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 JANUARY 31, 19992000 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.
61,144,930Approximately 201,677,034 shares of Common Stock, $0.01 par value,
as of February 26, 199929, 2000
2
- - --------------------------------------------------------------------------------
FORM 10-Q
INTUIT INC.
INDEX
- - --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 19981999 and January 31, 1999...........................2000........................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended January 31, 19981999 and 1999.....2000.... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended January 31, 19981999 and 1999...............2000............... 5
Notes to Condensed Consolidated Financial
Statements................................................... 6
- - -
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 1518
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 2629
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 2731
ITEM 4: Submission2: Changes in Securities and Use of Matters to a Vote of Security Holders............. 28Proceeds....................... 32
ITEM 5: Other Information............................................... 29Matters................................................... 33
ITEM 6: Exhibits and Reports on Form 8-K................................ 2934
Signatures...................................................... 3035
-2-
3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, JANUARY 31,
1998 1999 2000
---------- -----------
(In thousands, except par value) (Unaudited)value; unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................................................... $ 138,133554,230 $ 163,030377,685
Short-term investments ....................................................... 244,699 282,300................................... 305,125 412,918
Marketable securities ........................................................ 499,285 1,110,919.................................... 431,319 1,046,170
Customer deposits ........................................ 145,836 135,456
Accounts receivable, net(1) .................................................. 59,417 241,276............................. 63,677 249,146
Mortgage loans ........................................... 84,983 38,386
Deferred income taxes .................................... 64,925 65,002
Inventories .................................................................. 3,695 5,865.............................................. 4,931 9,351
Income taxes receivable .................................. -- 1,190
Prepaid expenses and other current assets(2) ................................. 34,896 50,713
-----------............ 67,859 34,803
---------- -----------
Total current assets ................................................. 980,125 1,854,103............................. 1,722,885 2,370,107
Property and equipment, net .................................................... 69,413 77,545................................ 119,220 149,324
Purchased intangibles, net ..................................................... 85,797 73,993................................. 98,049 97,275
Goodwill, net .................................................................. 285,793 255,227.............................................. 383,102 416,874
Other assets ............................................... 7,897 9,022
Long-term deferred income taxes ............................ 76,190 80,222
Investments ................................................ 21,006 21,006
Investments .................................................................... 17,009 17,48345,704 39,569
Restricted investments ......................................................... 28,516 35,454
Other assets ................................................................... 10,937 9,984
-----------..................................... 36,028 38,416
---------- -----------
Total assets .................................................................................................................. $2,489,075 $ 1,498,596 $ 2,344,795
===========3,200,809
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit .......................................... $ 29,896 $ 3,283
Accounts payable ............................................................. $ 44,035 $ 69,825......................................... 66,436 121,110
Accrued compensation and related liabilities ................................. 23,728 28,611............. 39,996 49,733
Payroll tax obligations .................................. 131,148 127,333
Escrow liabilities ....................................... 14,857 9,821
Drafts payable ........................................... 49,169 15,344
Deferred revenue ............................................................. 58,560 45,979......................................... 65,994 106,395
Income taxes payable ......................................................... 3,044 575..................................... 143,181 --
Deferred income taxes ........................................................ 120,482 366,112.................................... 136,694 384,484
Other accrued liabilities .................................................... 124,820 229,739
-----------................................ 201,872 271,760
---------- -----------
Total current liabilities ............................................ 374,669 740,841........................ 879,243 1,089,263
Long-term notes payable .................................... 36,614 37,862
Long-term deferred income taxes ................................................ -- 883
Long-term notes payable ........................................................ 35,566 39,276
Commitments and contingencies............................ 11,615 11,919
Minority interest .......................................... 215 224
Stockholders' equity:equity
Preferred stock, $0.01 par value
Authorized -- 3,000- 1,345 shares total; 145 shares
designated Series A;
200250 shares designated Series B Junior Participating
Issued and outstanding - none; none ............................................................ -- --
Common stock, $0.01 par value
Authorized -- 250,000- 750,000 shares
Issued and outstanding - 59,320196,350 and 61,108201,093 shares,
respectively ........... 593 611........................................ 1,073 2,012
Additional paid-in capital ................................................... 1,080,554 1,148,013
Net unrealized gain on marketable securities ................................. 181,071 552,413
Cumulative translation adjustment and............................... 1,266,004 1,433,323
Acquisition related deferred compensation ................ -- (30,063)
Accumulated other .................................. 1,531 (2,521)comprehensive income ................... 77,680 448,207
Accumulated deficit .......................................................... (175,388) (134,721)
-----------retained earnings ............................ 216,631 208,062
---------- -----------
Total stockholders' equity ........................................... 1,088,361 1,563,795
-----------....................... 1,561,388 2,061,541
---------- -----------
Total liabilities and stockholders' equity ...................................................... $2,489,075 $ 1,498,596 $ 2,344,795
===========3,200,809
========== ===========
(1) Includes $4.4$0.1 million and $1.3$2.3 million due from Checkfree and $3.4 million
and $4.0 million due from Excite at July 31, 19981999
and January 31, 1999,2000, respectively (see Note 10)11).
(2) Includes balances due of $7.3$6.7 million and $6.1$10.6 million on a note receivable from Venture
Finance Software Corp. at July 31, 19981999 and January 31, 1999,2000 respectively
(see Note 10)11).
See accompanying notes to condensed consolidated financial statements.
-3-
4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
1998 1999 19982000 1999 2000
-------- --------- -------- -------- -----------------
(In thousands, except per share amounts; unaudited)
Net revenue(1) ....................................... $237,513 $345,951 $333,471 $457,919.............................................. $373,733 $ 425,499 $510,614 $ 602,427
Costs and expenses:
Cost of goods sold:
Product .......................................... 45,479 65,815 67,875 101,030Products and services ................................... 70,234 93,066 109,231 149,506
Amortization of purchased software and other ..... 650............ 1,897 1,3532,489 3,701 4,921
Customer service & technical support ................ 37,511 39,932 65,432 69,755....................... 41,144 47,657 72,004 81,958
Selling & marketing ................................. 46,990 62,544 78,939 107,636........................................ 71,203 86,110 124,282 156,015
Research & development .............................. 26,634..................................... 36,353 52,77844,038 70,021 85,750
General & administrative ............................ 9,698 12,801 18,207 26,268................................... 19,625 23,327 38,934 44,819
Charge for purchased research and development .............. -- -- -- 1,312
Amortization of goodwill and purchased intangibles... 4,920intangibles ......... 20,962 8,86145,211 41,932 81,562
Amortization of acquisition related deferred compensation .. -- 1,005 -- 1,744
Reorganization costs ....................................... 2,000 -- 2,000 3,500
-------- --------- -------- -------- -----------------
Total costs & expenses ..................... 171,882 240,304 293,445 420,343
-------- -------- -------- --------............................ 263,418 342,903 462,105 611,087
Income (loss) from operations ..................... 65,631 105,647 40,026 37,576110,315 82,596 48,509 (8,660)
Interest and other income and expense, net ........... 2,241.................. 3,950 4,2716,988 7,298 Realized gain on sale of15,465
Gain (loss) from marketable securities ....... --...................... 10,088 --(2,800) 10,088 Gain on disposal of business ......................... -- -- 4,321 --(20,110)
-------- --------- -------- -------- -----------------
Income from continuing operations(loss) before income tax... 67,872 119,685 48,618 54,962taxes ........................... 124,353 86,784 65,895 (13,305)
Income tax provision ................................. 26,028 29,828 19,533 14,295(benefit) .............................. 31,228 29,582 17,665 (4,587)
Minority interest ........................................... -- (90) -- (149)
-------- --------- -------- -------- -----------------
Net income (loss) ........................................... $ 41,84493,125 $ 89,85757,292 $ 29,08548,230 $ 40,667(8,569)
======== ========= ======== ======== =================
Basic net income (loss) per share ........................... $ 0.880.49 $ 1.490.29 $ 0.610.26 $ 0.68(0.04)
======== ========= ======== ======== =================
Shares used in per share amounts ..................... 47,560 60,262 47,322 59,837............................ 188,813 195,935 187,600 192,285
======== ========= ======== ======== =================
Diluted net income (loss) per share ......................... $ 0.850.47 $ 1.420.27 $ 0.590.25 $ 0.65(0.04)
======== ========= ======== ======== =================
Shares used in per share amounts ..................... 49,438 63,350 48,929 62,379............................ 198,413 209,566 195,561 192,285
======== ========= ======== ======== =================
(1) Includes $1.0$1.3 million and $11.8$2.4 million of revenue from Checkfree for the three and six
months ended January 31, 19981999 and $1.3$1.8 million and $2.4$3.6 million of revenuefrom
Checkfree for the three and six months ended January 31, 1999,
respectively. Includes $2.0 million and $3.7 million of revenue from Excite
for the three and six months ended January 31, 1998 and $8.1 million and
$12.1 million of revenue for the three and six months ended January 31,
1999,2000 respectively
(see Note 10)11).
See accompanying notes to condensed consolidated financial statements.
-4-
5
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED
JANUARY 31,
1998(In thousands; unaudited) 1999 2000
--------- ---------
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .....................................................(loss) ............................................................. $ 29,08548,230 $ 40,667(8,569)
Adjustments to reconcile net income (loss) to net cash used inprovided by (used in)
operating activities:
Gain on disposal of business, net of tax .................. (1,621) --
Gain on sale of facility .................................. (1,501) --
Amortization of goodwill and other purchased intangibles... 9,466intangibles ................. 45,633 86,483
Deferred compensation expense ............................................ -- 1,744
Depreciation .............................................. 14,969 16,801
Realized gain on sale of............................................................. 18,002 21,798
Charge for purchased research and development ............................ -- 1,312
(Gain) loss from marketable securities ............ --................................... (10,088) 20,110
Changes in assets and liabilities:
Accounts receivable .................................... (128,087) (181,859)................................................... (181,831) (185,369)
Inventories ............................................ (2,291)........................................................... (2,170) (4,420)
Mortgage loans ........................................................ (66,435) 46,597
Prepaid expenses ....................................... (1,262) (15,817)and other current assets ............................. (16,544) 32,163
Customer deposits ..................................................... (8,514) 6,565
Deferred income tax assets and liabilities ............. (290) (1,048)............................ (1,428) (3,805)
Accounts payable ....................................... 23,847 25,790...................................................... 25,838 54,620
Accrued compensation and related liabilities ........... (1,727) 4,883.......................... 4,877 9,572
Escrow funds payable .................................................. 8,362 (5,036)
Deferred revenue ....................................... 15,907...................................................... (12,581) 40,401
Drafts payable ........................................................ 9,812 (33,825)
Accrued acquisition liabilities ........................ (31,476)....................................... (19,181) (5,389)
Other accrued liabilities .............................. 78,261 128,711............................................. 130,558 63,936
Income taxes payable ................................... 16,314.................................................. 25,404 (94,561)
Minority interest ..................................................... -- 9
--------- ---------
Net cash (used in) provided by operating activities ............ 19,594 45,145................. (2,056) 44,336
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility ................................. 9,025 --
Proceeds from sale of marketable securities ....................................................... 17,263 -- 17,356
Purchase of property and equipment ............................. (23,506) (24,933)
Proceeds from business sold .................................... 26,350............................................ (27,448) (51,901)
Principal payments of long-term debt .......................................... (29) --
(Increase) decrease in other assets ............................ 2,398.................................................... (7,262) (14,851)
Purchase of short-term investments ............................. (89,057)............................................ (145,086) (301,277)
Acquisitions and dispositions, net of cash acquired ........................... -- (54,584)
Purchase of long-term investments .............................. (2,000)............................................. (474) (11,115)
Liquidation and maturity of short-term investments ............. 106,470............................ 100,547 191,096
--------- ---------
Net cash provided by (used in)used in investing activities... 29,680 (59,852)activities ............................... (62,489) (242,632)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ........................... (3,797)Net borrowings (payments) under lines of credit ............................... 70,887 (26,613)
Net borrowings under reverse repurchase agreement ............................. 9,135 --
Purchase of common stock ...................................................... (1,308) --
Net proceeds from issuance of common stock ..................... 13,275 39,604.................................... 39,627 48,364
Rock Financial and Title Source payments of dividends ......................... (177) --
--------- ---------
Net cash provided by financing activities ............ 9,478 39,604........................... 118,164 21,751
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 58,752 24,897............................ 53,619 (176,545)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 46,780 138,133................................ 140,991 554,230
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................................. $ 105,532194,610 $ 163,030377,685
========= =========
See accompanying notes to condensed consolidated financial statements.
-5-
6
- - --------------------------------------------------------------------------------
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, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), mortgage loans and
InternetInternet-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. We sell our products throughout North America and in many
international markets. Sales are made through retail distribution channels,
traditional direct sales to customers and 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. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the six months ended January 31, 19992000 do not necessarily
indicate the results to be expected for the fiscal year ending July 31, 19992000 or
any other future period. The July 31, 1998 balance sheet was derived from
auditedAll financial statements but does notpresented are restated to
include all disclosures requiredthe results of our Rock Financial Corporation ("Rock") and Title Source,
Inc. ("Title Source") subsidiaries which were acquired on December 8, 1999 in a
transaction which was accounted for audited financial statements by generally accepted accounting principles.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, 19981999 included in
Intuit's Form 10-K10K-A, Amendment No. 1, filed with the Securities and Exchange
Commission.
Principles of Consolidation
The condensed consolidated financial statements include all of our accounts and
those of our wholly-owned subsidiaries. We have eliminated all significant
intercompany accounts and transactions. Investments in which management intends
to maintain more than a temporary 20% to 50% interest, or otherwise has the
ability to exercise significant influence, are accounted for under the equity
method. Investments in which we have less than a 20% interest and/or do not have
the ability to exercise significant influence are carried at the lower of cost
or estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectibilitycollectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, and purchased
intangibles.fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations,
-6-
7
once our products are delivered to the shipper, 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
-6-
7 versions of products still in the
distribution channel when new versions are launched. In some situations, we
receive advance payments from our customers. Revenue associated with these
advance payments is deferred until the products are shipped or services are
provided. We also reduce revenue by the estimated cost of rebates when products
are shipped. Warranty reserves are provided at the time revenue is recognized
for the estimated cost of replacing defective products.
We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provideddelivered or deliveredprovided at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a
payment, (such as the sale of insurance through our InsureMarket website),
revenue is recognized upon completion of the transaction, assuming
there are no remaining obligations on our part.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides free telephone support service to customers. This free service, also
referred to as post-contract customer support, is included in this expense
category. We do not defer the recognition of any revenue associated with sales
of these products, since the cost of providing this free support is
insignificant, the support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
We defer loan origination revenue and associated incremental direct 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. In connection
with the sale of certain products, Intuit provides limited 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.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and could
require us to use a significant amount of the cash investments held as
available-for-sale securities.
-7-
8
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
JULY 31, JANUARY 31,
1998 1999 -------- -----------
(In thousands) (Unaudited)2000
--------- ---------
(In thousands; unaudited)
Cash and cash equivalents:
Cash ................................................................ $ 22,38256,548 $ 40,8609,235
Money market funds ................... 6,972 88,828
Corporate notes ...................... -- 12,000................. 294,190 172,342
Commercial paper ..................... -- 10,042................... 156,037 40,875
Municipal bonds ...................... 81,927 11,300.................... 37,455 155,233
U.S. Government securities ........... 26,852......... 10,000 --
-------- --------
$138,133 $163,030
======== ========
JULY 31, JANUARY 31,
1998 1999
--------- -----------
(In thousands) (Unaudited)
---------
$ 554,230 $ 377,685
========= =========
Short-term investments:
Certificates of deposit .......................... $ 5,0439,901 $ 5,041--
Commercial Paper ................... -- 103,244
Corporate notes ...................... 2,000 21,235.................... 19,482 2,932
Municipal bonds ...................... 256,297 291,478.................... 284,057 312,487
U.S. Government securities ........... 9,875 --......... 27,713 32,671
Restricted short-term investments .... (28,516) (35,454).. (36,028) (38,416)
--------- ---------
$ 244,699305,125 $ 282,300412,918
========= =========
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
JULY 31, JANUARY 31,
1998 1999 2000
--------- -----------
(In thousands) (Unaudited)---------
(In thousands; unaudited)
Due within one year ...................................... $ 225,241735,349 $ 318,984725,909
Due within two years ................... 159,324 111,436................. 101,784 93,875
Due within three years ................. 4,401 9,504............... 1,702 --
Restricted short-term investments ...... (28,516) (35,454).... (36,028) (38,416)
--------- ---------
$ 360,450802,807 $ 404,470781,368
========= =========
For information about our restricted investments, see Note 7.8. 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 were acquired in connection with strategic business transactions
and relationships. Our available 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 investment in At Home Corporation
("At Home") as a trading security and fluctuations in the market value of these
shares are reported in net income. We held the following marketable securities
at July 31, 19981999 and January 31, 1999:2000:
GROSS UNREALIZED
----------------------------------------- NET REALIZED
COST GAIN LOSS LOSS FAIR VALUE
-------- -------- --------------- ------------ ----------
JULY 31, 1998
(In thousands)
Checkfree Corporation common stock ........ $156,350 $106,000 $ -- $262,350
Excite, Inc. common stock ................. 39,150 187,050 -- 226,200
Verisign, Inc. common stock ............... 2,000 5,750 -- 7,750
Concentric Network Corporation common stock -- 2,985 -- 2,985
-------- -------- -------- --------
$197,500 $301,785 $ -- $499,285
======== ======== ======== ========
GROSS UNREALIZED
----------------------------
COST GAIN LOSS FAIR VALUE
---------- ---------- ---------- ----------
JANUARYJULY 31, 1999
(In thousands; unaudited)
Checkfree Corporation common stock ......... $ 150,081 $ 262,007.. $150,081 $152,177 $ -- $ 412,088
Excite,-- $ 302,258
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 $ 36,856 $ 431,319
======== ======== ======= ========== ==========
JANUARY 31, 2000
(In thousands; unaudited)
Checkfree Corporation common stock .. $150,081 $450,245 $ -- $ -- $ 600,326
S1 Corporation common stock ......... 49,997 37,922 -- -- 87,919
S1 Corporation options .............. -- 178,874 -- -- 178,874
Mortgage.com, Inc. common stock .................. 39,150 648,150..... 6,000 13,859 -- 687,300
Verisign,-- 19,859
Homestore.com, Inc. common stock .... 3,500 67,639 -- -- 71,139
Quotesmith.com, Inc. common stock ... 6,000 6,971 -- -- 12,971
At Home common stock ................ 1,000 10,531132,060 -- 11,531-- 56,978 75,082
-------- -------- ------- ---------- ----------
---------- ----------
$ 190,231 $ 920,688$347,638 $755,510 $ -- $1,110,919
========== ==========$ 56,978 $1,046,170
======== ======== ======= ========== ==========
In January 1997, we sold our online banking and bill payment transaction
processing business to Checkfree Corporation. We acquired theobtained marketable securities
described above in connection with the
establishmentCheckfree as a result of ongoing strategic business relationships with the companies in
question, and, in the case of the Checkfree shares, as the purchase price for a
subsidiary we sold to Checkfree in January 1997.this sale.
We account for the investment in Checkfree Corporation ("Checkfree") as an available-for-sale equity
security, which accordingly is carried at market value. Checkfree common stock
is quoted on the Nasdaq StockNational Market under the symbol CKFR. The closing price
of Checkfree common stock at January 31, 19992000 was $40.50$59.00 per share. At January
31, 1999,2000, we held 10,175,00010.2 million shares, or approximately 19.9%19.5%, of Checkfree's
outstanding common stock.
During the second fiscal quarter, we sold 425,000 shares of Checkfree, 125,000
shares of Verisign, and 127,040 shares of Concentric Network Corporation. In connection with these sales we recognized realized gains of $1.1 million, $5.4
million and $3.6 million respectively.
In June 1997,May 1999, we purchased 5.8 million970,813 shares (as adjusted for a two-for-one
stock split) of common stock of Excite, Inc.Security First
Technologies. In November 1999, Security First Technologies changed its name to
S1 Corporation ("Excite"S1"). At the same time, we
entered into an agreement with Excite that providesWe account for the joint development,
promotion and distribution ofinvestment in S1 as an
online financial channel. Excite'savailable-for-sale-equity security, which accordingly is carried at market
value. S1 common stock is quoted on the Nasdaq StockNational Market under the symbol
XCIT.SONE. The closing price of ExciteS1 common stock at January 31, 19992000 was $118.50$90.5625 per
share. OnAt January 19,31, 2000, we held 970,813 shares, or approximately 3.5%, of
S1's outstanding common stock. In connection with the above purchase, we also
received an option to purchase up to an additional 4,579,187 shares of S1
exercisable at a per share purchase price of $51.50. We account for these
options as available-for-sale equity securities, and accordingly the options are
carried at market value.
In August 1999, Excite and At Home Corporation announced a proposed merger in which At
Home would acquire allwe acquired approximately 3.7 million shares of the outstandingcommon stock of
Excite. Intuit entered into a
Voting Agreement with At Home (the "Voting Agreement"Mortgage.com, Inc. ("Mortgage.com") in which we agreed to
voteupon conversion of our Excitepreferred shares in
favorconnection with Mortgage.com's initial public offering. We account for the
investment in Mortgage.com as an available-for-sale-equity security, which
accordingly is carried at market value. Mortgage.com common stock is quoted on
the Nasdaq National Market under the symbol MDCM. The closing price of
Mortgage.com common stock at January 31, 2000 was $5.4375 per
-9-
10
share. 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 proposed merger and to not transfer our
Exciteinvestment 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, unless the transferee agrees to be bound by the termsor approximately 1.0%, of the
Voting Agreement.Homestore.com's outstanding common
stock.
In February 1999, we sold 450,000purchased 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.
In connection with At Home Corporation's acquisition of Excite in May 1999, our
shares of Excite were converted into At Home common stock. We have elected to
report these converted At Home shares as a trading security. As a result, we are
reporting both positive and negative fluctuations in the market value of this
stock in net income. At January 31, 2000, we owned approximately 2.1 million
shares (or approximately 0.6%) of At Home common stock and madereported a financial investment decision to disposerealized
valuation loss of approximately $20.1 million for these securities for the
remaining
Excite shares over time, as appropriate opportunities become available. In Marchperiod between August 1, 1999 we entered into a forward sale arrangement with respect to an additional
4,350,000 shares. See Note 11 for more information about these transactions.
-9-
10and January 31, 2000. The closing price of At Home
(symbol ATHM) at January 31, 2000, was $36.0313 per share. The average price of
At Home between August 1, 1999 and January 31, 2000 was $41.49 per share.
Checkfree, ExciteAt Home, S1, Mortgage.com, Homestore.com and VerisignQuotesmith.com are high
technology companies whose stocks are subject to substantial volatility.
Accordingly, it is possible that the market price of one or more of these
companies' stocks could decline substantially and quickly, which could result in
a material reduction in the carrying value of these assets.
Lines of Credit
For lines of credit we estimate fair value based on the discounted value of
contractual cash flows using interest rates currently in effect for similar
maturities and collateral requirements. The carrying amount of these lines of
credit approximates their estimated fair values since all of the borrowings have
variable interest rates that approximate current market interest rates for
similar types of lines of credit and are due upon demand. We held the following
lines of credit at July 31, 1999 and January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- --------
Lines of credit.................... 29,896 30,000 3,283 3,291
Mortgage Loans
We carry mortgage loans at estimated realizable value, and we estimate their
fair value using quoted market prices for similar loans, adjusted for
differences in loan characteristics, including credit quality. The carrying
amount of accrued interest receivable approximates the assets' fair value. We
held the following mortgage loans and lines of credit at July 31, 1999 and
January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- --------
Mortgage loans..................... $84,983 $86,021 $38,386 $ 39,183
-10-
11
Carrying amounts at July 31, 1999 and January 31, 2000 include an allowance for
credit losses of $1.3 million and $0.4 million, respectively.
As of July 31, 1999 and January 31, 2000, there were approximately $1.8 million
and $0.5 million, respectively of mortgage loans that were greater than 90 days
past due.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
LIFE IN NET BALANCE AT
YEARS JULY 31, 19981999 JANUARY 31, 1999
------ ----------- --------------
(In thousands) (Unaudited)2000
------- ------------- -----------------
Goodwill .....................(In thousands; unaudited)
Goodwill.................................. 3-5 $285,793 $255,227$383,102 $416,874
Customer lists ...............lists............................ 3-5 53,517 47,498
Covenant66,934 67,535
Covenants not to compete ......compete.................. 3-5 2,211 1,6782,492 5,985
Purchased technology .........technology...................... 1-5 18,763 15,70217,751 14,970
Assembled workforce ..........workforce....................... 2-5 5,596 4,4063,972 3,428
Trade names and logos ........logos..................... 1-10 5,710 4,7096,900 5,357
Balances presented above are net of total accumulated amortization of $103.6$210.1
million and $154.2$289.5 million at July 31, 19981999 and January 31, 1999,2000, respectively.
Concentration of Credit Risk
Almost all of Intuit's operations are concentratedIntuit operates in the personal computer
softwarean industry which is highly competitive and rapidly changing.
Many circumstances could have an unfavorable impact on Intuit's operating
results. Examples include significant technological changes in the industry,
changes in customer requirements or the emergence of competitive products or
services with new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At January 31,
1999,2000, we held shares of Checkfree common stock representing approximately 19.9%19.5%
of Checkfree's outstanding common stock. We also held approximately 11%0.6% of Excite'sAt
Home's common stock, 3.5% of S1's outstanding common stock, as8.5% of
January 31, 1999. Our ability to disposeMortgage.com's outstanding common stock, 1.0% of these securities is limited by trading volumeHomestore.com's outstanding
common stock and other legal and contractual
restrictions.6.6% of Quotesmith.com's outstanding common stock. If there is
a permanent decline in the value of these securities below cost, we will need to
report this decline in our statement of operations. Fluctuations in the market
value of our shares in At Home are treated as realized gains and losses in our
statement of operations on an ongoing basis, since this investment is treated as
a trading security.
-11-
12
See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. See Note 11 for information regarding
subsequent dispositions of certain shares of Excite common stock. Our remaining portfolio is
diversified and consists primarily of short-term investment-grade securities.
-10-
11
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.
Recent Pronouncements
In June 1997,1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 131"FAS 133"), "Disclosures About
Segments of an Enterprise. FAS 133 provides a
comprehensive and Related Information." This statement establishes
standardsconsistent standard for the way companiesrecognition and measurement of
derivatives and hedging activities. Implementation is required for fiscal years
beginning after June 15, 2000. Upon adoption, we will report information about operating segmentstransition
adjustments in financial statements. It also sets standards for related disclosures about
products and services, geographic areas and major customers. The disclosures
prescribed by SFAS 131 will be adopted fornet income or other comprehensive income, as appropriate,
reflecting the fiscal year ending July 31, 1999.
Change in Estimateeffect of Goodwill Amortization
Our statements of operations reflect a change in estimate foraccounting principle. We have not yet
determined whether adoption of FAS 133 will have a material impact on our
consolidated financial position, results of operations, or cash flows.
Reclassifications
Certain previously reported amounts have been reclassified and restated to
include the amortization
liferesults of remaining goodwill related to the June 1998 acquisition of Lacerte from
three years to five years, commencing with the first quarter of fiscalour Rock and Title Source subsidiaries acquired on
December 8, 1999. The
change resulted in a $19.0 million decrease in amortization expense and an
increase in net income by approximately $14.5 million, or $0.24 per share, for
the six months ended January 31, 1999 but will result in continuing amortization
expenses (with a corresponding decrease in net income) during fiscal 2002 and
2003.
Reclassifications
Certain other previously reported amounts have been
reclassified to conform to the current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
On September 8, 1999, our Board of Directors declared a three-for-one stock
split, to be effected as a stock dividend of two shares of common stock for each
share of Intuit's common stock outstanding. Stockholders of record on September
20, 1999 were issued two additional shares of common stock for each share of
Intuit's common stock held on that date. The payment date for the stock dividend
was September 30, 1999. We have restated all share and per share amounts
referred to in the financial statements and notes to reflect this stock split.
3. COMPREHENSIVE NET INCOME
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
-12-
13
The components of comprehensive net income, net of tax, are as follows:
SIX MONTHS ENDED JANUARY 31,
----------------------------
1998 1999 2000
--------- ---------
(In thousands; unaudited)
Net income ................................(loss) ............................ $ 29,08548,230 $ 40,667(8,569)
Unrealized gain on marketable securities .. 97,261..... 371,342 371,684
Change in cumulative translation adjustment 875.. (4,052) (1,157)
--------- ---------
Comprehensive net income ....................................... $ 127,221415,520 $ 407,957361,958
========= =========
-11-
12
4. ACQUISITIONS
In June 1998,On May 3, 1999, we acquired substantially allcompleted 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 one of the assets of Lacerte Software
Corporationcountry's largest payroll services
companies and Lacerte Educational Services Corporation (together, "Lacerte"),
for cash. Lacerte is a leading developer and marketer of tax preparation
software andleader in providing payroll services for tax professionals.to small businesses. The
purchase price for privately-held CRI was approximately $400 million. In addition, we assumed liabilities$200 million, consisting
of $31.8
million.approximately $100 million cash and approximately $25 million of Intuit stock
that was paid at closing, and $75 million in cash to be paid in three annual
installments of $25 million each beginning in May 2000. We fundedaccounted for the
acquisition by a public offering of 10.0 million shares
of common stock, completed in the fourth quarter of fiscal 1998.
The acquisition of Lacerte was treatedCRI as a purchase for accounting purposes. Wepurposes and allocated
approximately $358.2$187 million to identified intangible assets and goodwill. These
assets are being amortized over a period of three to five years. The following
table shows pro forma net revenue, net loss from continuing operations and
diluted net loss per share from continuing operations of Intuit and CRI as if we
had acquired CRI at the beginning of fiscal 1999:
SIX MONTHS
ENDED JANUARY 31, 1999
----------------------
AS
PRO FORMA REPORTED
--------- --------
(In thousands, except per share data; unaudited)
Net revenue ....................................... $528,280 $510,614
Net income ........................................ 32,523 48,230
Diluted net income per share ...................... $ 0.17 $ 0.25
On November 30, 1999, we completed the purchase of all of the outstanding common
stock of Turning Mill Software, Inc. ("Turning Mill") for approximately $22
million in stock. Turning Mill is a developer of software and web based products
based in Acton, Massachusetts. We accounted for the acquisition of Turning Mill
as a purchase pricefor accounting purposes and allocated approximately $22 million to
identified intangible assets and goodwill. These assets are being amortized over
periods of twothree to five years.
On December 8, 1999, we completed 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 also expensed approximately $53.8accounted 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.
-13-
14
5. BORROWINGS
We have two 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. 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, 1999 and January 31, 2000 were 6.29% and 6.83%,
respectively. The weighted average interest rates for the year ended July 31,
1999 and quarter ended January 31, 2000 were 6.45% and 6.58%, 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 at rates that vary depending on the type of underlying loan, and the
loans are subject to sublimits, advance rates and warehouse terms that vary
depending on the type of underlying loan. The interest rates in effect at July
31, 1999 and January 31, 2000 were 6.37% and 6.96%, respectively, while the
weighted average interest rates for the three month periods ended July 31, 1999
and January 31, 2000 were 5.92% and 6.64%, 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, 1999 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 in-process
researchconventional prime and developmentsub-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 JulyJanuary 31, 1998. The following table
shows pro forma net revenue, net income and diluted net income per share2000.
Drafts payable represent funds advanced for mortgages originated which have not
yet been drawn against the lines of Intuit and Lacerte as if we had acquired Lacerte at the beginning of fiscal
1998, excluding the impact of the one-time charge for in-process research and
development:
SIX MONTHS
ENDED JANUARY 31, 1998
--------------------------
AS
PRO FORMA REPORTED
--------- --------
(In thousands, except per share data; unaudited)
Net revenue .......................................... $381,183 $333,471
Net income ........................................... 19,006 29,085
Diluted net income per share ......................... $ 0.32 $ 0.59
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer software and direct marketing
subsidiary, to Broderbund Software, Inc. for approximately $31 million. As a
result of the sale, Broderbund acquired net assets of approximately $17 million
and we incurred direct costs of approximately $9.5 million. We also recorded a
pre-tax gain of $4.3 million and a related tax provision of $2.7 million in the
quarter ended October 31, 1997.credit.
6. OTHER ACCRUED LIABILITIES
JULY 31, JANUARY 31,
1998 1999 ----------2000
-------- -----------
(In thousands) (Unaudited)
(In thousands; unaudited)
Reserve for returns and exchanges ................ $ 73,955 $ 96,372
Future payments due for CRI acquisition .......... $ 60,343 $110,835
Acquisition66,314 68,313
Other acquisition and disposition related items... 19,181 10,928items .. 10,824 12,341
Rebates .................................... 16,870 49,061.......................................... 18,002 34,204
Post-contract customer support ............. 4,433 10,758................... 3,418 11,289
Other accruals ............................. 23,993 48,157................................... 29,359 49,241
-------- --------
$124,820 $229,739$201,872 $271,760
======== ========
7. SEGMENTED 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 are broken out by our operating segments for the six
month periods ended January 31, 1999 and 2000:
SIX MONTHS ENDED
JANUARY 31, 1999
SMALL CONSUMER
BUSINESS FINANCE TAX INTERNATIONAL
(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- -------- -------- ------------- --------- ---------
Net revenue ................ $131,961 $134,269 $209,358 $ 35,026 $ -- 510,614
Segment operating
income / (loss) ............ 38,925 19,210 98,415 (6,263) -- 150,287
Common expenses ............ -- -- -- -- (54,145) (54,145)
-------- -------- -------- -------- --------- ---------
Sub-total operating
income (loss) .............. 38,925 19,210 98,415 (6,263) (54,145) 96,142
-------- -------- -------- -------- --------- ---------
Gains/(losses)
on marketable securities ... -- -- -- -- 10,088 10,088
Acquisition costs .......... -- -- -- -- (45,633) (45,633)
Reorganization costs ....... -- -- -- -- (2,000) (2,000)
Interest income/expense
and other items ............ -- -- -- -- 7,298 7,298
-------- -------- -------- -------- --------- ---------
Net income (loss)
before tax ................. $ 38,925 $ 19,210 $ 98,415 $ (6,263) $ (84,392) $ 65,895
======== ======== ======== ======== ========= =========
SIX MONTHS ENDED
JANUARY 31, 2000
(In thousands;
unaudited)
Net revenue ................ $216,912 $140,659 $196,844 $ 48,012 $ -- $ 602,427
Segment operating
income/(loss) .............. 70,007 10,238 68,581 4,383 -- 153,209
Common expenses ............ -- -- -- -- (68,830) (68,830)
-------- -------- -------- -------- --------- ---------
Sub-total operating
income (loss) .............. 70,007 10,238 68,581 4,383 (68,830) 84,379
-------- -------- -------- -------- --------- ---------
Gains/(losses)
on marketable securities ... -- -- -- -- (20,110) (20,110)
Acquisition costs .......... -- -- -- -- (89,539) (89,539)
Reorganization costs ....... -- -- -- -- (3,500) (3,500)
Interest income/expense
and other items ............ -- -- -- -- 15,465 15,465
-------- -------- -------- -------- --------- ---------
Net income (loss)
before tax ................. $ 70,007 $ 10,238 $ 68,581 $ 4,383 $(166,514) $ (13,305)
======== ======== ======== ======== ========= =========
(1) Reconciling items include acquisition and other common costs not allocated
to specific segments.
8. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting
-15-
16
purposes. The interest rate is variable based on the Tokyo inter-bank offered
rate or the short-term prime rate offered in Japan. At January 31, 1999,2000, the
rate was approximately 1.0%0.6%. 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 $35.5$38.4 million, or 110% of the
loan balance, of short-term investments to be restricted as security for the
borrowings at January 31, 1999.2000. We are obligated to pay interest only until
March 2000. -12-
13
8.We are currently refinancing this debt for another one-year term.
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.
9.10. LITIGATION
Intuit is currentlywas a defendant in the following two consolidated class action lawsuits alleging(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: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 23, for a
discussion of Intuit's status and plans withcompliant. With
respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaintCalifornia litigation, on October 9, 1998. Intuit filed13, 1999 the court dismissed
the case without leave to amend. The only remaining issue relates to a demurrerpotential
award of attorneys' fees to the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim.plaintiffs. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. We believe we have good
and valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1, 1998,1999, the court
granted our motion to dismiss all the New York actions with prejudice. Plaintiffs haveAlthough
plaintiffs filed a Notice of Appeal.
On March 3, 1999, IntuitAppeal, they failed to perfect the appeal.
Accordingly, this case is also now over.
In addition, a suit was filed a complaint against Checkfree Corporation in the Santa ClaraContra Costa County, California Superior
Court seeking damagesby an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and injunctive
relief. The complaint allegesothers,
alleging that Checkfree isthese retailers have sold software and hardware products which are
not complyingYear 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 termsplaintiffs. 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 its April 1998 bill presentment agreement withCalifornia, Eastern Division.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in which Checkfree agreedthe United States District Court, Southern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to support web-based bill presentment products offered through Intuit with its
processing services,third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
notviolations of federal statutes related to offer web-based bill presentment productselectronic communications. The
lawsuits seek injunctive relief, an order to disgorge profits related to the
alleged acts, and statutory and other damages. As of its
own except through Intuit in certain distribution channels. Intuit owns 19.9% of
Checkfree's outstanding Common Stock (see Note 1).March 10, 2000, neither
lawsuit had been served on Intuit.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
10.11. RELATED PARTY TRANSACTIONS
We held approximately 11% of Excite's outstanding common stock as of January 31,
1999. We reported revenue from Excite for shared advertising activities of $2.0
million and $3.7 million for the three and six months ended
-13-
14
January 31, 1998 and $8.1 million and $12.1 million for the three and six months
ended January 31, 1999, respectively. We held a receivable due from Excite for
$3.4 million and $4.0 million at July 31, 1998 and January 31, 1999,
respectively.
As of January 31, 1999,2000, we held approximately 19.9%19.5% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported
-16-
17
revenues of $1.0$1.3 million and $11.8$2.4 million from Checkfree for the three and
six monthssix-months ended January 31, 19981999 and $1.3$1.8 million and $2.4$3.6 million for the
three and six monthssix-months ended January 31, 1999,2000, respectively. The revenue from Checkfree for the six
months ended January 31, 1998 includes a royalty payment of $10 million received
in October 1997. We held a receivablereceivables
due from Checkfree for $4.4$0.1 million and $1.3$2.3 million at July 31, 19981999 and
January 31, 1999,2000, respectively. In March 1999,
we filed a lawsuit against Checkfree alleging a breach of an agreement between
Intuit and Checkfree related to bill presentment services (see Note 9).
As of January 31, 1999,2000, we held a 49% non-voting equity interest in Venture
Finance Software Corporation (VFSC)Corp. ("VFSC"). We have entered into an agreementagreements with VFSC to
provide them with services related to on-goingongoing development of Web-oriented
finance products.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 note receivable due from VFSC with outstanding balances
of $7.3for
$6.7 million and $6.1$10.6 million at July 31, 19981999 and January 31, 1999,
respectively, representing amounts due to us from VFSC for development and
administrative services we provided to VFSC.
11.2000,
respectively.
12. SUBSEQUENT EVENTS
InOn February 1999,18, 2000 we sold 450,0003.0 million shares of our Excite Common StockCheckfree common stock at an
averagea
price of $94.13$90 per share (netand on March 2, 2000 we sold 2.5 million shares of
brokers' commissions), generatingCheckfree common stock at a price of $92 per share. Gross proceeds from these
transactions were $500 million. These divestitures reduced our ownership in
Checkfree to 4.7 million shares or approximately 9% of $42.4 million. As a resultCheckfree's outstanding
stock.
On February 29, 2000, Verisign, Inc. ("Verisign") acquired all of this sale,the
outstanding securities of privately-held Signio, Inc. ("Signio"). We held an
investment in Signio, and in exchange for our investment, we will record a pre-tax
realized gain on the salereceive
approximately 194,000 common shares of marketable securities of approximately $36.3
million in our fiscal third quarter. In February 1999, we also made a financial
investment decision to disposeVerisign (representing less than 1% of
the remaining Excite shares over time, as
appropriate opportunities become available. Consistent with this decision,
effective March 11, 1999, Intuit and Credit Suisse Financial Products ("CSFP")
entered into a term sheet outliningoutstanding common stock of Verisign subsequent to the terms of a forward sale arrangement with
respect to 4,350,000 shares of Excite's Common Stock (the "Term Sheet"). If the
transactions contemplated by the Term Sheet are completed, Intuit will deliver
the 4,350,000 shares to CSFP after the restrictions imposed by the Voting
Agreement have terminated, and in any event on or before September 30, 1999 (the
"Settlement Date")acquisition). On
the Settlement Date, CSFP will pay Intuit for the
4,350,000 shares, with the price equal to the proceeds from prior sales by CSFP
of the same number of shares of Excite's Common Stock, less a negotiated fee.
The Term Sheet contemplates that the parties will enter into definitive
agreements with respect to the forward sale (including a Securities Contract and
Pledge Agreement), and that Intuit will deposit 4,350,000 shares of Excite
Common Stock into a collateral account and enter into the Pledge Agreement to
secure its obligations under the forward sale arrangement.
On March 2, 1999, we announced that we had reached a definitive agreement to
acquire Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of
payroll services. Since October 1998, Intuit has been offering payroll services
through CRI to its QuickBooks small business customers. These payroll services
include payroll tax filing, tax deposit services and direct deposit of employee
wage payments. CRI is one of the country's largest payroll services companies
and a leader in providing payroll services to small businesses. Under the terms
of the agreement, Intuit will acquire the privately-held CRI for approximately
$200 million, consisting of $100 million in cash and $25 million of Intuit stock
to be paid atFebruary 29, 2000, the closing and $75 million in cash to be paid in three annual
installmentsstock price of $25 million each. The acquisition, which has been approved by
the boards of directors of both companies and the shareholders of CRI, is
subject to regulatory approval and other closing conditions, including the
expiration or waiver of certain rights of refusal. The acquisition is expected
to close in the second calendar quarter of 1999.
In March 1999, we filed a lawsuit against Checkfree alleging a breach of an
agreement between Intuit and Checkfree related to bill presentment services
(see Note 9).
-14-Verisign was $253 per share.
-17-
1518
- - --------------------------------------------------------------------------------
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS AND INVESTMENT CONSIDERATIONS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements including
terms such as we "expect"with words
like "expect," "anticipate," or "anticipate""believe" and statements in the future tense,
are forward-looking statements. Investors should be aware that our actual results
may differ materially from Intuit's expressedour expectations because of risks and uncertainties
about the future. We will not necessarily update the information in this Form 10-Q
if and
when any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect 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 and pricing pressures,
particularlyfrom many companies in all of our business
areas.
- - - Competition in the personal tax preparation software market; potentially slowerbusiness is
particularly intense, with Microsoft having entered the market growth ratesduring 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 the small business areapage view and reach statistics could adversely affect our
ability to leverageearn advertising revenue from our existing
small business customer baseQuicken.com site.
- - - In order to take advantage of any market growth; whether our
general strategy with respect to the Internet and Internet-based businesses and
our implementation of that strategy will correctly anticipate key trendssucceed in the Internet environment; our abilitypayroll services business, we must continue to
adapt and expand our product, service and
content offerings forimprove the Internet environment; our ability to operationally
support and manage these new businesses;integration of the successoperations of our business
relationships with Excite, AOL, and others in continuing to increase traffic to
Quicken.com; the possible impact on our relationship with Excite of Excite's
proposed merger with At Home; the potential impact on our business of our
lawsuit against Checkfree Corporation; the costs of implementing our Internet
strategy; the uncertainty as to the timing and amount of future Internet-related
revenue and profits; the timing of availability for future products and
services, including wider availabilitypayroll processing
subsidiary, streamline customer activations for our online payroll
service;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 attractrecognize 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 retain payrollQuickBooks Internet Gateway services) will depend on a number
of variables, including the rate at which customers upgrade to QuickBooks
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, customers; market growth, salesthrough 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 upgradecost-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 our QuickBooks multi-user product; the valueaccess to retail and sizeOEM distribution
channels.
- - - The integration of our equity investments in otheracquired companies including Checkfree Corporationposes ongoing operational challenges
and Excite, Inc.; our ability to achieve Year 2000 readiness in our business
operations, our products and our dealings with significant third parties, such
as key suppliers and customers; the expected impact ofrisks. In addition, our recent acquisitions of Lacerte Software Corporationhave resulted in
significant acquisition-related expenses.
- - - Our mortgage business is subject to interest rate fluctuations, and Lacerte Educational Services Corporation;
the effect or our recently announced proposed acquisition of Computing
Resources, Inc., and our efforts, if that acquisition is consummated, to manage
a new line of business; the
impact of acquisitions generally; ourinterest rates on Intuit's operating results has become more
significant since the acquisition of Rock Financial was completed.
- - - Our recent acquisition
-18-
19
of Rock Financial could have a negative impact on Intuit's relationships
with retailers and other issues with respect to our distribution channels;
results for our international operations; and risks associated with regulated
businesses such as insurance andlenders that participate in the online mortgage lending.service.
- - - We hold investments that have been very volatile.
Additional information about factors that could affect future results and events
is included elsewhere in
this Form 10-Q, in our fiscal 19981999 Form 10-K10-K/A and our Form 10-Q for the first
quarter of fiscal 1999, and in other reports filed with the
Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal,As we create, sellexecute our mission, we have embarked on a strategy
to greatly expand the world of electronic finance. "Electronic finance"
encompasses three types of products and support small
business accounting, tax preparation and consumer financeservices: (1) desktop software products,
such as Quicken(R), QuickBooks(R) and Quicken TurboTax(R), that operate on
customers' personal computers to automate financial supplies (suchtasks; (2) online products
and services, such as computer checks, invoicesQuicken.com(SM), QuickenLoans(SM), QuickenInsurance(SM)
and envelopes)Quicken TurboTax for the Web(SM), that are delivered via the Internet; and
Internet(3) products for individuals and small businesses.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, Germany, Canada and the United Kingdom, through retail distribution
channels, direct customer sales and via the Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet commerceInternet-based revenue is growing rapidly. The Internet is a
pervasive force that has fundamentally changedFor the way we do business. It is
becoming increasingly importantthree months
ended January 31, 2000, Internet-based revenues grew by approximately 162%
compared to allthe same period last year and accounted for approximately 21% of
our business divisions, both astotal revenue in the platform for new products and services, and as an incremental, cost-effective
distribution channel. For example,quarter ended January 31, 2000, compared to approximately
10% in the Internet is the foundation for our
insurance and mortgage marketspaces, the online payroll service for small
businesses that we recently introduced through our QuickBooks product and our
Quicken Store website, where customers can purchase and download desktop
software products and obtain customer service. We also use the Internet to host
our technical
-15-
16
support website where we can quickly and cost-effectively provide patches for
product bugs and provide customers with answers to frequently asked questions.prior year quarter. We use the term "Internet commerce"Internet-based revenue to refer to all of our Internet-based
business activities. Internet commerce has two components: Internetinclude
revenue from both Internet-enabled products and services as well as revenue from
electronic distribution. Internet products and services include activities in whichwhere
the customer realizes the value of the goods or services directly on the
Internet or an Intuit server. Internet product revenues include, for example,
advertising revenues generated on our Quicken.com website, online tax
preparation and electronic tax filing revenues, on-lineonline payroll service revenuesrevenue
and transaction and processing fees from our online insurance and online
mortgage marketspaces.services. Electronic distribution activities include theincludes revenues generated by
electronic ordering and/or
electronic delivery of traditional desktop software products and
financial supplies throughsupplies. We also use the Internet.Internet to host our technical support
website where we can quickly and cost-effectively provide patches for product
bugs and provide customers with answers to frequently asked questions.
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 commerce activities,Internet-based businesses, investors should be aware thatmany of
these businesses are in their initial success achieved in these areas willstages, and are not necessarily result in improved financial results. We believe that the dramatic
growthyet generating
significant revenue or profit. Since Internet-based revenues and expenses cut
across all of the Internet will give us significant opportunities to grow our revenue over the next several years. However, revenue from Internet commerce was
only approximately 10% of total revenue during the second quarter of fiscal 1999
(approximately 5% for Internet products and 5% for electronic distribution). It
should be noted that these percentagesbusiness divisions, we do not necessarily indicate the amountreport results of Internet commerce revenues we will experience for the full fiscal year. Internet
revenues are not reported separatelyour
Internet-based businesses as a separate business segment in our financial
statements; insteadstatements. Instead, each of our business divisions reports Internet commerceInternet-based
revenues and expenses that are specific to its operations and are included in
its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred at relatively consistent levels during these periods. ThisThese seasonal
trends can result in significant operating losses, particularly in the July 31
and October 31 quarters when our revenues are lower. The seasonality of our revenue patterns has been further intensified
by our June 1998 acquisition of Lacerte, a professional tax software company.
Operating results can also
fluctuate for other reasons,
-19-
20
such as changes in product release dates, non-recurring events such as
acquisitions and dispositions, and product price cuts in quarters that have
relatively high fixed expenses. Acquisitions and dispositions in particular can
have a significant impact on the comparability of both our quarterly and yearly
results.results, and acquisition-related expenses have had a negative impact on
earnings.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and six-month periods ended January 31, 19981999 and 1999.2000. Investors should
note that results for the three and six-month periods ended January 31, 19992000
include activity for our LacerteCRI subsidiary, which was acquired in June 1998.May 1999. The
corresponding year ago periods dodid not include results for Lacerte.CRI (see Note 4).
Results for all periods include results for Rock Financial Corporation, which we
acquired in December 1999. The acquisition of Rock has been accounted for as a
pooling of interests, so all prior periods have been restated to reflect
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 closing 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.
NET REVENUE
Three Months Ended January 31, Six Months Ended January 31,
1999 Change 2000 1999 Change 2000
---------------------------- ----------------------------
(Dollars in millions; unaudited)
Software and other ................ $ 344.1 14% $ 392.7 $ 457.4 18% $ 541.7
% of revenue ...................... 92% 92% 90% 90%
Supplies .......................... $ 29.6 11% $ 32.8 $ 53.2 14% $ 60.7
% of revenue ...................... 8% 8% 10% 10%
Total ............................. $ 373.7 14% $ 425.5 $ 510.6 18% $ 602.4
The following revenue discussion is categorized by our business divisions, which
is how we examine results internally. Our domestic supplies business is
considered a part of our small business division while the international
supplies business is considered part of our international division.
-16-
17
NET REVENUE
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
Software ....................... $211.2 50% $316.4 $285.3 42% $404.7
% of revenue ................... 89% 91% 86% 88%
Supplies ....................... $ 26.3 13% $ 29.6 $ 48.2 10% $ 53.2
% of revenue ................... 11% 9% 14% 12%
Total .......................... $237.5 46% $346.0 $333.5 37% $457.9
division (see Note 7).
Small Business Division. Small business division revenues come primarily from
the following sources:
- QuickBooks product line
- Supplies products (including checks, envelopes and invoices)
- Tax tablePayroll services
- Support fees charges to customers for telephone assistance
- Payroll processing feesthe QuickBooks Support Network
Overall, revenue for the division was up 48%63% and 34%64% for the three and six-month
periods ended January 31, 1999,2000, 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 timing of recent QuickBooks
releases that occurredthree-month and six-month periods
-20-
21
ended January 31, 2000, but did not account for material revenue in June 1998 (version 6.0) and December 1998 (QuickBooks
'99). Prior to these releases, we had not launched a new version of QuickBooks
since December 1996 (version 5.0). As a result, the current three
and six-month periods compare favorablyended January 31, 1999.
Though they are a smaller component of small business division revenues, tax
tables service revenue and revenue from our QuickBooks Support Network also grew
in the three and six-month periods ended January 31, 2000 compared to the same
periods a year ago.
We launched our most recent version of the prior year, which did not
realize the benefit of a recent QuickBooks product launch. These increases were
also driven by higher average selling prices for(QuickBooks 2000) in December
1999. The increased revenue from our QuickBooks product line due
primarilywas attributable to
a more favorableincreased unit sales, mixas well as an increase in the average selling prices of
the QuickBooks product driven by consumer preferences toward higher priced,
products with
greater functionality.functionality products. We believe a significant number of customers may
have upgraded earlier than they otherwise may have, due to Year 2000 concerns.
Accordingly, we expect that some of the fiscal 2000 second quarter strength in
QuickBooks revenue is a shift from the second half of the year, and we expect
the revenue growth rate to decline significantly as the year progresses.
QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected
and integrated electronic services, that is designed to offer small businesses
direct access to services from third parties, such as electronic postage and
merchant account services, that can help them more easily and efficiently manage
their business. It also features QuickBooks Site Builder, a new web site
creation and domain name registration tool that enables small businesses to
quickly establish a presence on the Web. Although these new features are
strategically important for Intuit, it is too early to tell how successful these
services 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 13%11% and 11%14% for the three and six-month periods ended January 31, 1999,
respectively,2000 as a
result of our increasing customer base of small business ownerscustomers who use QuickBooks and
QuickenQuicken. In addition, in August 1999, we began charging for shipping and
handling for domestic supplies shipments which also contributed to run their small businesses.our domestic
supplies revenue.
We offer different types of payroll services. Our supplies businessQuickBooks Online Payroll
service, which is a more consistent source of recurring revenue than our
software business, and is derived primarily from our existing customer base.
Though they are a smaller component of Small Business Division revenues, tax
tables service revenue and fees charged for telephone support also grew
substantially in the three and six months ended January 31, 1999 compared to the
same periods of the prior year.
In October 1998, we introduced our new payroll processing service. The service
is offered throughintegrated with our QuickBooks products, (version 6.0 and QuickBooks '99) and handles all aspects
of payroll processing including calculation and electronic
depositing of federal and statewith 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 withholdings, electronic direct
deposit of paychecks, preparation and filing of quarterly and annualtable
subscription service for small business customers that need current tax tables
to prepare their own payroll. While the payroll tax
returns and creation of employee W-2 forms. While payroll processing business provides us
with a significant opportunity to generate revenues, it also introduces new
risks.
On March 3, 1999 we entered into an agreement to acquire Computing Resources,
Inc. ("CRI"), the company that has beenrevenue, there are business risks
associated with the payroll processing service provider
for this new business since October 1998 (see Note 11). This acquisition, which
is subject to regulatory approval and other closing conditions (including waiverthe continued integration of
a right of first refusal), will result in significant acquisition related
costs, as well asCRI into our existing business integration challenges common in all acquisitions. Ifmodel. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who we believe will have a low tolerance
for payroll processing errors. In addition,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 expect this servicewill rely on to
be unprofitable in its initial stages untilretain existing customers and attract new customers outside of our QuickBooks
customer base. If we are ableunable to accumulatedo so, it could result in a large number of subscribers fromnegative impact
on our -17-
18
QuickBooksconsolidated results. While the customer base for the QuickBooks Online
Payroll service continues to offsetexpand, the fixed costs of providingservice is not yet generating material
revenues and we must continue to focus on streamlining the payroll
service. We are managing the new customer activation
process at a measured rate
in order to insure high quality service levels and to minimize the impact of any
potential service disruptions during the initial phases of the service. Though
initial customer reaction to this service has been positive, it has not been a
significant contributor to our financial performance in fiscal 1999, and there
is no assurance that it will be widely accepted. If subscriptions to this
service don't meet expectations, future operating results could suffer.process.
Tax Division. Tax division revenues come primarily from the following sources:
- Quicken TurboTax and MacInTax personal desktop tax preparation
products
- Professional tax preparation products (ProSeries and Lacerte
product lines)
- ElectronicQuicken TurboTax for the Web electronic tax return preparation services
and electronic filing feesservices
-21-
22
Overall, tax division revenues for the three and six monthssix-months ended January 31,
1999 grew 67%2000 declined by 8% and 76%6% respectively, compared to the same periods last year.
Fiscal 1999 includes operating resultsThe declines in revenue were due primarily to an aggressive marketing and
pricing strategy for our Lacerte subsidiary which was
acquiredQuicken TurboTax in June 1998. Excluding Lacerte from our fiscal 1999 results, tax
division revenues would have increased by 25% and 31% over the same periods.
This growth was driven by our TurboTax product line which experienced higher
unit sales due in partresponse to a growingvery competitive market
for tax-preparation software because
an increasing number of taxpayers have access todesktop personal computers. The
year-over-year revenue increase wastax software. We lowered average selling prices, and we
also due to the fact that most of our
TurboTaxbundled electronic filing and state tax products were released in January (second quarter) this year,
but in February (third quarter)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 1998. TurboTaxyear.
While we have experienced significant unit sales growth was
partially offset byfor the quarter ended
January 31, 2000, we continue to experience extreme pricing pressures from both
H&R Block's aggressively priced TaxCut product and from Microsoft's TaxSaver
product, including free product offerings from Microsoft. The increased
competition has resulted in lower average selling prices in response to increased price
competition, primarily from H&R Block's aggressively priced TaxCut product.these
pricing pressures.
It is currently too early to predict the final level of demand for the Quicken
TurboTax product line through our retail distribution channels. Although the
number of units sold is currently higher in the current fiscal year to date
compared to the same period a year ago, revenue is lower due to lower average
selling prices. We alsoexpect 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, revenues and operating
results for this tax season will be unknown until late in the fiscal year.
We have experienced significantly higher revenues fromand volume for Quicken
TurboTax for the Web TurboTax (our web-based tax
preparation product) and for electronic filing fees compared to last year, as an
increasing number of customers gain Internet access and become more accustomed
to processing transactions on-line. In the past we have not experienced any
significant technical problems with Web TurboTax or electronic filing. However,
the risk of such problems increases with increased demand for these services.
During January and February 1999, we experienced higher than expected demand for
Web TurboTax, andWe expect that as the tax filing deadline
nears, we expect tomay experience a dramatic incremental increase in demand. Wedemand for both Web tax
preparation and electronic filing services. To deal with the expected increases
in demand, we have increased our capacity in
anticipation of this increased demand and have developed a contingency plan
to provide additional capacity if necessary. However, the exact level of demand
is very difficult to predict, and we could experience significant negative
financial and public relations consequences if our capacity to handle Web TurboTaxserve 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 expect
thathave not experienced any service
interruptions thus far in the demand forcurrent tax filing season. However, we did have
some interruptions in our electronic filing will also increase dramatically as the tax
filing deadline approaches. We experienced an interruption in electronic filing
serviceservices in February which was not material because it was fairly early in the
tax season.1999 and on
April 11-12, 1999. Although we do not believe those service outages prevented
customers from completing and filing their returns in a timely manner, or posed
a risk that customer data would be lost or corrupted, we have addressed the issues that caused that
service outage, a similar interruption in service during the peak tax filing
period could cause significant financial and public relations consequences.
While we believe our new TurboTax product line is selling well through retail
channels, it's too early to predict resultsdid experience negative
publicity.
Revenues for the entire tax season. We expect
our reserves for returned products will be adequate to cover retailers' returns
of unsold products during the next two quarters, though higher than expected
returns could have a negative impact on revenue for the season. As the end of
the tax season nears, it is possible that TaxCut will further reduce the sales
price of its products. If this occurs, our TurboTax product sales could suffer
and/or we might need to reduce our prices to remain competitive. Though
Microsoft Corporation did not release a competing product for this tax season,
we expect them to enter the tax preparation software market next year. If
Microsoft enters the market, their superior financial resources and strong
presence in retail distribution channels could result in an increasingly
competitive environment next tax season and beyond. If the average selling price
of our tax products were to decrease, or if we were to lose significant market
share as a result of increased future competition, our operating results would
suffer.
Excluding Lacerte from our fiscal 1999 operating results, our professional tax (ProSeries) product salesproducts and products from our
Lacerte subsidiary increased by 10% for the three and six monthssix-month periods ended
January 31, 19992000 compared to the same periods last year. This growth was
-18-
19
primarily because we have been successful in retaining our customers from prior
years and in many cases have upgraded themis
attributable to a combination of a continued shift to higher priced products. Revenue
from Lacerte products also grew compared to last year (though Lacerte's prior
year revenues are not reportedand
growth in our operating results)customer base due in part to our acquisitions of Compucraft and
TaxByte during 1999. In addition, we continue to experience a high customer
retentionrenewal rate.
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
- Quicken product line
- Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
- Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
- On-line consumer mortgage placement and servicing fees through
QuickenLoans
Overall, consumer finance division revenues were up 6%9% and 5% for the three and
six-month periods ended January 31, 19992000 compared to the same periods a year
ago. Excluding the impact of a nonrecurring $10 million royalty fee from
Checkfree in the first quarter of fiscal 1998,The increases are due primarily to strong revenue growth would have been
18% 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 six months ended January 31, 1999.year-ago
periods. Quicken sales were down slightly
for the three months ended January 31, 1999revenue increased compared to the same period in
fiscal 1998,periods of the prior
year primarily due primarily to the fact that the timing ofstrong consumer demand resulting from aggressive retail
-22-
23
promotions with our tax products and lower than expected product shipments into
the retail channel were more concentrated inrebate
redemptions related to Quicken 99. We believe some customers may have upgraded
during the second quarter, due to Year 2000 concerns. Accordingly, some of the
fiscal 1998
compared2000 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 fiscal 1999. Forface competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the six months ended January 31, 1999 Quicken sales
were slightly higherInternet 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.
Consumer division revenue growth also benefited from an increase in certain
Internet-based revenue compared to the same year-ago period due primarily to an
approximately 5 week earlier release of Quicken this year and to a more
favorable sales mix toward our higher-priced products.periods last year. This increase was
partially offset
by increased rebate incentives offered to customers who purchase both Quicken
and TurboTax products this year. While we expect Quicken sales to remain roughly
flat for fiscal 1999, there is a risk that they will decline in future periods.
In fiscal 1997, Quicken experienced over a 20% decline in revenues and there is
no assurance that similar declines will not occur in the future. For example,
sales could suffer if customers become less inclined to make upgrade purchases,
if our competitors were to lower their prices or if the growth rate in the
market for desktop personal finance software declines.
We have also experienced significant growth in consumer Internet-based revenues
compared to the same quarter last year, primarilylargely due to increasedhigher advertising, sponsorship and transaction-related revenue
through Quicken.com and Quicken. Specifically,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 online mortgage
business as well as the online and traditional mortgage businesses of Rock
Financial, which we acquired in December 1999. The decline in mortgage revenue
was primarily due to Rock's decision 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 frommay continue to
be adversely impacted if interest rates continue to rise, and as we continue to
phase out Rock's traditional mortgage business. In addition, the acquisition of
Rock will continue to result in new business risks and integration challenges
common in all acquisitions. For example, our QuickenMortgage
marketspaceability to successfully facilitate
the application, approval, and closing process in loan applications on a timely
basis will have grown relatively rapidly while fees froma significant impact on our InsureMarket
marketspaceability to attract customers to the
service. Our ability to successfully operate Rock will depend in part on
maintaining relationships with certain banks and other third parties who we will
rely on to provide access to capital, and later, service the loans. If we are
unable to do so, it could have grown at a slower pace. Total page views more than tripled for
the month of January 1999 compared to January 1998, though they can vary
significantly from month to month.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 ExciteAt Home Corporation (doing business as "Excite@Home")
and AOL, which have helped to increase traffic to our Quicken.com website. The
ExciteExcite@Home agreement calls for us to share revenue generated from our
Quicken.com site and the AOL agreement calls for us to make significant
guaranteed payments to AOL over the term of the agreement. While the Internet
provides a significant opportunity for revenue growth, we
have also made significantour 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.
We currently expect the proposed merger between Excite and At Home (see Note 1)
to have a neutral or positive impact on our business relationship with Excite
because At Home is expected to offer increased opportunities for distribution of
Excite's online financial content, which will benefit Intuit. However, it is
possible that the merger could have a negative impact on our relationship with
Excite.
-19-
20
International Division. International division revenues come primarily from the
following sources:
- Japanese QuickBooks and other small business products
- GermanCanadian Quicken, QuickBooks and Tax products
- CanadianGerman Quicken, QuickBooks and Tax products
- United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues were down 3% and 5%increased 37% for the
three and six-month periods ended January 31, 1999, respectively,2000 compared to the same periods
last year. This decreaseincrease is largely thea result of lowerstronger sales of Quicken and QuickBooks
in Germanyboth Canada and the U.K. partially offset by, 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 salesprofitability in
Canada. In Japan, our largest international subsidiary, sales were roughly flat.
As part of-23-
24
Germany due to a shift in our business strategy, we have refocused our product developmentmodel from direct participation in Europe towards small business products in selected larger markets. Asthe
market to a result,
we expect to devote fewer resources to consumer finance and tax products and to
smaller geographic markets. We also introduced our first release of QuickBooks
in Japan in September 1998 in an effort to target a lower-priced market than our
current small business products reach in Japan. Though we have increased our
retail market share in Japan since the launch of QuickBooks, the overall market
for small business products and services in Japan continues to suffer due
primarily to poor economic conditions. While we expect that international
revenues will be flat or slightly down for fiscal year 1999, there is a risk
that they could be significantly lower if our strategic initiatives are not
effective.third party distribution arrangement.
COST OF GOODS SOLD
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 19981999 Change 2000 1999 1998 Change 1999
------ ------ ------ ------ ------ ------2000
-------------------------- ----------------------------
Product ...................................................... $ 45.5 45%70.2 33% $ 65.893.1 $ 67.9 49% $101.0109.2 37% $ 149.5
% of revenue ............................................ 19% 19% 20% 22% 21% 25%
Amortization of purchased .. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9
software & other
$ 0.7 171% $ 1.9 $ 1.4 164% $ 3.7
% of revenue ............................. 0%............... 1% 1% 1% 1%
Total .......................................................... $ 46.2 47%72.1 33% $ 67.795.6 $ 69.3 51% $104.7112.9 37% $ 154.4
% of revenue ............................................ 19% 20% 21% 23%22% 22% 26%
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products offering Internet-based products and
services, providing our fee for support programs and offering our payroll
service.services. The second
component is the amortization of purchased software, which is the cost of
products obtained through acquisition.acquisitions. Total cost of goods sold increased to
20%22% and 23%26% of revenue for the three and six monthssix-months ended January 31, 1999 respectively,2000
compared to 19% and 21%22% for the same periods of the prior year. This increase isThese 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 than the costs of goods sold for
our traditional desktop software business. These infrastructure
costs tend to result from the depreciation of capital assets which areSecond, our service businesses, such
as payroll processing and QuickBooks Support Network, generally expensed evenly over the estimated useful lives of the assets. As a result, cost
of goods sold as a percentage of revenue may fluctuate significantly,
particularly on a quarterly basis, as they become more fixed in nature and less
connected to the direct cost of manufacturing and shipping software products.
For example, although in a quarter with low revenues we will usually have a
proportionately lower cost of goods sold because we ship fewer products, the
cost of goods sold from our Internet infrastructure will not decrease
proportionately and thus will inflate the cost of goods sold as a percentage of
revenue for that quarter. Second, we have also experienced significant increases
in our revenues from fee for support programs. The cost of goods sold associated
with these programs is also larger as a percentage of revenue than cost of goods
sold for our traditional desktop software business. Consequently, as revenues
from our Internet-related businesses and fee for support programs become a
larger portion of our overall revenue, our cost of
-20-
21
goods sold as a percentage of revenue is likely to increase. These upward
pressures on cost of goods sold were partially offset by a continuing shift of
consumer preferences toward higher-priced deluxe products, which result in lower
cost of goods sold as a percentage of their sales price. Due to expected growth
in higher cost
of goods sold compared to the sale of packaged software. As these businesses
such asgrow to a higher proportion of total revenue, we anticipate that our Internet-based initiatives,
fee for support programs and our online payroll service, we believe cost of
goods sold as a percentage of revenue forwill continue to increase. Note that results from CRI, our payroll
processing subsidiary that we acquired in May 1999, are included in fiscal 2000
results but not in the fiscal 1999 will exceed what we
experienced in fiscal 1998. If we experience errors in current or future
products, there could be incremental increasescomparison periods, which contributed to the
year-over-year increase in cost of goods sold that could
adversely effect our operating results.sold.
OPERATING EXPENSES
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 19981999 Change 2000 1999 1998 Change 1999
------ ------ ------ ------ ------ ------2000
-------------------------- ----------------------------
Customer service & technical support .... $ 37.5 6%41.1 16% $ 39.947.7 $ 65.4 7%72.0 14% $ 69.882.0
% of revenue ......................... 16% 12% 20% 15%............................ 11% 11% 14% 14%
Selling & marketing ....................................... $ 47.0 33%71.2 21% $ 62.586.1 $ 78.9 36% $107.6124.3 26% $ 156.0
% of revenue ..................................................... 19% 20% 18% 24% 23%26%
Research & development ............... $ 26.6 37%.................. $ 36.4 21% $ 52.8 33%44.0 $ 70.0 22% $ 85.8
% of revenue ......................... 11% 11% 16% 15%............................ 10% 10% 14% 14%
General and administrative ......................... $ 9.7 32%19.6 19% $ 12.823.3 $ 18.2 44%38.9 15% $ 26.344.8
% of revenue ............................ 5% 5% 8% 7%
Charge for purchased research
and development ......................... 4% 4% 5% 6%$ -- N/A $ -- $ -- N/A $ 1.3
% of revenue ............................ N/A N/A N/A 0%
-24-
25
Other acquisition costs, including
amortization of goodwill and purchased
intangibles .......................... $ 4.9 329%............................. $ 21.0 115% $ 8.9 371%45.2 $ 41.9 95% $ 81.6
% of revenue ........................ 2%............................ 6% 3% 9%11% 8% 14%
Other acquisition related costs-
amortization of deferred compensation ... $ -- N/A $ 1.0 $ -- N/A $ 1.7
% of revenue ............................ N/A 0% N/A 0%
Reorganization costs .................... $ 2.0 (100)% $ -- $ 2.0 75% $ 3.5
% of revenue ............................ 1% N/A 0% 1%
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 12% and 15%were flat as a percentage of revenue for the three and six monthssix-month
periods ended January 31, 1999, respectively,2000 compared to 16% and 20% for the same periods of the prior year.
These improvements reflect the continuing benefit from cost
reductions resulting from the restructuring and consolidation of our technical
support facilities in the United States and Europe in the fourth quarter of
fiscal 1997. We have also benefited from expanding our fee for support programs
and our initiativesefforts to provide customer service and technical
support less expensively through websites and other electronic means. WhileHowever,
we anticipate
that service and support expenses will decrease as a percentage of revenue for
fiscal 1999 compared to fiscal 1998, there is no assurance that they will remain
at current rates for the remainder of the fiscal year. For instance, if we
experience product errors, poor service levels or service outages forincreased our web-based products, it may resultinvestment in significant additional customer service and technical support expenses.during the
fiscal 2000 comparison periods in anticipation of increased call volumes
relating to potential year 2000 issues, and also to support two major product
launches in the second quarter (QuickBooks 2000 and Quicken TurboTax for the
1999 tax year).
Selling and Marketing. Selling and marketing expenses were 18%20% and 23%26% of
revenue for the three and six monthssix-months ended January 31, 1999, respectively,2000 compared to 20%19% and
24% for the same periods of the prior year. This decrease is
primarily the result of our acquisition of Lacerte which experiences
comparatively lowerThe increases in selling and
marketing expenses as a percentagecosts are attributable to the aggressive marketing programs relating
to the expansion of revenue.
While weour Internet-based businesses and the increasingly
competitive personal tax market. We continue to expect thesethat selling and
marketing costs as a percentage of revenue to remain roughly flat inwill increase for fiscal 19992000
compared to fiscal 1998, it is possible that they will increase. For
example, there is a risk that these costs could increase1999 as we continue to aggressively market our Internet-based
businesses and face intense competition in response to
competitive pressures from H&R Block (TaxCutthe personal tax preparation software),
Microsoft (Microsoft Money financial software) or other competitors.market for the rest
of the 1999 tax season.
Research and Development. Research and development expenses were 11%10% and 15%14% of
revenue for the three and six monthssix-months ended January 31, 1999, respectively,2000 compared to 11%10% and
16%14% of revenue for the same periods of the prior year. Though ourWe continue to invest in
research and development expenses have increased in absolute dollars as we have
continueddue to invest in Internet products, software and other initiatives,our efforts to develop our Internet-based
businesses. As a result, we expect these expensesour Internet-based businesses will continue
to remain roughly flat as a
-21-
22
percentage of revenue forrequire significant development expenditures in fiscal year 1999 compared to fiscal 1998. However, if
research2000 and developmentbeyond.
If such expenses exceed our current expectations, they may have an adverse
effect on operating results. ForThis could occur, for example, it is possible thatif we couldwere to
undertake a costly product development venture in response to competitive
pressures or other market conditions.
General and Administrative. General and administrative expenses were at 4%5% and 6%7%
of revenue for the three and six monthssix-months ended January 31, 19992000 compared to 4%5%
and 5%8% for the same periods of the prior year. For fiscal 1999,2000, we expect
general and administrative expenses to remain roughly flat as a percentage of
revenue compared to fiscal 1998.
Other Acquisition Costs. Other acquisition costs include1999.
Charge for Purchased Research and Development. For the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
These costs increased to $22.9 and $45.6 million for the three and six months ended January
31, 1999, respectively, compared to $5.62000, we recorded charges for purchased research and $10.2 million for the
same periodsdevelopment as a result
of the prior year. This increase was primarily attributable to the
amortization of intangibles associated with our acquisition of Lacerte in June
1998. In the first quarter of fiscal 1999, we changed the estimated life of
goodwill for Lacerte from three to five years to reflect our revised estimate of
the period of time we expect to benefit from the purchased assets of the
acquired business. We began accounting for this change in estimate in the first
quarter of fiscal 1999. This change results in different estimates of the net
income effect of future amortization compared to estimates previously provided
in the Company's fiscal 1998 Form 10-K. Revised estimates are provided below.
For more information regarding this change in estimate see Note 1 of the
financial statements.Boston Light and Hutchison acquisitions. In connection with our acquisition of Lacerte,these
acquisitions, we used a third party appraiser's
estimateappraisers' estimates to determine the value
of two in-process projects under development for which technological feasibility had
not been established. TheseThe total value of these projects were
identified for products being developed under separate operating systems (DOSat the time of the
acquisitions was determined to be approximately $1.3 million and Windows).was expensed in
the three months ended October 31, 1999. 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 believe willbelieved would
result from the products and discounting these net cash flows back to their
present value. AsWe believe the products related to these charges will be
completed during our fiscal year 2000, and that the risk of these products not
being
-25-
26
successfully completed is low.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles and deferred compensation costs that are
recorded as part of an acquisition. These costs increased to $48.7 million and
$88.2 million for the three and six-months ended January 31, 1999, actual results2000 compared to
date have been consistent with assumptions made when we
initially appraised$22.9 million and $45.6 million for the valuesame periods of these in-process projects. Specifically,
revenues, development costs and completion dates as they relatethe prior year. These
increases ware primarily attributable to the two
projects are consistentamortization of intangibles
associated with our expectations. Both projects were released on
scheduleacquisition of CRI in JanuaryMay 1999, and our acquisitions of
Secure Tax, Boston Light and Hutchison in August 1999, and Turning Mill Software
in November 1999.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Excluding the impact of our pending acquisition of CRI (see Note
11) and assumingAssuming no additional acquisitions and no impairment of value
resulting in an acceleration of amortization, future amortization will reduce net income
bybe
approximately $55.9$163.7 million, $50.0$145.5 million, $43.3$140.2 million and $40.1$90.9 million
for the years ending July 31, 19992000 through 2002,2003, respectively. If we complete
additional acquisitions or accelerate amortization in the future, there wouldcould be
an incremental negative impact on operating results.
Reorganization Costs. Reorganization costs represent the costs associated with
Rock's closure of numerous branch offices in Michigan prior to its acquisition
by Intuit as the mortgage business began to transition from a traditional
branch-based business to an on-line transactional-based business. These costs
increased to $3.5 million for the six-month period ended January 31, 2000 from
$2.0 million for the same period of the prior year.
OTHER INCOME
For the three and six monthssix-months ended January 31, 1999,2000, interest and other income
and expense, net, remained essentially flat as a percentage of revenueincreased to $7.0 million and $15.5 million compared to $4.0
million and $7.3 million for the same periods ofa year ago, reflecting increased
cash and short-term investment balances. We have elected to report our At Home
common stock as a trading security and are required to mark to market the
prior year. The $4.3 million gain on disposal of
businessfluctuations in the six-month periodstock price and report the fluctuations in our earnings. For
the three and six-months ended January 31, 1998 resulted2000, we reported losses arising from
fluctuations in the saleshare price of Parsons,At Home of $2.8 million and $20.1 million,
respectively. In the same period a year ago, we did not report a gain or a loss
for changes in the market value of Excite, Inc. ("Excite"), one of the
predecessor companies of Excite@Home in our direct marketing subsidiary, in August 1997. Ourearnings, since that security was
not classified as a trading security. We did, however, report a realized gain of
$10.1 million gain on the sale of marketable securities for both the three and six months ended
January 31, 1999 wassix-month periods from a year ago from the
result of our salesales of Checkfree, Verisign, and Concentric common stock (see Note 1).stock.
INCOME TAXES
For the three and six monthssix-months ended January 31, 1999,2000, we recorded income tax
provisions (benefits) of $29.8$29.6 million and $14.3($4.6) million on a pretax income
(loss) of $119.7 and $55.0$86.8 million ($13.3) million, respectively. This compares to income
tax provisions of $26.0$31.2 million and $19.5$17.7 million on a pretax income of $67.9$124.4
million and $48.6$65.9 million, respectively for the same periods of the prior year.
At January 31, 1999,2000, there was a valuation allowance of $9.6$11.6 million for tax
assets of our international subsidiaries based on management's assessment that
we may not receive the benefit of certain loss carryforwards.
-22-
23
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999,2000, our unrestricted cash and cash equivalents totaled $163.0$377.7
million, a $24.9$176.5 million increasedecrease from July 31, 1998.1999. The increasedecrease was thea result
of net cash generatedused by operations and financinginvesting activities, partially offset by cash used for investingprovided by
financing and operations activities. This reflectsCash from operating activities is driven by
the seasonality of our business, which typically results in the majority of net
revenues and cash receipts occurring in the January and April quarters, though
operating expenses are incurred more consistently throughout the year.
Our operating activities generated $45.1operations provided $44.3 million in cash forduring the six months ended
January 31, 1999, driven by net income of $40.7 million. Additional2000. Primary sources of cash were adjustments made for non-cash expenses such as acquisition
charges and depreciation in addition to significant increasesan increase of $54.6 million in
accounts payable and $63.9 million in other accrued liabilities. The
-26-
27
increases in accrued liabilities and accounts payable are the result ofdriven by the
seasonality of our business and the resulting increaseincreases in accruals for product
returns, customer rebates and accrued technical support expenses. These increases were partially offsetIn addition,
cash was generated by higheran increase in deferred revenues of $40.4 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 balances due from retailers and distributors forto the large volumes of seasonal product shipments to retailers
and distributors that typically occur in our second fiscal second
quarter. We also used cash to payquarter and a
significant decrease in income taxes payable as a result of the payment of taxes
for accrued liabilities resulting from
previous acquisitions and divestitures.our fiscal year ended July 31, 1999.
Investing activities resulted in the use of $59.9used $242.6 million in cash for the six months ended
January 31, 1999. This2000. Uses of cash included net purchases of $110.2 million in
short-term investments and purchases of $51.9 million in property and equipment.
Property and equipment purchases were made to support our ongoing operations,
information system upgrades and our growing Internet-based businesses. Due toWe also
used $54.6 million in cash for our substantial investments in
marketable securities, there is a risk that market value declines may have a
significant negative impact on our liquidity. If such declines were deemed to be
permanent, they would result in a charge to our statementsacquisitions of operations.SecureTax and Hutchison.
Financing activities provided $39.6$21.8 million forin the six months ended January 31,
1999first quarter, primarily
attributable to proceeds from the exercise of employee stock options. AsThis was
partially offset by a decrease in our line of January 31, 1999,credit as we hadfunded new consumer
mortgage loans during the period.
We currently hold investments in a remaining balancenumber of approximately $9.0 million
relatedpublicly traded companies (see Note
1). The volatility of the stock market and the potential risk of fluctuating
stock prices may have an impact on our future liquidity. Due to our three-year agreement with AOL.reporting of
the At Home shares as a trading security, future fluctuations in the carrying
value of At Home will impact our earnings (see Note 1). If future declines in
our other marketable securities are deemed to be permanent, they will also
impact our earnings.
In connection with our pending
acquisition of CRI we will be making significant cash payments (see Note 11).4), we are required to pay
three annual installments of $25 million in each of the next three fiscal years.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. We also evaluate the
merits of acquiring technology or businesses, or establishing strategic
relationships with and investing in other companies. Accordingly, it is possible
that we may decide to use cash and cash equivalents to fund such activities in
the future. For example, if we exercise our option to purchase VFSC (see Note
5 of the Form
10-K financial statement notes)11) and elect to pay all or a significant portion of the exercise price in cash,
itthis would requirehave a significant cash expenditure.
Though we are likely to require cash for future strategic initiatives, we
anticipate thatnegative impact on our short-term liquidity will improve with the expected sale of
a portion of our Excite common stock (see Note 11).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 2000
Many existing computer systems use onlyThe following is a Year 2000 readiness disclosure under the last two digitsYear 2000
Information and Readiness Disclosure Act.
Intuit established a Year 2000 Project Office to identify a year.
Consequently, asaddress the impact of the year
2000 approaches, many systems do not yet recognizedate transition on its operations, products and services globally. We
adopted a five-phase approach for reviewing and preparing the difference in a year that begins with "20" insteadsignificant
elements of "19." This, as well as
other date related processing issues, may cause systems to fail or malfunction
unless corrected.
We are currently taking steps to addressoperations, products and services for the Year 2000 issuesdate transition.
Through the date of this filing, we have had no major Y2K-related issues. In
addition, all substantive claims in the following three
areas: (1)lawsuits filed against Intuit in
connection with alleged Y2K problems with our internal systems (including information technology such as
financialproducts 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 entry systems and non-information technology systems such as
phones and facilities); (2)free solutions,
where required, on our products; and (3) the readiness of third parties
with whom we have business relationships. We have assigned a dedicatedCorporate Year 2000 Resource Center at
www.intuit.com/y2k.
Costs directly attributed to our Year 2000 project team to develop and implement a
-23-
24
comprehensive five-phase Year 2000 readiness plan for our world-wide operations
relating to all of these areas. This plan has executive sponsorship, is
regularly reviewed by senior management and includes progress reports to the
board of directors on a regular basis.
Phase One (initiation) involves increasing company awareness by educating and
involving all appropriate levels of management regarding the need to address
Year 2000 issues. Phase Two (inventory) consists of identifying all of our
systems, products and relationships that may be impacted by Year 2000. Phase
Three (assessment) involves determining our current state of Year 2000 readiness
for those areas identifiedwere approximately $6.5
million in fiscal 1999. We currently anticipate direct costs in the inventory phase and prioritizing areas that
needrange of $8
to be fixed. Phase Four (action) will consist of developing a plan$12 million for
those areas identified as needing correction in the assessment phase. Phase Five
(implementation) will consist of executing our action plan and completing the
steps identified to attain Year 2000 readiness. We are currently in the
assessment phase of the plan for both our internal systems and third party
relationships. For our products, we are in either the assessment or action phase
of our plan. We currently expect to substantially complete implementation for
all of the targeted areas by the end of our 1999 fiscal year (July 1999).
While Year 2000, including costs incurred to date (including litigation costs) have not
been material, we will incur additionalassociated with
-27-
28
ongoing maintenance and support activity in fiscal year 2000, and including
costs as we completeassociated with the project phases.
Based on preliminary assessments resulting from the early phasesmanufacture and distribution of our plan in
each of the targeted areas, we are currently unable to determine whether
additional costs to achieve Year 2000 readiness will be material. Additional
costs incurred may include but are not limited to: the cost of manufacturing and
distributing free solutions for
products that are not Year 2000 ready;compliant or in certain cases that were not
tested for Year 2000 compliance. Although the impact of lost sales due to distributionprovision of free Year 2000 ready solutions has
probably resulted in some lost revenue for affected products;new product upgrades, we believe the
administrative costs of completing the Year 2000 project;
the cost of correcting or replacing our internal systems; and the cost of
implementing necessary contingency plans.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that welost revenue will be successful in our efforts to
address all Year 2000 issues. If we are not successful, there could be
significant adverse effects on our operations. For example, failure to achieve
Year 2000 readiness for our internal systems could delay our ability to
manufacture and ship products, disrupt our customer service and technical
support facilities, or interrupt customer access to our online products and
services. If our products are not Year 2000 ready, we could suffer lost sales or
other negative consequences resulting from customer dissatisfaction, including
additional litigation (see discussion below). We also rely heavily on third
parties such as manufacturing suppliers, service providers, financial
institutions and a large retail distribution channel. If these or other third
parties experience Year 2000 failures or malfunctions, there could be a material
negative impact on our ability to conduct ongoing operations. For example, our
ability to manufacture and ship products into the retail channel, to receive
retail sales information necessary to maintain proper inventory levels, or to
complete online transactions dependent upon third party service providers, could
all be affected. Many of our products are significantly interconnected with
heavily regulated financial institutions. Our relationships with financial
institutions could be impacted if we do not achieve Year 2000 readiness in a
manner and on a time schedule that permits them to comply with regulatory
requirements. We may also incur additional costs if we are required to
accelerate our Year 2000 readiness to meet financial institution requirements.
As with all companies, we also rely on other more widely used entities such as
government agencies, public utilities and other external forces common to
business and industry. Consequently, if such entities were to experience Year
2000 failures, this could disrupt our ability to conduct ongoing operations.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures. For
example, we have contracted with multiple suppliers to better ensure that our
products can be manufactured if a particular supplier experiences system
failures. We are building a second data center facility that will give us an
opportunity to develop back-up systems. We have also contracted with multiple
transportation companies to provide product delivery alternatives. While we
believe these contingency plans will reduce certain risks, we are still
assessing the need for additional contingency plans in areas where we believe
there may be significant exposure. Despite our efforts, there can be no
assurance that contingencies can be anticipated or adequately provided for.
-24-less than $5 million.
-28-
25
Several class action lawsuits have been filed against Intuit in California and
New York, alleging Year 2000 issues with the online banking functionality in
certain versions of our Quicken products, and it is possible that we will face
additional lawsuits. We do not believe the lawsuits have merit and intend to
defend them vigorously. We have been working with financial institutions to
provide solutions to their current online banking customers and are planning to
make such solutions available before customers experience any Year 2000
problems. See "Legal Proceedings" for more information about this litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
-25-
2629
- - --------------------------------------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of January
31, 1999.2000. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities.
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. In a higher interest rate environment, borrower
demand for mortgage loans declines. 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 mortgage loans we hold for
sale in the secondary market and ultimately the gain 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 Loans and our
government-insured loans (together, "Prime Loans"), but not with respect to our
Sub-Prime Loans or Home Equity Lines of 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.
Management actively monitors and manages 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." The hedge position is
evaluated against a spectrum of interest rate scenarios to determine expected
net changes in the fair values of the hedge position in relation to the changes
in interest rates. We do not enter into instruments for trading purposes. Our
interest rate risk exposure is evaluated daily using models which estimate
changes in the fair value of the hedge position and compare those changes
against the fair value of the underlying assets and commitments.
-29-
30
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates)
PERIOD ENDING JANUARY 31, FAIR VALUE
EXPECTED MATURITY DATE JANUARY 31,
---------------------------------------------------
2000 2001 2002 2003 2004 TOTAL 2000
---- ---- ---- ---- ---- ----- -----------
ASSETS:
Mortgage Loans................... $38,386 -- -- -- -- $38,386 $39,183
Average Interest Rate........ 8.97% 8.97%
LIABILITIES:
Lines of Credit.................. $ 3,283 -- -- -- -- $ 3,283 $ 3,291
Average Interest Rate........ 6.64% 6.64%
Based on the carrying values of our mortgage loans and lines of credit that we
held at January 31, 2000, we do not believe that short-term changes in interest
rates would 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. See
Notes 1 and 5 of the financial statement notes for more information regarding
risks related to our mortgage loans and lines of credit.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of January 31, 1999, the currency of our Japanese subsidiary strengthened while
the currencies of our other subsidiaries remained essentially stable. As of
January 31, 2000, the currency of our Japanese subsidiary has strengthenedcontinued to
strengthen and the currencycurrencies of our other subsidiaries have remained
essentially stable since the end of our 19981999 fiscal year. Because we translate
foreign currencies into U.S dollars for reporting purposes, currency
fluctuations can have an impact, though generally immaterial, on our results. We
believe that our exposure to currency exchange fluctuation risk is
insignificant, primarily because our international subsidiaries invoice
customers and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended January 31, 1999,2000, there was an
immaterial currency exchange impact from our intercompany transactions. Currency
exchange risk is also minimized since foreign debt is due almost exclusively in
local foreign currencies. As of January 31, 1999,2000, we did not engage in foreign
currency hedging activities.
-26--30-
2731
- - --------------------------------------------------------------------------------
PART II
ITEM 1
LEGAL PROCEEDINGS
- - --------------------------------------------------------------------------------
Intuit is currentlywas a defendant in the following two consolidated class action lawsuits alleging(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: (1) In re Intuit Inc. Year 2000
California Litigation (consolidated in Santa Clara County, California Superior
Court from Alan Issokson v. Intuit Inc. (filed April 29, 1998 in the Santa Clara
County, California Superior Court); Joseph Rubin v. Intuit Inc. (filed May 27,
1998 in the Santa Clara County, California Superior Court); Donald Colbourn v.
Intuit Inc. (filed June 4, 1998 in the San Mateo County, California Superior
Court)); and (2) In re Intuit Inc. Year 2000 Litigation (consolidated in the New
York Supreme Court, New York County from Rocco Chilelli v. Intuit Inc. (filed
May 13, 1998 in the New York Supreme Court, Nassau County); Glenn Faegenburg v.
Intuit Inc. (filed May 27, 1998 in the New York Supreme Court, New York County);
and Jerald M. Stein v. Intuit Inc. (filed June 23, 1998 in the New York Supreme
Court, New York County)). The lawsuits are substantively very similar. The
lawsuits assert breach of implied warranty claims, violations of federal and/or
state consumer protection laws, and violations of various state business
practices laws, and the plaintiffs seek compensatory damages, disgorgement of
profits, and (in certain cases) attorneys' fees. See MD&A, page 23, for a
discussion of Intuit's status and plans withcompliant. With
respect to Year 2000 compliance.
On June 23, 1998, Intuit filed a demurrer in the Issokson complaint. In August
1998, our motion was granted but the plaintiff was provided an opportunity to
amend the complaint to allege injury. Issokson, Rubin and Colbourn filed a
consolidated amended complaintCalifornia litigation, on October 9, 1998. Intuit filed13, 1999 the court dismissed
the case without leave to amend. The only remaining issue relates to a demurrerpotential
award of attorneys' fees to the amended complaint on November 9, 1998. The court sustained Intuit's demurrer
on January 27, 1999, dismissing the contract and fraud claims with prejudice and
granting a leave to amend on plaintiffs' injunction and unfair business
practices claim.plaintiffs. On February 26, 1999, Issokson, Rubin and Colbourn filed a
Second Amended Complaint alleging that Intuit has engaged in unfair business
practices and seeking injunctive and equitable relief. We believe we have good
and valid defenses to the claims asserted, and we intend to vigorously defend
against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1, 1998,1999, the court
granted our motion to dismiss all the New York actions with prejudice. Plaintiffs haveAlthough
plaintiffs filed a Notice of Appeal.
On March 3, 1999, IntuitAppeal, they failed to perfect the appeal.
Accordingly, this case is also now over.
In addition, a suit was filed a complaint against Checkfree Corporation in the Santa ClaraContra Costa County, California Superior
Court seeking damagesby an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and injunctive
relief. The complaint allegesothers,
alleging that Checkfree isthese retailers have sold software and hardware products which are
not complyingYear 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 termsplaintiffs. 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 its April 1998 bill presentment agreement withCalifornia, Eastern Division.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in which Checkfree agreedthe United States District Court, Southern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to support web-based bill presentment products offered through Intuit with its
processing services,third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
notviolations of federal statutes related to offer web-based bill presentment productselectronic communications. The
lawsuits seek injunctive relief, an order to disgorge profits related to the
alleged acts, and statutory and other damages. As of its
own except through Intuit in certain distribution channels. Intuit owns 19.9% of
Checkfree's outstanding Common Stock (see Note 1).March 10, 2000, neither
lawsuit had been served on Intuit.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
-27--31-
2832
- - --------------------------------------------------------------------------------
ITEM 4
SUBMISSION2
CHANGES IN SECURITIES AND USE OF MATTERS TO A VOTE OF SECURITY HOLDERSPROCEEDS
- - --------------------------------------------------------------------------------
At the Company's Annual Meeting(a) Not applicable.
(b) Not applicable.
(c) On January 24, 2000, we issued and sold 225,000 shares of Stockholders on January 15, 1999, Intuit's
stockholders approved the following proposals:
1. Proposalour common
stock to Stephen M. Bennett, our recently appointed President and Chief
Executive Officer, pursuant to two Restricted Stock Purchase Agreements.
The purchase price for the electionshares was $0.01 per share, for an aggregate
purchase price of directors:
For Withheld
---------- ---------
Christopher W. Brody 52,539,611 968,305
William V. Campbell 52,539,615 968,301
Scott D. Cook 52,539,615 968,301
L. John Doerr 52,539,615 968,301
Michael R. Hallman 52,539,615 968,301
William H. Harris, Jr 51,648,003 1,859,913
Burton J. McMurtry 52,539,615 968,301
2. Proposal$2,250. The shares were issued without registration
under the Securities Act of 1993, as amended (the "1933 Act"), in
reliance on an exemption under Section 4(2) of the 1933 Act. The shares
are subject to amendvesting over periods of up to 10 years. Any unvested
shares may be repurchased by Intuit for the Company's 1993 Equity Incentive Plan to
increase the number of shares of common stock available for issuance
thereunder by 2,640,000 shares:
For 35,916,888
Against 17,454,810
Abstain 48,001
Unvoted 87,920
3. Proposal to amend the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares of common stock available for issuance
thereunder by 300,000 shares:
For 52,898,276
Against 568,248
Abstain 41,392
4. Proposal to amend the Company's 1996 Directors Stock Option Plan to
increase the number of shares of common stock available for issuance
thereunder by 30,000 shares:
For 39,467,813
Against 13,989,678
Abstain 50,425
5. Proposal to ratify the selection of Ernst & Young LLP as the Company's
independent auditors for fiscal 1999.
For 53,449,390
Against 24,044
Abstain 34,482
-28-original purchase price if
Mr. Bennett's employment with Intuit is terminated under certain
circumstances.
(d) Not applicable.
-32-
2933
- - --------------------------------------------------------------------------------
ITEM 5
OTHER INFORMATIONMATTERS
- - --------------------------------------------------------------------------------
CHANGES IN EXECUTIVE OFFICERS AND BOARD OF DIRECTORS
On FebruaryJanuary 24, 1999, we increased the size of our Board of Directors to eight
members2000, Stephen M. Bennett was appointed President and appointed Donna L. Dubinsky to fill the vacancy on the Board. Ms.
Dubinsky is the Chief
Executive Officer and a co-foundermember of Handspring, Inc.,
which creates handheld computers targeted at consumers. Prior to the formationBoard of Handspring, Ms. Dubinsky was President of Palm Computing, the 3Com
Corporation subsidiary that created the PalmPilot family of handheld computing
products. Dubinsky had joined Palm ComputingDirectors. William V. Campbell
stepped down as Acting Chief Executive Officer in June
1992. Before Palm, Dubinsky was a co-founderbut remains Chairman of Claris Corporation. Previously,
she had been a senior manager in a varietythe
Board.
As of logistics, salesMarch 13, 2000, Intuit's executive officers are as follows:
NAME POSITION
- - ---- --------
Stephen M. Bennett President and marketing
positions at Apple Computer.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-
34
- - --------------------------------------------------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
(a)(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 15, 1999 (1)19, 2000
10.02 Employment Agreement between Intuit Inc. 1996 Directors Stock Option Plan, as amended
throughand Stephen M. Bennett dated January
15, 1999, and form of Stock Option Grant
Agreement for use thereunder (2)21, 2000
10.03 Intuit Inc. 1993 Equity Incentive Plan, as amended through
January 15, 1999, and form ofRestricted Stock Option Grant Agreement
for use thereunder (3)
10.04 Term Sheet for Forward Sale of Excite Common Stock, dated
March 11, 1999, by andPurchase Agreements between Intuit and
Credit Suisse
Financial Products (4)Stephen M. Bennett dated January 24, 2000
10.04 Confidential Agreement and General Release of Claims between Intuit Inc.
and William H. Harris, Jr., dated September 23, 1999
27.01 Financial Data Schedule (filed only in electronic version only)
-----------------------------------------------------------------------
(1) Incorporated by reference to Exhibit 4.01format) period ended
January 31, 2000
27.02 Financial Data Schedule (filed only in Intuit's Form S-8
registration statement (file no. 333-71103) filed with the
Commission onelectronic format) period ended
January 25, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71101) filed with the
Commission on January 25, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71099) filed with the
Commission on January 25, 1999.
(4) Incorporated by reference to Intuit's Schedule 13D, Amendment
No. 2 with respect to Excite, Inc. Common Stock, filed with
the Commission on March 11, 1999.
(b)31, 1999
- - ----------------
(B) REPORTS ON FORM 8-K:
The Company has not(1) On January 25, 2000, Intuit filed any reportsa report on Form 8-K sinceto report under Item
5 the beginningappointment of the fiscal quarter ended January 31, 1999.
-29-Stephen M. Bennett as President and Chief Executive
Officer and a board member.
-34-
3035
- - --------------------------------------------------------------------------------
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 12,16, 1999 By: /s/ Greg J. Santora
-----------------------------------------------------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-30--35-
3136
EXHIBIT INDEX
Exhibit # Description
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 15, 1999 (1)
10.02 Intuit Inc. 1996 Directors Stock Option Plan, as amended through
January 15, 1999, and form of Stock Option Grant Agreement for use
thereunder (2)
10.03 Intuit Inc. 1993 Equity Incentive Plan, as amended through January
15, 1999, and form of Stock Option Grant Agreement for use thereunder
(3)
10.04 Term Sheet for Forward Sale of Excite Common Stock, dated
March 11, 1999, by and between Intuit and Credit Suisse Financial
Products (4)
27.01 Financial Data Schedule (filed in electronic version only)
(1) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71103) filed with the
Commission on January 25, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71101) filed with the
Commission on January 25, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-71099) filed with the
Commission on January 25, 1999.
(4) Incorporated by reference to Intuit's Schedule 13D, Amendment
No. 2 with respect to Excite, Inc. Common Stock, filed with
the Commission on March 11, 1999.
Exhibit
Number.. Description Page
- - ------ ----------- ----
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 19, 2000.......................................................
10.02 Employment Agreement between Intuit and Stephen M. Bennett dated
January 21, 2000.......................................................
10.03 Intuit Inc. Form of Restricted Stock Purchase Agreements between
Intuit and Stephen M. Bennett dated January 24, 2000...................
10.04 Confidential Agreement and General Release of Claims between
Intuit Inc. and William H. Harris, Jr., dated September 23, 1999.......
27.01 Financial Data Schedule (filed only in electronic format) period
ended January 31, 2000 ................................................
27.02 Financial Data Schedule (filed only in electronic format) period
ended January 31, 1999 ................................................
-36-