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 APRIL 30, 1999JANUARY 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
-------- ----------
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
-------------------------------------------
(Address of principal executive offices)
(650) 944-6000
---------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
62,240,887Approximately 201,677,034 shares of Common Stock, $0.01 par value,
as of May 28, 1999February 29, 2000
2
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FORM 10-Q
INTUIT INC.
INDEX
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PART I FINANCIAL INFORMATION
PAGE
NUMBER
------
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 19981999 and April 30, 1999................................January 31, 2000........................... 3
Condensed Consolidated Statements of Operations for
the three and ninesix months ended April 30, 1998January 31, 1999 and 1999.........2000.... 4
Condensed Consolidated Statements of Cash Flows for
the ninesix months ended April 30, 1998January 31, 1999 and 1999...................2000............... 5
Notes to Condensed Consolidated Financial
Statements......................................................Statements................................................... 6
- - -
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 16Operations.......................... 18
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk........... 27Risk...... 29
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.................................................... 28Proceedings............................................... 31
ITEM 2: Changes in Securities and Use of Proceeds....................... 32
ITEM 5: Other Matters................................................... 33
ITEM 6: Exhibits and Reports on Form 8-K..................................... 30
Signatures........................................................... 318-K................................ 34
Signatures...................................................... 35
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, APRIL 30,
1998JANUARY 31,
1999 2000
---------- -----------
-----------
(In thousands, except par value) (Unaudited)
value; unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................................................... $ 138,133554,230 $ 330,225377,685
Short-term investments ....................................................... 244,699 335,925................................... 305,125 412,918
Marketable securities ........................................................ 499,285 1,095,050.................................... 431,319 1,046,170
Customer deposits ........................................ 145,836 135,456
Accounts receivable, net (1) ................................................. 59,417 114,188net(1) ............................. 63,677 249,146
Mortgage loans ........................................... 84,983 38,386
Deferred income taxes .................................... 64,925 65,002
Inventories .................................................................. 3,695 2,267.............................................. 4,931 9,351
Income taxes receivable .................................. -- 1,190
Prepaid expenses and other current assets (2) ................................ 34,896 77,154
-----------assets(2) ............ 67,859 34,803
---------- -----------
Total current assets ................................................. 980,125 1,954,809............................. 1,722,885 2,370,107
Property and equipment, net .................................................... 69,413 91,195................................ 119,220 149,324
Purchased intangibles, net ..................................................... 85,797 74,038................................. 98,049 97,275
Goodwill, net .................................................................. 285,793 243,131.............................................. 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 43,22345,704 39,569
Restricted investments ......................................................... 28,516 34,568
Other assets ................................................................... 10,937 7,895
-----------..................................... 36,028 38,416
---------- -----------
Total assets .................................................................................................................. $2,489,075 $ 1,498,596 $ 2,469,865
===========3,200,809
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit .......................................... $ 29,896 $ 3,283
Accounts payable ............................................................. $ 44,035 $ 95,368......................................... 66,436 121,110
Accrued compensation and related liabilities ................................. 23,728 34,488............. 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 69,237......................................... 65,994 106,395
Income taxes payable ......................................................... 3,044..................................... 143,181 --
Deferred income taxes ........................................................ 120,482 361,379.................................... 136,694 384,484
Other accrued liabilities .................................................... 124,820 199,175
-----------................................ 201,872 271,760
---------- -----------
Total current liabilities ............................................ 374,669 759,647........................ 879,243 1,089,263
Long-term notes payable .................................... 36,614 37,862
Long-term deferred income taxes ................................................ -- 770
Long-term notes payable ........................................................ 35,566 36,043............................ 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 61,949201,093 shares,
respectively .......... 593 619........................................ 1,073 2,012
Additional paid-in capital ................................................... 1,080,554 1,190,817
Net unrealized gain on marketable securities ................................. 181,071 545,314
Cumulative translation adjustment and............................... 1,266,004 1,433,323
Acquisition related deferred compensation ................ -- (30,063)
Accumulated other .................................. 1,531 (1,179)comprehensive income ................... 77,680 448,207
Accumulated deficit .......................................................... (175,388) (62,166)
-----------retained earnings ............................ 216,631 208,062
---------- -----------
Total stockholders' equity ........................................... 1,088,361 1,673,405
-----------....................... 1,561,388 2,061,541
---------- -----------
Total liabilities and stockholders' equity ...................................................... $2,489,075 $ 1,498,596 $ 2,469,865
===========3,200,809
========== ===========
(1) Includes $4.4$0.1 million and $1.6$2.3 million due from Checkfree at July 31, 19981999
and April 30, 1999,January 31, 2000, respectively and $3.4 million due from Excite
at July 31, 1998. (see Note 10)11).
(2) Includes balances due of $7.3$6.7 million and $6.0$10.6 million on a note receivable from Venture
Finance Software Corp. at July 31, 19981999 and April 30, 1999,January 31, 2000 respectively
(see Note 10)11).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINESIX MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------- --------------------------
1998JANUARY 31, JANUARY 31,
1999 19982000 1999 2000
-------- --------- -------- ---------
--------- ---------
(In thousands, except per share amounts; unaudited)
Net revenue(1) .................................................................................. $373,733 $ 141,996425,499 $510,614 $ 239,701 $ 475,467 $ 697,620602,427
Costs and expenses:
Cost of goods sold:
Product ....................................... 29,331 50,070 97,206 151,100Products and services ................................... 70,234 93,066 109,231 149,506
Amortization of purchased software and other .. 588 1,885 1,941 5,586............ 1,897 2,489 3,701 4,921
Customer service & technical support ............. 26,389 28,557 91,821 98,312....................... 41,144 47,657 72,004 81,958
Selling & marketing .............................. 55,067 43,884 134,006 151,520........................................ 71,203 86,110 124,282 156,015
Research & development ........................... 25,381 34,325 78,159 104,346..................................... 36,353 44,038 70,021 85,750
General & administrative ......................... 9,180 14,421 27,387 40,689................................... 19,625 23,327 38,934 44,819
Charge for purchased research and development .............. -- -- -- 1,312
Amortization of goodwill and purchased intangibles 3,369 20,890 12,230 62,822......... 20,962 45,211 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 .................. 149,305 194,032 442,750 614,375
--------- --------- --------- ---------............................ 263,418 342,903 462,105 611,087
Income (loss) from operations ........... (7,309) 45,669 32,717 83,245..................... 110,315 82,596 48,509 (8,660)
Interest and other income and expense, net ........ 3,104 5,344 7,375 12,642
Realized gain on sale of.................. 3,950 6,988 7,298 15,465
Gain (loss) from marketable securities .... -- 58,596 -- 68,684
Gain on disposal of business ...................... -- -- 4,321 --10,088 (2,800) 10,088 (20,110)
-------- --------- --------- ----------------- ---------
Income (loss) before income tax ................... (4,205) 109,609 44,413 164,571taxes ........................... 124,353 86,784 65,895 (13,305)
Income tax provision (benefit) .................... (1,999) 37,054 17,534 51,349.............................. 31,228 29,582 17,665 (4,587)
Minority interest ........................................... -- (90) -- (149)
-------- --------- --------- ----------------- ---------
Net income (loss) ............................................................................ $ (2,206)93,125 $ 72,55557,292 $ 26,87948,230 $ 113,222(8,569)
======== ========= ========= ================= =========
Basic net income (loss) per share ............................................ $ (0.05)0.49 $ 1.180.29 $ 0.560.26 $ 1.87(0.04)
======== ========= ========= ================= =========
Shares used in per share amounts .................. 48,209 61,553 47,618 60,409............................ 188,813 195,935 187,600 192,285
======== ========= ========= ================= =========
Diluted net income (loss) per share ........................................ $ (0.05)0.47 $ 1.120.27 $ 0.540.25 $ 1.79(0.04)
======== ========= ========= ================= =========
Shares used in per share amounts .................. 48,209 64,817 49,560 63,192............................ 198,413 209,566 195,561 192,285
======== ========= ========= ================= =========
(1) Includes $0.2$1.3 million and $12.9$2.4 million of revenue from Checkfree for the three and ninesix
months ended April 30, 1998January 31, 1999 and $1.6$1.8 million and $4.0$3.6 million of revenuefrom
Checkfree for the three and ninesix months ended April 30, 1999,
respectively. Includes $3.1 million and $6.9 million of revenue from
Excite for the three and nine months ended April 30, 1998 and $5.9
million and $17.6 million of revenue for the three and nine months ended
April 30, 1999,January 31, 2000 respectively
(see Note 10)11).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
NINESIX MONTHS ENDED
APRIL 30,
---------------------------JANUARY 31,
(In thousands; unaudited) 1998 1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................(loss) ............................................................. $ 26,87948,230 $ 113,222(8,569)
Adjustments to reconcile net income (loss) to net cash provided 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 12,793 68,408................. 45,633 86,483
Deferred compensation expense ............................................ -- 1,744
Depreciation ........................................... 22,038 25,063
Realized gain on sale of............................................................. 18,002 21,798
Charge for purchased research and development ............................ -- 1,312
(Gain) loss from marketable securities ......... -- (68,684)................................... (10,088) 20,110
Changes in assets and liabilities:
Accounts receivable ................................. (76,486) (54,771)................................................... (181,831) (185,369)
Inventories ......................................... 505 1,428........................................................... (2,170) (4,420)
Mortgage loans ........................................................ (66,435) 46,597
Prepaid expenses .................................... (5,950) (42,258)and other current assets ............................. (16,544) 32,163
Customer deposits ..................................................... (8,514) 6,565
Deferred income tax assets and liabilities .......... (473) (1,162)............................ (1,428) (3,805)
Accounts payable .................................... 12,530 51,333...................................................... 25,838 54,620
Accrued compensation and related liabilities ........ 439 10,760.......................... 4,877 9,572
Escrow funds payable .................................................. 8,362 (5,036)
Deferred revenue .................................... 6,125 10,677...................................................... (12,581) 40,401
Drafts payable ........................................................ 9,812 (33,825)
Accrued acquisition liabilities ..................... (35,326)....................................... (19,181) (5,389)
Other accrued liabilities ........................... 100,264 95,424............................................. 130,558 63,936
Income taxes payable ................................ 13,801 46,833.................................................. 25,404 (94,561)
Minority interest ..................................................... -- 9
--------- ---------
Net cash (used in) provided by operating activities ......... 74,017 237,092................. (2,056) 44,336
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility .............................. 9,025 --
Proceeds from sale of marketable securities .................................................... 17,263 -- 79,993
Purchase of property and equipment .......................... (29,576) (46,846)
Proceeds from business sold ................................. 26,350............................................ (27,448) (51,901)
Principal payments of long-term debt .......................................... (29) --
(Increase) decrease in other assets ......................... (6,685) (15,067).................................................... (7,262) (14,851)
Purchase of short-term investments .......................... (186,869) (232,868)............................................ (145,086) (301,277)
Acquisitions and dispositions, net of cash acquired ........................... -- (54,584)
Purchase of long-term investments ........................... (11,000) (26,214)............................................. (474) (11,115)
Liquidation and maturity of short-term investments .......... 164,834 135,590............................ 100,547 191,096
--------- ---------
Net cash used in investing activities ............. (33,921) (105,412)............................... (62,489) (242,632)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ........................ (4,638)Net borrowings (payments) under lines of credit ............................... 70,887 (26,613)
Net borrowings under reverse repurchase agreement ............................. 9,135 --
Increase in note receivable ................................. (50,000)Purchase of common stock ...................................................... (1,308) --
Net proceeds from issuance of common stock .................. 30,953 60,412.................................... 39,627 48,364
Rock Financial and Title Source payments of dividends ......................... (177) --
--------- ---------
Net cash provided by (used in) financing activities (23,685) 60,412........................... 118,164 21,751
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 16,411 192,092............................ 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 .......................................................... $ 63,191194,610 $ 330,225377,685
========= =========
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, 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 ninesix months ended April 30, 1999January 31, 2000 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 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,
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7
once our products are delivered to the shipper, we recognize revenue upon
shipment, net of return
reserves based on
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7 historical experience. To recognize revenue,
it must also be probable that we will collect the accounts receivable from our
customers. Reserves are provided for returns of excess quantities of current
product versions, as well as previous versions of products still in the
distribution channel when new versions are launched. In some situations, we
receive advance payments from our customers. Revenue associated with these
advance payments is deferred until the products are shipped or services are
provided. We also reduce revenue by the estimated cost of rebates when products
are shipped. Warranty reserves are provided at the time revenue is recognized
for the estimated cost of replacing defective products.
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.
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The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
JULY 31, APRIL 30,
1998JANUARY 31,
1999 -------- --------
(In thousands) (Unaudited)2000
--------- ---------
(In thousands; unaudited)
Cash and cash equivalents:
Cash ......................................................... $ 22,382 $108,64856,548 $ 9,235
Money market funds ............ 6,972 177,192
Corporate notes ............... -- --................. 294,190 172,342
Commercial paper .............. -- 3,300................... 156,037 40,875
Municipal bonds ............... 81,927 41,085.................... 37,455 155,233
U.S. Government securities .... 26,852......... 10,000 --
-------- --------
$138,133 $330,225
======== ========
JULY 31, APRIL 30,
1998 1999
-------- --------
(In thousands) (Unaudited)
--------- ---------
$ 554,230 $ 377,685
========= =========
Short-term investments:
Certificates of deposit ................... $ 5,0439,901 $ 68--
Commercial Paper ................... -- 103,244
Corporate notes ............... 2,000 --
Commercial paper .............. -- 23,141.................... 19,482 2,932
Municipal bonds ............... 256,297 310,979.................... 284,057 312,487
U.S. Government securities .... 9,875 36,305......... 27,713 32,671
Restricted short-term investments................. (28,516) (34,568)
-------- --------
$244,699 $335,925
======== ========investments .. (36,028) (38,416)
--------- ---------
$ 305,125 $ 412,918
========= =========
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
JULY 31, APRIL 30,
1998JANUARY 31,
1999 -------- --------
(In thousands) (Unaudited)2000
--------- ---------
(In thousands; unaudited)
Due within one year ............ $225,241 $471,463.................. $ 735,349 $ 725,909
Due within two years ........... 159,324 119,098................. 101,784 93,875
Due within three years ......... 4,401 1,509............... 1,702 --
Restricted short-term investments ................. (28,516) (34,568)
-------- --------
$360,450 $557,502
======== ========.... (36,028) (38,416)
--------- ---------
$ 802,807 $ 781,368
========= =========
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.
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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 April 30, 1999:January 31, 2000:
GROSS UNREALIZED
------------------------------------ NET REALIZED
COST GAIN LOSS LOSS FAIR VALUE
-------- -------- ----------- ------------ ----------
JULY 31, 1998
- -------------
(In thousands)
JULY 31, 1999
(In thousands; unaudited)
Checkfree Corporation common stock ........ $156,350 $106,000.. $150,081 $152,177 $ -- $262,350
Excite, Inc.$ -- $ 302,258
S1 Corporation common stock ................. 39,150 187,050......... 49,997 -- 226,200
Verisign, Inc.16,140 -- 33,857
At Home common stock ............... 2,000 5,750132,060 -- 7,750
Concentric Network Corporation common stock -- 2,985 -- 2,98536,856 95,204
-------- -------- ---- --------
$197,500 $301,785------- ---------- ----------
$332,138 $152,177 $16,140 $ -- $499,28536,856 $ 431,319
======== ======== ==== ========
GROSS UNREALIZED
-------------------
COST GAIN LOSS FAIR VALUE
-------- -------- ---- ----------
APRIL 30, 1999
- --------------======= ========== ==========
JANUARY 31, 2000
(In thousands; unaudited)
Checkfree Corporation common stock ............ $150,081 $338,319$450,245 $ -- $ 488,400
Excite,-- $ 600,326
S1 Corporation common stock ......... 49,997 37,922 -- -- 87,919
S1 Corporation options .............. -- 178,874 -- -- 178,874
Mortgage.com, Inc. common stock ................... 37,463 569,187..... 6,000 13,859 -- 606,650-- 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 ................ 132,060 -- -- 56,978 75,082
-------- -------- ----------- ---------- $187,544 $907,506----------
$347,638 $755,510 $ -- $1,095,050$ 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 Corporation ("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 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 April 30, 1999January 31, 2000 was $48.00$59.00 per share. The closing price
on June 7, 1999 was $39.875. At April 30, 1999,January
31, 2000, we held 10,175,00010.2 million shares, or approximately 19.7%19.5%, of Checkfree's
outstanding common stock.
During the third fiscal quarter, we sold 125,000 shares of Verisign, 450,000
shares of Excite, and 90,600 shares of Concentric. In connection with these
sales we recognized realized gains of $12.3 million, $39.3 million, and $7.0
million, respectively.
In June 1997,May 1999, we purchased 5.8 million970,813 shares (as adjusted for a two-for-one
stock split) of common stock of Excite. At the same time, we entered into an
agreement with Excite that providesSecurity First
Technologies. In November 1999, Security First Technologies changed its name to
S1 Corporation ("S1"). We account for the joint development, promotion and
distribution ofinvestment in S1 as an
online financial channel. As of April 30, 1999, Excite'savailable-for-sale-equity security, which accordingly is carried at market
value. S1 common stock wasis quoted on the Nasdaq StockNational Market under the symbol
XCIT.SONE. The closing price of ExciteS1 common stock at April 30, 1999January 31, 2000 was $146.00$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 andwe acquired approximately 3.7 million shares of common stock of
Mortgage.com, Inc. ("Mortgage.com") upon conversion of our preferred shares in
connection with Mortgage.com's initial public offering. We account for the
investment in Mortgage.com as an available-for-sale-equity security, which
accordingly is carried at market value. Mortgage.com common stock is quoted on
the Nasdaq National Market under the symbol MDCM. The closing price of
Mortgage.com common stock at January 31, 2000 was $5.4375 per
-9-
10
share. At January 31, 2000, we held 3.7 million shares, or approximately 8.5%,
of Mortgage.com's outstanding common stock.
In August 1999, we acquired 729,165 shares of common stock of Homestore.com,
Inc. ("Homestore.com") upon conversion of our preferred shares in connection
with Homestore.com's initial public offering. We account for the investment in
Homestore.com as an available-for-sale-equity security, which accordingly is
carried at market value. Homestore.com common stock is quoted on the Nasdaq
National Market under the symbol HOMS. The closing price of Homestore.com common
stock at January 31, 2000 was $97.5625 per share. At January 31, 2000, we held
729,165 shares, or approximately 1.0%, of Homestore.com's outstanding common
stock.
In February 1999, we purchased one million shares of common stock of
Quotesmith.com, Inc. ("Quotesmith.com"). We purchased an additional 272,727
shares of Quotesmith.com in August 1999 at the time of its initial public
offering. We account for the investment in Quotesmith.com as an
available-for-sale-equity security, which accordingly is carried at market
value. Quotesmith.com common stock is quoted on the Nasdaq National Market under
the symbol QUOT. The closing price of Quotesmith.com common stock at January 31,
2000 was $10.1875 per share. At January 31, 2000, we held approximately
1,272,727 shares, or approximately 6.6%, of Quotesmith.com's outstanding common
stock.
In connection with At Home Corporation ("At Home") announced a
proposed mergerCorporation's acquisition of Excite in whichMay 1999, our
shares of Excite were converted into At Home would acquire all of the outstanding stock of
Excite and on May 28, 1999 the merger was completed ( with the combined company
now doing business as Excite@Home). In May 1999, we entered into a forward sale
arrangement with respect to 4,350,000 shares of our Excite common stock. See
Note 11We 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 reported a realized
valuation loss of approximately $20.1 million for more information about these transactions.
Checkfreesecurities for the
period between August 1, 1999 and 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, At Home, S1, Mortgage.com, Homestore.com and Quotesmith.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.
-9-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
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1011
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 31,1998 APRIL 30,31, 1999 ----- ------------ --------------
(In thousands) (Unaudited)JANUARY 31, 2000
------- ------------- -----------------
Goodwill ...................(In thousands; unaudited)
Goodwill.................................. 3-5 $285,793 $243,131$383,102 $416,874
Customer lists .............lists............................ 3-5 53,517 49,799
Covenant66,934 67,535
Covenants not to compete ....compete.................. 3-5 2,211 2,7232,492 5,985
Purchased technology .......technology...................... 1-5 18,763 13,70017,751 14,970
Assembled workforce ........workforce....................... 2-5 5,596 3,7133,972 3,428
Trade names and logos ......logos..................... 1-10 5,710 4,1036,900 5,357
Balances presented above are net of total accumulated amortization of $103.6$210.1
million and $176.2$289.5 million at July 31, 19981999 and April 30, 1999,January 31, 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 April 30,
1999,January 31,
2000, we held shares of Checkfree common stock representing approximately 19.7%19.5%
of Checkfree's outstanding common stock. We also held approximately 9.9%0.6% of Excite'sAt
Home's common stock, 3.5% of S1's outstanding common stock, as8.5% of
April 30, 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.
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See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. See Note 11 for information regarding
subsequent dispositions of certain shares of Excite common stock. Our remaining portfolio is
diversified and consists primarily of short-term investment-grade securities.
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
-10-
11
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 $28.5 million decrease in amortization expense and an
increase in net income by approximately $17.1 million, or $0.27 per share, for
the nine months ended April 30, 1999 but will result in continuing amortization
expenses (with a corresponding decrease in net income) during fiscal 2002 and
2003.
Reclassifications
Certain 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-
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The components of comprehensive net income, net of tax, are as follows:
NINESIX MONTHS ENDED APRIL 30,
---------------------------
1998JANUARY 31,
----------------------------
1999 2000
--------- ---------
(In thousands; unaudited)
Net income .....................................(loss) ............................ $ 26,87948,230 $ 113,222(8,569)
Unrealized gain on marketable securities ....... 148,367 364,243..... 371,342 371,684
Change in cumulative translation adjustment .... 1,475 (2,710).. (4,052) (1,157)
--------- ---------
Comprehensive net income ............................................ $ 176,721415,520 $ 474,755361,958
========= =========
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
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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.
We also expensedOn December 8, 1999, we completed the purchase of all of the outstanding shares
of Rock Financial Corporation ("Rock") for approximately $53.88.6 million of in-process
research and development in the quarter ended July 31, 1998. The following table
shows pro forma net revenue, net income and diluted net income per shareshares of
Intuit common stock. Rock is a provider of consumer mortgages and Lacerte as if we had acquired Lacerte atis based in
Michigan. In connection with the beginningacquisition, Intuit assumed all of fiscal
1998, excludingRock'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 impactacquisition of the one-time charge for in-process research and
development:
NINE MONTHS
ENDED APRIL 30, 1998
------------------------
AS
PRO FORMA REPORTED
-------- --------
(In thousands, except per share data; unaudited)
Net revenue .................................... $548,969 $475,467
Net income ..................................... 14,334 26,879
Diluted net income per share ................... $ 0.24 $ 0.54
On April 7, 1999, we acquired the customer list and intellectual property rights
of TaxByte,Title Source, Inc., an
affiliate of Rock, for approximately $11 million in cash. TaxByte was a
professional tax preparation software company with a customer base150,000 shares of approximately 3,600 professional tax preparation firms. The acquisition was
treatedIntuit stock. Title
Source provides title insurance and escrow services to real estate agents,
lenders, attorneys, corporations and homeowners. We accounted for the
acquisitions of Rock and Title Source as a purchasepooling of interests for accounting
purposes and have restated all previously reported amounts to reflect the entire purchase price was
allocatedeffect
of the pooling.
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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 identified intangible assets$50 million principal
amount of demand loans secured by mortgage loans and goodwillother assets. Loans
interest at rates that vary depending on the type of underlying loan, and the
loans are subject to be amortized over five
years. Nosublimits, 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 assetsnet worth and to satisfy other financial covenants,
as outlined in the line of credit agreements. We were acquired or liabilities assumed in connectioncompliance with the
purchase.
On March 2,requirements as of July 31, 1999 we announcedand January 31, 2000.
Our reverse repurchase agreement entered into in 1997 provides that we had reached a definitivethe lender
will purchase from us, subject to our agreement to acquire Computing Resources, Inc. ("CRI"),repurchase on a Reno, Nevada-based providerspecified
date, up to $200 million of payroll services.conventional prime and sub-prime mortgage loans at
par, as of January 31, 2000. Loans subject to purchase are fixed and adjustable
rate, fully-amortizing first or junior lien residential mortgage loans and home
equity loans that comply with our origination guidelines and conform to
whole-loan sale requirements. The transaction was completed on May 3, 1999. See Note 11.
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 7, 1997, we sold Parsons, our consumer softwarereverse repurchase agreement is not a
committed facility and direct marketing
subsidiary,the lender may elect to Broderbund Software, Inc. for approximately $31 million. As a
resultdiscontinue the repurchase
agreement at any time. The terms of the sale, Broderbund acquired net assetsfinancing 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 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 millionadvance. 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 OctoberJanuary 31, 1997.2000.
Drafts payable represent funds advanced for mortgages originated which have not
yet been drawn against the lines of credit.
6. OTHER ACCRUED LIABILITIES
JULY 31, APRIL 30,
1998JANUARY 31,
1999 2000
-------- --------
(In thousands) (Unaudited)-----------
(In thousands; unaudited)
Reserve for returns and exchanges ....................... $ 60,343 $106,360
Acquisition73,955 $ 96,372
Future payments due for CRI acquisition .......... 66,314 68,313
Other acquisition and disposition related items 19,181 11,231.. 10,824 12,341
Rebates ................................. 16,870 33,397.......................................... 18,002 34,204
Post-contract customer support .......... 4,433 4,875................... 3,418 11,289
Other accruals .......................... 23,993 43,312................................... 29,359 49,241
-------- --------
$124,820 $199,175$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
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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. -12-
13
At April 30, 1999,January 31, 2000, the
rate was approximately 0.5%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 $34.6$38.4 million, or 110% of the
loan balance, of short-term investments to be restricted as security for the
borrowings at April 30, 1999.January 31, 2000. We are obligated to pay interest only until
March 2000. 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 24, 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. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1, 1998,1999, the court
granted our motion to dismiss all the New York actions with prejudice. Plaintiffs haveAlthough
plaintiffs filed a Notice of Appeal.
IntuitAppeal, they failed to perfect the appeal.
Accordingly, this case is also understands that, sometime in the last 9 months,now over.
In addition, a suit was filed in the Contra Costa County, California Superior
Court by an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others,
alleging that these retailers have sold software and hardware products which are
not Year 2000 compliant, including at least one product published by Intuit. Intuit has
received information indicating that oneOne
of the defendants in this action, Fry's Electronics, may have filed a cross-complaint
against various software publishers and hardware manufacturers, including
Intuit, asserting a claim for indemnity in the main action. In September 1999,
Fry's Electronics reached a settlement with the plaintiffs. All the cross
defendants, including Intuit, hasthen 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 been served with or received a copy
of any such cross-complaint.
-13-
14appeal this ruling by April 4,
2000, this lawsuit against Intuit will also be over.
On March 3, 1999,2000 a class action lawsuit, Bruce v. Intuit Inc., was filed a complaint against Checkfree Corporation in the
Santa Clara County,United States District Court, Central District of California, SuperiorEastern Division.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in the United States District Court, seeking damagesSouthern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
violations of federal statutes related to electronic communications. The
lawsuits seek injunctive relief. The complaintrelief, an order to disgorge profits related to the
alleged that Checkfree was not complying with the termsacts, and statutory and other damages. As of its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement agreement
by which all claims asserted by each party were dismissed with prejudice. The
arbitration was dismissed with prejudiceMarch 10, 2000, neither
lawsuit had been served on May 24, 1999, and Intuit's suit
against Checkfree was dismissed with prejudice on May 25, 1999.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 9.9% of Excite's outstanding common stock as of April 30,
1999. We reported revenue from Excite for shared advertising activities of $ 3.1
million and $6.9 million for the three and nine months ended April 30, 1998 and
$5.9 million and $17.6 million for the three and nine months ended April 30,
1999, respectively.
As of April 30, 1999,January 31, 2000, we held approximately 19.7%19.5% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported
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17
revenues of $0.2$1.3 million and $12.9$2.4 million from Checkfree for the three and
nine monthssix-months ended April 30, 1998January 31, 1999 and $1.6$1.8 million and $4.0$3.6 million for the
three and nine
monthssix-months ended April 30, 1999,January 31, 2000, respectively. The revenue from Checkfree for the
nine months ended April 30, 1998 includes a royalty payment of $10 million
received in October 1997. We held a receivablereceivables
due from Checkfree for $4.4$0.1 million and $1.6$2.3 million at July 31, 19981999 and
April 30, 1999,January 31, 2000, respectively.
As of April 30, 1999,January 31, 2000, we held a 49% non-voting equity interest and an option to purchase
the remaining equity interests, in Venture
Finance Software CorporationCorp. ("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 $6.0$10.6 million at July 31, 19981999 and April 30, 1999, respectively, representing
amounts due to us from VFSC for development and administrative services we
provided to VFSC.
11.January 31, 2000,
respectively.
12. SUBSEQUENT EVENTS
On May 3, 1999,February 18, 2000 we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services. Since October 1998,
Intuit has been offering payroll services through CRI to its QuickBooks small
business customers. These payroll services include payroll tax filing, tax
deposit services and direct deposit of employee wage payments. CRI is one of the
country's largest payroll services companies and a leader in providing payroll
services to small businesses. The purchase price for privately-held CRI was
approximately $200sold 3.0 million consisting of approximately $100 million in cash and
approximately $25 million of Intuit stock to be paid at the closing, and
approximately $75 million in cash to be paid in three annual installments of
approximately $25 million each.
On May 5, 1999, we entered into definitive agreements (including a Securities
Contract and Pledge Agreement) with Credit Suisse Financial Products ("CSFP")
for the forward sale of 4,350,000 shares of Excite Common Stock. On May 28,
1999, our shares of Excite Common Stock were converted into shares of At Home as
a result of a merger between Excite and At Home Corporation. In June 1999, we
expect to settle the forward sale arrangement. At settlement, we will receive
approximately $451.4 million from CSFP (representing the proceeds from prior
sales
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15
by CSFP of 4.350,000 shares of Excite's Common Stock), less a negotiated fee,
and to deliver stock certificates to CSFP for 4,350,000 shares of Excite Common
Stock, which now represent 4,532,273 shares of Class A Common Stock of At Home.
As a result of this transaction, we expect to record a realized gain of
approximately $253.2 million, net of tax, in the fourth quarter of fiscal 1999.
Pursuant to an agreement entered into on May 17, 1999, we completed a $50
million investment in Security First Technologies ("Security First") on May 27,
1999. Security First delivers enterprise-wide Internet applications for
financial institutions. We purchased 970,813 shares ofCheckfree common stock at a
price of $51.50$90 per share which represents approximately 3.8% of Security First's
outstanding common stock. In connection with this agreement,and on March 2, 2000 we also received an
option to purchase 3,629,187 additionalsold 2.5 million shares of
Security FirstCheckfree common stock whichat a price of $92 per share. Gross proceeds from these
transactions were $500 million. These divestitures reduced our ownership in
Checkfree to 4.7 million shares or approximately 9% of Checkfree's outstanding
stock.
On February 29, 2000, Verisign, Inc. ("Verisign") acquired all of the
outstanding securities of privately-held Signio, Inc. ("Signio"). We held an
investment in Signio, and in exchange for our investment, we will become exercisable if Security First completes its planned
acquisition of Edify Corporation (a publicly held California-based provider of
Internet and voice electronic commerce solutions), and an option to purchase an
additional 1,800,000receive
approximately 194,000 common shares of common stock if Security First completes its
planned acquisitionVerisign (representing less than 1% of
FICS Group, N.V. (a privately held Belgium-based provider
of regulatory financial reporting and remote electronic banking software). These
options are exercisable at a per share purchase price of $51.50. Our investment
in Security First was made in connection with establishing a strategic
relationship to deliver online financial software and services to financial
institutions. Thethe outstanding common stock of Security First is quoted onVerisign subsequent to the Nasdaq Stock
Market underacquisition). On
February 29, 2000, the symbol "SONE." The closing stock price of Security First common stock
on June 7, 1999Verisign was $40,625.
On June 11, 1999, we acquired the customer list and intellectual property rights
of Compucraft Tax Services, LLC, for approximately $8 million in cash with a
provision that could increase the overall purchase price if certain performance
targets are met. Compucraft was a professional tax preparation service bureau
company with an active customer base of approximately 3,400 professional tax
preparation firms. The acquisition will be treated as a purchase for accounting
purposes.
-15-$253 per share.
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1618
- - --------------------------------------------------------------------------------
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 page view and reach statistics could adversely affect our
ability to earn advertising revenue from our Quicken.com site.
- - - In order to succeed in the payroll services business, we must continue to
improve the integration of the operations of our payroll processing
subsidiary, streamline customer activations for our online payroll
processing service and focus our traditional payroll service on existing
distribution channels.
- - - The technology and services of certain alliances for our QuickBooks
Internet Gateway initiative still need to be completed and integrated with
QuickBooks, and are subject to risks and uncertainties involved in the
product development process, including technological difficulties, possible
delays, and availability of financial resources. Significant delays in
implementing key services, or failure to implement, could delay or
eliminate our ability to recognize contractually committed revenues.
- - - The anticipated benefits of certain proposed small business services to
Intuit (including the Site Builder website creation tool, Site Solutions
services and QuickBooks Internet Gateway services) will depend on a number
of variables, including the rate at which customers upgrade to 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 areaalliances will depend on establishing and
our ability to leverage our existing
small business customer base to take advantage of any market growth and to
increase themaintaining a number of smallimportant business customers using our payroll processing
service; our strategyrelationships, and implementation with respectthere can be
no assurance that key relationships will continue.
- - - Our Tax and Quicken Internet Gateway initiatives, and related new services
to the Internetbe offered in these areas, are in very early stages. Success of these
initiatives will depend on establishing and our
Internet-based businesses, including but not limited our ability to timely adapt
and expand our product, service and content offerings for the Internet
environment, our ability to operationally support and manage these new Internet
businesses, the success of ourmaintaining business
relationships with Excite@Home, AOL,key participants and otherscompleting necessary technology
development and integration, as well as achieving broad customer
acceptance of the services to be offered.
- - - We offer electronic bill payment and bill presentment services, and the My
Finances web-based personal finance management service, through licensing
arrangements with a joint venture in continuingwhich we are a participant. The
success of these services for Intuit will depend on a number of factors,
including timely and cost-effective completion of ongoing development
efforts, customer and biller adoption and participation rates, and the
status of the relationship with the joint venture. Intuit has an option to
increase trafficpurchase 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
Quicken.com,use the coststechnology developed by the joint venture will be subject to
future negotiation.
- - - We face increasing competition for access to retail and OEM distribution
channels.
- - - The integration of implementingacquired companies poses ongoing operational challenges
and risks. In addition, our Internet strategy,recent acquisitions have resulted in
significant acquisition-related expenses.
- - - Our mortgage business is subject to interest rate fluctuations, and the
impact of interest rate fluctuationsrates on ourIntuit's operating results has become more
significant since the acquisition of Rock Financial was completed.
- - - Our recent acquisition
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19
of Rock Financial could have a negative impact on Intuit's relationships
with other lenders that participate in the online mortgage business, and the uncertainty as to the timing and amount of
future Internet-related revenue and profits; the timing of availability for
future products and services; market growth, sales and upgrade rates for our
QuickBooks multi-user product; the value, size and market volatility of our
equityservice.
- - - We hold investments in other companies, including Checkfree Corporation, At Home
Corporation and Security First Technologies; our ability to achieve Year 2000
readiness in our business operations, our products and our dealings with
significant third parties; the expected impact of our recent acquisition of
Computing Resources, Inc. ("CRI") and our ability to successfully manage and
operate the payroll processing business acquired from CRI, which is a new type
of business for Intuit; the impact of acquisitions generally; our relationships
with retailers and other issues with respect to our distribution channels;
results for our international operations; and risks associated with regulated
businesses such as insurance and mortgage lending.that have been very volatile.
Additional information about factors that could affect future results and events
is included in our fiscal 1998
Form10-K, our1999 Form 10-Qs for the first and second quarters of fiscal 1999,10-K/A and other reports filed with the
Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal,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 support website where we can quickly and cost-effectively provide
patches for product bugs and provide customers with answers to frequently asked
questions.
-16-
17prior 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 will not
necessarily result in improved financial results. We believe that the dramatic
growth of the Internet will give us significant opportunities to grow our
revenue over the next several years. However, revenue from Internet commerce was
only approximately 14% of total revenue for the nine months ending April 30,
1999 (approximately 8% for Internet productsstages, and 6% for electronic
distribution). It should be noted that Internet revenues are not reported
separatelyyet generating
significant revenue or profit. Since Internet-based revenues and expenses cut
across all of our business divisions, we do not report results of our
Internet-based businesses as a separate business segment in our financial
statements; instead,statements. 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. These seasonal
trends can result in significant operating losses, particularly in the July 31
and October 31 quarters when our revenues are lower. The seasonality of our revenue patterns
has been further intensified by our June 1998 acquisition of Lacerte, a
professional tax software company. Operating results can also
fluctuate for other reasons,
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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 nine-monthsix-month periods ended April 30, 1998January 31, 1999 and 1999.2000. Investors should
note that results for the three and nine-monthsix-month periods ended April 30, 1999January 31, 2000
include activity for our LacerteCRI subsidiary, which was acquired in June 1998.May 1999. The
corresponding year ago periods did 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.
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18
NET REVENUE
Three Months Ended April 30, Nine Months Ended April 30,
-------------------------------- --------------------------------
(Dollars in millions; unaudited) 1998 Change 1999 1998 Change 1999
------ ------ ------ ------ ------ ------
Software ............................. $118.8 79% $212.4 $404.1 53% $617.1
% of revenue ......................... 84% 89% 85% 88%
Supplies ............................. $ 23.2 18% $ 27.3 $ 71.4 13% $ 80.5
% of revenue ......................... 16% 11% 15% 12%
Total ................................ $142.0 69% $239.7 $475.5 47% $697.6
division (see Note 7).
Small Business Division. Small business division revenues come primarily from
the following sources:
o- QuickBooks product line
o- Supplies products (including checks, envelopes and invoices)
o Tax table- Payroll services
o- Support fees for the QuickBooks Support Network
o Payroll processing fees
Overall, revenue for the division was up 93%63% and 52%64% for the three and nine-monthsix-month
periods ended April 30, 1999,January 31, 2000, respectively, compared to the same periods a
year ago. The increases were primarily a result of revenue growth for our
QuickBooks products. In addition, CRI (acquired in May 1999) and our QuickBooks
Online Payroll Service (launched in October 1998) contributed to revenues during
the timing of
recent QuickBooks releases that occurredthree-month and six-month periods
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21
ended January 31, 2000, but did not account for material revenue in June 1998 (version 6.0) and January
1999 (QuickBooks '99). Prior to these releases, we had not launched a new
version of QuickBooks since December 1996 (version 5.0). As a result, the
current three
and nine-monthsix-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 recentQuickBooks (QuickBooks 2000) in December
1999. The increased revenue from our QuickBooks product launch. Current fiscal year revenues also benefited fromline was attributable to
increased unit sales, as well as an increase in revenue
per customer, due primarily to an improvement in the mixaverage selling prices of
the QuickBooks salesproduct driven by consumer preferences toward higher priced,
greater functionality products. We believe a significant number of customers may
have upgraded earlier than they otherwise may have, due to Year 2000 concerns.
Accordingly, we expect that some of the fiscal 2000 second quarter strength in
QuickBooks revenue is a shift from the second half of the year, and we expect
the revenue growth rate to decline significantly as the year progresses.
QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected
and integrated electronic services, that is designed to offer small businesses
direct access to services from third parties, such as electronic postage and
merchant account services, that can help them more easily and efficiently manage
their business. It also features QuickBooks Site Builder, a new web site
creation and domain name registration tool that enables small businesses to
quickly establish a presence on the Web. Although these new features are
strategically important for Intuit, it is too early to tell how successful these
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 17%11% and 13%14% for the three and nine-monthsix-month periods ended April 30, 1999,
respectively,January 31, 2000 as a
result of our increasing base of small business customers who use QuickBooks and
Quicken. Though they are a smaller componentIn addition, in August 1999, we began charging for shipping and
handling for domestic supplies shipments which also contributed to our domestic
supplies revenue.
We offer different types of small
business division revenues, tax tablespayroll services. Our QuickBooks Online Payroll
service, revenue and fees charged for
telephone support also grew substantially in the three and nine months ended
April 30, 1999 compared to the same periods of the prior year.
In October 1998, we introduced our new payroll processing service. The servicewhich 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. For example, werevenue, there are managing the new customer activation process at a
measured rate in order to provide high quality service levels and to minimize
the impact of any potential service disruptions during the initial phases of the
service. In addition,business risks
associated with the payroll processing business has been unprofitable in
its initial stages as we make systems and infrastructure investments required
for this newthe continued integration of
CRI into our existing business and incur acquisition, activation and set-up costs for new
payroll service customers. We expect the QuickBooks payroll processing business
to remain unprofitable until we are able to accumulate a large number of
subscribers who have used the service long enough for us to recover these
up-front costs. Though initial customer reaction to this service has been
positive, it has not been a significant contributor to our financial performance
in fiscal 1999.
In connection with this new payroll service business and consistent with our
strategy to expand products and service offerings to our small business
customers, we completed our acquisition of Computing Resources, Inc. ("CRI") on
May 3, 1999 (see Note 11). CRI has been our payroll processing service provider
since October 1998. This acquisition will result in significant future
acquisition related costs, as well as new business risks and integration
challenges common in all acquisitions.model. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who we believe will have a low tolerance
for payroll processing errors. Our ability to successfully operate CRI will
depend in part on retaining their existing customers and maintaining
relationships with certain banks and other third parties who we will rely on to
retain existing -18-
19
customers and attract new customers outside of our QuickBooks
customer base. If we are unable to do so, it could result in a negative impact
on our consolidated results. While the customer base for the QuickBooks Online
Payroll service continues to expand, the service is not yet generating material
revenues and we must continue to focus on streamlining the customer activation
process.
Tax Division. Tax division revenues come primarily from the following sources:
o- Quicken TurboTax and MacInTax personal desktop tax preparation
products
o- Professional tax preparation products (ProSeries and Lacerte
product lines)
o Electronic- Quicken TurboTax for the Web electronic tax return preparation services
and electronic filing feesservices
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Overall, tax division revenues for the three and nine monthssix-months ended April 30,
1999 grew 100%January 31,
2000 declined by 8% and 84%6% respectively, compared to the same periods last year.
Fiscal 1999 includes operating results for our Lacerte subsidiary which was
acquiredThe declines in June 1998, while fiscal 1998 results do not include Lacerte.
Excluding Lacerte from our fiscal 1999 results, tax division revenues would have
increased by 48% and 36% over the same periods. Growth in our tax business was
driven by our TurboTax product line which experienced significantly higher unit
salesrevenue were due in partprimarily to an increasing numberaggressive marketing and
pricing strategy for Quicken TurboTax in response to a very competitive market
for desktop personal tax software. We lowered average selling prices, and we
also bundled electronic filing and state tax products with certain versions of
taxpayers using personal computersQuicken TurboTax, which required us to prepare tax returns. Thisdefer recognition of approximately $30
million of revenue from the second quarter to the remainder of the fiscal year.
While we have experienced significant unit sales growth was partially offset by lower
average selling prices duefor the quarter ended
January 31, 2000, we continue to a higher percentage of customers buying our lower
priced regular products compared to deluxe versions and increased price
competition, primarilyexperience extreme pricing pressures from both
H&R Block's aggressively priced TaxCut product.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 these
pricing pressures.
It is currently too early to predict the final level of demand for the Quicken
TurboTax results benefited from strong growthproduct line through our retail distribution channels. Although the
number of units sold is currently higher in industry-wide retail salesthe current fiscal year to date
compared to the same period a year ago, revenue is lower due to lower average
selling prices. We expect our reserves for returned products will be adequate to
cover retailers' returns of
personal tax products, though TurboTax growth was lower than the industry growth
rate, resulting in a slight decline in retail market share. We will not be able
to determine final TurboTax sales until retailers return unsold products during the next two quarters. While we believe our reserves for returned product are
adequate to cover actual returns,three quarters,
though higher than expected returns could have a negative impact on revenue for
the season. Though they are a smaller componentBecause of these and other uncertainties, revenues and operating
results for this tax divisionseason will be unknown until late in the fiscal year.
We have experienced significantly higher revenues we also
experienced significant revenue increasesand volume for ourQuicken
TurboTax for the Web TurboTax product and for electronic filing service compared to last year, as a greateran
increasing number of customers gainedgain Internet access and becamebecome more accustomed
to processing transactions on-line. WhileWe expect that as the tax filing deadline
nears, we believe thatmay experience a dramatic increase in demand for both Web tax
preparation and electronic filing services. To deal with the increasing popularityexpected increases
in demand, we have increased our capacity and have developed a contingency plan
to provide additional capacity if necessary. However, the exact level of the Internet will
provide future revenue growth opportunities for these Internet-based tax
offerings, there are also risks. For example, with lower barriersdemand
is very difficult to entry,predict, and we expect a greater number of competitors offering Internet-based products and
services than wecould experience with our traditional desktop software business. In
addition, service interruptions can have significant negative
financial and public relations consequences.consequences if our capacity to serve our web tax
preparation and electronic filing customers is insufficient during the peak
filing period, or if the service is unavailable for other reasons such as
technical difficulties at our data center. We have not experienced an interruptionany service
interruptions thus far in the current tax filing season. However, we did have
some interruptions in our electronic filing services in February 1999 due to a power outage, which was not
significant because it was early in the tax season. However, the heavy volume
of, and peak filings periods for, electronically filed returns caused our
routine server maintenance procedures to take longer than expected, and the
procedures caused the electronic filing service to be unavailable for 14 hours on
April 11-12, 1999. WeAlthough we do not believe thisthose service outage had a material
financial impact,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. However,corrupted, we did experience negative
publicity.
The exact level of
future demandRevenues for Web TurboTax and electronic filing will be very difficult to
predict, and in future tax seasons we could experience adverse financial and
public relations consequences if these services are unavailable due to technical
difficulties or other reasons.
Though Microsoft Corporation did not release a competing product for this tax
season, we believe they will enter the personal tax preparation software market
next year. If Microsoft enters the market, their superior financial resources
and strong presence in retail distribution channels could result in an
increasingly competitive environment next tax season and beyond. If the average
selling price of our tax products were to decrease, or if we were to lose
significant market share as a result of increased future competition, our
operating results would suffer.
Excluding Lacerte from fiscal 1999 operating results, our professional tax (ProSeries) product salesproducts and products from our
Lacerte subsidiary increased by 30% and 14%10% for the three and nine monthssix-month periods ended
April 30, 1999, respectively,January 31, 2000 compared to the same periods a year ago.last year. This growth occurred 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 price increasesour acquisitions of Compucraft and
TaxByte during 1999. In addition, we continue to experience a high customer
retentionrenewal rate.
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20
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
o- Quicken product line
o- Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
o- Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
- On-line consumer mortgage placement and servicing fees through
QuickenLoans
Overall, consumer finance division revenues were up 34%9% and 11%5% for the three and
nine-monthsix-month periods ended April 30, 1999January 31, 2000 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
24% 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 nine months ended April 30, 1999.year-ago
periods. Quicken revenue was roughly flat
for the three months ended April 30, 1999increased compared to the same periodperiods of the prior
year primarily due to strong consumer demand resulting from aggressive retail
-22-
23
promotions with our tax products and lower than expected product rebate
redemptions related to Quicken 99. We believe some customers may have upgraded
during the second quarter, due to Year 2000 concerns. Accordingly, some of the
fiscal 2000 second quarter strength in fiscal
1998. For the nine months ended April 30, 1999, Quicken revenue grew 4% compared
tomay be a shift from the
same year-ago period due primarily to an approximately 5 week earlier
release of Quicken this yearthird quarter, and higher unit sales resulting from our
Quicken/TurboTax bundle promotion. This was partially offset by a higher
percentage of customers purchasing our lower priced Quicken Basic products
compared to our Quicken Deluxe versions and increased rebate incentives offered
to customers who purchased the Quicken/TurboTax bundle.
While we expect the revenue growth rate may decline as the year
progresses.
Our Quicken revenue to remain roughly flat for fiscal 1999, there is
a risk that it will decline in future periods. In fiscal 1997, Quicken
experienced over a 20% decline in revenues and there is no assurance that
similar declines will not occurproduct line faces many challenges in the future.desktop personal financial
software market. For example, sales could suffer
if customers become less inclinedwe continue to make upgrade purchases, if our competitors
were to lower their prices or ifface competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the demand for personal financeInternet at no cost, which has a negative
impact on desktop product sales. There is also an increasing emphasis on
packaging desktop software declines significantly.with original equipment manufacturers' personal
computers, which results in lower revenues per unit shipped.
Consumer division revenue growth was primarily the result of increasedalso benefited from an increase in certain
Internet-based revenues which grew by 69% and 77% for the three and nine months
ended April 30, 1999, respectively,revenue compared to the same periods last year. This increase was
largely due to higher advertising, sponsorship and transaction-related revenue
through Quicken.com and Quicken. However, revenue growth was not uniform across
all of our Internet product and service offerings.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
marketspace have grown at a slower pace. Total Quicken.com page views forability to attract customers to the
month of April 1999 were up approximately 130% comparedservice. Our ability to April 1998. While
page view growth has been strong, traffic volumes can vary significantly from
month to month due to seasonal trends, site performance, the timing of launches,
competitor's activities,successfully operate Rock will depend in part on
maintaining relationships with certain banks and other factors.third parties who we will
rely on to provide access to capital, and later, service the loans. If we are
unable to do so, it could have a negative impact on our consolidated results.
The rapid growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as 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, our financial commitments
to these and other third party providers are significant and we must continue to
increase traffic and revenue in order for our Internet businesses to bebecome
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 recently completed merger between Excite and At Home
(see Note 1) to have a neutral or positive impact on our business relationship
with Excite. Since the newly merged company (doing business under the name
Excite@Home) is expected to offer increased opportunities for distribution of
Excite's online financial content, we believe this should benefit Intuit.
However, our diminished ownership interest in the larger, combined company and
our divestiture of a significant portion of Excite stock (see Note 11) could
have a negative impact on our future relationship with Excite@Home.
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21
International Division. International division revenues come primarily from the
following sources:
o- Japanese QuickBooks and other small business products
o- Canadian Quicken, QuickBooks and Tax products
- German Quicken, QuickBooks and Tax products
o Canadian Quicken, QuickBooks and Tax products
o- United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues were down 23% and 12%increased 37% for the
three and nine-monthsix-month periods ended April 30, 1999, respectively,January 31, 2000 compared to the same periods
last year. This decreaseincrease is a result of lowerstronger sales
in Germany and the U.K, which is largely due to later releases of Quicken and QuickBooks
in those countries compared to prior year periods. This was partially
offset by increased revenues inboth Canada across all product lines. In Japan, our
largest international subsidiary, sales were roughly flat reflecting lowerand the U.K., higher sales of the Yayoi small business products for the high-end market that we acquired in
connection with our acquisitions of Milky Way and Nihon Micom, offset by sales
of our Japanese QuickBooks product which was introduced in September 1998. The
launch of QuickBooks in
Japan, is intendedand favorable currency fluctuations in Japan. Partially offsetting these
increases were declines in revenues, but increased profitability in
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24
Germany due to target a lower priced market than
our other Japanese small business products currently reach. Though we have
increased our retail market shareshift in Japan since the launch of QuickBooks, the
overall market for small business products and services in Japan continues to
suffer due primarily to poor economic conditions.
As part of our business strategy, we have refocused our European operations
towards small businessesmodel from direct participation in selected larger markets. Asthe
market to a result, we have
devoted fewer resources to consumer finance and tax products and to smaller
geographic markets during fiscal 1999. While we expect that international
revenues will be slightly down for the entire fiscal year 1999, there is a risk
that revenues in future periods could be significantly lower if our strategic
initiatives are not effective.third party distribution arrangement.
COST OF GOODS SOLD
Three Months Ended April 30, NineJanuary 31, Six Months Ended April 30,
------------------------------- --------------------------------January 31,
(Dollars in millions; unaudited) 19981999 Change 2000 1999 1998 Change 1999
------------------------------- --------------------------------2000
-------------------------- ----------------------------
Product ........................................................... $ 29.3 71% $50.1 $97.2 55% $151.170.2 33% $ 93.1 $ 109.2 37% $ 149.5
% of revenue ................................................. 19% 22% 21% 21% 21% 22%25%
Amortization of purchased .. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9
software & other
.... $ 0.6 217% $ 1.9 $ 1.9 195% $ 5.6
% of revenue .................................. 0%............... 1% 0%1% 1% 1%
Total ............................................................... $ 29.9 74% $52.0 $99.1 58% $156.772.1 33% $ 95.6 $ 112.9 37% $ 154.4
% of revenue .................................. 21%............... 19% 22% 21% 23%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 acquisitions. Total cost of goods sold increased to
22% and 23%26% of revenue for the three and nine monthssix-months ended April
30, 1999 respectively,January 31, 2000
compared to 21%19% and 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,have higher 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
connectedcompared to the direct costsale of manufacturing and shipping software products.
For example, although inpackaged software. As these businesses
grow to a quarter with low revenueshigher proportion of total revenue, we will
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22
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 foranticipate that quarter. Second, we have also experienced
significant increases in our revenues from fee for support programs. The cost of
goods sold associated with these programs is also larger as a percentage of
revenue than cost of goods sold for our traditional desktop software business.
Consequently, as revenues from our Internet-related businesses and fee for
support programs become a larger portion of our overall revenue, our cost of
goods sold as a percentage of revenue is likelywill continue to increase. Due to expected growthNote that results from CRI, our payroll
processing subsidiary that we acquired in higher cost of goods sold businesses such as our
Internet-based initiatives, fee for support programs and our online payroll
service, we believe cost of goods sold as a percentage of revenue forMay 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 April 30, NineJanuary 31, Six Months Ended April 30,
--------------------------------- -----------------------------------January 31,
(Dollars in millions; unaudited) 19981999 Change 2000 1999 1998 Change 1999
--------------------------------- -----------------------------------2000
-------------------------- ----------------------------
Customer service & technical support ....... $26.4 8% $28.6.... $ 91.8 7%41.1 16% $ 98.347.7 $ 72.0 14% $ 82.0
% of revenue ............................... 19% 12% 19%............................ 11% 11% 14% 14%
Selling & marketing ........................ $55.1 (20%) $43.9 $134.0 13% $151.5..................... $ 71.2 21% $ 86.1 $ 124.3 26% $ 156.0
% of revenue ............................... 39% 18% 28% 22%............................ 19% 20% 24% 26%
Research & development ..................... $25.4 35% $34.3.................. $ 78.2 33% $104.336.4 21% $ 44.0 $ 70.0 22% $ 85.8
% of revenue ............................... 18%............................ 10% 10% 14% 16% 15%14%
General and administrative ............................... $ 9.2 57% $14.419.6 19% $ 27.4 49%23.3 $ 40.738.9 15% $ 44.8
% of revenue ............................... 6% 6% 6% 6%............................ 5% 5% 8% 7%
Charge for purchased research
and development ......................... $ -- N/A $ -- $ -- N/A $ 1.3
% of revenue ............................ N/A N/A N/A 0%
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25
Other acquisition costs, including
amortization of goodwill and purchased
intangibles ............................................................. $ 3.4 518% $21.021.0 115% $ 12.2 415%45.2 $ 62.841.9 95% $ 81.6
% of revenue ............................... 2% 9% 3% 9%............................ 6% 11% 8% 14%
Other acquisition related costs-
amortization of deferred compensation ... $ -- N/A $ 1.0 $ -- N/A $ 1.7
% of revenue ............................ N/A 0% N/A 0%
Reorganization costs .................... $ 2.0 (100)% $ -- $ 2.0 75% $ 3.5
% of revenue ............................ 1% N/A 0% 1%
Customer Service and Technical Support. Customer service and technical support
expenses decreased to 12% and 14%were flat as a percentage of revenue for the three and nine monthssix-month
periods ended April 30, 1999, respectively,January 31, 2000 compared to 19% for the same periods of the prior year.
These improvements reflect the continuing benefit from cost reductions
resulting from the restructuring and consolidation of our technical support
facilities in the United States and Europe in the fourth quarter of fiscal 1997
and a greater proportion of expenses shifting into cost of sales as a result of
our expanding Internet related and fee for support initiatives. We have also benefited from our efforts to provide customer service and technical
support less expensively through websites and other electronic means. During the second
and third quarters of fiscal 1999, many customers experienced unusually long
hold times for customer service calls. We may need to increaseHowever,
we increased our investment in customer service and technical support expenses as a percentage of revenue induring the fourth quarter
of fiscal 1999 and in
fiscal 2000 comparison periods in orderanticipation of increased call volumes
relating to improve customer service levelspotential year 2000 issues, and also to handle customer questions relating to Yearsupport two major product
launches in the second quarter (QuickBooks 2000 compliance issues.
In addition, if we experience product errors, poor service levels or service
outagesand Quicken TurboTax for our web-based products, it may result in significant additional
customer service and technical support expenses or customer dissatisfaction.the
1999 tax year).
Selling and Marketing. Selling and marketing expenses were 18%20% and 22%26% of
revenue for the three and nine monthssix-months ended April 30, 1999, respectively,January 31, 2000 compared to 39%19% and
28%24% for the same periods of the prior year. Prior yearThe increases in selling and
marketing expenses included a $16.2 million charge forcosts are attributable to the AOL
agreement entered into in February 1998. Excluding this charge, selling andaggressive marketing expenses would have been 27% and 25% of revenue
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23
forprograms relating
to the three and nine months ended April 30, 1998. This decrease is primarily
the resultexpansion of our acquisition of Lacerte, which experiences comparatively lower
selling and marketing expenses as a percentage of revenue. The positive impact
of Lacerte was partially offset by increased TV and radio advertising for our
Quicken product line and additional costs related to the promotion of QuickBooksInternet-based businesses and the payroll product launch.increasingly
competitive personal tax market. We continue to expect that selling and
marketing costs as a percentage of revenue to decline slightly inwill increase for fiscal 19992000
compared to fiscal 1998.1999 as we continue to aggressively market our Internet-based
businesses and face intense competition in the personal tax market for the rest
of the 1999 tax season.
Research and Development. Research and development expenses decreased towere 10% and 14% and
15% of
revenue for the three and nine monthssix-months ended April 30, 1999, respectively,January 31, 2000 compared to 18%10% and
16%14% of revenue for the same periods of the prior year. This decrease is
dueWe continue to invest in part to our acquisition of Lacerte which experiences comparatively lower
research and development expenses asdue to our efforts to develop our Internet-based
businesses. As a percentage of revenue. Weresult, we expect researchour Internet-based businesses will continue
to require significant development expenditures in fiscal 2000 and development expenses to remain roughly flat as a percentage of revenue for
fiscal year 1999 compared to fiscal 1998. However, if thesebeyond.
If such expenses exceed our current expectations, they may have an adverse
effect on operating results. This could occur, for example, if we were to
undertake a costly product development venture in response to competitive
pressures or other market conditions.
General and Administrative. General and administrative expenses were flat at 6%5% and 7%
of revenue for the three and nine monthssix-months ended April 30, 1999January 31, 2000 compared to 5%
and 1998.8% 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 for fiscal year 1999 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 $22.8 and $68.4 million for the three and ninesix months ended April 30, 1999, respectively, compared to $4.0January
31, 2000, we recorded charges for purchased research and $14.2 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.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 believed would
result from the products and discounting these net cash flows back to their
present value. As of April 30,
1999, actual resultsWe believe the products related to date have been consistent with assumptions made when we
initially appraisedthese charges will be
completed during our fiscal year 2000, and that the valuerisk of these in-process projects. Specifically,
revenues, developmentproducts not
being
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26
successfully completed is low.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and completion datespurchased intangibles and deferred compensation costs that are
recorded as they relatepart of an acquisition. These costs increased to $48.7 million and
$88.2 million for the three and six-months ended January 31, 2000 compared to
$22.9 million and $45.6 million for the same periods of the 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 acquisition of CRI which closed
after our quarter end (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 $56.3$163.7 million, $51.4$145.5 million, $44.6$140.2 million and $41.5$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 nine monthssix-months ended April 30, 1999,January 31, 2000, interest and other income
and expense, net, increased to $5.3$7.0 million and $12.6$15.5 million respectively compared to $3.1$4.0
million and $7.4$7.3 million for the same periods a year ago, periods reflecting increased
cash and short-term investment balances. The $4.3 million gain on disposal of
businessWe have elected to report our At Home
common stock as a trading security and are required to mark to market the
fluctuations in the nine-month period ended April 30, 1998 resulted fromstock price and report the sale of
Parsons,fluctuations in our direct marketing subsidiary, in August 1997. Our $58.6 and $68.7
million gains on the sale of marketable securities forearnings. For
the three and nine monthssix-months ended April 30, 1999 wereJanuary 31, 2000, we reported losses arising from
fluctuations in the resultshare price of our saleAt 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 earnings, since that security was
not classified as a trading security. We did, however, report a realized gain of
$10.1 million for both the three and six-month periods from a year ago from the
sales of Checkfree, Verisign, and Concentric common stock (see Note 1).
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24stock.
INCOME TAXES
For the three and nine monthssix-months ended April 30, 1999,January 31, 2000, we recorded income tax
provisions (benefits) of $37.1$29.6 million and $51.3($4.6) million on a pretax income
(loss) of $109.6 and $164.6$86.8 million ($13.3) million, respectively. This compares to income
tax provisions (benefit) of ($2.0)$31.2 million and $17.5$17.7 million on a pretax income (loss) of ($4.2)$124.4
million and $44.4$65.9 million, respectively for the same periods of the prior year.
At April 30, 1999,January 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999,January 31, 2000, our unrestricted cash and cash equivalents totaled $330.2$377.7
million, a $192.1$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. Increase in cash 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 $237.1operations provided $44.3 million in cash forduring the ninesix months ended
April 30, 1999, driven by net income of $113.2 million. AdditionalJanuary 31, 2000. Primary sources of cash were net income adjustments made for non-cash expenses such as
acquisition charges and depreciation and significant increasesan increase of $54.6 million in
accounts payable and $63.9 million in other accrued liabilities. TheseThe
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27
increases in accrued liabilities and accounts payable and
other accrued liabilities 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 quarter and thirda
significant decrease in income taxes payable as a result of the payment of taxes
for our fiscal quarters. We also used cash to increase our prepaid assets, due in part
to a large federal quarterly tax prepayment.year ended July 31, 1999.
Investing activities resulted in the use of $105.4used $242.6 million in cash for the ninesix months ended
April 30, 1999. This was driven byJanuary 31, 2000. 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. We also
used $54.6 million in cash to make significant
strategic investments, primarily in private companies. Due tofor our substantial
investments in marketable securities, such as Checkfree, At Homeacquisitions of SecureTax and Security
First, there is a risk that market value declines may have a significant
negative impact on our liquidity. If such declines were deemed to be permanent,
they would result in a charge to our statements of operations.Hutchison.
Financing activities provided $60.4$21.8 million forin the nine months ended April 30,
1999first quarter, primarily
attributable to proceeds from the exercise of employee stock options. This was
partially offset by a decrease in our line of credit as we funded new consumer
mortgage loans during the period.
We currently hold investments in a number of publicly traded companies (see Note
1). 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 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 May 3, 1999 acquisition of CRI (see Note 4), we are making significant
cash payments (see Note 11)required to pay
three annual installments of $25 million in oureach of the next three fiscal fourth quarter and beyond. In
addition, in May 1999 we made a $50 million cash investment in Security First
Technologies (see Note 11), which also negatively impacted our liquidity.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
10)11) and elect to pay all or a significant portion of the exercise price in cash,
this would have a negative impact on our liquidity.
Though we are likely to require cash for future strategic initiatives, our
short-term liquidity will improve during the fourth quarter when we receive the
proceeds from the forward sale of a significant portion of our Excite common
stock (see Note 11).
We believe that our unrestricted cash, cash equivalents and short-term
investments will be sufficient to meet anticipated seasonal working capital and
capital expenditure requirements for at least the next twelve months.
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25
YEAR 2000
The Company hasfollowing is a Year 2000 readiness disclosure under the Year 2000
Information and Readiness Disclosure Act.
Intuit established a Year 2000 Project Office to address the impact of the year
2000 date transition on its operations, products and services globally. In 1998, the Company established this office to coordinate a number of existing
projects and put in place a formal, structured year 2000 process moving forward.
The Project Office has a dedicated Program Manager and team who report directly
to Intuit's senior management, and status is reported regularly to the Audit
Committee of the Company's Board of Directors.
The Company hasWe
adopted a five-phase approach that it believes follows standard
industry practices for reviewing and preparing the significant
elements of operations, products and services for the Year 2000 date transition.
Phase One
(initiation) involves increasing company awareness by educatingThrough the date of this filing, we have had no major Y2K-related issues. In
addition, all substantive claims in the lawsuits filed against Intuit in
connection with alleged Y2K problems with our products and involving
all appropriate levels of management regarding the need to addressservices have been
dismissed, with only one possible appeal remaining. Customers can find Intuit's
Year 2000 issues. Phase Two (inventory) consists of identifying all ofReadiness Disclosure about our systems, products, and relationships that may be impacted by Year 2000. Phase Three
(assessment) involves determining our current state of Year 2000 readiness for
those areas identified in the inventory phase and prioritizing areas that need
to be fixed. Phase Four (action) consists of developing Year 2000order free solutions,
where required, and completing a comprehensive test cycle for all appropriate
inventoried items. Phase Five (implementation) consists of rolling outon our Corporate Year 2000 solutions for affected products, services and technologies and implementing
maintenance and support processes to maintain ongoing compliance.
As a software developer, we have three key areas of focus: (1) our products and
services; (2) our internal systems (including information technology systems
such as financial and order entry systems and non-information technology systems
such as phones and facilities); and (3) the readiness of third parties with whom
we have significant business relationships. The majority of our efforts in the
product area have now completed the action phase and our efforts are primarily
focused on providing our customer base with confirmation of product compliance
or remediation options. We are currently in the action phase for our internal
systems, and in either the assessment phase or the action phase with respect to
third party relationships. We continue to expect that our remediation and
implementation efforts will be substantially complete by the end of the fiscal
year (July 1999), with ongoing maintenance and support activity continuing
throughout calendar year 1999 and into early calendar year 2000.Resource Center at
www.intuit.com/y2k.
Costs directly attributed to our Year 2000 project are currently estimated atwere approximately $6.5
million forin fiscal 1999. This estimate is comprised primarily
of hardware, software, internal resources and consulting fees necessary to
undertake our Year 2000 testing activities during this fiscal year. We currently anticipate direct costs in the range of $10$8
to $16$12 million for fiscal year 2000, resulting from the completion of the project phases and the transition into anincluding costs associated with
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28
ongoing maintenance and support activity in fiscal year 2000. We believe that
the nature of our products2000, and the size and profile of our customer base is
likely to lead to a significant increase in the calls to our customer support
centers throughout the remainder of calendar 1999 and early 2000. These support
operations may experience call volumes not experienced to date and we are
developing plans that will allow us to handle the anticipated increase in calls
in a manner that will not lead to material incremental costs. Additionally,
there will beincluding
costs associated with the manufacture and distribution of free solutions for
products that are not Year 2000 readycompliant or in certain cases that willwere not be
tested for Year 2000 readiness. We believecompliance. Although the provision of free solutions may resulthas
probably resulted in some lost revenue for new product upgrades, to within a range of $10 to $17
million, althoughwe believe the
exact amount will depend on customer response to the Year
2000 issue.
In an effort to reduce the risks associated with the Year 2000, we have
incorporated contingency planning as part of our five-phase plan, building upon
disaster recovery and contingency planning that we already have in place. This
includes identifying areas where we are most vulnerable to Year 2000 risk and
putting contingency plans in place before we experience potential failures.
Despite our efforts, there can be no assurance that all contingencies can be
anticipated or adequately provided for.
While we are dedicating substantial resources toward attaining Year 2000
readiness, there is no assurance that welost revenue will be successful in our efforts to
address Year 2000 issues. If we are not successful, there could be significant
-25-less than $5 million.
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26
adverse effects on our operations. For example, failure to achieve Year 2000
readiness for our internal systems could delay our ability to manufacture and
ship products, disrupt our customer service and technical support facilities, or
interrupt customer access to our online products and services. If our products
are not Year 2000 ready, we could suffer lost sales or other negative
consequences resulting from customer dissatisfaction, including additional
litigation (see discussion below). We also rely heavily on third parties such as
manufacturing suppliers, service providers, financial institutions and a large
retail distribution channel. If these or other third parties experience Year
2000 failures or malfunctions, there could be a material negative impact on our
ability to conduct ongoing operations. Many of our products are significantly
interconnected with heavily regulated financial institutions. Our relationships
with financial institutions could be adversely impacted if we do not achieve
Year 2000 readiness in a manner and on a time schedule that permits them to
comply with regulatory requirements. We may also incur additional costs if we
are required to accelerate our Year 2000 readiness to meet financial institution
requirements. As with all companies, we also rely on other more widely used
entities such as government agencies, public utilities and other external forces
common to business and industry. Consequently, if such entities were to
experience Year 2000 failures, this could disrupt our ability to conduct ongoing
operations.
Several class action lawsuits have been filed against Intuit in California and
New York, alleging Year 2000 issues with the online banking functionality in
certain versions of our Quicken products, and it is possible that we will face
additional lawsuits. We do not believe the pending lawsuits have merit and
intend to defend them vigorously. We have been working with financial
institutions to provide solutions to their current online banking customers and
are planning to make such solutions available before customers experience any
Year 2000 problems. See "Legal Proceedings" for more information about this
litigation.
The above discussion regarding costs, risks and estimated completion dates for
the Year 2000 is based on our best estimates given information that is currently
available, and is subject to change. As we continue to progress with this
initiative, we may discover that actual results will differ materially from
these estimates.
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2729
- - --------------------------------------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of April
30, 1999.January
31, 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 securitiessecurities.
INTEREST RATE RISK
Interest rate risk represents a component of market risk to us and Note 11represents
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.
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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
the forward salerisks related to our mortgage loans and lines of Excite common stock.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 April 30, 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 April 30, 1999,January 31, 2000, there was an
immaterial currency exchange impact from our intercompany transactions. Currency
exchange risk is also minimized since foreign debt is due almost exclusively in
local foreign currencies. As of April 30, 1999,January 31, 2000, we did not engage in foreign
currency hedging activities.
-27--30-
2831
- - --------------------------------------------------------------------------------
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 24, 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. Intuit filed demurrers to
the Second Amended Complaint's only remaining claims and class allegations,
which were sustained with leave to amend by the court on May 7, 1999. The
plaintiffs have indicated that they intend to file a Third Amended Complaint. We
believe we have good and valid defenses to the claims asserted, and we intend to
vigorously defend against the lawsuit.
We have also filed motions to dismiss in the New York actions and on December 1, 1998,1999, the court
granted our motion to dismiss all the New York actions with prejudice. Plaintiffs haveAlthough
plaintiffs filed a Notice of Appeal.
IntuitAppeal, they failed to perfect the appeal.
Accordingly, this case is also understands that, sometime in the last 9 months,now over.
In addition, a suit was filed in the Contra Costa County, California Superior
Court by an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others,
alleging that these retailers have sold software and hardware products which are
not Year 2000 compliant, including at least one product published by Intuit. Intuit has
received information indicating that oneOne
of the defendants in this action, Fry's Electronics, may have filed a cross-complaint
against various software publishers and hardware manufacturers, including
Intuit, asserting a claim for indemnity in the main action. In September 1999,
Fry's Electronics reached a settlement with the plaintiffs. All the cross
defendants, including Intuit, hasthen 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 been served with or received a copy
of any such cross-complaint.appeal this ruling by April 4,
2000, this lawsuit against Intuit will also be over.
On March 3, 1999,2000 a class action lawsuit, Bruce v. Intuit Inc., was filed a complaint against Checkfree Corporation in the
Santa Clara County,United States District Court, Central District of California, SuperiorEastern Division.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in the United States District Court, seeking damagesSouthern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
violations of federal statutes related to electronic communications. The
lawsuits seek injunctive relief. The complaintrelief, an order to disgorge profits related to the
alleged that Checkfree was not complying with the termsacts, and statutory and other damages. As of its April 1998 bill presentment agreement with Intuit, in which Checkfree agreed
to support web-based bill presentment products offered through Intuit with its
processing services, and not to offer web-based bill presentment products of its
own except through Intuit in certain distribution channels. At approximately the
same time, Checkfree filed an arbitration proceeding against Intuit arising out
of the same 1998 agreement. Intuit owns 19.7% of Checkfree's outstanding Common
Stock (see Note 1). On May 21, 1999, the parties executed a settlement
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29
agreement by which all claims asserted by each party were dismissed with
prejudice. The arbitration was dismissed with prejudiceMarch 10, 2000, neither
lawsuit had been served on May 24, 1999, and
Intuit's suit against Checkfree was dismissed with prejudice on May 25, 1999.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.
-29--31-
3032
- - --------------------------------------------------------------------------------
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
- - --------------------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) On January 24, 2000, we issued and sold 225,000 shares of our common
stock to Stephen M. Bennett, our recently appointed President and Chief
Executive Officer, pursuant to two Restricted Stock Purchase Agreements.
The purchase price for the shares was $0.01 per share, for an aggregate
purchase price of $2,250. The shares were issued without registration
under the Securities Act of 1993, as amended (the "1933 Act"), in
reliance on an exemption under Section 4(2) of the 1933 Act. The shares
are subject to vesting over periods of up to 10 years. Any unvested
shares may be repurchased by Intuit for the original purchase price if
Mr. Bennett's employment with Intuit is terminated under certain
circumstances.
(d) Not applicable.
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33
- - --------------------------------------------------------------------------------
ITEM 5
OTHER MATTERS
- - --------------------------------------------------------------------------------
CHANGES IN EXECUTIVE OFFICERS AND BOARD OF DIRECTORS
On January 24, 2000, Stephen M. Bennett was appointed President and Chief
Executive Officer and a member of the Board of Directors. William V. Campbell
stepped down as Acting Chief Executive Officer but remains Chairman of the
Board.
As of March 13, 2000, Intuit's executive officers are as follows:
NAME POSITION
- - ---- --------
Stephen M. Bennett President and Chief Executive Officer
Scott D. Cook Chairman of the Executive Committee of the Board of
Directors
Eric C.W. Dunn Senior Vice President and Chief Technology Officer
Alan A. Gleicher Senior Vice President, International
James J. Heeger Senior Vice President, Small Business Division
David A. Kinser Senior Vice President, Service Delivery and Operations
Greg J. Santora Senior Vice President, Finance, and Chief Financial
Officer
Raymond G. Stern Senior Vice President, Corporate Strategy and Marketing
Larry J. Wolfe Senior Vice President, Tax Division
Sonita J. Ahmed Vice President, Finance
Kristen S. Brown Vice President, Corporate Development
Caroline F. Donahue Vice President, Sales
Linda Fellows Vice President, Treasurer and Director of Investor
Relations
Daniel B. Gilbert Vice President, Quicken Loans
Larry King, Jr. Vice President, Payroll Services Group
Elisabeth M. Lang Vice President, Corporate Public Relations and
Marketing Communications
Carol Novello Vice President, Financial Supplies Group
Enrico Roderick Vice President, Personal Finance Group
Catherine L. Valentine Vice President, General Counsel and Secretary
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34
- - --------------------------------------------------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
(a)(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
2.01 Exchange Agreement dated as of March 2, 1999 by and among Intuit
Inc., Computing Resources, Inc., Ranson W. Webster and Harry D.
Hart and Amendment No. 1 thereto dated April 30, 1999. Pursuant
to Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request (1)
4.01 Registration Rights Agreement dated as of May 3, 1999 by and
among Intuit Inc., Ranson W. Webster and Norma J. Webster and
Harry D. and Carla J. Hart (2)
10.01 Intuit Inc. 1998 Option Plan for Mergers and Acquisitions, as
amended through April 28, 1999, and form of Stock Option Grant
Agreement for use thereunder (3)
10.02 Securities Contract, dated as of May 5, 1999 between Lacerte
Software Corporation, a wholly-owned subsidiary ("Lacerte") of
the Company and Credit Suisse Financial Products ("CSFP") (4)
10.03 Pledge Agreement, dated as of May 5, 1999, among Lacerte, CSFP
and Credit Suisse First Boston (5)
10.04* Stock Purchase and Option Agreement by and between Security
First Technologies Corporation and Intuit Inc., dated as of May
16, 1999
27*10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 19, 2000
10.02 Employment Agreement between Intuit and Stephen M. Bennett dated January
21, 2000
10.03 Intuit Inc. Restricted Stock Purchase Agreements between Intuit and
Stephen M. Bennett dated January 24, 2000
10.04 Confidential Agreement and General Release of Claims between Intuit Inc.
and William H. Harris, Jr., dated September 23, 1999
27.01 Financial Data Schedule
(b) Reports on Form(filed only in electronic format) period ended
January 31, 2000
27.02 Financial Data Schedule (filed only in electronic format) period ended
January 31, 1999
- - ----------------
(B) REPORTS ON FORM 8-K:
The Company(1) On January 25, 2000, Intuit filed the followinga report on Form 8-K:
1. A Report under items 2 and 7 was filed on May 7, 19998-K to report under Item
5 the Company's acquisitionappointment of Computing Resources, Inc. ("CRI") on May 3,
1999. An amendment to Form 8-K was filed on June 14, 1999 to include
CRI's audited financial statements for its fiscal year ended
December 31, 1998Stephen M. Bennett as President and required pro-forma financial information with
respect to the acquisition.Chief Executive
Officer and a board member.
-34-
35
- ----------
(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.
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31 - --------------------------------------------------------------------------------
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: June 14,March 16, 1999 By: /s/ Greg J. Santora
----------------------------------------------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-31--35-
3236
EXHIBIT INDEX
Exhibit
Number.. Description Page
- - ------ ----------- ----
2.01 Exchange Agreement dated as of March 2, 1999 by and among Intuit
Inc., Computing Resources, Inc., Ranson W. Webster and Harry D.
Hart and Amendment No. 1 thereto dated April 30, 1999. Pursuant
to Item 601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the Commission
upon request (1)
4.01 Registration Rights Agreement dated as of May 3, 1999 by and
among Intuit Inc., Ranson W. Webster and Norma J. Webster and
Harry D. and Carla J. Hart (2)
10.01 Intuit Inc. 1998 Option1996 Employee Stock Purchase Plan, for Mergers and Acquisitions, as amended through
April 28, 1999,January 19, 2000.......................................................
10.02 Employment Agreement between Intuit and formStephen M. Bennett dated
January 21, 2000.......................................................
10.03 Intuit Inc. Form of Stock Option Grant
Agreement for use thereunder (3)
10.02 Securities Contract, dated as of May 5, 1999 between Lacerte
Software Corporation, a wholly-owned subsidiary ("Lacerte") of
the Company and Credit Suisse Financial Products ("CSFP") (4)
10.03 Pledge Agreement, dated as of May 5, 1999, among Lacerte, CSFP
and Credit Suisse First Boston (5)
10.04*Restricted Stock Purchase Agreements between
Intuit and OptionStephen M. Bennett dated January 24, 2000...................
10.04 Confidential Agreement by and General Release of Claims between Security
First Technologies Corporation and
Intuit Inc. and William H. Harris, Jr., dated as of May
16,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 27* Financial Data Schedule................................................
- ----------
(1) Incorporated by reference to Exhibit 2.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(2) Incorporated by reference to Exhibit 4.01 in Intuit's Form 8-K filed
with the Commission on May 7, 1999.
(3) Incorporated by reference to Exhibit 4.01 in Intuit's Form S-8
registration statement (file no. 333-78041) filed with the Commission on
May 7, 1999.
(4) Incorporated by reference to Exhibit K in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
(5) Incorporated by reference to Exhibit L in Intuit's Schedule
13D/Amendment No. 3 filed with the Commission on May 6, 1999.
* Filed as an exhibit to this Report on Form 10-Q.-36-