonality, cash flow requirements within quarters may fluctuate dramatically and could require us to use a significant amount of the cashshort-term investments held as available-for-sale securities. -7- 8 The following schedule summarizes the estimated fair value of our cash, cash equivalents, and short-term investments:
JULY 31, JANUARY 31, 1999 2000 --------- ---------2001 ---------- ---------- (In thousands; unaudited)thousands) Cash and cash equivalents: Cash ................................................................. $ 56,5484,298 $ 9,23528,886 Certificate of deposits ............... -- 6,700 Money market funds ................. 294,190 172,342.................... 338,462 307,891 Commercial paper ................... 156,037 40,875& corporate notes .... 29,543 33,930 Municipal bonds .................... 37,455 155,233 U.S. Government securities ......... 10,000....................... 44,650 -- --------- ------------------- ---------- $ 554,230416,953 $ 377,685 ========= =========377,407 ========== ========== Short-term investments: Certificates of deposit .......................... $ 9,9015,053 $ -- Commercial Paper ................... -- 103,244 Corporate notes .................... 19,482 2,932...................... 75,640 72,604 Municipal bonds .................... 284,057 312,487...................... 920,360 962,863 U.S. Government securities ......... 27,713 32,671 Restricted short-term investments .. (36,028) (38,416) --------- --------- $ 305,125 $ 412,918 ========= =========........... 49,167 64,325 ---------- ---------- $1,050,220 $1,099,792 ========== ==========
The following table outlines the estimated fair value of cash equivalents andIntuit's available-for-sale debt securities held in short-term investments classified by the maturity date of maturity is as follows:listed on the security.
JULY 31, JANUARY 31, 1999 2000 --------- ---------2001 ---------- ---------- (In thousands; unaudited)thousands) Due within one year ..................................... $ 735,349235,998 $ 725,909252,692 Due within two years ................. 101,784 93,875.................. 157,309 177,002 Due within three years ............... 1,702 -- Restricted short-term investments .... (36,028) (38,416) --------- --------- $ 802,807 $ 781,368 ========= =========................. 13,039 1,793 Due after three years ................. 638,821 668,305 ---------- ---------- $1,045,167 $1,099,792 ========== ==========
For information about our restricted investments, see Note 8. Realized gains and losses from sales of each type of security were immaterial for all periods presented. -8- 9 Marketable Securities As explained in greater detail below, we currently hold several marketable securities, that weremost of which we acquired in connection with strategic business transactions and relationships. Our available for sale marketableavailable-for-sale equity securities are carried at fair value and we include unrealized gains and losses, net of tax, in stockholders' equity. We have designated our investmentinvestments in At Home Corporation ("At Home")(which does business as aExcite@ Home), VeriSign and 724 Solutions as trading securitysecurities and fluctuations in the market value of these shares are reported in net income. We held the following marketable securities at July 31, 19992000 and January 31, 2000:2001:
AVAILABLE-FOR-SALE EQUITY GROSS UNREALIZED ----------------- NET REALIZEDSECURITIES COST GAIN LOSS LOSS------------------------- ESTIMATED BASIS GAINS LOSSES FAIR VALUE -------- -------- ------- --------------------- --------- ---------- JULY 31, 19992000 (In thousands; unaudited)thousands) Checkfree Corporation common stock .. $150,081 $152,177.......... $ 36,875 $ 115,000 $ -- $$151,875 Homestore.com, Inc. common stock ............ 1,689 10,626 -- $ 302,25812,315 Quotesmith.com, Inc. common stock ........... 5,645 -- (2,721) 2,924 S1 Corporation common stock .......................... 49,997 -- 16,140 -- 33,857 At Home common stock ............... 132,060 -- -- 36,856 95,204(25,302) 24,695 -------- --------- --------- -------- ------- ---------- ---------- $332,138 $152,177 $16,140 $ 36,85694,206 $ 431,319125,626 $ (28,023) $191,809 ======== ========= ========= ======== ======= ========== ========== JANUARY 31, 2000 (In thousands; unaudited)2001 Checkfree Corporation common stock .. $150,081 $450,245.......... $ 35,621 $ 97,958 $ -- $$133,579 InsWeb Corporation common stock ............. 10,810 815 -- $ 600,32611,625 S1 Corporation common stock ......... 49,997 37,922................. 9,769 -- -- 87,919 S1 Corporation options ..............9,769 -------- --------- --------- -------- $ 56,200 $ 98,773 $ -- 178,874 -- -- 178,874 Mortgage.com,$154,973 ======== ========= ========= ========
TRADING SECURITIES CUMULATIVE NET COST RECOGNIZED ESTIMATED BASIS LOSSES FAIR VALUE --------- --------- ---------- JULY 31, 2000 Excite@Home common stock .................... $ 119,366 $ (92,997) $26,369 VeriSign, Inc. common stock ..... 6,000 13,859 -- -- 19,859 Homestore.com,................. 4,916 (1,833) 3,083 724 Solutions, Inc. common stock .... 3,500 67,639 -- -- 71,139 Quotesmith.com,............ 7,700 (3,083) 4,617 --------- --------- ------- $ 131,982 $ (97,913) $34,069 ========= ========= ======= JANUARY 31, 2001 Excite@Home common stock .................... $ 119,366 $(107,124) $12,242 VeriSign, Inc. common stock ... 6,000 6,971 -- -- 12,971 At Home................. 2,458 (1,744) 714 724 Solutions, Inc. common stock ................ 132,060 -- -- 56,978 75,082 -------- --------............ 2,118 (1,177) 941 --------- --------- ------- ---------- ---------- $347,638 $755,510 $ -- $ 56,978 $1,046,170 ======== ========123,942 $(110,045) $13,897 ========= ========= ======= ========== ==========
In January 1997, we soldobtained marketable securities in Checkfree as a result of selling our online banking and bill payment transaction processing business to Checkfree Corporation. We obtained marketable securities in Checkfree as a result of this sale. We account for the investment in Checkfree as an available-for-sale equity security, which accordingly is carried at market value. Checkfree common stock is quoted on the Nasdaq National Market under the symbol CKFR. The closing price of Checkfree common stock at January 31, 20002001 was $59.00$55.31 per share. At January 31, 2000,2001, we held 10.2approximately 2.4 million shares, or approximately 19.5%2.8%, of Checkfree's outstanding common stock. -9- 10 In connection with the sale of selected assets of our Quicken Insurance business to InsWeb Corp on January 24, 2001, we received approximately 7.0 million shares of InsWeb's common stock. We account for the investment in InsWeb as an available-for-sale equity security, which accordingly is carried at market value. InsWeb common stock is quoted on the Nasdaq National Market under the symbol INSW. The closing price of InsWeb common stock at January 31, 2001 was $1.66 per share. At January 31, 2001, we held approximately 7.0 million shares, or approximately 16.6%, of InsWeb's outstanding common stock. In May 1999, we purchased 970,813approximately 1.0 million shares of common stock of Security First Technologies. In November 1999, Security First Technologies changed its name to S1 Corporation ("S1").Corporation. We account for the investment in S1 as an available-for-sale-equityavailable-for-sale equity security, which accordingly is carried at market value. S1 common stock is quoted on the Nasdaq National Market under the symbol SONE. The closing price of S1 common stock at January 31, 20002001 was $90.5625$10.06 per share. At January 31, 2000,2001, we held 970,813approximately 1.0 million shares, or approximately 3.5%1.7%, of S1's outstanding common stock. During the quarter ended January 31, 2001, we recorded a loss of $40.2 million to recognize an other than temporary decline in the value of our S1 shares for the difference between our original cost of $51.50 per share and $10.06 per share, the fair value as of the date the other than temporary impairment determination was made. If a further decline in fair value occurs that is considered other than temporary, we will record the additional loss in the period when the subsequent impairment becomes apparent. In connection with the above purchase, we also received an option to purchase up to an4.6 million additional 4,579,187 shares of S1 exercisable at a per share purchase price of $51.50. We account forconsider these S1 options as available-for-sale equity securities, and accordingly the options are carried at market value. In August 1999, we acquired approximately 3.7 million shares of common stock of Mortgage.com, Inc. ("Mortgage.com") upon conversion of our preferred shares in connection with Mortgage.com's initial public offering. We account for the investment in Mortgage.com as an available-for-sale-equity security, which accordingly is carried at market value. Mortgage.com common stock is quoted on the Nasdaq National Market under the symbol MDCM. The closing price of Mortgage.com common stock at January 31, 2000 was $5.4375 per -9- 10 share.derivatives. At January 31, 2000, we held 3.72001 they were valued at $7.2 million shares, or approximately 8.5%, of Mortgage.com's outstanding common stock. In August 1999, we acquired 729,165 shares of common stock of Homestore.com, Inc. ("Homestore.com") upon conversion of our preferred shares in connection with Homestore.com's initial public offering. We account forusing the investment in Homestore.comBlack-Scholes model and are classified as an available-for-sale-equity security, which accordingly is carried at market value. Homestore.com common stock is quoted on the Nasdaq National Market under the symbol HOMS. The closing price of Homestore.com common stock at January 31, 2000 was $97.5625 per share. At January 31, 2000, we held 729,165 shares, or approximately 1.0%, of Homestore.com's outstanding common stock. In February 1999, we purchased one million shares of common stock of Quotesmith.com, Inc. ("Quotesmith.com"). We purchased an additional 272,727 shares of Quotesmith.com in August 1999 at the time of its initial public offering. We account for the investment in Quotesmith.com as an available-for-sale-equity security, which accordingly is carried at market value. Quotesmith.com common stock is quoted on the Nasdaq National Market under the symbol QUOT. The closing price of Quotesmith.com common stock at January 31, 2000 was $10.1875 per share. At January 31, 2000, we held approximately 1,272,727 shares, or approximately 6.6%, of Quotesmith.com's outstanding common stock.long term investments. In connection with At Home Corporation's acquisition of Excite in May 1999, our shares of Excite were converted into At HomeExcite@Home (Nasdaq symbol ATHM) common stock. We have elected to report these converted At HomeExcite@Home shares as a trading security. As a result, we are reporting both positive and negative fluctuations in the market value of this stock in net income. At January 31, 2000,2001, we owned approximately 2.11.9 million shares (or approximately 0.6%(less than 1%) of At HomeExcite@Home common stock andstock. From May 1999 through January 31, 2001, we have reported a realizedcumulative recognized valuation loss of approximately $20.1$107.1 million for these securities for the period between August 1, 1999 and January 31, 2000.1.9 million shares. The closing price of At Home (symbol ATHM)Excite@Home at January 31, 2000,2001, was $36.0313$6.50 per share. In connection with VeriSign Corporation's acquisition of Signio in February 2000, our shares of Signio were converted into VeriSign common stock. We have elected to report these converted VeriSign shares as a trading security. As a result, we are reporting both positive and negative fluctuations in the market value of this stock in net income. At January 31, 2001, we owned 9,716 shares (less than 1%) of VeriSign common stock. From February 2000 through January 31, 2001, we have reported a cumulative recognized valuation loss of approximately $1.7 million for these securities. The averageclosing price of At Home between August 1, 1999 andVeriSign (Nasdaq symbol VRSN) at January 31, 20002001, was $41.49$73.50 per share. In connection with 724 Solutions Inc.'s acquisition of eZlogin in June 2000, our shares of eZlogin were converted into 724 Solutions common stock. We have elected to report these converted 724 Solutions shares as a trading security. As a result, we are reporting both positive and negative fluctuations in the market value of this stock in net income. At January 31, 2001, we owned 37,906 shares (less than 1%) of 724 Solutions common stock. From June 2000 through January 31, 2001, we have reported a cumulative recognized valuation loss of approximately $1.2 million for these securities. The closing price of 724 Solutions (Nasdaq symbol SVNX) at January 31, 2001, was $24.81 per share. During the six months ended January 31, 2001, we sold 85,000 shares of Checkfree, At Home, S1, Mortgage.com,351,865 shares of Homestore.com, and Quotesmith.com99,902 shares of 724 Solutions. In connection with these sales we recognized realized gains of $4.0 million, $ 11.1 million, and $0.1 million, respectively. In addition we sold 9,715 shares of VeriSign and approximately 1.2 million shares of Quotesmith.com. and recognized realized losses of $0.2 million and $4.9 million, respectively. Total net gains on sales of marketable securities were $10.1 million for the six months ended January 31, 2001. This gain was offset by recognized losses of $30.7 million to reflect a decline in valuations of our trading securities and S1 options, and a loss of $55.2 million for other than temporary declines in the value of our marketable securities and other investments. This resulted in combined net losses on marketable securities and other investments of $75.8 million for the six months ended January 31, 2001. -10- 11 All of our marketable securities are stocks of high technology companies whose stocks are subject to substantial volatility. Accordingly, it is possible that thehave been extremely volatile. The market priceprices of one or morea number of these companies' stocks have declined substantially. Declines in the market prices of stocks we hold could decline substantiallycontinue. These declines have resulted, and quickly, which could continue to result in a material reduction in the carrying value of these assets. Lines of Credit For lines of credit we estimate fair value basedassets and a negative impact on the discounted value of contractual cash flows using interest rates currently in effect for similar maturities and collateral requirements. The carrying amount of these lines of credit approximates their estimated fair values since all of the borrowings have variable interest rates that approximate current market interest rates for similar types of lines of credit and are due upon demand. We held the following lines of credit at July 31, 1999 and January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------- ------- ------- -------- Lines of credit.................... 29,896 30,000 3,283 3,291
Mortgage Loans We carry mortgage loans at estimated realizable value, and we estimate their fair value using quoted market prices for similar loans, adjusted for differences in loan characteristics, including credit quality. The carrying amount of accrued interest receivable approximates the assets' fair value. We held the following mortgage loans and lines of credit at July 31, 1999 and January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------- ------- ------- -------- Mortgage loans..................... $84,983 $86,021 $38,386 $ 39,183
-10- 11 Carrying amounts at July 31, 1999 and January 31, 2000 include an allowance for credit losses of $1.3 million and $0.4 million, respectively. As of July 31, 1999 and January 31, 2000, there were approximately $1.8 million and $0.5 million, respectively of mortgage loans that were greater than 90 days past due.our operating results. Goodwill and Purchased Intangible Assets We record goodwill when the costpurchase price exceeds the book value of net assets we acquire exceeds their fair value.acquired. Goodwill is amortized on a straight-line basis over periods ranging from 3 to 5 years. The cost of identified intangibles is generally amortized on a straight-line basis over periods ranging from 1 to 10 years. We regularlyWhen appropriate, we perform reviews to determine if the carrying value of assets is impaired. The reviews look for the existence of facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. No such impairment has been indicated to date. If, in the future, management determines the existence of impairment indicators, we would use undiscounted cash flows to initially determine whether impairment should be recognized. If necessary, we would perform a subsequent calculation to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets. If quoted market prices for the assets are not available, the fair value would be calculated using the present value of estimated expected future cash flows. The cash flow calculations would be based on management's best estimates, using appropriate assumptions and projections at the time. Goodwill and purchased intangible assets consisted of the following:
LIFE IN NET BALANCE AT LIFE IN ----------------------------------- YEARS JULY 31, 19992000 JANUARY 31, 20002001 ------- ------------- --------------------------------- (In thousands; unaudited) Goodwill..................................(in thousands) Goodwill........................................... 3-5 $383,102 $416,874$358,890 $430,234 Customer lists............................lists..................................... 3-5 66,934 67,535 Covenants57,890 50,823 Covenant not to compete..................compete............................ 3-5 2,492 5,9854,992 3,998 Purchased technology......................technology............................... 1-5 17,751 14,97010,990 48,650 Assembled workforce.......................workforce................................ 2-5 3,972 3,4281,976 4,131 Trade names and logos.....................logos.............................. 1-10 6,900 5,3574,140 4,908
Balances presented above are net of total accumulated amortization of $210.1$465.3 million and $289.5$541.1 million at July 31, 19992000 and January 31, 2000,2001, respectively. Concentration of Credit Risk Intuit operates in an industry which is highly competitive and rapidly changing. Many circumstances could have an unfavorable impact on Intuit's operating results. Examples include significant technological changes in the industry, changes in customer requirements or the emergence of competitive products or services with new capabilities. We are also subject to risks related to changes in the values of our significant balances of marketable securities, private equity investments, short-term investments marketable securities and the collectability of our trade accounts receivable. At January 31, 2000,2001, we held shares of Checkfree common stock representing approximately 19.5% of Checkfree's outstanding common stock. We also held approximately 0.6% of At Home's common stock, 3.5% of S1's outstanding common stock, 8.5% of Mortgage.com's outstanding common stock, 1.0% of Homestore.com's outstanding common stock and 6.6% of Quotesmith.com's outstanding common stock. If there is a permanent decline$168.9 million in the value of thesemarketable securities, below cost, we will need to report this declineas described in our statement of operations."Marketable Securities", above in Note 1. Fluctuations in the market value of our shares in At Home are treated as realizedExcite@Home, VeriSign and 724 Solutions result in recognized gains and losses in our statement of operations on an ongoing basis, since this investment isthese investments are treated as a trading security. -11- 12securities. If there were an other than temporary impairment in any marketable securities held as available-for-sale, we would report this decline in our statement of operations. See "Marketable Securities," above in Note 1 for a discussion of risks associated with our marketable securities. At January 31, 2001, we held approximately $17.6 million in private equity investments, net of reserves for potential declines in value that are other than temporary. Our remaining portfolio is diversified and consists primarily of short-term investment-grade securities. To reduce the credit risk associated with accounts receivable, Intuit performs ongoing evaluations of customer credit. Generally, no collateral is required. We maintain reserves for estimated credit losses and these losses have historically been within our expectations. At January 31, 2001, we had one distributor, Ingram Micro, that accounted for approximately 34% of our accounts receivable balance. In the normal course of our mortgage business, we enter into loan commitments to extend credit in order to meet the financing needs of our customers. Loan commitments are agreements to lend to a customer as long as all conditions specified in the contract are met. Commitments generally have fixed expiration dates or other termination clauses and may require the customer to pay a fee. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral we obtain is based on our credit evaluation of the customer. -11- 12 Loan commitments subject us to market risks and credit risks. Market risk occurs if interest rates rise after a loan commitment is made. To offset this risk on conventional loans that are in process, we utilize mandatory forward sale commitments and purchase puts and calls on U.S. Treasury securities. At January 31, 2001, we had $150.1 million in mandatory forward sale commitments for future delivery of FNMA and FHLMC securities and held puts in the amount of $8.0 million. The credit risk associated with these puts and calls on U.S. Treasury securities is a small fraction of the notional amount of the securities and is reflected in their fair value. Loan commitments also involve credit risk relating to the customer, which is not reflected on the balance sheet. We use the same credit policies for making credit commitments as we do for the underlying loan product. Loan commitments to extend credit at July 31, 2000 and January 31, 2001 were as follows:
JULY 31, 2000 JANUARY 31, 2001 ------------------------------ ------------------------------ FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE -------- ------------- ---------- ------------- (In thousands) Conventional prime loans ..... $167,000 $ 31,100 $266,385 $ 26,323 Sub-prime loans .............. 4,200 1,700 2,291 885 High-LTV loans ............... 600 -- 368 -- -------- -------- -------- -------- $171,800 $ 32,800 $269,044 $ 27,208 ======== ======== ======== ========
Recent Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.FAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a comprehensiveActivities," which establishes accounting and consistent standardreporting standards for the recognition and measurement of derivativesderivative instruments and hedging activities. Implementation is requiredIt requires us to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. It further provides criteria for fiscal years beginning after June 15, 2000.designating derivative instruments at fair value, cash flow, or foreign currency hedges, and establishes accounting standards for reporting changes in the fair value of the derivative instruments. Upon the date of adoption, August 1, 2000, we will report transition adjustments in net income or other comprehensive income, as appropriate, reflectingrecorded the cumulative effect of athe change in accounting principle.for derivatives for our S1 options held. This resulted in a one-time cumulative effect of $14.3 million, net of taxes totaling $9.5 million, as of August 1, 2000. The one-time cumulative effect created a decrease of $0.07 per share on the basic and diluted net loss per share for the six month period ended January 31, 2001. FAS 133 requires the derivatives to be carried at fair value, so subsequent fluctuations in the fair value of these options will be included in our net income. For the three and six months ended January 31, 2001 these fluctuations resulted in a loss of $2.4 million and $10.0 million net of taxes, respectively. The following table shows what adjusted net profit (loss) and diluted net profit (loss) per share of Intuit would have been as if we had adopted this standard as of the beginning of fiscal 2000:
Six Months Ended January 31, 2000 --------------------------------- As Adjusted As Reported -------------- -------------- (In thousands, except per share data) Net income (loss) ................................ $ 117,899 $ (8,569) Diluted net income (loss) per share .............. $ 0.58 $ (0.04)
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), as amended in March and June 2000. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements for all public registrants. We have not yet determined whetherare required to adopt SAB 101 no later than our fourth quarter of 2001. The adoption of FAS 133 willSAB 101 is not expected to have a material impacteffect on our consolidated financial position or results of operations, or cash flows. Reclassifications Certain previously reported amounts have been reclassified and restated to include the results of our Rock and Title Source subsidiaries acquired on December 8, 1999. Certain other previously reported amounts have been reclassified to conform to the current presentation format.operations. 2. PER SHARE DATA Basic income per share is computed using the weighted average number of common shares outstanding during the period. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options under the treasury stock method. In loss periods, basic and dilutive loss per share is identical since the impact of common equivalent shares is anti-dilutive. On September 8, 1999, our Board of Directors declared a three-for-one stock split, to be effected as a stock dividend of two shares of common stock for each share of Intuit's common stock outstanding. Stockholders of record on September 20, 1999 were issued two additional shares of common stock for each share of Intuit's common stock held on that date. The payment date for the stock dividend was September 30, 1999. We have restated all share and per share amounts referred to in the financial statements and notes to reflect this stock split.-12- 13 3. COMPREHENSIVE NET INCOME As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income." SFAS 130Income" establishes new rulesstandards for the reporting and displaydisplaying of comprehensive net income and its components. However, it has no impact on our net income or stockholders' equity as presented in our financial statements. SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available for saleavailable-for-sale securities to be included in comprehensive income. -12- 13 The components of comprehensive net income, net of tax, are as follows:
SIX MONTHS ENDED JANUARY 31, ---------------------------- 1999 2000 2001 --------- ----------------- (In thousands; unaudited) Net income (loss) ............................thousands) Beginning balance, net of tax ......................... $ 48,23079,144 $ (8,569)55,586 Unrealized gainloss on marketable securities ..... 371,342 371,684 Change in cumulative translation.............. 619,474 29,691 Realized loss on marketable securities ................ -- (28,518) Tax provision (benefit) on marketable securities ...... (247,790) (469) Translation adjustment .. (4,052) (1,157)gain (loss), net of tax ........ (2,621) 1,106 --------- --------- Comprehensive-------- Ending balance, net income .....................of tax ............................ $ 415,520448,207 $ 361,95857,396 ========= =========
4. ACQUISITIONS On May 3, 1999,August 30, 2000, we completed our acquisition of Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of payroll services for a combination of cash and Intuit stock. CRI is onepurchased all of the country's largest payroll services companies and a leader in providing payroll services to small businesses. The purchase priceoutstanding securities of Venture Finance Software Corporation ("VFSC") that were not already held by Intuit (approximately 51%) for privately-held CRI was approximately $200 million, consisting of approximately $100 million cash and approximately $25 million of Intuit stock that was paid at closing, and $75$118 million in cash (including approximately $4.5 million in option exercise and tax payments in connection with VFSC options exercised immediately prior to be paid in three annual installments of $25 million each beginning in May 2000.the purchase). We accounted for the acquisition of CRIVFSC as a purchase for accounting purposes and allocated approximately $187 million to identified intangible assets and goodwill. These assets are being amortized over a period of three to five years. The following table shows pro forma net revenue, net loss from continuing operations and diluted net loss per share from continuing operations of Intuit and CRI as if we had acquired CRI at the beginning of fiscal 1999:
SIX MONTHS ENDED JANUARY 31, 1999 ---------------------- AS PRO FORMA REPORTED --------- -------- (In thousands, except per share data; unaudited) Net revenue ....................................... $528,280 $510,614 Net income ........................................ 32,523 48,230 Diluted net income per share ...................... $ 0.17 $ 0.25
On November 30, 1999, we completed the purchase of all of the outstanding common stock of Turning Mill Software, Inc. ("Turning Mill") for approximately $22 million in stock. Turning Mill is a developer of software and web based products based in Acton, Massachusetts. We accounted for the acquisition of Turning Mill as a purchase for accounting purposes and allocated approximately $22$113 million to identified intangible assets and goodwill. These assets are being amortized over periods of three to five years. Eric Dunn, who was Senior Vice President and Chief Technology Officer of Intuit through July 31, 2000, as well as VFSC's President and a director of VFSC, was an option holder of VFSC. He exercised his options immediately prior to the closing of Intuit's acquisition of VFSC. He received $5.7 million from Intuit for his VFSC shares, net of the aggregate exercise price for his option ($1.4 million) and withholding taxes ($3.1 million). Other shareholders of VFSC included venture capital funds managed by Kleiner Perkins Caufield & Byers, of which L. John Doerr, a director of Intuit, is a general partner. These funds received approximately $2.4 million from Intuit for their VFSC shares. The aggregate original purchase price for the shares held by the Kleiner Perkins Caufield & Byers funds was $1.2 million. On December 8, 1999,20, 2000 we completed the purchase ofacquired all of the outstanding sharesstock of Rock Financial Corporation ("Rock")EmployeeMatters, Inc., in exchange for approximately 8.6$41.9 million sharesin Intuit stock, the elimination of Intuit common stock. Rock is a providerapproximately $8.0 million in bridge loans we extended to EmployeeMatters prior to the closing, and the assumption of consumer mortgages and is based in Michigan. In connection with the acquisition, Intuit assumed allapproximately $3.4 million of Rock's outstanding employee stock options, which were converted into options to purchase approximately 1.2 million shares of Intuit common stock. In a related transaction, Intuit also completed the acquisition of Title Source, Inc., an affiliate of Rock, for approximately 150,000 shares of Intuit stock. Title Source provides title insurance and escrow services to real estate agents, lenders, attorneys, corporations and homeowners.liabilities. We accounted for the acquisitionsacquisition of Rock and Title SourceEmployeeMatters as a pooling of interestspurchase for accounting purposes and have restated all previously reported amountsallocated approximately $53.3 million to reflect the effectidentified intangible assets and goodwill. These assets are being amortized over periods of three to five years. 5. DISCONTINUED OPERATIONS AND DIVESTITURES On January 24, 2001, we sold selected assets of our Quicken Insurance business to InsWeb Corp. for approximately $10.8 million of InsWeb common stock. As a result of the pooling.divestiture, we recorded a pre-tax gain of $1.6 million and a related tax provision of $0.6 million in the quarter ended January 31, 2001. In addition, Intuit and InsWeb entered into a distribution agreement under which InsWeb became the exclusive consumer insurance aggregator for Intuit's Quicken.com and QuickenInsurance Web sites and certain Quicken consumer desktop products. In exchange, Intuit will share in associated revenues, which are subject to certain minimums, over the 5 year term of the distribution agreement. -13- 14 5.6. BORROWINGS We have two mortgage lines of credit.credit, which are reflected in escrow liabilities. Advances under the first line of credit are based on a formula computation, with interest due monthly. Advances are due on demand and are collateralized by residential first and second mortgages. Advances may be drawn for working capital and sub-prime, high loan-to-value and conventional prime mortgage loans. The maximum outstanding balance permitted under this line is $20 million. Interest rates are variable and are based on the federal funds rate and prime rate, depending on the type of advance. The interest rates in effect at July 31, 19992000 and January 31, 20002001 were 6.29%7.69% and 6.83%7.53%, respectively. The weighted average interest ratesrate for the year ended July 31, 1999 and quartersix months ended January 31, 2000 were 6.45% and 6.58%, respectively.was 6.59%. During the six months ended January 31, 2001 we had a zero balance outstanding for the line of credit resulting in a weighted average interest rate of 0%. Our second line of credit currently provides for up to $50 million principal amount of demand loans secured by mortgage loans and other assets. Loans interest atInterest rates thaton loans vary depending on the type of underlying loan, and the loans are subject to sublimits,sub-limits, advance rates and warehouse terms that vary depending on the type of underlying loan. The interest rates in effect at July 31, 19992000 and January 31, 20002001 were 6.37%7.89% and 6.96%7.05%, respectively, while the weighted average interest rates for the three month periodssix months ended JulyJanuary 31, 19992000 and January 31, 20002001 were 5.92%6.69% and 6.64%7.60%, respectively. We are required to maintain a minimum tangible net worth and to satisfy other financial covenants, as outlined in the line of credit agreements. We were in compliance with the requirements as of July 31, 19992000 and January 31, 2000. Our reverse repurchase agreement entered into in 1997 provides that the lender will purchase from us, subject to our agreement to repurchase on a specified date, up to $200 million of conventional prime and sub-prime mortgage loans at par, as of January 31, 2000. Loans subject to purchase are fixed and adjustable rate, fully-amortizing first or junior lien residential mortgage loans and home equity loans that comply with our origination guidelines and conform to whole-loan sale requirements. The reverse repurchase agreement is not a committed facility and the lender may elect to discontinue the repurchase agreement at any time. The terms2001. 7. OTHER CURRENT LIABILITIES Other current liabilities consisted of the financing under the repurchase agreement mature and may be renewed on a daily basis. In any event, the arrangement terminates in March 2000. Interest rates are variable and are based on the London Interbank Offered Rate, depending on the type of advance. The interest rate in effect at July 31, 1999 was 5.75%. The weighted average interest rate for the year ended July 31, 1999 was 5.92%. There were no borrowings on this line for the quarter ended January 31, 2000. Drafts payable represent funds advanced for mortgages originated which have not yet been drawn against the lines of credit. 6. OTHER ACCRUED LIABILITIESfollowing:
JULY 31, JANUARY 31, 1999 2000 --------2001 ---------- ----------- (In thousands; unaudited) Reserve for returnsthousands) Short-term notes payable ....................... $ 34,286 $ 39,939 Accrued compensation and exchanges ................ $ 73,955 $ 96,372related liabilities ... 49,303 53,763 Future payments due for CRI acquisition .......... 66,314 68,313 Other acquisition........ 44,916 46,455 Payroll tax obligations ........................ 177,002 175,088 Rebates ........................................ 21,552 41,758 Reserve for returns and disposition related items .. 10,824 12,341 Rebates .......................................... 18,002 34,204 Post-contract customer support ................... 3,418 11,289exchanges .............. 60,979 85,211 Other accruals ................................... 29,359 49,241................................. 35,322 67,430 -------- -------- $201,872 $271,760$423,360 $509,644 ======== ========
7. SEGMENTED-14- 15 8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION Intuit has adoptedThe following information is provided in accordance with Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information,"Information" ("SFAS 131"). SFAS 131 establishes standards for the way in which public companies disclose certain information about operating segments in the Company's financial reports. Consistent with SFAS 131, we have determined our operating segments based on factors such as how our operations are managed and how results are viewed by management. Since Internet-based revenues and expenses cut across all of our business divisions, we do not report results of our Internet-based businesses as a separate business segment in our financial statements. Instead, each of our business divisions reports Internet-based revenues and expenses that are specific -14- 15 to its operations and are included in its results. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Intuit does not track assets by operating segments. Consequently, we do not disclose assets by operating segments. The following unaudited results for the six months ended January 31, 2000 and 2001 are broken out by our operating segments for the six month periods ended January 31, 1999 and 2000:segments:
SIX MONTHS ENDED SMALL CONSUMER GLOBAL JANUARY 31, 1999 SMALL CONSUMER2000 BUSINESS TAX FINANCE TAX INTERNATIONALBUSINESS (In thousands; unaudited)thousands) DIVISION DIVISION DIVISION DIVISION OTHER(1)OTHER (1) CONSOLIDATED -------- -------- -------- ------------- --------- ----------------- ---------- ------------ Net revenue ................ $131,961 $134,269 $209,358 $ 35,026 $ -- 510,614 Segment operating income / (loss) ............ 38,925 19,210 98,415 (6,263) -- 150,287 Common expenses ............ -- -- -- -- (54,145) (54,145) -------- -------- -------- -------- --------- --------- Sub-total operating income (loss) .............. 38,925 19,210 98,415 (6,263) (54,145) 96,142 -------- -------- -------- -------- --------- --------- Gains/(losses) on marketable securities ... -- -- -- -- 10,088 10,088 Acquisition costs .......... -- -- -- -- (45,633) (45,633) Reorganization costs ....... -- -- -- -- (2,000) (2,000) Interest income/expense and other items ............ -- -- -- -- 7,298 7,298 -------- -------- -------- -------- --------- --------- Net income (loss) before tax ................. $ 38,925 $ 19,210 $ 98,415 $ (6,263) $ (84,392) $ 65,895 ======== ======== ======== ======== ========= ========= SIX MONTHS ENDED JANUARY 31, 2000 (In thousands; unaudited) Net revenue ................................................. $216,912 $140,659 $196,844 $ 48,012140,659 $48,012 $ -- $ 602,427 Segment operating income/(loss) .............. 70,007 10,238 68,581 4,383 -- 153,209 Common expenses ............ -- -- -- -- (68,830) (68,830) -------- -------- -------- -------- --------- --------- Sub-total operating income (loss) .............. 70,007 10,238 68,581 4,383 (68,830) 84,379 -------- -------- -------- -------- --------- --------- Gains/(losses) on marketable securities ................ 42,900 45,441 (2,379) 40 -- -- -- -- (20,110) (20,110)86,002 Acquisition costs ..................................... -- -- -- -- (89,539) (89,539) Reorganization costs ............................... -- -- -- -- (3,500) (3,500) Common expenses ............................. -- -- -- -- (1,623) (1,623) ---------------------------------------------------------------------------- Sub-total operating income (loss) ........... 42,900 45,441 (2,379) 40 (94,662) (8,660) Interest income/expenseincome (expense) and other items ............... -- -- -- -- 15,465 15,465 -------- -------- -------- -------- --------- ---------Realized net losses on marketable ........... -- -- -- -- (20,110) (20,110) securities Gain on divestiture ......................... -- -- -- -- -- -- ---------------------------------------------------------------------------- Net income (loss) before tax ................................. $ 70,00742,900 $ 10,23845,441 $ 68,581(2,379) $ 4,383 $(166,514)40 $(99,307) $ (13,305) ======== ======== ======== ======== ========= =====================================================================================
SIX MONTHS ENDED SMALL CONSUMER GLOBAL JANUARY 31, 2001 BUSINESS TAX FINANCE BUSINESS (In thousands) DIVISION DIVISION DIVISION DIVISION OTHER CONSOLIDATED -------- -------- -------- -------- ---------- ------------ Net revenue ................................. $253,782 $204,659 $ 130,006 $56,635 $ -- $ 645,082 Segment operating income (loss) ............. 54,320 46,523 (906) 3,340 -- 103,277 Acquisition costs ........................... -- -- -- -- (89,599) (89,599) Reorganization costs ........................ -- -- -- -- -- -- Common expenses ............................. -- -- -- -- (10,278) (10,278) ----------------------------------------------------------------------------- Sub-total operating income (loss) ........... 54,320 46,523 (906) 3,340 (99,877) 3,400 Interest income (expense) and other items ... -- -- -- -- 32,666 32,666 Realized net losses on marketable ........... -- -- -- -- (75,803) (75,803) securities Gain on divestiture ......................... -- -- -- -- 1,639 1,639 ----------------------------------------------------------------------------- Net income (loss) before tax ................ $ 54,320 $ 46,523 $ (906) $ 3,340 $(141,375) $ (38,098) =============================================================================
- -------------------- (1) Reconciling items include acquisition and other common costs not allocatedCommon expenses in fiscal 2000 have been reclassified to specific segments. 8.conform to the current presentation format. 9. NOTES PAYABLE AND COMMITMENTS In March 1997,2000, our Japanese subsidiary, Intuit KK, entered into a three-yearone-year loan agreement with Japanese banks for approximately $30.3$32.2 million which was used to fund itsrefinance the three year loan that was entered into in March 1997 to finance our acquisition of Nihon Micom. The loan is denominated in Japanese yen and is therefore subject to foreign currency fluctuations when translated to U.S. dollars for reporting -15- 16 purposes. The interest rate is variable based on the Tokyo inter-bank offered rate or the short-term prime rate offered in Japan. At January 31, 2000,2001, the rate was approximately 0.6%1.35%. The fair value of the loan approximates cost as the interest rate on the borrowings is adjusted periodically to reflect market rates (which are currently significantly lower in Japan than in the United States). We have guaranteed the loan and pledged approximately $38.4 million, or 110% of the loan balance, of short-term investments to be restricted as security for the borrowings at January 31, 2000. We are obligated to pay interest only untilon the loan through March 2000. We are currently refinancing this debt for another one-year term. 9.2001. -15- 16 10. INCOME TAXES Intuit computes the provision (benefit) for income taxes by applying the estimated annual effective tax rate to recurring operations and other taxable items. Our effective tax rate differs from the federal statutory rate primarily because of tax credits, tax exempt interest income, state taxes, non deductible acquisition costs and certain foreign losses. 10.11. LITIGATION Intuit was a defendant in two consolidated class action lawsuits (one in California and one in New York) which alleged that certain of its Quicken products have on-line banking functions that are not Year 2000 compliant. With respect to the California litigation, on October 13, 1999 the court dismissed the case without leave to amend. The only remaining issue relates to a potential award of attorneys' fees to the plaintiffs. On December 1, 1999, the court granted our motion to dismiss all the New York actions with prejudice. Although plaintiffs filed a Notice of Appeal, they failed to perfect the appeal. Accordingly, this case is also now over. In addition, a suit was filed in the Contra Costa County, California Superior Court by an individual consumer against various retailers, including Circuit City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others, alleging that these retailers have sold software and hardware products which are not Year 2000 compliant, including at least one product published by Intuit. One of the defendants in this action, Fry's Electronics, filed a cross-complaint against various software publishers and hardware manufacturers, including Intuit, asserting a claim for indemnity in the main action. In September 1999, Fry's Electronics reached a settlement with the plaintiffs. All the cross defendants, including Intuit, then filed a demurrer to the cross-complaint. On December 7, 1999 the court granted the demurrer and dismissed the case without leave to amend. If Fry's Electronics does not appeal this ruling by April 4, 2000, this lawsuit against Intuit will also be over. On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. On March 8, 2000 aTwo virtually identical lawsuit,lawsuits were later filed: Rubin v. Intuit Inc., was filed on March 8, 2000 in the United States District Court, Southern District of New York. BothYork and Newby v. Intuit Inc. was filed on April 27, 2000, in the United States District Court, Central District of California, Eastern Division. The Bruce and Newby lawsuits were consolidated into one lawsuit - In re Intuit Privacy Litigation, filed on July 28, 2000 in the United States District Court of California, Eastern Division. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior Court of State of California, San Bernadino County, Rancho Cucamonga Division. The Almanza complaint was amended on October 26, 2000. These purported class actions claim thatallege violations of various federal and California statutes and common law claims for invasion of privacy based upon the alleged intentional disclosure to third parties of personal and private customer information entered intoat Intuit's Quicken.com website was intentionally and secretly disclosed to third-party advertisers.website. The two lawsuits allege identical causes of actions for invasion of privacy and violations of federal statutes related to electronic communications. The lawsuitscomplaints seek injunctive relief, an orderorders to disgorge profits related to the alleged acts, and statutory and other damages. As of March 10, 2000, neither lawsuit had been served on Intuit. WeIntuit believes these lawsuits are without merit and intends to defend the litigation vigorously. Intuit is subject to other legal proceedings, as well as demands, claims and claimsthreatened litigation, that arise in the normal course of our business. We currently believe that the ultimate amount of liability, if any, for any pending actionsclaims of any type (either alone or combined) will not materially affect our financial position, results of operations or liquidity. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact. Regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, diversion of management resources and other factors. 11. RELATED PARTY TRANSACTIONS As of January 31, 2000, we held approximately 19.5% of Checkfree's outstanding common stock. In exchange for providing connectivity between Checkfree's bill payment processing service and our Quicken products, we reported -16- 17 revenues of $1.3 million and $2.4 million from Checkfree for the three and six-months ended January 31, 1999 and $1.8 million and $3.6 million for the three and six-months ended January 31, 2000, respectively. We held receivables due from Checkfree for $0.1 million and $2.3 million at July 31, 1999 and January 31, 2000, respectively. As of January 31, 2000, we held a 49% non-voting equity interest in Venture Finance Software Corp. ("VFSC"). We have entered into agreements with VFSC to provide them with services related to ongoing development of Web-oriented finance products and services. We have an option to purchase the equity interests of the other investors in VFSC between May 4, 2000 and May 4, 2002, at a price to be determined by a formula. We held a receivable due from VFSC for $6.7 million and $10.6 million at July 31, 1999 and January 31, 2000, respectively. 12. SUBSEQUENT EVENTS On February 18, 2000 we sold 3.0 million shares of Checkfree common stock at a price of $90 per share and on March 2, 2000 we sold 2.5 million shares of Checkfree common stock at a price of $92 per share. Gross proceeds from these transactions were $500 million. These divestitures reduced our ownership in Checkfree to 4.7 million shares or approximately 9% of Checkfree's outstanding stock. On February 29, 2000, Verisign, Inc. ("Verisign") acquired all of the outstanding securities of privately-held Signio, Inc. ("Signio"). We held an investment in Signio, and in exchange for our investment, we will receive approximately 194,000 common shares of Verisign (representing less than 1% of the outstanding common stock of Verisign subsequent to the acquisition). On February 29, 2000, the closing stock price of Verisign was $253 per share. -17- 18 - - -------------------------------------------------------------------------------- ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - -------------------------------------------------------------------------------- CAUTIONS ABOUT FORWARD LOOKING STATEMENTS AND INVESTMENT CONSIDERATIONS ThisThroughout this Form 10-Q, contains forward-lookingyou will find "forward-looking" statements, or statements about events andor circumstances that have not yet occurred. For example,In some cases, you can identify these statements withby forward-looking words like "expect,such as "may," "anticipate,"might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "believe""continue," and other similar terms. These forward-looking statements include, among other things, the anticipated future growth of our mortgage revenue, predictions about QuickBooks upgrade rates, expected trends in thecost of revenue, operating expenses and capital needs, projections of our future tense,financial performance, our anticipated growth and anticipated trends in our businesses (including trends in product pricing and seasonality). These statements are only predictions, based on our current expectations about future events., We cannot guarantee future results, performance or achievements or guarantee that predictions or current expectations will be accurate. These forward-looking statements. Investors should be aware thatstatements involve risks and uncertainties, and our actual results, mayperformance or achievements could differ materially from those expressed or implied by the forward-looking statements. The important factors that could cause our expectations becauseresults to differ are discussed under "Risks That Could Affect Future Results," at the end of risksthis Item 2. This Item 2 should also be read in conjunction with the Consolidated Financial Statements and uncertainties about the future. We will not necessarily update informationrelated Notes in Part I, Item 1 of this Form 10-Q, if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to the following: - - - Our revenue and earnings are highly seasonal and our quarterly and annual financial results fluctuate significantly. - - - We face intense competition from many companies in all of our business areas. - - - Competition in the personal tax preparation software business is particularly intense, with Microsoft having entered the market during the 1999 tax season. We are seeing increasing price competition during the remainder of the tax season (including free products from Microsoft), and this could have a material negative impact on revenue, profitability and market position for our personal tax business. - - - In our online mortgage and insurance businesses, we face competition from many newly public companies that have a narrower business focus, increasing financial resources and less demanding earnings expectations. - - - We must continue to establish and maintain important distribution relationships for our Internet-based products and services and successfully market and promote these products and services. - - - We must maintain high reliability for our server-based Web services. In particular, our web-based tax preparation and electronic filing services must handle extremely heavy customer demand during the peak tax season. - - - If we fail to provide responsive customer service and technical support, we could lose customers. - - - Our Internet businesses face risks relating to customer privacy and security and increasing regulation. - - - Our Internet businesses require significant research and development and marketing expenditures. - - - Page views and reach statistics for our Quicken.com site can vary significantly from month to month due to seasonal trends, site performance, the timing of launches, competitors' activities and other factors. Adverse changes in page view and reach statistics could adversely affect our ability to earn advertising revenue from our Quicken.com site. - - - In order to succeed in the payroll services business, we must continue to improve the integration of the operations of our payroll processing subsidiary, streamline customer activations for our online payroll processing service and focus our traditional payroll service on existing distribution channels. - - - The technology and services of certain alliances for our QuickBooks Internet Gateway initiative still need to be completed and integrated with QuickBooks, and are subject to risks and uncertainties involved in the product development process, including technological difficulties, possible delays, and availability of financial resources. Significant delays in implementing key services, or failure to implement, could delay or eliminate our ability to recognize contractually committed revenues. - - - The anticipated benefits of certain proposed small business services to Intuit (including the Site Builder website creation tool, Site Solutions services and QuickBooks Internet Gateway services) will depend on a number of variables, including the rate at which customers upgrade to QuickBooksfiscal 2000 and future versions of the product, customer acceptance of new and proposed services, and, the level of satisfaction of third party participants. - - - The success of the small business alliances will depend on establishing and maintaining a number of important business relationships, and there can be no assurance that key relationships will continue. - - - Our Tax and Quicken Internet Gateway initiatives, and related new services to be offered in these areas, are in very early stages. Success of these initiatives will depend on establishing and maintaining business relationships with key participants and completing necessary technology development and integration, as well as achieving broad customer acceptance of the services to be offered. - - - We offer electronic bill payment and bill presentment services, and the My Finances web-based personal finance management service, through licensing arrangements with a joint venture in which we are a participant. The success of these services for Intuit will depend on a number of factors, including timely and cost-effective completion of ongoing development efforts, customer and biller adoption and participation rates, and the status of the relationship with the joint venture. Intuit has an option to purchase the interests in the joint venture that it does not currently own between May 2000 and May 2002, at a formula-driven price that could exceed $100 million. If we do not exercise the purchase option, our rights to use the technology developed by the joint venture will be subject to future negotiation. - - - We face increasing competition for access to retail and OEM distribution channels. - - - The integration of acquired companies poses ongoing operational challenges and risks. In addition, our recent acquisitions have resulted in significant acquisition-related expenses. - - - Our mortgage business is subject to interest rate fluctuations, and the impact of interest rates on Intuit's operating results has become more significant since the acquisition of Rock Financial was completed. - - - Our recent acquisition -18- 19 of Rock Financial could have a negative impact on Intuit's relationships with other lenders that participate in the online mortgage service. - - - We hold investments that have been very volatile. Additional information about factors that could affect future results and events is included in our fiscal 1999 Form 10-K/A and other reports filed with the Securities and Exchange Commission.10K. OVERVIEW Intuit's mission is to revolutionize the wayhow people manage their financial lives and small businesses manage their businesses. We strive to offer innovative products and services that drive fundamental changes in how individuals and small businesses manage their finances. As we executeactivities - changes so profound that our mission, we have embarked oncustomers can't imagine going back to the "old way" of doing things. We offer a strategy to greatly expand the worldvariety of electronic finance. "Electronic finance" encompasses three types of productssmall business, tax preparation and services: (1) desktoppersonal finance software products such as Quicken(R), QuickBooks(R) and Quicken TurboTax(R), that operate on customers' personal computers to automate financial tasks; (2) online products and services, such as Quicken.com(SM), QuickenLoans(SM), QuickenInsurance(SM) and Quicken TurboTax for the Web(SM), that are delivered via the Internet; and (3) products and services, such as QuickBooks Online Payroll(SM) service, that connect Internet-based services with desktop software to enable customers to integrate their financial activities. Our revenues come primarily from the United States, Japan, Canada and the United Kingdom, through retail distribution channels, direct customer sales and via the Internet. While desktop software and related products and services now provide most of our revenue, our Internet-based revenue is growing rapidly. For the three months ended January 31, 2000, Internet-based revenues grew by approximately 162% comparedthat enable people and small businesses to the same period last year and accounted for approximately 21% of total revenue in the quarter ended January 31, 2000, compared to approximately 10% in the prior year quarter. We use the term Internet-based revenue to include revenue from both Internet-enabled products and services as well as revenue from electronic distribution. Internetrevolutionize how they manage their activities. Our products and services include activities where the customer realizes the value of the goods or services directly on the Internet or an Intuit server. Internet product revenues include, for example, advertising revenues generated on our Quicken.com website, online tax preparationQuicken(R), QuickBooks(R), Quicken TurboTax(R), ProSeries(R) and electronic tax filing revenues, online payroll service revenue and transaction and processing fees from our online insurance and online mortgage services. Electronic distribution includes revenues generated by electronic ordering and/or delivery of traditionalLacerte(R) desktop software products, as well as an expanding array of Internet-based products and financial supplies. We also useservices, including QuickBooks Deluxe Payroll service, QuickBooks Internet Gateway services, our Site Builder website tool, Quicken TurboTax for the Internet to host our technical support website where we can quicklyWeb, Quicken.com(SM) and cost-effectively provide patches for product bugs and provide customers with answers to frequently asked questions. While we believe that the Internet provides an opportunity to increase revenue in fiscal 2000, we also anticipate continued increases in spending in an effort to capitalize on new business opportunities. In particular, we continue to expect increased research and development expenses due to investments in Internet-based initiatives. We also anticipate increased selling and marketing expenses related to these initiatives and because of more intense competition in the personal tax market during fiscal 2000. While we have made significant progress in our Internet-based businesses, investors should be aware many of these businesses are in their initial stages, and are not yet generating significant revenue or profit. Since Internet-based revenues and expenses cut across all of our business divisions, we do not report results of our Internet-based businesses as a separate business segment in our financial statements. Instead, each of our business divisions reports Internet-based revenues and expenses that are specific to its operations and are included in its results.Quicken Loans(SM). Our business is highly seasonal. Sales of tax products are heavily concentrated from November through March. Sales of small business and consumer finance and small business products are typically strongest during the year-end holiday buying season and the beginning of the calendar year, and therefore our major product launches usually occur in the fall or early winter to take advantage of thisthese customer buying pattern.patterns. These seasonal patterns mean that revenue is usually strongesthighest during the quarters ending January 31 and April 30. We experience lower revenues for the quarters ending July 31 and October 31, while our operating expenses to develop and managesupport products and services continue to be incurred at relatively consistent levels during these periods. These seasonal trendsThis can result in significant operating losses particularly in the July 31 and October 31 quarters when our revenues are lower.quarters. Operating results can also fluctuate for other reasons, -19- 20 such as changes in product release dates, non-recurring events such as acquisitions, dispositions, gains and dispositions,losses from marketable securities, and product price cuts in quarters that have relatively high fixed expenses. Acquisitions and dispositions in particular can have a significant impact on the comparability of both our quarterly and yearlyannual results, and acquisition-related expenses continue to have had a negative impact on our earnings. While desktop software and related products and services provide a majority our revenue, our Internet-based revenue is continuing to grow rapidly. We use the term Internet-based revenue to include revenue from both Internet-enabled products and services as well as revenue generated by electronic ordering and/or delivery of traditional desktop software products and financial supplies. Since Internet-based revenues cut across all of our business divisions, we do not report results of our Internet-based revenues separately in our financial statements. Instead, each of our business divisions reports Internet-based revenues that are specific to its operations and are included in its results. We believe our Internet-based businesses and our other emerging service businesses provide an opportunity to increase revenue in fiscal 2001 and beyond. We have made significant progress in several of these businesses over the past three years. During fiscal 2000, our web-based tax preparation and electronic filing services achieved -17- 18 profitability on a pre-tax basis. During the second quarter of fiscal 2001, the profitability of our Quicken Loans and payroll businesses improved significantly from the prior year. During the second quarter of fiscal 2001, we introduced QuickBooks for the Web, which provides basic accounting functionality on the web, and QuickBase, a web-based tool that lets customers create, manage and share data from a browser. In February 2001, we announced the Intuit Developer Network, a program that gives software developers access to application programming interfaces (APIs) for various Intuit small business products, so that they can develop software applications that will be available to Intuit's small business customers. Despite this progress, investors should be aware that most of our emerging businesses are still in their initial stages and are not yet generating either profits or significant revenue. We anticipate increased spending in an effort to capitalize on new business opportunities. During the first half of fiscal 2001 we doubled our investments in our emerging businesses compared to the first half of fiscal 2000, which has contributed to increased research and development expenses. We expect to continue increasing our investment in emerging businesses during the remainder of fiscal 2001. See "Risks That Could Affect Future Results." RESULTS OF OPERATIONS Set forth below are certain consolidated statements of operations data for the three and six-month periods ended January 31, 1999 and 2000. Investors should note that results for the three and six-month periodssix months ended January 31, 2000 include activity for our CRI subsidiary, which was acquired in May 1999. The corresponding year ago periods did not include results for CRI (see Note 4).and 2001. Results for all periods include resultsactivity for Rock Financial Corporation and Title Source, Inc. (collectively, "Rock"), which wewere acquired in December 1999. TheAs the acquisition of Rock has beenwas accounted for as a pooling of interests, so all prior periods have been restated to reflect the combined results of Rock and Intuit. The inclusion of Rock's results in the comparison periods for both fiscal 1999 and fiscal 2000 had a significant impact on our financial results. Rock's revenue declined approximately 50% between the comparison periods, due to Rock's transition from a traditional mortgage business to an online mortgage business and the closingSee Note 1 of the majority of their traditional mortgage branch offices, as well as rising interest rates. Although Rock's operating expenses decreased in absolute dollars between the comparison periods, they increased significantly as a percentage of revenue and resulted in operating losses for Rock during the fiscal 2000 comparison periods (compared to operating profits in the fiscal 1999 periods), which partially offset growth in operating income for our other businesses as a whole. Since the business of selling software and related services is considerably different from our supplies business, we break them out separately for financial reporting purposes.statements. NET REVENUE
Three Months Ended January 31, Six Months Ended January 31, 1999 Change 2000 1999 Change 2000 ---------------------------- ---------------------------- (Dollars in millions; unaudited) Software and other ................ $ 344.1 14% $ 392.7 $ 457.4 18% $ 541.7 % of revenue ...................... 92% 92% 90% 90% Supplies .......................... $ 29.6 11% $ 32.8 $ 53.2 14% $ 60.7 % of revenue ...................... 8% 8% 10% 10% Total ............................. $ 373.7 14% $ 425.5 $ 510.6 18% $ 602.4
The following revenue discussion is categorized by our business divisions, which is how we examine results internally. Our domestic suppliesdivisions. The table below shows each business is considered a partdivision's percentage of our smallnet revenue for the three and six months ended January 31, 2000 and 2001. See Note 8 of the financial statements for additional information about our business division while the international supplies business is considered part of our international division (see Note 7).segments.
Q2 % Q2 % % YTD % YTD % % (Dollars in millions; FY00 REVENUE FY01 REVENUE CHANGE FY00 REVENUE FY01 REVENUE CHANGE Unaudited) Q2 YTD ------ ------- ------ ------- ------ ------ -------- ------ ------- ------ Small Business Division ... $136.8 32% $160.1 35% 17% $216.9 36% $253.8 39% 17% Tax Division............... 185.7 44% 192.3 42% 4% 196.8 33% 204.7 32% 4% Consumer Finance Division.. 72.6 17% 66.5 15% (8)% 140.7 23% 130.0 20% (8)% Global Business Division .. 30.4 7% 38.7 8% 27% 48.0 8% 56.6 9% 18% Total net revenue...... $425.5 100% $457.6 100% 8% $602.4 100% $645.1 100% 7%
Small Business Division. Small business division revenues comeBusiness Division revenue is derived primarily from the following sources: - QuickBooks product line - Suppliesdesktop products, (including checks, envelopes and invoices) - Payrollfinancial supplies, payroll services, - Support fees for the QuickBooks Support Network Overall,and QuickBooks Internet Gateway services. Revenue for the Small Business Division increased by 17% for both the three and six months ended January 31, 2001 compared to the same periods in the prior year. Our QuickBooks business experienced revenue growth of 6% for the three months ended January 31, 2001, compared to the same period a year ago. This growth was the result of higher average selling prices, which partially offset a 9% decline in unit sales. QuickBooks revenue for the division was up 63% and 64% for the three and six-month periodssix months ended January 31, 2000 respectively,was roughly flat, as higher average selling prices were offset by a 12% decline in unit sales compared to the prior year. These results primarily reflect a year-over-year decline in the rate at which existing QuickBooks customers upgraded to a newer QuickBooks product. Historically, approximately 20-30% of our QuickBooks customer base will upgrade in any one year. Year 2000 concerns, however, skewed both the normal seasonal patterns and traditional upgrade patterns in fiscal 2000. Almost 50 percent of our customers upgraded last year due to Year 2000 concerns. As a result, we currently expect the upgrade rate to be in the high teens this fiscal year. The relatively slow growth of QuickBooks revenue also reflects slower economic growth in the U.S. and other major markets for our QuickBooks products. -18- 19 Our financial supplies business experienced revenue growth of 9% for both the three and six months ended January 31, 2001 compared to the same periods in the prior year. This increase is primarily the result of higher average selling prices. Payroll services experienced revenue growth of 57% and 54% in the three and six months ended January 31, 2001, compared to the same periods a year ago. TheSignificant price increases were primarily a result of revenuecontributed to this growth for both our QuickBooks products. In addition, CRI (acquired in May 1999)Basic Payroll Service and our QuickBooks Onlineonline Deluxe Payroll Service. Both services also experienced solid growth in their customer base. While we believe our payroll business, and the Deluxe Payroll Service (launched in October 1998) contributed to revenues during the three-month and six-month periods -20- 21 ended January 31, 2000, but did not account for material revenue in the three and six-month periods ended January 31, 1999. Though they are a smaller component of small business division revenues, tax tables service revenue and revenue from our QuickBooks Support Network also grew in the three and six-month periods ended January 31, 2000 compared to the same periods a year ago. We launched our most recent version of QuickBooks (QuickBooks 2000) in December 1999. The increased revenue from our QuickBooks product line was attributable to increased unit sales, as well as an increase in the average selling prices of the QuickBooks product driven by consumer preferences toward higher priced, greater functionality products. We believe a significant number of customers may have upgraded earlier than they otherwise may have, due to Year 2000 concerns. Accordingly, we expect that some of the fiscal 2000 second quarter strength in QuickBooks revenue is a shift from the second half of the year, and we expect the revenue growth rate to decline significantly as the year progresses. QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected and integrated electronic services, that is designed to offer small businesses direct access to services from third parties, such as electronic postage and merchant account services, that can help them more easily and efficiently manage their business. It also features QuickBooks Site Builder, a new web site creation and domain name registration tool that enables small businesses to quickly establish a presence on the Web. Although these new features are strategically important for Intuit, it is too early to tell how successful these servicesparticular, will be, or the extent to which they will generate increasing demand for QuickBooks 2000. Domestic supplies revenues, which are part of the small business division, grew by 11% and 14% for the three and six-month periods ended January 31, 2000 as a result of our increasing base of small business customers who use QuickBooks and Quicken. In addition, in August 1999, we began charging for shipping and handling for domestic supplies shipments which also contributed to our domestic supplies revenue. We offer different types of payroll services. Our QuickBooks Online Payroll service, which is integrated with our QuickBooks products, handles all aspects of payroll processing with our CRI subsidiary providing the processing services. CRI also continues to provide traditional payroll processing services for its customer base. We also offer QuickPayroll, a subscription-based payroll service for customers who do not use QuickBooks, as well as a payroll tax table subscription service for small business customers that need current tax tables to prepare their own payroll. While the payroll processing business provides us with a significant opportunity to generate recurring revenue there are businessin the future, we face a number of challenges and risks, associated with theincluding operational issues in activating online payroll processing business and the continued integrationcustomers. See "Risks That Could Affect Future Results." In December 2000, we completed our acquisition of CRI into our existing business model. For example, if we are unableEmployeeMatters, which is developing employee administration services that will enable us to provide accurate and timely payroll information, cash deposits or tax return filings, that failure could be costlya broader set of solutions to correct and may have a significant negative impact on our ability to attract and retain customers, who have a low tolerance for payroll processing errors. Our ability to successfully operate CRI will depend in part on retaining their existing customers and maintaining relationships with certain banks and other third parties who we will rely on to retain existing customers and attract new customers outsidesmall business customers. See Note 4 of our QuickBooks customer base. If we are unable to do so, it could result in a negative impact on our consolidated results. While the customer base for the QuickBooks Online Payroll service continues to expand, the servicefinancial statements. Tax Division Tax Division revenue is not yet generating material revenues and we must continue to focus on streamlining the customer activation process. Tax Division. Tax division revenues comederived primarily from the following sources: - Quicken TurboTax federal and MacInTax personalstate consumer desktop tax preparation products - Professionalsoftware, ProSeries and Lacerte professional tax preparation products, (ProSerieselectronic tax filing services and Lacerte product lines) - Quicken TurboTax for the Web electroniconline tax preparation services and electronic filing services -21- 22services. Overall, tax division revenuesTax Division revenue for both the three and six-monthssix months ended January 31, 2000 declined2001 increased by 8% and 6% respectively,4% compared to the same periods last year. The declines in revenue were due primarily to an aggressive marketing and pricing strategy forRevenue from Quicken TurboTax products for both the three and six months ended January 31, 2001 remained roughly flat, compared to the same periods in responsethe prior year. This is consistent with our expectations as we continue to a very competitive market for desktop personal tax software. We lowered average selling prices, and we also bundledbundle electronic filing and state tax products with certain versions of Quicken TurboTax, which requiredrequires us to defer recognitionrecognizing a portion of approximately $30 million ofthe associated revenue from the second quarter to the remainder of the fiscal year. WhileIn addition, over the past few years, we have experienced significant unit sales growthnoticed a gradual change in the buying patterns of our customers. The general shift has been from customers purchasing Quicken TurboTax and preparing their tax returns throughout our second and third quarters to a concentration in the third quarter. We attribute this shift in part to an increasing number of customers using Quicken TurboTax for the Web. This service is generally not available until mid-January (late in our second quarter), so almost all of its revenue comes in the third quarter. As Quicken TurboTax for the Web expands to comprise an increasing proportion of our tax revenue, this concentration of revenue in the third quarter ended January 31,will become even more pronounced. The development and launch of our consumer tax products for the 2000 we continue to experience extreme pricing pressures from both H&R Block's aggressively priced TaxCut producttax year was completed on schedule, and from Microsoft's TaxSaver product,products reached retail shelves in late November. However, there are still ongoing risks associated with our tax business, including free product offerings from Microsoft. The increasedintense competition has resultedthat could potentially result in lower average selling prices and/or a decline in response to these pricing pressures. It is currently too early to predict the final levelour share of demand for the Quicken TurboTax product line through our retail distribution channels. Although the number of units sold is currently highersales in the current fiscal year to dateretail channel. In January 2001, H&R Block's TaxCut products were promoted in a manner that essentially made its basic tax product free for two weeks, while we increased our desktop product prices by about 5% compared to last year. According to PC Data, as of February 3, 2001, our share of dollar sales of desktop consumer tax products in the retail channel had increased to 82%, compared to 76% at the same period atime last year, ago, revenue is lower duewhile our share of unit sales had declined to lower average selling prices. We expect our reserves for returned products70%, from 72% in the prior year. Investors should note that these are early results, and we will not be adequateable to cover retailers' returns of unsold products during the next three quarters, though higher than expected returns could have a negative impact on revenue for the season. Because of these and other uncertainties,report revenues and operating results for thisthe entire tax season will be unknown until late in the fiscal year. We have experienced significantly higher revenues and volume for Quicken TurboTax for the Web and for electronic filing compared to last year, as an increasing number of customers gain Internet access and become more accustomed to processing transactions on-line. We expect that as the tax filing deadline nears, we may experience a dramatic increase in demand for both Web tax preparation and electronic filing services. To deal with the expected increases in demand, we have increased our capacity and have developed a contingency plan to provide additional capacity if necessary. However, the exact level of demand is very difficult to predict, and we could experience significant negative financial and public relations consequences if our capacity to serve our web tax preparation and electronic filing customers is insufficient during the peak filing period, or if the service is unavailable for other reasons such as technical difficulties at our data center. We have not experienced any service interruptions thus far in the current tax filing season. However, we did have some interruptions in our electronic filing services in February 1999 and on April 11-12, 1999. Although we do not believe those service outages prevented customers from completing and filing their returns in a timely manner, or posed a risk that customer data would be lost or corrupted, we did experience negative publicity. Revenues for ourOur professional tax (ProSeries) products and products from our Lacerte subsidiary increased by 10%experienced revenue growth of 6% for both the three and six-month periodssix months ended January 31, 2000 compared to the same periods last year. This growth is attributable to a combination of a continued shift to higher priced products and growth in our customer base due in part to our acquisitions of Compucraft and TaxByte during 1999. In addition, we continue to experience a high customer renewal rate. Consumer Finance Division. Consumer finance division revenues come primarily from the following sources: - Quicken product line - Advertising and sponsorship fees from the consumer areas of our Quicken.com website - Implementation, marketing and transaction fees from financial institutions (including marketspace participants) providing services through Quicken and Quicken.com - On-line consumer mortgage placement and servicing fees through QuickenLoans Overall, consumer finance division revenues were up 9% and 5% for the three and six-month periods ended January 31, 20002001 compared to the same periods a year ago. This growth in revenue was the result of higher average selling prices of our ProSeries and Lacerte unlimited-use products, as well as growth in our customer base. -19- 20 Our web-based tax preparation and electronic filing services have experienced strong growth during the current tax season. Through January 31, 2001, web tax preparation revenue more than doubled from the prior year, driven by a 50% price increase as well as a substantial increase in unit volume. Unit volume for our electronic filing service doubled from the first half of last year, with a slight increase in revenue. The increasesfaster unit growth reflected an increase in customers eligible for free electronic filing through our Quicken Tax Freedom Project]. Despite these encouraging early results, we face the challenge of maintaining high service levels, particularly during peak volume service times. The exact level of demand for Quicken TurboTax for the Web and electronic filing for the remainder of the current tax year is impossible to predict, and we could experience adverse financial and public relations consequences if these services are unavailable due to technical difficulties or other reasons. See "Risks That Could Affect Future Results." Consumer Finance Division Consumer Finance Division revenue comes primarily from Quicken desktop products, Quicken Loans, advertising, sponsorship and placement fees from Quicken.com and Quicken, and online transactions. Revenue for the Consumer Finance Division was down 8% for both the three and six months ended January 31, 2001, compared to strong revenue growththe same periods a year ago. Revenue for our Quicken product line declined 18% and growth in Internet-based revenues, offset in part by a significant decline in revenues15% for Rock's mortgage business from the year-ago periods. Quicken revenue increasedthree and six months ended January 31, 2001, compared to the same periods ofa year ago. Our comparative results were negatively impacted by strong consumer demand during the prior year primarily due to strong consumer demand resulting from aggressive retail -22- 23 promotions with our tax products and lower than expected product rebate redemptions related to Quicken 99. We believe someperiods as a result of a significant number of customers may have upgraded during the second quarter,upgrading due to Year 2000 concerns. Accordingly, someIn addition, Quicken.com advertising and sponsorship revenue declined due to reduced advertising spending by potential purchasers of the fiscal 2000 second quarter strength in Quicken revenue may be a shift from the third quarter, and we expect the revenue growth rate may decline as the year progresses.Internet advertising. Our Quicken product line faces many challenges in the desktop personal financial software market. For example, we continue to facecategory, including continued competition from Microsoft's Money product. In addition,product and from other web-based personal financial software functionality isfinance tracking and management tools that are becoming increasingly becoming available on the Internet at no cost to consumers. The Consumer Finance Division benefited from revenue growth experienced by our Quicken Loans mortgage business of 27% and 17% for the three and six months ended January 31, 2001, compared to the same periods a year ago. Online mortgage revenue (which includes services provided through our website or by telephone) was up 44% and 34% for the three and six months ended January 31, 2001 over the prior year periods. Mortgage revenue growth is primarily attributable to lower interest rates that drove higher demand for loans, as well as the process efficiencies and infrastructure improvements that we have made that allow us to capitalize on the interest rate environment. We currently expect mortgage revenue to increase at least 50% in fiscal 2001 compared to fiscal 2000. However, we face continuing challenges, including interest rate fluctuations. See "Risks That Could Affect Future Results." On January 24, 2001, we completed the sale of certain assets of our Intuit Insurance Services Inc. subsidiary (which operated our QuickenInsurance business) to InsWeb Corp. in exchange for common stock of InsWeb. In addition, we entered into a distribution agreement under which hasInsWeb is the exclusive consumer insurance aggregator for our Quicken.com and QuickenInsurance Web sites and certain consumer desktop products. See Note 5 of the financial statements. We do not expect this transaction to have a negativematerial impact on desktop product sales. There is also an increasing emphasis on packaging desktop software with original equipment manufacturers' personal computers, which resultsrevenue for the remainder of fiscal 2001, though it may result in lowera slight improvement in operating income. -20- 21 Global Business Division Global Business Division revenues per unit shipped. Consumer divisioncome primarily from small business products in Japan, QuickBooks, Quicken and tax products in Canada, QuickBooks, Quicken and consumer tax products in Europe, and QuickBooks and Quicken products in Southeast Asia. Overall, the Global Business Division revenue growth also benefited from an increase in certain Internet-based revenueincreased 27% and 18% for the three and six months ended January 31, 2001, compared to the same periods last year. This increase was largelyWe experienced more than 70% revenue growth in Canada for both the three and six months ended January 31, 2001, compared to the same periods in the prior year. The increases were due in part to higher advertising, sponsorship and transaction-relatedprofessional tax revenue through Quicken.com and Quicken. However,as a result of an acquisition we made earlier in the current fiscal year. In addition, we were able to release the Canadian version of QuickBooks 2001 in the second quarter of fiscal 2001 compared to last year when we released the Canadian version of QuickBooks 2000 in the third quarter. Japan experienced revenue growth was not uniform across all of our Internet product25% and service offerings in12% for the Consumer division. For example, advertising revenue from our Quicken.com site has grown relatively rapidly. However, revenue from QuickenLoans was substantially lower than inthree and six months ended January 31, 2001 compared to the same periods a year ago. QuickenLoans now encompasses Intuit's online mortgage business as well as the online and traditional mortgage businesses of Rock Financial, which we acquired in December 1999. The decline in mortgage revenueThis growth was primarily due to Rock's decisionhigher retail sales of our Yayoi small business accounting software. The increases in revenue in Canada and Japan were partially offset by a decline in revenue from Europe. Comparative results for Quicken products were negatively impacted by strong consumer demand during prior year periods as a result of customers upgrading due to close many of its traditional mortgage branch offices in order to focus resources on Internet-based lending, as well as increasing interest rates. Growth in mortgage transaction fees may continue to be adversely impacted if interest rates continue to rise, and as we continue to phase out Rock's traditional mortgage business.Year 2000 concerns. In addition the acquisition of Rock will continue to result in new business risks and integration challenges common in all acquisitions. For example, our ability to successfully facilitate the application, approval, and closing process in loan applications on a timely basis will have a significantwe experienced an adverse foreign exchange rate impact on our ability to attract customers to the service. Our ability to successfully operate Rock will depend in part on maintaining relationships with certain banks and other third parties who we will rely on to provide access to capital, and later, service the loans. If we are unable to do so, it could have a negative impact on our consolidated results. The rapid growth we've experienced in our Internet products and services has been generated in part by collaborating with third party online service and content providers such as At Home Corporation (doing business as "Excite@Home") and AOL, which have helped to increase traffic to our Quicken.com website. The Excite@Home agreement calls for us to share revenue generated from our Quicken.com site and the AOL agreement calls for us to make significant guaranteed payments to AOL over the term of the agreement. While the Internet provides a significant opportunity for revenue growth, our financial commitments to these and other third party providers are significant and we must continue to increase traffic and revenue in order for our Internet businesses to become profitable. Our ability to maintain important relationships with Internet portals, distributors and content providers will also have an impact on traffic and revenues. If our website traffic and revenue expectations aren't met, there could be a significant negative impact on our operating results. International Division. International division revenues come primarily from the following sources: - Japanese QuickBooks and other small business products - Canadian Quicken, QuickBooks and Tax products - German Quicken, QuickBooks and Tax products - United Kingdom Quicken and QuickBooks products In addition to the above, we also operate in smaller European, Asian and Latin American markets. Overall, international division revenues increased 37% for the three and six-month periodsquarter ended January 31, 2000 compared to the same periods last year. This increase is a result of stronger sales of Quicken and QuickBooks in both Canada and the U.K., higher sales of the Yayoi small business product in Japan, and favorable currency fluctuations in Japan. Partially offsetting these increases were declines in revenues, but increased profitability in -23- 24 Germany due to a shift in our business model from direct participation in the market to a third party distribution arrangement. COST OF GOODS SOLD2001.
Three Months Ended January 31, Six Months Ended January 31,COST OF REVENUE Q2 % Q2 % % YTD % YTD % % (Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000 -------------------------- ----------------------------FY00 REVENUE FY01 REVENUE CHANGE FY00 REVENUE FY01 REVENUE CHANGE Unaudited) Q2 YTD ------ ------- ------ ------- ------ ------ -------- ------ ------- ------ Product .................... $ 70.2 33%and services......... $ 93.1 $ 109.2 37%22% $103.8 23% 11% $ 149.5 % of revenue ............... 19% 22% 21% 25% $170.7 27% 14% Amortization of purchased .. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9 software & other %........... 2.5 1% 3.9 1% 56% 4.9 1% 6.8 1% 39% Total of cost of revenue ............... 1% 1% 1% 1% Total ...................... $ 72.1 33%............. $ 95.6 $ 112.9 37%23% $107.7 24% 13% $ 154.4 % of revenue ............... 19% 22% 22% 26% $177.5 28% 15%
There are two components of our cost of goods sold.revenue. The largestlarger component is the direct cost of manufacturing and shipping products and offering services, which includes data center costs relating to delivering Internet-based products and services. The second component is the amortization of purchased software, which is the cost of depreciating products or services obtained through acquisitions.acquisitions over their useful lives. Total cost of goods soldrevenue as a percentage of revenue increased to 22%24% and 28% for the three and six months ended January 31, 2001, compared to 23% and 26% for the same periods in the prior year. These increases are primarily attributable to the continued growth of our service businesses, such as payroll services, Quicken Loans and the QuickBooks Support Network, which typically have higher cost of revenue than our packaged software products. As our service businesses expand to become a higher portion of total revenue, we anticipate that our cost of revenue will continue to increase as a percentage of revenue. In addition, we are experiencing increased costs due to infrastructure investments for our new and existing service businesses. Also, in fiscal 2001 we reclassified certain operating expenses of Quicken Loans from selling and marketing expenses in fiscal 2000 to cost of revenue in fiscal 2001.
OPERATING EXPENSES Q2 % Q2 % % YTD % YTD % % (Dollars in millions; FY00 REVENUE FY01 REVENUE CHANGE FY00 REVENUE FY01 REVENUE CHANGE Unaudited) Q2 YTD ------ ------- ------ ------- ------ ------ -------- ------ ------- ------ Customer service and technical support ......... $ 47.7 11% $ 46.1 10% (3)% $ 82.0 14% $ 78.5 12% (4)% Selling and marketing ....... 86.1 20% 85.6 19% (1)% 156.0 26% 146.7 23% (6)% Research and development .... 44.0 10% 54.6 12% 24% 85.8 14% 102.5 16% 19% General and administrative ............ 23.3 5% 25.9 6% 11% 44.8 7% 53.7 8% 20% Charge for purchased research and development .. -- -- -- -- -- 1.3 0% -- -- -- Amortization of acquisition costs ......... 46.2 11% 43.1 9% (7)% 83.3 14% 82.8 13% (1)% Reorganization costs ........ -- -- -- -- -- 3.5 1% -- -- -- Total operating expenses .............. $247.3 58% $255.3 56% 3% $456.7 76% $464.2 72% 2%
-21- 22 Customer Service and Technical Support. Customer service and technical support expenses were 10% and 12% of revenue for the three and six-monthssix months ended January 31, 20002001, compared to 11% and 14% for the same periods of the prior year. This improvement reflects the continued efficiency gains in providing customer service and technical support less expensively through websites and other electronic means, and from the expansion of the QuickBooks Support Network and our other fee-for-support programs. Selling and Marketing. Selling and marketing expenses were 19% and 22%23% of revenue for the three and six months ended January 31, 2001, compared to 20% and 26% for the same periods of the prior year. The decline in selling and marketing costs as a percentage of revenue for both the three and six month periods is partly attributable to a reclassification of certain Quicken Loans expenses from sales and marketing expenses to cost of revenue in fiscal 2001. In addition, in the prior year we incurred higher than normal selling and marketing expenses to notify customers of Year 2000 issues and solutions. The year-over year declines also reflect relatively higher sales and marketing expenses in the first half of fiscal 2000 due to aggressive marketing programs relating to the expansion of our Internet-based businesses and the extremely competitive consumer tax season, as well as relatively lower marketing expenditures during the first half of fiscal 2001 for Quicken Loans and QuickBooks Deluxe Payroll Service, as those services began to more fully leverage the value of the Intuit brands. Research and Development. Research and development expenses were 12% and 16% of revenue for the three and six months ended January 31, 2001, compared to 10% and 14% for the same periods of the prior year. These increases are primarily attributable to two factors. First, consistent withcontinued investments in the development of our growing Internet-based business, we are experiencing a significant increase in related hardware and infrastructure costs as we purchase equipment to increase our Internet capability. These costs are classified as cost of goods sold and, as a percentage of revenue, are significantly higher than the costs of goods sold for our traditional desktop software business. Second, ouremerging service businesses, such as payroll processingincluding QuickBooks for the Web, our online Deluxe Payroll Service, our QuickBase information management tool, and QuickBooks Support Network, generallythe Intuit Developer Network. During the first half of fiscal 2001, we have higher cost of goods sold compared to the sale of packaged software. As theseinvested significant amounts in our emerging businesses grow to a higher proportion of total revenue, we anticipate that our cost of goods sold will continue to increase. Note that results from CRI, our payroll processing subsidiary that we acquired in May 1999, are included in fiscal 2000 results but not- mostly focused in the small business area. During the remainder of fiscal 1999 comparison periods, which contributed2001, we expect to the year-over-year increase in cost of goods sold. OPERATING EXPENSES
Three Months Ended January 31, Six Months Ended January 31, (Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000 -------------------------- ---------------------------- Customer service & technical support .... $ 41.1 16% $ 47.7 $ 72.0 14% $ 82.0 % of revenue ............................ 11% 11% 14% 14% Selling & marketing ..................... $ 71.2 21% $ 86.1 $ 124.3 26% $ 156.0 % of revenue ............................ 19% 20% 24% 26% Research & development .................. $ 36.4 21% $ 44.0 $ 70.0 22% $ 85.8 % of revenue ............................ 10% 10% 14% 14% General and administrative .............. $ 19.6 19% $ 23.3 $ 38.9 15% $ 44.8 % of revenue ............................ 5% 5% 8% 7% Charge for purchased research and development ......................... $ -- N/A $ -- $ -- N/A $ 1.3 % of revenue ............................ N/A N/A N/A 0%
-24- 25 Other acquisition costs, including amortization of goodwill and purchased intangibles ............................. $ 21.0 115% $ 45.2 $ 41.9 95% $ 81.6 % of revenue ............................ 6% 11% 8% 14% Other acquisition related costs- amortization of deferred compensation ... $ -- N/A $ 1.0 $ -- N/A $ 1.7 % of revenue ............................ N/A 0% N/A 0% Reorganization costs .................... $ 2.0 (100)% $ -- $ 2.0 75% $ 3.5 % of revenue ............................ 1% N/A 0% 1%
Customer Service and Technical Support. Customer service and technical support expenses were flat as a percentage of revenue for the three and six-month periods ended January 31, 2000 compared to the same periods of the prior year. We have benefited from our efforts to provide customer service and technical support less expensively through websites and other electronic means. However, we increased our investment in customer service and technical support during the fiscal 2000 comparison periods in anticipation of increased call volumes relating to potential year 2000 issues, and also to support two major product launches in the second quarter (QuickBooks 2000 and Quicken TurboTax for the 1999 tax year). Selling and Marketing. Selling and marketing expenses were 20% and 26% of revenue for the three and six-months ended January 31, 2000 compared to 19% and 24% for the same periods of the prior year. The increases in selling and marketing costs are attributable to the aggressive marketing programs relating to the expansion of our Internet-based businesses and the increasingly competitive personal tax market. We continue to expect that selling and marketing costs as a percentage of revenue will increase for fiscal 2000 compared to fiscal 1999 as we continue to aggressively market our Internet-based businesses and face intense competition in the personal tax market for the rest of the 1999 tax season. Research and Development. Research and development expenses were 10% and 14% of revenue for the three and six-months ended January 31, 2000 compared to 10% and 14% of revenue for the same periods of the prior year. We continue to investsignificant investments in research and development, due toparticularly for our efforts to develop our Internet-basedemerging service businesses. As a result, we expect our Internet-based businesses will continue to require significant development expenditures in fiscal 2000 and beyond. If such expenses exceed our current expectations, they may have an adverse effect on operating results. This could occur, for example, if we were to undertake a costly product development venture in response to competitive pressures or other market conditions.See "Risks That Could Affect Future Results." General and Administrative. General and administrative expenses were 5%6% and 7%8% of revenue for the three and six-monthssix months ended January 31, 20002001, compared to 5% and 8%7% for the same periods of the prior year.year, respectively. For our entire fiscal 2000,year 2001, we expect general and administrative expenses to remain roughly flat as a percentage of revenue compared to fiscal 1999.2000. Charge for Purchased Research and Development. ForWe did not incur any charges for purchased research and development during the six months ended January 31,first two quarters for fiscal 2001. During the first quarter of fiscal 2000, we recorded charges of $1.3 million for purchased research and development as a result of our Boston Light and Hutchison acquisitions. In connection with these acquisitions, we usedand with the assistance of third party appraisers' estimates to determineappraisers, we determined the value of in-process projects under development for which technological feasibility had not been established. The total value of these projects at the time of the acquisitions was determined to be approximately $1.3 million and was expensed in the three months ended October 31, 1999.million. The value of the projects was determined by estimating the costs to develop the in-process technology into commercially feasible products, estimating the net cash flows we believed would result from the products and discounting these net cash flows back to their present value. We believe theThe products related to these charges will bewere completed during our fiscal year 2000, and that the risk of these products not being -25-2000. -22- 26 successfully completed is low.23 Other Acquisition Costs. Other acquisition costs include the amortization of goodwill and purchased intangibles andintangible assets, as well as deferred compensation costs that are recorded as part of an acquisition.expenses arising from acquisitions. These costs increaseddecreased to $48.7$43.1 million and $88.2$82.8 million for the three and six-monthssix months ended January 31, 20002001, compared to $22.9$46.2 million and $45.6$83.3 million for the same periods of the prior year. These increases ware primarily attributable to the amortization of intangibles associated with our acquisition of CRI in May 1999, and our acquisitions of Secure Tax, Boston Light and Hutchison in August 1999, and Turning Mill Software in November 1999. The high levels of non-cash amortizationa year ago. Amortization expense related to completed acquisitions will continue to have a negative impact on our operating results in future periods. Assuming no additional acquisitions and nowe do not experience any impairment of value resulting in an acceleration of the intangible assets that would require us to accelerate amortization, future amortization will be approximately $163.7$186.4 million, $145.5$189.5 million, $140.2$165.5 million and $90.9$85.1 million for the years ending July 31, 20002001 through 2003,2004, respectively. If we complete additional acquisitions or accelerate amortization in the future, there couldwould be an incremental negative impact on operating results. See also "Risks That Could Affect Future Results" for a discussion of possible accounting changes related to goodwill amortization. Reorganization Costs. Reorganization costs representreflect the costs associated with Rock's closure ofour Quicken Loans subsidiary (formerly Rock) closing numerous branch offices in Michigan prior to its acquisition by Intuitin 1999, as the mortgage businessit began to transition its mortgage business from a traditional branch-based business to an on-line transactional-basedonline and call center-based business. These costs increased tototaled $3.5 million forin the six-month period ended January 31, 2000 from $2.0 million for the same periodfirst quarter of the prior year. OTHERfiscal 2000. NON-OPERATING INCOME AND EXPENSES Interest and Other Income and Expense, Net. For the three and six-monthssix months ended January 31, 2000,2001, interest and other income and expense, net, increased to $16.5 million and $32.7 million compared to $7.0 million and $15.5 million compared to $4.0 million and $7.3 million, for the same periods a year ago, reflecting increasedago. The increases reflect higher cash and short-term investment balances. We have electedbalances due primarily to report our At Home common stock as a trading securityproceeds from sales of marketable securities. Net Loss from Marketable Securities and are required to mark to market the fluctuations in the stock price and report the fluctuations in our earnings.Other Investments. For the three and six-monthssix months ended January 31, 2000,2001, we reportedrecorded net losses arising from fluctuations in the share pricemarketable securities and other investments, of At Home of$71.9 million and $75.8 million, compared to $2.8 million and $20.1 million respectively. Infor the same periodperiods a year ago,ago. The losses incurred during the three months ended January 31, 2001, are due primarily to declines in the values of certain equity investments held as trading securities below our cost, as well as charges to reflect other than temporary declines in the values of certain private equity investments. We consider our shares of Excite@Home, VeriSign and 724 Solutions common stock as trading securities. See Note 1 of the financial statements. As a result, unrealized gains and losses due to market fluctuations in these securities are included in our net income. Recent volatility in the market has significantly reduced the value of our trading and available-for-sale securities, and we did not report a gain or a lossexpect this volatility to continue for changes inthe foreseeable future. If the market value of Excite, Inc. ("Excite"), onethese trading securities continues to decline significantly in the future, it would have a negative impact on our earnings. Other than temporary decline of the predecessor companiesvalues of Excite@Homeour available-for-sale and private equity investments could result in our earnings, since that security was not classified as a trading security. We did, however, report a realized gain of $10.1 million for both the three and six-month periods from a year ago from the sales of Checkfree, Verisign, and Concentric common stock. INCOME TAXESadditional losses. Income Taxes. For the three and six-monthssix months ended January 31, 2000,2001, we recorded an income tax provisions (benefits)provision (benefit) of $14.2 million and $(16.7) million, on a pretax gain (loss) of $40.8 million and $(38.1) million. This compares to an income tax provision (benefit) of $29.6 million and ($4.6)$(4.6) million, on a pretax incomegain (loss) of $86.8 million ($13.3)and $(13.3) million, respectively. This compares to income tax provisions of $31.2 million and $17.7 million on a pretax income of $124.4 million and $65.9 million, respectively for the same periods of the prior year.a year ago. At January 31, 2000,2001, there was a valuation allowance of $11.6$11.4 million for tax assets of our internationalglobal subsidiaries based on management's assessment that we may not receive the benefit of certain loss carryforwards. Cumulative Effect of Change in Accounting For Derivatives, Net During the first quarter of fiscal 2001, we recorded a cumulative gain of $14.3 million, net of taxes, as a result of a change in accounting principle that required us to recognize the cumulative effect of the increase in the fair value of our S1 options as of August 1, 2000. See Note 1 of the financial statements. Subsequent fluctuations in the fair value of these options will also be included in our net income or net loss. -23- 24 LIQUIDITY AND CAPITAL RESOURCES At January 31, 2000,2001, our unrestricted cash and cash equivalents totaled $377.7$377.4 million, a $176.5$39.5 million decrease from July 31, 1999.2000. The decrease wasdecline primarily reflects a result of netshift from cash used by investing activities, partially offset by cash provided by financing and operations activities. Cash from operating activities is driven by the seasonality of our business, which typically results in the majority of net revenues and cash receipts occurring in the January and April quarters, though operating expenses are incurred throughout the year.equivalents to our short-term investment portfolio. Our operations provided $44.3$68.7 million in cash duringfor the six months ended January 31, 2000. Primary2001. The primary sources of cash provided by operations were an increase of $54.6 million in accounts payable and $63.9 million in other accrued liabilities. The -26- 27 increases in accrued liabilities of $58.9 million, and accounts payable aredeferred revenue of $35.6 million. The increase in accrued liabilities was driven by the seasonality of our business and the resulting increases in accruals for product returns, customer rebates and accrued technical support expenses. In addition, cash was generated by an increaseIncreases in deferred revenues of $40.4 million duerevenue were primarily todriven by the deferral of state tax product and electronic filing revenues whichthat will be realizedrecognized in our third and fourth fiscal quarters. Cash was also generated by the decreaseIn addition, adjustments made for non-cash expenses such as amortization of $32.2goodwill and other purchased intangibles of $79.4 million, in prepaid expenses due primarilydepreciation charges of $29.6 million, and losses on marketable securities and other investments, net of $75.8 million, contributed to the completion of acquisitions in the first quarter. Primarycash provided by operations. The primary uses of cash includedduring the net loss of $8.6 million,six months ended January 31, 2001 were an increase of $185.4 million in accounts receivable of $185.8 million due to the large volumes of seasonal product shipments to retailers and distributors that typically occur in our first and second fiscal quarterquarters and a significant decrease in our income taxes payable of $57.9 million as a result of the payment of taxes for our fiscal year ended July 31, 1999.2000. In addition to these uses of cash, we also recorded non-cash adjustments during the six months ended January 31, 2001 for a pre-tax cumulative accounting gain relating to a change in the method of accounting for derivatives of $23.9 million and net losses of $7.2 million. Investing activities used $242.6$167.5 million in cash for the six months ended January 31, 2000. Uses2001. The primary use of cash included net purchasesfor investing was the purchase of $110.2all of the outstanding securities of Venture Finance Software Corp. ("VFSC") not already owned by Intuit for $118 million in August 2000. We also purchased $49.6 million of net short-term investments, which was partially offset by proceeds of $24.9 million from the sale of our marketable securities. As a result of our continued investment in information systems and purchases of $51.9 million ininfrastructure for our emerging businesses, we purchased property and equipment. Property and equipment purchases were made to support our ongoing operations, information system upgrades and our growing Internet-based businesses. We also used $54.6of $46.0 million in cash for our acquisitions of SecureTax and Hutchison.during the six months ended January 31, 2001. Financing activities provided $21.8$59.3 million infor the first quarter,six months ended January 31, 2001, primarily attributable to proceeds from the exercise of employee stock options. This was partially offset by a decrease in our line of credit as we funded new consumer mortgage loans during the period. We currently hold investments in a number of publicly traded companies (see Note 1)1 of the financial statements). The volatility of the stock market and the potential risk of fluctuating stock prices may have an impact on the proceeds from future sales of these securities and therefore on our future liquidity. Due to our reporting of the At HomeExcite@Home, VeriSign and 724 Solutions shares as a trading security,securities, future fluctuations in the carrying valuevalues of At Homethese stocks will impact our earnings (see Note 1).operating results. If future declines in our other marketable securities are deemed to be permanent,other than temporary, they will also impact our earnings.operating results. Investors should note that many high technology companies, including Excite@Home, VeriSign and 724 Solutions, have recently experienced significant declines in their stock prices. In connection with our acquisition of CRI (see Note 4),Computing Resources, Inc. in May 1999, we are required to pay three annual installments of $25 million, the first of which was paid in each of the next three fiscal years.May 2000. In the normal course of business, we enter into leases for new or expanded facilities in both domestic and internationalglobal locations. We also evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Accordingly, it is possible that we may decide to use cash and cash equivalents to fund such activities in the future. For example, if we exercise our option to purchase VFSC (see Note 11) and elect to pay all or a significant portion of the exercise price in cash, this would have a negative impact on our liquidity. We believe that our unrestricted cash, cash equivalents and short-term investments will be sufficient to meet anticipated seasonal working capital and capital expenditure requirements for at least the next twelve months. YEAR-24- 25 RISKS THAT COULD AFFECT FUTURE RESULTS The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this Form 10-Q. Our fiscal 2000 Form 10-K contains additional details about these risks, as well as other risks that could affect future results. We face competitive pressures in all of our businesses, particularly our consumer tax preparation software business, which can have a negative impact on our revenue, profitability and market position. During the fiscal 2000 tax season we reduced prices for our Quicken TurboTax product line in response to aggressive pricing by H&R Block and Microsoft. This resulted in significantly lower average selling prices. We have increased our tax products prices somewhat for fiscal 2001. Although our share of dollar sales of consumer desktop products in the retail channel has increased compared to the same time last year, we have seen a slight decline in our share of unit sales in the retail channel. There are formidable current and potential competitors in the private sector, and we also face potential competition from publicly-funded government entities seeking to competitively enter private markets in the United States for consumer electronic financial services. Accordingly, we expect competition to remain intense during fiscal 2001, and it is too early to predict results for the full tax season. If we fail to maintain reliable and responsive service levels for our electronic tax offerings, we could lose revenue and customers. Our online tax preparation and electronic tax filing services face significant challenges in maintaining high service levels, particularly during peak volume service times. For example, we have experienced relatively brief unscheduled interruptions in our electronic filing/and or tax preparation services during fiscal 1999, 2000 and 2001. We do not believe any prior service outages had a material financial impact, prevented customers from completing and filing their returns in a timely manner, or posed a risk that customer data would be lost or corrupted. However, we did experience negative publicity in some instances. The following is a Year 2000 readiness disclosure underexact level of demand for Quicken TurboTax for the Year 2000 InformationWeb and Readiness Disclosure Act. Intuit established a Year 2000 Project Office to addresselectronic filing for the impactremainder of the current tax year is impossible to predict, and we could experience adverse financial and public relations consequences if these services are unavailable for an extended period of time, or late in the tax season, due to technical difficulties or other reasons. Despite our efforts to adequately staff and equip our customer service and technical support operations, we cannot always respond promptly to customer requests for assistance. We occasionally experience customer service and support problems, including longer than expected "hold" times when our staffing is inadequate to handle higher than anticipated call volume, and a large number of inquiries from customers checking on the status of product orders when shipments are delayed. This can adversely affect customer relationships and our financial performance. For example, during fiscal 2000, date transitionsome small business customers (particularly QuickBooks Support Network and payroll services customers) experienced inconsistent service levels and delays that led to some negative press attention. In order to improve our customer service and technical support, we must continue to focus on its operations,eliminating underlying causes of service and support calls (through product improvements and better order fulfillment processes), and on more accurately anticipating demand for customer service and technical support. We hold equity investments that have been very volatile. Our investment activities can impact our net income. We recorded pre-tax gains and losses from marketable securities and other investments of $481.1 million in fiscal 2000 and a loss of $75.8 million for the six months ended January 31, 2001. These amounts reflect net realized gains and losses on sales of certain marketable securities, unrealized quarter-to-quarter gains and losses due to price fluctuations in securities that we account for as "trading securities," and charges to reflect other than temporary declines in value of our available-for-sale and private equity investments below our cost (including charges in the second quarter of fiscal 2001 of $40.2 million related to our investment in S1 Corporation and $15.0 million related to our private equity investments). Fiscal 2000 and 2001 decreases in the market prices of our trading securities resulted in a significant reduction in our pre-tax income, and future price fluctuations in trading securities, and any significant long-term declines in value of other securities, could reduce our net income in future periods. A general decline in economic conditions could lead to reduced demand for our products and services globally. We adoptedservices. The recent downturn in general economic conditions had led to reduced demand for a five-phase approach for reviewing and preparing the significant elementsvariety of operations, productsgoods and services, forincluding many technology products. If conditions continue to decline, or fail to improve, in geographic areas that are significant to us, such as the Year 2000 date transition. Through the date of this filing,United States, Canada and Japan, we have had no major Y2K-related issues. In addition, all substantive claimscould see a significant decrease in the lawsuits filed against Intuit in connection with alleged Y2K problems withoverall demand for our products and services that could harm our operating results. -25- 26 Actual product returns may exceed return reserves. We generally ship significantly more desktop products to our distributors and retailers than we expect them to sell, in order to reduce the risk that distributors or retailers will run out of products. This is particularly true for our tax products, which have a short selling season. Like most software companies, we have a liberal product return policy and we have historically accepted significant product returns. We establish reserves for product returns in our financial statements, based on estimated future returns of products. We closely monitor levels of product sales and inventory in the retail channel in an effort to maintain reserves that are adequate to cover expected returns. In the past, returns have not generally exceeded these reserves. However, if we do experience actual returns that significantly exceed reserves, it would result in lower revenue. If we do not continue to successfully refine and update the business models for our Internet-based products and services and other emerging service businesses, and operationally support these businesses, the businesses will not achieve sustainable financial viability or broad customer acceptance. Our business models for our Internet-based businesses and other emerging service businesses have more complex and varied revenue streams than our traditional desktop software businesses. For these businesses to become and remain economically viable, we must continually refine their revenue models to reflect evolving economic circumstances. These businesses also depend on a different operational infrastructure than our desktop software businesses, and we must continually develop, expand and modify internal systems and procedures to support these businesses. In particular, our web-based tax preparation and electronic filing services must effectively handle extremely heavy customer demand during the peak tax season. If we are unable to meet customer expectations in a cost-effective manner, it could result in lost customers, negative publicity, and increased operating costs, which could have a significant negative impact on the financial and market success of these businesses. We face intense competition for qualified employees, especially for our Internet-based businesses. Like many of our competitors, we have had difficulties during the past few years in hiring and retaining employees, and we expect to face continuing challenges in recruiting and retention. We face risks relating to customer privacy and security and increasing regulation, which could hinder the growth of our businesses - particularly our Internet-based businesses. Despite our efforts to address customer concerns about privacy and security, these issues still pose a significant risk, and we have experienced lawsuits and negative publicity relating to privacy issues. For example, during fiscal 2000 and fiscal 2001, there have been dismissed,press articles criticizing our privacy and security practices as they relate to the connectivity of our desktop software to our web sites. We have faced lawsuits and negative press alleging that we improperly shared information about customers with only one possible appeal remaining. Customers can find Intuit's Year 2000 Readiness Disclosure aboutthird party "ad servers" for our products, and order free solutions, where required,web sites. A major breach of customer privacy or security by Intuit, or even by another company, could have serious consequences for our businesses - particularly our Internet businesses - including reduced customer interest and/or additional regulation by federal or state agencies. For example, if a "hacker" were able to overcome the security precautions we take to protect our customers' personal tax preparation information, it could have a material negative impact on our Corporate Yearoperating results and our relationships with our customers. In addition, mandatory privacy and security standards and protocols are still being developed by government agencies, and we may incur significant expenses to comply with any requirements that are ultimately adopted. For example, under the Gramm Leach Bliley Act recently adopted by the federal government, by July 1, 2001 Intuit will be required to provide written notice of its privacy practices to many of its customers. We must give customers an opportunity to state their preferences regarding Intuit's use of their non-public personal information, and we must honor those preferences. If Internet use does not grow as a result of privacy or security concerns, increasing regulation or for other reasons, the growth of our Internet-based businesses would be hindered. -26- 27 If our QuickBooks Internet Gateway services do not achieve and maintain acceptance by customers and the third-party vendors who provide these services, the services will not generate long-term revenue growth or profitability. We must meet customer and vendor expectations in delivering our QuickBooks Internet Gateway services. If we do not meet these expectations, we may not be able to maintain the third party vendor relationships that are necessary to allow us to provide services desired by customers. If we experience significant failures in meeting expectations and maintaining important relationships, our ability to expand our QuickBooks Internet Gateway services will be jeopardized. Intuit is refining its approach to selecting and working with QuickBooks Gateway vendors. Although we are seeing encouraging preliminary results for some services, such as merchant account services, that are more closely integrated with QuickBooks, we are in the process of ending relationships with most of our smaller alliance companies where the business results are not meeting our expectations or theirs. To retain other relationships, we may be required to adapt them in ways that are less attractive to us, financially or otherwise. In addition, QuickBooks Internet Gateway Services are currently available only to customers using QuickBooks 2000 Resource Center at www.intuit.com/y2k. Costs directly attributedor QuickBooks 2001, so customer adoption of the services is somewhat dependent on unit sales of newer QuickBooks products to new customers and to customers upgrading from older versions of the product. Customer upgrade rates for QuickBooks 2001 have been lower than historical upgrade levels. Development and/or implementation of certain announced services has not yet been completed to our Yearsatisfaction. Technological difficulties, financial difficulties and other problems could delay or prevent us from recognizing contractually committed revenues that are dependent on implementation. In order to expand our customer base in the payroll services business, we must continue to improve the efficiency and effectiveness of our payroll processing operations and streamline customer activations for our Deluxe online payroll processing service. The payroll processing business involves a number of business risks if we make errors in providing accurate and timely payroll information, cash deposits or tax return filings, including our incurring liability to customers, additional expense to correct product errors and loss of customers. For our Internet-based services (the Deluxe service, as well as the online Basic service), we must improve our operations to give customers more reliable connectivity to our data center to transmit and receive payroll data and tax tables. In order to expand the customer base for our Deluxe payroll service, we must continue to focus on streamlining the service activation process for new customers. Our mortgage business is subject to interest rate fluctuations and operational risks that could result in further revenue declines. Increases in mortgage rates and other interest rates adversely affected our mortgage business during 2000, project were approximately $6.5 millioncontributing to a significant revenue decline from fiscal 1999 to fiscal 2000. Conversely, declines in mortgage interest rates during fiscal 1999.2001 have had a positive impact on revenue. If mortgage interest rates rise again, this could negatively impact the volume of closed loans and applications - particularly our most interest-rate sensitive products such as conventional loans and refinancing loans. FHA loans and home purchase mortgages tend to be less mortgage-rate sensitive. Fluctuations in non-mortgage interest rates also create risks with respect to the loans on our balance sheet and impact our cost of funds to provide loans. In addition, our ability to successfully streamline the online application, approval, and closing process will have a significant impact on our ability to attract customers to our mortgage service, and on our ability to continue increasing the percentage of our mortgage revenue generated through the online channel compared to branch offices. We must also maintain relationships with certain banks and other third parties who we will rely on to provide access to capital, and later, service the loans. If we are unable to do so, it could have a negative impact on our mortgage business and on Intuit's financial results. Our ability to conduct business could be impacted by a variety of factors such as electrical power interruptions, earthquakes, fires and other similar events. Our business operations depend on the efficient and uninterrupted operation of a large number computer and communications hardware and software systems. These systems are vulnerable to damage or interruption from electrical power interruptions, telecommunication failures, earthquakes, fires, floods, and other similar events. Recently, electrical power in certain locations in California has been interrupted for short periods of time in the form of "rolling blackouts." We have principal facilities (including our primary data centers) located in California. To date, our business operations have not been materially impacted by these outages. However, it is possible that rolling blackouts will continue in the foreseeable future and our facilities could be significantly affected in the future. We currently anticipate direct costshave short-term alternate sources of power (in the form of backup batteries and generators) at all of our California facilities. However, if rolling blackouts become more frequent and/or longer in the rangeduration, it is possible that our alternative sources of $8power would be insufficient to $12 million for fiscal year 2000, including costs associated withallow us to -27- 28 ongoing maintenancecontinue our operations without interruption. Other events such as earthquakes, fires and support activityfloods, could also impact our ability to continue our business operations. For our Internet-based services, the system failures of various third-party Internet service providers, online service providers and other website operators could result in fiscal year 2000,interruption in our services to our customers. Any significant interruptions in our ability to conduct our business operations could reduce our revenue and including costs associated withoperating income. Our business interruption insurance may not adequately compensate us for the manufactureimpact of interruptions to our business operations. New FASB guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. On February 14, 2001, the FASB issued a limited revision of its Exposure Draft, Business Combinations and distributionIntangible Assets that establishes a new standard for accounting for goodwill acquired in a business combination. It would continue to require recognition of free solutions for products that aregoodwill as an asset but would not Year 2000 compliant or in certain cases that were notpermit amortization of goodwill as currently required by APB Opinion No. 17, Intangible Assets. Under the proposed statement, goodwill would be separately tested for Year 2000 compliance. Althoughimpairment using a fair-value-based approach when an event occurs indicating the provisionpotential for impairment. Any required goodwill impairment charges would be presented as a separate line item within the operating section of free solutions has probably resultedthe income statement. The shift from an amortization approach to an impairment approach would apply to previously recorded goodwill as well as goodwill arising from acquisitions completed after the application of the new standard. If the standard is adopted as described above, our goodwill amortization charges would cease. However, it is possible that in some lost revenue for new product upgrades,the future, we believewould incur less frequent, but larger, impairment charges related to the lost revenue will be less than $5 million. -28- 29 -goodwill already recorded as well as goodwill arising out of future acquisitions as we continue to expand our business. - -------------------------------------------------------------------------------- ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT PORTFOLIO We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments that meet high quality standards consistent with our investment policy. This policy dictates that we diversify our holdings and limit our short-term investments to a maximum of $5 million to any one issuer. Our policy also dictates that all short-term investments mature in 30 months or less. MARKETABLE SECURITIES We also carrycarried significant balances in marketable equity securities as of January 31, 2000.2001. These securities are subject to considerable market risk due to their volatility. Fluctuations in the carrying value of our shares of Excite@Home, VeriSign and 724 Solutions will have an immediate impact on our earnings because we report these shares as trading securities. See Note 1 of the financial statement notes for more information regarding risks related to our investments in marketable securities.securities and the impact of our trading securities on our reported net income. INTEREST RATE RISK Interest rate risk represents a component of market risk to us and represents the possibility that changes in interest rates will cause unfavorable changes in our net income and in the value of our interest rate sensitive assets, liabilities and commitments.commitments, particularly those that relate to our mortgage business. In a higher interest rate environment, borrower demand for mortgage loans declines.declines, adversely affecting our mortgage loan business. Interest rate movements also affect the interest income earned on loans we hold for sale in the secondary market, interest expense on our lines of credit, the value of our mortgage loans we hold for sale in the secondary market and ultimately the gain or loss on the sale of those mortgage loans. In addition, interest rate movements affect the interest income earned on investments we hold in our short-term investment portfolio and the value of those investments. -28- 29 As part of our risk management programs, we enter into financial agreements and purchase financial instruments in the normal course of business to manage our exposure to interest rate risk with respect to our Conventional Loansconventional loans and our government-insured loans (together, "Prime Loans"), but not with respect to our Sub-Prime Loanssub-prime loans or Home Equity Lineshome equity lines of Credit.credit. We use these financial agreements and financial instruments for the explicit purpose of managing interest rate risks to protect the value of our mortgage loan portfolio. Managementportfolio, and not for trading purposes. We actively monitorsmonitor and managesmanage our exposure to interest rate risk on Prime Loans, which is incurred in the normal course of business. The committed and closed pipelines of Prime Loans, as well as the related forward commitments and derivatives, are valued daily. We refer to the loans, pipeline, commitments and derivatives together as the "hedge position."Hedge Position." The hedge position is evaluatedWe evaluate the Hedge Position against a spectrum of interest rate scenarios to determine expected net changes in the fair values of the hedge positionHedge Position in relation to the changes in interest rates. We do not enter into instruments for trading purposes. Ourevaluate our interest rate risk exposure is evaluated daily using models whichthat estimate changes in the fair value of the hedge positionHedge Position and compare those changes against the fair value of the underlying assets and commitments. -29- 30The following table shows the maturity of our mortgage loans and home equity lines of credit: PRINCIPAL AMOUNTS BY EXPECTED MATURITY: (in thousands, except interest rates; Unaudited)
PRINCIPAL AMOUNTS BY EXPECTED MATURITY: (in thousands, except interest rates)MATURITY DATE (1) PERIOD ENDING JANUARY 31, FAIR VALUE EXPECTED MATURITY DATE------------------------------------------------- JANUARY 31, --------------------------------------------------- 2000 2001 2002 2003 2004 2005 TOTAL 20002001 ---- ---- ---- ---- ---- ----- --------------- ASSETS: Mortgage Loans................... $38,386Loans................. $86,780 -- -- -- -- $38,386 $39,183$86,780 $89,343 Average Interest Rate........ 8.97% 8.97%Rate.... 8.75% 8.75% LIABILITIES: Lines of Credit.................. $ 3,283Credit................ $2,381 -- -- -- -- $ 3,283 $ 3,291$2,381 $2,400 Average Interest Rate........ 6.64% 6.64%Rate.... 7.05% 7.05%
(1) In the ordinary course of our mortgage business, expected maturity is based on the assumption that loans will be re-sold in the indicated period. Based on the carrying values of our mortgage loans and lines of credit that we held at January 31, 2000,2001, we do not believe that short-term changes in interest rates wouldwill have a material effect on the interest income we earn on loans held for sale in the secondary market, interest expense on our lines of credit or the value of mortgage loans that we hold for sale in the secondary market.loans. See Notes 1 and 5 of the financial statement notes for more information regarding risks related to our mortgage loans and lines of credit. IMPACT OF FOREIGN CURRENCY RATE CHANGES DuringWhile the Japanese yen and the Canadian dollar have strengthened during the first six months of fiscal 1999, the currency of our Japanese subsidiary strengthened while2001, the currencies of our other subsidiaries remained essentially stable. As of January 31, 2000, the currency of our Japanese subsidiary has continued to strengthen and the currencies of our other subsidiaries have remained essentially stable since the end of our 1999 fiscal year. Because we translate foreign currencies into U.S dollars for reporting purposes, currency fluctuations can have an impact, though generally immaterial, on our results. We believe that our exposure to currency exchange fluctuation risk is insignificant primarily because our internationalglobal subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. For the quarter ended January 31, 2000, there was an immaterial currency exchange impact from our intercompany transactions. Currency exchange risk is also minimized since foreign debt is due almost exclusively in local foreign currencies. As of January 31, 2000,2001, we did not engage in foreign currency hedging activities. -30-- -------------------------------------------------------------------------------- -29- 31 - - --------------------------------------------------------------------------------30 PART II ITEM 1 LEGAL PROCEEDINGS - - -------------------------------------------------------------------------------- Intuit was a defendant in two consolidated class action lawsuits (one in California and one in New York) which alleged that certain of its Quicken products have on-line banking functions that are not Year 2000 compliant. With respect to the California litigation, on October 13, 1999 the court dismissed the case without leave to amend. The only remaining issue relates to a potential award of attorneys' fees to the plaintiffs. On December 1, 1999, the court granted our motion to dismiss all the New York actions with prejudice. Although plaintiffs filed a Notice of Appeal, they failed to perfect the appeal. Accordingly, this case is also now over. In addition, a suit was filed in the Contra Costa County, California Superior Court by an individual consumer against various retailers, including Circuit City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others, alleging that these retailers have sold software and hardware products which are not Year 2000 compliant, including at least one product published by Intuit. One of the defendants in this action, Fry's Electronics, filed a cross-complaint against various software publishers and hardware manufacturers, including Intuit, asserting a claim for indemnity in the main action. In September 1999, Fry's Electronics reached a settlement with the plaintiffs. All the cross defendants, including Intuit, then filed a demurrer to the cross-complaint. On December 7, 1999 the court granted the demurrer and dismissed the case without leave to amend. If Fry's Electronics does not appeal this ruling by April 4, 2000, this lawsuit against Intuit will also be over. On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. On March 8, 2000 aTwo virtually identical lawsuit,lawsuits were later filed: Rubin v. Intuit Inc., was filed on March 8, 2000 in the United States District Court, Southern District of New York. BothYork and Newby v. Intuit Inc. was filed on April 27, 2000, in the United States District Court, Central District of California, Eastern Division. The Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit Privacy Litigation, filed on July 28, 2000 in the United States District Court of California, Eastern Division. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior Court of State of California, San Bernadino County, Rancho Cucamonga Division. The Almanza complaint was amended on October 26, 2000. These purported class actions claim thatallege violations of various federal and California statutes and common law claims for invasion of privacy based upon the alleged intentional disclosure to third parties of personal and private customer information entered intoat Intuit's Quicken.com website was intentionally and secretly disclosed to third-party advertisers.website. The two lawsuits allege identical causes of actions for invasion of privacy and violations of federal statutes related to electronic communications. The lawsuitscomplaints seek injunctive relief, an orderorders to disgorge profits related to the alleged acts, and statutory and other damages. As of March 10, 2000, neither lawsuit had been served on Intuit. WeIntuit believes these lawsuits are without merit and intends to defend the litigation vigorously. Intuit is subject to other legal proceedings, as well as demands, claims and claimsthreatened litigation, that arise in the normal course of our business. We currently believe that the ultimate amount of liability, if any, for any pending actionsclaims of any type (either alone or combined) will not materially affect our financial position, results of operations or liquidity. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact. Regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, diversion of management resources and other factors. -31- 32 - - -------------------------------------------------------------------------------- ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - - -------------------------------------------------------------------------------- (a) Not applicable. (b) Not applicable. (c) On January 24, 2000, we issued and sold 225,000 shares of our common stock to Stephen M. Bennett, our recently appointed President and Chief Executive Officer, pursuant to two Restricted Stock Purchase Agreements. The purchase price for the shares was $0.01 per share, for an aggregate purchase price of $2,250. The shares were issued without registration under the Securities Act of 1993, as amended (the "1933 Act"), in reliance on an exemption under Section 4(2) of the 1933 Act. The shares are subject to vesting over periods of up to 10 years. Any unvested shares may be repurchased by Intuit for the original purchase price if Mr. Bennett's employment with Intuit is terminated under certain circumstances. (d) Not applicable. -32- 33 - - -------------------------------------------------------------------------------- ITEM 5 OTHER MATTERS - - -------------------------------------------------------------------------------- CHANGES IN EXECUTIVE OFFICERS AND BOARD OF DIRECTORS On January 24, 2000, Stephen M. Bennett was appointed President and Chief Executive Officer and a member of the Board of Directors. William V. Campbell stepped down as Acting Chief Executive Officer but remains Chairman of the Board. As of March 13, 2000,14, 2001, Intuit's executive officers arewere as follows:
NAME AGE POSITION - - ---- -------- Stephen M. Bennett 47 President, Chief Executive Officer and Director William V. Campbell 60 Chairman of the Board of Directors Scott D. Cook 48 Chairman of the Executive Committee of the Board of Directors Alan A. Gleicher 48 Senior Vice President, Global Business Division Richard William Ihrie 51 Senior Vice President, Technology David A. Kinser 49 Senior Vice President, Service Delivery and Operations Greg J. Santora 49 Senior Vice President, Finance and Corporate Services; Chief Financial Officer Raymond G. Stern 39 Senior Vice President, Corporate Strategy and Marketing Larry J. Wolfe 50 Senior Vice President, Tax Division Sonita Ahmed 44 Vice President, Finance & Corporate Controller Caroline F. Donahue 40 Vice President, Sales Linda Fellows 52 Vice President, Investor Relations and Treasurer Elisabeth M. Lang 43 Vice President, Corporate Public Relations & Marketing Communication Carol Novello 36 Vice President, Financial Supplies Group Daniel T. Nye 34 Vice President, Small Business Division Enrico Roderick 41 Vice President, Personal Finance Group Catherine L. Valentine 48 Vice President, General Counsel and Corporate Secretary Sherry Whiteley 41 Vice President, Human Resources
Stephen M. Bennett President and Chief Executive Officer Scott D. Cook Chairman of the Executive Committee of the Board of Directors Eric C.W. Dunn Senior Vice President and Chief Technology Officer Alan A. Gleicher Senior Vice President, International James J. Heeger Senior Vice President, Small Business Division David A. Kinser Senior Vice President, Service Delivery and Operations Greg J. Santora Senior Vice President, Finance, and Chief Financial Officer Raymond G. Stern Senior Vice President, Corporate Strategy and Marketing Larry J. Wolfe Senior Vice President, Tax Division Sonita J. Ahmed Vice President, Finance Kristen S. Brown Vice President, Corporate Development Caroline F. Donahue Vice President, Sales Linda Fellows Vice President, Treasurer and Director of Investor Relations Daniel B. Gilbert Vice President, Quicken Loans Larry King, Jr. Vice President, Payroll Services Group Elisabeth M. Lang Vice President, Corporate Public Relations and Marketing Communications Carol Novello Vice President, Financial Supplies Group Enrico Roderick Vice President, Personal Finance Group Catherine L. Valentine Vice President, General Counsel and Secretary -33--30- 34 -31 - -------------------------------------------------------------------------------- ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - - -------------------------------------------------------------------------------- (A)(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT: 10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through January 19, 2000 10.02 Employment Agreement between Intuit and Stephen M. Bennett dated January 21, 2000 10.03 Intuit Inc. Restricted Stock Purchase Agreements between Intuit and Stephen M. Bennett dated January 24, 2000 10.04 Confidential Agreement and General Release of Claims between Intuit Inc. and William H. Harris, Jr., dated September 23, 1999 27.01 Financial Data Schedule (filed only in electronic format) period ended January 31, 2000 27.02 Financial Data Schedule (filed only in electronic format) period ended January 31, 1999 - - ---------------- (B)REPORT. None (b) REPORTS ON FORM 8-K: (1) On January 25, 2000,29, 2001, Intuit filed a report on Form 8-K to report under Item 5 that it had completed the appointmentsale of Stephen M. Bennettcertain assets of its Intuit Insurances Services, Inc. subsidiary. (2) On February 28, 2001, Intuit filed a report on Form 8-K to report under Item 5 its financial results for the quarter ended January 31, 2001. Intuit's balance sheet as Presidentof January 31, 2000 and Chief Executive Officer2001, and a board member. -34- 35 -statement of operations for the three months and six months ended January 31, 2000 and 2001 were included in the Form 8-K. - -------------------------------------------------------------------------------- SIGNATURES - - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTUIT INC. (REGISTRANT) Date: March 16, 199914, 2001 By: /s/ Greg J. Santora ---------------------------------------------------------------------------- Greg J. Santora Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -35- 36 EXHIBIT INDEX
Exhibit Number.. Description Page - - ------ ----------- ---- 10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through January 19, 2000....................................................... 10.02 Employment Agreement between Intuit and Stephen M. Bennett dated January 21, 2000....................................................... 10.03 Intuit Inc. Form of Restricted Stock Purchase Agreements between Intuit and Stephen M. Bennett dated January 24, 2000................... 10.04 Confidential Agreement and General Release of Claims between Intuit Inc. and William H. Harris, Jr., dated September 23, 1999....... 27.01 Financial Data Schedule (filed only in electronic format) period ended January 31, 2000 ................................................ 27.02 Financial Data Schedule (filed only in electronic format) period ended January 31, 1999 ................................................
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