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 JANUARYOctober 31, 2000 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]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 201,677,034206,912,924 shares of Common Stock, $0.01 par value, as of
February 29,November 30, 2000
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, 19992000 and JanuaryOctober 31, 2000...........................2000..................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended JanuaryOctober 31, 1999 and 2000....2000....... 4
Condensed Consolidated Statements of Cash Flows for
the sixthree months ended JanuaryOctober 31, 1999 and 2000...............2000....... 5
Notes to Condensed Consolidated Financial Statements...................................................Statements ........... 6
- - -
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................Operations.................... 18
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 2926
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 3128
ITEM 2: Changes in Securities and Use4: Submission of Proceeds....................... 32Matters to a Vote of Security Holders ............ 29
ITEM 5: Other Matters................................................... 3330
ITEM 6: Exhibits and Reports on Form 8-K................................ 3431
Signatures...................................................... 3532
-2-
3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, JANUARYOCTOBER 31,
1999 2000
---------- -----------
(In thousands, except par value; unaudited)value) 2000 2000
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 554,230416,953 $ 377,685278,719
Short-term investments ................................... 305,125 412,918.......................................... 1,050,220 1,092,665
Marketable securities .................................... 431,319 1,046,170
Customer deposits ........................................ 145,836 135,456........................................... 225,878 154,647
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 67,938
Prepaid expenses and other current assets(2) ............ 67,859 34,803
----------assets (1) ................... 368,323 396,364
----------- -----------
Total current assets ............................. 1,722,885 2,370,107........................................ 2,128,794 1,990,333
Property and equipment, net ................................ 119,220 149,324
Purchased...................................... 167,707 183,243
Goodwill and intangibles, net ................................. 98,049 97,275
Goodwill, net .............................................. 383,102 416,874.................................... 438,878 529,318
Investments ...................................................... 31,160 43,279
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) ................................................. 112,363 112,250
----------- -----------
Total assets ............................................... $2,489,075..................................................... $ 3,200,809
==========2,878,902 $ 2,858,423
=========== ===========
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 $ 81,877
Escrow liabilities ....................................... 14,857 9,821
Drafts payable ........................................... 49,169 15,344.............................................. 32,077 36,571
Deferred revenue ......................................... 65,994 106,395................................................ 107,578 121,169
Income taxestax payable ..................................... 143,181 --.............................................. 110,743 50,401
Deferred income taxes .................................... 136,694 384,484........................................... 53,934 31,552
Other accruedcurrent liabilities ................................ 201,872 271,760
----------....................................... 423,360 446,493
----------- -----------
Total current liabilities ........................ 879,243 1,089,263................................... 806,837 768,063
Long-term notes payable .................................... 36,614 37,862
Long-term deferred income taxes ............................ 11,615 11,919obligations ............................................ 538 18,505
Minority interest .......................................... 215 224................................................ 238 288
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 1,587,467
Deferred compensation ................ -- (30,063)........................................... (26,522) (24,750)
Accumulated other comprehensive income, ................... 77,680 448,207
Accumulated retainednet ..................... 55,586 21,949
Retained earnings ............................ 216,631 208,062
----------............................................... 520,666 486,901
----------- -----------
Total stockholders' equity ....................... 1,561,388 2,061,541
----------.................................. 2,071,289 2,071,567
----------- -----------
Total liabilities and stockholders' equity ................. $2,489,075....................... $ 3,200,809
==========2,878,902 $ 2,858,423
=========== ===========
(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 January$7.1 million loans due from affiliates as of
July 31, 2000 respectively
(see Note 11).and October 31, 2000, respectively.
See accompanying notes to condensed consolidated financial statements.notes.
-3-
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
SIX MONTHS ENDED
JANUARY 31, JANUARYOCTOBER 31,
1999 2000
1999 2000
-------- --------- -------- ---------
(In thousands, except per share amounts;data; unaudited)
Net revenue(1) .............................................. $373,733revenue .......................................................... $ 425,499 $510,614176,928 $ 602,427187,522
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 ..................................................... 58,871 69,881
Customer service &and technical support ....................... 41,144 47,657 72,004 81,958.............................. 34,301 32,396
Selling &and marketing ........................................ 71,203 86,110 124,282 156,015............................................... 69,905 61,100
Research &and development ..................................... 36,353 44,038 70,021 85,750............................................ 41,713 47,878
General &and administrative ................................... 19,625 23,327 38,934 44,819.......................................... 21,492 27,783
Charge for purchased research and development ..................................... 1,312 -- -- -- 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 ................................... 37,091 39,679
Reorganization costs ....................................... 2,000................................................ 3,500 --
2,000 3,500
-------- --------- -------- ---------
Total costs & expenses ............................ 263,418 342,903 462,105 611,087
Income (loss).............................................. 268,185 278,717
--------- ---------
Loss from operations ..................... 110,315 82,596 48,509 (8,660)................................................. (91,257) (91,195)
Interest and other income and expense, net .................. 3,950 6,988 7,298 15,465
Gain (loss) from........................... 8,476 16,118
Losses on marketable securities ...................... 10,088 (2,800) 10,088 (20,110)
--------and other investments, net ........... (17,309) (3,868)
--------- -------- ---------
Income (loss)Loss before income taxes ........................... 124,353 86,784 65,895 (13,305)tax benefit, minority interest and
cumulative effect of accounting change ............................. (100,090) (78,945)
Income tax provision (benefit) .............................. 31,228 29,582 17,665 (4,587)benefit ................................................... 34,170 30,916
Minority interest ............................................................................................... 59 (50)
--------- ---------
Loss before cumulative effect of accounting change ................... (65,861) (48,079)
Cumulative effect of change in accounting for derivatives, net of
taxes .............................................................. -- (90) -- (149)
--------14,314
--------- -------- ---------
Net income (loss) ...........................................loss ............................................................. $ 93,125(65,861) $ 57,292 $ 48,230 $ (8,569)
========(33,765)
========= ======== =========
Basic and diluted net income (loss)loss per share ...........................before
cumulative effect of accounting change ............................. $ 0.49(0.33) $ 0.29(0.23)
Cumulative effect of accounting change ............................... -- 0.07
--------- ---------
Basic and diluted net loss per share ................................. $ 0.26(0.33) $ (0.04)
========(0.16)
========= ======== =========
Shares used in per share amounts ............................ 188,813 195,935 187,600 192,285
========..................................... 197,362 205,727
========= ======== =========
Diluted net income (loss) per share ......................... $ 0.47 $ 0.27 $ 0.25 $ (0.04)
======== ========= ======== =========
Shares used in per share amounts ............................ 198,413 209,566 195,561 192,285
======== ========= ======== =========
(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
SIXTHREE MONTHS ENDED
JANUARYOCTOBER 31,
(In thousands; unaudited)
1999 2000
--------- ---------
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .............................................................loss ......................................................................... $ 48,230(65,861) $ (8,569)(33,765)
Adjustments to reconcile net income (loss) to net cash providedused by (used in) operating activities:
Amortization of goodwill and other purchased intangibles ................. 45,633 86,483
Deferred compensation expense ............................................ -- 1,744.................... 31,148 43,110
Depreciation ............................................................. 18,002 21,798
Charge for purchased research and development ............................ -- 1,312
(Gain)................................................................ 8,778 14,610
Net loss from marketable securities ................................... (10,088) 20,110......................................... 17,309 3,868
Cumulative effect of accounting change ...................................... -- (23,857)
Deferred income tax benefit (provision) ..................................... (3,691) 2,170
Tax benefit from employee stock options ..................................... 52,796 32,006
Changes in assets and liabilities:
Accounts receivable ................................................... (181,831) (185,369)
Inventories ........................................................... (2,170) (4,420)
Mortgage loans ........................................................ (66,435) 46,597...................................................... (23,376) (95)
Prepaid expenses and other current assets ............................. (16,544) 32,163
Customer deposits ..................................................... (8,514) 6,565
Deferred income tax................................ 81,476 (1,462)
Other assets and liabilities ............................ (1,428) (3,805)............................................................. (5) (1,255)
Accounts payable ...................................................... 25,838 54,620
Accrued compensation and related......................................................... 24,657 (6,620)
Escrow liabilities .......................... 4,877 9,572
Escrow funds payable .................................................. 8,362 (5,036)....................................................... (35,741) 3,937
Deferred revenue ...................................................... (12,581) 40,401
Drafts......................................................... 18,547 13,591
Income taxes payable ........................................................ 9,812 (33,825)
Accrued acquisition liabilities ....................................... (19,181) (5,389)..................................................... (136,985) (60,342)
Other accrued liabilities ............................................. 130,558 63,936
Income taxes payable .................................................. 25,404 (94,561)................................................ 7,733 (1,144)
Minority interest ..................................................... -- 9........................................................ (59) 50
--------- ---------
Net cash (used in) providedused by operating activities ................. (2,056) 44,336.................................. (23,274) (15,198)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities ................................... 17,263 --
Purchase of property and equipment ............................................ (27,448) (51,901)
Principal payments............................................... (27,257) (29,383)
Proceeds from the sale of long-term debt .......................................... (29)marketable securities .................................. -- (Increase) in other assets .................................................... (7,262) (14,851)24,137
Purchase of marketable securities ................................................ (2,974) --
Purchase of short-term investments ............................................ (145,086) (301,277)............................................... (162,291) (998,903)
Liquidation and maturity of short-term investments ............................... 83,587 956,458
Acquisitions and dispositions, net of cash acquired ........................... -- (54,584).............................. (95,561) (105,860)
Purchase of long-term investments ............................................. (474) (11,115)
Liquidation and maturity of short-term investments ............................ 100,547 191,096................................................ (4,300) (1,000)
--------- ---------
Net cash used inby investing activities ............................... (62,489) (242,632).................................. (208,796) (154,551)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal proceeds (payments) on long-term debt .................................. 2,419 (2,943)
Net borrowingsincreases (payments) under lineswarehouse line of credit ............................... 70,887 (26,613)
Net borrowings under reverse repurchase agreement ............................. 9,135 --
Purchase of common stock ...................................................... (1,308) --.......................... (8,660) 557
Net proceeds from issuance of common stock .................................... 39,627 48,364
Rock Financial and Title Source payments of dividends ......................... (177) --....................................... 10,556 33,901
--------- ---------
Net cash provided by financing activities ........................... 118,164 21,751.............................. 4,315 31,515
--------- ---------
NET INCREASE (DECREASE)DECREASE IN CASH AND CASH EQUIVALENTS ............................ 53,619 (176,545).......................................... (227,755) (138,234)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................ 140,991................................... 554,230 416,953
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................................................... $ 194,610326,475 $ 377,685278,719
========= =========
See accompanying notes to condensed consolidated financial statements.notes.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
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
sixthree months ended JanuaryOctober 31, 2000 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 include the results of 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, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped 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 that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a payment
(such as the sale of mortgage loans through our Quicken Loans website), revenue
is recognized upon completion of the transaction, assuming there are no
remaining obligations on our part. To recognize revenue, it must be probable
that we will collect the accounts receivable from our customers.
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 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 telephone support service to customers. This
free service, also referred to as post-contract customer support, is included in
this expense category. We do not defer the recognition of any revenue associated
with sales of these products, since the cost of providing this free support is
insignificant. The support is provided within one year after the associated
revenue is recognized and enhancements are minimal and infrequent. The estimated
cost of providing this free support is accrued upon product shipment.
In situations where customers are charged for technical support assistance, the
costs incurred in providing services are included in cost of goods sold rather
than as customer service and technical support expenses.
-7-
8
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 securities and are carried at amortized cost,
which approximates fair value. Available-for-sale securities are classified as
current assets based upon our intent and ability to use any and all of these
securities as necessary to satisfy the significant short-term liquidity
requirements that may arise from the highly seasonal and cyclical nature of our
business. Based on our significant business seasonality, cash flow requirements
within quarters may fluctuate dramatically and 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, JANUARYOCTOBER 31,
1999 2000 --------- ---------2000
---------- ----------
(unaudited)
(In thousands; unaudited)thousands)
Cash and cash equivalents:
Cash ................................................................ $ 56,5484,298 $ 9,23516,974
Certificate of deposits .............. -- 8,060
Money market funds ................. 294,190 172,342................... 338,462 180,138
Commercial paper ................... 156,037 40,875& corporate notes ... 29,543 25,531
Municipal bonds .................... 37,455 155,233
U.S. Government securities ......... 10,000 --
--------- ---------...................... 44,650 48,016
---------- ----------
$ 554,230416,953 $ 377,685
========= =========278,719
========== ==========
Short-term investments:
Certificates of deposit .......................... $ 9,9015,053 $ --
Commercial Paper ................... -- 103,244
Corporate notes .................... 19,482 2,932...................... 75,640 82,961
Municipal bonds .................... 284,057 312,487...................... 920,360 945,631
U.S. Government securities ......... 27,713 32,671
Restricted short-term investments .. (36,028) (38,416)
--------- ---------
$ 305,125 $ 412,918
========= =========........... 49,167 64,073
---------- ----------
$1,050,220 $1,092,665
========== ==========
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, JANUARYOCTOBER 31,
1999 2000 --------- ---------2000
---------- ----------
(unaudited)
(In thousands; unaudited)thousands)
Due within one year .................. $ 735,349235,998 $ 725,909266,823
Due within two years ................. 101,784 93,875157,309 139,697
Due within three years ............... 1,702 --
Restricted short-term investments .... (36,028) (38,416)
--------- ---------
$ 802,807 $ 781,368
========= =========13,039 8,700
Due after three years ................ 638,821 677,445
---------- ----------
$1,045,167 $1,092,665
========== ==========
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 saleavailable-for-sale marketable 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
JanuaryOctober 31, 2000:
AVAILABLE-FOR-SALE SECURITIES
GROSS UNREALIZED
----------------- NET REALIZED-------------------------- ESTIMATED
COST GAIN LOSS LOSSGAINS LOSSES FAIR VALUE
-------- -------- ------- --------------------- --------- --------- ----------
(In thousands)
JULY 31, 1999
(In thousands; unaudited)2000
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
-------- -------- ------- ---------- ----------
$332,138 $152,177 $16,140(25,302) 24,695
--------- --------- --------- ---------
$ 36,85694,206 $ 431,319
======== ======== ======= ========== ==========
JANUARY125,626 $ (28,023) $ 191,809
========= ========= ========= =========
OCTOBER 31, 2000
(In thousands; unaudited)(unaudited)
Checkfree Corporation common stock .. $150,081 $450,245$ 35,621 $ 84,525 $ -- $ 120,146
Quotesmith.com, Inc. common stock 5,645 -- $ 600,326(4,592) 1,053
S1 Corporation common stock ......... 49,997 37,922 -- (38,287) 11,710
--------- --------- --------- ---------
$ 91,263 $ 84,525 $ (42,879) $ 132,909
========= ========= ========= =========
TRADING SECURITIES
NET RECOGNIZED
-------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
(In thousands)
JULY 31, 2000
Excite@Home common stock $ 119,366 $ -- 87,919
S1 Corporation options .............. -- 178,874 -- -- 178,874
Mortgage.com,$ (92,997) $ 26,369
VeriSign, Inc. common stock ..... 6,000 13,8594,916 -- (1,833) 3,083
724 Solutions common stock 7,700 -- 19,859
Homestore.com,(3,083) 4,617
--------- --------- --------- ---------
$ 131,982 $ -- $ (97,913) $ 34,069
========= ========= ========= =========
OCTOBER 31, 2000
(unaudited)
Excite@Home common stock $ 119,366 $ -- $ (99,942) $ 19,424
VeriSign, Inc. common stock .... 3,500 67,6392,458 -- -- 71,139
Quotesmith.com, Inc.(1,175) 1,283
724 Solutions common stock ... 6,000 6,9712,118 -- -- 12,971
At Home common stock ................ 132,060 -- -- 56,978 75,082
-------- -------- ------- ---------- ----------
$347,638 $755,510(1,087) 1,031
--------- --------- --------- ---------
$ 123,942 $ -- $(102,204) $ 56,978 $1,046,170
======== ======== ======= ========== ==========21,738
========= ========= ========= =========
In January 1997, we sold 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 JanuaryOctober
31, 2000 was $59.00$49.75 per share. At JanuaryOctober 31, 2000, we held 10.2approximately 2.4
million shares, or approximately 19.5%2.8%, of Checkfree's outstanding common stock.
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10
In February 1999, we purchased one million shares of common stock of
Quotesmith.com, Inc. 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 October 31, 2000 was $0.88 per share. At October
31, 2000, we held approximately 1.2 million shares, or approximately 6.3%, of
Quotesmith.com's outstanding common stock.
In May 1999, we purchased 970,813 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 JanuaryOctober 31, 2000 was $90.5625$12.06 per share. At JanuaryOctober 31,
2000, we held 970,813approximately 1.0 million shares, or approximately 3.5%1.7%, of S1's
outstanding common stock. In connection with the above purchase, we also
received an option to purchase up to an additional 4,579,1874.6 million shares of S1
exercisable at a per share purchase price of $51.50. We account forAt October 31, 2000, these
options as available-for-sale equity securities, and accordingly theS1 options are carriednow considered derivatives and were valued at market value.
In August 1999, we acquired approximately 3.7$11.1 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 forusing
the investment in Mortgage.comBlack-Scholes model and are classified 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
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10
share. At January 31, 2000, we held 3.7 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 for the investment in
Homestore.com 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 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 JanuaryOctober 31, 2000, we owned approximately 2.11.9
million shares (or approximately 0.6%(less than 1%) of At HomeExcite@Home common stock and reported a
realizedrecognized cumulative valuation loss of approximately $20.1$99.9 million for these
securities for the
period between August 1, 1999 and January 31, 2000.securities. The closing price of At Home
(symbolExcite@Home (Nasdaq symbol ATHM) at JanuaryOctober 31,
2000, was $36.0313$10.31 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 October 31, 2000, we owned 9,716 shares
(less than 1%) of VeriSign common stock and reported a recognized cumulative
valuation loss of approximately $1.2 million for these securities. The averageclosing
price of At Home between August 1, 1999 and JanuaryVeriSign (Nasdaq symbol VRSN) at October 31, 2000, was $41.49$132.00 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 October 31, 2000, we owned 37,906 shares
(less than 1%) of 724 Solutions common stock and reported a recognized
cumulative valuation loss of approximately $1.1 million for these securities.
The closing price of 724 Solutions (Nasdaq symbol SVNX) at October 31, 2000, was
$27.19 per share.
During the first quarter of fiscal 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 recognized realized losses of $0.2 million. Total net gains on
sales of marketable securities were $8.9 million for the first quarter of fiscal
2001. This gain was offset by a recognized loss for the quarter of $12.8 million
for the valuation of our S1 options, resulting in a net loss on marketable
securities of $3.9 million.
All of our marketable securities are stocks of high technology companies whose stocksthat
are subject to substantial volatility. Accordingly, it is possible that the
market price of one or more of these companies' stocks could decline
substantially and quickly, which could result in a material reduction in the
carrying value of these assets.
Linesassets and, in the case of Credit
For lines of credit we estimate fair value basedsecurities treated as trading
securities, 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
our operating results.
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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.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fairbook
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We 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 1999 JANUARY2000, OCTOBER 31 2000,
------- ------------- --------------------- ------------ ---------------
(unaudited)
(In thousands; unaudited)
Goodwill..................................(in thousands)
Goodwill .......................... 3-5 $383,102 $416,874$358,890 $425,441
Customer lists............................lists .................... 3-5 66,934 67,535
Covenants57,890 53,372
Covenant not to compete..................compete ........... 3-5 2,492 5,9854,992 4,495
Purchased technology......................technology .............. 1-5 17,751 14,97010,990 40,104
Assembled workforce.......................workforce ............... 2-5 3,972 3,4281,976 1,989
Trade names and logos.....................logos ............. 1-10 6,900 5,3574,140 3,917
Balances presented above are net of total accumulated amortization of $210.1$465.3
million and $289.5$506.6 million at July 31, 19992000 and JanuaryOctober 31, 2000, 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 short-term investments and marketable securities and the
collectability of our trade accounts receivable. At JanuaryOctober 31, 2000, 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$154.6 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 trading securities. If there is a trading security.
-11-
12permanent decline
in the value of any other marketable securities below cost, 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. 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.
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.
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 purchase puts and calls on U.S.
Treasury securities. At October 31, 2000, we held calls 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.
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Loan commitments to extend credit at July 31, 2000 and October 31, 2000 were as
follows:
JULY 31, 2000 OCTOBER 31, 2000
------------------------------- -------------------------------
FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE
---------- ------------- ---------- -------------
(unaudited)
(In thousands)
Conventional prime loans ..... $167,000 $ 31,100 $141,101 $ 19,795
Sub-prime loans .............. 4,200 1,700 3,002 1,182
High-LTV loans ............... 600 -- 115 --
-------- -------- -------- --------
$171,800 $ 32,800 $144,218 $ 20,977
======== ======== ======== ========
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
the change in accounting 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. 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. During the first quarter of fiscal 2001 these
fluctuations resulted in a loss of $7.6 million net of taxes, this created a
decrease of $0.04 per share on the basic and diluted net loss per share for the
period. The following table shows what adjusted net loss from continuing
operations and basic and diluted net loss per share from continuing operation of
Intuit would have been as if we had adopted this standard as of the beginning of
fiscal 2000:
Three Months Ended October 31, 1999
-----------------------------------
As Adjusted As Reported
------------ ------------
(In thousands, except per share data; unaudited)
Net loss from continuing operations ....................................... $ (54,733) $ (65,861)
Basic and diluted loss per share from continuing operations ............... $ (0.28) $ (0.33)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), and
amended it in March and June 2000. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements for all public
registrants. Changes in our revenue recognition policy, if any, resulting from
the interpretation of SAB 101 would be reported as a change in accounting
principle. We have not yet
determined whether adoptionare currently reviewing the impact of FAS 133 will have a material impactSAB 101 on our consolidated financial position,previously
reported results of operations or cash flows.
Reclassificationsand anticipate that we will adopt SAB 101 during
the fourth quarter of fiscal 2001.
In April 2000 the FASB issued FASB Interpretation Accounting for Certain
previously reported amounts have been reclassifiedTransactions Involving Stock Compensation - an Interpretation of APB 25 ("FIN
44"). FIN 44 specifically answers twenty-nine questions on the implementation of
APB 25 that were derived from a survey of members of the Emerging Issues Task
Force ("EITF") and restated to
include the task force on stock compensation. FIN 44 was effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur
after December 15, 1998. To the extent that FIN 44 covers events occurring
during the period after December 15, 1998, but before the effective date of July
1, 2000, the effects of applying FIN 44 are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 has not had a material effect on our
financial position and 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.
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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 bewhich was 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.
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 display of comprehensive net income and its components. However,
it has no impact on our net income or
stockholders' equity as presented in our financial statements.
SFAS 130 requires foreign currency translation adjustments and changes in the
fair value of available for saleavailable-for-sale securities to be included in comprehensive
income.
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13
The components of comprehensive net income, net of tax, are as follows:
SIXTHREE MONTHS ENDED JANUARYOCTOBER 31,
-----------------------------------------------------------
1999 2000
--------- ---------
(In thousands; unaudited)
Net income (loss) ............................Beginning balance gain, net of tax ................. $ 48,23079,144 $ (8,569)55,586
Unrealized gain (loss) on marketable securities .... 145,747 (72,449)
Realized gain (loss) on marketable securities ...... -- 16,492
Tax benefit (effect) on marketable securities ...... (58,299) 22,383
Translation adjustment gain (loss), net of tax ..... 371,342 371,684
Change in cumulative translation adjustment .. (4,052) (1,157)(2,485) (63)
--------- ---------
ComprehensiveEnding balance gain, net income .....................of tax .................... $ 415,520164,107 $ 361,95821,949
========= =========
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 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 paidthe
purchase). We participated in three annual
installmentsthe formation of $25 million each beginningVFSC in May 2000.1998 in order to
facilitate the development of certain Web-oriented finance products. We acquired
the remaining securities of VFSC pursuant to the exercise of a purchase option
that we received in connection with the formation of VFSC. We accounted for the
acquisition of CRIVFSC as a purchase for accounting purposes and allocated
approximately $187$113 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 operationsEric Dunn, who was Senior Vice President and diluted net loss per share from continuing operationsChief Technology Officer of Intuit
through July 31, 2000, as well as VFSC's President and CRI as if we
had acquired CRI ata director of VFSC, was
an option holder of VFSC. He exercised his options immediately prior to the
beginningclosing 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
DilutedIntuit's acquisition of VFSC. He received $5.7 million from Intuit
for his VFSC shares, net income per share ...................... $ 0.17 $ 0.25
On November 30, 1999, we completed the purchase of all of the outstanding common
stockaggregate exercise price for his option ($1.4
million) and withholding taxes ($3.1 million).
Other shareholders of Turning Mill Software, Inc. ("Turning Mill") for approximately $22
million in stock. Turning MillVFSC included venture capital funds managed by Kleiner
Perkins Caufield & Byers, of which L. John Doerr, a director of Intuit, is a
developer of software and web based products
based in Acton, Massachusetts. We accountedgeneral partner. These funds received approximately $2.4 million from Intuit for
their VFSC shares. The aggregate original purchase price for the acquisition of Turning Mill
as a purchase for accounting purposes and allocated approximately $22 million to
identified intangible assets and goodwill. These assets are being amortized over
periods of three to five years.
On December 8, 1999, we completedshares held by
the purchase of all of the outstanding shares
of Rock Financial Corporation ("Rock") for approximately 8.6 million shares of
Intuit common stock. Rock is a provider of consumer mortgages and is based in
Michigan. In connection with the acquisition, Intuit assumed all 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. We accounted for the
acquisitions of Rock and Title Source as a pooling of interests for accounting
purposes and have restated all previously reported amounts to reflect the effect
of the pooling.Kleiner Perkins Caufield & Byers funds was $1.2 million.
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5. BORROWINGS
We have two mortgage lines of credit. 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 $125 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 JanuaryOctober 31, 2000 were 6.29%7.69% and
6.83%7.76%, respectively. The weighted average interest rates for the yearthree months
ended JulyOctober 31, 1999 and quarter ended JanuaryOctober 31, 2000 were 6.45%6.39% and 6.58%7.76%, respectively.
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
JanuaryOctober 31, 2000 were 6.37%7.89% and 6.96%7.84%, respectively, while the weighted average
interest rates for the three month periodsmonths ended JulyOctober 31, 1999 and JanuaryOctober 31, 2000
were 5.92%6.43% and 6.64%7.73%, 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 terms 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 JanuaryOctober 31, 2000.
Drafts payable represent funds advanced for mortgages originated whichthat have not
yet been drawn against the lines of credit.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
JULY 31, JANUARYOCTOBER 31,
19992000 2000
-------- -------------------
(In thousands; unaudited)
Reserve for returnsthousands) (unaudited)
Short-term notes payable .......................... $ 34,286 $ 34,376
Accrued Compensation and exchanges ................ $ 73,955 $ 96,372related liabilities ...... 49,303 52,129
Future payments due for CRI acquisition .......... 66,314 68,313
Other acquisition and disposition related items .. 10,824 12,341........... 44,916 45,690
Payroll tax obligations ........................... 177,002 190,922
Rebates .......................................... 18,002 34,204
Post-contract customer support ................... 3,418 11,289........................................... 21,552 16,104
Other accruals ................................... 29,359 49,241.................................... 96,301 139,480
-------- --------
$201,872 $271,760$423,360 $446,493
======== ========
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15
7. SEGMENTEDINDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Intuit has adopted Statement of Financial Accounting No. 131, "Disclosures about
Segments of an Enterprise and Related 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 three month periods October
31, 1999 and 2000 are broken out by our operating segments for the six
month periods ended January 31, 1999 and 2000:segments:
SIXTHREE MONTHS ENDED JANUARYSMALL CONSUMER GLOBAL
OCTOBER 31, 1999 SMALL CONSUMER
BUSINESS TAX FINANCE TAX INTERNATIONALBUSINESS
(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- -------- -------- ------------- --------- --------- --------- --------- --------- ------------
Net revenue ................ $131,961 $134,269 $209,358.................................... $ 35,02680,119 $ 11,120 $ 68,048 $ 17,641 $ -- 510,614$ 176,928
Segment operating income / (loss) ............ 38,925 19,210 98,415 (6,263)................ 17,516 (34,400) 5,441 (2,165) -- 150,287(13,608)
Common expenses ............................................ -- -- -- -- (54,145) (54,145)
-------- -------- -------- --------(33,314) (33,314)
--------- --------- --------- --------- --------- ---------
Sub-total operating income (loss) .............. 38,925 19,210 98,415 (6,263) (54,145) 96,142
-------- -------- -------- -------- --------- ---------
Gains/(losses)17,516 (34,400) 5,441 (2,165) (33,314) (46,922)
Realized net losses on marketable securities ... -- -- -- -- 10,088 10,088(17,309) (17,309)
Acquisition costs ........................................ -- -- -- -- (45,633) (45,633)(40,835) (40,835)
Reorganization costs .................................. -- -- -- -- (2,000) (2,000)(3,500) (3,500)
Interest income/expenseincome (expense) and other items .................. -- -- -- -- 7,298 7,298
-------- -------- -------- --------8,476 8,476
--------- --------- --------- --------- --------- ---------
Net income (loss) before tax .................................... $ 38,92517,516 $ 19,210(34,400) $ 98,4155,441 $ (6,263)(2,165) $ (84,392) $ 65,895
======== ======== ======== ========(86,482) $(100,090)
========= ========= SIX========= ========= ========= =========
THREE MONTHS ENDED JANUARYSMALL CONSUMER GLOBAL
OCTOBER 31, 20001999 BUSINESS TAX FINANCE BUSINESS
(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
--------- --------- --------- --------- --------- ------------
Net revenue ................ $216,912 $140,659 $196,844.................................... $ 48,01293,731 $ --12,372 $ 602,42763,522 $ 17,901 $ (4) $ 187,522
Segment operating income/income (loss) .............. 70,007 10,238 68,581 4,383................ (183) 5,371 (45,503) (4,106) -- 153,209(44,421)
Common expenses ............................................ -- -- -- -- (68,830) (68,830)
-------- -------- -------- --------(4,108) (4,108)
--------- --------- --------- --------- --------- ---------
Sub-total operating income (loss) .............. 70,007 10,238 68,581 4,383 (68,830) 84,379
-------- -------- -------- -------- --------- ---------
Gains/(losses)(183) 5,371 (45,503) (4,106) (4,108) (48,529)
Realized net losses on marketable securities ... -- -- -- -- (20,110) (20,110)(3,868) (3,868)
Acquisition costs ........................................ -- -- -- -- (89,539) (89,539)(42,666) (42,666)
Reorganization costs .................................. -- -- -- -- (3,500) (3,500)-- --
Interest income/expenseincome (expense) and other items .................. -- -- -- -- 15,465 15,465
-------- -------- -------- --------16,118 16,118
--------- --------- --------- --------- --------- ---------
Net income (loss) before tax .................................... $ 70,007(183) 5,371 (45,503) (4,106) $ 10,238(34,524) $ 68,581 $ 4,383 $(166,514) $ (13,305)
======== ======== ======== ========(78,945)
========= ========= ========= ========= ========= =========
- -----------
(1) Reconciling items include"Other" includes acquisition and other common costs not allocated to
specific segments. Certain types of expenses that were considered common
expenses in fiscal 2000 are being allocated to specific business
segments during fiscal 2001, which resulted in significantly lower
common expenses for the three months ended October 31, 2000.
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8. 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$35.1 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
JanuaryOctober 31, 2000, the rate was approximately 0.6%1.07%. 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 on the
loan until March 2000. We are currently refinancing this debt for another one-year term.2001.
9. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
10. 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
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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,November 15, 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
Checkfreeentered into an agreement to 4.7 million shares or approximately 9% of Checkfree's outstanding
stock.
On February 29, 2000, Verisign, Inc. ("Verisign") acquiredacquire all of the
outstanding securitiesstock of privately-held Signio,EmployeeMatters, Inc. ("Signio"). We heldfor approximately $41.4 million in
Intuit stock. In addition, we expect to extend bridge loans to EmployeeMatters
in an investmentaggregate amount of approximately $8.0 million up through the closing, and
to assume liabilities of approximately $4.0 million in Signio,connection with the
transaction. EmployeeMatters, which is based in Stamford, Connecticut, provides
human resource management, benefits and payroll services via the Internet. The
acquisition, which is subject to various conditions, including customary
regulatory and other approvals, is expected to be completed by the end of the
second quarter of fiscal 2001 and will be treated as a purchase for accounting
purposes.
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On November 25, 2000, we entered into an Asset Purchase Agreement pursuant to
which we have agreed to sell selected assets of our QuickenInsurance business to
InsWeb Corp. in exchange for our investment, we will receive
approximately 194,000 common shares$14 million of Verisign (representing less than 1% of
the outstanding common stock of Verisign subsequentInsWeb
(representing a 16.6% equity interest on a post-closing basis). In addition, we
will enter into a distribution agreement under which InsWeb will become the
exclusive consumer insurance aggregator for our Quicken.com and QuickenInsurance
Web sites and certain consumer desktop products. In exchange, we will share in
associated revenues, which are subject to certain minimums over the acquisition). On
February 29, 2000,5-year term
of the distribution agreement. The transactions are expected to close in the
first calendar quarter of 2001, subject to various conditions, including
regulatory clearances and customary closing stock price of Verisign was $253 per share.conditions.
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- - --------------------------------------------------------------------------------
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 may include, among other things, projections of
our future financial performance, our anticipated growth and anticipated trends
in our businesses. These statements are only predictions, based on our current
expectations about future events. Although we believe the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
tense,
areresults, performance or achievements or 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
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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.10-K.
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 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 manage 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,
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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 have had a negative impact on earnings.
While desktop software and related products and services provide most of our
revenue, our Internet-based revenue is continuing to grow rapidly. For the three
months ended October 31, 2000, Internet-based revenue increased approximately
42% compared to the prior year quarter and accounted for approximately 27% of
total revenue in the current quarter, compared to approximately 20% 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 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.
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19
We believe our Internet-based businesses and our other emerging businesses
provide an opportunity to increase revenue in fiscal 2001 and beyond. We have
made significant progress in several of our Internet businesses over the past
three years. During fiscal 2000, our web-based tax preparation and electronic
filing services and the QuickBooks Internet Gateway were profitable. However,
investors should be aware that some of our other emerging businesses are still
in their initial stages and are not yet generating either profits or significant
revenue. We also anticipate increased spending in an effort to capitalize on new
business opportunities. During fiscal 2001 we expect to double our investments
in our emerging businesses, which will contribute to increased research and
development expenses as well as increased selling and marketing expenses. 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 periodsmonths ended JanuaryOctober 31, 1999 and 2000. Investors should
note that results for the three and six-month periods 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). 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 Months3 Mos. Ended January 31, Six Months% 3 Mos. Ended January 31,
1999%
10/31/99 Revenue 10/31/00 Revenue % Change
2000 1999 Change 2000
---------------------------- ------------------------------------ ------- -------- ------- ---------
(Dollars in millions; unaudited)
Software and otherSmall Business Division .............. $ 80.1 45% $ 93.7 50% 17 %
Tax .................................. 11.1 6% 12.4 7% 12 %
Consumer Finance ..................... 68.1 39% 63.5 34% (7)%
Global Business Division ............. 17.6 10% 17.9 9% 2 %
Total net revenue ................ $ 344.1 14% $ 392.7 $ 457.4 18% $ 541.7$176.9 100% $187.5 100% 6 % 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 supplies business is
considered a part of our small business divisionSmall Business Division, while the international
supplies business is considered part of our international division (seeGlobal Business Division. The table
above shows each business division's percentage of our net revenue for the three
months ended October 31, 1999 and 2000. See Note 7).7 of the financial statements
for additional information about our business segments.
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
and QuickBooks Internet Gateway services.
Overall, revenue for the division was up 63% and 64%17% for the three and six-month
periodsmonths ended January 31, 2000, respectively, compared to the same periods a
year ago. The increases were primarily a result of revenue growth for our
QuickBooks products. In addition, CRI (acquired in May 1999) and our QuickBooks
Online Payroll Service (launched in October 1998) contributed to revenues during
the three-month and six-month periods
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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 periodsperiod in the prior year. Payroll services
experienced revenue growth of 49% in the three months ended October 31, 2000
compared to the same period a year ago. We launched our most recent version of QuickBooks (QuickBooks 2000) in December
1999. The increased revenue from our QuickBooks product lineThis was attributabledue to increasedgreater unit sales as
well as an increase in thehigher 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,price increases for our online
Deluxe Payroll Service. While we expect that some ofbelieve our payroll business, and the fiscal 2000 second quarter strengthDeluxe
Payroll Service 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 withincluding operational issues in activating online payroll customers. See
"Risks That Could Affect Future Results." The QuickBooks Internet Gateway, which
was launched in January 2000, also contributed to the payroll processing business and the continued integration of
CRI into our existing business model. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who 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 outside 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 baseoverall revenue growth for
the Small Business Division for the first quarter of fiscal year 2001. We
believe it will contribute to increasing revenue and profitability in fiscal
2001 and beyond, but the business remains subject to a number of risks and
uncertainties, including customer and vendor participation and satisfaction
levels. See "Risks That Could Affect Future Results." In addition, financial
supplies experienced revenue growth of 9% for the three months ended October 31,
2000 compared to the same period in the prior year.
The increase in Small Business Division revenue was partially offset by the
expected decline in QuickBooks Online
Payroll service continuesrevenue of 15% for the first quarter of fiscal
2001 compared to expand, the servicefirst quarter of fiscal 2000. The decline was primarily the
result of lower unit sales compared to the prior year quarter, when we
experienced exceptionally strong demand as customers purchased upgrades due to
Year 2000 concerns.
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On November 15, 2000 we entered into an agreement to acquire all of the
outstanding common and Series A preferred stock of EmployeeMatters, Inc.
EmployeeMatters, which is not yet generating material
revenuesbased in Stamford, Connecticut, provides human
resource management, benefits and we must continue to focus on streamliningpayroll services via the customer activation
process.Internet. See Note 11
of the financial statements.
Tax Division.
Tax division revenues come primarilyDivision revenue is derived from the following sources:
- Quicken TurboTax federal and MacInTax personalstate consumer
desktop tax preparation products, - ProfessionalProSeries and Lacerte professional tax
preparation products, (ProSerieselectronic tax filing services and Lacerte
product lines)
- Quicken TurboTax for
the Web electroniconline tax preparation servicesservices.
Due to the seasonal nature of our tax business, the first quarter typically
generates only nominal revenue from tax products in comparison to the second and
electronic filing services
-21-
22third quarters of the fiscal year. Overall, tax division revenuesthe Tax Division revenue for the
three and six-monthsmonth period ended JanuaryOctober 31, 2000 declinedincreased by 8% and 6% respectively,12% compared to the same
periodsperiod last year.
The declines in revenue were due primarily to an aggressive marketingdevelopment and pricing strategy for Quicken TurboTax in response to a very competitive market
for desktop personal tax software. We lowered average selling prices, and we
also bundled electronic filing and statelaunch of our consumer tax products with certain versions of
Quicken TurboTax, which required us to defer recognition of approximately $30
million of revenue from the second quarter to the remainder of the fiscal year.
While we have experienced significant unit sales growth for the quarter ended
January 31, 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 early
December. However, there are still ongoing risks associated with our tax
business, including free product offerings from Microsoft. The increasedintense competition has resultedthat could 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 yearretail channel.
While we have undertaken product development and marketing efforts intended to
date
comparedaddress competitive pressures, we will not be able to the same period a year ago, revenue is lower due to lower average
selling prices. We expect our reserves for returned products will be adequate 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 haveIn connection with our web-based tax preparation electronic filing services, we
also face the challenge of maintaining service levels during peak volume service
times. Although service reliability and responsiveness were very good during
fiscal 2000, we experienced significantly higher revenuesbrief interruptions in our electronic filing
services during February and volumeApril 1999. The exact level of demand for Quicken
TurboTax for the Web and for electronic filing compared to lastfor the current tax 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 negativeadverse financial and public
relations consequences if our capacitythese services are unavailable due 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 1999or other reasons.
Consumer Finance Division.
Consumer Finance Division revenue comes primarily from Quicken desktop products,
Quicken Loans, advertising, sponsorship and on
April 11-12, 1999. Although we do not believe those service outages prevented
customers from completingplacement fees, online transactions
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 our professional tax (ProSeries) products and products from our
Lacerte subsidiary increased by 10%QuickenInsurance.
Overall, Consumer Finance Division revenue was down 7% for the three and six-month periodsmonths
ended JanuaryOctober 31, 2000, compared to the same periods last year. This growth is
attributable toquarter a combination of a continued shift to higher priced products and
growth inyear ago. Revenue for 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 areasexperienced an expected decline 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%11% for the three and
six-month periodsmonths
ended JanuaryOctober 31, 2000, compared to the same periods a year
ago. The increases are due primarily to strong revenue growth for our Quicken
product line and growth in Internet-based revenues, offset in part by a
significant decline in revenues for Rock's mortgage business from the year-ago
periods. Quicken revenue increased compared to the same periods of the prior year primarily due toquarter. Our comparative
results were negatively impacted by strong consumer demand resulting fromduring the three
months ended October 31, 1999 as a result of aggressive retail -22-
23
promotions with our tax products and lower than expected product rebate
redemptions related to Quicken 99. We believe somea
significant number of customers may have upgraded
during the second quarter,upgrading due to Year 2000 concerns. Accordingly, some 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. 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 other
web-based personal financial software functionality isfinance tracking and management tools that are becoming
increasingly becoming available on the Internet at no cost which has a negative
impact on desktop product sales. There is also an increasing emphasis on
packaging desktop software with original equipment manufacturers' personal
computers, which results in lower revenues per unit shipped.to consumers.
The Consumer divisionFinance Division benefited from 7% revenue growth also benefited from an increase in certain
Internet-based revenue compared to the same periods last year. This increase was
largely due to higher advertising, sponsorship and transaction-related revenue
through Quicken.com and Quicken. However, revenue growth was not uniform across
all of our Internet product and service offerings in the Consumer division. For
example, advertising revenue from our Quicken.com site has grown relatively
rapidly. However, revenue from QuickenLoans was substantially lower than in the
same periods a year ago. QuickenLoans now encompasses Intuit's onlineQuicken
Loans mortgage business as well as the online and traditional mortgage businesses of Rock
Financial, which we acquired in December 1999. The decline inbusiness. Online mortgage revenue was primarily dueup 53% over the prior year,
which more than offset the revenue declines that resulted from discontinuing our
loan referral business model and the closing and consolidation of 22 branch
offices. The percentage of our mortgage revenue generated and processed online
and/or through our call center increased from 37% for all of fiscal 2000 to Rock's decision54%
in the first quarter of fiscal 2001. While we expect the total mortgage business
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 ifgrow for the full fiscal year, we face continuing challenges in
our mortgage business, including interest rates continuerate fluctuations. See "Risks That
Could Affect Future Results."
On November 25, 2000, we entered into an Asset Purchase Agreement pursuant to
rise, and aswhich we continuehave agreed to phase out Rock's traditional mortgage business.sell selected assets of our QuickenInsurance business to
InsWeb Corp. in exchange for common stock of InsWeb (representing a 16.6% equity
interest on a post-closing basis). 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 significant 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, serviceenter into a
distribution agreement under which InsWeb will become 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 toexclusive consumer
insurance aggregator for 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 termQuickenInsurance Web sites and
certain consumer desktop products. See Note 11 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.
Internationalstatements.
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21
Global Business Division.
International divisionGlobal Business Division revenues come primarily from the
following sources:
- JapaneseYayoi and QuickBooks and other small
business products - Canadianin Japan, QuickBooks, Quicken and QuickTax products in Canada,
QuickBooks, Quicken and consumer tax products in Europe, and QuickBooks and
TaxQuicken 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.Southeast Asia.
Overall, international divisionGlobal Business Division revenues increased 37%2% for the three and six-month periodsmonth
period ended JanuaryOctober 31, 2000 compared to the same periodsperiod last year. We
experienced an increase in revenue from Canada, due primarily to higher
QuickBooks sales. This increase iswas partially offset by a result of stronger sales of Quicken and QuickBooksdecline 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
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24
Germanyrevenue from Europe,
due to aour shift in our business model from direct participation in the market to a third party distributionlicensing
arrangement. Revenue from Japan remained roughly flat for the quarter compared
to the prior year quarter.
COST OF GOODS SOLD
Three Months3 Mos. Ended January 31, Six Months% 3 Mos. Ended January 31,
(Dollars in millions; unaudited) 1999%
10/31/99 Revenue 10/31/00 Revenue % Change
2000 1999 Change 2000
-------------------------- ------------------------------------ ------- -------- ------- --------
(Dollars in millions; unaudited)
Product .................... $ 70.2 33% $ 93.1 $ 109.2 37% $ 149.5
% of revenue ............... 19% 22% 21% 25%.............................. $56.5 32% $66.9 36% 18%
Amortization of purchased
.. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9
software & other %..................... 2.4 1% 3.0 2% 25%
Total cost of revenue ............... 1% 1% 1% 1%
Total ...................... $ 72.1goods sold ......... $58.9 33% $ 95.6 $ 112.9$69.9 37% $ 154.4
% of revenue ............... 19% 22% 22% 26%
There are two components of our cost of goods sold. 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 sold increased to
22% and 26% of revenue for the three and six-months ended January 31, 2000
compared to 19% and 22% for the same periods of the prior year. These increases
are primarily attributable to two factors. First, consistent with our growing
Internet-based business, we are experiencing a significant increase in related
hardware and infrastructure costs as we purchase equipment to increase our
Internet capability. These costs are classified as cost of goods sold and, as a percentage of revenue are significantly higher thanincreased to 37% for the
coststhree month period ended October 31, 2000, compared to 33% for the same period
in the prior year. This increase is attributable to growth of goods sold for
our traditional desktop software business. Second, our service
businesses, such as payroll processing and QuickBooks Support Network, generallyas they
typically have higher cost of goods sold compared tothan our packaged software products.
During the sale of packaged software. As these 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,three months ended October 31, 2000 our payroll processing subsidiary that we acquired in May 1999, are included in fiscal 2000
results but not in the fiscal 1999 comparison periods, which contributed to the
year-over-yearservices experienced
a significant increase in cost of goods sold, due to growth in our online
payroll business. The increase from the first quarter of fiscal 2000 is also
attributable to infrastructure investments relating to new and existing online
businesses, as well as certain operating expenses of QuickenLoans being
reclassified this year from selling and marketing expenses to cost of goods
sold.
OPERATING EXPENSES
Three Months3 Mos. Ended January 31, Six Months% 3 Mos. Ended January 31,
(Dollars in millions; unaudited) 1999%
10/31/99 Revenue 10/31/00 Revenue % Change
2000 1999 Change 2000
-------------------------- ---------------------------------------- ------- ------------ ------- --------
(Dollars in millions; unaudited)
Customer service &and technical support ............... $ 41.1 16%34.3 19% $ 47.7 $ 72.0 14% $ 82.0
32.4 17% (6)%
of revenueSelling and marketing ............................ 11% 11% 14% 14%
Selling & marketing ..................... $ 71.2 21% $ 86.1 $ 124.369.9 40% 61.1 33% (13)%
Research and development ......................... 41.7 24% 47.9 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%15%
General and administrative .............. $ 19.6 19% $ 23.3 $ 38.9....................... 21.5 12% 27.8 15% $ 44.8
% of revenue ............................ 5% 5% 8% 7%29%
Charge for purchased research and development ......................... $.... 1.3 1% -- -- N/A $ -- $ -- N/A $ 1.3
% of revenue ............................ N/A N/A N/A 0%
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25
Other acquisition costs, including amortization
of goodwill and purchased intangibles ............................. $ 21.0 115% $ 45.2 $ 41.9 95% $ 81.6
% of revenue ........................................ 36.4 21% 38.5 21% 6%
11% 8% 14%
Other acquisitionAcquisition related costs-
amortization of deferred compensation ... $........ 0.7 -- 1.1 1% 57%
Reorganization costs ............................. 3.5 2% -- -- N/A
$ 1.0 $Totals ....................................... $209.3 118% $208.8 111% -- 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%
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22
Customer Service and Technical Support.
Customer service and technical support expenses were flat as a percentage17% of revenue for the
three and six-month
periodsmonths ended JanuaryOctober 31, 2000 compared to 19% for the same periodsperiod of the
prior year. We have benefited from our efforts to provideThis improvement reflects the continued efficiency in providing
customer service and technical support less expensively through websites and
other electronic means. However,
we increasedmeans, and from the expansion of the QuickBooks Support Network
and 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).other fee-for-support programs.
Selling and Marketing.
Selling and marketing expenses were 20% and 26%33% of revenue for the three and six-monthsmonths ended
JanuaryOctober 31, 2000 compared to 19% and
24%40% for the same periodsperiod of the prior year. The
increasesdecline in selling and marketing costs areas a percentage of revenue for the three
month period is partly attributable to a delay or reduction in customer
acquisition programs (particularly for QuickenLoans and Deluxe Payroll), based
on the customer demand generated by the strength of our brands. In addition, in
the first quarter last year we incurred higher than normal selling and marketing
expenses to notify customers of Year 2000 issues and solutions. Also
contributing to the decline was a reclassification of certain QuickenLoans
expenses from sales and marketing expenses to cost of goods sold in fiscal 2001.
In addition, during the prior year quarter we experienced increased sales and
marketing expenses as a result of aggressive marketing programs relating to the
expansion of our Internet-based businesses and the increasinglyextremely 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 1999consumer tax season.
Research and Development.
Research and development expenses were 10% and 14%26% of revenue for the three and six-monthsmonths ended
JanuaryOctober 31, 2000 compared to 10% and
14%24% of revenue for the same periodsperiod of the prior
year. WeThis increase is primarily attributable to continued investments in the
development of our emerging businesses, including QuickBooks Internet Gateway,
Site Solutions, our online QuickBooks Deluxe Payroll Service and web-based bill
presentment and payment. During the remainder of fiscal 2001, we expect to
continue to investsignificant investments in research and development, due toparticularly for
our efforts to develop our Internet-basedemerging 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% and 7%15% of revenue for the three and six-monthsmonths
ended JanuaryOctober 31, 2000 compared to 5%
and 8%12% for the same periodsperiod of the prior year.
The increase as a percentage of revenue was primarily due to a $5 million
increase in bad debt reserves to reflect the deteriorating financial condition
of many Internet commerce companies with whom we do business. 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.
For the sixthree months ended JanuaryOctober 31, 2000,1999, 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 2000,2000. We did not incur any charges for purchased research and thatdevelopment
in the risk of these products not
being
-25-three months ended October 31, 2000.
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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 increased to $48.7 million and
$88.2$42.7 million for the three and six-monthsmonths ended
JanuaryOctober 31, 2000 compared to $22.9 million and $45.6$40.8 million for the same periodsperiod of the prior
year. These
increases wareThe slight increase was 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 HutchisonVenture Finance Software Corp. in
August 1999, and Turning Mill Software
in November 1999.
The high levels of non-cash amortization2000. See Note 4 of the financial statements. 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$178.7 million, $145.5$176.4 million,
$140.2$152.3 million and $90.9$73.0 million for the years ending July 31, 20002001 through
2003,2004, respectively. If we complete additional acquisitions (including the
pending acquisition of EmployeeMatters) or accelerate amortization in the
future, there couldwould be an incremental negative impact on operating results.
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-monthsmonths ended JanuaryOctober 31, 2000, interest and other income and
expense, net, increased to $7.0 million and $15.5$16.1 million compared to $4.0
million and $7.3$8.5 million for the same
periodsperiod a year ago, reflecting increased cash and short-term investment balances. We have electedbalances
due primarily to report our At Home
common stock as a trading securityproceeds from recent 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-monthsmonths ended JanuaryOctober 31, 2000, we reportedrecorded losses arising from fluctuations in the share pricemarketable
securities and other investments, net of At Hometaxes, of $2.8$3.9 million, and $20.1compared to
losses of $17.3 million respectively. Infor the same period a year ago,ago. 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 securities, and we did not report a gain or a loss
for changes inexpect this volatility to continue as long as we hold
these securities. If the market value of Excite, Inc. ("Excite"), one ofthese securities declines significantly
in the predecessor companies of Excite@Home infuture, it would have a negative impact on 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 TAXESearnings. Income Taxes
For the three and six-monthsmonths ended JanuaryOctober 31, 2000, we recorded an income tax provisions (benefits)benefit
of $29.6 million and ($4.6)$30.9 million on a pretax income
(loss)loss of $86.8 million ($13.3) million, respectively.$78.9 million. This compares to an income
tax provisionsbenefit of $31.2 million and $17.7$34.2 million on a pretax incomeloss of $124.4$100.1 million and $65.9 million, respectively for the same
periodsperiod of the prior year. At JanuaryOctober 31, 2000, 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
For the quarter ended October 31, 2000, we recorded a cumulative gain of $14.3
million, net of taxes, as a result of a change in accounting principle that
recognized the cumulative effect of 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.
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24
LIQUIDITY AND CAPITAL RESOURCES
At JanuaryOctober 31, 2000, our unrestricted cash and cash equivalents totaled $377.7$278.7
million, a $176.5$138.2 million decrease from July 31, 1999.2000.
We used $15.2 million in cash for our operations during the three months ended
October 31, 2000. The decrease was a resultprimary components of net cash used by investing activities, partiallyoperations were a net
loss of $33.8 million, an adjustment for a cumulative accounting gain of $23.9
million and a significant reduction in our income tax payables of $60.3 million.
These were offset by cash provided by
financingadjustments made for non-cash expenses such as acquisition
charges of $43.1 million, depreciation charges of $14.6 million and operations activities. Casha $32.0
million tax benefit from operating activities is driven by
the seasonalityexercise 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.
Our operations provided $44.3 million in cash during the six months ended
January 31, 2000. Primary sources of cash were an increase of $54.6 million in
accounts payable and $63.9 million in other accrued liabilities. The
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27
increases in accrued liabilities and accounts payable are 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 byemployee stock options. We also
experienced an increase in deferred revenuesrevenue of $40.4$13.6 million due
primarily to the deferral of state tax product and electronic filing revenues
which will be realized in our third and fourth fiscal quarters. Cash was also
generated by the decrease of $32.2 million in prepaid expenses due primarily to
the completion of acquisitions in the first quarter. Primary uses of cash
included the net loss of $8.6 million, an increase of $185.4 million in accounts
receivable due to the large volumes of seasonal product shipments to retailers
and distributors that typically occur in our second fiscal quarter and a
significant decrease in income taxes payable as a result of an
increasing number of Internet-related agreements under which we receive payments
from third parties prior to the payment of taxes
for our fiscal year ended July 31, 1999.time that we can recognize them as revenue.
Investing activities used $242.6$154.6 million in cash for the sixthree months ended
JanuaryOctober 31, 2000. UsesThe primary use of cash includedfor investing was the purchase of
Venture Finance Software Corp. ("VFSC") for $118 million. We also purchased
$42.4 million of net purchases of $110.2 million in short-term investments, which was partially offset by
proceeds of $24.1 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 Internet-based 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 $29.4
million in cash for our acquisitions of SecureTax and Hutchison.during the quarter.
Financing activities provided $21.8$31.5 million infor the first quarter,three months ended October
31, 2000, 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).results. If future declines in our other marketable securities
are deemed to be permanent, they will also impact our earnings.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), 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
The following is a Year 2000 readiness disclosure underForm 10-K contains additional details about these risks, as well as other risks
that could affect future results.
If we do not continue to successfully refine and update the Year 2000
Information and Readiness Disclosure Act.
Intuit established a Year 2000 Project Office to address the impact of the year
2000 date transition on its operations,business models for
our Internet--based products and services globally. We
adoptedand other emerging business, 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 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 five-phase approach for reviewingdifferent operational
infrastructure than our desktop software businesses, and preparingwe 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 continue to 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 elementsnegative impact on
the financial and market success of operations,these businesses.
The market pressure to launch Internet-based products and services quickly may
lead to lower product quality. The development process for the Year 2000 date transition.
Through the dateInternet-based
products is more rapid, less predictable, and shorter than for our desktop
products. Getting Internet-based products and services launched quickly is
crucial to competitive success, but this time pressure may result in lower
product quality, dissatisfied customers and negative publicity, as well as
additional expenses to fix bugs.
We face intense competition for qualified employees, especially for our
Internet-based businesses. Like many of this filing,our competitors, we have had
nodifficulties 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, there have been articles criticizing our privacy
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 third party "ad servers" for our web
sites. A major Y2K-related issues.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. 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 all
substantive claimscustomers. 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.
If we cannot fully and successfully implement our announced QuickBooks Internet
Gateway Services in a timely fashion, we may be unable to sustain these services
as a successful business. Development of some of the announced QuickBooks
Internet Gateway services has not yet been completed. Intuit and the
third--party service providers of these services could face technological
difficulties, financial difficulties and other problems that could delay or
prevent implementation of the QuickBooks Internet Gateway Services, which in
turn could delay or prevent us from recognizing contractually committed revenues
to the extent that recognition of such revenue depends on implementation with
the customer.
-25-
26
If our recently introduced QuickBooks Internet Gateway services do not achieve
and maintain acceptance by customers and the third-party vendors who provide
these services, they 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, and we are in the lawsuits filed against Intuitprocess of ending
relationships with between three to five of our 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 connectionways that are less attractive
to us, financially or otherwise. In addition, QuickBooks Internet Gateway
Services are currently available only to customers using QuickBooks 2000 or the
newly announced QuickBooks 2001. Customer upgrade rates to QuickBooks 2000 were
lower than historical upgrade levels, which impacted the growth of the potential
customer base for these services.
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 have adversely affected our mortgage business,
contributing to a significant revenue decline from fiscal 1999 to fiscal 2000.
If mortgage interest rates continue to rise, this may continue to 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 alleged Y2K problems with our products and services have been
dismissed, with only one possible appeal remaining. Customers can find Intuit's
Year 2000 Readiness Disclosure about our products, and order free solutions,
where required,respect to
the loans on our Corporate Year 2000 Resource Center at
www.intuit.com/y2k.
Costs directly attributedbalance 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 Year 2000 project were approximately $6.5
million in fiscal 1999.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 currently anticipate direct costs inmust also maintain relationships with
certain banks and other third parties who we will rely on to provide access to
capital, and later, service the rangeloans. If we are unable to do so, it could have
a negative impact on our mortgage business and on Intuit's financial results.
The closing of $8our pending transactions with EmployeeMatters and InsWeb are
subject to $12 million for fiscal year 2000,various conditions, including costs associated with
-27-
28
ongoing maintenancecustomary regulatory and support activity in fiscal year 2000, and including
costs associated with the manufacture and distribution of free solutions for
products that are not Year 2000 compliant or in certain cases that were not
tested for Year 2000 compliance. Although the provision of free solutions has
probably resulted in some lost revenue for new product upgrades, we believe the
lost revenue will be less than $5 million.
-28-
29
- - --------------------------------------------------------------------------------other
approvals.
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.
-26-
27
MARKETABLE SECURITIES
We also carrycarried significant balances in marketable equity securities as of
JanuaryOctober 31, 2000. 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.
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 JANUARYOCTOBER 31, FAIR VALUE
EXPECTED MATURITY DATE JANUARY---------------------------------------------------- OCTOBER 31,
---------------------------------------------------
2000
2001 2002 2003 2004 2005 TOTAL 2000
---- ---- ---- ---- ---- ----- --------------------- ---------- ---------- ---------- ---------- ---------- ----------
ASSETS:
Mortgage Loans................... $38,386 -- -- -- -- $38,386 $39,183
Average Interest Rate........ 8.97% 8.97%
LIABILITIES:
Lines of Credit..................Loans .................. $ 3,28367,269 -- -- -- -- $ 3,28367,269 $ 3,29169,199
Average Interest Rate........ 6.64% 6.64%Rate .... 10.36% 10.36%
LIABILITIES:
Lines of Credit ................. $ 3,137 -- -- -- -- $ 3,137 $ 3,200
Average Interest Rate .... 7.80% 7.80%
(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 JanuaryOctober 31, 2000, 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.
-27-
28
IMPACT OF FOREIGN CURRENCY RATE CHANGES
DuringWhile the Japanese yen strengthened during fiscal 1999, the currency of our Japanese subsidiary strengthened while2000, 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
JanuaryOctober 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
JanuaryOctober 31, 2000, we did not engage in foreign currency hedging activities.
-30-
31
- - --------------------------------------------------------------------------------
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--28-
32
- - --------------------------------------------------------------------------------29
ITEM 2
CHANGES IN SECURITIES AND USE4
SUBMISSION OF PROCEEDS
- - --------------------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) On January 24,MATTERS TO A VOTE OF SECURITY HOLDERS
At Intuit's Annual Meeting of Stockholders on December 8, 2000, we issued and sold 225,000our stockholders
voted on the following proposals:
1. Proposal to elect directors:
For Withheld
----------- -----------
Stephen M. Bennett 189,361,684 3,485,812
Christopher W. Brody 189,298,874 3,547,822
William V. Campbell 189,362,661 3,684,835
Scott D. Cook 189,368,897 3,485,799
L. John Doerr 189,359,812 3,486,884
Donna L. Dubinsky 189,361,722 3,484,974
Michael R. Hallman 189,360,910 3,485,786
William H. Harris, Jr 189,327,037 3,519,659
2. Proposal to amend Intuit's 1993 Equity Incentive Plan to increase the
number of shares of our common stock available for issuance thereunder by
9,700,000 shares:
For 110,611,523
Against 81,869,148
Abstain 366,083
Unvoted 202
3. Proposal to Stephen M. Bennett, our recently appointed President and Chief
Executive Officer, pursuant to two Restrictedamend Intuit's 1996 Employee Stock Purchase Agreements.
The purchase pricePlan to increase
the number of shares of common stock available for issuance thereunder
by 400,000 shares and to change the shares was $0.01 per share, for an aggregate
purchase priceduration of $2,250. The shares were issued without registrationthe offering periods
under the Securities Actplan:
For 189,728,568
Against 2,745,732
Abstain 372,395
Unvoted 1
4. Proposal to amend Intuit's 1996 Directors Stock Option Plan to increase
the number of 1993,shares of common stock available for issuance thereunder
by 125,000 shares:
For 130,330,243
Against 62,886,434
Abstain 430,018
Unvoted 1
5. Proposal to ratify the selection of Ernst & Young LLP 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 IntuitIntuit's
independent auditors for the original purchase price if
Mr. Bennett's employment with Intuit is terminated under certain
circumstances.
(d) Not applicable.
-32-fiscal 2001:
For 192,461,612
Against 139,554
Abstain 245,529
Unvoted 1
-29-
33
- - --------------------------------------------------------------------------------30
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 MarchDecember 13, 2000, Intuit's executive officers arewere as follows:
NAME AGE POSITION
- - ---- --- --------
Stephen M. Bennett 46 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 49 Senior Vice President, Tax Division
Dennis Adsit 42 Vice President, Process Excellence
Sonita Ahmed 44 Vice President, Finance & Corporate Controller
Thomas A. Allanson 42 Vice President, Tax Strategy
Caroline F. Donahue 40 Vice President, Sales
Linda Fellows 52 Vice President, Investor Relations and Treasurer
Daniel B. Gilbert 38 Vice President, Quicken Loans
Larry King, Jr. 39 Vice President, Payroll Services Group
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:
10.01REPORT.
10.01(1) Intuit Inc. 1993 Equity Incentive Plan and related documents, as
amended through December 8, 2000
10.02(2) Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 19,December 8, 2000
10.02 Employment10.03(3) Intuit Inc. 1996 Directors Stock Option Plan, and related documents,
as amended through December 8, 2000
10.04* Secured Balloon Payment Note Agreement between Intuit Inc. and
Stephen M. Bennett dated January
21,February 17, 2000
10.03 Intuit Inc. Restricted Stock Purchase Agreements between Intuit and
Stephen M. Bennett dated January 24, 2000
10.04 Confidential10.05* Secured Balloon Payment Promissory Note Agreement and General Release of Claims between Intuit
Inc. and William H. Harris, Jr.,Dennis Adsit dated September 23, 1999
27.0127, 2000
10.06* Secured Balloon Payment Promissory Note Agreement between Intuit
Inc. and Thomas Allanson dated October 16, 2000
10.07* Secured Bridge Loan Promissory Note between Intuit Inc. and Richard
William Ihrie dated November 28, 2000
10.08* Secured Balloon Payment Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
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)* Filed with this Form 10-Q
(1) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51694), filed with the Commission on December 12, 2000 and
incorporated by reference
(2) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51692), filed with the Commission on December 12, 2000 and
incorporated by reference
(3) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51698), filed with the Commission on December 12, 2000 and
incorporated by reference
- ----------------
(b) REPORTS ON FORM 8-K:
(1) On January 25,September 13, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that it had entered into a Stock Sale and Purchase Agreement
under which it purchased all of the appointmentoutstanding securities of Stephen M. BennettVenture
Finance Software Corp. that were not already held by Intuit.
(2) On November 21, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that on November 16, 2000, it entered into a definitive agreement
to acquire EmployeeMatters, Inc.
(3) On November 22, 2000, Intuit filed a report on Form 8-K to report under
Item 5 its financial results for the quarter ended October 31, 2000.
Intuit's balance sheet and statement of operations as Presidentof and Chief Executive
Officerfor the
three months ended October 31, 1999 and 2000 were included in the Form
8-K.
(4) On November 27, 2000, Intuit filed a board member.
-34-report on Form 8-K to report under
Item 5 that on November 27, 2000, it entered into a definitive agreement
with Isotope to sell certain assets of its QuickenInsurance business.
-31-
35
- - --------------------------------------------------------------------------------32
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, 1999December 13, 2000 By: /s/ Greg J. Santora
--------------------------------------------------------------------------
Greg J. Santora
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
-35--32-
3633
EXHIBIT INDEX
Exhibit
Number..Number Description Page
- -
------ -----------
----
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 19, 2000.......................................................
10.02 Employment10.04 Secured Balloon Payment Note Agreement between Intuit Inc. 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 ConfidentialFebruary 17, 2000
10.05 Secured Balloon Payment Promissory Note Agreement and General Release of Claims between Intuit
Inc. and William H. Harris, Jr.,Dennis Adsit dated September 23, 1999.......27, 2000
10.06 Secured Balloon Payment Promissory Note between Intuit Inc. and
Thomas Allanson dated October 16, 2000
10.07 Secured Bridge Loan Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
10.08 Secured Balloon Payment Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
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 JanuaryOctober 31, 1999 ................................................2000
-36-