1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 2001 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
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(Address of principal executive offices)
(650) 944-6000
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Approximately 209,143,388 shares of Common Stock,
$0.01 par value, as of May 31, 2001
2
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FORM 10-Q
INTUIT INC.
INDEX
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PAGE
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NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 2000 and April 30, 2001............................. 3
Condensed Consolidated Statements of Operations for
the three and nine months ended April 30, 2000 and 2001...... 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended April 30, 2000 and 2001................ 5
Notes to Condensed Consolidated Financial Statements ........ 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 16
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 27
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 28
ITEM 5: Other Matters................................................... 29
ITEM 6: Exhibits and Reports on Form 8-K................................ 30
Signatures...................................................... 30
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, APRIL 30,
(In thousands; Unaudited) 2000 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 416,953 $ 437,604
Short-term investments ......................... 1,050,220 1,129,929
Marketable securities .......................... 225,878 117,494
Customer deposits .............................. 181,678 221,944
Accounts receivable, net ........................ 67,420 103,310
Mortgage loans ................................. 60,330 145,964
Prepaid expenses and other current assets(1) ... 126,315 134,704
----------- -----------
Total current assets ....................... 2,128,794 2,290,949
Property and equipment, net ..................... 167,707 181,635
Goodwill and intangibles, net ................... 438,878 487,667
Investments ..................................... 31,160 21,311
Other assets(2) ................................. 112,363 110,354
----------- -----------
Total assets .................................... $ 2,878,902 $ 3,091,916
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 79,145 $ 74,709
Payroll tax obligations ........................ 177,002 197,700
Escrow liabilities ............................. 32,077 105,046
Deferred revenue ............................... 107,578 82,374
Income taxes payable ........................... 110,743 66,374
Deferred income taxes .......................... 53,934 36,318
Other current liabilities ...................... 246,358 323,568
----------- -----------
Total current liabilities .................. 806,837 886,089
Long-term obligations ........................... 538 15,786
Minority interest ............................... 238 836
Commitments and contingencies
Stockholders' equity:
Preferred stock ................................ -- --
Common stock and additional paid in capital .... 1,521,559 1,682,138
Deferred compensation .......................... (26,522) (23,657)
Accumulated other comprehensive income, net .... 55,586 31,562
Retained earnings .............................. 520,666 499,162
----------- -----------
Total stockholders' equity ................. 2,071,289 2,189,205
----------- -----------
Total liabilities and stockholders' equity ...... $ 2,878,902 $ 3,091,916
=========== ===========
(1) Includes $7.2 million notes receivable from Venture Finance Software Corp.
as of July 31, 2000.
(2) Includes $6.5 million and $9.5 million loans due from affiliates as of July
31, 2000 and April 30, 2001, respectively.
See accompanying notes.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
2000 2001 2000 2001
--------- --------- --------- -----------
(In thousands, except per share data; Unaudited)
Net revenue ...................................... $ 329,139 $ 425,210 $ 931,566 $ 1,070,292
Costs and expenses:
Cost of revenue ................................. 77,647 81,888 232,074 259,446
Customer service and technical support .......... 31,596 37,538 113,554 116,068
Selling and marketing ........................... 60,173 68,479 216,188 215,146
Research and development ........................ 40,779 52,697 126,529 155,174
General and administrative ...................... 20,027 23,917 64,846 77,614
Charge for purchased research and development ... -- 238 1,312 238
Acquisition related costs ....................... 38,404 122,575 121,710 205,328
Reorganization costs ............................ -- -- 3,500 --
--------- --------- --------- -----------
Total costs and expenses ........................ 268,626 387,332 879,713 1,029,014
--------- --------- --------- -----------
Income from operations ........................... 60,513 37,878 51,853 41,278
Interest and other income and expense, net ....... 14,516 15,070 29,981 47,736
Gain (loss) on marketable securities and other
investments, net ............................... 422,206 (11,504) 402,096 (87,307)
Gain on divestiture .............................. -- -- -- 1,639
--------- --------- --------- -----------
Income before income tax, minority interest and
cumulative effect of accounting change ......... 497,235 41,444 483,930 3,346
Income tax provision ............................. 200,204 55,294 195,617 38,566
Minority interest (income) ....................... (54) 451 (203) 598
--------- --------- --------- -----------
Income (loss) before cumulative effect of
accounting change .............................. 297,085 (14,301) 288,516 (35,818)
Cumulative effect of accounting change, net of
taxes .......................................... -- -- -- 14,314
--------- --------- --------- -----------
Net income (loss) ................................ $ 297,085 $ (14,301) $ 288,516 $ (21,504)
========= ========= ========= ===========
Basic net income (loss) per share before
cumulative effect of accounting change ......... $ 1.47 $ (0.07) $ 1.44 $ (0.17)
Cumulative effect of accounting change ........... -- -- -- 0.07
--------- --------- --------- -----------
Basic net income (loss) per share ................ $ 1.47 $ (0.07) $ 1.44 $ (0.10)
========= ========= ========= ===========
Shares used in per share amounts ................. 202,342 208,715 199,787 207,345
========= ========= ========= ===========
Diluted net income (loss) per share before
cumulative effect of accounting change ......... $ 1.39 $ (0.07) $ 1.37 $ (0.17)
Cumulative effect of accounting change ........... -- -- -- 0.07
--------- --------- --------- -----------
Diluted net income (loss) per share .............. $ 1.39 $ (0.07) $ 1.37 $ (0.10)
========= ========= ========= ===========
Shares used in per share amounts ................. 214,362 208,715 211,049 207,345
========= ========= ========= ===========
See accompanying notes.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
APRIL 30,
(In thousands; Unaudited) 2000 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................... $ 288,516 $ (21,504)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Acquisition related costs .............................. 128,746 213,144
Depreciation ........................................... 33,682 45,208
Net (gain) loss from marketable securities and other
investments .......................................... (402,096) 87,307
Charge for purchased research and development .......... 1,312 238
Cumulative effect of accounting change ................. -- (23,857)
Deferred income tax (benefit) provision ................ (3,121) 49,793
Gain on divestiture .................................... -- (1,639)
Changes in operating assets and liabilities:
Customer deposits ...................................... 8,621 (40,266)
Accounts receivable .................................... (64,390) (35,445)
Mortgage loans ......................................... 19,798 (85,634)
Prepaid expenses and other current assets .............. 24,746 (10,071)
Other assets ........................................... (17,050) 7,738
Accounts payable ....................................... 27,034 (14,711)
Payroll tax obligations ................................ 10,077 20,702
Escrow liabilities ..................................... (26,594) 71,844
Deferred revenue ....................................... 23,134 (25,204)
Income taxes payable ................................... 106,535 (44,369)
Other current liabilities .............................. 43,601 40,932
Minority interest ...................................... (203) 598
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Net cash provided by operating activities ............ 202,348 234,804
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .......................... (71,683) (58,011)
Proceeds from the sale of marketable securities ............. 519,183 25,238
Purchase of marketable securities ........................... (16,500) --
Purchase of short-term investments .......................... (728,504) (2,581,316)
Liquidation and maturity of short-term investments .......... 509,259 2,501,607
Acquisitions, net of cash acquired .......................... (54,584) (164,059)
Purchase of long-term investments ........................... (7,157) (3,694)
--------- -----------
Net cash provided (used) by investing activities .... 150,014 (280,235)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ........................ (3,348) (2,610)
Net proceeds (payments) under warehouse line of credit ...... (11,105) 1,125
Net proceeds from issuance of common stock .................. 70,887 65,086
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Net cash provided by financing activities ........... 56,434 63,601
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Effect of foreign currency translation on cash and
cash equivalents .................................. (919) 2,481
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 407,877 20,651
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 554,230 416,953
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CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 962,107 $ 437,604
========= ===========
See accompanying notes.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. All intercompany balances and transactions have
been eliminated in consolidation. Certain other previously reported amounts have
been reclassified to conform to the current presentation format. We have
included all normal recurring adjustments considered necessary to give a fair
presentation of our operating results for the periods shown. Results for the
three and nine months ended April 30, 2001 do not necessarily indicate the
results to be expected for the fiscal year ending July 31, 2001 or any other
future period. All financial statements presented are restated to reflect the
combined results of Intuit and our Rock Financial Corporation and Title Source,
Inc. subsidiaries that were acquired on December 8, 1999 in a transaction that
was accounted for as a pooling of interests. These statements and accompanying
notes should be read together with the audited consolidated financial statements
for the fiscal year ended July 31, 2000 included in Intuit's Form 10-K, filed
with the Securities and Exchange Commission.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and the
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, fixed assets and deferred tax assets. Despite our intention to
establish accurate estimates and assumptions, actual results may differ from our
estimates.
Net Revenue
We recognize revenue upon shipment of our shrink-wrapped software products, net
of returns reserves, based on historical experience, provided that collection is
probable and we have no significant remaining obligations. 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.
We recognize revenue from Internet products and services when it is "earned"
based on the nature of the particular product or service. For Internet products
and services that we provide over a period of time, we recognize revenue pro
rata based on the contractual time period. However, where we provide or deliver
the Internet product or service at one point in time, we recognize revenue upon
delivery of the product or completion of the service.
Intuit also offers several plans under which customers are charged for technical
support assistance. We collect fees charged for these plans in advance and we
recognize revenue over a period of time (generally one year). We include costs
incurred for fee for support plans in cost of goods sold.
We defer loan origination revenue and the associated commissions and processing
costs on loans held for sale until the related loan is sold. We recognize gains
and losses on loans at the time we sell them, based upon the difference between
the selling price and the carrying value of the related loans sold. We recognize
loan servicing revenue as the related principal is collected. We recognize
interest income on mortgage loans held for sale as it is earned, and we
recognize interest expenses on related borrowings as we incur them.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries through websites and
other electronic means and providing customer assistance by telephone. In
connection with the sale of certain products, Intuit provides a limited amount
of free technical support
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assistance to customers. 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. We
accrue the estimated cost of providing this free support upon product shipment.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with maturities of three months or
less at the date of purchase to be cash equivalents. Short-term investments are
considered available-for-sale debt securities and are carried at amortized cost,
which approximates fair value. Available-for-sale debt securities are classified
as current assets based upon our intent and ability to use any and all of these
securities as necessary to satisfy the significant short-term liquidity
requirements that may arise from the highly seasonal and cyclical nature of our
business. Based on our significant business seasonality, cash flow requirements
within quarters may fluctuate dramatically and require us to use a significant
amount of the short-term investments held as available-for-sale debt securities.
The following schedule summarizes the estimated fair value of our cash, cash
equivalents, and short-term investments:
JULY 31, APRIL 30,
2000 2001
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(In thousands)
Cash and cash equivalents:
Cash .................................... $ 4,298 $ 40,197
Certificate of deposits ................. -- 6,309
Money market funds ...................... 338,462 388,495
Commercial paper and corporate notes .... 29,543 --
Municipal bonds ......................... 44,650 2,603
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$ 416,953 $ 437,604
========== ==========
Short-term investments:
Certificates of deposit ............ $ 5,053 $ --
Corporate notes .................... 75,640 64,671
Municipal bonds .................... 920,360 1,045,258
U.S. Government securities ......... 49,167 20,000
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$1,050,220 $1,129,929
========== ==========
The following table outlines the estimated fair value of Intuit's
available-for-sale debt securities held in short-term investments classified by
the maturity date listed on the security.
JULY 31, APRIL 30,
2000 2001
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(In thousands)
Due within one year ........ $ 235,998 $ 181,690
Due within two years ....... 157,309 201,044
Due within three years ..... 13,039 1,785
Due after three years ...... 638,821 745,410
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$1,045,167 $1,129,929
========== ==========
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Marketable Securities
We currently hold several marketable securities, most of which we acquired in
connection with strategic business transactions and relationships. Our
available-for-sale equity securities are carried at fair value and we include
unrealized gains and losses, net of tax, in stockholders' equity. We have
designated our investments in At Home Corporation (which does business as
Excite@Home), VeriSign and 724 Solutions as trading securities and fluctuations
in the market value of these shares are reported in net income. We held the
following marketable securities at July 31, 2000 and April 30, 2001:
AVAILABLE-FOR-SALE EQUITY COST GROSS UNREALIZED ESTIMATED
SECURITIES BASIS GAINS LOSSES FAIR VALUE
- ------------------------- -------- --------- --------- ----------
(In thousands)
JULY 31, 2000
Checkfree Corporation common stock $ 36,875 $ 115,000 $ -- $151,875
Homestore.com, Inc. common stock 1,689 10,626 -- 12,315
Quotesmith.com, Inc. common stock 5,645 -- (2,721) 2,924
S1 Corporation common stock 49,997 -- (25,302) 24,695
-------- --------- --------- --------
$ 94,206 $ 125,626 $ (28,023) $191,809
======== ========= ========= ========
APRIL 30, 2001
Checkfree Corporation common stock $ 35,621 $ 60,592 $ -- $ 96,213
InsWeb Corporation common stock 10,810 -- (3,720) 7,090
S1 Corporation common stock 9,769 -- (3,313) 6,456
-------- --------- --------- --------
$ 56,200 $ 60,592 $ (7,033) $109,759
======== ========= ========= ========
CUMULATIVE NET
COST RECOGNIZED ESTIMATED
TRADING SECURITIES BASIS LOSSES FAIR VALUE
--------- -------------- ----------
(In thousands)
JULY 31, 2000
Excite@Home common stock $ 119,366 $ (92,997) $26,369
VeriSign, Inc. common stock 4,916 (1,833) 3,083
724 Solutions, Inc. common stock 7,700 (3,083) 4,617
--------- --------- -------
$ 131,982 $ (97,913) $34,069
========= ========= =======
APRIL 30, 2001
Excite@Home common stock $ 114,614 $(107,760) $ 6,854
VeriSign, Inc. common stock 2,458 (1,960) 498
724 Solutions, Inc. common stock 2,118 (1,735) 383
--------- --------- -------
$ 119,190 $(111,455) $ 7,735
========= ========= =======
The cost basis of our marketable securities reflect adjustments for other than
temporary impairments in value as well as sales of securities.
Our marketable securities are quoted on the Nasdaq National Market. All of our
marketable securities are stocks of high technology companies that have been
extremely volatile. The market prices of a number of these companies' stocks
have declined substantially. Declines in the market prices of stocks we hold
could continue. These declines have resulted, and could continue to result, in a
material reduction in the carrying value of these assets and a negative impact
on our operating results. For example, if our available-for-sale securities
experience further declines in fair value that is considered other than
temporary, we will record the additional loss in the period when the subsequent
impairment becomes apparent.
During the nine months ended April 30, 2001, we recorded a loss of $40.2 million
to recognize an other than temporary decline in the value of our S1 shares for
the difference between our original cost of $51.50 per share and $10.06 per
share, the fair value as of October 31, 2000 the date we made the impairment
determination.
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During the nine months ended April 30, 2001, we sold 85,000 shares of Checkfree,
351,865 shares of Homestore.com, and 99,902 shares of 724 Solutions. In
connection with these sales we recognized realized gains of $4.0 million, $ 11.1
million, and $0.1 million, respectively. In addition, we sold 9,715 shares of
VeriSign, 1,197,327 shares of Quotesmith.com and 75,000 shares of Excite@Home
and recognized aggregate realized losses of $5.1 million. Total net gains on
sales of marketable securities were $10.1 million for the nine months ended
April 30, 2001. This gain was offset by recognized losses of $42.2 million to
reflect a decline in valuations of our trading securities and S1 options, and a
loss of $55.2 million for other than temporary declines in the value of our
marketable securities and other investments. This resulted in combined net
losses on marketable securities and other investments of $87.3 million for the
nine months ended April 30, 2001.
Goodwill and Purchased Intangible Assets
We record goodwill when the purchase price exceeds the book value of net assets
acquired. Goodwill is amortized on a straight-line basis over periods ranging
from 3 to 5 years. The cost of identified intangibles is generally amortized on
a straight-line basis over periods ranging from 1 to 15 years.
We regularly perform reviews to determine if the carrying values of our
long-lived assets are 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. During the third quarter, events and
circumstances indicated possible impairment of our long-lived assets consisting
principally of acquired intangible assets and goodwill. These indicators
included deterioration in the business climate for web-based companies and
recent changes in our fiscal 2002 operating forecasts.
We measured the impairment loss related to long-lived assets based on the amount
by which the carrying amount of such assets exceeded their fair values. Our
measurement of fair value was based on an analysis of the future discounted cash
flows at the enterprise level. In performing this analysis, we used the best
information available in the circumstances including reasonable and supportable
assumptions and projections. The discounted cash flow analysis considered the
likelihood of possible outcomes and was based on our best estimate of projected
future cash flows, including terminal value cash flows expected to result from
the disposition of the assets at the end of their useful lives. The anticipated
proceeds from the pending disposition of a portion of Venture Finance Software
Corp. ("VFSC"), our Quicken Bill Manager business, assisted management in the
determination of the fair value of the assets associated with VFSC as of April
30, 2001. Based on our analysis we recorded a charge of $51 million and $26
million to write down the goodwill associated with VFSC and SecureTax,
respectively. If necessary, we will perform subsequent calculations 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 market values 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:
NET BALANCE AT
LIFE IN -------------------------------
YEARS JULY 31, 2000 APRIL 30, 2001
------- ------------- --------------
(in thousands)
Goodwill................................ 3-5 $358,890 $370,200
Customer lists.......................... 3-5 57,890 60,926
Covenant not to compete................. 3-5 4,992 3,501
Purchased technology.................... 1-5 10,990 44,276
Assembled workforce..................... 2-5 1,976 4,216
Trade names and logos................... 1-15 4,140 4,548
Balances presented above are net of total accumulated amortization of $465.3
million and $569.6 million at July 31, 2000 and April 30, 2001, respectively.
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Concentration of Credit Risk
We are subject to risks related to changes in the values of our significant
balances of, marketable securities, private equity investments and short-term
investments, as well as risks related to the collectability of our trade
accounts receivable. At April 30, 2001, we held approximately $117.5 million in
marketable securities, as described in "Marketable Securities," above.
Fluctuations in the market value of our shares in Excite@Home, VeriSign and 724
Solutions result in recognized gains and losses in our statement of operations
on an ongoing basis, since these investments are treated as trading securities.
If there were an other than temporary impairment in any marketable securities
held as available-for-sale, we would report this decline in our statement of
operations. See "Marketable Securities," above in Note 1 for a discussion of
risks associated with our marketable securities. At April 30, 2001, we held
approximately $19.8 million in private equity investments, net of reserves for
potential declines in value that are other than temporary. Our remaining
portfolio is diversified and consists primarily of short-term investment-grade
securities.
To appropriately manage the credit risk associated with accounts receivable,
Intuit performs ongoing evaluations of customer credit. Generally, no collateral
is required. We maintain reserves for estimated credit losses and these losses
have historically been within our expectations. At April 30, 2001, we had one
distributor, that accounted for approximately 25% of our accounts receivable
balance.
In the normal course of our mortgage business, we enter into loan commitments to
extend credit in order to meet the financing needs of our customers. Loan
commitments are agreements to lend to a customer as long as all conditions
specified in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require the customer to pay a fee. We
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral we obtain is based on our credit evaluation of the customer.
Loan commitments subject us to market risks and credit risks. Market risk occurs
if interest rates rise after a loan commitment is made. To offset this risk on
conventional loans that are in process, we utilize mandatory forward sale
commitments and purchase puts and calls on U.S. Treasury securities. At April
30, 2001, we had $214.3 million in mandatory forward sale commitments for future
delivery of FNMA and FHLMC securities. Loan commitments also involve credit risk
relating to the customer, which is not reflected on the balance sheet. We use
the same credit policies for making credit commitments as we do for the
underlying loan product.
Loan commitments to extend credit at July 31, 2000 and April 30, 2001 were as
follows:
JULY 31, 2000 APRIL 30, 2001
-------------------------- --------------------------
FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE
---------- ------------- ---------- -------------
(In thousands)
Conventional prime loans... $167,000 $31,100 $377,091 $48,390
Sub-prime loans............ 4,200 1,700 3,239 587
High-LTV loans............. 600 -- 25 --
-------- ------- -------- -------
$171,800 $32,800 $380,355 $48,977
======== ======= ======== =======
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires us to recognize all derivatives as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
It further provides criteria for designating derivative instruments at fair
value, cash flow, or foreign currency hedges, and establishes accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon the date of adoption, August 1, 2000, we recorded the cumulative effect of
the change in accounting for derivatives for our 4.6 million S1 options held in
long term investments. This resulted in a one-time cumulative effect of $14.3
million, net of taxes totaling $9.5 million, as of August 1, 2000. The one-time
cumulative effect created a decrease of $0.07 per share on the basic and diluted
net loss per share for the nine month period ended April 30, 2001. FAS 133
requires the derivatives to be carried at fair value, so subsequent fluctuations
in the fair value of these options will be included in our net income. For the
three and nine months ended April 30, 2001 these fluctuations resulted in a loss
of $3.4 million and $13.4 million net of taxes, respectively.
The following table shows what adjusted net income and diluted net income per
share would have been as if we had adopted this standard as of the beginning of
fiscal 2000:
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Nine Months Ended April 30, 2000
--------------------------------
As Adjusted As Reported
----------- -----------
(In thousands, except per share data)
Net income ....................................... $323,657 $288,516
Diluted net income per share ..................... $ 1.53 $ 1.37
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), as
amended in March and June 2000. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements for all public
registrants. We are required to adopt SAB 101 no later than our fourth quarter
of 2001. The adoption of SAB 101 is not expected to have a material effect on
our financial position or results of operations.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
common equivalent shares is anti-dilutive.
3. COMPREHENSIVE NET INCOME
Statement of Financial Accounting No. 130, "Reporting Comprehensive Income"
("SFAS 130") establishes standards for reporting and displaying comprehensive
net income and its components in stockholders' equity. However, it has no impact
on our net income 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.
The components of comprehensive net income, net of tax, are as follows:
NINE MONTHS ENDED APRIL 30,
---------------------------
2000 2001
--------- --------
(In thousands)
Beginning balance, net of tax..................... $ 79,144 $ 55,586
Unrealized gain (loss) on marketable securities... 447,333 (72,560)
Realized (gain) loss on marketable securities..... (435,713) 28,518
Tax effect on marketable securities............... 20,241 17,808
Translation adjustment gain (loss), net of tax.... (910) 2,211
--------- --------
Ending balance, net of tax........................ $ 110,095 $ 31,562
========= ========
4. ACQUISITIONS
On August 30, 2000, we purchased all of the outstanding securities of Venture
Finance Software Corp. ("VFSC") that were not already held by Intuit
(approximately 51%) for approximately $118 million in cash (including
approximately $4.5 million in option exercise and tax payments in connection
with VFSC options exercised immediately prior to the purchase). We accounted for
the acquisition of VFSC as a purchase for accounting purposes and allocated
approximately $113 million to identified intangible assets and goodwill. These
assets were determined to be impaired by $51 million as of April 30, 2001. The
remaining balance of $52.8 million, net of accumulated depreciation year to
date, is being amortized over approximately three years.
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On December 20, 2000, we acquired all of the outstanding stock of
EmployeeMatters, Inc., in exchange for approximately $41.9 million in Intuit
stock, the elimination of approximately $8.0 million in bridge loans we extended
to EmployeeMatters prior to the closing, and the assumption of approximately
$3.4 million of liabilities. We accounted for the acquisition of EmployeeMatters
as a purchase for accounting purposes and allocated approximately $53.3 million
to identified intangible assets and goodwill. These assets are being amortized
over periods of three to five years.
On April 17, 2001, we acquired substantially all of the assets of Tax and
Accounting Software Corporation ("TAASC"), for $63.0 million in cash and
approximately $7.8 million in accrued costs. We accounted for the acquisition of
TAASC as a purchase for accounting purposes and allocated approximately $69.8
million to identified intangible assets and goodwill. These assets are being
amortized over five years.
We classify the following expenses as acquisition related costs in our statement
of operations:
Three Months Ended April 30, Nine Months Ended April 30,
(In thousands) 2000 2001 2000 2001
-------- -------- -------- --------
Amortization of goodwill $ 29,515 $ 37,880 $ 89,101 $106,504
Amortization of intangibles 6,758 6,458 20,573 18,184
Deferred compensation 1,137 1,233 2,882 3,563
Impairment charge -- 77,000 -- 77,000
Other 994 4 9,154 77
-------- -------- -------- --------
$ 38,404 $122,575 $121,710 $205,328
======== ======== ======== ========
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On January 24, 2001, we sold selected assets of our Quicken Insurance business
to InsWeb Corp. for approximately $10.8 million of InsWeb common stock. As a
result of the divestiture, we recorded a pre-tax gain of $1.6 million and a
related tax provision of $0.6 million in the second quarter of fiscal 2001.
In addition, Intuit and InsWeb entered into a distribution agreement under which
InsWeb became the exclusive consumer insurance aggregator for Intuit's
Quicken.com and QuickenInsurance Web sites and certain Quicken consumer desktop
products. In exchange, Intuit is sharing associated revenues, which are subject
to certain minimums, over the 5-year term of the distribution agreement.
6. BORROWINGS
We have two mortgage lines of credit, which balances are reflected in escrow
liabilities. The first line of credit currently provides for up to $50 million
principal amount of demand loans secured by mortgage loans and other assets. As
of April 30, 2001 our outstanding balance was $3.7 million. Interest rates on
loans vary depending on the type of underlying loan, and the loans are subject
to sub-limits, advance rates and warehouse terms that vary depending on the type
of underlying loan. The interest rates in effect at July 31, 2000 and April 30,
2001 were 7.89% and 5.96%, respectively, while the weighted average interest
rates for the nine months ended April 30, 2000 and 2001 were 7.18% and 7.07%,
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, 2000 and April 30,
2001.
Our second line of credit advances may be drawn for working capital and
sub-prime, high loan-to-value and conventional prime mortgage loans. Advances
are due on demand and are collateralized by residential first and second
mortgages. Advances are based on a formula computation, with interest due
monthly. The maximum outstanding balance permitted under this line is $20
million. During the second and third quarters of fiscal 2001 we had a zero
balance outstanding for the line of credit.
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7. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
JULY 31, APRIL 30,
(In thousands) 2000 2001
-------- ---------
Accrued compensation .............................. $ 49,303 $ 66,327
Short-term notes payable .......................... 34,286 37,884
Future payments due for CRI acquisition ........... 44,916 47,373
Rebates............................................ 21,552 34,485
Reserve for returns and exchanges ................. 60,979 68,654
Other accruals..................................... 35,322 68,845
-------- --------
$246,358 $323,568
======== ========
8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The following information is provided in accordance with 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. 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. Intuit does not track assets by operating segments. Consequently,
we do not disclose assets by operating segments. The following unaudited results
for the nine months ended April 30, 2000 and 2001 are broken out by our
operating segments:
NINE MONTHS ENDED SMALL CONSUMER GLOBAL
APRIL 30, 2000 BUSINESS TAX FINANCE BUSINESS
(In thousands) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- -------- --------- -------- --------- ------------
Net revenue ........................................ $307,606 $365,473 $ 183,921 $74,566 $ -- $ 931,566
Segment operating income (loss) .................... 50,099 150,099 (18,818) 5,108 -- 186,488
Acquisition costs .................................. -- -- -- -- (130,058) (130,058)
Reorganization costs ............................... -- -- -- -- (3,500) (3,500)
Common expenses .................................... -- -- -- -- (1,077) (1,077)
-------- -------- --------- ------- --------- ---------
Sub-total operating income (loss) .................. 50,099 150,099 (18,818) 5,108 (134,635) 51,853
Interest income (expense) and other items .......... -- -- -- -- 29,981 29,981
Realized net gain (loss) on marketable securities .. -- -- -- -- 402,096 402,096
Gain on divestiture ................................ -- -- -- -- -- --
-------- -------- --------- ------- --------- ---------
Net income (loss) before tax ....................... $ 50,099 $150,099 $ (18,818) $ 5,108 $ 297,442 $ 483,930
======== ======== ========= ======= ========= =========
NINE MONTHS ENDED SMALL CONSUMER GLOBAL
APRIL 30, 2001 BUSINESS TAX FINANCE BUSINESS
(In thousands) DIVISION DIVISION DIVISION DIVISION OTHER CONSOLIDATED
-------- -------- -------- -------- --------- ------------
Net revenue ........................................ $357,305 $437,177 $195,265 $80,545 $ -- $ 1,070,292
Segment operating income (loss) .................... 58,013 208,439 2,638 4,106 -- 273,196
Acquisition costs .................................. -- -- -- -- (216,786) (216,786)
Reorganization costs ............................... -- -- -- -- -- --
Common expenses .................................... -- -- -- -- (15,132) (15,132)
-------- -------- -------- ------- --------- -----------
Sub-total operating income (loss) .................. 58,013 208,439 2,638 4,106 (231,918) 41,278
Interest income (expense) and other items .......... -- -- -- -- 47,736 47,736
Realized net gain (loss) on marketable securities .. -- -- -- -- (87,307) (87,307)
Gain on divestiture ................................ -- -- -- -- 1,639 1,639
-------- -------- -------- ------- --------- -----------
Net income (loss) before tax ....................... $ 58,013 $208,439 $ 2,638 $ 4,106 $(269,850) $ 3,346
======== ======== ======== ======= ========= ===========
(1) Common expenses in fiscal 2000 have been reclassified to conform to the
current presentation format.
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9. NOTES PAYABLE AND COMMITMENTS
In March 2001, our Japanese subsidiary, Intuit KK, refinanced its one-year loan
agreement with a Japanese bank for approximately $30.3 million. The loan is
denominated in Japanese yen and is therefore subject to foreign currency
fluctuations when translated to U.S. dollars for reporting purposes. The
interest rate is variable based on the Tokyo inter-bank offered rate or the
short-term prime rate offered in Japan. At April 30, 2001, the rate was
approximately 0.72%. 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
are obligated to pay interest only on the loan through March 2002.
10. INCOME TAXES
Intuit computes the provision for income taxes by applying the estimated annual
effective tax rate to recurring operations and other taxable items. Our
effective tax rate differs from the federal statutory rate primarily because of
tax credits, tax exempt interest income, state taxes, non deductible acquisition
costs and certain foreign losses.
11. LITIGATION
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.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. The
Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. Following Intuit's successful motion to dismiss
several of the claims, an amended complaint was filed on May 2, 2001. A similar
lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior
Court of State of California, San Bernardino County, Rancho Cucamonga Division.
An amended complaint was filed on October 26, 2000. These purported class
actions allege violations of various federal and California statutes and common
law claims for invasion of privacy based upon the alleged intentional disclosure
to third parties of personal and private customer information entered at
Intuit's Quicken.com website. The complaints seek injunctive relief, orders to
disgorge profits related to the alleged acts, and statutory and other damages.
Intuit believes these lawsuits are without merit and intends to defend the
litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
12. SUBSEQUENT EVENTS
Sale of Quicken Bill Manager
On May 15, 2001, we sold the technology assets of our Quicken Bill Manager
business to Princeton eCom Corporation. In exchange for these assets, Intuit is
entitled to receive, at Princeton eCom's election to be made by February 2002,
either shares of Princeton eCom common stock equal to approximately 20% of
Princeton eCom's fully diluted shares or cash payments in four annual
installments, beginning in February 2002, with each cash installment to equal
25% of the value, measured at the time of the payment, of the Princeton eCom
shares that Intuit would have received if Princeton had elected to pay with
shares of its stock.
In addition, Intuit and Princeton eCom entered into several multi-year business
agreements related to bill payment and presentment. Under these agreements,
Intuit will offer Web-based Quicken Bill Manager-branded service processed by
Princeton eCom and will receive a share in revenues derived from the services.
Intuit will also receive certain payments if Princeton eCom licenses the
Web-based user interface technology to third parties. Intuit will utilize
Princeton eCom as a provider of bill payment and presentment services for
Intuit's Quicken desktop bill management services. Princeton eCom was also
granted a license to use the "Powered by Quicken Bill Manager" mark on third
party sites.
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Share Repurchase Program
On May 22, 2001, we announced that our board of directors has authorized a
three-year stock repurchase program for the purchase up to $500 million of
common stock. The program authorizes us to repurchase shares of common stock on
the open market from time to time, depending on general market conditions and
the trading price of our common stock. The company's cash and cash equivalents
will fund the repurchases.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
Throughout this Form 10-Q, you will find "forward-looking" statements, or
statements about events or circumstances that have not yet occurred. In some
cases, you can identify these statements by forward-looking words such as "may,"
"might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," and other similar terms.
These forward-looking statements include, among other things, the potential for
our emerging businesses and our payroll business, the anticipated future growth
of our mortgage revenue, predictions about QuickBooks new user growth and
upgrade rates for existing customers, expected trends in operating income and
expenses and capital needs. These statements are only predictions, based on our
current expectations about future events. We cannot guarantee future results,
performance or achievements or guarantee that predictions or current
expectations will be accurate. In addition, we will not necessarily update these
statements if circumstances change in the future. These forward-looking
statements involve risks and uncertainties, and our actual results, performance
or achievements could differ materially from those expressed or implied by the
forward-looking statements. The important factors that could cause our results
to differ are discussed under "Risks That Could Affect Future Results," at the
end of this Item 2. This Item 2 should also be read in conjunction with the
Consolidated Financial Statements and related Notes in Part I, Item 1 of this
Form 10-Q, and our fiscal 2000 Form 10K.
OVERVIEW
Intuit's mission is to revolutionize how people manage their financial lives and
small businesses manage their businesses. We strive to offer innovative products
and services that will revolutionize how individuals and small businesses manage
their activities. We offer a variety of small business, tax preparation and
personal finance software products and related products and services that
include Quicken(R), QuickBooks(R), Quicken TurboTax(R), ProSeries(R) and
Lacerte(R) desktop software products, as well as an array of Internet-based
products and services, including QuickBooks Deluxe Payroll service,
QuickBase(R), Quicken TurboTax for the Web, Quicken.com(SM) and Quicken
Loans.(SM)
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of small business and consumer finance
products are typically strongest during the year-end holiday buying season and
the beginning of the calendar year, and therefore our major product launches
usually occur in the fall or early winter to take advantage of these customer
buying patterns. These seasonal patterns mean that revenue is usually highest
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 support products and services continue at relatively consistent
levels during these periods. This can result in significant operating losses in
the July 31 and October 31 quarters. Operating results can also fluctuate for
other reasons, such as changes in product release dates, non-recurring events
such as acquisitions, dispositions, gains and losses from marketable securities,
and product price cuts in quarters that have relatively high fixed expenses.
Acquisitions and dispositions in particular can have a significant impact on the
comparability of both our quarterly and annual results, and acquisition-related
expenses continue to have a negative impact on our earnings.
While desktop software and related products and services provide a majority of
our revenue, our Internet-based revenue is continuing to grow. We use the term
Internet-based revenue to include revenue from both Internet-enabled products
and services as well as revenue generated by electronic ordering and/or delivery
of traditional desktop software products and financial supplies. Since
Internet-based revenues cut across all of our business divisions, we do not
report results of our Internet-based revenues separately in our financial
statements. Instead, each of our business divisions reports Internet-based
revenues that are specific to its operations and are included in its results.
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We believe our internal emerging businesses will provide an opportunity to
increase revenue in fiscal 2001 and beyond. We have made significant progress in
several of these businesses in the past. During fiscal 2000, our web-based tax
preparation and electronic filing services achieved profitability. During both
the second and third quarter of fiscal 2001, the profitability of our Quicken
Loans and payroll businesses improved significantly from the prior year. During
the second quarter of fiscal 2001, we introduced QuickBooks for the Web, which
provides basic accounting functionality on the web, and QuickBase, a web-based
tool that lets customers create, manage and share data from a browser. In
February 2001, we announced the Intuit Developer Network, a program that gives
software developers access to application programming interfaces (APIs) for
various Intuit small business products, so that they can develop software
applications that will be available to Intuit's small business customers.
Despite this progress, investors should be aware that most of our emerging
businesses are still in their initial stages and are not yet generating either
profits or significant revenue. We anticipate increased spending in an effort to
capitalize on new business opportunities. Year over year, as of April 30, 2001
we have doubled our investments in our internally developed emerging businesses.
We expect to continue increasing our investment in emerging businesses during
the remainder of fiscal 2001. See "Risks That Could Affect Future Results."
RESULTS OF OPERATIONS
The following tables set forth data from our consolidated statements of
operations for the quarter and year-to-date ended April 30, 2000 and 2001.
Results for all periods include activity for Rock Financial Corporation and
Title Source, Inc. (collectively, "Rock"), which were acquired in December 1999.
As the acquisition of Rock was accounted for as a pooling of interests, all
prior periods have been restated to reflect the combined results of Rock and
Intuit. See Note 1 of the financial statements.
NET REVENUE
The following revenue discussion is categorized by our business divisions. The
table below shows each business division's percentage of our net revenue for the
quarter and year-to-date ended April 30, 2000 and 2001. See Note 8 of the
financial statements for additional information about our business segments.
Q3 % Q3 % % YTD % YTD % %
(Dollars in millions; CHANGE CHANGE
Unaudited) FY00 REVENUE FY01 REVENUE Q3 FY00 REVENUE FY01 REVENUE YTD
------ ------- ------ ------- ------ ------ ------- -------- ------- ------
Small Business Division ..... $ 90.7 28% $103.5 24% 14% $307.6 33% $ 357.3 33% 16%
Tax Division ................ 168.6 51% 232.5 55% 38% 365.5 39% 437.2 41% 20%
Consumer Finance Division ... 43.2 13% 65.3 15% 51% 183.9 20% 195.2 18% 6%
Global Business Division .... 26.6 8% 23.9 6% (10)% 74.6 8% 80.6 8% 8%
Total net revenue........ $329.1 100% $425.2 100% 29% $931.6 100% $1,070.3 100% 15%
Small Business Division.
Small Business Division revenue is derived primarily from QuickBooks desktop
products, financial supplies, payroll services, the QuickBooks Support Network
("QBSN"), and QuickBooks Internet Gateway services ("QBIG").
Revenue for the Small Business Division increased by 14% and 16% for quarter and
year to date ended April 30, 2001 compared to the same periods in the prior
year. Our QuickBooks business (including QuickBooks desktop products, QBSN and
QBIG) experienced revenue growth of 5% and 9% for the quarter and year to date
ended April 30, 2001, compared to the same period a year ago. This growth was
primarily attributable to increased QBIG revenue as well as higher average
selling prices for our QuickBooks desktop products. These factors were partially
offset by 12% and 18% declines in unit sales for our QuickBooks desktop products
for the quarter and year to date ended April 30, 2001. These results primarily
reflect a year-over-year decline in the rate at which existing QuickBooks
customers upgraded to a newer QuickBooks product, as well as lower acquisition
rate of new users compared to the prior year. Year 2000 concerns skewed both the
normal seasonal patterns and traditional annual upgrade patterns in fiscal 2000.
Almost 50 percent of our customers upgraded last year due to Year 2000 concerns.
QuickBooks revenue results also reflect slower economic growth in the U.S. and
other major markets for our QuickBooks products, which has resulted in slower
new customer acquisition.
Payroll services experienced revenue growth of 56% and 54% for the quarter and
year to date, compared to the same periods a year ago. Significant price
increases contributed to this growth for both our Basic Payroll Service and our
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online Deluxe Payroll Service. Both services also experienced solid growth in
their customer base. While we believe our payroll business, and the Deluxe
Payroll Service in particular, will provide us with a significant opportunity to
generate recurring revenue in the future, we face a number of ongoing challenges
and risks, including operational issues in activating payroll customers. See
"Risks That Could Affect Future Results."
Tax Division
Tax Division revenue is derived primarily from Quicken TurboTax consumer desktop
tax preparation software, Quicken TurboTax for the Web online tax preparation
services, ProSeries and Lacerte professional tax preparation products and
electronic tax filing services.
Overall, Tax Division revenue for the quarter and year to date increased by 38%
and 20%, respectively compared to the same periods last year. The increase in
revenue was due to a combination of higher average selling prices to reflect
product enhancements (such as the Automated Tax Return feature) and increased
unit sales of our desktop and web-based tax preparation products. Our web-based
preparation and electronic filing services experienced strong growth during the
current tax season. Year to date through April 30, 2001, web tax preparation
revenue grew 130% from the prior year, driven by price increases and a 73%
increase in federal tax unit volume. We experienced an increase in the number of
customers who take advantage of our free electronic tax preparation and filing
through Quicken Tax Freedom Project, which accounted for approximately 50% of
total Quicken TurboTax for the Web federal units.
Our professional tax products experienced revenue growth of 17% and 10% for the
quarter and year to date, respectively compared to the same periods a year ago.
This growth in revenue was the result of higher average selling prices of our
ProSeries and Lacerte unlimited-use products, as well as pay-per return unit
growth.
Although we are encouraged by the year to date results for our tax products,
revenues for the full tax season are still subject to consumer product returns
from our retail distribution channels. While we expect our reserves for returned
products will be adequate to cover retailers' returns of unsold products during
the next two quarters, higher than expected returns could have a negative impact
on revenue for the full season.
In April 2001, we completed our acquisition of Tax and Accounting Software Corp.
("TAASC"), which offered a fully integrated suite of software tools for
accounting and tax professionals. TAASC will become part of our professional tax
division. See Note 4 of the financial statements.
Consumer Finance Division
Consumer Finance Division revenue comes primarily from Quicken desktop products,
Quicken Loans, advertising, sponsorship and placement fees from Quicken.com and
Quicken, and online transactions.
Revenue for the Consumer Finance Division increased by 51% and 6% for the
quarter and year to date, respectively compared to the same periods a year ago.
The Consumer Finance Division benefited from revenue growth experienced by our
Quicken Loans mortgage business of 209% and 68% for the quarter and year to date
respectively, compared to the same periods a year ago. Mortgage revenue
increases reflect both an increase in volume of loans sold, as well as increase
in margins earned on loan fees and gains on the sale of loans. Mortgage revenue
growth is primarily attributable to process efficiencies and infrastructure
improvements that we have made that allow us to capitalize on the mortgage rate
environment. While we expect continued growth in our mortgage business, we do
not expect revenue and profit growth rates experienced by our mortgage business
year to date during fiscal 2001 to be sustainable long-term. We face continuing
challenges, including mortgage rate fluctuations. See "Risks That Could Affect
Future Results."
For the quarter our Quicken product line revenue was roughly flat compared to
the same period a year ago. Year to date our Quicken products experienced a
decline in revenues of 12%, compared to the prior year. Our year to date
comparative results were negatively impacted by strong consumer demand during
the prior year periods as a result of a significant number of customers
upgrading due to Year 2000 concerns. In addition, Quicken.com advertising and
sponsorship revenue declined due to reduced advertising spending by potential
purchasers of Internet advertising. Our Quicken product line faces many
challenges in the personal financial software category, including continued
competition from Microsoft's Money product and from other web-based personal
finance tracking and management tools that are becoming increasingly available
at no cost to consumers.
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On May 15, 2001, we completed the sale of our Quicken Bill Manager business to
Princeton eCom Corporation. See Note 12 of the financial statements for details
about this transaction. We do not expect this transaction to have a material
impact on revenue for the remainder of fiscal 2001, though it may have a
slight positive impact on operating income.
Global Business Division
Global Business Division revenues come primarily from small business products in
Japan, QuickBooks, Quicken and tax products in Canada, QuickBooks, Quicken and
consumer tax products in Europe, and QuickBooks and Quicken products in
Southeast Asia.
Overall, the Global Business Division revenue declined 10% for the quarter ended
April 30, 2001 and increased 8% year to date compared to the same periods last
year. The decline for the quarter is primarily due to relatively higher revenue
in the second quarter compared to the third quarter because of Canada's early
launch of the localized version of QuickBooks 2001. In addition, year to date we
experienced a 68% year-over-year decline in QuickBooks retail sales in Japan for
the quarter due to prior year promotion activities that were discontinued in
fiscal 2001.
The year-to date increase in revenues can be attributed to overall growth in
Canada's professional tax revenue as a result of an acquisition we made earlier
in the current fiscal year, and an increase in Europe revenue due to an earlier
release of QuickBooks compared to last year. Partially offsetting the increases,
we experienced an adverse foreign exchange rate impact year to date.
COST OF REVENUE Q3 % Q3 % % YTD % YTD % %
(Dollars in millions; CHANGE CHANGE
Unaudited) FY00 REVENUE FY01 REVENUE Q3 FY00 REVENUE FY01 REVENUE YTD
----- ------- ----- ------- ------ ------ ------- ------ ------- ------
Product and services........... $75.5 23% $77.5 18% 3% $225.1 24% $248.2 23% 10%
Amortization of purchased
software & other............. 2.1 1% 4.4 1% 110% 7.0 1% 11.2 1% 60%
Total of cost of revenue... $77.6 24% $81.9 19% 6% $232.1 25% $259.4 24% 12%
There are two components of our cost of revenue. The larger component is the
direct cost of manufacturing and shipping products and offering services, which
includes data center costs relating to delivering Internet-based products and
services. The second component is the amortization of purchased software, which
is the cost of depreciating products or services obtained through acquisitions
over their useful lives.
Total cost of revenue as a percentage of revenue declined to 19% and 24% for the
quarter and year to date ended April 30, 2001, compared to 24% and 25% for the
same periods in the prior year. These declines are primarily attributable to
improved inventory management with lower excess and obsolete inventory expenses
for all our product lines. We expect cost of revenue for fiscal 2001 to be
roughly flat compared to the prior year as a percentage of revenue.
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OPERATING EXPENSES Q3 % Q3 % % YTD % YTD % %
(Dollars in FY00 REVENUE FY01 REVENUE CHANGE FY00 REVENUE FY01 REVENUE CHANGE
millions; Unaudited) Q3 YTD
------ ------- ------ ------- ------ ------ ------- ------ ------- ------
Customer service and
technical support .......... $ 31.6 10% $ 37.5 9% 19% $113.6 12% $116.1 11% 2%
Selling and marketing ........ 60.2 18% 68.5 16% 14% 216.2 23% 215.2 20% (1)%
Research and development ..... 40.8 12% 52.7 12% 29% 126.5 14% 155.2 15% 23%
General and administrative ... 20.0 6% 23.9 6% 20% 64.8 7% 77.6 7% 20%
Charge for purchased
research and development.... -- -- 0.2 -- -- 1.3 -- 0.2 -- (85)%
Acquisition related costs..... 38.4 12% 122.6 29% 219% 121.7 13% 205.3 19% 69%
Reorganization costs.......... -- -- -- -- -- 3.5 -- -- -- (100)%
Total operating expenses.. $191.0 58% $305.4 72% 60% $647.6 70% $769.6 72% 19%
Customer Service and Technical Support.
Customer service and technical support expenses were 9% and 11% of revenue for
the quarter and year to date ended April 30, 2001, compared to 10% and 12% for
the same periods of the prior year. This improvement reflects the continued
efficiency gains in providing customer service and technical support less
expensively through websites and other electronic means, and from the expansion
of the QuickBooks Support Network and our other fee-for-support programs.
Selling and Marketing.
Selling and marketing expenses were 16% and 20% of revenue for the quarter and
year to date ended April 30, 2001, compared to 18% and 23% for the same periods
of the prior year. The decline in selling and marketing costs as a percentage of
revenue for both the quarter and year to date is partly attributable to a
reclassification of certain Quicken Loans expenses from sales and marketing
expenses to cost of revenue in fiscal 2001. In addition, in the prior year we
incurred higher than normal selling and marketing expenses to notify customers
of Year 2000 issues and solutions. The year-over-year declines also reflect
relatively higher sales and marketing expenses in the first half of fiscal 2000
due to aggressive marketing programs relating to the expansion of our
Internet-based businesses and the extremely competitive consumer tax season with
the entrance and subsequent exit of Microsoft's TaxSaver product, as well as
relatively lower marketing expenditures during fiscal 2001 year to date for
Quicken Loans and QuickBooks Deluxe Payroll Service, as those services have
begun to more fully leverage the value of the Intuit brands.
Research and Development.
Research and development expenses were 12% and 15% of revenue for the quarter
and year to date ended April 30, 2001, compared to 12% and 14% for the same
periods of the prior year. We expect to continue significant investments in
research and development, particularly for our emerging service businesses.
General and Administrative.
General and administrative expenses were 6% and 7% of revenue for the quarter
and year to date ended April 30, 2000 and 2001, respectively. For our entire
fiscal year 2001, we expect general and administrative expenses to remain
roughly flat as a percentage of revenue compared to fiscal 2000.
Charge for Purchased Research and Development.
For the quarter ended April 30, 2001, we recorded a charge for purchased
research and development of $0.2 million as a result of our acquisition of Tax
and Accounting Software Corporation. During the first quarter of fiscal 2000, we
recorded charges of $1.3 million for purchased research and development as a
result of our Boston Light and Hutchison acquisitions. See Note 4 of the
financial statements. In connection with these acquisitions, and with the
assistance of third party appraisers, we determined the value of in-process
projects under development for which technological feasibility had not been
established. 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.
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Acquisition Related Costs.
Acquisition related costs include the amortization of goodwill and purchased
intangible assets, deferred compensation expenses arising from acquisitions, and
impairment charges. (See Note 4 of the financial statements.) These costs
increased to $122.6 million and $205.3 million for the quarter and year to date,
compared to $38.4 million and $121.7 million for the same periods a year ago.
The quarter and year to date increase was the primarily attributable to an
impairment charge of $77.0 million recorded in the third quarter of fiscal 2001
During our review for impairment in the third quarter, events and circumstances
indicated possible impairment of our long-lived assets consisting principally of
acquired intangible assets and goodwill. These indicators included deterioration
in the business climate for web-based companies and recent changes in our fiscal
2002 operating forecasts.
We measured the impairment loss related to long-lived assets based on the amount
by which the carrying amount of such assets exceeded their fair values. Our
measurement of fair value was based on an analysis of the future discounted cash
flows at the enterprise level. In performing this analysis, we used the best
information available in the circumstances including reasonable and supportable
assumptions and projections. The discounted cash flow analysis considered the
likelihood of possible outcomes and was based on our best estimate of projected
future cash flows, including terminal value cash flows expected to result from
the disposition of the assets at the end of their useful lives. The anticipated
proceeds from the pending disposition of a portion of Venture Finance Software
Corp. ("VFSC"), our Quicken Bill Manager business assisted management in the
determination of the fair value of the assets associated with VFSC as of April
30, 2001. Based on our analysis we recorded an impairment charge of $51 million
and $26 million associated with VFSC and SecureTax, respectively.
Amortization expense related to completed acquisitions will continue to have a
negative impact on our operating results in future periods. Assuming we do not
experience any further impairment of value of the intangible assets that would
require us to accelerate amortization, under the current accounting guidance,
amortization will be approximately $185.6 million, $180.5 million, $156.5
million and $75.9 million for the years ending July 31, 2001 through 2004,
respectively. See "Risks That Could Affect Future Results." If we complete
additional acquisitions or accelerate amortization in the future, there would be
an incremental negative impact on operating results. See also "Risks that Could
Affect Future Results" for a discussion of possible accounting changes related
to goodwill amortization.
Reorganization Costs.
Reorganization costs reflect the costs associated with our Quicken Loans
subsidiary (formerly Rock) closing numerous branch offices in Michigan in 1999,
as it began to transition its mortgage business from a traditional branch-based
business to an online and call center-based business. These costs totaled $3.5
million in the first quarter of fiscal 2000.
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NON-OPERATING INCOME AND EXPENSES
Interest and Other Income and Expense, Net.
For the quarter and year to date ended April 30, 2001, interest and other income
and expense, net, increased to $15.1 million and $47.7 million compared to $14.5
million and $30.0 million, for the same periods a year ago. The increases
reflect higher cash and short-term investment balances due primarily to proceeds
from sales of marketable securities.
Net gain (loss) from Marketable Securities and Other Investments.
For the quarter and year to date ended April 30, 2001, we recorded net losses
from marketable securities and other investments of $(11.5) million and $(87.3)
million, compared to net gains of $422.2 million and $402.1 million for the same
periods a year ago. The losses incurred during the quarter and year to date
ended April 30, 2001, are due primarily to declines in the values of certain
equity investments held as trading securities below our cost, as well as charges
to reflect other than temporary declines in the values of certain private equity
investments. We consider our shares of Excite@Home, VeriSign and 724 Solutions
common stock as trading securities. See Note 1 of the financial statements. As a
result, unrealized gains and losses due to market fluctuations in these
securities are included in our net income. Recent declines in the market have
significantly reduced the value of our trading and available-for-sale
securities, and we expect this volatility to continue for the foreseeable
future. If the market value of these trading securities continues to decline
significantly in the future, it would have a negative impact on our earnings.
Other than temporary decline of the values of our available-for-sale and private
equity investments could result in additional losses.
Income Taxes.
For the quarter and year to date ended April 30, 2001, we recorded an income tax
provision of $55.3 million and $38.6 million, on a pretax income of $41.4
million and $3.3 million. This compares to an income tax provision of $200.2
million and $195.6 million, on a pretax income of $497.2 million and $483.9
million, for the same periods a year ago. At April 30, 2001, there was a
valuation allowance of $11.4 million for tax assets of our global subsidiaries
based on management's assessment that we may not receive the benefit of certain
loss carry forwards.
Cumulative Effect of Accounting Change.
During the first quarter of fiscal 2001, we recorded a cumulative gain of $14.3
million, net of taxes, as a result of a change in accounting principle that
required us to recognize the cumulative effect of the increase in the fair value
of our S1 options as of August 1, 2000. See Note 1 of the financial statements.
Subsequent fluctuations in the fair value of these options will also be included
in our net income or net loss.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2001, our unrestricted cash and cash equivalents totaled $437.6
million, a $20.7 million increase from July 31, 2000. Year to date, the
improvement in liquidity was the result of net cash provided by operating and
financing activities, which were partially offset by investing activities.
Our operations provided $234.8 million in cash year to date. Cash from operating
activities is driven by the seasonality of our business, which typically results
in the majority of net revenues and cash receipts occurring in the January and
April quarters, though operating expenses are incurred throughout the year. In
addition, adjustments made for non-cash expenses such as amortization of
goodwill and other purchased intangibles of $213.1 million, which included a
$77.0 million impairment charge, and losses on marketable securities and other
investments, net, of $87.3 million, contributed to the cash provided by
operations. The primary use of cash year to date was an increase in mortgage
loans of $85.6 million due to increased activity in our mortgage business. In
addition, we also recorded non-cash adjustments for a pre-tax cumulative
accounting gain relating to a change in the method of accounting for derivatives
of $23.9 million and a net loss of $21.5 million, year to date.
Investing activities used $280.2 million in cash year to date. The primary use
of cash was for business acquisitions, which included Venture Finance Software
Corp. in the first quarter (for $118 million in cash), and Tax and Accounting
Software Corp. in the third quarter (for $63 million in cash). As part of our
continuing internal
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investment in information systems and infrastructure for our emerging business,
we purchased $58.0 million of property and equipment year to date.
Financing activities provided $63.6 million year to date, primarily attributable
to proceeds from the exercise of employee stock options.
We currently hold investments in a number of publicly traded companies (see Note
1 of the financial statements). The volatility of the stock market and the
potential risk of fluctuating stock prices may have an impact on the proceeds
from future sales of these securities and therefore on our future liquidity. Due
to our reporting of the Excite@Home, VeriSign and 724 Solutions shares as
trading securities, future fluctuations in the carrying values of these stocks
will impact our operating results. If future declines in our other marketable
securities are deemed to be other than temporary, they will also impact our
operating results. Investors should note that many high technology companies,
including Excite@Home, VeriSign and 724 Solutions, have recently experienced
significant declines in their stock prices.
In connection with our acquisition of Computing Resources, Inc. in May 1999, we
are required to pay three annual installments of $25 million, the second of
which was paid in May 2001. In the normal course of business, we enter into
leases for new or expanded facilities in both domestic and global locations. We
also evaluate, on an ongoing basis, the merits of acquiring technology or
businesses, or establishing strategic relationships with and investing in other
companies. Accordingly, it is possible that we may decide to use cash and cash
equivalents to fund such activities in the future.
We believe that our 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.
RISKS THAT COULD AFFECT FUTURE RESULTS
The factors discussed below are cautionary statements that identify important
factors that could cause actual results to differ materially from those
anticipated in the forward-looking statements in this Form 10-Q. Our fiscal 2000
Form 10-K contains additional details about these risks, as well as other risks
that could affect future results.
Our revenue and earnings are highly seasonal, which causes significant quarterly
fluctuations in our revenue and net income. Several of our businesses are highly
seasonal - particularly our tax business, but also small business and consumer
finance to a lesser extent. This causes significant quarterly fluctuations in
our financial results. Revenue and earnings are usually strongest during the
quarters ending January 31 and April 30. We experience lower revenues, and often
significant operating losses, in the July 31 and October 31 quarters.
Acquisition-related charges can cause significant fluctuation in our net income.
Our recent acquisitions have resulted in significant expenses, including
amortization of purchased software, goodwill and purchased intangibles, and
charges for in-process research and development. Acquisition-related expenses
were $80.9 million in fiscal 1998, $100.7 million in fiscal 1999, $168.1 million
in fiscal 2000 and $216.8 in the nine months ended April 30, 2001, including a
charge of $77 million in the third quarter of fiscal 2001 to write down the
long-lived intangible assets related to two recent acquisitions (see Note 1 of
the financial statements). Additional acquisitions and any additional
accelerated impairment of the value of purchased assets, could have a
significant negative impact on future operating results.
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Proposed Financial Accounting Standards Board guidelines relating to accounting
for goodwill could make our acquisition-related charges less predictable in any
given reporting period. On February 14, 2001, the FASB issued a limited revision
of its Exposure Draft, Business Combinations and Intangible Assets that
establishes a new standard for accounting for goodwill acquired in a business
combination. It would continue to require recognition of goodwill as an asset
but would not permit amortization of goodwill as currently required. Under the
proposed statement, goodwill would be separately tested for impairment using a
fair-value-based approach when an event occurs indicating the potential for
impairment. Any required goodwill impairment charges would be presented as a
separate line item within the operating section of the income statement. The
shift from an amortization approach to an impairment approach would apply to
previously recorded goodwill as well as goodwill arising from acquisitions
completed after the application of the new standard. If the standard is adopted
as described above, our goodwill amortization charges would cease. However, it
is possible that in the future, we would incur less frequent, but larger,
impairment charges related to the goodwill already recorded as well as goodwill
arising out of future acquisitions as we continue to expand our business.
Gains and losses related to marketable securities can cause significant
fluctuation in our net income. Our investment activities have had a significant
impact on our net income. We recorded pre-tax net gains from marketable
securities and other investments of $579.2 million in fiscal 1999 and $481.1
million in fiscal 2000 and a pre-tax net loss of $87.3 for the nine months ended
April 30, 2001. See Note 1 of the financial statements. Fiscal 2000 and 2001
decreases in the market prices of our trading securities have resulted in
significant reductions in our pre-tax income. Future price fluctuations in
trading securities, and any significant long-term declines in value of other
securities, could reduce our net income in future periods.
A general decline in economic conditions could lead to reduced demand for our
products and services. The recent downturn in general economic conditions has
led to reduced demand for a variety of goods and services, including many
technology products, and we believe the economic decline has been partially
responsible for slower than expected growth in our Small Business Division. If
conditions continue to decline, or fail to improve, in geographic areas that are
significant to us, such as the United States, Canada and Japan, we could see a
significant decrease in the overall demand for our products and services that
could harm our operating results.
We face risks relating to customer privacy and security and increasing
regulation, which could hinder the growth of our businesses - particularly our
Internet-based businesses. Despite our efforts to address customer concerns
about privacy and security, these issues still pose a significant risk, and we
have experienced lawsuits and negative publicity relating to privacy issues. For
example, during fiscal 2000 and fiscal 2001, there have been press articles
criticizing our privacy and security practices as they relate to the
connectivity of our desktop software to our web sites. We have faced lawsuits
and negative press alleging that we improperly shared information about
customers with third party "ad servers" for our web sites. A major breach of
customer privacy or security by Intuit, or even by another company, could have
serious consequences for our businesses - particularly our Internet businesses -
including reduced customer interest and/or additional regulation by federal or
state agencies. For example, if a "hacker" were able to overcome the security
precautions we take to protect our customers' consumer tax preparation
information, it could have a material negative impact on our operating results
and our relationships with our customers. In addition, mandatory privacy and
security standards and protocols are still being developed by government
agencies, and we may incur significant expenses to comply with any requirements
that are ultimately adopted. For example, under the Gramm Leach Bliley Act
recently adopted by the federal government, by July 1, 2001 Intuit will be
required to provide written notice of its privacy practices to many of its
customers. We must give customers an opportunity to state their preferences
regarding Intuit's use of their non-public personal information, and we must
honor those preferences. If Internet use does not grow as a result of privacy or
security concerns, increasing regulation or for other reasons, the growth of our
Internet-based businesses would be hindered.
We face competitive pressures in all of our businesses, which can have a
negative impact on our revenue, profitability and market position. There are
formidable current and potential competitors in the private sector, and we also
face potential competition from publicly-funded government entities seeking to
competitively enter private markets in the United States for consumer electronic
financial services. Accordingly, we expect competition to remain intense during
the rest of fiscal 2001.
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Despite our efforts to adequately staff and equip our customer service and
technical support operations, we cannot always respond promptly to customer
requests for assistance. We occasionally experience customer service and support
problems, including longer than expected "hold" times when our staffing is
inadequate to handle higher than anticipated call volume, and a large number of
inquiries from customers checking on the status of product orders when the
timing of shipments fails to meet customer expectations. This can adversely
affect customer relationships and our financial performance. In order to improve
our customer service and technical support, we must continue to focus on
eliminating underlying causes of service and support calls (through product
improvements and better order fulfillment processes), and on more accurately
anticipating demand for customer service and technical support.
Actual product returns may exceed return reserves. We generally ship
significantly more desktop products to our distributors and retailers than we
expect them to sell, in order to reduce the risk that distributors or retailers
will run out of products. This is particularly true for our tax products, which
have a short selling season. Like most software companies, we have a liberal
product return policy and we have historically accepted significant product
returns. We establish reserves for product returns in our financial statements,
based on estimated future returns of products. We closely monitor levels of
product sales and inventory in the retail channel in an effort to maintain
reserves that are adequate to cover expected returns. In the past, returns have
not generally exceeded these reserves. However, if we do experience actual
returns that significantly exceed reserves, it would result in lower revenue.
If we do not continue to successfully refine and update the business and
operating models for our Internet-based products and services and other emerging
service businesses, and continue to improve the operational support for these
businesses, the businesses will not achieve sustainable financial viability or
broad customer acceptance. Our business models for our Internet-based businesses
and other emerging service businesses have more complex and varied revenue
streams than our traditional desktop software businesses. For these businesses
to become and remain economically viable, we must continually refine their
business and operating models to reflect evolving economic circumstances. These
businesses also depend on a different operational infrastructure than our
desktop software businesses, and we must continually develop, expand and modify
internal systems and procedures to support these businesses. In particular, our
web-based tax preparation and electronic filing services must effectively handle
extremely heavy customer demand during the peak tax season. If we are unable to
meet customer expectations in a cost-effective manner, it could result in lost
customers, negative publicity, and increased operating costs, which could have a
significant negative impact on the financial and market success of these
businesses.
If we are unable to capitalize on new sources of revenue for our QuickBooks
business, the business will not be able to achieve sustained growth. Sales of
our QuickBooks desktop product for fiscal 2001 year to date are lower than
expected, due to lower upgrades sales to existing customers compared to fiscal
2000, as well as lower than expected sales to new customers. We cannot rely
solely on these sources of revenue to provide sustainable future growth for our
Small Business Division. We must generate revenue from broader markets and
customer segments as well as from new products and services.
If we are unable to successfully restructure our QuickBooks Internet Gateway
services and business model, the services will not achieve and maintain
acceptance by customers and the third-party vendors who provide these services,
and they will not generate long-term revenue growth or profitability. Intuit is
refining its approach to selecting and working with QuickBooks Gateway vendors.
Although we are seeing encouraging results for some services, such as merchant
account services, that are more closely integrated with QuickBooks, we have
ended relationships with most of our smaller alliance companies where the
business results are not meeting our expectations or theirs. To maintain other
current relationships, we may be required to adapt them in ways that are less
attractive to us, financially or otherwise. In addition, QuickBooks Internet
Gateway Services are currently available only to customers using QuickBooks 2000
or QuickBooks 2001, so customer adoption of the services is somewhat dependent
on unit sales of newer QuickBooks products to new customers and to customers
upgrading from older versions of the product. Customer upgrade and new user
acquisition rates for QuickBooks 2001 have been lower than historical levels.
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In order to successfully grow our payroll services business, we must continue to
improve the efficiency and effectiveness of our payroll processing operations
and streamline customer activations for our Deluxe and Premier payroll
processing service. The payroll processing business involves a number of
business risks if we make errors in providing accurate and timely payroll
information, cash deposits or tax return filings, including potential liability
to customers, additional expense to correct product errors and loss of
customers. For our Internet-based services (the Deluxe service, as well as the
online Basic service), we must improve our operations to give customers more
reliable connectivity to our data center to transmit and receive payroll data
and tax tables. In order to expand the customer bases for our Deluxe and Premier
payroll services, we must continue to focus on streamlining the service
activation process for new customers.
It is unlikely that the revenue and profit growth rates experienced by our
mortgage business year-to-date during fiscal 2001 will be sustainable long-term,
either on a year-over-year basis or on a sequential quarter basis. Mortgage rate
increases, the impact of the economic climate on the housing market, business
operation risks and other factors could result in significantly lower revenue
and profit growth for our mortgage business. Increases in mortgage rates and
other interest rates adversely affected our mortgage business during 2000,
contributing to a significant revenue decline from fiscal 1999 to fiscal 2000.
Conversely, declines in mortgage rates during fiscal 2001 have had a positive
impact on revenue. If mortgage rates rise again, this could negatively impact
the volume of applications and closed loans, particularly our most mortgage-rate
sensitive products such as conventional loans and refinancing loans.
Fluctuations in non-mortgage rates also create risks with respect to the loans
on our balance sheet and impact our cost of funds to provide loans. In addition,
our ability to successfully streamline the online application, approval, and
closing process will have a significant impact on our ability to attract
customers to our mortgage service, and on our ability to continue increasing the
percentage of our mortgage revenue generated through the online channel compared
to branch offices. We must also maintain relationships with certain banks and
other third parties who we will rely on to provide access to capital, and later,
service the loans. If we are unable to maintain key relationships, or if the
terms of key relationships change to be less favorable to Intuit, it could have
a negative impact on our mortgage business and on Intuit's financial results.
Our ability to conduct business could be impacted by a variety of factors such
as electrical power interruptions, earthquakes, fires and other similar events.
Our business operations depend on the efficient and uninterrupted operation of a
large number computer and communications hardware and software systems. These
systems are vulnerable to damage or interruption from electrical power
interruptions, telecommunication failures, earthquakes, fires, floods, and other
similar events. Recently, electrical power in certain locations in California
has been interrupted for short periods of time in the form of "rolling
blackouts." We have principal facilities (including our primary data center)
located in California. To date, our business operations have not been materially
impacted by these outages. However, it is possible that rolling blackouts will
continue in the foreseeable future and our facilities could be significantly
affected in the future. We currently have short-term alternate sources of power
(in the form of backup batteries and generators) for all of our critical
customer-facing operations in California, including our primary data center.
However, if rolling blackouts become more frequent and/or longer in duration, it
is possible that our alternative sources of power would be insufficient to allow
us to continue our operations without interruption. Other events such as
earthquakes, fires and floods, could also impact our ability to continue our
business operations. For our Internet-based services, the system failures of
various third-party Internet service providers, online service providers and
other website operators could result in interruption in our services to our
customers. Any significant interruptions in our ability to conduct our business
operations could reduce our revenue and operating income. Our business
interruption insurance may not adequately compensate us for the impact of
interruptions to our business operations.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 quality
standards consistent with our investment policy. This policy dictates that we
diversify our holdings and limit our short-term investments with any individual
issuer in a managed portfolio to a maximum of $5 million. Our policy also
dictates that all short-term investments mature in 24 months or less.
MARKETABLE SECURITIES
We carried significant balances in marketable equity securities as of April 30,
2001. These securities are subject to considerable market risk due to their
volatility. Fluctuations in the carrying value of our shares of Excite@Home,
VeriSign and 724 Solutions will have an immediate impact on our earnings because
we report these shares as trading securities. See Note 1 of the financial
statement notes for more information regarding risks related to our investments
in marketable securities and the impact of our trading securities on our
reported net income.
INTEREST RATE RISK
Interest rate risk represents a component of market risk to us and represents
the possibility that changes in interest rates will cause unfavorable changes in
our net income and in the value of our interest rate sensitive assets,
liabilities and commitments, particularly those that relate to our mortgage
business. In a higher interest rate environment, borrower demand for mortgage
loans declines, adversely affecting our mortgage loan business. Interest rate
movements also affect the interest income earned on loans we hold for sale in
the secondary market, interest expense on our lines of credit, the value of our
mortgage loans and ultimately the gain or loss on the sale of those mortgage
loans. In addition, interest rate movements affect the interest income earned on
investments we hold in our short-term investment portfolio and the value of
those investments.
As part of our risk management programs, we enter into financial agreements and
purchase financial instruments in the normal course of business to manage our
exposure to interest rate risk with respect to our conventional 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, and not
for trading purposes.
We actively monitor and manage 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." We evaluate the Hedge Position
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 evaluate our interest rate risk exposure daily using models that
estimate changes in the fair value of the Hedge Position and compare those
changes against the fair value of the underlying assets and commitments.
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The following table shows the maturity of our mortgage loans held for sale and
home equity lines of credit:
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates; Unaudited)
EXPECTED MATURITY DATE(1)
PERIOD ENDING APRIL 30, FAIR VALUE
---------------------------------------- APRIL 30,
2001 2002 2003 2004 2005 TOTAL 2001
---- ---- ---- ---- ---- ----- ----
ASSETS:
Mortgage Loans................. $144,050 -- -- -- -- $144,050 $148,121
Average Interest Rate...... 7.82% 7.82%
LIABILITIES:
Lines of Credit................ $ 3,705 -- -- -- -- $ 3,705 $ 3,800
Average Interest Rate...... 5.96% 5.96%
(1) In the ordinary course of our mortgage business, expected maturity is based
on the assumption that loans will be re-sold in the indicated period.
Based on the carrying values of our mortgage loans held for sale and lines of
credit that we held at April 30, 2001, we do not believe that short-term changes
in interest rates will 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. See Notes 1 and 6 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
Most local currencies of our international subsidiaries have slightly weakened
during the first nine months of fiscal 2001. Because we translate foreign
currencies into U.S dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. We believe that our
exposure to currency exchange fluctuation risk is insignificant primarily
because our global subsidiaries invoice customers and satisfy their financial
obligations almost exclusively in their local currencies. Currency exchange risk
is also minimized since foreign debt is due almost exclusively in local foreign
currencies. As of April 30, 2001, we did not engage in foreign currency hedging
activities.
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PART II
ITEM 1
LEGAL PROCEEDINGS
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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.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. The
Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. Following Intuit's successful motion to dismiss
several of the claims, an amended complaint was filed on May 2, 2001. A similar
lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior
Court of State of California, San Bernardino County, Rancho Cucamonga Division.
An amended complaint was filed on October 26, 2000. These purported class
actions allege violations of various federal and California statutes and common
law claims for invasion of privacy based upon the alleged intentional disclosure
to third parties of personal and private customer information entered at
Intuit's Quicken.com website. The complaints seek injunctive relief, orders to
disgorge profits related to the alleged acts, and statutory and other damages.
Intuit believes these lawsuits are without merit and intends to defend the
litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
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ITEM 5
OTHER MATTERS
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CHANGES IN EXECUTIVE OFFICERS
As of June 12, 2001, Intuit's executive officers were as follows:
NAME AGE POSITION
- ---- --- --------
Stephen M. Bennett 47 President, Chief Executive Officer and Director; Acting Senior
Vice President, Small Business Division
William V. Campbell 60 Chairman of the Board of Directors
Scott D. Cook 48 Chairman of the Executive Committee of the Board of Directors
Thomas A. Allanson 43 Senior Vice President, Tax Division
Alan A. Gleicher 48 Senior Vice President, Global Business Division
Richard William Ihrie 51 Senior Vice President and Chief Technology Officer
Greg J. Santora 50 Senior Vice President and Chief Financial Officer
Raymond G. Stern 39 Senior Vice President, Corporate Strategy and Marketing
Sonita Ahmed 44 Vice President, Finance and Corporate Controller
Caroline F. Donahue 40 Vice President, Sales
Linda Fellows 52 Vice President, Investor Relations and Treasurer
Elisabeth M. Lang 44 Vice President, Corporate Public Relations and Marketing Communication
Carol Novello 36 Vice President - Marketing, Small Business Division
Enrico Roderick 42 Vice President, Personal Finance Group
Catherine L. Valentine 48 Vice President, General Counsel and Corporate Secretary
Sherry Whiteley 41 Vice President, Human Resources
Mr. Allanson joined Intuit in September 2000 as Vice President of Tax Strategy
and was promoted to Senior Vice President of the Tax Division in April 2001.
Prior to joining Intuit, he was with GE Capital Colonial Pacific Leasing (a
vendor financial services business) from May 1995 through August 2000, serving
as President from October 1998 to August 2000. He was Sales Effectiveness
Leader/GM from September 1997 to October 1998 and was Manager, Marketing
Equipment Business (an electrical distribution and control business) from May
1995 through September 1997. Mr. Allanson holds a Bachelor of Science degree in
mechanical engineering from Auburn University.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
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(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.01 Amendment No. 1, dated January 17, 2001, to Employment Agreement between Intuit Inc. and
Stephen M. Bennett date January 21, 2000
10.02 Amendment No. 1, dated January 17, 2001, to Restricted Stock Purchase Agreement between
Intuit Inc. and Stephen M. Bennett with respect to 150,000 shares of Intuit Common Stock
10.03 Amendment No. 1, dated January 17, 2001, to Restricted Stock Purchase Agreement between
Intuit Inc. and Stephen M. Bennett with respect to 75,000 shares of Intuit Common Stock
10.04 Secured Full Recourse Promissory Note and Stock Pledge Agreement, dated March 30, 2001,
between Intuit Inc. and Stephen M. Bennett
10.05 Letter from Intuit to Stephen M. Bennett, dated April 6, 2001, confirming forgiveness of
certain loan interest
10.06 Separation Agreement between Daniel T. H. Nye and Intuit Inc. dated March 26, 2001
10.07 Amendment No. 1 dated May 29, 2001, to Secured Balloon Payment Bridge Loan Promissory
Note between Intuit Inc. and Thomas A. Allanson
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(b) REPORTS ON FORM 8-K:
(1) On April 17, 2001, Intuit filed a report on Form 8-K to report under
Item 5 that it had acquired the assets of Tax and Accounting Software
Corporation.
(2) On May 24, 2001, Intuit filed a report on Form 8-K to report under Item
5 (a) the sale of its Quicken Bill Manager business to Princeton eCom
Corporation; (b) the authorization of a $500 million three-year stock
repurchase program; and (c) its financial results for the quarter ended
April 30, 2001. Intuit's balance sheet as of April 30, 2000 and 2001,
and statement of operations for the three months and nine months ended
April 30, 2000 and 2001 were included in the Form 8-K.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: June 13, 2001 By: /s/ Greg J. Santora
----------------------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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