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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0034661
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
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2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 944-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 par value
Preferred Stock Purchase Rights
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 29, 2000, there were 206,281,121 shares of the Registrant's
common stock, $0.01 par value, outstanding. This is the only outstanding class
of common stock of the Registrant. As of that date, the aggregate market value
of the shares of common stock held by non-affiliates of the Registrant (based on
the closing price of $57.00 for the common stock as quoted by the Nasdaq
National Market on such date), was approximately $10,600,035,666.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held in December 2000 are incorporated by
reference into Part III of this report on Form 10-K.
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FISCAL 2000 FORM 10-K
INTUIT INC.
INDEX
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ITEM PAGE
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PART I
ITEM 1: Business.................................................... 3
ITEM 2: Properties.................................................. 15
ITEM 3: Legal Proceedings........................................... 16
ITEM 4: Submission of Matters to a Vote of Security Holders......... 16
ITEM 4A: Executive Officers of the Registrant........................ 16
PART II
Market for Registrant's Common Equity and Related
ITEM 5: Stockholder Matters......................................... 20
ITEM 6: Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
ITEM 7: and Results of Operations................................... 22
Quantitative and Qualitative Disclosures About Market
ITEM 7A: Risk........................................................ 39
ITEM 8: Financial Statements and Supplementary Data................. 41
Changes in and Disagreements with Accountants on Accounting
ITEM 9: and Financial Disclosure.................................... 74
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 74
ITEM 11: Executive Compensation...................................... 74
Security Ownership of Certain Beneficial Owners and
ITEM 12: Management.................................................. 74
ITEM 13: Certain Relationships and Related Transactions.............. 74
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
ITEM 14: 8-K......................................................... 74
Signatures............................................................ 78
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Intuit, the Intuit logo, Quicken, QuickBooks, QuickBooks Pro, TurboTax,
ProSeries and Lacerte, among others, are registered trademarks and/or registered
service marks of Intuit Inc. or one of its subsidiaries. Quicken.com,
QuickenInsurance, Quicken Loans and QuickenStore, among others, are trademarks
and/or service marks of Intuit Inc. or one of its subsidiaries.
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Throughout this Form 10-K, 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 may include, among other things, projections of
our future financial performance, our anticipated growth and anticipated trends
in our businesses. These statements are only predictions, based on our current
expectations about future events. Although we believe the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, performance or achievements or that predictions or current expectations
will be accurate. 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
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risks That Could Affect Future Results,"
beginning on page 32. We encourage you to read that section carefully. We will
not necessarily update information in this Form 10-K if any forward-looking
statement later turns out to be inaccurate.
PART I
ITEM 1. BUSINESS
CORPORATE BACKGROUND
Intuit began operations in March 1983 and was incorporated in California in
March 1984. In March 1993, we reincorporated in Delaware and completed our
initial public offering. Our principal executive offices are located at 2535
Garcia Avenue, Mountain View, California, 94043, and our telephone number is
(650) 944-6000. When we refer to "we" or "Intuit" in this Form 10-K, we mean the
current Delaware corporation (Intuit Inc.) and its California predecessor, as
well as all of our consolidated subsidiaries.
BUSINESS OVERVIEW
INTUIT'S MISSION: REVOLUTIONIZING FINANCIAL AND BUSINESS MANAGEMENT
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 drive fundamental changes in how individuals and
small businesses manage their activities -- changes so profound that our
customers can't imagine going back to the "old way" of doing things.
We offer a variety of small business, tax preparation and personal finance
software products and related products and services that enable people and small
businesses to revolutionize how they manage their activities. Our products and
services include QuickBooks(R), Quicken(R), Quicken TurboTax(R), ProSeries(R)
and Lacerte(R) desktop software products, as well as an expanding array of
Internet-based products and services, including QuickBooks Deluxe Payroll
service, QuickBooks Internet Gateway services, our Site Builder website tool,
Quicken TurboTax for the Web, Quicken.com(SM), Quicken Loans(SM) and
QuickenInsurance(SM). Details about our products and services are provided
beginning on page 5.
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BUSINESS STRATEGY AND KEY INITIATIVES
We accomplish our mission by identifying common but complex customer
problems, and developing simple, easy-to-use solutions that can be marketed to
large numbers of customers. Here are two key principles we follow as we drive to
be the best we can be:
- CONTINUE TO CHANGE OUR MINDSET IN ORDER TO INNOVATE AND GROW.
Achieving our objectives requires us to continually evaluate and change the
way we think about our businesses, in order to keep pace with our
customers' evolving needs and changes in the markets we serve. For example,
we are redefining the markets in which we participate in order to drive
growth. We are broadening our focus from single point products, such as our
QuickBooks desktop accounting software, to more comprehensive customer
solutions -- small business management tools that include QuickBooks
complemented by financial supplies, Site Builder, online payroll services
and the QuickBooks Internet Gateway. Other examples of our changing mindset
are our shift from exclusively desktop solutions to products and services
for both desktop and Web platforms; and the expansion of our strategic
relationships with third parties that allow us to provide a broader set of
solutions to our customers.
- ACHIEVE SUSTAINABLE COMPETITIVE ADVANTAGE IN EACH OF OUR BUSINESSES.
We believe that achieving sustainable competitive advantage is the key to
reaching our long-term growth and profitability goals. Accordingly, in each
of our businesses we seek to identify and exploit important advantages that
differentiate us from our competitors and that are built into the structure
of the business. Examples of sustainable competitive advantage include
quickly achieving industry-leading volume in businesses with high fixed
costs and low marginal costs, and pursuing businesses with a strong
"network effect," where more value is created for all customers as more
customers adopt our solution.
Following are four key initiatives that are fundamental to all of our
business activities:
1. SOLVE CUSTOMER PROBLEMS THROUGH INNOVATIVE SOLUTIONS.
We strive to solve complex customer problems with innovative and easy-to
use solutions. For example, establishing a web presence has been a
complicated and expensive challenge for many small businesses. Our Site
Builder website creation tool gives small businesses a fast, easy and
affordable way to build and manage a professional-looking website. As
another example, preparing tax returns is a complex, paper-intensive
process involving extensive manual data entry. Through our innovative "10
Minute Tax Return" vision, we are striving to create a seamless,
end-to-end electronic solution by enabling electronic downloads of
relevant tax data -- such as W-2 information from employers and 1099
information from financial institutions.
2. DRIVE GREAT CUSTOMER EXPERIENCE THROUGH OPERATIONAL RIGOR.
Our goal is to deliver the best possible customer service and experience
in the most cost-effective and efficient manner. By taking advantage our
operational infrastructure and processes, we strive to consistently
deliver this result to our customers. Our organization consists of
business divisions that have responsibility for the total customer
experience, from product development through marketing and sales, and
ongoing customer service and support. For the functional organizations
that support our business divisions (such as manufacturing and data
center operations), we strive to achieve organization-wide learning in
order to share experience and knowledge across all our business
divisions. We recognize the need to be both a "small" company and a "big"
company, to foster a fast, innovative, entrepreneurial culture, while
effectively taking advantage of the opportunities offered by our size and
scale.
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3. USE TECHNOLOGY TO SHAPE STRATEGY AND DELIVER MORE VALUE TO CUSTOMERS,
EMPLOYEES AND SHAREHOLDERS.
We believe our use of technology is a competitive advantage. We use
technology to create better and more innovative products and services, to
expand and improve our delivery channels, to improve our customer
interactions, and to enhance our operational effectiveness.
4. PROVIDE A GREAT PLACE TO WORK THAT ATTRACTS GREAT PEOPLE.
Our employees are the key to our success. We strive to maintain a
productive and performance oriented work environment that supports
employee growth and development, recognizes and rewards contributions,
and reinforces positive individual and team dynamics.
PRODUCTS AND SERVICES
Intuit offers products and services through four principal business
divisions: Small Business, Tax, Consumer Finance and International.
SMALL BUSINESS DIVISION
QuickBooks and QuickBooks Pro(R) Software. Our QuickBooks product line
brings extensive bookkeeping capabilities to small business users in an
easy-to-use design that does not require customers to be familiar with
debit/credit accounting. QuickBooks Pro products address the needs of U.S. small
businesses that are project, job or time based, that require a multi-user
product or that desire more extensive features. In January 2000, we launched
QuickBooks 2000, which features the QuickBooks Internet Gateway platform of
online small businesses services, as well as the Site Builder website creation
tool.
Internet-Based Small Business Services. The QuickBooks Internet Gateway
platform gives our QuickBooks 2000 customers direct access to a broad range of
online "e-service" offerings from third-party vendors that address the specific
needs of small businesses. We currently offer over a dozen Gateway services,
including the QuickBooks Merchant Account Service, which enables small
businesses to accept credit card payments from their customers; the QuickBooks
Postage Service, which allows customers to purchase postage electronically; and
the QuickBooks Shopping Source, which enables customers to find, compare and
purchase office supplies and other small business products and services from
within QuickBooks 2000. Gateway vendors pay us a placement fee and/or a portion
of their Gateway-generated revenues to participate.
QuickBooks 2000 also features the Site Builder website creation tool, a
subscription service that enables small businesses to set up and maintain
professional-looking web sites quickly and inexpensively. Site Builder is also
available on a stand-alone basis for customers who do not use QuickBooks. We
plan to use Site Builder as the platform for Site Solutions, an expanded range
of e-services that Intuit expects to begin offering during fiscal 2001.
Our Internet-based small business services are strategically important to
Intuit as a way to expand our customer base and generate more revenue and profit
per customer. However, there are business risks associated with these services,
including whether customers will accept the new and proposed services, and
whether the third party vendors that participate in the services will be
satisfied with the benefits they receive from the services. See "Risks That
Could Affect Future Results."
Payroll Services. We offer several payroll services for small businesses.
Our Basic Payroll Service is a payroll tax table subscription service for small
business customers that need current tax tables to prepare their own payrolls.
Our QuickBooks Deluxe Payroll Service is an online payroll services that handles
all aspects of payroll processing, including tax payments. It is fully
integrated with QuickBooks, so customer data entry is minimized. Our Premier
Payroll Service provides traditional, full service payroll processing, tax
payment and check delivery services on a "private label" basis to customers of
participating financial institutions. While the payroll processing business
provides us with a significant opportunity to generate recurring revenue, there
are business risks associated with it,
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including increased operating expenses, the potential loss of customers and
liability exposure if we make payroll processing errors. See "Risks That Could
Affect Future Results."
QuickBooks Support Network ("QBSN"). QBSN(SM) is our subscription-based
technical support program for QuickBooks users. The program reflects our belief
that high-quality customer support tailored to the specific requirements of
small businesses has the potential to be a profitable and strategically
important business, and can also help us control technical support costs.
Although QBSN has become a growing source of incremental recurring revenue for
us, we face ongoing challenges in improving customer satisfaction and
subscription renewal levels.
Financial Supplies. We offer a range of financial supplies designed for use
with our small business and consumer finance desktop software products. Supplies
include paper checks, envelopes, invoices, business forms, deposit slips and
rubber stamps. Many products can incorporate small business' custom company
logos and offer a variety of color, font and design options.
Since September 1995, we have had an exclusive contract with John H. Harland
Company to print all of our checks and other imprinted products. We renegotiated
the contract in January 2000 and extended it for an additional five years. The
products provided by Harland accounted for about 75% of our supplies revenue in
fiscal 1999 and 2000. We believe our relationship with Harland is strong, and
the renegotiated terms of the contract are favorable to Intuit. However, if
there are any problems with Harland's performance, it could have a material
negative impact on sales of supplies and on Intuit as a whole.
TAX DIVISION
Desktop Consumer Tax Software. Our Quicken TurboTax desktop products are
designed to make it easy and fast for individuals and small business owners to
prepare their own federal and state personal and business income tax returns.
Our tax products are designed to be easy to use, but sophisticated enough for
complicated tax returns.
Web-Based Consumer Tax Preparation and Electronic Filing Services. Quicken
TurboTax for the Web is an interactive tax preparation service that allows
individual taxpayers to prepare their federal and state income tax returns
entirely online. This service is enabling us to reach a different segment of
consumer tax customers than those who use our desktop products, as more than 80%
of Quicken TurboTax for the Web tax filers in fiscal 2000 were new customers for
Intuit. Customers of our desktop and web-based tax preparation software can file
their federal (and most state) tax returns electronically through our electronic
filing center. Demand for online tax preparation and electronic filing has
increased dramatically during the past two tax seasons. While our service
reliability and responsiveness were very good during fiscal 2000, we must
continue to expand our capacity and scale the infrastructure to accommodate
significant future growth in customer demand, while maintaining high service
levels.
During the 1998 tax year, we initiated the Quicken Tax Freedom Project, a
philanthropic public service initiative designed to address the "Digital
Divide," under which we provide online tax preparation and electronic filing
services at no charge to federal and state tax filers with adjusted gross
incomes of $20,000 or less. We expanded the scope of this program during the
1999 tax year to include anyone who filed a Form 1040EZ, regardless of income
level.
Professional Tax Software. Our ProSeries and Lacerte tax products are
designed for tax professionals who prepare tax returns for their individual and
business clients. Our ProSeries products emphasize ease-of-use and feature data
entry on government form facsimiles. Lacerte products emphasize efficiency and
feature customer-tailored data sheet entry. Customers can elect to license
professional tax products for a single fee for unlimited annual use or to use
them on a "pay-per-return" basis. ProSeries and Lacerte customers can file their
returns through our electronic filing services.
In an effort to broaden our relationship with the accountants that use our
professional tax software, in October 2000, we announced IntuitAdvisor(SM), a
website channel designed for professional accountants. This subscription-
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based website, which is expected to launch in December 2000, will offer services
to enable professional tax preparers to better manage and grow their businesses.
For example, the service will be able to help professional tax preparers set up
internal "Intranet" sites to enable them to share information and data with
their clients.
CONSUMER FINANCE DIVISION
Quicken Software. Our Quicken line of desktop software products help users
organize, understand and manage their personal finances. Quicken allows
customers to reconcile bank accounts, record credit card and other transactions,
and track investments, mortgages and other assets and liabilities. Many
customers use Quicken products to manage their home-based businesses. We also
give Quicken customers easy access to a range of financially-oriented third
party products and services, from within the Quicken desktop product, through
our Quicken Internet Gateway service.
Quicken.com. Quicken.com is our primary personal finance website and is
freely accessible to the public. It enables customers to automate financial
management tasks and make better financial decisions by giving them software
tools, resources and objective information about a variety of personal finance
topics, including investing, mortgage, insurance, taxes, banking and retirement,
in a single online destination. Quicken.com content is created by Intuit as well
as by third party publishers and financial experts. We do not currently charge
customers a fee to access most features on Quicken.com, but we receive revenue
from financial institutions and other companies that advertise and/or sell their
products or services through links from Quicken.com.
Quicken Loans. Quicken Loans combines our former QuickenMortgage(SM)
business with the online and traditional lending business of Rock Financial
Corporation. We acquired Rock in December 1999 in a "pooling of interests"
transaction, which means that in our financial statements, Rock's results from
prior years are combined with Intuit's results from prior years. See Note 3 of
the financial statements. Through Quicken Loans, consumers can shop and apply
for residential mortgages through the Quicken Loans website or by telephone
(which we consider our "online" business), or through traditional branch offices
(for Michigan residents only). We offer a variety of loans, including fixed rate
and adjustable conventional home purchase loans, FHA loans, refinance and home
equity loans, and sub-prime loans.
With the establishment of Quicken Loans, we shifted our mortgage business
from a "referral" model, under which Intuit relayed customers' application
information to participating lenders for processing and funding, to a "direct"
model, under which Intuit manages the entire loan process from origination
through funding, and then sells the loans and post-closing servicing obligations
in bulk to participating financial institutions. The direct model allows us to
offer our consumers a more seamless experience, and also enables us to increase
our revenue per loan. During fiscal 2000, we continued a transition process,
which Rock began in January 1999, of shifting resources from branch offices to
focus on the website and call center -- a process which included consolidating
some of the branch office operations and closing approximately 25 branch
offices. As a result, the percentage of our mortgage revenue generated and
processed online and/or through the call center increased from 18% in fiscal
1999 to 37% in fiscal 2000, although our total mortgage revenue declined
significantly. Over the next several years, we expect the percentage of our
mortgage revenue generated online will continue to increase, with more rapid
growth in online revenues relative to growth in branch-based revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Revenue by Business Divisions -- Consumer Finance Division."
Our mortgage business is subject to a number of risks, including risks
associated with our Internet-based businesses generally, and fluctuations in
mortgage rates and other interest rates. See "Risks That Could Affect Future
Results."
QuickenInsurance. Our QuickenInsurance website enables customers to educate
themselves about, and shop for, insurance products online. We receive initial
implementation fees, ongoing annual participation fees and transaction-based
fees (for referrals and purchases) from participating carriers, and some
carriers also pay us fees for
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data processing and other administrative services. Users can currently receive
quotes and apply for term life insurance from 12 national carriers in 50 states
and Washington, D.C. Auto insurance quotes are currently available in 38 states
(covering about 95% of the U.S. population), and online purchase for auto
insurance is available from two carriers in 34 states (about 80% of the
population). Consumers can also purchase from eight auto insurance carriers in
17 states (covering about 60% of the U.S. population) through the carriers' call
centers. Progress for our auto insurance business has been slow. Future success
will require us to offer a greater choice of quoting carriers in each state, and
to provide online purchase or call center fulfillment capability in more states.
While we have plans in place to increase carriers and purchasing options, we
expect to face continuing challenges in implementing these plans.
Bill Management Services and other Online Transactions. Our online
transactions business includes a range of services, including web-based bill
presentment and payment services, desktop bill payment services, online banking
services, and the Quicken credit card. In August 2000 we acquired Venture
Finance Software Corp., a joint venture company in which we were a 49%
non-voting equity holder. VFSC developed the technology for our web-based bill
presentment and payment services. See Note 20 of the financial statements. We
believe there is significant opportunity for revenue growth in bill management
services. However, the timing of widespread consumer and biller adoption of bill
management services may still be years away.
INTERNATIONAL DIVISION
Through our International Division, Intuit has a direct presence in Japan,
Canada and the UK. We reach markets across Europe, Southeast Asia and other
selected locations through relationships with third parties. During the past few
years, we have narrowed our strategic focus to fewer products (primarily small
business products) in fewer international markets. We have also established
important third-party relationships with local companies in selected locations
to help us better address specific markets -- including a comprehensive third
party development, marketing and distribution arrangement with Lexware (a
subsidiary of Rudolf Haufe Publishing), a leading business software company in
Germany, that we entered into in June 1999, and a multi-year comprehensive third
party development, marketing and distribution arrangement with Reckon, a leading
business software company in Australia. Our international operations are subject
to a unique set of risks and challenges, including potential volatility in the
political and economic conditions of foreign countries and the need to address
unique user requirements in various countries. See "Risks That Could Affect
Future Results."
Japan. The principal products offered by Intuit KK, our Japanese subsidiary,
are Yayoi(R), a small business accounting product that addresses the middle
segment of the small business market in Japan, as well as a localized version of
QuickBooks that is targeted at the lower end of the small business market. Sales
of Yayoi products also generate recurring revenue from ongoing support contracts
that are sold with the software.
Canada. We offer localized versions of QuickBooks and Quicken in Canada, as
well as QuickTax consumer and professional tax products. We also have a
relationship with Rogers Media, Inc., a leading media company in Canada, under
which we offer Quicken.ca(SM), a personal finance website with content similar
to Quicken.com.
Europe. We offer localized versions of QuickBooks and Quicken through our
office in the United Kingdom. We serve selected European markets with localized
versions of QuickBooks and Quicken through our relationship with Lexware in
Germany and through other local distributors and agents. Lexware develops and
markets products and services for Intuit in Germany under the Intuit brand. We
believe that Lexware's local expertise will enable us to deliver products and
services that are more customized for the German market.
Southeast Asia. We offer localized versions of QuickBooks and Quicken
products in Australia, New Zealand, Hong Kong, and Singapore, as well as other
parts of Southeast Asia through our relationship with Reckon. This relationship
includes rights relating to Quicken.com in these territories.
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PRODUCT DEVELOPMENT
During the past few years, we have devoted significant resources to
developing and expanding new products and services, including QuickBooks
Internet Gateway, Site Builder, QuickBooks Deluxe Payroll Service, electronic
tax filing for states, and our Quicken.com, Quicken Loans and QuickenInsurance
websites, as well as enhancing our desktop software products. Our total research
and development expenses as a percentage of net revenue were approximately 15%
during each of the last three fiscal years.
The expansion of our Internet-based products and services has had a
significant impact on our development process. Our desktop software products
tend to have a fairly predictable, structured development cycle of about 12 - 18
months. Once new products are released, they generally are not modified (except
to fix bugs) until the next scheduled product upgrade. However, the development
process for Internet-based products is much more rapid, much less predictable,
and has much shorter development cycles. In addition, Internet-based products
and services must incorporate technology to address customer concerns about
privacy and security.
Over the next few years, we expect that our research and development efforts
will continue to focus on moving the functionality of our desktop products to
the Internet, and adding complementary products and services that can drive
additional, and often recurring revenue, from our core products. Examples of
incremental revenue sources include financial supplies and payroll services for
our QuickBooks customers, electronic filing and state tax products for our
Quicken TurboTax customers, and mortgage, insurance and bill payment services
for our Quicken customers. While much of our product development is done
internally, we supplement our internal development efforts by acquiring
strategically important products and technology from third parties, or
establishing other relationships that enable us to expand our business more
rapidly.
The development process for our products and services is complex and
involves some risks, including challenges in hiring and retaining highly
qualified technical employees, possible delays in product or service launches,
challenges posed by Internet-based products and services, as well as potential
"bugs." The development of tax preparation software presents a unique challenge
because of the demanding annual development cycle required to incorporate annual
tax law changes each year. See "Risks That Could Affect Future Results."
MARKETING, SALES AND DISTRIBUTION
MARKETS
The markets that we compete in, particularly in the Internet area, are
characterized by rapidly changing customer demands, continuous technological
changes and improvements, shifting industry standards and frequent new product
introductions by other companies. In particular, the Internet has greatly
enhanced the ability of customers to make product and price comparisons,
shifting more power to consumers. Market and industry changes can quickly render
existing products and services obsolete, so our marketing success depends on our
ability to respond rapidly to these changes with new or enhanced products and
services, new distribution methods, different competitive strategies and other
appropriate changes to the way we do business.
RETAIL DISTRIBUTION
We market our desktop software in North America through traditional retail
software outlets, computer superstores, office and warehouse clubs and general
mass merchandisers, as well as through "e-tailers" that take customer orders for
products on their websites. In international markets, we also rely on
distributors, value-added resellers and other third parties, who sell products
into the retail channel.
During the past several years, there has been some consolidation among
retailers, which has resulted in several large retailers and mass merchandisers
with significant bargaining power. We expect to face ongoing challenges in
negotiating retail relationships, and in ensuring good access to retail
distribution channels, in fiscal 2001 and
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beyond. See "Competition," and "Risks That Could Affect Future Results."
However, we continue to benefit from strong relationships with a number of major
retailers, which allows us to minimize our dependency on any specific retailers.
No retailer accounted for 10% or more of our revenue during the past three
fiscal years, and only one distributor met this threshold. (Ingram Micro Inc.
accounted for 15% in fiscal 1998, 16% in fiscal 1999 and 10% in fiscal 2000.) We
expect to rely less on distributors in future years as we ship more of our
products directly to individual retail locations. See "Manufacturing and
Distribution."
We generally ship substantially more products to our retailers than we
expect them to sell in order to reduce the risk that they will run out of
products. This is particularly true for our tax products. As a result, we
experience significant levels of product returns from the retail channel. See
"Risks That Could Affect Future Results."
DIRECT AND ELECTRONIC DISTRIBUTION
We use direct sales campaigns (such as direct-mail and telephone
solicitations, direct-response newspaper and magazine advertising, and
television and radio advertising) to generate software orders, stimulate retail
demand and generally maintain and increase consumer awareness of our products.
Direct marketing campaigns are one of the most effective ways to encourage
software upgrades and the purchase of new products and services by existing
customers. Direct sales frequently generate significantly higher revenue per
unit than retail sales, but this also means that aggressive retail pricing (such
as we have seen in the consumer tax area) can harm our direct sales efforts.
Direct sales make up a significant portion of total desktop software revenue,
accounting for more than a third of our desktop revenues in fiscal 2000.
Many of our direct customers choose to order and/or take delivery of
products electronically through our QuickenStore(SM), Intuit Market.com and
other websites. Electronic ordering and delivery are convenient for customers
and more cost-efficient for Intuit. Electronic delivery has been a particularly
effective method of distribution for our Quicken TurboTax state tax preparation
products. During fiscal 2000, approximately 11% of our total net revenue was
generated by products ordered and/or delivered electronically. We may be
required to make additional investments in our direct distribution operations in
order to comply with evolving requirements relating to customer privacy and
security. See "Risks that Could Affect Future Results."
OEM, FRANCHISE/CORPORATE AND ADVERTISING SALES
We have relationships with a number of OEMs, or "original equipment
manufacturers," that enable us to generate sales of Intuit products in two ways.
First, the OEMs "pre-bundle" entry-level versions of our products on the
computer systems that the OEMs sell to their customers. Although these
"prebundled" OEM sales sometimes generate little revenue for Intuit (due to the
low prices that the OEMs may pay for the products), and reduce profitability in
the short term, they are strategically important because they are a good source
of new customers. The second source of revenue from the OEM channel is "after
sale" programs, where customers who are purchasing custom-configured computers
can select and purchase software products that they want to have pre-installed.
This is an attractive distribution channel for us, as revenues generally reflect
retail pricing but our costs are relatively low. We currently sell QuickBooks
and higher-end Quicken products through after-sale programs, and we expect to
expand our OEM after-sale program in fiscal 2001.
We have a franchise/corporate direct sales program through which we make
products and services available to a large number of individual users under a
license with the franchise or corporation with which the users are associated.
For example, we offer QuickBooks products and related services, such as payroll
and QuickBooks Support Network, to individual small businesses under a franchise
or corporate license. Although fiscal 2000 revenues from this channel were not
material, we believe franchise and corporate sales will become a important new
distribution channel (especially for our small business products and services)
over the next several years.
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A small but increasing portion of our revenue comes from the sale of
advertising and sponsorships on Quicken.com, as well as advertising within our
desktop products. As this source of revenue has grown, we have developed a small
internal sales force with media and services sales skills.
COMPETITION
OVERVIEW
We face intense competition from many companies in almost all of our
business areas, both domestically and internationally. Many of our competitors
have significantly greater financial, technical and marketing resources than we
do, and the competitive landscape can shift rapidly, particularly in Internet
products and services. See "Risks That Could Affect Future Results."
We believe the most important competitive factors for our desktop software
are product features, ease of use, the size of the installed customer base,
quality and reliability, brand name recognition, timing of product launches
compared to competitors (particularly for tax products), price, quality of
technical support services and access to distribution channels. We believe we
compete effectively on most of these factors, as our three principal desktop
software products (QuickBooks, Quicken TurboTax, and Quicken) are the leading
products in the retail sales channel for their respective categories.
For our Internet-based products, and services, we believe the most important
competitive factors are speed in getting new products and services to market,
the ability to distribute them effectively (through generating website traffic
or through traditional retail and direct distribution), brand name recognition,
product features and ease of use. Although some of our Internet-based product
and service offerings, such as Quicken TurboTax for the Web and electronic
filing services, have initially established strong competitive positions, the
markets for Internet-based products and services are still emerging and the
competitive landscape is constantly evolving.
SMALL BUSINESS DIVISION
The major domestic competitor for our small business accounting software is
currently Peachtree Software, which is owned by The Sage Group PLC, a major
accounting software competitor based in the United Kingdom and Germany. We also
face competition from web-based accounting software. Despite competitive
pressures, according to statistics published by PC Data, QuickBooks accounted
for more than 85% of unit sales of small business accounting desktop software in
the retail channel from August 1999 through July 2000.
Our Premier Payroll Service competes with traditional payroll services
offered by a number of companies, including Paychex and ADP. Our Deluxe Payroll
Service competes with other web-based payroll services. Peachtree and others
also offer tax table subscription services that compete with our Basic Payroll
Service.
Our financial supplies business competes with a number of business forms
companies, such as New England Business Service and Deluxe Business Systems, as
well as with direct mail check printers and banks and a number of smaller-scale
Internet-based printing companies. In addition, our QuickBooks products include
some features (such as customizable invoicing) that compete with our supplies
products. Also, online bill payment services, and online payroll services with
direct deposit capabilities (including services offered by or through Intuit)
offer competitive alternatives to printed checks. Significant competitive
factors for the supplies business include ordering convenience, distribution
channels, product quality, speed of delivery and price. We believe convenient
access to our large QuickBooks and Quicken customer bases is a significant
competitive advantage for us.
TAX DIVISION
Competition in consumer tax is intense, and has been increasing over the
past several years. Our major domestic competitors for desktop consumer tax
software during fiscal 2000 were H&R Block (the makers of TaxCut
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software) and Microsoft (with its TaxSaver product). Despite intense
competition, our Quicken TurboTax products accounted for approximately 68% of
unit sales of desktop consumer tax preparation software in the retail channel
from August 1999 through July 2000 (according to statistics published by PC
Data) -- only a one-point decline from the prior year. For web-based tax
preparation, H&R Block was our primary competitor in fiscal 2000. Web-based tax
preparation is a relatively new service, and we expect the competitive landscape
to evolve as more competitors enter the market and as others consolidate. We
also face potential competitive challenges from electronic tax preparation and
filing services that the government may seek to offer. However, countervailing
developments have also occurred, as some government tax agencies in the past
year abandoned their previous plans to try to duplicate private sector services.
See "Risks That Could Affect Future Results."
The professional tax preparation software marketplace has many competitors.
Our largest competitors in the U.S. are CCH Incorporated, with its Computax
product line, and RIA, with its Fast-Tax and Creative Solutions offerings. We
face an ongoing challenge in obtaining new professional tax customers, because
of the time and expense involved for professional tax preparers to switch to a
new product. In the past, the professional tax market has been highly
fragmented, but it has experienced some consolidation in recent years, including
acquisitions by Intuit. See Note 3 of the financial statements.
CONSUMER FINANCE DIVISION
In desktop consumer finance software, Microsoft is currently our primary
domestic competitor. We also face competition from web-based personal finance
tracking and management tools that are becoming increasingly available at no
cost to consumers. Despite competitive pressures, according to statistics
published by PC Data, Quicken accounted for approximately 80% of unit sales of
desktop personal finance software in the retail channel from August 1999 through
July 2000.
There are many competitors for our other consumer finance products and
services, particularly for our Internet products and services. Our Quicken.com
site competes for traffic with online financial publishers and the financial
areas on numerous online services such as Yahoo!, as well as
financially-oriented websites such as Microsoft's Money Central. We also face
increasing competition from financial institutions that are developing their own
financial software and websites. Similarly, government agencies such as the U.S.
Postal Service have entered the market in the past year, offering commercial
electronic financial services to consumers, such as electronic bill payment and
presentment. Our online mortgage and insurance businesses compete with
traditional providers of mortgage and insurance products, as well as with other
online services. In the online arena, we compete with a number of smaller
companies with a very narrow product focus, as well as larger, more diversified
companies. For example, Quicken Loans competes with E-LOAN and Countrywide
Credit Industries, Inc., and QuickenInsurance competes with Insweb and
Quotesmith.
INTERNATIONAL DIVISION
In Japan, our primary competitors in the small business accounting arena are
OBC, PCA and Sorimachi. In Canada, we face competition from a number of
companies in the small business arena, including Computer Associates
International, Inc. and MYOB Group. The primary competitor for our tax business
is CCH and our primary competitor in the personal finance area is Microsoft. In
Europe, we face strong competition from The Sage Group PLC (based in the United
Kingdom), Bhuldata (Wiso) and Microsoft in the small business market, as well as
competition from web-based accounting products that are becoming available. This
increasing competition may have a more significant impact on our international
business in the future, as the focus of our European business is shifting
towards the small business market. Many of the competitors identified above,
including MYOB, Sage and Microsoft, also compete with us in other international
markets.
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CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support by telephone, fax,
electronic mail and the Web. We have full-time customer service and technical
support staffs for each of our business divisions, which we supplement with
seasonal employees and outsourcing during periods of peak call volumes (such as
during the tax return filing season, or following a major product launch).
During the past few years, we have focused on developing support
capabilities that can supplement, or in some situations replace, telephone
service and support. For example, customers who are connected to the Internet
can use our website to find answers to commonly asked questions, check on the
status of a product order and receive bug fixes electronically. Alternative
service and support methods are less expensive for us and are often more
efficient and effective for customers as well. In addition, except for product
installation or product defect issues, we generally charge customers for
technical support, and these fee-for-support programs have helped control our
technical support costs.
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. When we experience customer service and support
problems, they can adversely affect customer relationships and our financial
results. See "Risks That Could Affect Future Results."
MANUFACTURING AND DISTRIBUTION
DESKTOP SOFTWARE
The major steps involved in manufacturing desktop software are duplicating
CDs and disks, printing manuals and boxes, and assembling and shipping the final
products. We outsource most of these tasks to vendors who are required to follow
our strict quality guidelines. We have a small in-house manufacturing and
shipping facility to handle low-volume products, and to handle shipments for
direct sales orders after the initial product launch orders are filled. Our
retail product launches have become operationally more complex over the past few
years. We have evolved from shipping to a few hundred distribution centers (with
distributors delivering products to individual retail locations) to a "direct to
storefront" model in which we ship products directly to thousands of individual
retail locations. This allows us to be more responsive to the needs of our
retail accounts. We have a manufacturing and distribution agreement with Modus
Media International, Inc. that covers all outsourced aspects of our retail
launches for QuickBooks, Quicken TurboTax, and Quicken. Modus has operations in
multiple locations to provide redundancy, and, with our permission, they may
work with other vendors to handle selected aspects of the product launches.
While we believe that using a single vendor for our three primary retail product
launches improves the efficiency and reliability of our product launches,
reliance on one vendor can have severe negative consequences if the vendor fails
to perform for any reason.
We have multiple sources for all of our raw materials and availability has
not been a problem for us in the past. Prior to major product releases, we tend
to have significant levels of backlog, but at other times backlog is minimal and
we normally ship products within a few days of receiving an order. Because of
this fluctuation in backlog, we believe that backlog is not an important measure
of our future sales.
INTERNET-BASED PRODUCTS AND SERVICES
Intuit's data centers house the systems, networks and databases required to
operate and deliver our Internet-based products and services. Through our data
centers, we connect customers to products and services, and we store the vast
amount of data that represents the content on our websites. Our data centers
consist of approximately 1,700 servers and 200 databases located primarily in
three locations. In an effort to minimize unavailability,
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or "down time" for our Internet-based products and services, we follow
industry-standard practices for creating a fault-tolerant environment.
Despite our efforts to maintain continuous and reliable operations at our
data center, like all providers of Internet-based products and services, we
occasionally experience unplanned outages or technical difficulties. For
example, during fiscal 2000, we experienced service interruptions for our online
payroll service, and during fiscal 1999 we experienced outages for our
electronic tax offerings and the portfolio functionality on Quicken.com. Lengthy
and/or frequent service outages -- particularly for services that customers
consider time sensitive -- can result in negative publicity, damage to our
reputation and loss of customers. See "Risks That Could Affect Future Results."
PRIVACY AND SECURITY OF CUSTOMER INFORMATION
As Internet-based products and services continue to expand, customers are
becoming increasingly concerned about the privacy and security of information
that they provide over the Internet to product and services providers. We have
established guidelines and practices to help ensure that customers are aware of,
and can control, how we use information about them. All of our Intuit-owned and
operated websites (including Quicken.com, QuickBooks.com and TurboTax.com) have
been certified by TRUSTe, an independent, non-profit privacy organization that
operates a website certification program to alleviate users' concerns about
online privacy. We have a privacy statement posted on our websites that provides
details on our privacy principles.
To address security concerns, we use industry-standard security safeguards
to help protect the information customers give to us from loss, misuse and
unauthorized alteration. Whenever customers transmit sensitive information, such
as a credit card number or tax return data, to us through our web site, we
provide them access to our servers that allow encryption of the information as
it is transmitted to us. We work to protect personally identifiable information
stored on the web site's servers from unauthorized access using commercially
available computer security products, such as firewalls, as well as internally
developed security procedures and practices.
Despite our efforts to address customer concerns about privacy and security,
these issues still pose a significant risk to Intuit and other companies doing
business over the Internet. During the past year we have faced lawsuits and
negative publicity relating to privacy issues. Our response to these allegations
has been that we do not share any personally identifiable information except as
disclosed in our privacy policies. A major breach of customer privacy or
security, even by another company, could have serious consequences for our
Internet-based businesses. See "Risks That Could Affect Future Results" and
"Legal Proceedings."
GOVERNMENT REGULATION
We offer several regulated products and services through separate subsidiary
corporations. For example, Intuit's Quicken Investment Services, Inc. subsidiary
("QISI") is registered as an investment adviser with the SEC and is subject to
some state regulatory laws as well. QISI is responsible for certain of the
investment-related features in our products and services. Our Quicken Loans
service is offered by a subsidiary that is subject to federal and state mortgage
and loan broker regulations. Our QuickenInsurance service is offered by a
subsidiary that is subject to state insurance regulations.
Our Quicken products allow customers of participating brokerages to trade
securities through their broker's website. QuickenInsurance may expand its site
to directly offer other insurance products, such as variable annuities, that are
considered "securities" under federal and state laws. We believe we have
structured these services in a way that does not subject Intuit to direct
government regulation under federal and/or state securities broker-dealer laws.
However, it is possible that these services, or other services we may offer in
the future, may become regulated under broker-dealer laws or other regulations.
We continually analyze new business opportunities, and any new businesses that
we pursue may require additional costs for regulatory compliance.
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Current government regulation poses a number of risks to us, including
potential liability to customers and/or penalties and sanctions by government
regulators. Future regulation could hamper the growth of our Internet-based
businesses. In addition, our Internet-based products and services are available
in many states and foreign countries, and as a result, we may be subject to
regulation and taxation in many additional jurisdictions. If Internet activity
becomes heavily regulated in other respects, that could have major negative
consequences for the growth of our Internet-based businesses. See "Risks That
Could Affect Future Results."
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark and trade secret
laws, and employee and third-party nondisclosure and license agreements, to
protect our software products and other proprietary technology. While our
proprietary technology is important, we believe our success depends more heavily
on the innovative skills and technical competency of our employees. We do not
own all of the software and other technologies used in our products and
services, but we have the licenses from third parties that we believe are
necessary for using that technology in our current products.
We consider our principal trademarks (including Intuit, QuickBooks, Quicken
TurboTax, and Quicken) to be important assets and have registered these and
other trademarks and service marks in the U.S. and many foreign countries. The
initial duration of trademark registrations varies from country to country and
is 10 years in the U.S. Most registrations can be renewed perpetually at 10-year
intervals.
We face a number of risks relating to our intellectual property, including
persistent piracy issues for our desktop software products, and the risk of
third party infringement claims. See "Risks That Could Affect Future Results."
EMPLOYEES
As of September 30, 2000, we had about 4,500 full-time employees in the
United States, and about 350 full-time employees internationally. We believe our
future success and growth will depend on our ability to attract and retain
qualified employees in all areas of our business. We don't currently have any
collective bargaining agreements with our employees, and we believe employee
relations are generally good. Although we have employment-related agreements
with a few key people, these agreements do not guarantee continued service. We
believe we offer competitive compensation and a good working environment.
However, we face intense competition for qualified employees, especially for our
Internet-based businesses. Like many of our competitors, we have had
difficulties during the past few years hiring and retaining employees, and we
expect to face continuing challenges in recruiting and retention.
ITEM 2. PROPERTIES
Our principal offices and corporate headquarters are located in Mountain
View, California. We lease the majority of our Mountain View facilities under
leases with staggered eight-year terms that we entered into in 1994. With
additional buildings that we leased in fiscal years 1999 and 2000, our total
available Mountain View facilities consist of approximately 482,000 square feet.
We have significant operations in leased facilities in San Diego, California, as
well, with approximately 258,000 square feet for office space, a data center and
a manufacturing and distribution center. The San Diego leases expire from 2004
through 2007. We also lease approximately 135,000 square feet in Tucson,
Arizona, where our primary customer service call center is located. The Tucson
lease expires in 2009. See Note 8 of the financial statements for information
about our lease commitments.
We also lease or own facilities in a number of other domestic locations,
including Alexandria, Virginia (where our QuickenInsurance business is located);
Dallas and Plano, Texas (where our Lacerte subsidiaries are located);
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Reno, Nevada (headquarters for our payroll business); and Livonia, Michigan
(where our Quicken Loans business is headquartered). We also lease or own
facilities in Canada, England and Japan.
We believe our facilities are adequate for our current and near-term needs,
and that we will be able to locate additional facilities as needed. However, our
lease expenses for our headquarters in Mountain View, California could increase
significantly if and when we renew our current leases, as the cost of office
space in the region has increased sharply in recent years.
ITEM 3. LEGAL PROCEEDINGS
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. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000
in the Superior Court of State of California, San Bernadino County, Rancho
Cucamonga Division. The Bruce and Newby lawsuits were then consolidated into one
lawsuit, In re Intuit Privacy Litigation, filed on July 28, 2000 in the United
States District Court of California, Eastern Division. 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.
In addition, on April 19, 2000, Bosch v. Intuit Inc. was filed in the
Superior Court, State of California, County of Los Angeles, Central District.
This lawsuit alleges violations of California statutes for alleged false and
deceptive advertising and unlawful business practices related to QuickBooks
products and purchasing the Basic Payroll Service. In September 2000, the
plaintiff voluntarily dismissed this lawsuit.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows executive officers and their areas of
responsibility as of September 30, 2000. Biographies are included after the
table.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen M. Bennett......................... 46 President, Chief Executive Officer and Director
William V. Campbell........................ 60 Chairman of the Board of Directors
Scott D. Cook.............................. 48 Chairman of the Executive Committee of the Board of Directors
Alan A. Gleicher........................... 47 Senior Vice President, International
David A. Kinser............................ 49 Senior Vice President, Service Delivery and Operations
Greg J. Santora............................ 49 Senior Vice President, Finance and Corporate Services; Chief
Financial Officer
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Raymond G. Stern........................... 39 Senior Vice President, Corporate Strategy and Marketing
Larry J. Wolfe............................. 49 Senior Vice President, Tax Division
Dennis Adsit............................... 42 Vice President, Process Excellence
Sonita Ahmed............................... 43 Vice President, Finance & Corporate Controller
Thomas A. Allanson......................... 42 Vice President, Tax Strategy
Caroline F. Donahue........................ 39 Vice President, Sales
Linda Fellows.............................. 52 Vice President, Investor Relations and Treasurer
Daniel B. Gilbert.......................... 38 Vice President, Quicken Loans
Larry King, Jr............................. 38 Vice President, Payroll Services Group
Elisabeth M. Lang.......................... 43 Vice President, Corporate Public Relations & Marketing Communication
Carol Novello.............................. 35 Vice President, Financial Supplies Group
Daniel T. Nye.............................. 34 Vice President, Small Business Division
Enrico Roderick............................ 41 Vice President, Personal Finance Group
Catherine L. Valentine..................... 48 Vice President, General Counsel and Corporate Secretary
Sherry Whiteley............................ 41 Vice President, Human Resources
</TABLE>
Mr. Bennett joined Intuit as President and Chief Executive Officer and a
Board member in January 2000. Prior to joining Intuit, Mr. Bennett was an
Executive Vice President and a member of the Board of Directors of GE Capital,
the financial services subsidiary of General Electric Corporation, positions he
held since December 1999. From July 1999 to November 1999 he was President and
Chief Executive Officer of GE Capital e-Business. He was President and Chief
Executive Officer of GE Capital Vendor Financial Services from April 1996
through June 1999, and Vice President of Americas GE Industrial Systems from
August 1993 through March 1996. He holds a BA degree in finance and real estate
from the University of Wisconsin.
Mr. Campbell was elected to Intuit's Board of Directors in May 1994. He has
served as Chairman of the Board since August 1998 and was Acting Chief Executive
Officer from September 1999 until January 2000. He also served as Intuit's
President and Chief Executive Officer from April 1994 through July 1998. Mr.
Campbell also serves on the board of directors of SanDisk Corporation (a
computer storage devices company), and Apple Computer, Inc. (a computer
company). He is a member of SanDisk's Compensation Committee and a member of
Apple's Audit Committee. Mr. Campbell holds both a Bachelors and a Masters
degree in economics from Columbia University.
Mr. Cook, a founder of Intuit, has been a director of Intuit since March
1984 and is currently Chairman of the Executive Committee of the Board. He
served as Intuit's Chairman of the Board from March 1993 through July 1998. From
March 1984 to April 1994, he also served as President and Chief Executive
Officer of Intuit. Mr. Cook also serves on the board of directors of Amazon.com,
Inc. (an online merchant), ebay Inc. (an electronic commerce company) and The
Procter & Gamble Company (a consumer products company). Mr. Cook holds a
Bachelor of Arts degree in economics and mathematics from the University of
Southern California and an MBA from Harvard University.
Mr. Gleicher was appointed Senior Vice President, International Division in
March 2000. He had been Intuit's Senior Vice President of Sales since March 1997
and assumed responsibility for the International Division in September 1999. He
served as Intuit's Vice President of Sales from December 1993 to March 1997. Mr.
Gleicher has a Bachelors degree in economics and business finance from San Diego
State University. He also earned a certificate from the Marketing Management
Program at Stanford University.
Mr. Kinser was appointed Senior Vice President, Service Delivery and
Operations in March 2000. Mr. Kinser joined Intuit as Senior Vice President of
Operations in February 1997. Prior to that, Mr. Kinser served as a consultant to
Intuit from July 1995 to February 1997. Mr. Kinser served as Chief Financial
Officer and Vice President of Operations for Collabra Software from 1994 to
1995. He has also held executive positions at Claris Corp. and Apple Computer,
Inc. Mr. Kinser holds a Bachelor of Arts degree from Humboldt State University.
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Mr. Santora has been Senior Vice President, Finance and Corporate Services
since March 1999. He has served as Intuit's Chief Financial Officer since July
1997. He served as Vice President of Finance from November 1996 to March 1999.
He joined Intuit as Corporate Controller in January 1996. From 1983 to 1995, Mr.
Santora held a variety of senior financial positions at Apple Computer, Inc.,
including Senior Finance Director of Apple Americas from May 1992 to January
1996. Mr. Santora, who is a certified public accountant, holds a Bachelor of
Science degree in accounting from the University of Illinois and an MBA from San
Jose State University.
Mr. Stern became Senior Vice President, Corporate Strategy and Marketing in
March 2000. Prior to that he was Intuit's Senior Vice President, Strategy,
Corporate Development and Administration from March 1999 until March 2000. He
joined Intuit in January 1998 as Senior Vice President of Strategy, Finance and
Administration. Prior to joining Intuit, Mr. Stern spent over ten years with The
Boston Consulting Group (a business consulting firm), where he was the partner
responsible for the firm's West Coast high technology practice from May 1994 to
December 1997. Mr. Stern holds a Bachelor of Science degree in mechanical
engineering from Stanford University and an MBA from Harvard University.
Mr. Wolfe has been Intuit's Senior Vice President of the Tax Division since
May 1997. Prior to that, he served as Vice President and General Manager of
Intuit's Personal Tax Group from April 1996 to May 1997. He was the director of
technical support and sales for Intuit's Professional Tax Group from March 1994
to April 1996. Mr. Wolfe holds a Bachelor of Science degree in Business
Administration from the University of Southern California and is a certified
public accountant.
Mr. Adsit joined Intuit in July 2000 as Vice President, Process Excellence.
He was Senior Vice President, Six Sigma Practice Leader, at Rath and Strong, a
division of AON Corporation in Lexington, Massachusetts from April 1999 to June
2000. From June 1995 until April 1999 he also held Principal and Vice President
positions in the Leadership & Organizational Effectiveness Practice at Rath and
Strong Management Consultants. He holds a BA degree in mathematics and
psychology from Bowling Green State University and a Masters and Ph.D. in
industrial and organizational psychology from the University of Minnesota.
Ms. Ahmed joined Intuit in April 1997. She became Vice President Finance in
July 1999 and has been Controller since November 1997. She held Divisional
Controller positions at Apple Computer, Inc. from August 1988 to March 1997. Ms.
Ahmed holds a bachelor's degree in Business and an MBA from Santa Clara
University and is also a certified public accountant.
Mr. Allanson joined Intuit in September 2000 as Vice President of Tax
Strategy. 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.
Ms. Donahue joined Intuit as Director of Sales in May 1995 and was appointed
a Vice President in September 1997. Prior to that, Ms. Donahue was Director of
Sales at Knowledge Adventure and she worked in various sales and channel
management positions at Apple Computer and Next, Inc. She holds a Bachelor of
Arts degree from Northwestern University.
Ms. Fellows was appointed Vice President, Investor Relations and Treasurer
in January 2000. She joined Intuit as Corporate Treasurer and Director of
Investor Relations in May 1997. Prior to that, Ms. Fellows served as Treasurer
and Director of Investor Relations of Bay Networks, Inc. from October 1990 to
April 1997. Ms. Fellows holds a Bachelor of Arts degree from Stanford University
and an MBA from Santa Clara University.
Mr. Gilbert joined Intuit as a Vice President in December 1999, when Intuit
acquired Rock Financial Corporation. Prior to joining Intuit, Mr. Gilbert had
founded Rock in 1985 and had served as its President and Chief Executive
Officer. Mr. Gilbert is currently CEO and a director of Quicken Loans Inc.,
which is a wholly owned
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subsidiary of Intuit that operates Intuit's mortgage business. He holds an
undergraduate degree from Michigan State University and a law degree from Wayne
State Law School.
Mr. King has been a Vice President of Intuit since August 1997 and has been
responsible for Intuit's payroll business since September 1999. He served as
Vice President and General Manager of the Financial Supplies Group from August
1998 to September 1999. Prior to that, he was responsible for Direct Sales and
Service from September 1995 to August 1998. Prior to joining Intuit in September
1995, Mr. King was Director of Telephone Services at Household Credit Services,
a part of Household International, from 1993 to 1995 He holds a BA degree in
communications marketing and an MBA from the University of Miami.
Ms. Lang joined Intuit as a Vice President of Corporate Communications in
July 1998 and became Vice President, Corporate Public Relations, Marketing
Communications and Privacy in March 2000. She was previously Vice President of
Corporate Communications for a subsidiary of LVMH Moet Hennessy Louis Vuitton
from February 1998 to May 1998 and Vice President of Corporate Communications
for Pacific Telesis from 1994 to January 1998. She holds a Liberal Arts degree
from Ohio State University.
Ms. Novello became Vice President of the Financial Supplies Group in
December 1999. She served as Director of Intuit's Small Business Direct
Marketing and Sales from April 1999 to November 1999, and Director of Marketing
for the Financial Supplies Group from November 1997 to March 1999. She joined
Intuit as Group Marketing Manager of the Financial Supplies Group in November
1996, a position she held until October 1997. Prior to joining Intuit, Ms.
Novello was General Manager, Consumer Products Division at Cincinnati Microwave,
Inc. (a wireless communications company) from August 1995 to August 1996 and was
Chief Operating Officer at Capital Rose, Inc. (a cooperative financial services
company) from August 1994 to July 1995. Ms. Novello holds a BA in Economics and
English from Dickinson College and an MBA from Harvard University.
Mr. Nye has been Vice President of the Small Business Division since March
2000. He was Vice President of the QuickBooks Internet Solutions business from
September 1999 to March 2000, and Vice President of International Operations
from September 1998 to August 1999. Mr. Nye joined Intuit in January 1995 and
served in a number of positions, including Director of Marketing for the
QuickBooks product line, from January 1995 to September 1998. Prior to joining
Intuit, he held a number of positions in brand management at Procter and Gamble.
Mr. Nye holds a BA degree from Hamilton College in New York and an MBA from
Harvard University.
Mr. Roderick was elected a Vice President of Intuit in October 1998 and
assumed responsibility for the Personal Finance Group in March 2000. He joined
Intuit in August 1996 as Group Product Manager, and became Director of Banking
Services in March 1997. Before joining Intuit, he was a Vice President and
Senior Marketing Manager for Wells Fargo from October 1977 through August 1996.
Mr. Roderick holds a BS in business administration from San Francisco State
University and an MBA from University of California, Berkeley. He also completed
the Executive Management Program at UCLA.
Ms. Valentine joined Intuit as General Counsel in September 1994. She has
served as a Vice President of Intuit since August 1997 and as Corporate
Secretary since April 1996. Prior to joining Intuit, Ms. Valentine had served as
general counsel for Macromedia and for Go Corporation. Ms. Valentine holds
Bachelor of Arts degrees in finance and economics from the University of
Illinois and a JD degree from the University of Chicago.
Ms. Whitely joined Intuit in July 2000. Prior to joining Intuit, she served
in several human resources positions with Silicon Graphics, Inc. from 1992 to
July 2000, including Staffing from 1992 to 1994 and HR Strategy from 1994 to
1996, Executive Coaching and Development, Leadership Development and Technical
Education from 1996 to 1998 and Executive Recruiting from 1998 to July 2000. Ms.
Whiteley holds a Bachelor of Arts degree in history from Santa Clara University,
and graduated from the Executive General Management and Human Resources
Executive Programs at Stanford University.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Intuit's common stock began trading over the counter in March 1993 at the
time of our initial public offering. It is quoted on the Nasdaq National Market
under the symbol "INTU." The following table shows the range of high and low
closing sale prices reported on the Nasdaq National Market for the periods
indicated. Prices reflect inter-dealer prices without retail markup, markdown or
commissions. The market price of our common stock has been volatile. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risks That Could Affect Future Results." On September 29, 2000,
the closing price of Intuit's common stock was $57.00.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1999
First quarter............................................. $17.04 $11.40
Second quarter............................................ 32.77 16.63
Third quarter............................................. 36.75 25.69
Fourth quarter............................................ 32.75 24.25
FISCAL YEAR ENDED JULY 31, 2000
First quarter............................................. $35.75 $22.50
Second quarter............................................ 90.00 27.69
Third quarter............................................. 72.75 30.00
Fourth quarter............................................ 46.19 25.75
</TABLE>
STOCKHOLDERS
As of September 29, 2000, we had approximately 900 record holders of our
common stock, and about 90,000 beneficial holders.
ANNUAL MEETING OF STOCKHOLDERS
The date of our next Annual Meeting of Stockholders will be December 8,
2000. Any stockholder who wished to bring a proposal before the December 8, 2000
Annual Meeting of Stockholders was required to provide written notice of the
proposal to our Corporate Secretary, at Intuit's principal executive offices, by
August 29, 2000.
DIVIDENDS
Intuit has never paid any cash dividends on its common stock. However, our
financial statements reflect dividends previously paid by Rock and Title Source
because we accounted for those acquisitions as a pooling of interests. See Note
1 of the financial statements. We currently anticipate that we will retain all
future earnings for use in our business, and do not anticipate paying any cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On August 2, 1999 we issued 299,940 shares of our common stock as partial
consideration for our acquisition of Boston Light Software Corporation, a
Massachusetts corporation that provides electronic commerce tools for small
businesses. Intuit issued these shares to five principal stockholders in
connection with the merger transaction in which Boston Light became a
wholly-owned subsidiary of Intuit. The shares issued in this transaction were
issued without registration under the Securities Act of 1993, as amended (the
"1933 Act") in reliance on an exemption under Section 3(a)(10) of the 1933 Act,
after a hearing on the fairness of the transaction held by the California
Department of Corporations under the California Corporate Securities Law of
1968.
On January 24, 2000, we issued and sold 225,000 shares of our common stock
to Stephen M. Bennett, our recently appointed President and Chief Executive
Officer, pursuant to two Restricted Stock Purchase Agreements. The purchase
price for the shares was $0.01 per share, for an aggregate purchase price of
$2,250. The shares were issued without registration under the 1933 Act, in
reliance on an exemption under Section 4(2) of the 1933 Act. The shares are
subject to vesting over periods of up to 10 years. Intuit may repurchase any
unvested shares for the original purchase price if Mr. Bennett's employment with
Intuit is terminated under specified circumstances.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information for
Intuit for the past five fiscal years. The comparability of the information is
affected by a variety of factors, including acquisitions and dispositions of
businesses, and gains and losses related to marketable securities and other
investments. Historical information has been restated to reflect the
acquisitions of Rock Financial Corporation and Title Source, Inc. as a pooling
of interests in December 1999. To better understand the information in the
table, investors should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on the next page, and
the Consolidated Financial Statements and Notes following that section.
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net revenue as previously reported.................... $538,608 $598,925 $592,736 $847,568 $ --
Net revenue of pooled companies....................... 28,565 50,820 96,546 92,867 --
-------- -------- -------- -------- ----------
Net revenue as restated................................... 567,173 649,745 689,282 940,435 1,093,825
Income (loss) from continuing operations.................. (12,351) 8,590 6,182 386,564 305,661
Net income (loss) as previously reported.............. (20,699) 68,308 (12,157) 376,549 --
Net income of pooled companies........................ 2,004 11,522 18,339 10,015 --
-------- -------- -------- -------- ----------
Net income (loss)......................................... (18,695) 79,830 6,182 386,564 305,661
Basic income (loss) per share from continuing
operations.............................................. (0.09) 0.06 0.04 2.02 1.52
Basic net income (loss) per share......................... (0.13) 0.54 0.04 2.02 1.52
Diluted net income (loss) per share from continuing
operations.............................................. (0.09) 0.06 0.04 1.93 1.45
Diluted net income (loss) per share....................... $ (0.13) $ 0.53 $ 0.04 $ 1.93 $ 1.45
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short-term investments..... $201,307 $217,046 $ 414,564 $ 859,355 $1,467,173
Marketable securities................................. 5,954 -- 499,378 431,319 225,878
Working capital....................................... 179,390 253,172 632,713 842,213 1,321,957
Total assets.......................................... 518,379 808,104 1,727,584 2,477,460 2,878,902
Long-term obligations................................. 5,583 38,323 36,045 36,614 538
Total stockholders' equity............................ $311,581 $430,169 $1,127,943 $1,561,388 $2,071,289
</TABLE>
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE: For a more complete understanding of our financial condition and
results of operations, and some of the risks that could affect future results,
see "Risks That Could Affect Future Results," beginning on page 32. This section
should also be read in conjunction with the Consolidated Financial Statements
and related Notes, which immediately follow this section.
RESULTS OF OPERATIONS -- OVERVIEW
Three-Year Revenue and Net Income Trends. The following table shows trends
in our revenue and net income for the past three years. Net income is shown in
accordance with generally accepted accounting principles ("GAAP"), and also on
an adjusted basis. We provide financial information that is adjusted to exclude
acquisition-related charges, reorganization costs, and gains and losses related
to our marketable securities and other investments. We provide this adjusted
financial information as a supplement to, but not a substitute for, GAAP
information, in order to assist investors in assessing the results of our core
operating businesses as they would be without the impact of significant events
that tend to be non-recurring.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL 1998 - 1999 1999 - 2000
1998 1999 2000 % CHANGE % CHANGE
------ ------ -------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue................................................ $689.3 $940.4 $1,093.8 36.4% 16.3%
Net income -- GAAP......................................... $ 6.2 $386.6 $ 305.7 6000+% (21.0)%
Net income -- Adjusted*.................................... $102.2 $ 99.6 $ 134.2 (2.5)% 34.7%
</TABLE>
---------------
* Adjusted to exclude acquisition-related charges (such as amortization of
purchased intangibles), reorganization costs and gains and losses related to
marketable securities and other investments
Impact of Acquisitions and Investment-Related Activity on Comparability of
Year-Over-Year Results. During the past three years, we have completed several
acquisitions. See Note 3 of the financial statements. In comparing Intuit's
results for the last three fiscal years, readers should note that our
acquisitions of Lacerte in June 1998, Computing Resources, Inc. in May 1999 and
Rock in December 1999 have had a significant impact on our financial results,
and on the comparability of our results year over year. Results for fiscal 1999
and 2000 include results for our Lacerte subsidiaries, while fiscal 1998 results
include only six weeks of results for Lacerte. Results for fiscal 2000 include
activity for our CRI payroll processing subsidiary, while fiscal 1999 results
include only three months of CRI's activity and fiscal 1998 does not include any
CRI results. Finally, all three years include activity for Rock because the
acquisition of Rock was accounted for as a pooling of interests, and all prior
periods have been restated to reflect the combined results of Rock and Intuit.
See Notes 1 and 3 of the financial statements.
Acquisition-related expenses (including amortization of goodwill) also have
a significant impact on the comparability of both our quarterly and yearly
results, and have had a negative impact on our earnings. Acquisition-related
expenses (on a pre-tax basis) were $80.9 million in fiscal 1998, $100.7 million
in fiscal 1999 and $168.1 million in fiscal 2000, and will continue to impact
earnings for the next several years. See "Risks That Could Affect Future
Results" and Notes 1 and 20 of the financial statements.
During fiscal 1999 and 2000, we made a number of investments in companies
with technologies that may be strategically relevant to our businesses, and we
liquidated significant portions of certain other investments. These and other
activities relating to our investments resulted in pre-tax net gains of $579.2
million in fiscal 1999 and $481.1 million in fiscal 2000. In addition, many of
our current investments have experienced significant price volatility, which in
some cases has a direct impact on our net income. See Note 1 of the financial
statements and "Risks That Could Affect Future Results."
Internet-based Businesses. Our Internet-based revenue was approximately 7%
of total revenue for fiscal 1998, compared to about 15% in fiscal 1999 and about
27% in fiscal 2000. We use the term "Internet-based revenue" to include revenue
from both Internet-enabled products and services, as well as revenue derived
from electronic
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<PAGE> 23
distribution. Internet products and services include activities where the
customer realizes the value of the goods or services directly on the Internet or
an Intuit server. Internet product and service revenues include, for example,
electronic tax preparation and filing revenues, online payroll subscription
revenue, QuickBooks Internet Gateway placement fees, advertising revenues
generated on our Quicken.com website and online mortgage and insurance
transaction revenue. Electronic distribution includes revenues generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies. During fiscal 2000, Internet products and services accounted
for approximately 60% of our Internet-based revenue, and electronic distribution
accounted for about 40%. Our Internet-based revenues cut across all of our
business divisions. As a result, we do not report 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.
We believe the Internet provides an opportunity to increase revenue in
fiscal 2001 and beyond. We have made significant progress in several of our
Internet businesses over the past three years. During fiscal 2000, our web-based
tax preparation and electronic filing services and the QuickBooks Internet
Gateway were profitable. However, investors should be aware that some of our
other Internet businesses are still in their initial stages and are not yet
generating either profits or significant revenue. We also anticipate increased
spending in an effort to capitalize on new business opportunities. During fiscal
2001 we expect to double our investments in our emerging Internet businesses,
which will contribute to increased research and development expenses as well as
increased selling and marketing expenses. See "Risks That Could Affect Future
Results."
Seasonality and Other Fluctuations in Results. Our businesses are highly
seasonal. Sales of tax products are heavily concentrated in the period from
November through March. Sales of consumer finance and small business products
are typically strongest during the year-end holiday buying season and the
beginning of the calendar year, and therefore major product launches for these
products usually occur in the fall or early winter to take advantage of these
customer buying patterns. These seasonal patterns mean that our 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
operating expenses to develop and manage 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 with relatively
high fixed expenses.
NET REVENUE
<TABLE>
<CAPTION>
FISCAL % FISCAL % FISCAL % 1998 - 1999 1999 - 2000
1998 REVENUE 1999 REVENUE 2000 REVENUE % CHANGE % CHANGE
------ ------- ------ ------- -------- ------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUE:
Small Business...................... $208.3 30.2% $292.7 31.1% $ 394.3 36.0% 40.5% 34.7%
Tax................................. 192.8 28.0% 337.7 35.9% 379.3 34.7% 75.2% 12.3%
Consumer Finance.................... 217.5 31.5% 230.6 24.6% 225.8 20.7% 6.0% (2.1)%
International....................... 70.7 10.3% 79.4 8.4% 94.4 8.6% 12.3% 18.9%
Totals...................... $689.3 100.0% $940.4 100.0% $1,093.8 100.0% 36.0% 16.0%
</TABLE>
Fiscal 2000 Compared to Fiscal 1999. Revenue for fiscal 2000 was $1,093.8
million, compared to $940.4 million in fiscal 1999, representing growth of 16%.
This growth reflected strength in a number of areas, including a 108% increase
in our Internet-based revenue, as well as a 15% increase in non-Internet product
and service revenue, and 19% revenue growth for the International Division.
Partially offsetting this growth was a 42% decline in revenue for our Quicken
Loans businesses, which combines our former QuickenMortgage business and Rock's
mortgage business. Our acquisition of Rock in December 1999 was accounted for as
a pooling of interests transaction and had a significant negative impact on our
revenue and profit growth from fiscal 1999 to fiscal 2000, because it required
us to include Rock's pre-acquisition results in both fiscal 1999 and fiscal
2000. During fiscal 2000, Rock's revenue
23
<PAGE> 24
declined due to its consolidation of many branch offices and its reallocation of
resources from a traditional branch office-based mortgage business to its online
mortgage business, as well as rising mortgage interest rates and lower volumes
of refinancing and sub-prime loans.
Fiscal 1999 Compared to Fiscal 1998. During fiscal 1999, revenue increased
36% compared to fiscal 1998. The growth was primarily due to our acquisitions of
Lacerte in June 1998, and CRI in May 1999, and was partially offset by a decline
in Rock's revenue from fiscal 1998 to fiscal 1999. Results also reflected strong
growth in our Small Business Division, and growth in Internet-based revenues as
a whole.
NET REVENUE BY BUSINESS DIVISIONS
The following revenue discussion is categorized by our business divisions,
which is how we examine results internally. Our domestic supplies business is
considered a part of our Small Business Division, while the international
supplies business is considered part of our International Division. The table
above shows each business division's percentage of our net revenue for fiscal
1998, 1999 and 2000. See Note 6 of the financial statements for additional
information about our business segments.
Small Business Division. Small Business Division revenue is derived
primarily from QuickBooks desktop products, financial supplies products, payroll
services, the QuickBooks Support Network and QuickBooks Internet Gateway
services.
Fiscal 2000 Compared to Fiscal 1999. Fiscal 2000 revenue for the Small
Business Division increased 35% over revenue for fiscal 1999, reflecting growth
in several products and services. QuickBooks revenue grew due to higher average
selling prices resulting from a greater mix of higher priced, greater
functionality products, although unit sales were down slightly from fiscal 1999.
Although we experienced solid growth in new users for QuickBooks 2000, which was
launched in January 2000, the upgrade rate for existing customers was lower than
our historical patterns. We believe there were two primary reasons for the lower
upgrade rate. First, we encouraged owners of older versions of QuickBooks to
upgrade prior to January 2000 in order to minimize Year 2000 issues. Second, we
gave over 350,000 online customers free QuickBooks '98 upgrades to bring them
into Year 2000 compliance.
Domestic supplies revenues grew about 13% in fiscal 2000 compared to fiscal
1999. Most of the revenue growth resulted from our decision to charge customers
for shipping and handling charges beginning in August 1999. Growth in our base
of small business customers who use QuickBooks and Quicken also contributed to
revenue growth for supplies.
Our Premier, Deluxe and Basic Payroll Services and the QuickBooks Support
Network also contributed to revenue growth for the division in fiscal 2000.
While we believe our payroll businesses, and the Deluxe Payroll Service in
particular, provide us with a significant opportunity to generate recurring
revenue in the future, we face a number of challenges and risks, including
operational issues in activating online payroll customers. See "Risks That Could
Affect Future Results."
The QuickBooks Internet Gateway, launched in January 2000, is strategically
important to us as a way to expand our small business customer base and generate
more revenue and profit per customer. It contributed to revenue growth for the
Small Business Division, and was also profitable for the year. We believe it
will contribute increasing revenue and profitability in fiscal 2001 and beyond,
but the business remains subject to a number of risks and uncertainties,
including customer and vendor participation and satisfaction levels. See "Risks
That Could Affect Future Results."
Fiscal 1999 Compared to Fiscal 1998. Small Business Division revenue for
fiscal 1999 increased 41% over fiscal 1998. This increase was largely due to the
timing of QuickBooks product launches, with two launches (QuickBooks '99 in
January 1999 and QuickBooks 6.0 in June 1998) favorably impacting fiscal 1999
results. Also contributing to the growth was the inclusion of three months of
revenue from CRI in fiscal 1999 results. Domestic supplies revenues for fiscal
1999 grew by 12% compared to fiscal 1998 due to price increases and a continued
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<PAGE> 25
expansion of products, as well as an increase in our base of small business
customers. Revenue from our Basic Payroll Service and QuickBooks Support Network
also increased substantially in fiscal 1999 compared to fiscal 1998.
Tax Division. Tax Division revenue is derived from Quicken TurboTax federal
and state consumer desktop tax preparation products, ProSeries and Lacerte
professional tax preparation products, electronic tax filing services and
Quicken TurboTax for the Web online tax preparation services.
Fiscal 2000 Compared to Fiscal 1999. Fiscal 2000 Tax Division revenues
increased approximately 12% compared to fiscal 1999, reflecting growth in all
products and services. While our Quicken TurboTax desktop products experienced
about 18% unit growth in fiscal 2000, revenue growth was less than 2%, as we
also experienced extreme pricing pressures from both H&R Block's TaxCut product
and from Microsoft's TaxSaver product, including free product offerings from
Microsoft for about half of the tax selling season. This increased competition
resulted in significantly lower average selling prices. In March 2000, Microsoft
announced that it would discontinue its TaxSaver product after the 1999 tax
season. However, they may offer competitive products and services, either
directly or indirectly, on the desktop and/or via the web, in future tax
seasons. Accordingly, we expect the consumer tax market to remain extremely
competitive for the foreseeable future. See "Business -- Competition" and "Risks
That Could Affect Future Results."
Revenue for the full consumer tax season is still subject to product returns
from our retail distribution channels. Although we expect our reserves for
returned products will be adequate to cover retailers' remaining returns of
unsold products, higher than expected returns could have a negative impact on
fiscal 2001 revenue.
During fiscal 2000 we also experienced significantly higher revenue and
volume for Quicken TurboTax for the Web, with revenue more than doubling and
units increasing by 470% compared to fiscal 1999. Unit growth was driven by free
units offered through our Quicken Tax Freedom Project, which accounted for more
than half of Quicken TurboTax for the Web units. Revenue for our electronic
filing services almost doubled during fiscal 2000 as well, with 76% unit growth.
While we believe that the increasing popularity of the Internet will provide
future revenue growth opportunities for these Internet-based tax offerings, we
do not expect comparable growth rates in fiscal 2001. In addition, there are
risks for these businesses, including potential negative financial and public
relations consequences that could result from any significant service
interruptions. See "Risks That Could Affect Future Results."
Fiscal 2000 revenues for our professional tax products increased
approximately 13% from fiscal 1999. This growth is attributable to a combination
of a continued shift to higher priced products, increased pay-per-return
revenues (which generate higher revenues per unit), growth in our customer base
due in part to our acquisitions of Compucraft and TaxByte during fiscal 1999
(see Note 3 of the financial statements), and continued strength in renewal
rates for existing customers.
Fiscal 1999 Compared to Fiscal 1998. Tax Division revenue increased 75% in
fiscal 1999 compared to fiscal 1998. A significant portion of this growth
resulted from our acquisition of Lacerte in June 1998. Excluding Lacerte, Tax
Division revenue increased 30% from fiscal 1998 to fiscal 1999. This growth was
driven by our Quicken TurboTax product line, which experienced significantly
higher unit sales. The revenue impact of unit sales growth was partially offset
by lower average selling prices, due to lower product prices offered in response
to aggressive price competition from H&R Block's TaxCut product, as well as a
shift in product mix towards the lower priced basic products compared to
higher-priced Deluxe versions. We also experienced significant revenue increases
in fiscal 1999 for our Quicken TurboTax for the Web and electronic filing
services, compared to fiscal 1998. Excluding Lacerte from fiscal 1999 results,
our professional tax (ProSeries) product sales increased by 13% in fiscal 1999
compared to fiscal 1998, due to high customer retention rates and customer
upgrades to higher-priced products.
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<PAGE> 26
Consumer Finance Division. Consumer Finance Division revenues come primarily
from Quicken desktop products, Quicken Loans, advertising, sponsorship and
placement fees (both web-based in Quicken.com, as well as in-product advertising
in Quicken), online transactions and QuickenInsurance.
Fiscal 2000 Compared to Fiscal 1999. Fiscal 2000 Consumer Finance Division
revenue was down about 2% compared to fiscal 1999. Revenue for our Quicken
product line grew approximately 18% compared to fiscal 1999, despite lower
average selling prices. The increase was due to Y2K-driven customer upgrade
activity, aggressive retail promotions in tandem with our tax products, and the
launch of the first new Macintosh version since 1998. Advertising and
sponsorship revenues more than doubled from fiscal 1999, due to increased sales
of Quicken, and increased page views, unique visitors and registered visitors on
Quicken.com. Online transactions revenue also grew more than 20%.
QuickenInsurance revenues experienced a significant percentage increase, but are
still not material.
Revenue growth in these areas was more than offset by a revenue decline of
approximately 42% for our Quicken Loans mortgage business, which now consists of
our former QuickenMortgage online business, and Rock's online and traditional
mortgage businesses. The decline was due in part to Rock's consolidation of many
branch offices and its reallocation of resources from its traditional branch
office-based mortgage business to its online/call center mortgage business, and
the resulting decline in revenue generated by the branch offices. Although total
loan volume has declined during the transition period, online mortgage revenues
increased 25% from fiscal 1999. In addition, our revenue per loan has increased
significantly since our shift, following our acquisition of Rock, from a loan
"referral" model to a "direct" lending model. (These business models are
explained in "Business -- Products and Services -- Consumer Finance
Division -- Quicken Loans.") Rising mortgage rates (which reduced the demand for
refinance mortgages), as well as a significant decline in volume for sub-prime
loans due to deteriorating conditions in the sub-prime lending market, also
contributed to the Quicken Loans revenue decline. We face continuing challenges
in our mortgage business, including interest rate fluctuations. However, we
expect revenue growth as well as profitability for our online and total mortgage
business in fiscal 2001. See "Risks That Could Affect Future Results."
Our Quicken product line faces many challenges in the personal financial
software category, including continuing competition from Microsoft's Money
product. Our consumer Internet products and services also face challenges,
including the need to establish and maintain important distribution
relationships. See "Risks That Could Affect Future Results."
Fiscal 1999 Compared to 1998. Consumer Finance Division revenue increased 6%
in fiscal 1999 compared to fiscal 1998. Revenue growth was primarily the result
of increased Internet-based revenues, with significant growth in Quicken.com
advertising and sponsorship revenue, which was partially offset by a decline in
Rock's revenue. Quicken revenue grew approximately 5%. Unit sales increased due
to an earlier product release date in fiscal 1999 compared to fiscal 1998, as
well as a Quicken/TurboTax bundle promotion. However, revenue growth was
negatively impacted by product mix shift towards the lower-priced Quicken Basic
products, the fact that we did not introduce a new Quicken product for the
Macintosh in fiscal 1999, and increased rebate incentives offered to customers
who purchased the Quicken/TurboTax bundle.
International Division. International Division revenues come primarily from
Yayoi and QuickBooks small business products in Japan, QuickBooks, Quicken and
QuickTax products in Canada, QuickBooks, Quicken and consumer tax products in
Europe, and QuickBooks and Quicken products in Southeast Asia.
Fiscal 2000 Compared to Fiscal 1999. International Division revenue for
fiscal 2000 increased 19% compared to fiscal 1999. This increase was a result of
favorable currency fluctuations (particularly in Japan), as well as increased
sales of the Yayoi small business product in Japan, strong tax product sales in
Canada (due in part to our acquisition of the assets of CCH's consumer tax
business) and stronger sales of QuickBooks in the U.K. Results in Germany
partially offset these revenue increases, as we experienced reduced revenue but
increased profitability due to a shift in our business model. We moved from
direct participation in the German market to a third party distribution
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<PAGE> 27
arrangement with Lexware, a leading business software company, under which we
receive royalty payments on sales made by Lexware.
Fiscal 1999 Compared to 1998. Fiscal 1999 International Division revenue
increased approximately 12% compared to fiscal 1998. This increase was
attributable to increased revenues in Canada across all product lines, with
particular strength in our QuickBooks and Quicken product lines. In Germany, we
experienced strong sales due to new releases of our Quicken and QuickBooks
products. Finally, while the overall market for small business products and
services in Japan continued to experience poor economic conditions, our Japan
revenues increased due to higher sales of our Yayoi and QuickBooks product
lines, and more favorable currency exchange rates.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
FISCAL % FISCAL % FISCAL % 1998-1999 1999-2000
1998 REVENUE 1999 REVENUE 2000 REVENUE % CHANGE % CHANGE
------ ------- ------ ------- ------ ------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST OF GOODS SOLD:
Cost of products and services........... $135.7 19.7% $217.5 23.2% $282.4 25.8% 60.3% 29.8%
Amortization (incl. purchased
software)............................. 2.9 0.4% 7.8 0.8% 8.8 0.8% 169.0% 12.8%
Totals:......................... $138.6 20.1% $225.3 24.0% $291.2 26.6% 62.6% 29.2%
</TABLE>
There are two components of our cost of goods sold. The largest 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.
Fiscal 2000 Compared to Fiscal 1999. For fiscal 2000, cost of goods sold
increased to 25.8% of revenue, compared to 23.2% for fiscal 1999. This increase
was primarily attributable to two factors. First, consistent with our growing
Internet-based business, we are experiencing a significant increase in related
hardware and infrastructure costs as we purchase equipment to increase our
Internet capability and capacity. These costs are classified as cost of goods
sold and, as a percentage of revenue, are significantly higher than the cost of
goods sold for our traditional desktop software businesses. These infrastructure
costs tend to reflect the depreciation of capital assets which are generally
expensed evenly over the estimated useful lives of the assets. As a result, cost
of goods sold as a percentage of revenue may fluctuate significantly as costs
become more fixed in nature. Second, our service businesses, such as our payroll
services and QuickBooks Support Network, generally have higher cost of goods
sold compared to our desktop software businesses. As service businesses
contribute a higher proportion of total revenue, we anticipate that our cost of
goods sold will continue to increase.
Fiscal 1999 Compared to Fiscal 1998. Fiscal 1999 cost of goods sold
increased to 23.2% of revenue, compared to 19.7% in fiscal 1998. This increase
was primarily attributable to Internet hardware and infrastructure costs, and
expansion of our service businesses, which have a higher cost of goods sold. See
Fiscal 2000 Compared to Fiscal 1999 above for additional explanation of these
factors. During fiscal 1999, we improved the efficiency of our order-taking
process in the financial supplies business, which reduced re-order expenses and
partially offset the increase in cost of goods sold.
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OPERATING EXPENSES
<TABLE>
<CAPTION>
FISCAL % FISCAL % FISCAL % 1998 - 1999 1999 - 2000
1998 REVENUE 1999 REVENUE 2000 REVENUE % CHANGE % CHANGE
------ ------- ------ ------- ------ ------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Customer service and technical
support............................ $121.9 17.7% $135.2 14.4% $139.6 12.8% 10.9% 3.3%
Selling and marketing................ 196.1 28.4% 222.4 23.6% 264.4 24.2% 13.4% 18.9%
Research and development............. 108.6 15.8% 143.4 15.2% 169.1 15.5% 32.0% 17.9%
General and administrative........... 59.7 8.7% 84.7 9.0% 83.7 7.6% 41.9% (1.2)%
Charge for purchased research and
development........................ 53.8 7.8% 0 0.0% 1.3 0.1% n/a n/a
Other acquisition costs.............. 24.2 3.5% 92.9 9.9% 157.9 14.4% 283.9% 70.0%
Reorganization costs................. 2.0 0.3% 2.0 0.2% 3.5 0.3% 0.0% 75.0%
Totals:...................... $566.3 82.2% $680.6 72.4% $819.5 74.9% 20.2% 20.4%
</TABLE>
Customer Service and Technical Support
Fiscal 2000 Compared to Fiscal 1999. Fiscal 2000 customer service and
technical support expenses were 12.8% of revenue, compared to 14.4% in fiscal
1999. This improvement reflected our May 1999 acquisition of our Premier Payroll
Service business from CRI, which experiences comparatively lower customer
service and technical support expenses as a percentage of revenue. We have also
benefited from our efforts to provide customer service and technical support
less expensively through websites and other electronic means, and from the
expansion of the QuickBooks Support Network and our other fee-for-support
programs.
Fiscal 1999 Compared to Fiscal 1998. Fiscal 1999 customer service and
technical support expenses decreased to 14.4% of revenue, compared to 17.7% in
fiscal 1998. The improvement reflected the continuing benefit from cost
reductions resulting from the restructuring and consolidation of our technical
support facilities in the United States and Europe in fiscal 1997. In addition,
certain costs that were categorized as customer service and technical support
costs in fiscal 1998 were reflected in fiscal 1999 as cost of goods sold for our
expanding fee for support programs.
Selling and Marketing
Fiscal 2000 Compared to Fiscal 1999. Selling and marketing expenses were
approximately 24.2% of revenue in fiscal 2000, compared to 23.6% in fiscal 1999.
Selling and marketing expenses increased for some of our small business products
and services, and well as for our International Division. These increases were
partially offset by decreases in selling and marketing expenses for our payroll
business and QuickenLoans, which we reduced to allow more focus on process
improvements for those businesses.
Fiscal 1999 Compared to Fiscal 1998. Fiscal 1999 selling and marketing
expenses decreased to 23.6% of revenue, compared to 28.4% for fiscal 1998.
However, fiscal 1998 selling and marketing expenses included an expense of $16.2
million related to the AOL agreement that we entered into in February 1998.
Excluding this expense, selling and marketing expenses would have been 26.5% of
revenue for fiscal 1998. The fiscal 1999 decrease in these expenses (net of the
$16.2 million expense associated with the AOL agreement) as a percentage of
revenue was primarily due to our acquisition of Lacerte, which experiences
comparatively lower selling and marketing expenses as a percentage of revenue.
This decrease was partially offset by increased advertising and promotion
expenses for our Quicken and QuickBooks products and the launch of the
QuickBooks Deluxe Payroll Service in October 1998.
Research and Development
Fiscal 2000 Compared to Fiscal 1999. Research and development expenses were
15.5% of revenue for fiscal 2000, compared to 15.2% for fiscal 1999. During
fiscal 2000, our primary research and development efforts were in the Small
Business Division, with significant investments in the QuickBooks Internet
Gateway, Site Solutions and
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the QuickBooks Deluxe payroll service. Fiscal 1999 research and development
efforts were focused on our electronic tax offerings. During fiscal 2001, we
expect to continue significant investments in research and development,
particularly for our emerging Internet-based businesses.
Fiscal 1999 Compared to Fiscal 1998. Research and development expenses
decreased to 15.2% of revenue in fiscal 1999 compared to 15.8% in fiscal 1998.
This decrease was due in part to our acquisition of Lacerte, which experiences
comparatively lower research and development expenses as a percentage of
revenue. The positive impact of the Lacerte results was partially offset by
increased development expenses for our first QuickBooks multi-user product, as
well as several of our Internet based products and services.
General and Administrative
Fiscal 2000 Compared to Fiscal 1999. General and administrative expenses in
fiscal 2000 were approximately 7.6% of revenue, compared to 9.0% for fiscal
1999. The improvement was primarily a result of two factors. First, since
general and administrative expenses tend to be more fixed in nature than other
operating expenses, we have been able to leverage our infrastructure to keep the
growth in these expenses at a lower rate than our revenue growth. Second, fiscal
1999 expenses included a reserve for doubtful accounts of approximately $3
million relating to a financially weak distributor.
Fiscal 1999 Compared to Fiscal 1998. General and administrative expenses
were approximately 9.0% of revenue in fiscal 1999 compared to 8.7% in fiscal
1998, reflecting infrastructure investments and higher expenses related to Rock
during fiscal 1999.
Charge for Purchased Research and Development
Fiscal 2000 Compared to Fiscal 1999. In fiscal 2000, we recorded charges of
$1.3 million for purchased research and development as a result of our Boston
Light and Hutchison acquisitions. In connection with these acquisitions, 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 total value of these projects at the time of the
acquisitions was determined to be approximately $1.3 million and was recorded as
an expense in the first quarter of fiscal 2000. 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. The products related to these charges were completed during
fiscal 2000. We did not incur any charge for purchased research and development
in fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998. In fiscal 1998, we recorded charges of
$53.8 million for purchased research and development relating in-process
research and development for Lacerte, which we acquired in June 1998. We did not
incur any charge for purchased research and development in fiscal 1999.
Other Acquisition Costs
Other acquisition costs include the amortization of goodwill and purchased
intangible assets, as well as deferred compensation expenses arising from
acquisitions.
Fiscal 2000 Compared to Fiscal 1999. Other acquisition costs increased to
$157.9 million in fiscal 2000, compared to $92.9 million in fiscal 1999. The
increase was attributable to the amortization of intangible assets associated
with our acquisitions of CRI in May 1999, of Boston Light, SecureTax and
Hutchison in August 1999, and of Turning Mill Software in November 1999.
Amortization expense related to completed acquisitions will continue to have a
negative impact on our operating results in future periods. Taking into account
the acquisitions we had completed as of July 31, 2000, and assuming we do not
experience any impairment of value of the intangible assets that would require
us to accelerate amortization, amortization will be approximately $148.1 million
in fiscal 2001, $142.8 million in fiscal 2002 and $118.7 million in fiscal 2003.
We completed the acquisition of
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Venture Finance Software Corp. in August 2000, which will result in
approximately $111 million in additional amortization expense in future periods.
See Note 20 of the financial statements. If we complete additional acquisitions
or accelerate amortization in the future, there would be an incremental negative
impact on our operating results. See "Risks That Could Affect Future Results."
Fiscal 1999 Compared to Fiscal 1998. Other acquisition costs increased to
$92.9 million in fiscal 1999, compared to $24.2 million in fiscal 1998. The
increase reflected additional amortization resulting from our acquisitions of
Lacerte in June 1998 and CRI in May 1999.
Reorganization Costs
Fiscal 2000, Fiscal 1999 and Fiscal 1998. Reorganization costs reflect the
costs associated with Rock closing numerous branch offices in Michigan as it
began to transition its mortgage business from a traditional branch-based
business to an online and call center-based business. These costs increased to
$3.5 million for fiscal 2000, compared to $2.0 million in fiscal 1999 and fiscal
1998. See Notes 1 and 16 of the financial statements.
NON-OPERATING INCOME AND EXPENSES
Interest and Other Income and Expense, Net
Fiscal 2000 Compared to Fiscal 1999. In fiscal 2000, interest and other
income and expense, net, increased to $48.5 million, compared to $18.3 million
in fiscal 1999. The increase reflected increased cash and short-term investment
balances resulting primarily from our sales of marketable securities, as well as
increased interest rates. Interest earned on customer payroll deposits and
mortgage loans held for resale, as well as interest expense on lines of credit
used for our mortgage business are reported as, or offset against, revenue, as
appropriate, and are not included in interest and other income.
Fiscal 1999 Compared to Fiscal 1998. In fiscal 1999, interest and other
income and expense, net, increased to $18.3 million, compared to $12.4 million
in fiscal 1998. This reflected increased cash and short-term investment
balances, due in part to sales of marketable securities.
Gains from Marketable Securities and Other Investments, Net
Fiscal 2000, Fiscal 1999 and Fiscal 1998. During fiscal 2000, we recorded
pre-tax net gains relating to marketable securities of $481.1 million, compared
to $579.2 million in fiscal 1999. We did not have any net gains from marketable
securities in fiscal 1998. Our fiscal 2000 net gains resulted primarily from
dispositions of Checkfree, Signio (now VeriSign) and Homestore.com common stock.
Our fiscal 1999 net gains resulted primarily from sales of Excite, Signio and
Concentric common stock, and the gain from converting our Excite common stock to
Excite@Home common stock in connection with At Home Corporation's acquisition of
Excite. We consider our shares of Excite@Home, VeriSign and 724 Solutions common
stock to be trading securities. See Note 1 of the financial statements. As a
result, unrealized gains (or losses) due to market fluctuations in these
securities are included in our net income on a quarterly basis. Recent
volatility in the market has significantly reduced the value of our trading
securities. Market fluctuations for trading securities that we continued to hold
as of July 31, 2000 resulted in a net reduction in pre-tax income of
approximately $97.9 million in fiscal 2000 and approximately $37 million in
fiscal 1999. These amounts are included in the pre-tax net gains of $481.1
million and $579.2 million noted above. We expect this volatility to continue as
long as we hold these securities. If the market value of these securities
declines significantly in the future, it would have a negative impact on our
earnings. See "Risks That Could Affect Future Results."
Gain on Divestiture
In fiscal 1998, we recorded a $4.3 million gain on our August 1997 sale of
Parsons Technology, Inc., a direct marketing consumer software subsidiary.
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Income Taxes
Fiscal 2000, Fiscal 1999 and Fiscal 1998. For fiscal 2000, we recorded an
income tax provision of $207.2 million on a pretax income of $512.7 million,
resulting in an effective tax rate of approximately 40.4%. For fiscal 1999, we
recorded an income tax provision of $245.5 million on pretax income of $632.0
million, resulting in an effective income tax rate of approximately 38.8%. This
compares to an income tax benefit of $5.1 million in fiscal 1998, on income of
$1.1 million.
As of July 31, 2000, we had net deferred tax assets of $134.8 million, which
included a valuation allowance of $11.4 million against net operating loss
carryforwards relating to our international subsidiaries. The allowance reflects
management's assessment that we may not receive the benefit of certain loss
carryforwards of our international subsidiaries. While we believe our current
valuation allowance is sufficient, it may be necessary to increase this amount
if it becomes more likely than not that a greater portion of the net deferred
tax assets will not be realized. We will assess the need for an adjustment to
the valuation allowance on a quarterly basis. See Note 13 of the financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, our cash and cash equivalents totaled $416.9 million, a
$137.2 million decrease from July 31, 1999.
Our operations provided $6.1 million in cash during fiscal 2000. Primary
components of cash from operations were net income of $305.7 million and net
income adjustments made for non-cash expenses such as acquisition charges and
depreciation. These were offset by net gains from the disposition of marketable
securities such as Checkfree, Homestore.com, Excite@Home and Signio Inc., as the
cash impact of these dispositions is reflected in investing activities rather
than operating activities. See Note 1 of the financial statements. We also
experienced a $126.6 million decrease in deferred tax liabilities due primarily
to cash payments made for taxes due from the sale of these securities. Increased
deferred revenue of $41.6 million also contributed to increased cash from
operations, and was driven by agreements related to our Internet-based
businesses entered into during the year under which we receive payments from
third parties prior to the time that we can recognize them as revenue. This was
partially offset by a reduction in acquisition-related liabilities due primarily
to a $25 million installment payment to former shareholders of CRI in connection
with our acquisition of CRI in June 1999.
Investing activities used $202.7 million in cash during fiscal 2000. The
primary use of cash for investing was the net purchase of $709.1 million of
short-term investments, which was roughly offset by proceeds of $681.4 million
from the sale of marketable securities. We also purchased $94.9 million in
property and equipment as a result of our ongoing investment in information
systems and infrastructure for our Internet-based businesses. Our acquisitions
of SecureTax and Hutchison were also paid for with $54.6 million in cash.
Financing activities provided $59.3 million during fiscal 2000, which was
primarily attributable to $90.1 million in proceeds from the exercise of
employee stock options. This was partially offset by a $27.3 million decrease in
the outstanding balance on our warehouse line of credit for our mortgage
business, as we decided to use some of our cash position to significantly reduce
the balance.
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 Excite@Home,
VeriSign and 724 Solutions will impact our earnings. See Note 1 of the financial
statements. If future declines in our other marketable securities are deemed to
be permanent, they will also impact our earnings.
In connection with our acquisition of CRI (see Note 3 of the financial
statements), we are required to pay two additional annual installments of $25
million in each of the next two fiscal years. We also evaluate, on an ongoing
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basis, the merits of acquiring technologies or businesses, or establishing
strategic relationships with and investing in other companies. For example, we
exercised our option to purchase VFSC (see Note 20 of the financial statements)
and paid all of the exercise price of approximately $119 million in cash in
August 2000. In addition, in the normal course of business we enter into leases
for new or expanded facilities in both domestic and international locations. We
expect to use cash and cash equivalents to partially or fully fund these types
activities in the future, which could have a negative impact on our liquidity in
future periods.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 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 in the balance sheet and measure those instruments at fair value.
It further provides criteria for derivative instruments to be designated as 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, the impact of applying SFAS 133 was
immaterial.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"), and amended it in March and June 2000. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements for
all public registrants. Changes in our revenue recognition policy, if any,
resulting from the interpretation of SAB 101 would be reported as a change in
accounting principle. We are currently reviewing the impact of SAB 101 on our
previously reported results of operations and anticipate that we will adopt SAB
101 during the fourth quarter of fiscal 2001.
In March 2000, FASB issued FASB Interpretation 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion 25
("FIN 44"). FIN 44 applies prospectively to new stock option awards, exchanges
of awards in a business combination, modifications to outstanding awards, and
changes in grantee status that occur on or after July 1, 2000. Although we are
still in the process of analyzing the impact of FIN 44, if any, on our
consolidated statements and related disclosures, we do not expect a material
impact on our historically reported financial position or results of operations.
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 10K.
COMPANY-WIDE FACTORS 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 and gains and losses related to marketable
securities 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 and $168.1 million in
fiscal 2000. Additional acquisitions (including our acquisition of Venture
Finance Software Corp. in August 2000)
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and any premature impairment of the value of purchased assets, could have a
significant negative impact on future operating results. Our investment
activities also impact our net income. We recorded pre-tax gains and losses from
marketable securities and other investments of $579.2 million in fiscal 1999 and
$481.1 in fiscal 2000. These amounts reflect net realized gains on sales of
certain marketable securities during fiscal 1999 and 2000, as well as unrealized
quarter-to-quarter gains and losses due to price fluctuations in securities that
we account for as "trading securities." Fiscal 2000 decreases in the market
prices of our trading securities resulted in a significant reduction in our
pre-tax income, and 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.
If we do not continue to successfully develop new products and services in a
timely manner, our future financial results would suffer. The development of
products and services is a complex process involving several risks. Hiring and
retaining highly qualified technical employees is critical to the success of our
development efforts, and we face intense competition for these employees.
Launches of products and services can be delayed for a variety of reasons.
Products and services may also have "bugs" that hinder performance, give
customers incorrect results and/or damage customer data. These problems can be
expensive to fix and can also result in higher technical support costs and lost
customers.
We face intense competition for qualified employees, especially for our
Internet-based businesses. Like many of our competitors, we have had
difficulties during the past few years in hiring and retaining employees, and we
expect to face continuing challenges in recruiting and retention.
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 shipments
are delayed. This can adversely affect customer relationships and our financial
performance. For example, during fiscal 2000, some small business customers
(particularly QuickBooks Support Network and payroll services customers)
experienced inconsistent service levels and delays that led to some negative
press attention. 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.
We face risks relating to customer privacy and security and increasing
regulation, which could hinder the growth of our businesses -- particularly our
Internet-based businesses. Despite our efforts to address customer concerns
about privacy and security, these issues still pose a significant risk, and we
have experienced lawsuits and negative publicity relating to privacy issues. For
example, during fiscal 2000, there have been articles criticizing our privacy
practices as they relate to the connectivity of our desktop software to our web
sites. We have faced lawsuits and negative press alleging that we improperly
shared information about customers with third party "ad servers" for our web
sites. A major breach of customer privacy or security by Intuit, or even by
another company, could have serious consequences for our
businesses -- particularly our Internet businesses -- including reduced customer
interest and/or additional regulation by federal or state agencies. In addition,
mandatory privacy and security standards and protocols are still being developed
by government agencies, and we may incur significant expenses to comply with any
requirements that are ultimately adopted. For example, under the Gramm Leach
Bliley Act recently adopted by the federal government, by July 1, 2001 Intuit
will be required to provide written notice of its privacy practices to all
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.
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We face increasing challenges in maintaining adequate access to retail
distribution channels. During the past several years, consolidation among
retailers caused a number of large retailers and mass merchandisers to hold
significant bargaining power. This has made it challenging for us to negotiate
financially favorable terms with retailers. Any termination or significant
disruption of our relationship with any of our major distributors or retailers,
or a significant unanticipated reduction in sales volume attributable to any of
our principal resellers, could result in a significant decline in our net
revenue. Also, any financial difficulties of our retailers or distributors could
have an adverse effect on our operating expenses if uncollectable amounts from
them exceed the bad debt reserves we have established.
We rely on a single third party vendor to handle all outsourced aspects of
our primary retail desktop software product launches. While we believe that
using a single outsourcer for our primary retail product launches improves the
efficiency and reliability of our product launches, reliance on one vendor can
have severe negative consequences if the vendor fails to perform for any reason.
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.
Our recent acquisitions have resulted in business integration
challenges. Our recent acquisitions have expanded our product and service
offerings, personnel and geographic locations. Integrating and organizing
acquired businesses creates challenges for our operational, financial and
management information systems. If we do not adequately address issues presented
by growth through acquisitions, we may not fully realize the intended benefits
(including financial benefits) of these acquisitions.
We face existing and potential government regulation in many of our
businesses, which can increase our costs and hinder the growth of our
businesses. Our Internet-based products and services are available in many
states and foreign countries. As a result, we may be subject to regulation
and/or taxation in many additional jurisdictions, which could substantially slow
commercial use of the Internet and growth of our Internet-based businesses. We
offer several regulated products and services through separate subsidiary
corporations. Establishing and maintaining regulated subsidiaries requires
significant financial, legal and management resources. If the subsidiaries fail
to comply with applicable regulations, they could face liability to customers
and/or penalties and sanctions by government regulators.
Legal protection for our intellectual property is not always effective to
prevent unauthorized use. We rely on a combination of copyright, patent,
trademark and trade secret laws, and employee and third-party nondisclosure and
license agreements, to protect our software products and other proprietary
technology. We do not have significant copy-protection mechanisms in our
software because we do not believe they are practical or effective at this time.
Current U.S. laws that prohibit copying give us only limited practical
protection from software "pirates," and the laws of many other countries provide
very little protection. Policing unauthorized use of our products is difficult,
expensive and time-consuming and we expect that software piracy will be a
persistent problem for our desktop software products. In addition, the unique
technology of the Internet may tend to increase, and provide new methods for,
illegal copying of the technology used in our desktop and Internet-based
products and services.
We do not own all of the software and other technologies used in our
products and service. We have the licenses from third parties that we believe
are necessary for using technology that we do not own in our current products
and services. It may be necessary to renegotiate with these third parties for
inclusion of their technology in any new versions of our current products or in
new products. Third party licenses may not be available on
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reasonable terms, or at all. Other parties occasionally claim that features or
content of our products, or our use of trademarks, may infringe their propriety
rights. Past claims have not resulted in any significant litigation, settlement
or licensing expenses, but future claims could. Third parties may assert
infringement claims against us in the future, and claims could result in costly
litigation, require us to redesign one or more of our products or services, or
require us to obtain a license to intellectual property rights of third parties
or perhaps to cease marketing affected products and services. Third party
licenses may not be available on reasonable terms, or at all.
The stock market has experienced price volatility that has particularly
affected technology companies. These market fluctuations have adversely affected
our stock price in the past and may do so in the future. Some of the volatility
has resulted from factors such as the seasonality and quarterly fluctuations in
our revenue and operating results, announcements of technical innovations,
acquisitions or strategic relationships by Intuit or its competitors, changes in
earnings estimates by analysts and changes in market conditions in the computer
hardware and software industries. However, volatility may also be unrelated to
our operating performance or the business environment in which we operate.
FACTORS RELATING TO COMPETITION
We face competitive pressures in all of our businesses, which can have a
negative impact on our revenue, profitability and market position. In all our
businesses, we face continual risks that competitors will introduce better
products and services, reduce prices, gain better access to distribution
channels, increase advertising (including advertising targeted at Intuit
customers), and release new products and services before we do. Any of these
competitive actions (particularly any prolonged price competition) could result
in lower net revenue and/or lower profitability for Intuit. They could also
affect our ability to keep existing customers and acquire new customers, which
is particularly important for our Internet-based products and services.
In the small business area, we face a wide range of competitive risks that
could impact our financial results. For example, in online payroll, the
competitive landscape is changing quickly and we could lose some competitive
advantage if other companies begin offering online payroll services that
integrate with desktop and/or web-based accounting software. As another example,
our financial supplies business continues to experience pricing pressures from
many of our competitors. While we have been able to offset some of the impact of
price competition by improving operational efficiencies and customer service,
ongoing price pressures could result in lower revenue and profitability for our
supplies business.
Intense competition in the consumer tax preparation software business has
caused us to reduce prices, which has impacted our revenue, profitability and
competitive position. During the recent tax season we reduced prices for our
Quicken TurboTax product line in response to aggressive pricing by H&R Block and
Microsoft. This resulted in significantly lower average selling prices. Although
Microsoft ultimately withdrew from the desktop consumer tax preparation software
segment this season, they may offer competitive products and services, either
directly or indirectly, on the desktop and/or via the web, in future tax
seasons. In addition, there are other 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 fiscal 2001.
Our consumer finance products face aggressive competition that could limit
future growth. Our Quicken products compete directly with Microsoft Money, which
is aggressively promoted and priced. We expect competitive pressures for Quicken
to continue, both from Microsoft Money, and from web-based personal finance
tracking and management tools that are becoming increasingly available at no
cost to consumers. These pressures could ultimately result in a decline in
revenue and profitability for our Quicken product line. There are many
competitors for our Internet-based consumer finance products and services. The
number of competitors has increased in recent years as more companies expand
their businesses onto the Internet. However, we expect that the general downturn
35
<PAGE> 36
in Internet and technology stocks since March 2000 will result in significant
consolidation, with fewer, but more financially sound, competitors surviving.
This could make it more difficult for us to compete effectively.
Products and services offered to consumers by government agencies may
increasingly overlap with products and services offered by Intuit and others in
the private sector, and could have a significant negative impact on our future
financial results. Government agencies are increasingly using public funds to
offer commercial products and services to consumers that are duplicative of
those provided by private sector companies, including Intuit. For example, some
federal and state tax agencies have begun to expand their mission by offering
individual taxpayers electronic tax preparation and filing services similar to
those currently offered by Intuit and others at a low cost. In addition, a
growing number of firms are providing web-based tax filing services at no cost
to lower income taxpayers through "Digital Divide" public service initiatives,
such as Intuit's Quicken Tax Freedom Project, offering additional competition.
Another example of the trend for government agencies to provide private sector
products and services is the U.S. Postal Service's offering of electronic bill
payment services to consumers. Although some governmental agencies have begun
taking steps to reverse this trend by abandoning previous plans to provide
electronic commerce products and services, future administrative, regulatory or
legislative activity in this area could adversely impact Intuit and other
companies that provide software and electronic financial services. Intuit is
actively working with others in the private sector, as well as with federal and
state government officials, to help clarify the appropriate role for government
agencies in the electronic commerce marketplace.
FACTORS AFFECTING OUR INTERNET-BASED BUSINESSES GENERALLY
If we do not continue to successfully refine and update the business models
for our Internet -- based products and services, and operationally support these
businesses, the businesses will not achieve sustainable financial viability or
broad customer acceptance. Our Internet-based business models have more complex
and varied revenue streams than our traditional desktop software businesses. For
these businesses to become and remain economically viable, we must continually
refine their revenue models to reflect the evolving economics of Internet
commerce. 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
continue to effectively handle extremely heavy customer demand during the peak
tax season. If we are unable to meet customer expectations in a cost-effective
manner, it could result in lost customers, negative publicity, and increased
operating costs, which could have a significant negative impact on the financial
and market success of these businesses.
The market pressure to launch Internet-based products and services quickly
may lead to lower product quality. The development process for Internet-based
products is more rapid, less predictable, and shorter than for our desktop
products. Getting Internet-based products and services launched quickly is
crucial to competitive success, but this time pressure may result in lower
product quality, dissatisfied customers and negative publicity, as well as
additional expenses to fix bugs.
SPECIFIC FACTORS AFFECTING OUR SMALL BUSINESS DIVISION
If we cannot fully and successfully implement all announced QuickBooks
Internet Gateway Services in a timely fashion, we may be unable to sustain these
services as a successful business. Development of some of the announced
QuickBooks Internet Gateway services has not yet been completed. Intuit and the
third-party service providers of these services could face technological
difficulties, financial difficulties and other problems that could delay or
prevent implementation of the QuickBooks Internet Gateway Services, which in
turn could delay or prevent us from recognizing contractually committed revenues
to the extent that recognition of such revenue depends on implementation with
the customer.
If our recently introduced QuickBooks Internet Gateway services do not
achieve and maintain acceptance by customers and the third-party vendors who
provide these services, they will not generate long-term revenue
36
<PAGE> 37
growth or profitability. We must meet customer and vendor expectations in
delivering our QuickBooks Internet Gateway services. If we do not meet these
expectations, we may not be able to maintain the third party vendor
relationships that are necessary to allow us to provide services desired by
customers. If we fail to meet expectations and maintain these relationships, our
ability to expand our QuickBooks Internet Gateway services will be jeopardized.
To retain these 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. Customer upgrade rates to QuickBooks 2000 have been lower than
historical upgrade levels, which has impacted the growth of the potential
customer base for these services.
In order to expand our customer base in the payroll services business, we
must continue to improve the efficiency and effectiveness of our payroll
processing operations and streamline customer activations for our Deluxe online
payroll processing service. The payroll processing business involves a number of
business risks if we make errors in providing accurate and timely payroll
information, cash deposits or tax return filings, including our incurring
liability to customers, additional expense to correct product errors and loss of
customers. For our Internet-based services (the Deluxe service, as well as the
online Basic service), we must improve our operations to give customers more
reliable connectivity to our data center to transmit and receive payroll data
and tax tables. In order to expand the customer base for our Deluxe payroll
service, we must continue to focus on streamlining the service activation
process for new customers.
Our financial supplies business relies on a single vendor to print all check
and other imprinted products. The products provided by this vendor accounted for
about 75% of our supplies revenue in fiscal 1999 and 2000. If there are any
problems with the vendor's performance, it could have a material negative impact
on sales of supplies and on Intuit as a whole.
SPECIFIC FACTORS AFFECTING OUR TAX DIVISION
Intense competition in the consumer tax preparation software business has
caused us to reduce prices, which has impacted our revenue, profitability and
competitive position. During the recent tax season we reduced prices for our
Quicken TurboTax product line in response to aggressive pricing by H&R Block and
Microsoft. This resulted in significantly lower average selling prices. Although
Microsoft ultimately withdrew from the desktop consumer tax preparation software
segment this season, they may offer competitive products and services, either
directly or indirectly, on the desktop and/or via the web, in future tax
seasons. In addition, there are other 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 fiscal 2001.
Significant problems or delays in the development of our tax products would
result in lost revenue and customers. The development of tax preparation
software presents a unique challenge because of the demanding annual development
cycle required to incorporate unpredictable tax law changes each year. The rigid
development timetable increases the risk of errors in the products and the risk
of launch delays. Any major defects could lead to negative publicity, customer
dissatisfaction and incremental operating expenses -- including expenses
resulting from our commitment to reimburse penalties and interest paid by
consumer customers due solely to calculation errors in our products. A late
product launch could cause our current and prospective customers to choose a
competitor's product for that year's tax season. This would result in lost
revenue in the current year and would make it more difficult for us to sell our
products to those customers in future tax seasons.
37
<PAGE> 38
SPECIFIC FACTORS AFFECTING OUR CONSUMER FINANCE DIVISION
The long-term viability of Quicken.com and our other Internet-based personal
finance services will depend on our ability to increase our customer base as
quickly as possible, get greater participation by financial institutions, and
expand the depth and breadth of our offerings in order to differentiate
ourselves from other Internet-based personal finance service providers. Growth
in customers and traffic is crucial for our Quicken.com site and its ability to
generate advertising revenue, but traffic can vary significantly from month to
month due to seasonal trends, site performance, performance of the major stock
market indices and other factors. Monthly Quicken.com page views have varied
dramatically over the past year, from approximately 150 million in July 1999, to
a peak of over 300 million in March 2000, back down to slightly under 200
million in July 2000. Continued expansion and customer use of Quicken.com and
our other personal finance websites will require us to improve site performance,
and the scalability and reliability of the underlying technology, to reduce the
length and frequency of service interruptions. It will also require us to
establish and maintain relationships with key Internet portals, distributors and
content providers, and our distribution relationships require us to make
significant financial commitments to these companies. For example, our agreement
with Excite@Home currently calls for us to share certain revenue generated from
our Quicken.com site and our agreement with America Online calls for us to make
significant guaranteed payments to America Online over the term of the
agreement. Due to the constantly evolving business environment in which we
operate, and the changing priorities and economic circumstances of Intuit and
our business allies, we may be required to adapt some of our relationships in
ways that are less attractive to us (financially or otherwise) in order to
continue benefiting from those relationships. Adding more high-quality content
is also crucial to our efforts to continue expanding our Quicken.com customer
base and to differentiate our site from other personal finance sites. This may
require us to invest significant resources in research and development,
strategic relationships and/or acquisitions.
Our mortgage business is subject to interest rate fluctuations and
operational risks that could result in further revenue declines. Increases in
mortgage rates and other interest rates have adversely affected our mortgage
business, contributing to the significant revenue decline from fiscal 1999 to
fiscal 2000. If mortgage interest rates continue to rise, this may continue to
impact the volume of closed loans and applications -- particularly our most
interest-rate sensitive products such as conventional loans and refinancing
loans. FHA loans and home purchase mortgages tend to be less mortgage-rate
sensitive. Fluctuations in non-mortgage interest rates also create risks with
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 do so, it could
have a negative impact on our mortgage business and on Intuit's financial
results.
The viability of electronic bill management services will require widespread
consumer and biller adoption, which may still be years away. The financial
success of our bill management services will depend on a number of factors,
including timely and cost-effective completion of ongoing development efforts,
and adoption and participation rates by customers and financial institutions,
including billers. We have not yet completed our development efforts for
electronic bill payment and presentment services, and widespread consumer and
biller adoption may still be years away. Failure of consumers and billers to
widely adopt electronic bill payment and presentment would have a material
negative effect on our business.
SPECIFIC FACTORS AFFECTING OUR INTERNATIONAL DIVISION
Business conditions in international markets, other risks inherent in
international operations, and changes in our business model in Europe, may
negatively impact our financial performance. Conducting business internationally
involves many risks, including potential volatility in the political and
economic conditions of foreign
38
<PAGE> 39
countries; difficulties in managing operations in different locations (including
hiring and retaining management personnel); a product development process that
is often more time-consuming and costly than in the U.S. due in part to
"localization" requirements; fluctuations in foreign currency exchange rates;
and unanticipated changes in foreign regulatory requirements. For example, the
economic situation in Japan had a negative impact on international revenue and
profits during fiscal 1998 and 1999. We experienced product launch delays in
Germany in fiscal 1998 and fiscal 1999, which contributed to revenue declines in
certain quarters. In addition, the shift in our business model in Germany has
led to declining revenues for us in the markets served by our partner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet quality
standards consistent with our investment policy. This policy dictates that we
diversify our holdings and limit our short-term investments to a maximum of $5
million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less. The following table of our short-term
investments portfolio is classified by the maturity date listed on the security:
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
<TABLE>
<CAPTION>
YEARS ENDING JULY 31, FAIR VALUE
----------------------------------------------------- JULY 31,
2000 2001 2002 2003 2004 TOTAL 2000
-------- -------- ------- ------ -------- ---------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Equivalents.................. $412,655 -- -- -- -- $ 412,655 $ 412,597
Average Interest Rate........... 5.36% 5.36%
Investments....................... $182,801 $157,309 $13,039 $3,872 $693,199 $1,050,220 $1,050,397
Average Interest Rate........... 4.97% 5.14% 4.42% 4.36% 4.40% 4.61%
Total Portfolio................... $595,456 $157,309 $13,039 $3,872 $693,199 $1,462,875 $1,462,994
Average Interest Rate........... 5.24% 5.14% 4.42% 4.36% 4.40% 4.82%
</TABLE>
MARKETABLE SECURITIES
We carried significant balances in marketable equity securities as of July
31, 2000. These securities are subject to considerable market risk due to their
volatility. Fluctuations in the carrying value of our shares of Excite@Home,
VeriSign and 724 Solutions will have an immediate impact on our earnings because
we report these shares as trading securities. See Note 1 of the financial
statement notes for more information regarding risks related to our investments
in marketable securities 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
39
<PAGE> 40
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.
The following table shows the maturity of our mortgage loans and home equity
lines of credit:
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE(1)
PERIOD ENDING JULY 31, FAIR VALUE
--------------------------------------- JULY 31,
2000 2001 2002 2003 2004 TOTAL 2000
------- ---- ---- ---- ---- ------- ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Mortgage Loans..................................... $60,330 -- -- -- -- $60,330 $62,247
Average Interest Rate............................ 10.05% 10.05%
LIABILITIES:
Lines of Credit.................................... $ 2,580 -- -- -- -- $ 2,580 $ 2,600
Average Interest Rate............................ 7.42% 7.42%
</TABLE>
---------------
(1) In the ordinary course of our mortgage business, expected maturity is based
on the assumption that loans will be re-sold in the indicated period.
Based on the carrying values of our mortgage loans and lines of credit that
we held at July 31, 2000, 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 5 of the financial statement notes for
more information regarding risks related to our mortgage loans and lines of
credit.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
The currencies of our subsidiaries have remained essentially stable since
the end of our 1999 fiscal year, except for the Japanese yen, which strengthened
during fiscal 2000. Because we translate foreign currencies into U.S. dollars
for reporting purposes, currency fluctuations can have an impact, though
generally immaterial, on our results. We believe that our exposure to currency
exchange fluctuation risk is insignificant primarily because our international
subsidiaries invoice customers and satisfy their financial obligations almost
exclusively in their local currencies. For fiscal 2000, there was an immaterial
currency exchange impact from our intercompany transactions. Currency exchange
risk is also minimized since foreign debt is due almost exclusively in local
foreign currencies. As of July 31, 2000, we did not engage in foreign currency
hedging activities.
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<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INTUIT INC.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, independent auditors........... 42
Report of KPMG LLP, independent auditors.................... 43
Consolidated Balance Sheets as of July 31, 1999 and 2000.... 44
Consolidated Statements of Operations for the three years
ended July 31, 2000....................................... 45
Consolidated Statements of Stockholders' Equity for the
three years ended July 31, 2000........................... 46
Consolidated Statements of Cash Flows for the three years
ended July 31, 2000....................................... 47
Notes to Consolidated Financial Statements.................. 48
</TABLE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this report
and should be read in conjunction with the Consolidated Financial Statements:
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<C> <S> <C>
II Valuation and Qualifying Accounts........................... 73
</TABLE>
41
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Intuit Inc.
We have audited the accompanying consolidated balance sheets of Intuit Inc.
as of July 31, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the 1998 financial statements of Rock Financial
Corporation, a wholly owned subsidiary, which statements reflect total revenues
constituting $89,762,000 of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Rock Financial Corporation,
is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and, for 1998, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Intuit
Inc. at July 31, 1999 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
August 22, 2000
42
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Rock Financial Corporation:
We have audited the statements of income, stockholders' equity, and cash
flows of Rock Financial Corporation (the "Corporation") for the year ended
December 31, 1998. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the Corporation's operations and its
cash flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the financial statements, the Corporation changed
its method of accounting for software developed for internal use to adopt the
provisions of the American Institute of Certified Public Accountants' Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" in 1998.
KPMG LLP
Detroit, Michigan
January 28, 1999
43
<PAGE> 44
INTUIT INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT
PAR VALUE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 554,230 $ 416,953
Short-term investments.................................... 305,125 1,050,220
Marketable securities..................................... 431,319 225,878
Customer deposits......................................... 145,836 181,678
Accounts receivable, net of allowance for doubtful
accounts of $12,420 and $9,018, respectively............ 63,677 67,420
Mortgage loans............................................ 84,983 60,330
Deferred income taxes..................................... 64,925 95,777
Prepaid expenses and other current assets (1)............. 71,361 30,538
---------- ----------
Total current assets................................ 1,721,456 2,128,794
Property and equipment, net............................... 119,220 167,707
Goodwill, net............................................. 383,102 358,890
Purchased intangibles, net................................ 98,049 79,988
Long-term deferred income taxes........................... 64,575 92,985
Investments............................................... 45,704 31,160
Restricted investments.................................... 36,028 --
Loans due from affiliates................................. 1,429 6,464
Other assets.............................................. 7,897 12,914
---------- ----------
Total assets........................................ $2,477,460 $2,878,902
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................... $ 29,896 $ 2,580
Accounts payable.......................................... 66,436 79,145
Accrued compensation and related liabilities.............. 39,996 49,303
Payroll tax obligations................................... 131,148 177,002
Escrow liabilities........................................ 14,857 5,899
Drafts payable............................................ 49,169 23,598
Deferred revenue.......................................... 65,994 107,578
Income taxes payable...................................... 143,181 110,743
Short-term note payable................................... -- 34,286
Deferred income taxes..................................... 136,694 53,934
Other accrued liabilities................................. 201,872 162,769
---------- ----------
Total current liabilities........................... 879,243 806,837
Long-term obligations....................................... 36,614 538
Minority interest........................................... 215 238
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized -- 1,345 shares total; 145 shares designated
Series A; 250 shares designated Series B Junior
Participating
Issued and outstanding -- none............................ -- --
Common stock, $0.01 par value
Authorized -- 750,000 shares
Issued and outstanding -- 196,349 and 204,300 shares,
respectively............................................ 1,963 2,043
Additional paid-in capital................................ 1,265,114 1,519,516
Deferred compensation..................................... -- (26,522)
Accumulated other comprehensive income, net of taxes of
$66,300 and $15,373, respectively....................... 79,144 55,586
Retained earnings......................................... 215,167 520,666
---------- ----------
Total stockholders' equity.......................... 1,561,388 2,071,289
---------- ----------
Total liabilities and stockholders' equity.......... $2,477,460 $2,878,902
========== ==========
</TABLE>
---------------
(1) Includes $6.7 million and $7.2 million notes receivable from Venture Finance
Software Corp. as of July 31, 1999 and 2000, respectively, see Note 20 of
the financial statements.
See accompanying notes.
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<PAGE> 45
INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
1998 1999 2000
--------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenue................................................. $689,282 $940,435 $1,093,825
Costs and expenses:
Cost of goods sold:
Product and service..................................... 135,656 217,463 282,385
Amortization of purchased software and other............ 2,905 7,775 8,798
Customer service and technical support.................... 121,947 135,172 139,550
Selling and marketing..................................... 196,127 222,450 264,367
Research and development.................................. 108,604 143,437 169,083
General and administrative................................ 59,698 84,655 83,745
Charge for purchased research and development............. 53,800 -- 1,312
Other acquisition costs, including amortization of
goodwill and purchased intangibles...................... 24,204 92,917 153,929
Acquisition related deferred compensation................. -- -- 4,019
Reorganization costs...................................... 2,000 2,000 3,500
-------- -------- ----------
Total costs and expenses............................ 704,941 905,869 1,110,688
-------- -------- ----------
Income (loss) from operations....................... (15,659) 34,566 (16,863)
Interest and other income and expense, net.................. 12,438 18,252 48,443
Gains on marketable securities and other investments, net... -- 579,211 481,130
Gain on disposal of business................................ 4,321 -- --
-------- -------- ----------
Income before income taxes and minority interests........... 1,100 632,029 512,710
Provision (benefit) for income taxes........................ (5,082) 245,550 207,184
-------- -------- ----------
Income before minority interests............................ 6,182 386,479 305,526
Minority interest........................................... -- (85) (135)
-------- -------- ----------
Net income.................................................. $ 6,182 $386,564 $ 305,661
======== ======== ==========
Basic net income per share.................................. $ 0.04 $ 2.02 $ 1.52
======== ======== ==========
Shares used in basic net income per share amounts........... 157,147 190,927 200,770
======== ======== ==========
Diluted net income per share................................ $ 0.04 $ 1.93 $ 1.45
======== ======== ==========
Shares used in diluted net income per share amounts......... 163,891 199,816 211,271
======== ======== ==========
</TABLE>
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL
-------------------- PAID-IN DEFERRED COMPREHENSIVE EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INCOME (DEFICIT) EQUITY
----------- ------ ---------- ------------ ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1997 as
reported.......................... 140,826,324 1,408 557,452 -- 19,432 (163,231) 415,061
Adjustment due to pooling of
interests......................... 5,811,429 58 1,767 -- -- 13,693 15,518
----------- ------ ---------- -------- --------- --------- ----------
Balance at August 1, 1997.......... 146,637,753 1,466 559,219 -- 19,432 (149,538) 430,579
Comprehensive income (loss):
Unrealized gains on marketable
securities...................... 160,403
Foreign currency translation
adjustments..................... 2,767
---------
Total comprehensive income, net of
tax............................. 163,170 163,170
Issuance of common stock upon
exercise of options and other..... 7,003,001 70 42,774 -- -- -- 42,844
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 443,928 4 3,755 -- -- -- 3,759
Issuance of common stock pursuant
to public offering................ 32,029,122 321 486,774 -- -- -- 487,095
Distribution to S corporation
shareholders in connection with
conversion to C corp.............. -- -- (6,755) -- -- (12,029) (18,784)
Repurchase of common shares........ (141,479) (1) (1,307) -- -- -- (1,308)
Stockholder distributions.......... -- -- -- -- -- (7,188) (7,188)
Tax benefit from employee stock
option transactions............... -- -- 21,594 -- -- -- 21,594
Net income......................... -- -- -- -- -- 6,183 6,183
----------- ------ ---------- -------- --------- --------- ----------
Balance at July 31, 1998........... 185,972,325 1,860 1,106,054 -- 182,602 (162,572) 1,127,944
Comprehensive income (loss):
Unrealized (losses) on marketable
securities...................... (99,450)
Foreign currency translation
adjustments..................... (4,008)
---------
Total comprehensive loss, net of
tax............................. (103,458) (103,458)
Issuance of common stock upon
exercise of options and other..... 9,113,204 91 71,796 -- -- -- 71,887
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 396,546 4 6,323 -- -- -- 6,327
Issuance of common stock pursuant
to acquisition.................... 866,449 8 22,791 -- -- -- 22,799
Stockholder distributions.......... -- -- -- -- -- (1,049) (1,049)
Tax benefit from employee stock
option transactions............... -- -- 58,150 -- -- -- 58,150
Adjustment due to acquisitions
accounted for as a pooling of
interests......................... -- -- -- -- -- (7,776) (7,776)
Net income......................... -- -- -- -- -- 386,564 386,564
----------- ------ ---------- -------- --------- --------- ----------
Balance at July 31, 1999........... 196,348,524 1,963 1,265,114 -- 79,144 215,167 1,561,388
Comprehensive income (loss):
Unrealized losses on marketable
securities...................... (23,060)
Foreign currency translation
adjustments..................... (498)
---------
Total comprehensive loss, net of
tax............................. (23,558) (23,558)
Issuance of common stock upon
exercise of options and other..... 6,651,953 67 80,296 -- -- -- 80,363
Issuance of restricted common
stock............................. 225,000 2 15,202 (15,202) -- -- 2
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 355,281 4 9,771 -- -- -- 9,775
Issuance of common stock pursuant
to acquisitions................... 719,197 7 55,618 (16,605) -- -- 39,020
Tax benefit from employee stock
option transactions............... -- -- 93,515 -- -- -- 93,515
Amortization of deferred
compensation...................... -- -- -- 5,285 -- -- 5,285
Stockholder distributions.......... -- -- -- -- -- (162) (162)
Net income......................... -- -- -- -- -- 305,661 305,661
----------- ------ ---------- -------- --------- --------- ----------
Balance at July 31, 2000........... 204,299,955 $2,043 $1,519,516 ($26,522) $ 55,586 $ 520,666 $2,071,289
=========== ====== ========== ======== ========= ========= ==========
</TABLE>
See accompanying notes.
46
<PAGE> 47
INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------
1998 1999 2000
--------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,182 $386,564 $ 305,661
Adjustment to retained earnings due to acquisitions
accounted for as a pooling of interests................. (7,776)
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on disposal of business, net of tax................ (1,621) -- --
Net gain from marketable securities and investments..... -- (579,211) (481,130)
Gain on sale of facility................................ (1,404) -- --
Minority interest....................................... -- (85) (135)
Charge for purchased research and development........... 53,800 -- 1,312
Amortization of acquisition related costs............... 24,330 100,692 166,746
Depreciation............................................ 31,246 41,971 46,458
Provision for credit losses............................. 568 684 --
Deferred income tax benefit............................. (36,485) (14,742) (140,368)
Tax benefit from employee stock options................. 21,594 58,150 93,515
Changes in operating assets and liabilities:
Accounts receivable..................................... (17,026) (3,011) (3,643)
Prepaid and other current assets........................ (14,815) (33,825) 32,453
Drafts payable.......................................... 22,146 5,148 (25,571)
Escrow liabilities...................................... -- (34) (8,958)
Accounts payable........................................ 10,008 16,253 12,655
Accrued compensation and related liabilities............ 1,403 12,861 9,142
Deferred revenue........................................ 6,320 7,434 41,584
Other accrued liabilities............................... 18,083 11,698 (49,722)
Mortgage loans.......................................... (37,856) 73,373 24,653
Income taxes payable.................................... (8,508) 72,567 (18,588)
--------- -------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 77,965 148,711 6,064
--------- -------- -----------
Cash flows from investing activities:
Proceeds from sale of fixed assets and real estate owned.... 9,170 -- --
Purchase of property and equipment.......................... (39,948) (81,308) (94,944)
Sale of marketable securities............................... -- 531,426 681,388
Purchase of marketable securities........................... (93) (50,050) (18,800)
Liquidation and maturity of short-term investments.......... 213,176 278,636 1,346,993
Purchase of short-term investments.......................... (293,306) (346,574) (2,056,060)
Acquisitions and dispositions, net of cash acquired......... (350,288) (117,608) (41,987)
Increase in other assets.................................... (1,276) (6,977) (17,614)
Stockholder repayments...................................... 665 994 --
Purchase of long-term investments, net...................... (17,009) (28,164) (1,656)
--------- -------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... (478,909) 180,375 (202,680)
--------- -------- -----------
Cash flows from financing activities:
Net borrowings under warehouse line of credit............... 18,714 (68,112) (27,316)
Net payments under reverse repurchase agreement............. (6,640) (11,521) --
Principal payments on long-term debt........................ (6,580) (21) (3,323)
Stockholder distributions................................... (25,974) (1,464) (162)
Net proceeds from issuance of common stock, net of
purchases................................................. 532,358 136,397 90,140
--------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 511,878 55,279 59,339
--------- -------- -----------
Net increase (decrease) in cash and cash equivalents........ 110,934 384,365 (137,277)
Cash and cash equivalents at beginning of period............ 58,931 169,865 554,230
--------- -------- -----------
Cash and cash equivalents at end of period.................. $ 169,865 $554,230 $ 416,953
========= ======== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 7,486 $ 2,650 $ 2,554
========= ======== ===========
Income taxes paid........................................... $ 6,054 $ 66,005 $ 270,271
========= ======== ===========
</TABLE>
See accompanying notes.
47
<PAGE> 48
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting and
management, tax preparation and consumer finance desktop software products,
financial supplies (such as computer checks, envelopes and invoices), and
Internet-based products and services for individuals and small businesses. Our
products and services are designed to automate commonly performed financial
tasks and to simplify the way individuals and small businesses manage their
finances and businesses. We sell our products and services throughout North
America and in many international markets. Sales are made primarily through
retail and OEM distribution channels, traditional direct sales to customers and
via the Internet.
Basis of Presentation
The consolidated financial statements include the financial statements of
Intuit and its wholly owned subsidiaries. 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.
As discussed in Note 3, in December, 1999, we acquired all of the
outstanding stock of Rock Financial Corporation, a provider of consumer
mortgages, based in Michigan and Title Source Inc. ("Title Source"), a title
insurance and escrow company affiliated with Rock, in exchange for the issuance
of common shares of Intuit stock. Rock subsequently changed its name to Quicken
Loans Inc. These acquisitions have been accounted for as poolings of interests
in accordance with Accounting Principles Board 16 ("APB 16") and accordingly,
the consolidated financial statements, including the related notes, have been
restated as of the earliest period presented to include the results of
operations, financial position and cash flows of the above pooled entities.
Intuit reports its financial results on a July 31 fiscal year-end basis,
whereas Rock and Title Source reported their financial results on a December 31
calendar year-end basis prior to the acquisitions. For the purpose of pooling of
interests accounting, Rock and Title Source changed their year-end from December
31, to July 31. Intuit's statement of operations for the year ended July 31,
1998 was combined with Rock's and Title Source's statements of operations for
the twelve months ended December 31, 1998. Intuit's statement of operations for
the year ended July 31, 1999 was combined with Rock's and Title Source's
statements of operations for the twelve months ended June 30, 1999. As a result,
Rock's and Title Source's revenues and net income of $52.7 million and $7.8
million, respectively for the six month period ended December 31, 1998 have been
included in our combined results for both fiscal 1998 and fiscal 1999. This $7.8
million in net income has been reflected as an adjustment to retained earnings
for the year ended July 31, 1999. Our fiscal 2000 financial statements, includes
results for Rock and Title Source for the thirteen months ended July 31, 2000.
Principles of Consolidation
The consolidated financial statements include all of our accounts and those
of our wholly-owned subsidiaries. We have eliminated all significant
intercompany accounts and transactions. Investments in which management intends
to maintain more than a temporary 20% to 50% interest, or otherwise has the
ability to exercise significant influence, are accounted for under the equity
method. Investments in which we have less than a 20% interest and/or do not have
the ability to exercise significant influence are carried at the lower of cost
or estimated realizable value.
48
<PAGE> 49
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
To comply with generally accepted accounting principles, we make estimates
and assumptions that affect the amounts reported in the financial statements and
the disclosures made in the accompanying notes. Our most significant estimates
are related to reserves for product returns and exchanges, reserves for rebates
and the collectability of accounts receivable. We also use estimates to
determine the remaining economic lives and carrying value of goodwill, purchased
intangibles, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based
on "FOB shipping" terms. Under FOB shipping terms, title and risk of loss are
transferred, and we have no continuing obligations, once our products are
delivered to the shipper. We recognize revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that we will collect the accounts receivable from our customers.
Reserves are provided for returns of excess quantities of current product
versions, as well as previous versions of products still in the distribution
channel when new versions are launched. In some situations, we receive advance
payments from our customers. Revenue associated with these advance payments is
deferred until the products are shipped or services are provided. We also reduce
revenue by the estimated cost of rebates when products are shipped.
We recognize revenue from Internet products and services when that revenue
is "earned" based on the nature of the particular product or service. For
Internet products and services that are provided over a period of time, revenue
is recognized pro rata based on the passage of the contractual time period
during which the product or service is to be provided or in accordance with
agreed upon performance criteria. However, where the Internet product or service
is to be provided or delivered at one point in time, revenue is recognized upon
delivery of the product or completion of the service, rather than over time. For
example, we earn advertising revenues from third parties that advertise on
certain of our websites and contract to run such advertisements for a particular
period of time. In that case, the associated advertising revenue is recognized
ratably over the contractual time period during which the advertising is to be
placed. By contrast, for on-line transactions for which we receive a payment
(such as the sale of insurance through our QuickenInsurance website), revenue is
recognized upon completion of the transaction, assuming there are no remaining
obligations on our part. To recognize revenue, it must be probable that we will
collect the accounts receivable from our customers.
Intuit also offers several plans under which customers are charged for
technical support assistance. Fees charged for these plans are collected in
advance and are recognized as revenue over a period of time (generally one year)
at a rate that is based on historical call volumes for support, which
approximates when these services are performed. Costs incurred for fee for
support plans are included in cost of goods sold.
We defer loan origination revenue and associated incremental direct costs on
loans held for sale until the related loan is sold. We recognize gains and
losses on loans at the time we sell them, based upon the difference between the
selling price and the carrying value of the related loans sold. We recognize
loan servicing revenue as the related principal is collected. We recognize
interest income on mortgage loans as it is earned, and we recognize interest
expenses on related borrowings as we incur them.
49
<PAGE> 50
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Customer Service and Technical Support
Customer service and technical support costs include the costs associated
with performing order processing, answering customer inquiries and providing
telephone assistance. In connection with the sale of certain products, Intuit
provides a limited amount of free telephone support service to customers. This
free service, also referred to as post-contract customer support, is included in
this expense category. We do not defer the recognition of any revenue associated
with sales of these products, since the cost of providing this free support is
insignificant. The support is provided within one year after the associated
revenue is recognized and enhancements are minimal and infrequent. The estimated
cost of providing this free support is accrued upon product shipment.
In situations where customers are charged for technical support assistance,
the costs incurred in providing services are included in cost of goods sold
rather than as customer service and technical support expenses.
Advertising
We expense advertising costs as incurred. Advertising expense for the years
ended July 31, 1998, 1999 and 2000 was approximately $40.2 million, $53.3
million and $57.9 million, respectively.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months
or less at the date of purchase to be cash equivalents. Short-term investments
are considered available-for-sale securities and are carried at amortized cost,
which approximates fair value. Available-for-sale securities are classified as
current assets based upon our intent and ability to use any and all of these
securities as necessary to satisfy the significant short-term liquidity
requirements that may arise from the highly seasonal and cyclical nature of our
business. Based on our significant business seasonality, cash flow requirements
within quarters may fluctuate dramatically and require us to use a significant
amount of the short-term investments held as available-for-sale securities.
The following schedule summarizes the estimated fair value of our cash, cash
equivalents, and short-term investments:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 56,548 $ 4,298
Money market funds........................................ 294,190 338,462
Commercial paper & corporate notes........................ 156,037 29,543
Municipal bonds........................................... 37,455 44,650
U.S. Government securities................................ 10,000 --
-------- ----------
$554,230 $ 416,953
======== ==========
Short-term investments:
Certificates of deposit................................... $ 9,901 $ 5,053
Corporate notes........................................... 19,482 75,640
Municipal bonds........................................... 284,057 920,360
U.S. Government securities................................ 27,713 49,167
Restricted short-term investments......................... (36,028) --
-------- ----------
$305,125 $1,050,220
======== ==========
</TABLE>
50
<PAGE> 51
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair value of cash equivalents and short-term investments
classified by the maturity date listed on the security is as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due within one year......................................... $735,349 $ 595,456
Due within two years........................................ 101,784 157,309
Due within three years...................................... 1,702 13,039
Due after three years....................................... -- 697,071
Restricted short-term investments........................... (36,028) --
-------- ----------
$802,807 $1,462,875
======== ==========
</TABLE>
Realized gains and losses from sales of each type of instrument were
immaterial for all periods presented.
Marketable Securities
As explained in greater detail below, we currently hold several marketable
securities, most of which we acquired in connection with strategic business
transactions and relationships. Our available-for-sale marketable securities are
carried at fair value and we include unrealized gains and losses, net of tax, in
stockholders' equity. For purposes of the table below, the cost basis for each
security was determined using the average purchase price. 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 on a quarterly basis. We held
the following marketable securities at July 31, 1999 and 2000:
<TABLE>
<CAPTION>
GROSS UNREALIZED
------------------- NET RECOGNIZED
COST GAIN LOSS LOSS FAIR VALUE
-------- -------- -------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Checkfree Corporation common stock................ $150,081 $152,177 $ -- $ -- $302,258
Excite@Home common stock.......................... 132,060 -- -- (36,856) 95,204
S1 Corporation common stock....................... 49,997 -- (16,140) -- 33,857
-------- -------- -------- -------- --------
$332,138 $152,177 $(16,140) $(36,856) $431,319
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
------------------- NET RECOGNIZED
COST GAIN LOSS LOSS FAIR VALUE
-------- -------- -------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2000
Checkfree Corporation common stock................ $ 36,875 $115,000 $ -- $ -- $151,875
Excite@Home common stock.......................... 119,366 -- -- (92,997) 26,369
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
VeriSign, Inc. (formerly Signio) common stock..... 4,916 -- -- (1,833) 3,083
724 Solutions (formerly eZlogin) common stock..... 7,700 -- -- (3,083) 4,617
-------- -------- -------- -------- --------
$226,188 $125,626 $(28,023) $(97,913) $225,878
======== ======== ======== ======== ========
</TABLE>
In January 1997, we sold our online banking and bill payment transaction
processing business to Checkfree Corporation. We obtained marketable securities
in Checkfree as a result of this sale. We account for the investment
51
<PAGE> 52
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in Checkfree as an available-for-sale equity security, which accordingly is
carried at market value. Checkfree common stock is quoted on the Nasdaq National
Market under the symbol CKFR. The closing price of Checkfree common stock at
July 31, 2000 was $60.75 per share. At July 31, 2000, we held 2.5 million
shares, or approximately 4.3%, of Checkfree's outstanding common stock.
In connection with At Home Corporation's acquisition of Excite in May 1999,
our shares of Excite were converted into Excite@Home common stock. We have
elected to report these converted Excite@Home shares as a trading security. As a
result, we are reporting both positive and negative fluctuations in the market
value of this stock in net income. At July 31, 2000, we owned approximately 1.9
million shares (or approximately 0.5%) of Excite@Home common stock and reported
a recognized valuation loss of approximately $93.0 million for these securities
for fiscal 2000. The closing price of Excite@Home (Nasdaq symbol ATHM) at July
31, 2000, was $14.00 per share.
In August 1999, we acquired 729,165 shares of common stock of Homestore.com,
Inc. upon conversion of our preferred shares in connection with Homestore.com's
initial public offering. We account for the investment in Homestore.com as an
available-for-sale equity security, which accordingly is carried at market
value. Homestore.com common stock is quoted on the Nasdaq National Market under
the symbol HOMS. The closing price of Homestore.com common stock at July 31,
2000, was $35.00 per share. At July 31, 2000, we held 351,865 shares, or
approximately 0.4%, of Homestore.com's outstanding common stock.
In February 1999, we purchased one million shares of common stock of
Quotesmith.com, Inc. We purchased an additional 272,727 shares of Quotesmith.com
in August 1999 at the time of its initial public offering. We account for the
investment in Quotesmith.com as an available-for-sale equity security, which
accordingly is carried at market value. Quotesmith.com common stock is quoted on
the Nasdaq National Market under the symbol QUOT. The closing price of
Quotesmith.com common stock at July 31, 2000 was $2.44 per share. At July 31,
2000, we held 1,197,327 shares, or approximately 6.2%, of Quotesmith.com's
outstanding common stock.
In May 1999, we purchased 970,813 shares of common stock of Security First
Technologies. In November 1999, Security First Technologies changed its name to
S1 Corporation. We account for the investment in S1 as an available-for-sale
equity security, which accordingly is carried at market value. S1 common stock
is quoted on the Nasdaq National Market under the symbol SONE. The closing price
of S1 common stock at July 31, 2000 was $25.44 per share. At July 31, 2000, we
held 970,813 shares, or approximately 1.8%, of S1's outstanding common stock. In
connection with the above purchase, we also received an option to purchase up to
additional 4,579,187 shares of S1 exercisable at a per share purchase price of
$51.50.
In connection with VeriSign Corporation's acquisition of Signio in February
2000, our shares of Signio were converted into VeriSign common stock. At the
time of the conversion of our existing Signio shares into VeriSign shares, we
recorded a realized gain of approximately $48.2 million. We have elected to
report these converted VeriSign shares as a trading security. As a result, we
are reporting both positive and negative fluctuations in the market value of
this stock in net income. At July 31, 2000, we owned 19,431 shares (less than
1%) of VeriSign common stock and reported a recognized valuation loss of
approximately $1.8 million for these securities for fiscal 2000. The closing
price of VeriSign (Nasdaq symbol VRSN) at July 31, 2000, was $158.69 per share.
In connection with 724 Solutions Inc.'s acquisition of eZlogin in June 2000,
our shares of eZlogin were converted into 724 Solutions common stock. At the
time of the conversion of our existing eZlogin shares into 724 Solutions shares,
we recorded a realized gain of approximately $5.4 million. We have elected to
report these converted 724 Solutions shares as a trading security. As a result,
we are reporting both positive and negative fluctuations in the market value of
this stock in net income. At July 31, 2000, we owned 137,808 shares (or
52
<PAGE> 53
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately 0.4%) of 724 Solutions common stock and reported a recognized
valuation loss of approximately $3.1 million for these securities for fiscal
2000. The closing price of 724 Solutions (Nasdaq symbol SVNX) at July 31, 2000,
was $33.50 per share.
During fiscal year 2000, we sold 7,675,000 shares of Checkfree, 377,300
shares of Homestore.com, and 174,877 shares of VeriSign. In connection with
these sales we recognized realized gains of $505.1 million, $15.4 million, and
$6.2 million, respectively. Total net gains from marketable securities were
$481.1 million for fiscal 2000.
All of our marketable securities are stocks of high technology companies
that are subject to substantial volatility. Accordingly, it is possible that the
market price of one or more of these companies' stocks could decline
substantially and quickly, which could result in a material reduction in the
carrying value of these assets.
Mortgage Lines of Credit
For mortgage lines of credit we estimate fair value based on the discounted
value of contractual cash flows using interest rates currently in effect for
similar maturities and collateral requirements. The carrying amount of these
lines of credit approximates their estimated fair values since all of the
borrowings have variable interest rates that approximate current market interest
rates for similar types of lines of credit and are due upon demand. The carrying
amount of mortgage lines of credit held at July 31, 1999 and 2000, were $30.0
million and $2.6 million, respectively.
Mortgage Loans
We carry mortgage loans at estimated realizable value, and we estimate their
fair value using quoted market prices for similar loans, adjusted for
differences in loan characteristics, including credit quality. The carrying
amount of accrued interest receivable approximates the assets' fair value. The
carrying amount of mortgage loans held at July 31, 1999 and 2000, were $85.0
million and $60.3 million, respectively.
Property and Equipment
Property and equipment is stated at cost. We calculate depreciation using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 30 years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives or remaining
lease terms. Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $ 138,762 $ 204,836
Furniture and fixtures...................................... 30,035 31,204
Leasehold improvements...................................... 40,524 54,370
Land and buildings.......................................... 9,049 11,551
Construction in progress.................................... 2,703 8,247
--------- ---------
221,073 310,208
Less accumulated depreciation and amortization.............. (101,853) (142,501)
--------- ---------
$ 119,220 $ 167,707
========= =========
</TABLE>
53
<PAGE> 54
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. When appropriate we
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
NET BALANCE AT JULY 31,
LIFE IN ------------------------
YEARS 1999 2000
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.................................................... 3 - 5 $383,102 $358,890
Customer lists.............................................. 3 - 5 66,934 57,890
Covenant not to compete..................................... 3 - 5 2,492 4,992
Purchased technology........................................ 1 - 5 17,751 10,990
Assembled workforce......................................... 2 - 5 3,972 1,976
Trade names and logos....................................... 1 - 10 6,900 4,140
</TABLE>
Balances presented above are net of total accumulated amortization of $210.1
million and $465.3 million at July 31, 1999 and July 31, 2000, respectively.
Concentration of Credit Risk
Intuit operates in an industry that is highly competitive and rapidly
changing. Many circumstances could have an unfavorable impact on Intuit's
operating results. Examples include significant technological changes in the
industry, changes in customer requirements or the emergence of competitive
products or services with new capabilities.
We are also subject to risks related to our significant balances of
short-term investments, marketable securities and trade accounts receivable. At
July 31, 2000, we held approximately $226 million in marketable securities, as
described in "Marketable Securities", above in Note 1. 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 is a
permanent decline in the value of any other marketable securities below cost, we
would report this decline in our statement of operations. See "Marketable
Securities," above in Note 1 for a discussion of risks associated with our
marketable securities. Our remaining portfolio is diversified and consists
primarily of short-term investment-grade securities.
To reduce the credit risk associated with accounts receivable, Intuit
performs ongoing evaluations of customer credit. Generally, no collateral is
required. We maintain reserves for estimated credit losses and these losses have
historically been within our expectations.
54
<PAGE> 55
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the normal course of our mortgage business, we enter into loan
commitments to extend credit in order the meet the financing needs of our
customers. Loan commitments are agreements to lend to a customer as long as all
conditions specified in the contract are met. Commitments generally have fixed
expiration dates or other termination clauses and may require the customer to
pay a fee. We evaluate each customer's creditworthiness on a case-by-case basis.
The amount of collateral we obtain is based on our credit evaluation of the
customer.
Loan commitments subject us to market risks and credit risks. Market risk
occurs if interest rates rise after a loan commitment is made. To offset this
risk on conventional loans that are in process, we purchase puts and calls on
U.S. Treasury securities. At July 31, 2000, we held calls in the amount of $7.5
million. The credit risk associated with these puts and calls on U.S. Treasury
securities is a small fraction of the notional amount of the securities and is
reflected in their fair value. Loan commitments also involve credit risk
relating to the customer, which is not reflected on the balance sheet. We use
the same credit policies for making credit commitments as we do for the
underlying loan product.
Loan commitments to extend credit at July 31, 1998, 1999 and 2000 were as
follows:
<TABLE>
<CAPTION>
JULY 31, 1998 JULY 31, 1999 JULY 31, 2000
--------------------- --------------------- ---------------------
FIXED- VARIABLE- FIXED- VARIABLE- FIXED- VARIABLE-
RATE RATE RATE RATE RATE RATE
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Conventional prime loans...................... $299,000 $49,000 $213,000 $58,000 $167,000 $31,100
Sub-prime loans............................... 8,000 31 7,300 85 4,200 1,700
High-LTV loans................................ 500 -- 400 -- 600 --
-------- ------- -------- ------- -------- -------
$307,500 $49,031 $220,700 $58,085 $171,800 $32,800
======== ======= ======== ======= ======== =======
</TABLE>
Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue, costs and expenses are
translated at average rates of exchange in effect during the year. We report
translation gains and losses as a separate component of stockholders' equity.
Net gains and losses resulting from foreign exchange transactions were
immaterial in all periods presented.
Comprehensive Income (Loss)
SFAS 130, "Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive net income and its components. 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.
55
<PAGE> 56
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of comprehensive net income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------
1998 1999 2000
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance gain, net of tax.......................... $ 19,432 $ 182,602 $ 79,144
Unrealized gain (loss) on marketable securities............. 267,338 (165,750) (38,433)
Tax benefit (effect) on unrealized gain..................... (106,935) 66,300 15,373
Translation adjustment gain (loss), net of tax.............. 2,767 (4,008) (498)
--------- --------- --------
Ending balance gain, net of tax............................. $ 182,602 $ 79,144 $ 55,586
========= ========= ========
</TABLE>
The change in unrealized loss on marketable securities during 1999 and 2000
includes reclassification adjustments totaling $616.1 million and $520.8
million, respectively, relating to gains realized in income from sale of
securities and reclassification of available-for-sale securities to trading
securities. Accumulated unrealized holding gains, net of taxes, were $181.1
million at July 31, 1998, $81.6 million at July 31, 1999 and $58.6 million at
July 31, 2000. Accumulated translation gain (loss), net of taxes, was $1.5
million at July 31, 1998, $(2.5) million at July 31, 1999 and $(3.0) million at
July 31, 2000.
Deferred Stock-based Compensation
We recognize deferred stock compensation for the difference between the
exercise price and the fair value of stock options and unvested options issued
in exchange for options of acquired companies. The deferred stock compensation
is amortized straight-line over the vesting term of such options. During fiscal
2000, Intuit recorded deferred compensation of $31.8 million and amortization
expense of $5.3 million.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
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 in the balance sheet and measure those instruments at fair value.
It further provides criteria for derivative instruments to be designated as 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, the impact of applying SFAS 133 was
immaterial.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"), and amended it in March and June 2000. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements for
all public registrants. Changes in our revenue recognition policy, if any,
resulting from the interpretation of SAB 101 would be reported as a change in
accounting principle. We are currently reviewing the impact of SAB 101 on our
previously reported results of operations and anticipate that we will adopt SAB
101 during the fourth quarter of fiscal 2001.
In March 2000, the FASB issued FASB Interpretation 44, "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of APB
Opinion 25 ("FIN 44"). FIN 44 applies prospectively to new stock option awards,
exchanges of awards in a business combination, modifications to outstanding
awards, and changes in grantee status that occur on or after July 1, 2000.
Although we are still in the process of analyzing the impact of FIN 44, if any,
on our consolidated statements and related disclosures, we do not expect a
material impact on our historically reported financial position or results of
operations.
56
<PAGE> 57
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. All share and per share amounts shown in this table have
been restated to reflect a three for one stock split effective September 30,
1999 (see Note 10). The following table shows the computation of basic and
diluted income per share for the years ended July 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
BASIC:
Weighted average common shares outstanding................ 157,147 190,927 200,770
======== ======== ========
Net income................................................ $ 6,182 $386,564 $305,661
======== ======== ========
Per share amount.......................................... $ 0.04 $ 2.02 $ 1.52
======== ======== ========
DILUTED:
Weighted average common shares outstanding................ 157,147 190,927 200,770
Equivalent shares issuable upon exercise of options....... 6,744 8,889 10,501
-------- -------- --------
Shares used in per share amounts.......................... 163,891 199,816 211,271
======== ======== ========
Net income................................................ $ 6,182 $386,564 $305,661
======== ======== ========
Per share amount.......................................... $ 0.04 $ 1.93 $ 1.45
======== ======== ========
</TABLE>
The effect of options to purchase 2.8 million shares of common stock in 1999
and 2.3 million shares of common stock in 2000 was not included in the
computation of diluted income per share because the option exercise prices were
greater than the average market price of common stock.
3. ACQUISITIONS
On December 8, 1999, we completed the purchase of all of the outstanding
shares of Rock for approximately 8.6 million shares of Intuit common stock. Rock
is a provider of consumer mortgages and is based in Michigan. In connection with
the acquisition, Intuit assumed all of Rock's outstanding employee stock
options, which were converted into options to purchase approximately 1.2 million
shares of Intuit common stock. Rock stockholders received 0.58 shares of Intuit
common stock for each share of Rock common stock. In a related transaction,
Intuit also completed the acquisition of Title Source, Inc., an affiliate of
Rock, for approximately 150,000 shares of Intuit common stock. Title Source
provides title insurance and escrow services to real estate agents, lenders,
attorneys, corporations and homeowners. We accounted for the acquisitions of
Rock and Title Source as a pooling of interests
57
<PAGE> 58
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for accounting purposes and have restated all previously reported amounts to
reflect the effect of the pooling. A net revenue and net income (loss)
reconciliation for the years ended July 31, 1998 and 1999 is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue:
Intuit.................................................... $592,736 $847,568
Quicken Loans and Title Source............................ 96,546 92,867
-------- --------
Combined.................................................. $689,282 $940,435
======== ========
Net income (loss):
Intuit.................................................... $(12,157) $376,549
Quicken Loans and Title Source............................ 18,339 10,015
-------- --------
Combined.................................................. $ 6,182 $386,564
======== ========
Basic net income (loss) per share:
Intuit.................................................... $ (0.08) $ 2.06
Quicken Loans and Title Source............................ 0.12 (0.04)
-------- --------
Combined.................................................. $ 0.04 $ 2.02
======== ========
Diluted net income (loss) per share; Intuit................. $ (0.08) $ 1.97
Quicken Loans and Title Source............................ 0.12 (0.04)
-------- --------
Combined.................................................. $ 0.04 $ 1.93
======== ========
</TABLE>
The acquisitions described below have been accounted for as purchase
transactions in accordance with APB No. 16 and, accordingly, the results of
operations and financial position of the acquired businesses are included in
Intuit's consolidated financial statements only after the date of acquisition.
In June 1998, we acquired substantially all of the assets of Lacerte
Software Corporation and Lacerte Educational Services Corporation (together,
"Lacerte"), for cash. Lacerte is a leading developer and marketer of tax
preparation software and services for tax professionals. The purchase price was
approximately $400 million, which was funded by a public offering of 30.0
million shares of common stock in May and June 1998. In addition, we assumed
liabilities of $31.8 million. Note 10 provides more information on this public
offering.
The acquisition of Lacerte was treated as a purchase for accounting
purposes. We allocated approximately $358.2 million of the purchase price to
identified intangible assets and goodwill. These assets are being amortized over
a period of three to five years. We also expensed approximately $53.8 million of
in-process research and development at the time of the acquisition. The
following table shows pro forma net revenue, net loss from
58
<PAGE> 59
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuing operations and diluted net loss per share from continuing operations
of Intuit and Lacerte for the fiscal year ending July 31, 1998 as if we had
acquired Lacerte at the beginning of fiscal 1998:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998
--------------------------
INCLUDING
LACERTE AS REPORTED
--------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA; UNAUDITED)
<S> <C> <C>
Net revenue................................................. $764,790 $689,282
Net income (loss) from continuing operations................ (38,350) 6,182
Diluted net income (loss) per share from continuing
operations................................................ $ (0.23) $ 0.04
</TABLE>
On April 7, 1999, we acquired the customer list and intellectual property
rights of TaxByte, Inc., for approximately $11 million in cash. TaxByte was a
professional tax preparation software company with a customer base of
approximately 3,600 professional tax preparers. The acquisition was treated as a
purchase for accounting purposes and the entire purchase price was allocated to
identified intangible assets and goodwill to be amortized over five years. We
did not acquire any tangible assets or assume any liabilities in connection with
the purchase.
On May 3, 1999, we acquired Computing Resources, Inc. ("CRI"), a Reno,
Nevada-based provider of payroll services. The purchase price for privately-held
CRI was approximately $200 million, consisting of approximately $100 million
cash and approximately $25 million of Intuit stock that was paid at closing, and
$75 million in cash being paid in three annual installments of $25 million each.
We accounted for the acquisition of CRI as a purchase for accounting
purposes and allocated approximately $187 million to identified intangible
assets and goodwill. These assets are being amortized over a period of three to
five years. The following table shows pro forma net revenue, net income (loss)
from continuing operations and diluted net loss per share from continuing
operations of Intuit and CRI as if we had acquired CRI at the beginning of
fiscal 1998:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, YEAR ENDED JULY 31,
1998 1999
----------------------- --------------------
INCLUDING INCLUDING AS
CRI AS REPORTED CRI REPORTED
--------- ----------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA;
UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue................................................. $721,182 $689,282 $966,183 $940,435
Net income (loss) from continuing operations................ (25,759) 6,182 361,197 386,564
Diluted net income (loss) per share from continuing
operations................................................ $ (0.16) $ 0.04 $ 1.81 $ 1.93
</TABLE>
On June 11, 1999, we acquired the customer list and intellectual property
rights of Compucraft Tax Services, LLC, for approximately $8 million in cash,
with a provision that could increase the overall purchase price if certain
performance targets are met. Compucraft was a professional tax preparation
service bureau company with an active customer base of approximately 3,400
professional tax preparers. The acquisition was accounted for as a purchase for
accounting purposes. The entire purchase price was allocated to identified
intangible assets. No liabilities were assumed in connection with the purchase.
On August 2, 1999, we completed the purchase of all of the outstanding
common and Series A preferred stock of Boston Light Software Corp. ("Boston
Light") for approximately $33.5 million in stock. In connection with the
agreement, Intuit assumed 482,910 of Boston Light's outstanding employee stock
options, which were converted into 160,970 shares of Intuit common stock. Boston
Light is a developer of software and web based products for small businesses and
is based in Boston, Massachusetts. We accounted for the acquisition of Boston
Light as a
59
<PAGE> 60
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase for accounting purposes and allocated approximately $24.0 million to
identified intangible assets, goodwill and deferred compensation. These assets
are being amortized over a period of three to five years. We also expensed
approximately $0.3 million of in-process research and development at the time of
acquisition.
On August 9, 1999, we completed the purchase of all of the outstanding
common stock of SecureTax.com, for approximately $52.0 million in cash.
SecureTax is a developer of online tax preparation and electronic filing
services and is based in Rome, Georgia. We accounted for the acquisition of
SecureTax as a purchase for accounting purposes and allocated approximately
$52.0 million to identified intangible assets and goodwill. These assets are
being amortized over a period of three to five years.
On August 10, 1999, we completed the purchase of all of the outstanding
common stock of Hutchison Avenue Software Corporation ("Hutchison"), for
approximately $7.5 million in cash. Hutchison is a developer of software and web
based products and is based in Ontario, Canada. In connection with the
agreement, Intuit assumed 395,058 of Hutchison's outstanding employee stock
options, which were converted into 131,686 shares of Intuit common stock. We
accounted for the acquisition of Hutchison as a purchase for accounting purposes
and allocated approximately $6.8 million to identified intangible assets and
goodwill. These assets are being amortized over periods of three to five years.
The total purchase price, including the cost associated with the assumption of
Hutchison's stock options, was approximately $18.5 million. We also expensed
approximately $1.1 million of in-process research and development at the time of
acquisition.
On November 30, 1999, we completed the purchase of all of the outstanding
common stock of Turning Mill Software, Inc. ("Turning Mill") for approximately
$22.1 million in stock. Turning Mill is a developer of software and web based
products based in Acton, Massachusetts. We accounted for the acquisition of
Turning Mill as a purchase for accounting purposes and allocated approximately
$22.1 million to identified intangible assets, goodwill and deferred
compensation. These assets are being amortized over periods of three to five
years. Under the terms of agreement, we issued 416,881 shares of Intuit common
stock in exchange for all outstanding shares of Turning Mill.
For acquisitions treated as a purchase for accounting purposes, we must
determine the allocation between developed and in-process research and
development. This allocation is based on whether or not technological
feasibility has been achieved and whether there is an alternative future use for
the technology. SFAS 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," sets guidelines for establishing
technological feasibility. Technological feasibility can be achieved through the
existence of either a detailed program design or a completed working model. As
of the respective dates of the acquisitions discussed above, we concluded that
the purchased in-process research and development had no alternative future use
and expensed it according to the provisions of SFAS 86.
4. SIGNIFICANT TRANSACTIONS
On February 17, 1998, we announced a three-year agreement with America
Online, Inc. ("AOL"). Under the terms of the agreement, subject to certain
limited exceptions, we are the exclusive provider of tax preparation and filing,
multi-carrier life and auto insurance, and multi-lender mortgage services on
both the AOL service and AOL.com, which is AOL's default site for Internet
access by AOL members. In addition, on AOL.com, we are the primary source of
financial content for the Personal Finance Web Channel. We have guaranteed
payments to AOL totaling $30 million over three years. Of that amount $16.2
million was paid upon signing, and the remainder is being amortized over the
term of the agreement. AOL will also be eligible for additional revenue sharing
payments once Intuit has recovered certain advances and other amounts.
60
<PAGE> 61
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 27, 1999, we completed a $50 million investment in Security First
Technologies ("Security First"). In November 1999, Security First Technologies
changed its name to S1 Corporation ("S1"). S1 delivers enterprise-wide Internet
applications for financial institutions. We purchased 970,813 shares of common
stock at a price of $51.50 per share. In connection with this agreement, and
contingent on S1's completion of two subsequent acquisitions, we received
options to purchase 4,579,187 additional shares of S1 common stock, at a per
share purchase price of $51.50. Our investment in S1 was made in connection with
establishing a strategic relationship to deliver online financial software and
services to financial institutions. The common stock of S1 is quoted on the
Nasdaq National Market under the symbol "SONE."
5. BORROWINGS
We have two mortgage lines of credit. Advances under the first line of
credit are based on a formula computation, with interest due monthly. Advances
are due on demand and are collateralized by residential first and second
mortgages. Advances may be drawn for working capital and sub-prime, high
loan-to-value and conventional prime mortgage loans. The maximum outstanding
balance permitted under this line is $125 million. Interest rates are variable
and are based on the federal funds rate and prime rate, depending on the type of
advance. The interest rates in effect at July 31, 1999 and July 31, 2000 were
6.29% and 7.69%, respectively. The weighted average interest rates for the years
ended July 31, 1999 and July 31, 2000 were 6.45% and 7.35%, respectively.
Our second line of credit currently provides for up to $50 million principal
amount of demand loans secured by mortgage loans and other assets. Interest
rates on loans vary depending on the type of underlying loan, and the loans are
subject to sublimits, advance rates and warehouse terms that vary depending on
the type of underlying loan. The interest rates in effect at July 31, 1999 and
July 31, 2000 were 6.37% and 7.89%, respectively, while the weighted average
interest rates for the twelve month periods ended July 31, 1999 and July 31,
2000 were 5.92% and 7.48%, respectively. We are required to maintain a minimum
tangible net worth and to satisfy other financial covenants, as outlined in the
line of credit agreements. We were in compliance with the requirements as of
July 31, 1999 and July 31, 2000.
Our reverse repurchase agreement entered into in 1997 provided that the
lender will purchase from us, subject to our agreement to repurchase on a
specified date, up to $200 million of conventional prime and sub-prime mortgage
loans at par, as of January 1, 2000. Loans subject to purchase were fixed and
adjustable rate, fully-amortizing first or junior lien residential mortgage
loans and home equity loans that complied with our origination guidelines and
conformed to whole-loan sale requirements. The reverse repurchase agreement was
not a committed facility and the lender could elect to discontinue the
repurchase agreement at any time. The terms of the financing under the
repurchase agreement matured and could be renewed on a daily basis. Interest
rates were variable and were based on the London Interbank Offered Rate,
depending on the type of advance. The interest rate in effect at July 31, 1999
was 5.75%. The weighted average interest rate for the year ended July 31, 1999
was 5.92%. The arrangement terminated in March 2000.
Drafts payable represent funds advanced for mortgages originated which have
not yet been drawn against the lines of credit.
6. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Intuit has adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the
way in which public companies disclose certain information about operating
segments in the Company's financial reports. Consistent with SFAS 131, we have
determined our four
61
<PAGE> 62
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operating segments, outlined below, based on factors such as how our operations
are managed and how results are viewed by management.
Small Business Division revenue is derived primarily from QuickBooks desktop
products, financial supplies products, payroll services, the QuickBooks Support
Network and QuickBooks Internet Gateway services.
Tax Division revenue is derived from Quicken Turbo Tax federal and state
consumer desktop tax preparation products, ProSeries and Lacerte professional
tax preparation products, electronic tax filing services and Quicken TurboTax
for the Web online tax preparation services.
Consumer Finance Division revenues come primarily from Quicken desktop
products, Quicken Loans, advertising, sponsorship and placement fees (both
web-based in Quicken.com, as well as in-product advertising in Quicken), online
transactions and QuickenInsurance.
International Division revenues come primarily from Yayoi and QuickBooks
small business products in Japan, QuickBooks, Quicken and QuickTax products in
Canada, QuickBooks, Quicken and consumer tax products in Europe, and QuickBooks
and Quicken products in Southeast Asia.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Intuit does not
track assets by operating segments. Consequently, we do not disclose assets by
operating segments. The following results are broken out by our operating
segments for the fiscal years ended July 31, 1998, 1999 and 2000):
<TABLE>
<CAPTION>
SMALL CONSUMER
BUSINESS TAX FINANCE INTERNATIONAL
DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- -------- -------- ------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1998
Net revenue................................... $208,349 $192,789 $217,406 $ 70,738 $ -- $ 689,282
Segment operating income (loss)............... 75,770 79,373 4,509 (11,472) -- 148,180
Common expenses............................... -- -- -- -- (66,776) (66,776)
-------- -------- -------- -------- --------- ---------
Sub-total operating income (loss)............. 75,770 79,373 4,509 (11,472) (66,776) 81,404
-------- -------- -------- -------- --------- ---------
Realized gains (losses) on marketable
securities, net............................. -- -- -- -- -- --
Acquisition costs............................. -- -- -- -- (80,909) (80,909)
Interest income (expense) and other items..... -- -- -- -- 605 605
-------- -------- -------- -------- --------- ---------
Income (loss) before tax...................... $ 75,770 $ 79,373 $ 4,509 $(11,472) $(147,080) $ 1,100
======== ======== ======== ======== ========= =========
FISCAL 1999
Net revenue................................... $292,707 $337,734 $230,549 $ 79,445 $ -- $ 940,435
Segment operating income (loss)............... 95,924 148,464 8,059 (2,252) -- 250,195
Common expenses............................... -- -- -- -- (114,937) (114,937)
-------- -------- -------- -------- --------- ---------
Sub-total operating income (loss)............. 95,924 148,464 8,059 (2,252) (114,937) 135,258
-------- -------- -------- -------- --------- ---------
Realized gains (losses) on marketable
securities, net............................. -- -- -- -- 579,211 579,211
Acquisition costs............................. -- -- -- -- (100,692) (100,692)
Interest income (expense) and
other items................................. -- -- -- -- 18,252 18,252
-------- -------- -------- -------- --------- ---------
Income (loss) before tax...................... $ 95,924 $148,464 $ 8,059 $ (2,252) $ 381,834 $ 632,029
======== ======== ======== ======== ========= =========
</TABLE>
62
<PAGE> 63
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SMALL CONSUMER
BUSINESS TAX FINANCE INTERNATIONAL
DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
-------- -------- -------- ------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FISCAL 2000
Net revenue................................... $394,264 $379,270 $225,930 $ 94,361 $ -- $1,093,825
Segment operating income (loss)............... 112,275 165,400 (4,793) 14,042 -- 286,924
Common expenses............................... -- -- -- -- (135,729) (135,729)
-------- -------- -------- -------- --------- ---------
Sub-total operating income (loss)............. 112,275 165,400 (4,793) 14,042 (135,729) 151,195
-------- -------- -------- -------- --------- ---------
Realized gains (losses) on marketable
securities, net............................. -- -- -- -- 481,130 481,130
Acquisition costs............................. -- -- -- -- (168,058) (168,058)
Interest income (expense) and
other items................................. -- -- -- -- 48,443 48,443
-------- -------- -------- -------- --------- ---------
Income (loss) before tax...................... $112,275 $165,400 $(4,793) $ 14,042 $ 225,786 $ 512,710
======== ======== ======== ======== ========= =========
</TABLE>
---------------
(1) Reconciling items include acquisition and other common costs not allocated
to specific segments.
7. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Reserve for returns and exchanges........................... $ 73,955 $ 60,979
Future payments due for CRI acquisition..................... 66,314 44,916
Other acquisition and disposition related items............. 10,824 6,400
Rebates..................................................... 18,002 21,552
Post-contract customer support.............................. 3,418 2,717
Other accruals.............................................. 29,359 26,205
-------- --------
$201,872 $162,769
======== ========
</TABLE>
8. NOTES PAYABLE AND COMMITMENTS
NOTES PAYABLE
In March 2000, our Japanese subsidiary, Intuit KK, entered into a one-year
loan agreement with Japanese banks for approximately $35.1 million which was
used to refinance the three year loan that was entered into in March 1997 to
finance our acquisition of Nihon Micom. The loan is denominated in Japanese yen
and is therefore subject to foreign currency fluctuations when translated to
U.S. dollars for reporting purposes. The interest rate is variable based on the
Tokyo inter-bank offered rate or the short-term prime rate offered in Japan. At
July 31, 2000, the rate was approximately 0.83%. 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 until March 2001.
Under the previous loan arrangement we had guaranteed the loan and pledged
approximately $36.0 million, or 110% of the loan balance, of short-term
investments to be restricted as security for the borrowings. The Pledge
agreement was terminated upon refinancing.
63
<PAGE> 64
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intuit leases certain office facilities and equipment under various
operating lease agreements. The leases provide for annual rent increases of up
to 10%. Annual minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JULY 31, COMMITMENTS
--------------------- --------------
(IN THOUSANDS)
<S> <C>
2001........................................................ $ 27,068
2002........................................................ 50,523
2003........................................................ 75,539
2004........................................................ 100,549
2005........................................................ 124,072
Thereafter.................................................. 145,145
--------
$522,896
========
</TABLE>
Total lease expense for the years ended July 31, 1998, 1999 and 2000 was
approximately $13.8 million, $15.1 million and $21.4 million, respectively.
9. MORTGAGE LOANS
The following summarizes mortgage loans by type at July 31, 1999 and July
31, 2000:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Conventional loans.......................................... $65,624 $41,555
Sub-prime loans............................................. 10,683 5,182
Government loans............................................ 8,676 12,357
High LTV loans.............................................. -- 1,236
------- -------
84,983 60,330
Net deferred loan origination costs......................... 84 81
------- -------
Mortgage loans.............................................. $85,067 $60,411
======= =======
</TABLE>
Included in mortgage loans held for investment at July 31, 1999 and July 31,
2000 is an allowance for credit losses of $1.3 million and $0.4 million,
respectively. The activity for the year ended July 31, 1999 includes a provision
of $1.0 million offset by charge-offs of $0.1 million. The activity for the year
ended July 31, 2000 includes a provision of $0.7 million offset by charge-offs
of $1.6 million.
As of July 31, 1999 and July 31, 2000, there were approximately $1.8 million
and $0.3 million, respectively, of loans held for investment that were greater
than 90 days past due, the vast majority of which was sub-prime loans.
10. STOCKHOLDERS' EQUITY
Stock Option Plans
On January 31, 1993, we adopted the 1993 Equity Incentive Plan. Under the
1993 Plan, we may grant incentive and non-qualified stock options, restricted
stock awards and stock bonuses to employees, directors, consultants, and
independent contractors of and advisors to Intuit. The Board of Directors or its
delegees determine who will receive grants, exercisability, option price and
other terms. The option exercise price is usually the fair market value at the
date of grant. The options generally vest over a four-year period and expire
after ten years.
On October 7, 1996, we adopted the 1996 Directors Stock Option Plan. This
plan provides for non-qualified stock options for a specified number of shares
to be granted to non-employee directors of Intuit on an annual basis.
64
<PAGE> 65
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The option exercise price equals the fair market value at the date of grant.
Most options are subject to vesting over time, with vesting periods ranging from
two to four years. All options expire after ten years.
On November 11, 1998, we adopted the 1998 Option Plan for Mergers and
Acquisitions. Under the 1998 Plan, we may grant non-qualified stock options to
individuals who are hired by Intuit as a result of acquisitions of, or mergers
with, other companies by Intuit. The 1998 Plan has been designed to meet the
"broadly based plans" exemption from the stockholder approval requirement for
stock option plans under the Nasdaq National Market listing requirements and,
accordingly, has not been submitted to Intuit stockholders for approval. Options
under the 1998 Plan can only be granted to eligible individuals within 18 months
following the completion of the relevant acquisition or merger. Options granted
under the 1998 Plan have an exercise price not less than the fair market value
of Intuit's common stock on the date of grant. They will generally become
exercisable over a four-year period based on continued service and expire ten
years after the grant date. Options granted to officers hired as a result of a
merger or acquisition cannot exceed 45% of all shares reserved for grant under
the 1998 Plan.
In addition, we have several discontinued option plans with outstanding
options. We assumed options in connection with our acquisitions of Boston Light
and Hutchison Avenue Software in August 1999 and Rock Financial Corporation in
December 1999.
A summary of activity under all option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
SHARES NUMBER EXERCISE WEIGHTED AVERAGE
AVAILABLE OF PRICE PER EXERCISE PRICE
FOR GRANT SHARES SHARE PER SHARE
----------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance at July 31, 1997........................... 6,987,125 28,287,904 $ 0.02 - $28.00 $ 7.58
Additional shares authorized..................... 6,450,000 -- -- --
Options granted.................................. (9,790,690) 9,790,690 8.21 - 18.83 12.97
Options exercised................................ -- (6,885,018) 0.02 - 14.67 6.33
Options canceled or expired...................... 3,500,251 (3,631,171) 0.76 - 28.00 8.60
----------- ---------- --------------- ------
Balance at July 31, 1998........................... 7,146,686 27,562,405 $ 0.02 - $26.00 9.66
Additional shares authorized..................... 14,010,000 -- -- --
Options granted.................................. (15,466,064) 15,466,064 13.04 - 31.21 23.32
Options exercised................................ -- (9,093,374) 0.02 - 31.21 8.30
Options canceled or expired...................... 2,239,120 (2,239,863) 0.76 - 31.21 15.46
----------- ---------- --------------- ------
Balance at July 31, 1999........................... 7,929,742 31,695,232 $ 0.02 - $31.21 $16.13
Additional shares authorized..................... 9,000,000 -- -- --
Plans assumed related to acquisitions............ 964,941 -- -- --
Options converted related to acquisitions........ (964,941) 964,941 0.003 - 51.69 5.21
Options granted.................................. (9,887,734) 9,887,734 2.50 - 72.31 34.44
Options exercised................................ -- (6,651,954) 0.003 - 33.53 11.49
Options canceled or expired...................... 4,051,948 (4,623,728) 0.39 - 64.81 22.29
----------- ---------- --------------- ------
Balance at July 31, 2000........................... 11,093,956 31,272,225 $0.003 - $72.31 $23.43
=========== ========== =============== ======
</TABLE>
There were 8,742,961, 8,658,814, and 11,608,020 options exercisable under
the various plans at July 31, 1998, 1999 and 2000, respectively. At July 31,
2000, there were 7,446,689 shares available for grant under the 1993 Plan,
167,500 shares available for grant under the 1996 Directors Stock Option Plan,
and 3,479,767 shares available for grant under the 1998 Plan.
65
<PAGE> 66
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Split
Intuit's Board of Directors authorized a three-for-one stock split on
September 8, 1999. This was effected by distributing a 200% stock dividend on
September 30, 1999 to stockholders of record on September 20, 1999. We have
restated all share and per share amounts referred to in the financial statements
and notes to reflect this stock split.
Employee Stock Purchase Plan
In October 1996, Intuit adopted an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code and reserved 900,000 shares of common
stock for future issuance. In January 1998, an additional 600,000 shares were
reserved for future issuance, in January 1999, an additional 900,000 shares were
reserved for future issuance, and in November 1999 an additional 400,000 shares
were reserved for future issuance. The plan allows eligible employees to
purchase Intuit's stock at 85% of the lower of the fair market value at the
beginning or end of each six-month offering period. During fiscal 1998, 1999,
and 2000 employees purchased 443,928, 396,546, and 355,281 shares, respectively.
Stock-Based Compensation
We follow APB Opinion 25 ("APB 25"), "Accounting for Stock Issued to
Employees," in accounting for stock-based compensation. Accordingly, we are not
required to record compensation expense when stock options are granted to
employees, as long as the exercise price is not less than the fair market value
of the stock when the option is granted, and we are not required to record
compensation expense in connection with the Employee Stock Purchase Plan as long
as the purchase price is not less than 85% of the lower of the fair market value
at the beginning or end of each six-month offering period. In October 1995, the
FASB issued SFAS 123, "Accounting for Stock Based Compensation." Although SFAS
123 allows us to continue to follow the present APB 25 guidelines, we are
required to disclose pro forma net income (loss) and net income (loss) per share
as if we had adopted the new statement. The pro forma impact of applying SFAS
123 in fiscal 1998, 1999 and 2000 will not necessarily be representative of the
pro forma impact in future years.
We have elected to use the Black-Scholes model to estimate the fair value of
options granted. This valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. This model requires the input of highly subjective assumptions
including the expected stock price volatility. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect this estimate, we believe the Black-Scholes model does not necessarily
provide a reliable single measure of the fair value of our employee stock
options. Inputs used for the valuation model are as follows:
<TABLE>
<CAPTION>
OPTIONS EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------------- ---------------------------------------------
1998 1999 2000 1998 1999 2000
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Expected life
(years).............. 1.61 - 4.61 1.61 - 4.61 1.75 - 4.75 0.5 0.5 0.5
Expected volatility.... 0.60% 0.69% 0.73% 0.60% 0.69% 0.73%
Risk-free interest
rate................. 5.34% - 6.0% 4.10% - 6.31% 5.61% - 6.80% 5.25% - 5.45% 4.59% - 4.93% 5.57% - 5.77%
</TABLE>
66
<PAGE> 67
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our pro forma net income (loss) and diluted net income (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss) As reported............................... $ 6,182 $386,564 $305,661
Pro forma................................................. $(24,594) $332,304 $207,965
Diluted net income (loss) per share As reported............. $ 0.04 $ 1.93 $ 1.45
Pro forma................................................. $ (0.15) $ 1.66 $ 0.98
</TABLE>
The weighted average fair value of options granted during fiscal 1998, 1999
and 2000 was approximately $6.72, $10.43 and $23.27.
The following table summarizes information about stock options outstanding
as of July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ---------------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICE NUMBER LIFE (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ---------- ---------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 7.92 3,350,319 6.15 $ 6.28 2,485,764 $ 7.22
$ 8.08 - $ 9.00 3,520,717 6.86 $ 8.39 2,335,849 $ 8.39
$ 9.10 - $15.00 3,462,847 7.36 $12.44 1,953,076 $12.15
$15.50 - $16.38 3,312,025 7.90 $15.92 1,348,026 $15.88
$16.40 - $26.21 3,447,496 8.51 $22.82 1,369,850 $22.79
$26.31 - $27.25 3,366,501 8.77 $26.62 985,014 $26.58
$27.71 - $29.25 3,732,148 8.96 $28.76 435,692 $27.78
$29.85 - $36.13 3,172,053 9.13 $32.56 501,749 $31.11
$36.94 - $67.56 3,885,619 9.63 $52.94 193,000 $66.03
$72.31 - $72.31 22,500 9.57 $72.31 -- $ 0.00
--------------- ---------- ---- ------ ---------- ------
$ 0.00 - $72.31.. 31,272,225 8.17 $23.43 11,608,020 $15.55
=============== ========== ==== ====== ========== ======
</TABLE>
11. PROFIT SHARING AND BENEFIT PLANS
Profit Sharing Plan
Full-time employees are eligible to participate in Intuit's profit-sharing
plan. The Compensation Committee of the Board of Directors determines amounts to
be contributed to the plan. Profit-sharing expense for fiscal 1998, 1999 and
2000 was approximately $9.1 million, $12.4 million and $20.7 million,
respectively.
Benefit Plans
We provide three 401(k) plans for full-time employees. Participating
employees may contribute up to 15% of pretax salary to the plan, subject to IRS
limitations. Intuit matches a specified portion of the employee contributions up
to a maximum amount per employee per year. The amount is subject to change on an
annual basis. At July 31, 1998, the match was 75%, up to $1,500, at July 31,
1999 and 2000, the match was 75%, up to $2,500. Matching contributions were
approximately $3.0 million, $5.8 million and $6.6 million, respectively, for the
years ended July 31, 1998, 1999 and 2000. Our wholly owned subsidiary Lacerte
merged with the existing Intuit 401(k) plan on January 1, 2000. Quicken Loans
maintains its own separate 401(k) plan. Employees under this plan can make
elective contributions to the plan. The plan requires Quicken Loans to
contribute 20% of employee contribu-
67
<PAGE> 68
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tions to the plan up to a maximum of 1% of the employee's gross pay. Matching
contributions to the Quicken Loans plan for the years ended July 31, 1998, 1999,
and 2000 amounted to $0.1 million, $0.2 million, and $0.6 million, respectively.
The Quicken Loans plan was merged with the existing Intuit plan on August 1,
2000.
12. SHAREHOLDER RIGHTS PLAN
On April 29, 1998, the Board of Directors adopted a shareholder rights plan
designed to protect the long-term value of Intuit for its stockholders during
any future unsolicited acquisition attempt. In connection with the plan, the
Board declared a dividend of one preferred share purchase right for each share
of Intuit's common stock outstanding on May 11, 1998 (the "Record Date") and
further directed the issuance of one such right with respect to each share of
Intuit's common stock that is issued after the Record Date, except in certain
circumstances. If a person or a group (an "Acquiring Person") acquires 20% or
more of Intuit's common stock, or announces an intention to make a tender offer
for Intuit's common stock, the consummation of which would result in a person or
group becoming an Acquiring Person, then the rights will be distributed (the
"Distribution Date"). After the Distribution Date, each right may be exercised
for 1/3000th of a share of a newly designated Series B Junior Participating
Preferred stock at an exercise price of approximately $83.33. The preferred
stock has been structured so that the value of 1/3000th of a share of such
preferred stock will approximate the value of one share of common stock. The
rights will expire on May 1, 2008.
13. INCOME TAXES
Income before income taxes includes income (loss) from foreign operations of
$(14.5) million, $(9.0) million and $4.4 million for the years ended July 31,
1998, 1999 and 2000, respectively. The provision for income taxes consisted of
the following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ 27,319 $214,765 $ 282,740
State..................................................... 3,694 45,527 62,041
Foreign................................................... 390 -- 2,771
-------- -------- ---------
31,403 260,292 347,552
Deferred:
Federal................................................... (29,683) (14,529) (117,276)
State..................................................... (6,802) (213) (23,092)
-------- -------- ---------
(36,485) (14,742) (140,368)
-------- -------- ---------
Total provision (benefit) for income taxes.................. $ (5,082) $245,550 $ 207,184
======== ======== =========
</TABLE>
68
<PAGE> 69
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Differences between income taxes calculated using the federal statutory
income tax rate of 35% and the provision (benefit) for income taxes were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------
1998 1999 2000
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes.................................. $ 1,100 $632,029 $512,710
======= ======== ========
Statutory federal income tax................................ $ 385 $221,211 $179,449
State income tax, net of federal benefit.................... (1,812) 29,454 25,317
Federal research and experimental credits................... (2,700) (4,500) (5,000)
Non-deductible merger related charges....................... 3,814 980 11,263
Tax exempt interest......................................... (2,627) (4,398) (8,204)
Foreign losses not benefited................................ 5,396 3,074 --
Other, net.................................................. (7,538) (271) 4,359
------- -------- --------
Total............................................... $(5,082) $245,550 $207,184
======= ======== ========
</TABLE>
Tax savings from deductions associated with our various stock option plans
are not reflected in the current federal and state provisions. Savings were
approximately $21.6 million in fiscal 1998, $58.2 million in fiscal 1999 and
$93.5 million in fiscal 2000. These amounts were credited to stockholders'
equity.
Significant deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 2000
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently deductible............ $ 50,229 $ 54,483
Deferred foreign taxes.................................... 9,976 6,294
State income taxes........................................ 15,296 32,567
Merger charges............................................ 47,078 86,760
Fixed asset adjustments................................... 11,788 18,364
Other, net................................................ 6,748 1,705
-------- --------
Total deferred tax assets........................... 141,115 200,173
-------- --------
Deferred tax liabilities:
Deferred gain on discontinued operations.................. 51,421 5,753
Unrealized gain on marketable securities.................. 85,273 48,181
-------- --------
Total deferred tax liabilities...................... 136,694 53,934
-------- --------
Total net deferred tax assets............................... 4,421 146,239
Valuation reserve due to foreign losses..................... (11,615) (11,411)
-------- --------
Total net deferred tax assets (liabilities), net of
valuation reserve......................................... $ (7,194) $134,828
======== ========
</TABLE>
We have provided a valuation reserve related to the benefit of losses in our
foreign subsidiaries that we believe are unlikely to be realized.
14. SIGNIFICANT CUSTOMER INFORMATION
One distributor accounted for 15% of net revenue in fiscal 1998, 16% of net
revenue in fiscal 1999 and 10% of net revenue in fiscal 2000.
69
<PAGE> 70
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LOAN FEES AND GAINS AND LOSSES ON THE SALE OF MORTGAGES
Loans fees and gains and losses on the sale of mortgages for the years ended
July 31, 1998, 1999 and 2000 were comprised of the following components:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Gain on loan sales.......................................... $69,390 $66,219 $30,391
Net loan origination fees................................... 15,826 14,267 11,276
Provision for premium recapture............................. (815) (190) (9)
------- ------- -------
$84,401 $80,296 $41,658
======= ======= =======
</TABLE>
16. REORGANIZATION
Prior to Intuit's acquisition of Rock in December 1999, Rock had evaluated
the performance of certain retail mortgage branches and made a decision in
December 1998, to close nine branches that had been generating operating losses
and negative cash flow. Reorganization costs incurred in connection with the
branch closings were $2 million in fiscal 1998 and 1999 and $3.5 million in
fiscal 2000, and primarily consisted of fixed asset write-offs, ongoing lease
commitments, and severance pay for terminated employees. See Note 1 for more
information about our basis of presentation.
17. 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. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000
in the Superior Court of State of California, San Bernadino County, Rancho
Cucamonga Division. The Bruce and Newby lawsuits were then consolidated into one
lawsuit, In re Intuit Privacy Litigation, filed on July 28, 2000 in the United
States District Court of California, Eastern Division. 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.
In addition, on April 19, 2000, Bosch v. Intuit Inc. was filed in the
Superior Court, State of California, County of Los Angeles, Central District.
This lawsuit alleges violations of California statutes for alleged false and
deceptive advertising and unlawful business practices related to QuickBooks
products and purchasing the Basic Payroll Service. In September 2000, the
plaintiff voluntarily dismissed this lawsuit.
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.
70
<PAGE> 71
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RELATED PARTY TRANSACTIONS
At July 31, 2000, we held approximately 4% of Checkfree's outstanding common
stock. In exchange for providing connectivity between Checkfree's bill payment
processing service and our Quicken products, we reported revenues of $14.1
million, $6.1 million, and $7.1 million from Checkfree for the years ended July
31, 1998, 1999, and 2000, respectively.
As of July 31, 2000, we held a 49% non-voting equity interest in Venture
Finance Software Corp. ("VFSC"). We entered into agreements with VFSC to provide
them with services related to on-going development of Web-oriented finance
products. We received cost reimbursements of approximately $17.1 million and
$23.8 million in fiscal 1999 and 2000 respectively, for development and
administrative services provided in connection with this agreement. At July 31,
2000, we held a receivable due from VFSC of $7.2 million. In August 2000, we
acquired all of the outstanding securities of VFSC. See Note 20 of the financial
statements.
19. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
We accounted for the acquisitions of Rock and Title Source as a pooling of
interests for accounting purposes and have restated all previously reported
amounts to reflect the effect of the pooling.
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED
------------------------------------------------------
OCTOBER 31, JANUARY 31,
------------------------- -------------------------
AS PREVIOUSLY AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED
-------- ------------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue................................................. $136,881 $111,968 $373,733 $345,951
Cost of goods sold.......................................... 40,801 37,019 72,131 67,712
All other costs and expenses................................ 157,886 143,020 191,287 172,592
Net income (loss)........................................... (44,895) (49,190) 93,125 89,857
Basic net income (loss) per share........................... (0.24) (0.28) 0.49 0.50
Diluted net income (loss) per share......................... (0.24) (0.28) 0.47 0.47
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED
------------------------------------------------------
APRIL 30, JULY 31,(1)
------------------------- -------------------------
AS PREVIOUSLY AS PREVIOUSLY
RESTATED REPORTED RESTATED REPORTED
-------- ------------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue................................................. $261,492 $239,701 $168,329 $149,948
Cost of goods sold.......................................... 55,687 51,955 56,619 52,457
All other costs and expenses................................ 155,767 142,077 175,692 160,850
Net income (loss)........................................... 75,351 72,555 262,983 263,327
Basic net income (loss) per share........................... 0.39 0.39 1.34 1.41
Diluted net income (loss) per share......................... 0.37 0.37 1.29 1.35
</TABLE>
71
<PAGE> 72
INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 2000 QUARTER ENDED
--------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,(2)
------------------------- ----------- --------- -----------
AS PREVIOUSLY
RESTATED REPORTED
-------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue...................................... $176,928 $163,058 $425,499 $329,139 $162,259
Cost of goods sold............................... 58,871 57,099 95,555 77,647 59,109
All other costs and expenses..................... 209,314 190,630 247,348 190,979 171,866
Net income (loss)................................ (65,861) (61,729) 57,292 297,085 17,145
Basic net income (loss) per share................ (0.33) (0.33) 0.29 1.47 0.08
Diluted net income (loss) per share.............. (0.33) (0.33) 0.27 1.39 0.08
</TABLE>
---------------
(1) Includes a realized pre-tax gain of $422.1 million from the sale of Excite
shares, a realized pre-tax gain of $125.3 million from the conversion of
Excite common shares to common shares of Excite@Home, and a realized pre-tax
valuation loss of $36.7 million at July 31, 1999.
(2) Includes a realized pre-tax gain of $505.1 million and $15.4 million from
the sales of Checkfree shares and Homestore.com shares, respectively, at
July 31, 2000.
20. SUBSEQUENT EVENTS (UNAUDITED)
On August 30, 2000, we purchased all of the outstanding securities of VFSC
that were not already held by Intuit for approximately $119 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). The
acquisition will be treated as a purchase for accounting purposes and will be
recorded in the first quarter of fiscal 2001. We expect approximately $111
million of the purchase price will be allocated to intangible assets, which will
result in amortization expenses over future periods.
We participated in the formation of VFSC in May 1998 in order to facilitate
the development of certain Web-oriented finance products. Intuit acquired a 49%
non-voting equity interest and an option (the "Option") to purchase all of the
other outstanding securities of VFSC. In exchange for this equity interest,
Intuit granted VFSC a license of certain technology and intellectual property
rights and agreed with VFSC not to compete in certain areas of server-based
personal finance for a period of ten years. Intuit purchased the shares of VFSC
pursuant to the exercise of the Option. From May 1998 through August 2000, VFSC
received approximately $54.5 million in funding from several other investors.
See Note 18 for more information regarding VFSC.
Eric Dunn, who was Senior Vice President and Chief Technology Officer of
Intuit through July 31, 2000, as well as VFSC's President and a director of
VFSC, was an option holder of VFSC. He exercised his options immediately prior
to the closing of Intuit's acquisition of VFSC. He received $5.7 million from
Intuit for his VFSC shares, net of the aggregate exercise price for his option
($1.4 million) and withholding taxes ($3.1 million).
Other shareholders of VFSC included venture capital funds managed by Kleiner
Perkins Caufield & Byers, of which L. John Doerr, a director of Intuit, is a
general partner. These funds received approximately $2.4 million from Intuit for
their VFSC shares. The aggregate original purchase price for the shares held by
the Kleiner Perkins Caufield & Byers funds was $1.2 million.
72
<PAGE> 73
SCHEDULE II
INTUIT INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
CLASSIFICATION PERIOD EXPENSE WRITE-OFFS PERIOD
-------------- ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended July 31, 1998
Allowance for doubtful accounts........................... $ 4,769 $ 3,948 $ (2,747) $ 5,970
Reserve for returns and exchanges......................... $36,310 $80,602 $(56,569) $60,343
Year ended July 31, 1999
Allowance for doubtful accounts........................... $ 5,970 $ 7,503 $ (1,053) $12,420
Reserve for returns and exchanges......................... $60,343 $89,093 $(75,481) $73,955
Year ended July 31, 2000
Allowance for doubtful accounts........................... $12,420 $ 4,884 $ (8,286) $ 9,018
Reserve for returns and exchanges......................... $73,955 $48,077 $(61,053) $60,979
</TABLE>
73
<PAGE> 74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about directors that is required by this Item is
incorporated by reference to our Proxy Statement for our December 2000 Annual
Meeting of Stockholders. Information about executive officers that is required
by this Item can be found in Item 4A.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to our Proxy Statement for our
December 2000 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to our Proxy Statement for our
December 2000 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our Proxy Statement for our
December 2000 Annual Meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements -- See Index to Consolidated Financial Statements in
Part II, Item 8.
2. Financial Statement Schedules -- See Index to Consolidated Financial
Statements in Part II, Item 8.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<S> <C>
2.01(1) Amended and Restated Registration Rights Agreement dated as
of September 15, 1996 between Intuit and Checkfree
Corporation
2.02(2) Asset Purchase Agreement by and among Lacerte Software
Corporation, Lacerte Educational Services Corporation,
Intuit Inc. and IL Acquisition Corporation, dated May 18,
1998
2.03(3) Exchange Agreement dated as of March 2, 1999 by and among
Intuit Inc., Computing Resources, Inc., Ranson W. Webster
and Harry D. Hart and Amendment No. 1 thereto dated April
30, 1999
2.04(15) Agreement and Plan of Merger among Intuit, Merger Sub 1,
Inc., Merger Sub 2, Inc., Rock Financial Corporation and
Title Source, Inc., dated October 6, 1999 (schedules and
similar attachments will be furnished to the Commission upon
request)
2.05(25) Stock Sale and Purchase Agreement dated August 30, 2000 by
and among Intuit, Venture Finance Software Corp. and certain
security holders of Venture Finance Software Corp.
3.01(24) Restated Intuit Certificate of Incorporation dated as of
January 19, 2000
3.02(18) Second Amended and Restated Rights Agreement, dated October
15, 1999
3.03(7) Bylaws of Intuit, as amended and restated effective April
29, 1998
4.01* Form of Specimen Certificate for Intuit's Common Stock
4.02(6) Form of Right Certificate for Series B Junior Participating
Preferred Stock (included in Exhibit 3.02)
10.01(4)+ Intuit 1988 Stock Option Plan and related documents
</TABLE>
74
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<S> <C>
10.02(8)+ 1992 Stock Option Plan of ChipSoft and related documents
10.03(18)+ Rock Financial Corporation Amended and Restated 1996 Stock
Option Plan and related documents
10.04(21)+ Boston Light Software Corp. 1999 Amended and Restated Stock
Option/Stock Issuance Plan and related documents
10.05(22)+ The Hutchinson Avenue Software Corporation Stock Option Plan
and related documents
10.06(19)+ Intuit Inc. 1993 Equity Incentive Plan and related
documents, as amended through November 30, 1999
10.07(23)+ Intuit Inc. 1996 Employee Stock Purchase Plan, as amended
through January 19, 2000
10.08(20)+ Intuit Inc. 1996 Directors Stock Option Plan, and related
documents, as amended through November 30, 1999
10.09(4)+ Intuit's form of Non-Plan Non-Qualified Stock Option
Agreement
10.10(9)+ Intuit Inc. 1998 Option Plan for Mergers and Acquisitions,
as amended through April 28, 1999 and related documents
10.11(16)+ Intuit Inc. Form of Amendment to All Stock Options
Outstanding at February 19, 1999
10.12(5)+ Letter Agreement of Employment dated March 30, 1994 between
Intuit and William V. Campbell
10.13(23)+ Employment Agreement dated January 21, 2000 between Intuit
and Stephen M. Bennett
10.14(23)+ Restricted Stock Purchase Agreements, dated January 24, 2000
between Intuit and Stephen M. Bennett
10.15(23)+ Confidential Agreement and General Release of Claims between
Intuit Inc. and William H. Harris, Jr., dated September 23,
1999
10.16(24)+ Separation Agreement between Intuit and Mark Goines dated
March 9, 2000
10.17(24)+ Separation Agreement between Intuit and James Heeger dated
May 2, 2000
10.18(4) Form of Indemnification Agreement entered into by Intuit
with each of its directors and certain executive officers
10.19* Supply Agreement effective as of January 1, 2000 by and
between Intuit Inc. and John H. Harland Company
10.20(11) Stock Purchase and Option Agreement by and between Security
First Technologies Corporation and Intuit Inc., dated as of
May 16, 1999
10.21(16) Master Agreement between Intuit Inc. and Modus Media
International, Inc., dated as of August 31, 1999
10.22(12) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2700 Coast Drive, Mountain
View, California to commence on January 1, 1999
10.23(12) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2750 Coast Drive, Mountain
View, California to commence on January 1, 1998
10.24(12) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2475 Garcia Drive, Mountain
View, California
10.25(12) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2525 Garcia Drive, Mountain
View, California
10.26(12) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2535 Garcia Drive, Mountain
View, California
10.27(13) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2500 Garcia Drive, Mountain
View, California
10.28(13) Lease Agreement dated as of November 30, 1994 between Intuit
and Charleston Properties for 2550 Garcia Drive, Mountain
View, California
10.29(6) Lease Agreement dated as of January 7, 1998 between Intuit
and Charleston Properties for 2650 Casey Drive, Mountain
View, California
10.30* Lease Agreement dated as of April 30, 1999 between Intuit
and Charleston Properties for 2675 Coast Drive, Mountain
View, California
10.31* Lease Agreement dated as of March 29, 1999 between Intuit
and various parties as Landlord for 2632 Marine Way,
Mountain View, California
10.32(24) Lease Agreement dated January 31, 2000 between Intuit and
Broderick Way Partners, LLC for 2700 Broderick Way, Mountain
View, California
10.33(14) Build-to-Suit Lease Agreement dated as of June 9, 1995 as
amended April 14, 1998 between Intuit and Kilroy Realty
Corporation, successor to UTC Greenwich Partners, a
California limited partnership for 6200 and 6220 Greenwich,
San Diego, California
10.34* Lease Agreement dated as of July 2, 1997 between Intuit and
Spieker Properties, L.P. for 6060 Nancy Ridge Road, San
Diego, California
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<S> <C>
10.35(24) Consent to Sublease Agreement dated March 31, 2000 among
Intuit Inc. as subtenant, Spieker Properties, L.P. and
Franklin Templeton Corporate Services, Inc. for Eastgate
Mall, San Diego, California
10.36(6) Offer to Purchase Real Estate Agreement dated as of October
14, 1997, as amended on December 5, 1997, between Intuit
Inc. and General American Life Insurance Company, for
property located at 110 Juliad Court, Fredericksburg,
Virginia (purchase and sale agreement)
10.37(6) Build-to-Suit Lease Agreement dated as of April 8, 1998,
between Intuit and TACC Investors, LLC for property located
at 2800 East Commerce Center Place, Tucson, Arizona
10.38(16) Deed of Lease dated as of July 27, 1999 between Intuit and
Waterfront I Corporation for 44 Canal Center Plaza,
Alexandria, Virginia
10.39(16) Lease Agreement dated as of June 1, 1993 between Intuit as
successor in interest to Computing Resources, Inc. who is
successor in interest to Pioneer Bank and Dermody Properties
for 5400 Equity Avenue, Reno, Nevada
10.40(16) Lease Agreement dated as of January 1, 1994 between Intuit
as successor in interest to Computing Resources, Inc. and
1285 Financial Boulevard, Inc. for 1285 Financial Boulevard,
Reno, Nevada
10.41* Lease Agreement dated as of February 28, 1999 between
Intuit's CRI subsidiary and 1225 Financial Boulevard, Inc.
for 1225 Financial Boulevard, Reno, Nevada
10.42(16) Lease Agreement dated as of January 1, 1996 between Intuit
as successor in interest to Computing Resources, Inc. and
565 Rio Vista Drive, Inc. for 565 Rio Vista Drive, Fallon,
Nevada
10.43(16) Sublease Agreement and Amendments between Lacerte Software
Corporation and Oryx Energy Company for 13155 Noel Road,
Suite 2200, Dallas, Texas
10.44(24) Office Lease Agreement dated February 22, 2000 between
Lacerte Software Corporation and KCD-TX 1 Investment Limited
Partnership for office space in Plano, Texas
10.45(17)+ Non-Competition Agreement by and among Intuit, Rock
Financial Corporation and Daniel Gilbert, dated October 6,
1999
21.01* List of Intuit's Subsidiaries
23.01* Consent of Ernst & Young LLP, Independent Auditors
23.02* Consent of KPMG LLP, Independent Auditors
24.01* Power of Attorney (see signature page)
27.01* Financial Data Schedule (filed only in electronic format)
</TABLE>
---------------
+ Indicates a management contract or compensatory plan or arrangement
* Filed with this Form 10-K
(1) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1997, filed with the Commission on March 14, 1997 and incorporated by
reference
(2) Filed as an exhibit to Intuit's Form 8-K, Amendment No. 1, filed with the
Commission on May 19, 1998 and incorporated by reference
(3) Filed as an Exhibit to Intuit's Form 8-K filed with the Commission on May
7, 1999 and incorporated by reference
(4) Filed as an exhibit to Intuit's Registration Statement on Form S-1, filed
with the Commission on February 3, 1993, as amended (File No. 33-57884) and
incorporated by reference.
(5) Filed as an exhibit to Intuit's Form 10-K as originally filed with the
Commission on October 31, 1994, as amended, and incorporated by reference
(6) Filed as an Exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1998, filed with the Commission on October 6, 1998 and incorporated by
reference
(7) Filed as an exhibit to Intuit's Form 8-K filed with the Commission on May
2, 1998 and incorporated by reference
(8) Filed as an exhibit to the ChipSoft Form S-1 registration statement filed
with the Commission on February 24, 1993 (file No. 33-57692) and
incorporated by reference
(9) Filed as an Exhibit to Intuit's Registration Statement on Form S-8, filed
with the Commission on May 7, 1999 and incorporated by reference
(10) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1995, filed with the Commission on December 14, 1995 and incorporated by
reference
(11) Filed as an Exhibit to Intuit's Form 10-Q for the quarter ended April 30,
1999 and incorporated by reference
(12) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
1995, filed with the Commission on March 17, 1995 and incorporated by
reference
76
<PAGE> 77
(13) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1997, filed with the Commission on October 15, 1997 and incorporated by
reference
(14) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1995, filed with the Commission on October 30, 1995 and incorporated by
reference
(15) Filed as an exhibit to Intuit's Form S-4 registration statement (file no.
333-90393), filed with the Commission on November 5, 1999 and incorporated
by reference
(16) Filed as an exhibit to Intuit's Form 10-K for the fiscal year ended July
31, 1999, filed with the Commission on October 12, 1999 and as amended
October 27, 1999
(17) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended October 31,
1999 , filed with the Commission on December 14, 1999
(18) Filed as an exhibit to Intuit's Form S-8 registration statement (file no.
333-92503), filed with the Commission on December 10, 1999 and incorporated
by reference
(19) Filed as an exhibit to Intuit's Form S-8 registration statement ( file no.
333-92517), filed with the Commission on December 10, 1999 and incorporated
by reference
(20) Filed as an exhibit to Intuit's Form S-8 registration statement (file no.
333-92515), filed with the Commission on December 10, 1999 and incorporated
by reference
(21) Filed as an exhibit to Intuit's Form S-8 registration statement (file no.
333-84385), filed with the Commission on August 2, 1999 and incorporated by
reference
(22) Filed as an exhibit to Intuit's Form S-8 registration statement (file no.
333-85349), filed with the Commission on August 17, 1999 and incorporated
by reference
(23) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended January 31,
2000, filed with the Commission on March 16, 2000 and incorporated by
reference
(24) Filed as an exhibit to Intuit's Form 10-Q for the quarter ended April 30,
2000, filed with the Commission on June 14, 2000
(25) Filed as an Exhibit to Intuit's Form 8-K filed with the Commission on
September 13, 2000 and incorporated by reference.
(b) Reports on Form 8-K
1. On November 24, 1999, Intuit filed a report on Form 8-K to report under
Item 5 its financial results for the quarter ended October 31, 1999.
Intuit's balance sheet and statement of operations as of and for the
three months ended October 31, 1999 were included in the 8-K.
2. On January 25, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that the Board of Directors had selected Stephen M. Bennett as the
President and Chief Executive Officer of Intuit effective as of January
24, 2000.
3. On September 13, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that it had completed the acquisition of Venture Finance Software
Corp. No financial statements were filed with the report.
(c) Exhibits
See Item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
77
<PAGE> 78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTUIT INC.
Dated: October 13, 2000
By: /s/ GREG J. SANTORA
--------------------------------------
Greg J. Santora
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
78
<PAGE> 79
POWER OF ATTORNEY
By signing this Form 10-K below, I hereby appoint each of Stephen M. Bennett
and Greg J. Santora, as my attorney-in-fact to sign all amendments to this Form
10-K on my behalf, and to file this Form 10-K (including all exhibits and other
documents related to the Form 10-K) with the Securities and Exchange Commission.
I authorize each of my attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions that he believes are
necessary or appropriate to carry out the intention and purpose of this Power of
Attorney. I ratify and confirm all lawful actions taken directly or indirectly
by my attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <C> <S>
PRINCIPAL EXECUTIVE OFFICER:
/s/ STEPHEN M. BENNETT President, Chief Executive Officer October 13, 2000
----------------------------------------------------- and Director
Stephen M. Bennett
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ GREG J. SANTORA Senior Vice President and October 13, 2000
----------------------------------------------------- Chief Financial Officer
Greg J. Santora
ADDITIONAL DIRECTORS:
/s/ CHRISTOPHER W. BRODY Director October 13, 2000
-----------------------------------------------------
Christopher W. Brody
/s/ WILLIAM V. CAMPBELL Chairman of the Board October 13, 2000
----------------------------------------------------- of Directors
William V. Campbell
/s/ SCOTT D. COOK Director October 13, 2000
-----------------------------------------------------
Scott D. Cook
Director October , 2000
-----------------------------------------------------
L. John Doerr
/s/ DONNA L. DUBINSKY Director October 13, 2000
-----------------------------------------------------
Donna L. Dubinsky
/s/ MICHAEL R. HALLMAN Director October 13, 2000
-----------------------------------------------------
Michael R. Hallman
/s/ WILLIAM H. HARRIS, JR. Director October 13, 2000
-----------------------------------------------------
William H. Harris, Jr.
/s/ BURTON J. MCMURTRY Director October 13, 2000
-----------------------------------------------------
Burton J. McMurtry
</TABLE>
79
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
4.01 Form of Specimen Certificate for Intuit's Common Stock
10.19 Supply Agreement effective as of January 1, 2000 by and
between Intuit Inc. and John H. Harland
Company
10.30 Lease Agreement dated as of April 30, 1999 between Intuit
and Charleston Properties for 2675 Coast Drive, Mountain
View, California
10.31 Lease Agreement dated as of March 29, 1999 between Intuit
and various parties as Landlord for 2632 Marine Way,
Mountain View, California
10.34 Lease Agreement dated as of July 2, 1997 between Intuit and
Spieker Properties, L.P. for 6060 Nancy Ridge Road, San
Diego, California
10.41 Lease Agreement dated as of February 28, 1999 between
Intuit's CRI subsidiary and 1225 Financial Boulevard, Inc.
for 1225 Financial Boulevard, Reno, Nevada
21.01 List of Intuit's Subsidiaries
23.01 Consent of Ernst & Young LLP, Independent Auditors
23.02 Consent of KPMG LLP, Independent Auditors
24.01 Power of Attorney (see signature page)
27.01 Financial Data Schedule (filed only in electronic format)
</TABLE>
