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 OCTOBERJANUARY 31, 19992000 or

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

      For the transition period from ____________ to ____________.


                         COMMISSION FILE NUMBER 0-21180

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

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


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


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


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


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

       190,365,481Approximately 201,677,034 shares of Common Stock, $0.01 par value,
                            as of November 30, 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, 1999 and OctoberJanuary 31, 1999...........................2000........................... 3 Condensed Consolidated Statements of Operations for the three and six months ended OctoberJanuary 31, 19981999 and 1999............2000.... 4 Condensed Consolidated Statements of Cash Flows for the threesix months ended OctoberJanuary 31, 19981999 and 1999.............2000............... 5 Notes to Condensed Consolidated Financial Statements................................................... 6 - - - ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 1718 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 2829 PART II OTHER INFORMATION ITEM 1: Legal Proceedings............................................... 2931 ITEM 2: Changes in Securities and Use of Proceeds....................... 3032 ITEM 4: Submission of Matters to a Vote of Security Holders............. 315: Other Matters................................................... 33 ITEM 6: Exhibits and Reports on Form 8-K................................ 3334 Signatures...................................................... 35
-2- 3 INTUIT INC. CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBERJANUARY 31, 1999 19992000 ---------- ----------- ----------- (In thousands, except par value) (Unaudited)value; unaudited) ASSETS Current assets: Cash and cash equivalents ............................................................................ $ 518,305554,230 $ 286,427 Payroll tax deposits ................................................. 131,148 128,559377,685 Short-term investments .................................................................................. 305,125 380,238412,918 Marketable securities .................................................................................... 431,319 575,2191,046,170 Customer deposits ........................................ 145,836 135,456 Accounts receivable, net(1) .......................................... 63,045 86,766............................. 63,677 249,146 Mortgage loans ........................................... 84,983 38,386 Deferred income taxes .................................................................................... 64,925 65,04165,002 Inventories ........................................................................................................ 4,931 7,1749,351 Income taxes receivable .................................. -- 1,190 Prepaid expenses and other current assets(2) ......................... 66,982 34,819 -----------............ 67,859 34,803 ---------- ----------- Total current assets ......................................... 1,585,780 1,564,243............................. 1,722,885 2,370,107 Property and equipment, net ............................................ 108,851 128,515................................ 119,220 149,324 Purchased intangibles, net ............................................. 98,004 106,370................................. 98,049 97,275 Goodwill, net .......................................................... 382,888 429,600.............................................. 383,102 416,874 Other assets ........................................................... 7,549 7,806............................................... 7,897 9,022 Long-term deferred income taxes ........................................ 63,675 63,218............................ 76,190 80,222 Investments ............................................................ 45,473 35,549................................................ 45,704 39,569 Restricted investments ...................................................................................... 36,028 39,619 -----------38,416 ---------- ----------- Total assets .......................................................................................................... $2,489,075 $ 2,328,248 $ 2,374,920 ===========3,200,809 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit .......................................... $ 29,896 $ 3,283 Accounts payable ..................................................... $ 63,003 $ 87,591......................................... 66,436 121,110 Accrued compensation and related liabilities ......................... 37,414............. 39,996 49,733 Payroll tax obligations ................................................................................ 131,148 128,559127,333 Escrow liabilities ....................................... 14,857 9,821 Drafts payable ........................................... 49,169 15,344 Deferred revenue .............................................................................................. 65,994 84,541106,395 Income taxes payable ................................................. 146,847 11,878..................................... 143,181 -- Deferred income taxes .................................................................................... 136,694 194,993384,484 Other accrued liabilities ............................................ 200,030 206,570 -----------................................ 201,872 271,760 ---------- ----------- Total current liabilities .................................... 781,130 754,128........................ 879,243 1,089,263 Long-term notes payable ................................................ 36,308 38,588.................................... 36,614 37,862 Long-term deferred income taxes ............................ 11,615 11,919 Minority interest .......................................... 215 224 Stockholders' equity Preferred stock, $0.01 par value Authorized - 1,345 shares total; 145 shares designated Series A; 250 shares designated Series B Junior Participating Issued and outstanding - none; none .................................................... -- -- Common stock, $0.01 par value Authorized - 750,000 shares Issued and outstanding - 187,626196,350 and 189,439201,093 shares, respectively.. 625 1,895respectively ........................................ 1,073 2,012 Additional paid-in capital ........................................... 1,229,880 1,287,863............................... 1,266,004 1,433,323 Acquisition related deferred compensation ............................................ -- (11,094)(30,063) Accumulated other comprehensive income ............................... 79,144 164,108................... 77,680 448,207 Accumulated retained earnings ........................................ 201,161 139,432............................ 216,631 208,062 ---------- ----------- Total stockholders' equity ................................... 1,510,810 1,582,204 -----------....................... 1,561,388 2,061,541 ---------- ----------- Total liabilities and stockholders' equity .............................................. $2,489,075 $ 2,328,248 $ 2,374,920 ===========3,200,809 ========== ===========
(1) Includes $0.1 million and $2.2$2.3 million due from Checkfree at July 31, 1999 and OctoberJanuary 31, 1999,2000, respectively (see Note 10)11). (2) Includes a $6.7 million and $10.6 million note receivable from Venture Finance Software Corp. at July 31, 1999 and OctoberJanuary 31, 19992000 respectively (see Note 10)11). See accompanying notes to condensed consolidated financial statements. -3- 4 INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, 1998JANUARY 31, 1999 2000 1999 2000 -------- --------- -------- --------- (In thousands, except per share amounts; unaudited) Net revenue(1) ............................................................................................. $373,733 $ 111,968425,499 $510,614 $ 163,058602,427 Costs and expenses: Cost of goods sold: Product .................................................. 35,215 54,667Products and services ................................... 70,234 93,066 109,231 149,506 Amortization of purchased software and other ............. 1,804 2,432............ 1,897 2,489 3,701 4,921 Customer service & technical support ........................ 29,823 34,275....................... 41,144 47,657 72,004 81,958 Selling & marketing ......................................... 45,092 57,555........................................ 71,203 86,110 124,282 156,015 Research & development ...................................... 33,668 41,713..................................... 36,353 44,038 70,021 85,750 General & administrative .................................... 13,467 18,676................................... 19,625 23,327 38,934 44,819 Charge for purchased research and development ............................. -- -- -- 1,312 Amortization of goodwill and purchased intangibles .......... 20,970 36,359......... 20,962 45,211 41,932 81,562 Amortization of acquisition related deferred compensation ..... -- 7401,005 -- 1,744 Reorganization costs ....................................... 2,000 -- 2,000 3,500 -------- --------- -------- --------- Total costs & expenses ............................. 180,039 247,729 --------- --------- Loss............................ 263,418 342,903 462,105 611,087 Income (loss) from operations ............................... (68,071) (84,671)..................... 110,315 82,596 48,509 (8,660) Interest and other income and expense, net ................... 3,348 8,486.................. 3,950 6,988 7,298 15,465 Gain (loss) from marketable securities ....................... -- (17,309)...................... 10,088 (2,800) 10,088 (20,110) -------- --------- -------- --------- LossIncome (loss) before income taxes ..................................... (64,723) (93,494)........................... 124,353 86,784 65,895 (13,305) Income tax benefitprovision (benefit) .............................. 31,228 29,582 17,665 (4,587) Minority interest ........................................... (15,533) (31,765)-- (90) -- (149) -------- --------- -------- --------- Net loss .....................................................income (loss) ........................................... $ (49,190)93,125 $ (61,729)57,292 $ 48,230 $ (8,569) ======== ========= ======== ========= Basic and diluted net lossincome (loss) per share .................................................... $ (0.28)0.49 $ (0.33)0.29 $ 0.26 $ (0.04) ======== ========= ======== ========= Shares used in per share amounts ............................. 178,236 188,633............................ 188,813 195,935 187,600 192,285 ======== ========= ======== ========= Diluted net income (loss) per share ......................... $ 0.47 $ 0.27 $ 0.25 $ (0.04) ======== ========= ======== ========= Shares used in per share amounts ............................ 198,413 209,566 195,561 192,285 ======== ========= ======== =========
(1) Includes $3.4$1.3 million and $5.7$2.4 million from Checkfree for the three and six months ended OctoberJanuary 31, 19981999 and October$1.8 million and $3.6 million from Checkfree for the three and six months ended January 31, 19992000 respectively (see Note 10)11). See accompanying notes to condensed consolidated financial statements. -4- 5 INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
THREESIX MONTHS ENDED OCTOBERJANUARY 31, (In thousands; unaudited) 1998 1999 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ...........................................................income (loss) ............................................................. $ (49,190)48,230 $ (61,729)(8,569) Adjustments to reconcile net lossincome (loss) to net cash provided (used) inby (used in) operating activities: Amortization of goodwill and other purchased intangibles ...... 27,813 38,791................. 45,633 86,483 Deferred compensation expense ............................................................................. -- 7401,744 Depreciation .................................................. 9,221 10,780............................................................. 18,002 21,798 Charge for purchased research and development ............................................. -- 1,312 Loss(Gain) loss from marketable securities ............................... -- 17,309................................... (10,088) 20,110 Changes in assets and liabilities: Accounts receivable ........................................ (5,308) (23,621)................................................... (181,831) (185,369) Inventories ................................................ (40) (2,243) Income taxes receivable .................................... (15,208) --........................................................... (2,170) (4,420) Mortgage loans ........................................................ (66,435) 46,597 Prepaid expenses and other current assets .................. 4,245 31,579............................. (16,544) 32,163 Customer deposits ..................................................... (8,514) 6,565 Deferred income tax assets and liabilities ................. 892 341............................ (1,428) (3,805) Accounts payable ........................................... 4,424 24,535...................................................... 25,838 54,620 Accrued compensation and related liabilities ............... (1,388) 2,440.......................... 4,877 9,572 Escrow funds payable .................................................. 8,362 (5,036) Deferred revenue ........................................... 9,656 18,547...................................................... (12,581) 40,401 Drafts payable ........................................................ 9,812 (33,825) Accrued acquisition liabilities ............................ (1,559) (3,472)....................................... (19,181) (5,389) Other accrued liabilities .................................. 17,044 6,811............................................. 130,558 63,936 Income taxes payable ....................................... (1,520) (121,229).................................................. 25,404 (94,561) Minority interest ..................................................... -- 9 --------- --------- Net cash used in(used in) provided by operating activities .................... (918) (59,109)................. (2,056) 44,336 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of marketable securities ................................... 17,263 -- Purchase of property and equipment ................................. (13,611) (30,463) Increase............................................ (27,448) (51,901) Principal payments of long-term debt .......................................... (29) -- (Increase) in other assets ........................................... (7,743) (14,458).................................................... (7,262) (14,851) Purchase of short-term investments ................................. (82,874) (162,291)............................................ (145,086) (301,277) Acquisitions and dispositions, net of cash acquired ........................................... -- (54,606)(54,584) Purchase of long-term investments .................................. (4,474) (7,326)............................................. (474) (11,115) Liquidation and maturity of short-term investments ................. 63,318 83,587............................ 100,547 191,096 --------- --------- Net cash used in investing activities .................... (45,384) (185,557)............................... (62,489) (242,632) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (payments) under lines of credit ............................... 70,887 (26,613) Net borrowings under reverse repurchase agreement ............................. 9,135 -- Purchase of common stock ...................................................... (1,308) -- Net proceeds from issuance of common stock .................................... 39,627 48,364 Rock Financial and Title Source payments of dividends ......................... 4,444 12,788(177) -- --------- --------- Net cash provided by financing activities ................ 4,444 12,788........................... 118,164 21,751 --------- --------- NET DECREASEINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................ (41,858) (231,878)53,619 (176,545) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 138,133 518,305................................ 140,991 554,230 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................................. $ 96,275194,610 $ 286,427377,685 ========= =========
See accompanying notes to condensed consolidated financial statements. -5- 6 - - -------------------------------------------------------------------------------- INTUIT INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Intuit Inc. develops, sells and supports small business accounting, tax preparation and consumer finance desktop software products, financial supplies (such as computer checks, envelopes and invoices), mortgage loans and Internet-based products and services for individuals and small businesses. Our products and services are designed to automate commonly performed financial tasks and to simplify the way individuals and small businesses manage their finances. 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 threesix months ended OctoberJanuary 31, 19992000 do not necessarily indicate the results to be expected for the fiscal year ending July 31, 2000 or any other future period. The July 31, 1999 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, 1999 included in Intuit's Form 10K-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 collectability of accounts receivable. We also use estimates to determine the remaining economic lives and carrying value of goodwill, purchased intangibles, and fixed assets. Despite our intention to establish accurate estimates and assumptions, actual results may differ from our estimates. Net Revenue Intuit recognizes revenue upon shipment of our shrink-wrapped products based on "FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss are transferred, and we have no continuing obligations, -6- 7 once our products are delivered to the shipper, we recognize revenue upon shipment, net of return reserves based -6- 7 on historical experience. To recognize revenue, it must also be probable that we will collect the accounts receivable from our customers. Reserves are provided for returns of excess quantities of current product versions, as well as previous versions of products still in the distribution channel when new versions are launched. In some situations, we receive advance payments from our customers. Revenue associated with these advance payments is deferred until the products are shipped or services are provided. We also reduce revenue by the estimated cost of rebates when products are shipped. Warranty reserves are provided at the time revenue is recognized for the estimated cost of replacing defective products. 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 QuickenInsurance website), revenue is recognized upon completion of the transaction, assuming there are no remaining obligations on our part. 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. 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. Cash, Cash Equivalents and Short-Term Investments Intuit considers highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Both cash equivalents and short-term investments are considered available-for-sale securities and are carried at amortized cost, which approximates fair value. Available-for-sale securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our business. Based on our significant business seasonality, cash flow requirements within quarters may fluctuate dramatically and could require us to use a significant amount of the cash investments held as available-for-sale securities. -7- 8 The following schedule summarizes the estimated fair value of our cash, cash equivalents and short-term investments:
JULY 31, OCTOBERJANUARY 31, 1999 19992000 --------- --------- (In thousands) (In thousands; unaudited) Cash and cash equivalents: Cash ............................... $ 20,62356,548 $ 36,7549,235 Money market funds ................. 294,190 65,671172,342 Commercial paper ................... 156,037 5,000 Corporate Notes .................... -- 4,00040,875 Municipal bonds .................... 37,455 175,002155,233 U.S. Government securities ......... 10,000 -- --------- --------- $ 518,305554,230 $ 286,427377,685 ========= ========= Short-term investments: Certificates of deposit ............ $ 9,901 $ -- Commercial Paper ................... -- 145,053103,244 Corporate notes .................... 19,482 2,932 Municipal bonds .................... 284,057 244,156312,487 U.S. Government securities ......... 27,713 27,71632,671 Restricted short-term investments...investments .. (36,028) (39,619)(38,416) --------- --------- $ 305,125 $ 380,238412,918 ========= =========
The estimated fair value of cash equivalents and short-term investments classified by date of maturity is as follows:
JULY 31, OCTOBERJANUARY 31, 1999 19992000 --------- --------- (In thousands) (In thousands; unaudited) Due within one year ................................... $ 735,349 $ 425,043725,909 Due within two years ................................. 101,784 211,01493,875 Due within three years ............................. 1,702 33,473-- Restricted short-term investments....investments .... (36,028) (39,619)(38,416) --------- --------- $ 802,807 $ 629,911781,368 ========= =========
For information about our restricted investments, see Note 7.8. Realized gains and losses from sales of each type of security were immaterial for all periods presented. -8- 9 Marketable Securities As explained in greater detail below, we currently hold several marketable securities that were acquired in connection with strategic business transactions and relationships. Our available for sale marketable securities are carried at fair value and we include unrealized gains and losses, net of tax, in stockholders' equity. We have designated our investment in At Home Corporation ("At Home") as a trading security and fluctuations in the market value of these shares are reported in net income. We held the following marketable securities at July 31, 1999 and OctoberJanuary 31, 1999:2000:
GROSS UNREALIZED ----------------- NET REALIZED COST GAIN LOSS LOSS FAIR VALUE JULY 31, 1999 (In thousands)-------- -------- ------- ------------ ---------- JULY 31, 1999 (In thousands; unaudited) Checkfree Corporation common stock............stock .. $150,081 $152,177 $ -- $ -- $302,258$ 302,258 S1 Corporation common stock...................stock ......... 49,997 -- 16,140 -- 33,857 At Home common stock.........................stock ............... 132,060 -- -- 36,856 95,204 -------- -------- ------- ------- ------------------ ---------- $332,138 $152,177 $16,140 $36,856 $431,319$ 36,856 $ 431,319 ======== ======== ======= ======= ======== OCTOBER========== ========== JANUARY 31, 19992000 (In thousands)thousands; unaudited) Checkfree Corporation common stock............stock .. $150,081 $230,210$450,245 $ -- $ -- $380,291$ 600,326 S1 Corporation common stock...................stock ......... 49,997 37,922 -- 10,982 -- 39,01587,919 S1 Corporation options .............. -- 178,874 -- -- 178,874 Mortgage.com, Inc. common stock...............stock ..... 6,000 27,30113,859 -- -- 33,30119,859 Homestore.com, Inc. common stock..............stock .... 3,500 30,72567,639 -- -- 34,22571,139 Quotesmith.com, Inc. common stock.............stock ... 6,000 4,5056,971 -- -- 10,50512,971 At Home common stock..........................stock ................ 132,060 -- -- 54,178 77,882 -------56,978 75,082 -------- -------- ------- ------- ------------------ ---------- $347,638 $292,741 $10,982 $54,178 $575,219$755,510 $ -- $ 56,978 $1,046,170 ======== ======== ======= ======= ================== ==========
In January 1997, we sold our online banking and bill payment transaction processing business to Checkfree Corporation. We obtained marketable securities in Checkfree as a result of this sale. We account for the investment in Checkfree as an available-for-sale equity security, which accordingly is carried at market value. Checkfree common stock is quoted on the Nasdaq StockNational Market under the symbol CKFR. The closing price of Checkfree common stock at OctoberJanuary 31, 19992000 was $37.375$59.00 per share. At OctoberJanuary 31, 1999,2000, we held 10.2 million shares, or approximately 19.6%19.5%, of Checkfree's outstanding common stock. In May 1999, we purchased 970,813 shares of common stock of Security First Technologies. In November 1999, Security First Technologies changed its name to S1 Corporation ("S1"). We account for the investment in S1 as an available-for-sale-equity security, which accordingly is carried at market value. S1 common stock is quoted on the Nasdaq National Market under the symbol SONE. The closing price of S1 common stock at OctoberJanuary 31, 19992000 was $40.1875$90.5625 per share. At OctoberJanuary 31, 1999,2000, 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, we acquired approximately 3.7 million shares of common stock of Mortgage.com, Inc. ("Mortgage.com") upon conversion of our preferred shares in connection with Mortgage.com's initial public offering. We account for the investment in Mortgage.com as an available-for-sale-equity security, which accordingly is carried at market value. Mortgage.com common stock is quoted on the Nasdaq National Market under the symbol MDCM. The closing price of Mortgage.com common stock at OctoberJanuary 31, 19992000 was $9.125$5.4375 per -9- 10 share. At OctoberJanuary 31, 1999,2000, 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 -9- 10 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 OctoberJanuary 31, 19992000 was $46.9375$97.5625 per share. At OctoberJanuary 31, 1999,2000, we held 729,165 shares, or approximately 1.1%1.0%, of Homestore.com's outstanding common stock. In February 1999, we purchased approximately 1.0one million shares of common stock of Quotesmith.com, Inc. ("Quotesmith.com") prior to its initial public offering.. We purchased an additional 0.3 million272,727 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 OctoberJanuary 31, 19992000 was $8.25$10.1875 per share. At OctoberJanuary 31, 1999,2000, we held approximately 1.3 million1,272,727 shares, or approximately 7.9%6.6%, of Quotesmith.com's outstanding common stock. In connection with At Home Corporation's acquisition of Excite in May 1999, our shares of Excite were converted into At Home common stock. We have elected to report these converted At Home shares as a trading security. As a result, we are reporting both positive and negative fluctuations in the market value of this stock in net income. At OctoberJanuary 31, 1999,2000, we owned approximately 2.1 million shares (or approximately 0.6%) of At Home common stock and reported a realized valuation loss of approximately $17.3$20.1 million for these securities for the period between August 1, 1999 and OctoberJanuary 31, 1999.2000. The closing price of At Home (symbol ATHM) at OctoberJanuary 31, 1999,2000, was $37.375$36.0313 per share. The average price of At Home between August 1, 1999 and OctoberJanuary 31, 19992000 was $39.00$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. Lines of Credit For lines of credit we estimate fair value based on the discounted value of contractual cash flows using interest rates currently in effect for similar maturities and collateral requirements. The carrying amount of these lines of credit approximates their estimated fair values since all of the borrowings have variable interest rates that approximate current market interest rates for similar types of lines of credit and are due upon demand. We held the following lines of credit at July 31, 1999 and January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------- ------- ------- -------- Lines of credit.................... 29,896 30,000 3,283 3,291
Mortgage Loans We carry mortgage loans at estimated realizable value, and we estimate their fair value using quoted market prices for similar loans, adjusted for differences in loan characteristics, including credit quality. The carrying amount of accrued interest receivable approximates the assets' fair value. We held the following mortgage loans and lines of credit at July 31, 1999 and January 31, 2000.
JULY 31, 1999 JANUARY 31, 2000 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------- ------- ------- -------- Mortgage loans..................... $84,983 $86,021 $38,386 $ 39,183
-10- 11 Carrying amounts at July 31, 1999 and January 31, 2000 include an allowance for credit losses of $1.3 million and $0.4 million, respectively. As of July 31, 1999 and January 31, 2000, there were approximately $1.8 million and $0.5 million, respectively of mortgage loans that were greater than 90 days past due. Goodwill and Purchased Intangible Assets We record goodwill when the cost of net assets we acquire exceeds their fair value. Goodwill is amortized on a straight-line basis over periods ranging from 3 to 5 years. The cost of identified intangibles is generally amortized on a straight-line basis over periods ranging from 1 to 10 years. We regularly perform reviews to determine if the carrying value of assets is impaired. The reviews look for the existence of facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. No such impairment has been indicated to date. If, in the future, management determines the existence of impairment indicators, we would use undiscounted cash flows to initially determine whether impairment should be recognized. If necessary, we would perform a subsequent calculation to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets. If quoted market prices for the assets are not available, the fair value would be calculated using the present value of estimated expected future cash flows. The cash flow calculations would be based on management's best estimates, using appropriate assumptions and projections at the time. Goodwill and purchased intangible assets consisted of the following:
LIFE IN NET BALANCE AT YEARS JULY 31,1999 OCTOBER 31, 1999 (In thousands) (Unaudited)JANUARY 31, 2000 ------- ------------- ----------------- Goodwill...........................................(In thousands; unaudited) Goodwill.................................. 3-5 $382,888 $429,600$383,102 $416,874 Customer lists.....................................lists............................ 3-5 66,907 72,135 Covenant66,934 67,535 Covenants not to compete............................compete.................. 3-5 2,492 6,4825,985 Purchased technology...............................technology...................... 1-5 17,751 17,51014,970 Assembled workforce................................workforce....................... 2-5 3,972 4,1113,428 Trade names and logos..............................logos..................... 1-10 6,882 6,1326,900 5,357
-10- 11 Balances presented above are net of total accumulated amortization of $210.1 million and $251.0$289.5 million at July 31, 1999 and OctoberJanuary 31, 1999,2000, respectively. Concentration of Credit Risk Intuit operates in an industry which is highly competitive and rapidly changing. Many circumstances could have an unfavorable impact on Intuit's operating results. Examples include significant technological changes in the industry, changes in customer requirements or the emergence of competitive products or services with new capabilities. We are also subject to risks related to our significant balances of short-term investments, marketable securities and trade accounts receivable. At OctoberJanuary 31, 1999,2000, we held shares of Checkfree common stock representing approximately 19.6%19.5% of Checkfree's outstanding common stock. We also held approximately 0.6% of At Home's common stock, 3.5% of S1's outstanding common stock, 8.5% of Mortgage.com's outstanding common stock, 1.1%1.0% of Homestore.com's outstanding common stock and 7.9%6.6% of Quotesmith.com's outstanding common stock outstanding as of October 31, 1999.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. At October 31, 1999, we held approximately 0.6% of At Home's outstanding common stock.-11- 12 See "Marketable Securities," above in Note 1 for a discussion of risks associated with our marketable securities. Our remaining portfolio is diversified and consists primarily of short-term investment-grade securities. To reduce the credit risk associated with accounts receivable, Intuit performs ongoing evaluations of customer credit. Generally, no collateral is required. We maintain reserves for estimated credit losses and these losses have historically been within our expectations. Recent Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. In June 1999, the FASB delayed implementation of FAS 133, so that implementationImplementation is now required for fiscal years beginning after June 15, 2000. Upon adoption, we will report transition adjustments will be reported in net income or other comprehensive income, as appropriate, reflecting the effect of a change in accounting 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 results of our Rock and Title Source subsidiaries acquired on December 8, 1999. Certain other previously reported amounts have been reclassified to conform to the current presentation format. 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. -11- 12 On September 8, 1999, our Board of Directors declared a three-for-one stock split, to be effected as a stock dividend of two shares of common stock for each share of Intuit's common stock outstanding. Stockholders of record on September 20, 1999 were issued two additional shares of common stock for each share of Intuit's common stock held on that date. The payment date for the stock dividend was September 30, 1999. We have restated all share and per share amounts referred to in the financial statements and notes to reflect this stock split. 3. COMPREHENSIVE NET INCOME As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive net income and its components. However, it has no impact on our net income or stockholders' equity as presented in our financial statements. SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available for sale securities to be included in comprehensive income. -12- 13 The components of comprehensive net income, net of tax, are as follows:
THREESIX MONTHS ENDED OCTOBERJANUARY 31, 1998---------------------------- 1999 2000 --------- --------- (In thousands; unaudited) Net loss ...........................................income (loss) ............................ $ (49,190)48,230 $ (61,729)(8,569) Unrealized gain (loss) on marketable securities .... (58,950) 87,449..... 371,342 371,684 Change in cumulative translation adjustment ........ (4,409) (2,485).. (4,052) (1,157) --------- --------- Comprehensive net income ........................... $(112,549)..................... $ 23,235415,520 $ 361,958 ========= =========
4. ACQUISITIONS On May 3, 1999, we completed our acquisition of Computing Resources, Inc. ("CRI"), a Reno, Nevada-based provider of payroll services for a combination of cash and Intuit stock. CRI is 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 $200 million, consisting of 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.each beginning in May 2000. We accounted for the acquisition of CRI as a purchase for accounting purposes and allocated approximately $187 million to identified intangible assets and goodwill. These assets are being amortized over a period of three to five years. The following table shows pro forma net revenue, net loss from continuing operations and diluted net loss per share from continuing operations of Intuit and CRI as if we had acquired CRI at the beginning of fiscal 1999:
THREESIX MONTHS ENDED OCTOBERJANUARY 31, 19981999 ---------------------- AS PRO FORMA REPORTED --------- -------- (In thousands, except per share data; unaudited) Net revenue ......................................... $ 119,635 $ 111,968....................................... $528,280 $510,614 Net loss ............................................ (57,445) (49,190)income ........................................ 32,523 48,230 Diluted net lossincome per share ................................................ $ (0.32)0.17 $ (0.28)0.25
On August 2,November 30, 1999, we completed athe purchase of all of the outstanding common and Series A preferred stock of Boston LightTurning Mill Software, Corp.Inc. ("Boston Light"Turning Mill") for approximately $33.5$22 million in stock. Boston LightTurning Mill is a developer of software and web based products for small businesses and is based in Boston, MA. In connection with the agreement, Intuit assumed 482,910 of Boston Light's outstanding employee stock options.Acton, Massachusetts. We accounted for the acquisition of Boston LightTurning Mill as a purchase for accounting purposes and allocated approximately $24.0 -12- 13 million to identified intangible assets and goodwill. These assets are being amortized over a period of three to five years. On August 9, 1999, we completed a purchase of all of the outstanding common stock of SecureTax.com, for approximately $52 million in cash. SecureTax is a developer of online tax preparation and electronic filing services and is based in Rome, GA. We accounted for the acquisition of SecureTax as a purchase for accounting purposes and allocated approximately $52 million to identified intangible assets and goodwill. These assets are being amortized over a period of three to five years. On August 10, 1999, we completed a purchase of all of the outstanding common stock of Hutchison Avenue Software Corporation ("Hutchison"), for approximately $7.5 million in cash. Hutchison is a developer of software and web based products and is based in Ontario, Canada. In connection with the agreement, Intuit assumed 395,058 of Hutchison's outstanding employee stock options. We accounted for the acquisition of Hutchison as a purchase for accounting purposes and allocated approximately $6.8$22 million to identified intangible assets and goodwill. These assets are being amortized over periods of three to five years. The total purchase price, including the cost associated with the assumption of Hutchison's stock options, was approximately $18.5 million. On October 7,December 8, 1999, we announcedcompleted the proposed acquisitionpurchase of all of the outstanding common stockshares of Rock Financial Corporation ("Rock"). for approximately 8.6 million shares of Intuit common stock. Rock is a provider of consumer mortgages and is based in Michigan. In connection with the acquisition, Intuit assumed all of Rock's outstanding employee stock options, which were converted into options to purchase approximately 1.2 million shares of Intuit common stock. In a related transaction, Intuit also completed the acquisition of Title Source, Inc., an affiliate of Rock, for approximately 150,000 shares of Intuit stock. Title Source provides title insurance and escrow services to real estate agents, lenders, attorneys, corporations and homeowners. We expect to accountaccounted for the acquisitionacquisitions of Rock and Title Source as a pooling of interests.interests for accounting purposes and have restated all previously reported amounts to reflect the effect of the pooling. -13- 14 5. BORROWINGS We have two lines of credit. Advances under the first line of credit are based on a formula computation, with interest due monthly. Advances are due on demand and are collateralized by residential first and second mortgages. Advances may be drawn for working capital and sub-prime, high loan-to-value and conventional prime mortgage loans. Interest rates are variable and are based on the federal funds rate and prime rate, depending on the type of advance. The acquisitioninterest rates in effect at July 31, 1999 and January 31, 2000 were 6.29% and 6.83%, respectively. The weighted average interest rates for the year ended July 31, 1999 and quarter ended January 31, 2000 were 6.45% and 6.58%, respectively. Our second line of credit currently provides for up to $50 million principal amount of demand loans secured by mortgage loans and other assets. Loans interest at rates that vary depending on the type of underlying loan, and the loans are subject to sublimits, advance rates and warehouse terms that vary depending on the type of underlying loan. The interest rates in effect at July 31, 1999 and January 31, 2000 were 6.37% and 6.96%, respectively, while the weighted average interest rates for the three month periods ended July 31, 1999 and January 31, 2000 were 5.92% and 6.64%, respectively. We are required to maintain a minimum tangible net worth and to satisfy other financial covenants, as outlined in the line of credit agreements. We were in compliance with the requirements as of July 31, 1999 and January 31, 2000. Our reverse repurchase agreement entered into in 1997 provides that the lender will purchase from us, subject to our agreement to repurchase on a specified date, up to $200 million of conventional prime and sub-prime mortgage loans at par, as of January 31, 2000. Loans subject to purchase are fixed and adjustable rate, fully-amortizing first or junior lien residential mortgage loans and home equity loans that comply with our origination guidelines and conform to whole-loan sale requirements. The reverse repurchase agreement is not a committed facility and the lender may elect to discontinue the repurchase agreement at any time. The terms of the financing under the repurchase agreement mature and may be renewed on a daily basis. In any event, the arrangement terminates in March 2000. Interest rates are variable and are based on the London Interbank Offered Rate, depending on the type of advance. The interest rate in effect at July 31, 1999 was completed5.75%. The weighted average interest rate for the year ended July 31, 1999 was 5.92%. There were no borrowings on December 8, 1999. See Note 11. 5.this line for the quarter ended January 31, 2000. Drafts payable represent funds advanced for mortgages originated which have not yet been drawn against the lines of credit. 6. OTHER ACCRUED LIABILITIES
JULY 31, OCTOBERJANUARY 31, 1999 19992000 -------- -------- (In thousands) (Unaudited)----------- (In thousands; unaudited) Reserve for returns and exchanges .................................. $ 73,955 $ 74,94696,372 Future payments due for CRI acquisition ...................... 66,314 67,29568,313 Other acquisition and disposition related items ...... 10,824 13,40212,341 Rebates ...................................................................................... 18,002 16,22334,204 Post-contract customer support ........................................ 3,418 3,60411,289 Other accruals ..................................... 27,517 31,100................................... 29,359 49,241 -------- -------- $200,030 $206,570$201,872 $271,760 ======== ========
6.7. SEGMENTED INFORMATION Intuit has adopted Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes standards for the way in which public companies disclose certain information about operating segments in the Company's financial reports. Consistent with SFAS 131, we have determined our operating segments based on factors such as how our operations are managed and how results are viewed by management. Since Internet-based revenues and expenses cut across all of our business divisions, we do not report results of our Internet-based businesses as a separate business segment in our financial statements. Instead, each of our business divisions reports Internet-based revenues and expenses that are specific -14- 15 to its operations and are included in its results. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Intuit does not track assets by operating segments. Consequently, we do not disclose assets by operating segments. The following unaudited results are broken out by our operating segments for the six month periods ending Octoberended January 31, 19981999 and 1999: -13- 142000:
1998SIX MONTHS ENDED JANUARY 31, 1999 SMALL CONSUMER BUSINESS FINANCE TAX INTERNATIONAL (IN THOUSANDS)(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED --------- --------- ----------------- -------- -------- ------------- --------- --------------------- Net revenue ............................. $131,961 $134,269 $209,358 $ 48,121 $ 42,497 $ 8,477 $ 12,87335,026 $ -- $ 111,968510,614 Segment operating income/income / (loss) ........... 8,638 7,331 (27,229) (4,965)............ 38,925 19,210 98,415 (6,263) -- (16,225)150,287 Common expenses ..................... -- -- -- -- (29,072) (29,072) --------- --------- --------- ---------(54,145) (54,145) -------- -------- -------- -------- --------- --------- Sub-total operating income (loss) ........... 8,638 7,331 (27,229) (4,965) (29,072) (45,297) --------- --------- --------- ---------.............. 38,925 19,210 98,415 (6,263) (54,145) 96,142 -------- -------- -------- -------- --------- --------- Gains/(losses) on marketable securities ... -- -- -- -- 10,088 10,088 Acquisition costs .......... -- -- Acquisition-- -- (45,633) (45,633) Reorganization costs ....... -- -- -- -- (22,774) (22,774)(2,000) (2,000) Interest income/expense and other items ..................... -- -- -- -- 3,348 3,3487,298 7,298 -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- Net income (loss) before tax ...................................... $ 8,63838,925 $ 7,33119,210 $ (27,229)98,415 $ (4,965) $(48,498)(6,263) $ (64,723)(84,392) $ 65,895 ======== ======== ======== ======== ========= ========= ========= ========= ======== ========= 1999SIX MONTHS ENDED JANUARY 31, 2000 (In thousands; unaudited) Net revenue ............................. $216,912 $140,659 $196,844 $ 80,119 $ 54,178 $ 11,120 $ 17,64148,012 $ -- $ 163,058602,427 Segment operating income/(loss) ........... 17,516 8,763 (34,400) (2,165).............. 70,007 10,238 68,581 4,383 -- (10,286)153,209 Common expenses ..................... -- -- -- -- (33,542) (33,542)(68,830) (68,830) -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- Sub-total operating income (loss) ........... 17,516 8,763 (34,400) (2,165) (33,542) (43,828).............. 70,007 10,238 68,581 4,383 (68,830) 84,379 -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- Gains/(losses) on marketable securities ... -- -- -- -- (17,309) (17,309)(20,110) (20,110) Acquisition costs .......... -- -- -- -- (89,539) (89,539) Reorganization costs ....... -- -- -- -- (40,843) (40,843)(3,500) (3,500) Interest income/expense and other items ..................... -- -- -- -- 8,486 8,48615,465 15,465 -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- Net income (loss) before tax ...................................... $ 17,51670,007 $ 8,76310,238 $ (34,400)68,581 $ (2,165) $(83,208)4,383 $(166,514) $ (93,494)(13,305) ======== ======== ======== ======== ========= ========= ========= ========= ======== =========
(1) Reconciling items include acquisition and other common costs not allocated to specific segments. 7.8. NOTES PAYABLE AND COMMITMENTS In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year loan agreement with Japanese banks for approximately $30.3 million used to fund its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is therefore subject to foreign currency fluctuations when translated to U.S. dollars for reporting -15- 16 purposes. The interest rate is variable based on the Tokyo inter-bank offered rate or the short-term prime rate offered in Japan. At OctoberJanuary 31, 1999,2000, the rate was approximately 0.4%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 $39.6$38.4 million, or 110% of the loan balance, of short-term investments to be restricted as security for the borrowings at OctoberJanuary 31, 1999.2000. We are obligated to pay interest only until March 2000. -14- 15 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 was a defendant in the following two consolidated class action lawsuits (one in California and one in New York) which alleged that certain of its Quicken products have on-line banking functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000compliant. With respect to the 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 were substantively similar. The lawsuits asserted breach of implied warranty claims, violations of federal and/or state consumer protection laws, and violations of various state business practices laws. The plaintiffs sought compensatory damages, disgorgement of profits, and (in some cases) attorneys' fees. Intuit successfully had the original complaint and subsequent consolidated amended complaint dismissed with leave to amend. The plaintiffs then filed a third amended complaint and Intuit filed a demurrer in response to it, seeking dismissal of the complaint. Onlitigation, on October 13, 1999 the court sustained Intuit's demurrer and dismissed the case without leave to amend. The only remaining issue relates to a potential award of attorneys' fees. We also filed motionsfees to dismiss in the New York actions and, onplaintiffs. On December 1, 1998,1999, the court granted our motion to dismiss all the New York actions with prejudice. Although plaintiffs filed a Notice of Appeal, Intuit understands that plaintiffsthey failed to perfect the appeal. Accordingly, Intuit understands that this case is also now over. In addition, a suit was filed in the Contra Costa County, California Superior Court by an individual consumer against various retailers, including Circuit City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others, alleging that these retailers have sold software and hardware products which are not Year 2000 compliant, including at least one product published by Intuit. One of the defendants in this action, Fry's Electronics, filed a cross-complaint against various software publishers and hardware manufacturers, including Intuit, asserting a claim for indemnity in the main action. In September 1999, Fry's Electronics reached a settlement with the plaintiffs. All the cross defendants, including Intuit, then filed a demurrer to the cross-complaint. On Tuesday, December 7, 1999 the court granted the demurrer and dismissed the case without leave to amend. UnlessIf Fry's Electronics appealsdoes not appeal this ruling by April 4, 2000, this lawsuit against Intuit iswill also nowbe over. On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed in the United States District Court, Southern District of New York. Both actions claim that private customer information entered into Intuit's Quicken.com website was intentionally and secretly disclosed to 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, an order to disgorge profits related to the alleged acts, and statutory and other damages. As of March 10, 2000, neither lawsuit had been served on Intuit. 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 As of OctoberJanuary 31, 1999,2000, we held approximately 19.6%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 -15--16- 1617 revenues of $3.4$1.3 million and $5.7$2.4 million from Checkfree for the three monthsand six-months ended OctoberJanuary 31, 19981999 and 1999,$1.8 million and $3.6 million for the three and six-months ended January 31, 2000, respectively. We held a receivablereceivables due from Checkfree for $0.1 million and $2.2$2.3 million at July 31, 1999 and OctoberJanuary 31, 1999,2000, respectively. As of OctoberJanuary 31, 1999,2000, we held a 49% non-voting equity interest in Venture Finance Software Corporation (VFSC)Corp. ("VFSC"). We have entered into agreements with VFSC to provide them with services related to on-goingongoing development of Web-oriented finance products. At October 31, 1999, weproducts and services. We have an option to purchase the equity interests of the other investors in VFSC between May 4, 2000 and May 4, 2002, at a price to be determined by a formula. We held a receivable due from VFSC for $6.7 million. 11.million and $10.6 million at July 31, 1999 and January 31, 2000, respectively. 12. SUBSEQUENT EVENTS On November 30, 1999,February 18, 2000 we completedsold 3.0 million shares of Checkfree common stock at a purchaseprice of $90 per share and on March 2, 2000 we sold 2.5 million shares of Checkfree common stock at a price of $92 per share. Gross proceeds from these transactions were $500 million. These divestitures reduced our ownership in Checkfree to 4.7 million shares or approximately 9% of Checkfree's outstanding stock. On February 29, 2000, Verisign, Inc. ("Verisign") acquired all of the outstanding securities of privately-held Signio, Inc. ("Signio"). We held an investment in Signio, and in exchange for our investment, we will receive approximately 194,000 common shares of Verisign (representing less than 1% of the outstanding common stock of Turning Mill Software, Inc. ("Turning Mill") for approximately $14.7 million in stock. Turning Mill is a developerVerisign subsequent to the acquisition). On February 29, 2000, the closing stock price of software and web based products based in Acton, MA. The acquisition will be treated as a purchase for accounting purposes and will be recorded in the second quarter of fiscal 2000. On December 8, 1999, we completed the acquisition of Rock Financial Corporation, whichVerisign was originally announced on October 7, 1999. Rock is a provider of online consumer mortgages. We acquired all of the outstanding stock of Rock for approximately 8.6 million shares of Intuit common stock as of the date of the closing. As part of the transaction, we also assumed all of Rock's outstanding options. We expect to incur expenses of between $7.0 and $10.0 million as a result of this merger. The acquisition will be accounted for as a pooling of interests. Intuit's historical financial statements will be restated to reflect the combination of Intuit and Rock for all periods. -16-$253 per share. -17- 1718 - - -------------------------------------------------------------------------------- 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 with words like "expect," "anticipate," or "believe" and statements in the future tense, are forward-looking statements. Investors should be aware that actual results may differ materially from our expectations because of risks and uncertainties about the future. We will not necessarily update information in this formForm 10-Q if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to the following: - - - Our revenue and earnings are highly seasonal and our quarterly and annual financial results fluctuate significantly. - - - We face intense competition from many companies in all of our business areas. We expect Microsoft to enter- - - Competition in the personal tax preparation software business is particularly intense, with Microsoft having entered the market induring the 1999 tax year.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 with additionalthat have a narrower business focus, increasing financial resources.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 service provider and increasesubsidiary, streamline customer activations for our online payroll processing service.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 and sales and marketing implementation processes,process, including technological difficulties, possible delays, failure to establish necessary supplier and customer relationships, 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 next versionproduct, customer acceptance of QuickBooks,new and we cannot predictproposed services, and, the upgrade rate.level of satisfaction of third party participants. - - - The success of the small business alliances will depend on establishing and maintaining a number of important business relationships, and there can be no assurance that key relationships will continue. - - - Our tax products must follow a demandingTax and rigid annualQuicken Internet Gateway initiatives, and related new services to be offered in these areas, are in very early stages. Success of these initiatives will depend on establishing and maintaining business relationships with key participants and completing necessary technology development and release cycle. Ourintegration, 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 tax preparationpersonal finance management service, through licensing arrangements with a joint venture in which we are a participant. The success of these services for Intuit will depend on a number of factors, including timely and electronic filing services must handle extremely heavycost-effective completion of ongoing development efforts, customer demand duringand biller adoption and participation rates, and the peak tax season.status of the relationship with the joint venture. Intuit has an option to purchase the interests in the joint venture that it does not currently own between May 2000 and May 2002, at a formula-driven price that could exceed $100 million. If we do not exercise the purchase option, our rights to use the technology developed by the joint venture will be subject to future negotiation. - - - We face increasing competition for access to retail and OEM distribution channels. - - - The integration of acquired companies poses ongoing operational challenges and risks. OurIn addition, our recent acquisitions have resulted in significant acquisition-related expenses. The QuickenMortgage- - - Our mortgage business is subject to interest rate fluctuations, and the impact of interest rates on Intuit's operating results willhas become more significant as a result ofsince the acquisition of Rock Financial. TheFinancial was completed. - - - Our recent acquisition -18- 19 of Rock Financial could have a negative impact on Intuit's relationships with other lenders that participate in the QuickenMortgageonline mortgage service. If we fail to provide responsive customer service and technical support, we could lose customers. We depend on a single manufacturer for all outsourced aspects of our primary retail product launches for fiscal 2000. Problems related to the Year 2000 could have a significant adverse effect on our operations.- - - We hold investments that have been very volatile. Additional information about factors that could affect future results and events is included in the our fiscal 1999 Form10-K/Form 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. As we execute our mission, we have embarked on a strategy to greatly expand the world of electronic finance. "Electronic finance" encompasses three types of products and services: (1) desktop software products, such as Quicken(R), -17- 18 QuickBooks(R) and Quicken TurboTax(R), that operate on customers' personal computers to automate financial tasks; (2) online products and services, such as Quicken.com(SM), QuickenMortgage(SM)QuickenLoans(SM), QuickenInsurance(SM) and WebTurboTax(SM)Quicken TurboTax for the Web(SM), that are delivered via the Internet; and (3) products and services, such as QuickBooks Online Payroll(SM) service, that connect Internet-based services with desktop software to enable customers to integrate their financial activities. Our revenues come primarily from the United States, Japan, Canada and the United Kingdom, through retail distribution channels, direct customer sales and via the Internet. While desktop software and related products and services now provide most of our revenue, our Internet-based revenue is growing rapidly. For the three months ended OctoberJanuary 31, 1999,2000, Internet-based revenues grew by 119%approximately 162% compared to the same period last year and accounted for 19%approximately 21% of total revenue in the quarter ended OctoberJanuary 31, 1999,2000, compared to 13%approximately 10% in the prior year quarter. We use the term Internet-based revenue to include revenue from both Internet-enabled products and services as well as revenue from electronic distribution. Internet products and services include activities where the customer realizes the value of the goods or services directly on the Internet or an Intuit server. Internet product revenues include, for example, advertising revenues generated on our Quicken.com website, online tax preparation and electronic tax filing revenues, online payroll service revenue and transaction and processing fees from our online insurance and online mortgage services. Electronic distribution includes revenues generated by electronic ordering and/or delivery of traditional desktop software products and financial supplies. 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. While we believe that the Internet provides an opportunity to increase revenue in fiscal 2000, we also anticipate increasedcontinued increases in spending in an effort to capitalize on new business opportunities. In particular, we continue to expect increased research and development expenses due to investments in Internet-based initiatives. We also anticipate increased selling and marketing expenses related to these initiatives and because of more intense competition in the personal tax market during fiscal 2000. While we have made significant progress in our Internet-based businesses, investors should be aware many of these businesses are in their initial stages, and are not yet generating significant revenue or profit. Since Internet-based revenues and expenses cut across all of our business divisions, we do not report results of our Internet-based businesses as a separate business segment in our financial statements. Instead, each of our business divisions reports Internet-based revenues and expenses that are specific to its operations and are included in its results. 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. Operating results can also fluctuate for other reasons, -19- 20 such as changes in product release dates, non-recurring events such as acquisitions and dispositions, and product price cuts in quarters that have relatively high fixed expenses. Acquisitions and dispositions in particular can have a significant impact on the comparability of both our quarterly and yearly results, 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-monththree and six-month periods ended OctoberJanuary 31, 19981999 and 1999.2000. Investors should note that results for the three monthand six-month periods ended OctoberJanuary 31, 19992000 include activity for our CRI subsidiary, which was acquired in May 1999. The corresponding year ago periodperiods did not include results for CRI (see Note 4). -18- 19Results 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 OCTOBERThree Months Ended January 31, Six Months Ended January 31, 1999 Change 2000 1999 Change 2000 ---------------------------- ---------------------------- (Dollars in millions; unaudited) 1998 CHANGE 1999 ---------------------------------- Software and other ............................ $ 88.4 53% $135.2344.1 14% $ 392.7 $ 457.4 18% $ 541.7 % of revenue .................. 79% 83%...................... 92% 92% 90% 90% Supplies ................................................ $ 23.6 18%29.6 11% $ 27.932.8 $ 53.2 14% $ 60.7 % of revenue .................. 21% 17%...................... 8% 8% 10% 10% Total ......................... $112.0 46% $163.1............................. $ 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 (see Note 6)7). Small Business Division. Small business division revenues come primarily from the following sources: - QuickBooks product line - Supplies products (including checks, envelopes and invoices) - Payroll related transaction and subscription feesservices - Support fees for the QuickBooks Support Network Overall, revenue for the division was up 67%63% and 64% for the three-month periodthree and six-month periods ended OctoberJanuary 31, 19992000, respectively, compared to the same periodperiods a year ago. The increase wasincreases were primarily a result of overall strength exhibited in QuickBooks products. The increased revenues fromrevenue growth for our QuickBooks product line were attributable to increased unit shipments in the three month period ended October 31, 1999 compared to the same quarter of the prior year, and a moderate increase in the average selling prices of the QuickBooks product driven by consumer preferences toward higher priced, greater functionality products. In addition, the acquisition of CRI (acquired in May 19991999) and the launch of our QuickBooks Online Payroll Service (launched in October 1998 provided additional1998) contributed to revenues during the three-month and six-month periods -20- 21 ended January 31, 2000, but did not account for material revenue streams which were not a significant part of our overall business in the three month periodand six-month periods ended OctoberJanuary 31, 1998. Domestic supplies revenues, which are part of the small business division, grew by 22% for the three month period ended October 31, 1999 as a result of our increasing base of small business customers who use QuickBooks and Quicken. In addition, we began charging for shipping and handling for domestic supplies shipments which also contributed to our domestic supplies revenue stream.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 substantially in the three monthsand six-month periods ended OctoberJanuary 31, 19992000 compared to the same periodperiods a year ago. We launched our most recent version of QuickBooks (QuickBooks 2000) in December 1999. The increased revenue from our QuickBooks product line was attributable to increased unit sales, as well as an increase in the average selling prices of the QuickBooks product driven by consumer preferences toward higher priced, greater functionality products. We believe a significant number of customers may have upgraded earlier than they otherwise may have, due to Year 2000 concerns. Accordingly, we expect that some of the fiscal 2000 second quarter strength in QuickBooks revenue is a shift from the second half of the year, and we expect the revenue growth rate to decline significantly as the year progresses. QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected and integrated electronic services, that is designed to offer small businesses direct access to services from third parties, such as electronic postage and merchant account services, that can help them more easily and efficiently manage their business. It also features QuickBooks Site Builder, a new web site creation and domain name registration tool that enables small businesses to quickly establish a presence on the Web. Although these new features are strategically important for Intuit, it is too early to tell how successful these 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 11% and 14% for the three and six-month periods ended January 31, 2000 as a result of our increasing base of small business customers who use QuickBooks and Quicken. In addition, in August 1999, we began charging for shipping and handling for domestic supplies shipments which also contributed to our domestic supplies revenue. We offer different types of payroll services. Our QuickBooks Online Payroll service, which is 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 state payroll tax withholdings, electronic direct deposit of paychecks, preparation and filing of quarterly and annual payroll tax returns and creation of employee W-2 forms. Ourwith our CRI subsidiary providesproviding the processing for QuickBooks Online Payroll andservices. CRI also continues to provide traditional payroll processing services for its customer base. We also offer QuickPayroll, a subscription-based payroll service for customers who do not use QuickBooks, as well as a payroll tax table subscription service for small business customers that need current tax tables to prepare their own payroll. While the payroll processing business provides us with a significant opportunity to generate revenue, there are business risks associated with the payroll processing business and the continued integration of CRI into our existing business model. For example, if we are unable to provide accurate and timely payroll information, cash deposits or tax return filings, that failure could be costly to correct and may have a significant negative impact on our ability to attract and retain customers, who we believe will have a low tolerance for payroll processing errors. -19- 20 Our ability to successfully operate CRI will depend in part on retaining their existing customers and maintaining relationships with certain banks and other third parties who we will rely on to retain existing customers and attract new customers outside of our QuickBooks customer base. If we are unable to do so, it could result in a negative impact on our consolidated results. While the customer 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: - Quicken TurboTax and MacInTax personal desktop tax preparation products - Professional tax preparation products (ProSeries and Lacerte product lines) - ElectronicQuicken TurboTax for the Web electronic tax return preparation services and electronic filing fees Due to the seasonal nature of the tax business, the first quarter normally generates very little revenue from tax products. The majority ofservices -21- 22 Overall, tax division revenues generally occurfor the three and six-months ended January 31, 2000 declined by 8% and 6% respectively, compared to the same periods last year. The declines in our secondrevenue were due primarily to an aggressive marketing and third fiscal quarters. The development and launch of ourpricing 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 Quicken TurboTax, which required us to defer recognition of approximately $30 million of revenue from the second quarter to the remainder of the fiscal year. While we have experienced significant unit sales growth for the 1999 tax year was completed on schedule, and products reached retail shelves in early December. However, there are still ongoing risks associated with our tax business including the risk of increased competitionquarter ended January 31, 2000, we continue to experience extreme pricing pressures from Microsoft's expected entrance into the personal tax preparation market. If Microsoft enters the market, its superior financial resources and historically strong presence in retail distribution channels could result in an increasingly competitive environment this tax season and beyond. We also face continued competition fromboth H&R Block's aggressively priced TaxCut product and the challenge of developing and launching high-quality products that accurately reflect new tax legislation. If thefrom Microsoft's TaxSaver product, including free product offerings from Microsoft. The increased competition has resulted in lower average selling priceprices in response to these pricing pressures. It is currently too early to predict the final level of demand for the Quicken TurboTax product line through our taxretail distribution channels. Although the number of units sold is currently higher in the current fiscal year to date compared to the same period a year ago, revenue is lower due to lower average selling prices. We expect our reserves for returned products werewill be adequate to decrease or if we were to lose significant market share ascover retailers' returns of unsold products during the next three quarters, though higher than expected returns could have a resultnegative impact on revenue for the season. Because of increased future competition, our operating results would suffer. While we have undertaken product developmentthese and marketing efforts intended to address competitive pressures,other uncertainties, revenues and operating results for this tax season will be unknown until late in the fiscal year. In connection with ourWe have experienced significantly higher revenues and volume for Quicken TurboTax for the Web and for electronic filing services,compared to last year, as an increasing number of customers gain Internet access and become more accustomed to processing transactions on-line. We expect that as the tax filing deadline nears, we also facemay experience a dramatic increase in demand for both Web tax preparation and electronic filing services. To deal with the challengeexpected 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 maintainingdemand is very difficult to predict, and we could experience significant negative financial and public relations consequences if our capacity to serve our web tax preparation and electronic filing customers is insufficient during the peak filing period, or if the service during peak volumeis unavailable for other reasons such as technical difficulties at our data center. We have not experienced any service times. We experienced a brief interruptioninterruptions thus far in the current tax filing season. However, we did have some interruptions in our electronic filing services in February 1999 and on April 11-12, 1999, routine server maintenance procedures took longer than expected, resulting in a 14-hour outage for the electronic filing service. We1999. Although 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 demandRevenues for Web TurboTaxour professional tax (ProSeries) products and electronic filingproducts from our Lacerte subsidiary increased by 10% for the 1999 tax yearthree and six-month periods ended January 31, 2000 compared to the same periods last year. This growth is very difficultattributable to predict,a combination of a continued shift to higher priced products and growth in our customer base due in part to our acquisitions of Compucraft and TaxByte during 1999. In addition, we couldcontinue to experience adverse financial and public relations consequences if these services are unavailable due to technical difficulties or other reasons.a high customer renewal rate. Consumer Finance Division. Consumer finance division revenues come primarily from the following sources: - Quicken product line - Advertising and sponsorship fees from the consumer areas of our Quicken.com website - Implementation, marketing and transaction fees from financial institutions (including marketspace participants) providing services through Quicken and Quicken.com - On-line consumer mortgage placement and servicing fees through QuickenLoans Overall, consumer finance division revenues were up 27%9% and 5% for the three-month periodthree and six-month periods ended OctoberJanuary 31, 19992000 compared to the same periodperiods a year ago. The increases are due primarily to strong revenue growth for our Quicken product line and growth in Internet-based revenues, offset in part by a significant decline in revenues for Rock's mortgage business from the year-ago periods. Quicken revenue increased compared to the same periodperiods of the prior year primarily due to strong consumer demand and the four week earlier launch of Quicken 2000 compared to the product release date in the prior year,resulting from aggressive retail -22- 23 promotions with our tax products and lower than expected product rebate redemptions related to Quicken 99. It is too earlyWe believe some customers may have upgraded during the second quarter, due to determine whetherYear 2000 concerns. Accordingly, some of the fiscal 2000 second quarter strength in Quicken 2000 will continue its strongrevenue may be a shift from the third quarter, and we expect the revenue growth forrate may decline as the rest of the year.year progresses. Our Quicken product line faces many challenges in the desktop personal financial software market. For example, we continue to face competition from Microsoft's Money product. In addition, personal financial software functionality is increasingly becoming available on the Internet at no cost, which has a negative impact on desktop -20- 21 product sales. There is also an increasing emphasis on packaging desktop software with original equipment manufacturers' personal computers, which results in lower revenues per unit shipped. Consumer division revenue growth also benefited from an increase in certain Internet-based revenue compared to the same periodperiods last year. This increase was largely due to higher advertising, sponsorship and transaction-related revenue through Quicken.com QuickenMortgage, QuickenInsurance and Quicken. However, revenue growth was not uniform across all of our Internet product and service offerings in the Consumer division. For example, advertising revenue from our QuickenMortgage marketspaceQuicken.com site has grown relatively rapidly whilerapidly. However, revenue from our QuickenInsurance marketspace has grown atQuickenLoans was substantially lower than in the same periods a slower pace. On December 8, 1999, we completedyear ago. QuickenLoans now encompasses Intuit's online mortgage business as well as the proposed acquisitiononline and traditional mortgage businesses of Rock Financial, Corporation, a provider of on-line consumer mortgages. We expect that this acquisition will allow us to manage the entire loan process, from application and approval through closing, which we believe will enable usacquired in December 1999. The decline in mortgage revenue was primarily due to generate significantly more revenue per loan. We anticipate that Rock will perform loan processing functions similarRock's decision to those provided by Mortgage.com under a Distribution, Marketing, Facilities and Services Agreement with Intuit. That agreement was terminatedclose many of its traditional mortgage branch offices in order to focus resources on October 7, 1999 and the services will be phased out over the next twelve months.Internet-based lending, as well as increasing interest rates. Growth in mortgage transaction fees may continue to be adversely impacted if interest rates continue to rise. The negative impact of interest rate increases could be exacerbated by the acquisition of Rock because of our increased fixed cost infrastructure.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 ability to successfully facilitate the application, approval, and closing process in loan applications on a timely basis will have a significant impact on our ability to attract customers to the service. Our ability to successfully operate Rock will depend in part on maintaining relationships with certain banks and other third parties who we will rely on to provide access to capital, and later, service the loans. If we are unable to do so, it could have a negative impact on our consolidated results. The rapid growth we've experienced in our Internet products and services has been generated in part by collaborating with third party online service and content providers such as At Home Corporation (doing business as "Excite@Home") and AOL, which have helped to increase traffic to our Quicken.com website. The Excite@Home agreement calls for us to share revenue generated from our Quicken.com site and the AOL agreement calls for us to make significant guaranteed payments to AOL over the term of the agreement. While the Internet provides a significant opportunity for revenue growth, our financial commitments to these and other third party providers are significant and we must continue to increase traffic and revenue in order for our Internet businesses to become profitable. Our ability to maintain important relationships with Internet portals, distributors and content providers will also have an impact on traffic and revenues. If our website traffic and revenue expectations aren't met, there could be a significant negative impact on our operating results. International Division. International division revenues come primarily from the following sources: - Japanese QuickBooks and other small business products - GermanCanadian Quicken, QuickBooks and Tax products - CanadianGerman Quicken, QuickBooks and Tax products - United Kingdom Quicken and QuickBooks products In addition to the above, we also operate in smaller European, Asian and Latin American markets. Overall, international division revenues increased 36%37% for the three-month periodthree and six-month periods ended OctoberJanuary 31, 19992000 compared to the same periodperiods last year. This increase is a result of stronger sales of Quicken and QuickBooks in both Canada and the U.K., higher sales of the Yayoi small business product in Japan, and favorable currency fluctuations in Japan. -21-Partially offsetting these increases were declines in revenues, but increased profitability in -23- 2224 Germany due to a shift in our business model from direct participation in the market to a third party distribution arrangement. COST OF GOODS SOLD
THREE MONTHS ENDED OCTOBERThree Months Ended January 31, Six Months Ended January 31, (Dollars in millions; unaudited) 1998 CHANGE 1999 ---------------------------------Change 2000 1999 Change 2000 -------------------------- ---------------------------- Product ..................................... $35.2 55% $54.7.................... $ 70.2 33% $ 93.1 $ 109.2 37% $ 149.5 % of revenue ................................ 31% 34%............... 19% 22% 21% 25% Amortization of purchased .. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9 software & other .. $ 1.8 33% $ 2.4 % of revenue ................................ 2%............... 1% 1% 1% 1% Total ....................................... $37.0 54% $57.1...................... $ 72.1 33% $ 95.6 $ 112.9 37% $ 154.4 % of revenue ................................ 33% 35%............... 19% 22% 22% 26%
There are two components of cost of goods sold. The largest is the direct cost of manufacturing and shipping products and offering 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 35%22% and 26% of revenue for the three monthsand six-months ended OctoberJanuary 31, 19992000 compared to 33%19% and 22% for the same periodperiods 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. Second, our service businesses, such as payroll processing and QuickBooks Support Network, generally have higher cost of goods sold thancompared to the sale of packaged software. As these businesses grow to a higher proportion of total revenue, we anticipate that our cost of goods sold will continue to increase. IfNote that results from CRI, our payroll processing subsidiary that we experience errorsacquired in current or future products, there could be incremental increasesMay 1999, are included in fiscal 2000 results but not in the fiscal 1999 comparison periods, which contributed to the year-over-year increase in cost of goods sold that could adversely affect our operating results.sold. OPERATING EXPENSES
THREE MONTHS ENDED OCTOBERThree Months Ended January 31, Six Months Ended January 31, (Dollars in millions; unaudited) 1998 CHANGE 1999 ----------------------------------Change 2000 1999 Change 2000 -------------------------- ---------------------------- Customer service & technical support ...... $29.8 15% $34.3.... $ 41.1 16% $ 47.7 $ 72.0 14% $ 82.0 % of revenue .............................. 27% 21%............................ 11% 11% 14% 14% Selling & marketing ....................... $45.1 28% $57.6..................... $ 71.2 21% $ 86.1 $ 124.3 26% $ 156.0 % of revenue .............................. 40% 35%............................ 19% 20% 24% 26% Research & development .................... $33.7 24% $41.7.................. $ 36.4 21% $ 44.0 $ 70.0 22% $ 85.8 % of revenue .............................. 30% 26%............................ 10% 10% 14% 14% General and administrative ................ $13.5 39% $18.7.............. $ 19.6 19% $ 23.3 $ 38.9 15% $ 44.8 % of revenue .............................. 12% 11%............................ 5% 5% 8% 7% Charge for purchased research and development ........................................................ $ -- N/A $ -- $ -- N/A $ 1.3 % of revenue .......................................................... N/A 1%N/A N/A 0%
-24- 25 Other acquisition costs, including amortization of goodwill and purchased intangibles ............................... $21.0 73% $36.4............................. $ 21.0 115% $ 45.2 $ 41.9 95% $ 81.6 % of revenue .............................. 19% 22%............................ 6% 11% 8% 14% Other acquisition related costs -costs- amortization of deferred compensation ........ $ -- N/A $ 0.71.0 $ -- 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%
-22- 23 While all operating expenses experienced increases for the three months ended October 31, 1999, compared to the same period of the prior year, our percentage growth in revenues was greater than the percentage growth in our operating expenses across all areas except acquisition related costs. As a result, operating expenses as a percentage of revenues experienced significant declines. It is too early to determine whether growth in revenues will continue to exceed the growth in operating expenses for the rest of the year. Customer Service and Technical Support. Customer service and technical support expenses decreased to 21%were flat as a percentage of revenue for the three monthsand six-month periods ended OctoberJanuary 31, 19992000 compared to 27% for the same periodperiods of the prior year. In addition to the less rapid growth of all operating expenses compared to revenues, this improvement reflects the acquisition of CRI which experiences comparatively lower customer service and technical support expenses as a percentage of revenue. 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 remainder of 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 Year 2000 compliance issues. To date, call volumes related to Year 2000 issues have been lower than we expected. It's possible that we will receive a large volume of Y2K calls latersupport two major product launches in the second quarter. See "Yearquarter (QuickBooks 2000" below. We also expect a significant increase in call volumes during and Quicken TurboTax for the second quarter related to major product launches by our1999 tax and small business divisions. If these potential increases in call volume overlap to any significant extent, or if we experience product errors, poor service levels or service outages for our web-base products, we could face significant capacity problems and increased customer service and technical support expenses, as well as customer dissatisfaction.year). Selling and Marketing. Selling and marketing expenses were 35%20% and 26% of revenue for the three monthsand six-months ended OctoberJanuary 31, 19992000 compared to 40%19% and 24% for the same periodperiods of the prior year. In addition to the less rapid growth of all operating expenses compared to revenues, this decrease is also the result of our acquisition of CRI, which experiences comparatively lower selling and marketing expenses as a percentage of revenue. Despite the decreaseThe increases in selling and marketing expenses as a percentage of revenue in the first quarter of fiscal 2000, comparedcosts are attributable to the first quarteraggressive marketing programs relating to the expansion of fiscal 1999, weour Internet-based businesses and the increasingly competitive personal tax market. We continue to expect that selling and marketing costs as a percentage of revenue towill increase slightly infor fiscal 2000 compared to fiscal 1999. We anticipate increased selling and marketing expenses related1999 as we continue to aggressively market our Internet-based businesses and as a result of moreface intense competition in the personal tax market during fiscal 2000.for the rest of the 1999 tax season. Research and Development. Research and development expenses decreased to 26%were 10% and 14% of revenue for the three monthsand six-months ended OctoberJanuary 31, 19992000 compared to 30%10% and 14% of revenue for the same periodperiods of the prior year. In additionWe continue to the less rapid growth of all operating expenses compared to revenues, this decrease is dueinvest in part to our acquisition of CRI 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 our Internet-based businesses will continue to result inrequire significant development expensesexpenditures in fiscal 2000 despite lower expenses as a percentage of revenue for the three months ended October 31, 1999.and beyond. If such expenses exceed our current expectations, they may have an adverse effect on operating results. This could occur, for example, if we were to undertake a costly product development venture in response to competitive pressures or other market conditions. General and Administrative. General and administrative expenses decreased to 11%were 5% and 7% of revenue for the three monthsand six-months ended OctoberJanuary 31, 19992000 compared to 12%5% and 8% for the same periodperiods of the prior year. For fiscal 2000, we expect general and administrative expenses to remain roughly flat as a percentage of revenue compared to fiscal 1999. Charge for Purchased Research and Development. For the threesix months ended OctoberJanuary 31, 1999,2000, we recorded a chargecharges for purchased research and development as a result of our Boston Light and Hutchison acquisitions. In connection with these acquisitions, we used third party appraisers' estimates to determine the value of in-process projects under development for which technological feasibility had not been established. The total value of these projects at the time of the acquisitions was determined to be approximately $1.3 million and has beenwas 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. We believe the products related to these charges will be completed during our fiscal year 2000, and that the risk of these products not being -25- 26 successfully completed is low. However, if they are not successfully completed, there could be a negative impact on our results. Other Acquisition Costs. Other acquisition costs include the amortization of goodwill and purchased intangibles and deferred compensation costs that are recorded as part of an acquisition. These costs increased to $37.0$48.7 million and $88.2 million for the three monthsand six-months ended OctoberJanuary 31, 19992000 compared to $21.0$22.9 million and $45.6 million for the same periodperiods of the prior year. This -23- 24 increase wasThese increases ware primarily attributable to the amortization of intangibles associated with our acquisition of CRI in May 1999, and our acquisitions of Secure Tax, Boston Light and Hutchison in August 1999, and Turning Mill Software in November 1999. The high levels of non-cash amortization expense related to completed acquisitions will continue to have a negative impact on operating results in future periods. Assuming no additional acquisitions and no impairment of value resulting in an acceleration of amortization, future amortization will reduce net income bybe approximately $97.9$163.7 million, $88.8$145.5 million, $85.7$140.2 million and $56.2$90.9 million for the years ending July 31, 2000 through 2003, respectively. If we complete additional acquisitions or accelerate amortization in the future, there could 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 monthsand six-months ended OctoberJanuary 31, 1999,2000, interest and other income and expense, net, increased to $8.5$7.0 million and $15.5 million compared to $3.3$4.0 million and $7.3 million for the same periodperiods a year ago, reflecting increased cash and short-term investment balances. We have elected to report our Excite@HomeAt Home common stock as a trading security and are required to mark to market the fluctuations in the stock price and report the fluctuations in our earnings. For the three monthsand six-months ended OctoberJanuary 31, 1999,2000, we reported a losslosses arising from fluctuations in the share price of Excite@HomeAt Home of $17.3 million.$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. INCOME TAXES For the three monthsand six-months ended OctoberJanuary 31, 1999,2000, we recorded an income tax benefitprovisions (benefits) of $31.8$29.6 million and ($4.6) million on a pretax lossincome (loss) of $93.5 million.$86.8 million ($13.3) million, respectively. This compares to an income tax benefitprovisions of $15.5$31.2 million and $17.7 million on a pretax lossincome of $64.7$124.4 million and $65.9 million, respectively for the same periodperiods of the prior year. At OctoberJanuary 31, 1999,2000, there was a valuation allowance of $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 OctoberJanuary 31, 1999,2000, our unrestricted cash and cash equivalents totaled $286.4$377.7 million, a $231.9$176.5 million decrease from July 31, 1999. The decrease was a result of net cash used by operations and investing activities, partially offset by cash provided by financing and operations activities. It wasCash from operating activities is driven by the seasonality of our business, which typically results in the majority of net revenues and cash receipts occurring in the January and April quarters, though operating expenses are incurred throughout the year. Our operations used $59.1provided $44.3 million in cash during the threesix months ended OctoberJanuary 31, 1999.2000. Primary sources of cash were an increase of $54.6 million in accounts payable and $63.9 million in other accrued liabilities. The -26- 27 increases in accrued liabilities and accounts payable are driven by the seasonality of our business and the resulting increases in accruals for product returns, customer rebates and accrued technical support expenses. In addition, cash was generated by an 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 $61.7$8.6 million, an increase of $185.4 million in accounts receivable due to the large volumes of $23.6 million as well asseasonal product shipments to retailers and distributors that typically occur in our second fiscal quarter and a significant decrease in income taxes payable as a result of the payment of taxes for our fiscal year ended July 31, 1999. The increase in accounts receivable was attributable to revenue growth for the three months ended October 31, 1999. Uses of cash were offset by adjustments made for non-cash expenses such as acquisition charges and depreciation, the loss from our trading security Excite@Home. We also experienced significant decreases in prepaid expenses, -24- 25 accrued liabilities and deferred revenue. Decreases in prepaid expenses resulted from the completion of acquisitions in the first quarter, while the increase in accrued liabilities was driven by increased product returns reserves for the September 1999 launch of Quicken 2000. The increase in deferred revenues was due primarily to the increase in professional tax product orders which will ship at a later date. Investing activities used $185.6$242.6 million in cash for the threesix months ended OctoberJanuary 31, 1999.2000. Uses of cash included net purchases of $110.2 million in short-term investments in addition toand purchases of $51.9 million in property and equipment. Property and equipment purchases during the quarter were made to support our ongoing operations, information system upgrades and our growing Internet-based businesses. We also used $54.6 million in cash for our acquisitions of Boston Light, SecureTax and Hutchison. Financing activities provided $21.8 million in the first 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 Excite@HomeAt Home shares as a trading security, future fluctuations in the carrying value of Excite@HomeAt 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. Financing activities provided $12.8 million in the first quarter, primarily attributable to proceeds from the exercise of employee stock options. In connection with our acquisition of CRI (see Note 4), we are required to pay three annual installments of $25 million in each of the next three fiscal years. In the normal course of business, we enter into leases for new or expanded facilities in both domestic and international locations. We also evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Accordingly, it is possible that we may decide to use cash and cash equivalents to fund such activities in the future. For example, if we exercise our option to purchase VFSC (see Note 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. We believe that our unrestricted cash, cash equivalents and short-term investments will be sufficient to meet anticipated seasonal working capital and capital expenditure requirements for at least the next twelve months. YEAR 2000 The following is a Year 2000 readiness disclosure under the Year 2000 Information and Readiness Disclosure Act. Intuit has 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, we 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 who reports directly to Intuit's senior management, and status is reported regularly to the Audit Committee of Intuit's Board of Directors. We have adopted a five-phase approach that we believe 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 educating and involvingThrough the date of this filing, we have had no major Y2K-related issues. In addition, all appropriate levels of management regarding the need to address Year 2000 issues. Phase Two (inventory) consists of identifying all of our systems, products and relationships that may be impacted by Year 2000. Phase Three (assessment) involves determining our current state of Year 2000 readiness for those areas identifiedsubstantive claims in the inventory phase and prioritizing areas that need to be fixed. Phase Four (action) consists of developing Year 2000 solutions where required, and completing a comprehensive test cycle for all appropriate inventoried items. Phase Five (implementation) consists of rolling out Year 2000 solutions for affected products, services and technologies and implementing maintenance and support processes to maintain ongoing compliance. -25- 26 As a software developer, we have three key areas of focus: (1)lawsuits filed against Intuit in connection with alleged Y2K problems with 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 partiesservices have been dismissed, with whom we have significant business relationships. Substantially all of our efforts in the product area have now completed the implementation phase and our efforts are primarily focused on providing our customer base with confirmation of product compliance and remediation options, where required. Remaining efforts in the product area are expected to be completed by December 31, 1999.only one possible appeal remaining. Customers can find Intuit's Year 2000 Readiness Disclosure about our products, and order free solutions, where required, on our Corporate Year 2000 Resource Center at www.intuit.com/y2k. Substantially all of the action and implementation efforts for the majority of our internal systems have been completed and remaining efforts in the internal systems area are expected to be completed by December 31, 1999. As most companies are experiencing, there is an extensive on-going maintenance effort required to continually review the compliance statements of our software and hardware vendors and to verify that our technology remains compliant. We will continue to work with our third party vendors to review the status of their efforts and have dedicated considerable time and effort on testing activities with our key vendors. We are not currently aware of any material Y2K issues with key third parties that are likely to affect us. However, this understanding is based on information they have provided to us, and it is difficult to get a definitive understanding of the Y2K status of any third parties. Costs directly attributed to our Year 2000 project were approximately $6.5 million in fiscal 1999. This figure is comprised primarily of hardware, software, internal resources and consulting fees necessary for our Year 2000 testing activities during fiscal 1999. 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 -27- 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 have developed plans that should allow us to handle the increases in calls that we have internally forecasted. If call levels and the timing of calls are consistent with our forecasts, we do not expect to incur material incremental costs related to Y2K call volume. To date, call volumes have been lower than our forecast. We are unable to determine what portion of the additional forecasted calls may come later in the year (in which case we could face significant capacity problems because of resource constraints), and what portion of the calls will not come at all (for customers who do not experience any Y2K problems). In parallel, we have initiated a number of proactive communications to our customer base and the media in an attempt to increase Y2K awareness concerning our products and services and reduce the likelihood of unanticipated end of year demand for Y2K solutions and/or technical support. Our ability to handle significant volumes of Y2K-related calls may also be impacted by additional resources required to support major product launches by our tax and small business divisions, which are taking place during our second fiscal quarter. Additionally, there will beincluding costs associated with the manufacture and distribution of free solutions for products that are not Year 2000 compliant or in certain cases that willwere not be tested for Year 2000 compliance. We believeAlthough 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. -26- 27 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 establishment of contingency plans throughout the company, we may not anticipate or adequately provide for all contingencies. Although 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 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 were filed against Intuit in California and New York, alleging Year 2000 issues with the online banking functionality in certain versions of our Quicken products but these lawsuits were dismissed by the courts. It is possible that we will face additional lawsuits. We continue to work with financial institutions to provide solutions to their current online banking customers and have made such solutions available before customers experience any Year 2000 problems. See "Legal Proceedings" for more information. 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. -27-less than $5 million. -28- 2829 - - -------------------------------------------------------------------------------- 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 OctoberJanuary 31, 1999.2000. These securities are subject to considerable market risk due to their volatility. See Note 1 of the financial statement notes for more information regarding risks related to our investments in marketable securities. INTEREST RATE RISK Interest rate risk represents a component of market risk to us and represents the possibility that changes in interest rates will cause unfavorable changes in our net income and in the value of our interest rate sensitive assets, liabilities and commitments. In a higher interest rate environment, borrower demand for mortgage loans declines. Interest rate movements also affect the interest income earned on loans we hold for sale in the secondary market, interest expense on our lines of credit, the value of mortgage loans we hold for sale in the secondary market and ultimately the gain on the sale of those mortgage loans. In addition, interest rate movements affect the interest income earned on investments we hold in our short-term investment portfolio and the value of those investments. As part of our risk management programs, we enter into financial agreements and purchase financial instruments in the normal course of business to manage our exposure to interest rate risk with respect to our Conventional Loans and our government-insured loans (together, "Prime Loans"), but not with respect to our Sub-Prime Loans or Home Equity Lines of Credit. We use these financial agreements and financial instruments for the explicit purpose of managing interest rate risks to protect the value of our mortgage loan portfolio. Management actively monitors and manages our exposure to interest rate risk on Prime Loans, which is incurred in the normal course of business. The committed and closed pipelines of Prime Loans, as well as the related forward commitments and derivatives, are valued daily. We refer to the loans, pipeline, commitments and derivatives together as the "hedge position." The hedge position is evaluated against a spectrum of interest rate scenarios to determine expected net changes in the fair values of the hedge position in relation to the changes in interest rates. We do not enter into instruments for trading purposes. Our interest rate risk exposure is evaluated daily using models which estimate changes in the fair value of the hedge position and compare those changes against the fair value of the underlying assets and commitments. -29- 30
PRINCIPAL AMOUNTS BY EXPECTED MATURITY: (in thousands, except interest rates) PERIOD ENDING JANUARY 31, FAIR VALUE EXPECTED MATURITY DATE JANUARY 31, --------------------------------------------------- 2000 2001 2002 2003 2004 TOTAL 2000 ---- ---- ---- ---- ---- ----- ----------- ASSETS: Mortgage Loans................... $38,386 -- -- -- -- $38,386 $39,183 Average Interest Rate........ 8.97% 8.97% LIABILITIES: Lines of Credit.................. $ 3,283 -- -- -- -- $ 3,283 $ 3,291 Average Interest Rate........ 6.64% 6.64%
Based on the carrying values of our mortgage loans and lines of credit that we held at January 31, 2000, we do not believe that short-term changes in interest rates would have a material effect on the interest income we earn on loans held for sale in the secondary market, interest expense on our lines of credit or the value of mortgage loans that we hold for sale in the secondary market. See Notes 1 and 5 of the financial statement notes for more information regarding risks related to our mortgage loans and lines of credit. IMPACT OF FOREIGN CURRENCY RATE CHANGES During fiscal 1999, the currency of our Japanese subsidiary strengthened while the currencies of our other subsidiaries remained essentially stable. As of OctoberJanuary 31, 1999,2000, the currency of our Japanese subsidiary has continued to strengthen and the currencies of our other subsidiaries have remained essentially stable since the end of our 1999 fiscal year. Because we translate foreign currencies into U.S.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 OctoberJanuary 31, 1999,2000, there was an immaterial currency exchange impact from our intercompany transactions. Currency exchange risk is also minimized since foreign debt is due almost exclusively in local foreign currencies. As of OctoberJanuary 31, 1999,2000, we did not engage in foreign currency hedging activities. -28--30- 2931 - - -------------------------------------------------------------------------------- PART II ITEM 1 LEGAL PROCEEDINGS - - -------------------------------------------------------------------------------- Intuit was a defendant in the following two consolidated class action lawsuits (one in California and one in New York) which alleged that certain of its Quicken products have on-line banking functions that are not Year 2000 compliant: (1) In re Intuit Inc. Year 2000compliant. With respect to the 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 were substantively similar. The lawsuits asserted breach of implied warranty claims, violations of federal and/or state consumer protection laws, and violations of various state business practices laws. The plaintiffs sought compensatory damages, disgorgement of profits, and (in some cases) attorneys' fees. Intuit successfully had the original complaint and subsequent consolidated amended complaint dismissed with leave to amend. The plaintiffs then filed a third amended complaint and Intuit filed a demurrer in response to it, seeking dismissal of the complaint. Onlitigation, on October 13, 1999 the court sustained Intuit's demurrer and dismissed the case without leave to amend. The only remaining issue relates to a potential award of attorneys' fees. We also filed motionsfees to dismiss in the New York actions and, onplaintiffs. On December 1, 1998,1999, the court granted our motion to dismiss all the New York actions with prejudice. Although plaintiffs filed a Notice of Appeal, Intuit understands that plaintiffsthey failed to perfect the appeal. Accordingly, Intuit understands that this case is also now over. In addition, a suit was filed in the Contra Costa County, California Superior Court by an individual consumer against various retailers, including Circuit City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others, alleging that these retailers have sold software and hardware products which are not Year 2000 compliant, including at least one product published by Intuit. One of the defendants in this action, Fry's Electronics, filed a cross-complaint against various software publishers and hardware manufacturers, including Intuit, asserting a claim for indemnity in the main action. In September 1999, Fry's Electronics reached a settlement with the plaintiffs. All the cross defendants, including Intuit, then filed a demurrer to the cross-complaint. On Tuesday, December 7, 1999 the court granted the demurrer and dismissed the case without leave to amend. UnlessIf Fry's Electronics appealsdoes not appeal this ruling by April 4, 2000, this lawsuit against Intuit iswill also nowbe over. On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed in the United States District Court, Southern District of New York. Both actions claim that private customer information entered into Intuit's Quicken.com website was intentionally and secretly disclosed to 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, an order to disgorge profits related to the alleged acts, and statutory and other damages. As of March 10, 2000, neither lawsuit had been served on Intuit. 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) 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.Not applicable. (b) On December 1, 1999, we amended our Certificate of Incorporation to increase the authorized shares of common stock to 750,000,000 shares. This amendment was approved by stockholders on November 30, 1999 (see Item 4 below). The Board has the right to determine when and on what terms shares of the newly authorized common stock will be issued. Existing stockholders will not have any rights to purchase any newly issued shares in order to maintain their proportionate ownership interests. If Intuit issues additional shares of common stock or securities convertible into common stock in the future, it would dilute the voting rights of existing stockholders and could also dilute earnings per share and book value per share of existing stockholders. The increase in authorized common stock could discourage or hinder efforts by other parties to obtain control of Intuit.Not applicable. (c) On August 2, 1999January 24, 2000, we issued 299,940and sold 225,000 shares of our common stock as partial considerationto Stephen M. Bennett, our recently appointed President and Chief Executive Officer, pursuant to two Restricted Stock Purchase Agreements. The purchase price for our acquisitionthe shares was $0.01 per share, for an aggregate purchase price of Boston Light Software Corporation, a Massachusetts corporation that provides electronic commerce tools for small businesses. Intuit issued these shares to five principal stockholders in connection with the merger transaction in which Boston Light became a wholly-owned subsidiary of Intuit.$2,250. The shares issued in this transaction were issued without registration under the Securities Act of 1993, Actas amended (the "1933 Act"), in reliance on an exemption under Section 3(a)(10)4(2) of the 1933 Act, after a hearing onAct. The shares are subject to vesting over periods of up to 10 years. Any unvested shares may be repurchased by Intuit for the fairness of the transaction. The California Department of Corporations issued a Permit for Qualification of the Securitiesoriginal purchase price if Mr. Bennett's employment with Intuit is terminated under Section 25121 of the California Corporate Securities Law of 1968. -30-certain circumstances. (d) Not applicable. -32- 3133 - - -------------------------------------------------------------------------------- ITEM 4 SUBMISSION OF5 OTHER MATTERS TO A VOTE OF SECURITY HOLDERS- - -------------------------------------------------------------------------------- AtCHANGES 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 Annual Meeting of Stockholders on November 30, 1999, our stockholders voted on the following proposals: 1. Proposal to elect directors:executive officers are as follows:
For Withheld Unvoted ---NAME POSITION - - ---- -------- ------- Christopher W. Brody 172,997,600 102,820 0 William V. Campbell 172,997,750 102,670 0 Scott D. Cook 172,997,750 102,670 0 L. John Doerr 172,997,600 102,820 0 Donna L. Dubinsky 172,997,474 109,946 0 Michael R. Hallman 172,997,000 103,420 0 William H. Harris, Jr. 172,968,597 131,823 0 Burton J. McMurtry 172,944,403 106,017 0
2. Proposal to amend Intuit's CertificateStephen M. Bennett President and Chief Executive Officer Scott D. Cook Chairman of Incorporation to increase the numberExecutive Committee of sharesthe Board of authorized common stock by 500,000,000 shares: For 161,413,642 Against 11,534,561 Abstain 152,217 Unvoted 0
3. Proposal to amend Intuit's CertificateDirectors 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 Incorporation to (i) increase the number of shares of authorized preferred stock by 3,655,082 shares;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 (ii) eliminate all authorized Series A Preferred Stock: For 70,995,629 Against 78,438,619 Abstain 166,111 Unvoted 23,500,061
4. Proposal to amend Intuit's 1993 Equity Incentive Plan to increase the number of shares of common stock available for issuance thereunder by 8,900,000 shares: For 96,326,401 Against 76,585,036 Abstain 188,983 Unvoted 0
5 Proposal to amend Intuit's 1996 Employee Stock Purchase Plan to increase the number of shares of common stock available for issuance thereunder by 400,000 shares: For 171,262,828 Against 1,685,669 Abstain 151,923 Unvoted 0
-31-Marketing Communications Carol Novello Vice President, Financial Supplies Group Enrico Roderick Vice President, Personal Finance Group Catherine L. Valentine Vice President, General Counsel and Secretary -33- 32 6. Proposal to amend Intuit's 1996 Directors Stock Option Plan to (i) increase the number of shares of common stock available for issuance thereunder by 100,000 shares; (ii) increase the size of future option grants to reflect our recent 3-for-1 stock split; and (iii) lengthen the vesting period for future option grants: For 129,538,463 Against 43,360,663 Abstain 201,294 Unvoted 0
7. Proposal to ratify the selection of Ernst & Young LLP as Intuit's independent auditors for fiscal 2000: For 172,921,061 Against 80,192 Abstain 99,167 Unvoted 0
-32- 3334 - - -------------------------------------------------------------------------------- ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - - -------------------------------------------------------------------------------- (a)(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT: 2.01(1) Agreement and Plan of Merger among Intuit, Merger Sub 1, Inc., Merger Sub 2, Inc., Rock Financial Corporation and Title Source, Inc., dated October 6, 1999 (schedules and similar attachments will be furnished to the Commission upon request) 2.02* Non-Competition Agreement by and among Intuit, Rock Financial Corporation and Daniel Gilbert, dated October 6, 1999 3.01(2) Certificate of Increase of Series B Junior Participating Preferred Stock dated November 9, 1999 3.02(2) Certificate of Amendment to Intuit's Certificate of Incorporation dated November 30, 1999 3.03(2) Second Amended and Restated Rights Agreement, dated October 15, 1999 10.01(2) Rock Financial Corporation Amended and Restated 1996 Stock Option Plan and related documents 10.02(3) Intuit Inc. 1993 Equity Incentive Plan and related documents, as amended through November 30, 1999 10.03(4)10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through November 30, 1999 10.04(5)January 19, 2000 10.02 Employment Agreement between Intuit and Stephen M. Bennett dated January 21, 2000 10.03 Intuit Inc. 1996 DirectorsRestricted Stock Option Plan,Purchase Agreements between Intuit and related documents, as amended through November 30,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 10.05(6) Boston Light Software Corp. 1999 Amended and Restated Stock Option/Stock Issuance Plan and related documents 10.06(7) The Hutchison Avenue Software Corporation Stock Option Plan and related documents 27.01*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 - - ---------------- * Filed with this Form 10-Q (1) Filed as an exhibit to Intuit's Form S-4 registration statement (file no. 333-90393), filed with the Commission on November 5, 1999 and incorporated by reference (2) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-92503), filed with the Commission on December 10, 1999 and incorporated by reference (3) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-92517), filed with the Commission on December 10, 1999 and incorporated by reference (4) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-92513), filed with the Commission on December 10, 1999 and incorporated by reference (5) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-92515), filed with the Commission on December 10, 1999 and incorporated by reference (6) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-84385), filed with the Commission on August 2, 1999 and incorporated by reference (7) Filed as an exhibit to Intuit's Form S-8 registration statement (file no. 333-85349), filed with the Commission on August 17, 1999 and incorporated by reference (b)(B) REPORTS ON FORM 8-K: (1) On September 14, 1999,January 25, 2000, Intuit filed a report on Form 8-K to report under Item 5 that on September 9, 1999, its Boardthe appointment of Directors had declared a three-for-one stock split, to be effectedStephen M. Bennett as a stock dividend. -33- 34 (2) On September 24, 1999, Intuit filed a report on Form 8-K to report under Item 5 that its President and Chief Executive Officer had resigned, and that its current Chairman had been named as Acting Chief Executive Officer pending selection of a new Chief Executive Officer. (3) On November 24, 1999, Intuit filed a report on Form 8-K to report under Item 5 its financial results for the quarter ended October 31, 1999. Intuit's balance sheet and statement of operations as of and for the three months ended October 31, 1998 and 1999 were included in the Form 8-K.board member. -34- 35 - - -------------------------------------------------------------------------------- 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: December 14,March 16, 1999 By: /s/ Greg J. Santora --------------------------------------------------------------------------------- Greg J. Santora Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -35- 36 EXHIBIT INDEX
Exhibit NumberNumber.. Description Page - - ------ ----------- ---- 2.02 Non-Competition10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through January 19, 2000....................................................... 10.02 Employment Agreement bybetween Intuit and amongStephen M. Bennett dated January 21, 2000....................................................... 10.03 Intuit Rock Financial CorporationInc. Form of Restricted Stock Purchase Agreements between Intuit and Daniel Gilbert,Stephen M. Bennett dated October 6, 1999...................................................January 24, 2000................... 10.04 Confidential Agreement and General Release of Claims between Intuit Inc. and William H. Harris, Jr., dated September 23, 1999....... 27.01 Financial Data Schedule (filed only in electronic format)............................... period ended January 31, 2000 ................................................ 27.02 Financial Data Schedule (filed only in electronic format) period ended January 31, 1999 ................................................
-36-