<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended October 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0034661
-------- ----------
(State of incorporation) (IRS employer identification no.)
</TABLE>
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Approximately 206,912,924 shares of Common Stock, $0.01 par value, as of
November 30, 2000
<PAGE> 2
FORM 10-Q
INTUIT INC.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
NUMBER
------
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 2000 and October 31, 2000..................... 3
Condensed Consolidated Statements of Operations for
the three months ended October 31, 1999 and 2000....... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended October 31, 1999 and 2000....... 5
Notes to Condensed Consolidated Financial Statements ........... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 28
ITEM 4: Submission of Matters to a Vote of Security Holders ............ 29
ITEM 5: Other Matters................................................... 30
ITEM 6: Exhibits and Reports on Form 8-K................................ 31
Signatures...................................................... 32
</TABLE>
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<PAGE> 3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
(In thousands, except par value) 2000 2000
----------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 416,953 $ 278,719
Short-term investments .......................................... 1,050,220 1,092,665
Marketable securities ........................................... 225,878 154,647
Accounts receivable, net ........................................ 67,420 67,938
Prepaid expenses and other current assets (1) ................... 368,323 396,364
----------- -----------
Total current assets ........................................ 2,128,794 1,990,333
Property and equipment, net ...................................... 167,707 183,243
Goodwill and intangibles, net .................................... 438,878 529,318
Investments ...................................................... 31,160 43,279
Other assets (2) ................................................. 112,363 112,250
----------- -----------
Total assets ..................................................... $ 2,878,902 $ 2,858,423
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 79,145 $ 81,877
Escrow liabilities .............................................. 32,077 36,571
Deferred revenue ................................................ 107,578 121,169
Income tax payable .............................................. 110,743 50,401
Deferred income taxes ........................................... 53,934 31,552
Other current liabilities ....................................... 423,360 446,493
----------- -----------
Total current liabilities ................................... 806,837 768,063
Long-term obligations ............................................ 538 18,505
Minority interest ................................................ 238 288
Commitments and contingencies ....................................
Stockholders' equity:
Preferred stock ................................................ -- --
Common stock and additional paid in capital ..................... 1,521,559 1,587,467
Deferred compensation ........................................... (26,522) (24,750)
Accumulated other comprehensive income, net ..................... 55,586 21,949
Retained earnings ............................................... 520,666 486,901
----------- -----------
Total stockholders' equity .................................. 2,071,289 2,071,567
----------- -----------
Total liabilities and stockholders' equity ....................... $ 2,878,902 $ 2,858,423
=========== ===========
</TABLE>
(1) Includes $7.2 million notes receivable from Venture Finance Software
Corp. as of July 31, 2000.
(2) Includes $6.5 million and $7.1 million loans due from affiliates as of
July 31, 2000 and October 31, 2000, respectively.
See accompanying notes.
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<PAGE> 4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1999 2000
--------- ---------
<S> <C> <C>
(In thousands, except per share data; unaudited)
Net revenue .......................................................... $ 176,928 $ 187,522
Costs and expenses:
Cost of revenue ..................................................... 58,871 69,881
Customer service and technical support .............................. 34,301 32,396
Selling and marketing ............................................... 69,905 61,100
Research and development ............................................ 41,713 47,878
General and administrative .......................................... 21,492 27,783
Charge for purchased research and development ....................... 1,312 --
Amortization of acquisition costs ................................... 37,091 39,679
Reorganization costs ................................................ 3,500 --
--------- ---------
Total costs & expenses .............................................. 268,185 278,717
--------- ---------
Loss from operations ................................................. (91,257) (91,195)
Interest and other income and expense, net ........................... 8,476 16,118
Losses on marketable securities and other investments, net ........... (17,309) (3,868)
--------- ---------
Loss before income tax benefit, minority interest and
cumulative effect of accounting change ............................. (100,090) (78,945)
Income tax benefit ................................................... 34,170 30,916
Minority interest .................................................... 59 (50)
--------- ---------
Loss before cumulative effect of accounting change ................... (65,861) (48,079)
Cumulative effect of change in accounting for derivatives, net of
taxes .............................................................. -- 14,314
--------- ---------
Net loss ............................................................. $ (65,861) $ (33,765)
========= =========
Basic and diluted net loss per share before
cumulative effect of accounting change ............................. $ (0.33) $ (0.23)
Cumulative effect of accounting change ............................... -- 0.07
--------- ---------
Basic and diluted net loss per share ................................. $ (0.33) $ (0.16)
========= =========
Shares used in per share amounts ..................................... 197,362 205,727
========= =========
</TABLE>
See accompanying notes.
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<PAGE> 5
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1999 2000
--------- ---------
<S> <C> <C>
(In thousands; unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................................... $ (65,861) $ (33,765)
Adjustments to reconcile net income to net cash used by operating activities:
Amortization of goodwill and other purchased intangibles .................... 31,148 43,110
Depreciation ................................................................ 8,778 14,610
Net loss from marketable securities ......................................... 17,309 3,868
Cumulative effect of accounting change ...................................... -- (23,857)
Deferred income tax benefit (provision) ..................................... (3,691) 2,170
Tax benefit from employee stock options ..................................... 52,796 32,006
Changes in assets and liabilities:
Accounts receivable ...................................................... (23,376) (95)
Prepaid expenses and other current assets ................................ 81,476 (1,462)
Other assets ............................................................. (5) (1,255)
Accounts payable ......................................................... 24,657 (6,620)
Escrow liabilities ....................................................... (35,741) 3,937
Deferred revenue ......................................................... 18,547 13,591
Income taxes payable ..................................................... (136,985) (60,342)
Other accrued liabilities ................................................ 7,733 (1,144)
Minority interest ........................................................ (59) 50
--------- ---------
Net cash used by operating activities .................................. (23,274) (15,198)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................................... (27,257) (29,383)
Proceeds from the sale of marketable securities .................................. -- 24,137
Purchase of marketable securities ................................................ (2,974) --
Purchase of short-term investments ............................................... (162,291) (998,903)
Liquidation and maturity of short-term investments ............................... 83,587 956,458
Acquisitions and dispositions, net of cash acquired .............................. (95,561) (105,860)
Purchase of long-term investments ................................................ (4,300) (1,000)
--------- ---------
Net cash used by investing activities .................................. (208,796) (154,551)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal proceeds (payments) on long-term debt .................................. 2,419 (2,943)
Net increases (payments) under warehouse line of credit .......................... (8,660) 557
Net proceeds from issuance of common stock ....................................... 10,556 33,901
--------- ---------
Net cash provided by financing activities .............................. 4,315 31,515
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......................................... (227,755) (138,234)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................... 554,230 416,953
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................................... $ 326,475 $ 278,719
========= =========
</TABLE>
See accompanying notes.
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<PAGE> 6
INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting 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 global markets. Sales are made primarily through retail and
OEM distribution channels, traditional direct sales to customers and via the
Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. All intercompany balances and transactions have
been eliminated in consolidation. Certain other previously reported amounts have
been reclassified to conform to the current presentation format. We have
included all normal recurring adjustments considered necessary to give a fair
presentation of our operating results for the periods shown. Results for the
three months ended October 31, 2000 do not necessarily indicate the results to
be expected for the fiscal year ending July 31, 2001 or any other future period.
All financial statements presented are restated to include the results of our
Rock Financial Corporation ("Rock") and Title Source, Inc. ("Title Source")
subsidiaries that were acquired on December 8, 1999 in a transaction that was
accounted for as a pooling of interests. These statements and accompanying notes
should be read together with the audited consolidated financial statements for
the fiscal year ended July 31, 2000 included in Intuit's Form 10-K, filed with
the Securities and Exchange Commission.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and the
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, 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 software 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.
-6-
<PAGE> 7
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 once upon
delivery of the product or completion of the service, rather than ratably 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 placed. By contrast, for on-line transactions for which we receive a payment
(such as the sale of mortgage loans through our Quicken Loans 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 the associated commissions and processing
costs on loans held for sale until the related loan is sold. We recognize gains
and losses on loans at the time we sell them, based upon the difference between
the selling price and the carrying value of the related loans sold. We recognize
loan servicing revenue as the related principal is collected. We recognize
interest income on mortgage loans as it is earned, and we recognize interest
expenses on related borrowings as we incur them.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
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.
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<PAGE> 8
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, OCTOBER 31,
2000 2000
---------- ----------
(unaudited)
<S> <C> <C>
(In thousands)
Cash and cash equivalents:
Cash ................................. $ 4,298 $ 16,974
Certificate of deposits .............. -- 8,060
Money market funds ................... 338,462 180,138
Commercial paper & corporate notes ... 29,543 25,531
Municipal bonds ...................... 44,650 48,016
---------- ----------
$ 416,953 $ 278,719
========== ==========
Short-term investments:
Certificates of deposit .............. $ 5,053 $ --
Corporate notes ...................... 75,640 82,961
Municipal bonds ...................... 920,360 945,631
U.S. Government securities ........... 49,167 64,073
---------- ----------
$1,050,220 $1,092,665
========== ==========
</TABLE>
The following table outlines the estimated fair value of Intuit's
available-for-sale debt securities held in short-term investments classified by
the maturity date listed on the security.
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
2000 2000
---------- ----------
(unaudited)
<S> <C> <C>
(In thousands)
Due within one year .................. $ 235,998 $ 266,823
Due within two years ................. 157,309 139,697
Due within three years ............... 13,039 8,700
Due after three years ................ 638,821 677,445
---------- ----------
$1,045,167 $1,092,665
========== ==========
</TABLE>
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<PAGE> 9
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. We have designated our investments in At Home Corporation
(which does business as Excite@ Home), VeriSign and 724 Solutions as trading
securities and fluctuations in the market value of these shares are reported in
net income. We held the following marketable securities at July 31, 2000 and
October 31, 2000:
AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
JULY 31, 2000
Checkfree Corporation common stock $ 36,875 $ 115,000 $ -- $ 151,875
Homestore.com, Inc. common stock 1,689 10,626 -- 12,315
Quotesmith.com, Inc. common stock 5,645 -- (2,721) 2,924
S1 Corporation common stock 49,997 -- (25,302) 24,695
--------- --------- --------- ---------
$ 94,206 $ 125,626 $ (28,023) $ 191,809
========= ========= ========= =========
OCTOBER 31, 2000
(unaudited)
Checkfree Corporation common stock $ 35,621 $ 84,525 $ -- $ 120,146
Quotesmith.com, Inc. common stock 5,645 -- (4,592) 1,053
S1 Corporation common stock 49,997 -- (38,287) 11,710
--------- --------- --------- ---------
$ 91,263 $ 84,525 $ (42,879) $ 132,909
========= ========= ========= =========
</TABLE>
TRADING SECURITIES
<TABLE>
<CAPTION>
NET RECOGNIZED
-------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
JULY 31, 2000
Excite@Home common stock $ 119,366 $ -- $ (92,997) $ 26,369
VeriSign, Inc. common stock 4,916 -- (1,833) 3,083
724 Solutions common stock 7,700 -- (3,083) 4,617
--------- --------- --------- ---------
$ 131,982 $ -- $ (97,913) $ 34,069
========= ========= ========= =========
OCTOBER 31, 2000
(unaudited)
Excite@Home common stock $ 119,366 $ -- $ (99,942) $ 19,424
VeriSign, Inc. common stock 2,458 -- (1,175) 1,283
724 Solutions common stock 2,118 -- (1,087) 1,031
--------- --------- --------- ---------
$ 123,942 $ -- $(102,204) $ 21,738
========= ========= ========= =========
</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 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 October
31, 2000 was $49.75 per share. At October 31, 2000, we held approximately 2.4
million shares, or approximately 2.8%, of Checkfree's outstanding common stock.
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<PAGE> 10
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 October 31, 2000 was $0.88 per share. At October
31, 2000, we held approximately 1.2 million shares, or approximately 6.3%, 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 October 31, 2000 was $12.06 per share. At October 31,
2000, we held approximately 1.0 million shares, or approximately 1.7%, of S1's
outstanding common stock. In connection with the above purchase, we also
received an option to purchase up to additional 4.6 million shares of S1
exercisable at a per share purchase price of $51.50. At October 31, 2000, these
S1 options are now considered derivatives and were valued at $11.1 million using
the Black-Scholes model and are classified as long term investments.
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 October 31, 2000, we owned approximately 1.9
million shares (less than 1%) of Excite@Home common stock and reported a
recognized cumulative valuation loss of approximately $99.9 million for these
securities. The closing price of Excite@Home (Nasdaq symbol ATHM) at October 31,
2000, was $10.31 per share.
In connection with VeriSign Corporation's acquisition of Signio in February
2000, our shares of Signio were converted into VeriSign common stock. 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 October 31, 2000, we owned 9,716 shares
(less than 1%) of VeriSign common stock and reported a recognized cumulative
valuation loss of approximately $1.2 million for these securities. The closing
price of VeriSign (Nasdaq symbol VRSN) at October 31, 2000, was $132.00 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. 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 October 31, 2000, we owned 37,906 shares
(less than 1%) of 724 Solutions common stock and reported a recognized
cumulative valuation loss of approximately $1.1 million for these securities.
The closing price of 724 Solutions (Nasdaq symbol SVNX) at October 31, 2000, was
$27.19 per share.
During the first quarter of fiscal 2001, we sold 85,000 shares of Checkfree,
351,865 shares of Homestore.com, and 99,902 shares of 724 Solutions. In
connection with these sales we recognized realized gains of $4.0 million, $ 11.1
million, and $0.1 million, respectively. In addition we sold 9,715 shares of
VeriSign and recognized realized losses of $0.2 million. Total net gains on
sales of marketable securities were $8.9 million for the first quarter of fiscal
2001. This gain was offset by a recognized loss for the quarter of $12.8 million
for the valuation of our S1 options, resulting in a net loss on marketable
securities of $3.9 million.
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 and, in the case of securities treated as trading
securities, a negative impact on our operating results.
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<PAGE> 11
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their book
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
LIFE IN ----------------------------------
YEARS JULY 31 2000, OCTOBER 31 2000,
---- ------------ ---------------
(unaudited)
<S> <C> <C> <C>
(in thousands)
Goodwill .......................... 3-5 $358,890 $425,441
Customer lists .................... 3-5 57,890 53,372
Covenant not to compete ........... 3-5 4,992 4,495
Purchased technology .............. 1-5 10,990 40,104
Assembled workforce ............... 2-5 1,976 1,989
Trade names and logos ............. 1-10 4,140 3,917
</TABLE>
Balances presented above are net of total accumulated amortization of $465.3
million and $506.6 million at July 31, 2000 and October 31, 2000, respectively.
Concentration of Credit Risk
We are subject to risks related to changes in the values of our significant
balances of short-term investments and marketable securities and the
collectability of our trade accounts receivable. At October 31, 2000, we held
approximately $154.6 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.
In the normal course of our mortgage business, we enter into loan commitments to
extend credit in order to meet the financing needs of our customers. Loan
commitments are agreements to lend to a customer as long as all conditions
specified in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require the customer to pay a fee. We
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral we obtain is based on our credit evaluation of the customer.
Loan commitments subject us to market risks and credit risks. Market risk occurs
if interest rates rise after a loan commitment is made. To offset this risk on
conventional loans that are in process, we purchase puts and calls on U.S.
Treasury securities. At October 31, 2000, we held calls in the amount of $8.0
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.
-11-
<PAGE> 12
Loan commitments to extend credit at July 31, 2000 and October 31, 2000 were as
follows:
<TABLE>
<CAPTION>
JULY 31, 2000 OCTOBER 31, 2000
------------------------------- -------------------------------
FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE
---------- ------------- ---------- -------------
(unaudited)
<S> <C> <C> <C> <C>
(In thousands)
Conventional prime loans ..... $167,000 $ 31,100 $141,101 $ 19,795
Sub-prime loans .............. 4,200 1,700 3,002 1,182
High-LTV loans ............... 600 -- 115 --
-------- -------- -------- --------
$171,800 $ 32,800 $144,218 $ 20,977
======== ======== ======== ========
</TABLE>
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires us to recognize all derivatives as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
It further provides criteria for designating derivative instruments at fair
value, cash flow, or foreign currency hedges, and establishes accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon the date of adoption, August 1, 2000, we recorded the cumulative effect of
the change in accounting for derivatives for our S1 options held. This resulted
in a one-time cumulative effect of $14.3 million, net of taxes totaling $9.5
million, as of August 1, 2000. FAS 133 requires the derivatives to be carried at
fair value, so subsequent fluctuations in the fair value of these options will
be included in our net income. During the first quarter of fiscal 2001 these
fluctuations resulted in a loss of $7.6 million net of taxes, this created a
decrease of $0.04 per share on the basic and diluted net loss per share for the
period. The following table shows what adjusted net loss from continuing
operations and basic and diluted net loss per share from continuing operation of
Intuit would have been as if we had adopted this standard as of the beginning of
fiscal 2000:
<TABLE>
<CAPTION>
Three Months Ended October 31, 1999
-----------------------------------
As Adjusted As Reported
------------ ------------
<S> <C> <C>
(In thousands, except per share data; unaudited)
Net loss from continuing operations ....................................... $ (54,733) $ (65,861)
Basic and diluted loss per share from continuing operations ............... $ (0.28) $ (0.33)
</TABLE>
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 April 2000 the FASB issued FASB Interpretation Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB 25 ("FIN
44"). FIN 44 specifically answers twenty-nine questions on the implementation of
APB 25 that were derived from a survey of members of the Emerging Issues Task
Force ("EITF") and the task force on stock compensation. FIN 44 was effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur
after December 15, 1998. To the extent that FIN 44 covers events occurring
during the period after December 15, 1998, but before the effective date of July
1, 2000, the effects of applying FIN 44 are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 has not had a material effect on our
financial position and results of operations.
-12-
<PAGE> 13
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
common equivalent shares is anti-dilutive.
On September 8, 1999, our Board of Directors declared a three-for-one stock
split, which was effected as a stock dividend of two shares of common stock for
each share of Intuit's common stock outstanding. Stockholders of record on
September 20, 1999 were issued two additional shares of common stock for each
share of Intuit's common stock held on that date. The payment date for the stock
dividend was September 30, 1999. We have restated all share and per share
amounts referred to in the financial statements and notes to reflect this stock
split.
3. COMPREHENSIVE NET INCOME
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.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
-------------------------------
1999 2000
--------- ---------
<S> <C> <C>
(In thousands; unaudited)
Beginning balance gain, net of tax ................. $ 79,144 $ 55,586
Unrealized gain (loss) on marketable securities .... 145,747 (72,449)
Realized gain (loss) on marketable securities ...... -- 16,492
Tax benefit (effect) on marketable securities ...... (58,299) 22,383
Translation adjustment gain (loss), net of tax ..... (2,485) (63)
--------- ---------
Ending balance gain, net of tax .................... $ 164,107 $ 21,949
========= =========
</TABLE>
4. ACQUISITIONS
On August 30, 2000, we purchased all of the outstanding securities of VFSC that
were not already held by Intuit (approximately 51%) for approximately $118
million in cash (including approximately $4.5 million in option exercise and tax
payments in connection with VFSC options exercised immediately prior to the
purchase). We participated in the formation of VFSC in May 1998 in order to
facilitate the development of certain Web-oriented finance products. We acquired
the remaining securities of VFSC pursuant to the exercise of a purchase option
that we received in connection with the formation of VFSC. We accounted for the
acquisition of VFSC as a purchase for accounting purposes and allocated
approximately $113 million to identified intangible assets and goodwill. These
assets are being amortized over a period of three to five years.
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.
-13-
<PAGE> 14
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, 2000 and October 31, 2000 were 7.69% and
7.76%, respectively. The weighted average interest rates for the three months
ended October 31, 1999 and October 31, 2000 were 6.39% and 7.76%, 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 sub-limits, advance rates and warehouse terms that vary depending on
the type of underlying loan. The interest rates in effect at July 31, 2000 and
October 31, 2000 were 7.89% and 7.84%, respectively, while the weighted average
interest rates for the three months ended October 31, 1999 and October 31, 2000
were 6.43% and 7.73%, respectively. We are required to maintain a minimum
tangible net worth and to satisfy other financial covenants, as outlined in the
line of credit agreements. We were in compliance with the requirements as of
July 31, 2000 and October 31, 2000.
Drafts payable represent funds advanced for mortgages originated that have not
yet been drawn against the lines of credit.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
2000 2000
-------- --------
<S> <C> <C>
(In thousands) (unaudited)
Short-term notes payable .......................... $ 34,286 $ 34,376
Accrued Compensation and related liabilities ...... 49,303 52,129
Future payments due for CRI acquisition ........... 44,916 45,690
Payroll tax obligations ........................... 177,002 190,922
Rebates ........................................... 21,552 16,104
Other accruals .................................... 96,301 139,480
-------- --------
$423,360 $446,493
======== ========
</TABLE>
-14-
<PAGE> 15
7. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Intuit has adopted Statement of Financial Accounting No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS 131
establishes standards for the way in which public companies disclose certain
information about operating segments in the Company's financial reports.
Consistent with SFAS 131, we have determined our operating segments based on
factors such as how our operations are managed and how results are viewed by
management. Since Internet-based revenues and expenses cut across all of our
business divisions, we do not report results of our Internet-based businesses as
a separate business segment in our financial statements. Instead, each of our
business divisions reports Internet-based revenues and expenses that are
specific to its operations and are included in its results. The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies. Intuit does not track assets by
operating segments. Consequently, we do not disclose assets by operating
segments. The following unaudited results for the three month periods October
31, 1999 and 2000 are broken out by our operating segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SMALL CONSUMER GLOBAL
OCTOBER 31, 1999 BUSINESS TAX FINANCE BUSINESS
(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue .................................... $ 80,119 $ 11,120 $ 68,048 $ 17,641 $ -- $ 176,928
Segment operating income (loss) ................ 17,516 (34,400) 5,441 (2,165) -- (13,608)
Common expenses ................................ -- -- -- -- (33,314) (33,314)
--------- --------- --------- --------- --------- ---------
Sub-total operating income (loss) .............. 17,516 (34,400) 5,441 (2,165) (33,314) (46,922)
Realized net losses on marketable securities ... -- -- -- -- (17,309) (17,309)
Acquisition costs .............................. -- -- -- -- (40,835) (40,835)
Reorganization costs ........................... -- -- -- -- (3,500) (3,500)
Interest income (expense) and other items ...... -- -- -- -- 8,476 8,476
--------- --------- --------- --------- --------- ---------
Net income (loss) before tax ................... $ 17,516 $ (34,400) $ 5,441 $ (2,165) $ (86,482) $(100,090)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SMALL CONSUMER GLOBAL
OCTOBER 31, 1999 BUSINESS TAX FINANCE BUSINESS
(In thousands; unaudited) DIVISION DIVISION DIVISION DIVISION OTHER(1) CONSOLIDATED
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue .................................... $ 93,731 $ 12,372 $ 63,522 $ 17,901 $ (4) $ 187,522
Segment operating income (loss) ................ (183) 5,371 (45,503) (4,106) -- (44,421)
Common expenses ................................ -- -- -- -- (4,108) (4,108)
--------- --------- --------- --------- --------- ---------
Sub-total operating income (loss) .............. (183) 5,371 (45,503) (4,106) (4,108) (48,529)
Realized net losses on marketable securities ... -- -- -- -- (3,868) (3,868)
Acquisition costs .............................. -- -- -- -- (42,666) (42,666)
Reorganization costs ........................... -- -- -- -- -- --
Interest income (expense) and other items ...... -- -- -- -- 16,118 16,118
--------- --------- --------- --------- --------- ---------
Net income (loss) before tax ................... $ (183) 5,371 (45,503) (4,106) $ (34,524) $ (78,945)
========= ========= ========= ========= ========= =========
</TABLE>
-----------
(1) "Other" includes acquisition and other common costs not allocated to
specific segments. Certain types of expenses that were considered common
expenses in fiscal 2000 are being allocated to specific business
segments during fiscal 2001, which resulted in significantly lower
common expenses for the three months ended October 31, 2000.
-15-
<PAGE> 16
8. NOTES PAYABLE AND COMMITMENTS
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
October 31, 2000, the rate was approximately 1.07%. 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.
9. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
10. LITIGATION
On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the
United States District Court, Central District of California, Eastern Division.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. The
Bruce and Newby lawsuits were consolidated into one lawsuit - In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. 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 Almanza complaint was amended
on October 26, 2000. These purported class actions allege violations of various
federal and California statutes and common law claims for invasion of privacy
based upon the alleged intentional disclosure to third parties of personal and
private customer information entered at Intuit's Quicken.com website. The
complaints seek injunctive relief, orders to disgorge profits related to the
alleged acts, and statutory and other damages. Intuit believes these lawsuits
are without merit and intends to defend the litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
11. SUBSEQUENT EVENTS
On November 15, 2000 we entered into an agreement to acquire all of the
outstanding stock of EmployeeMatters, Inc. for approximately $41.4 million in
Intuit stock. In addition, we expect to extend bridge loans to EmployeeMatters
in an aggregate amount of approximately $8.0 million up through the closing, and
to assume liabilities of approximately $4.0 million in connection with the
transaction. EmployeeMatters, which is based in Stamford, Connecticut, provides
human resource management, benefits and payroll services via the Internet. The
acquisition, which is subject to various conditions, including customary
regulatory and other approvals, is expected to be completed by the end of the
second quarter of fiscal 2001 and will be treated as a purchase for accounting
purposes.
-16-
<PAGE> 17
On November 25, 2000, we entered into an Asset Purchase Agreement pursuant to
which we have agreed to sell selected assets of our QuickenInsurance business to
InsWeb Corp. in exchange for approximately $14 million of common stock of InsWeb
(representing a 16.6% equity interest on a post-closing basis). In addition, we
will enter into a distribution agreement under which InsWeb will become the
exclusive consumer insurance aggregator for our Quicken.com and QuickenInsurance
Web sites and certain consumer desktop products. In exchange, we will share in
associated revenues, which are subject to certain minimums over the 5-year term
of the distribution agreement. The transactions are expected to close in the
first calendar quarter of 2001, subject to various conditions, including
regulatory clearances and customary closing conditions.
-17-
<PAGE> 18
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
Throughout this Form 10-Q, you will find "forward-looking" statements, or
statements about events or circumstances that have not yet occurred. In some
cases, you can identify these statements by forward-looking words such as "may,"
"might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," and other similar terms.
These forward-looking statements 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
"Risks That Could Affect Future Results," at the end of this Item 2. This Item 2
should also be read in conjunction with the Consolidated Financial Statements
and related Notes in Part I, Item 1 of this Form 10-Q, and our fiscal 2000 Form
10-K.
OVERVIEW
Intuit's mission is to revolutionize how people manage their financial lives and
small businesses manage their businesses. We strive to offer innovative products
and services that 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 Quicken(R), QuickBooks(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) and Quicken Loans (SM).
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season and
the beginning of the calendar year, and therefore our major product launches
usually occur in the fall or early winter to take advantage of these customer
buying patterns. These seasonal patterns mean that revenue is usually highest
during the quarters ending January 31 and April 30. We experience lower revenues
for the quarters ending July 31 and October 31, while our operating expenses to
develop and 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 that have relatively high fixed expenses.
Acquisitions and dispositions in particular can have a significant impact on the
comparability of both our quarterly and annual results, and acquisition-related
expenses have had a negative impact on earnings.
While desktop software and related products and services provide most of our
revenue, our Internet-based revenue is continuing to grow rapidly. For the three
months ended October 31, 2000, Internet-based revenue increased approximately
42% compared to the prior year quarter and accounted for approximately 27% of
total revenue in the current quarter, compared to approximately 20% in the prior
year quarter. We use the term Internet-based revenue to include revenue from
both Internet-enabled products and services as well as revenue generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies. Since Internet-based revenues cut across all of our business
divisions, we do not report results of our Internet-based revenues separately in
our financial statements. Instead, each of our business divisions reports
Internet-based revenues that are specific to its operations and are included in
its results.
-18-
<PAGE> 19
We believe our Internet-based businesses and our other emerging businesses
provide 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 emerging 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 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."
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three months ended October 31, 1999 and 2000. Results for all periods include
activity for Rock Financial Corporation and Title Source, Inc. (collectively,
"Rock"), which were acquired in December 1999. As the acquisition of Rock was
accounted for as a pooling of interests, all prior periods have been restated to
reflect the combined results of Rock and Intuit. See Note 1 of the financial
statements.
<TABLE>
<CAPTION>
NET REVENUE 3 Mos. Ended % 3 Mos. Ended %
10/31/99 Revenue 10/31/00 Revenue % Change
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in millions; unaudited)
Small Business Division .............. $ 80.1 45% $ 93.7 50% 17 %
Tax .................................. 11.1 6% 12.4 7% 12 %
Consumer Finance ..................... 68.1 39% 63.5 34% (7)%
Global Business Division ............. 17.6 10% 17.9 9% 2 %
Total net revenue ................ $176.9 100% $187.5 100% 6 %
</TABLE>
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 Global Business Division. The table
above shows each business division's percentage of our net revenue for the three
months ended October 31, 1999 and 2000. See Note 7 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, payroll services, the QuickBooks Support Network
and QuickBooks Internet Gateway services.
Overall, revenue for the division was up 17% for the three months ended October
31, 2000 compared to the same period in the prior year. Payroll services
experienced revenue growth of 49% in the three months ended October 31, 2000
compared to the same period a year ago. This was due to greater unit sales as
well as higher average selling prices due to price increases for our online
Deluxe Payroll Service. While we believe our payroll business, and the Deluxe
Payroll Service in particular, will provide us with a significant opportunity to
generate recurring revenue in the future, we face a number of challenges and
risks, including operational issues in activating online payroll customers. See
"Risks That Could Affect Future Results." The QuickBooks Internet Gateway, which
was launched in January 2000, also contributed to the overall revenue growth for
the Small Business Division for the first quarter of fiscal year 2001. We
believe it will contribute to 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." In addition, financial
supplies experienced revenue growth of 9% for the three months ended October 31,
2000 compared to the same period in the prior year.
The increase in Small Business Division revenue was partially offset by the
expected decline in QuickBooks revenue of 15% for the first quarter of fiscal
2001 compared to the first quarter of fiscal 2000. The decline was primarily the
result of lower unit sales compared to the prior year quarter, when we
experienced exceptionally strong demand as customers purchased upgrades due to
Year 2000 concerns.
-19-
<PAGE> 20
On November 15, 2000 we entered into an agreement to acquire all of the
outstanding common and Series A preferred stock of EmployeeMatters, Inc.
EmployeeMatters, which is based in Stamford, Connecticut, provides human
resource management, benefits and payroll services via the Internet. See Note 11
of the financial statements.
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.
Due to the seasonal nature of our tax business, the first quarter typically
generates only nominal revenue from tax products in comparison to the second and
third quarters of the fiscal year. Overall, the Tax Division revenue for the
three month period ended October 31, 2000 increased by 12% compared to the same
period last year.
The development and launch of our consumer tax products for the 2000 tax year
was completed on schedule, and products reached retail shelves in early
December. However, there are still ongoing risks associated with our tax
business, including intense competition that could result in lower average
selling prices and/or a decline in our share of sales in the retail channel.
While we have undertaken product development and marketing efforts intended to
address competitive pressures, we will not be able to report revenues and
operating results for the entire tax season until late in the fiscal year.
In connection with our web-based tax preparation electronic filing services, we
also face the challenge of maintaining service levels during peak volume service
times. Although service reliability and responsiveness were very good during
fiscal 2000, we experienced brief interruptions in our electronic filing
services during February and April 1999. The exact level of demand for Quicken
TurboTax for the Web and electronic filing for the current tax year is very
difficult to predict, and we could experience adverse financial and public
relations consequences if these services are unavailable due to technical
difficulties or other reasons.
Consumer Finance Division.
Consumer Finance Division revenue comes primarily from Quicken desktop products,
Quicken Loans, advertising, sponsorship and placement fees, online transactions
and QuickenInsurance.
Overall, Consumer Finance Division revenue was down 7% for the three months
ended October 31, 2000, compared to the same quarter a year ago. Revenue for our
Quicken product line experienced an expected decline of 11% for the three months
ended October 31, 2000, compared to the prior year quarter. Our comparative
results were negatively impacted by strong consumer demand during the three
months ended October 31, 1999 as a result of aggressive retail promotions and a
significant number of customers upgrading due to Year 2000 concerns. Our Quicken
product line faces many challenges in the personal financial software category,
including continued competition from Microsoft's Money product and other
web-based personal finance tracking and management tools that are becoming
increasingly available at no cost to consumers.
The Consumer Finance Division benefited from 7% revenue growth from our Quicken
Loans mortgage business. Online mortgage revenue was up 53% over the prior year,
which more than offset the revenue declines that resulted from discontinuing our
loan referral business model and the closing and consolidation of 22 branch
offices. The percentage of our mortgage revenue generated and processed online
and/or through our call center increased from 37% for all of fiscal 2000 to 54%
in the first quarter of fiscal 2001. While we expect the total mortgage business
to continue to grow for the full fiscal year, we face continuing challenges in
our mortgage business, including interest rate fluctuations. See "Risks That
Could Affect Future Results."
On November 25, 2000, we entered into an Asset Purchase Agreement pursuant to
which we have agreed to sell selected assets of our QuickenInsurance business to
InsWeb Corp. in exchange for common stock of InsWeb (representing a 16.6% equity
interest on a post-closing basis). In addition, we will enter into a
distribution agreement under which InsWeb will become the exclusive consumer
insurance aggregator for our Quicken.com and QuickenInsurance Web sites and
certain consumer desktop products. See Note 11 of the financial statements.
-20-
<PAGE> 21
Global Business Division.
Global Business 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.
Overall, Global Business Division revenues increased 2% for the three month
period ended October 31, 2000 compared to the same period last year. We
experienced an increase in revenue from Canada, due primarily to higher
QuickBooks sales. This was partially offset by a decline in revenue from Europe,
due to our shift from direct participation in the market to a licensing
arrangement. Revenue from Japan remained roughly flat for the quarter compared
to the prior year quarter.
<TABLE>
<CAPTION>
COST OF GOODS SOLD 3 Mos. Ended % 3 Mos. Ended %
10/31/99 Revenue 10/31/00 Revenue % Change
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in millions; unaudited)
Product .............................. $56.5 32% $66.9 36% 18%
Amortization of purchased
software & other ..................... 2.4 1% 3.0 2% 25%
Total cost of goods sold ......... $58.9 33% $69.9 37% 19%
</TABLE>
There are two components of our cost of goods sold. The larger component is the
direct cost of manufacturing and shipping products and offering services, which
includes data center costs relating to delivering Internet-based products and
services. The second component is the amortization of purchased software, which
is the cost of depreciating products or services obtained through acquisitions
over their useful lives.
Total cost of goods sold as a percentage of revenue increased to 37% for the
three month period ended October 31, 2000, compared to 33% for the same period
in the prior year. This increase is attributable to growth of our service
businesses, such as payroll processing and QuickBooks Support Network, as they
typically have higher cost of goods sold than our packaged software products.
During the three months ended October 31, 2000 our payroll services experienced
a significant increase in cost of goods sold, due to growth in our online
payroll business. The increase from the first quarter of fiscal 2000 is also
attributable to infrastructure investments relating to new and existing online
businesses, as well as certain operating expenses of QuickenLoans being
reclassified this year from selling and marketing expenses to cost of goods
sold.
<TABLE>
<CAPTION>
OPERATING EXPENSES 3 Mos. Ended % 3 Mos. Ended %
10/31/99 Revenue 10/31/00 Revenue % Change
------------ ------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in millions; unaudited)
Customer service and technical support ........... $ 34.3 19% $ 32.4 17% (6)%
Selling and marketing ............................ 69.9 40% 61.1 33% (13)%
Research and development ......................... 41.7 24% 47.9 26% 15%
General and administrative ....................... 21.5 12% 27.8 15% 29%
Charge for purchased research and development .... 1.3 1% -- -- N/A
Other acquisition costs, including amortization
of goodwill and purchased intangibles ............ 36.4 21% 38.5 21% 6%
Acquisition related deferred compensation ........ 0.7 -- 1.1 1% 57%
Reorganization costs ............................. 3.5 2% -- -- N/A
Totals ....................................... $209.3 118% $208.8 111% --
</TABLE>
-21-
<PAGE> 22
Customer Service and Technical Support.
Customer service and technical support expenses were 17% of revenue for the
three months ended October 31, 2000 compared to 19% for the same period of the
prior year. This improvement reflects the continued efficiency in providing
customer service and technical support less expensively through websites and
other electronic means, and from the expansion of the QuickBooks Support Network
and our other fee-for-support programs.
Selling and Marketing.
Selling and marketing expenses were 33% of revenue for the three months ended
October 31, 2000 compared to 40% for the same period of the prior year. The
decline in selling and marketing costs as a percentage of revenue for the three
month period is partly attributable to a delay or reduction in customer
acquisition programs (particularly for QuickenLoans and Deluxe Payroll), based
on the customer demand generated by the strength of our brands. In addition, in
the first quarter last year we incurred higher than normal selling and marketing
expenses to notify customers of Year 2000 issues and solutions. Also
contributing to the decline was a reclassification of certain QuickenLoans
expenses from sales and marketing expenses to cost of goods sold in fiscal 2001.
In addition, during the prior year quarter we experienced increased sales and
marketing expenses as a result of aggressive marketing programs relating to the
expansion of our Internet-based businesses and the extremely competitive
consumer tax season.
Research and Development.
Research and development expenses were 26% of revenue for the three months ended
October 31, 2000 compared to 24% of revenue for the same period of the prior
year. This increase is primarily attributable to continued investments in the
development of our emerging businesses, including QuickBooks Internet Gateway,
Site Solutions, our online QuickBooks Deluxe Payroll Service and web-based bill
presentment and payment. During the remainder of fiscal 2001, we expect to
continue significant investments in research and development, particularly for
our emerging businesses. If such expenses exceed our current expectations, they
may have an adverse effect on operating results. See "Risks That Could Affect
Future Results."
General and Administrative.
General and administrative expenses were 15% of revenue for the three months
ended October 31, 2000 compared to 12% for the same period of the prior year.
The increase as a percentage of revenue was primarily due to a $5 million
increase in bad debt reserves to reflect the deteriorating financial condition
of many Internet commerce companies with whom we do business. For our entire
fiscal year 2001, we expect general and administrative expenses to remain
roughly flat as a percentage of revenue compared to fiscal 2000.
Charge for Purchased Research and Development.
For the three months ended October 31, 1999, 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. 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 charges for purchased research and development
in the three months ended October 31, 2000.
-22-
<PAGE> 23
Other Acquisition Costs.
Other acquisition costs include the amortization of goodwill and purchased
intangible assets, as well as deferred compensation expenses arising from
acquisitions. These costs increased to $42.7 million for the three months ended
October 31, 2000 compared to $40.8 million for the same period of the prior
year. The slight increase was primarily attributable to the amortization of
intangibles associated with our acquisition of Venture Finance Software Corp. in
August of 2000. See Note 4 of the financial statements. Amortization expense
related to completed acquisitions will continue to have a negative impact on our
operating results in future periods. Assuming we do not experience any
impairment of value of the intangible assets that would require us to accelerate
amortization, amortization will be approximately $178.7 million, $176.4 million,
$152.3 million and $73.0 million for the years ending July 31, 2001 through
2004, respectively. If we complete additional acquisitions (including the
pending acquisition of EmployeeMatters) or accelerate amortization in the
future, there would be an incremental negative impact on operating results.
Reorganization Costs.
Reorganization costs reflect the costs associated with our Quicken Loans
subsidiary (formerly Rock) closing numerous branch offices in Michigan in 1999,
as it began to transition its mortgage business from a traditional branch-based
business to an online and call center-based business. These costs totaled $3.5
million in the first quarter of fiscal 2000.
NON-OPERATING INCOME AND EXPENSES
Interest and Other Income and Expense, Net
For the three months ended October 31, 2000, interest and other income and
expense, net, increased to $16.1 million compared to $8.5 million for the same
period a year ago, reflecting increased cash and short-term investment balances
due primarily to proceeds from recent sales of marketable securities.
Net Loss from Marketable Securities and other investments
For the three months ended October 31, 2000, we recorded losses from marketable
securities and other investments, net of taxes, of $3.9 million, compared to
losses of $17.3 million for the same period a year ago. We consider our shares
of Excite@Home, VeriSign and 724 Solutions common stock as trading securities.
See Note 1 of the financial statements. As a result, unrealized gains and losses
due to market fluctuations in these securities are included in our net income.
Recent volatility in the market has significantly reduced the value of our
trading securities, and 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. Income Taxes
For the three months ended October 31, 2000, we recorded an income tax benefit
of $30.9 million on a pretax loss of $78.9 million. This compares to an income
tax benefit of $34.2 million on a pretax loss of $100.1 million for the same
period of the prior year. At October 31, 2000, there was a valuation allowance
of $11.4 million for tax assets of our global subsidiaries based on management's
assessment that we may not receive the benefit of certain loss carryforwards.
Cumulative Effect of Change in Accounting For Derivatives, Net
For the quarter ended October 31, 2000, we recorded a cumulative gain of $14.3
million, net of taxes, as a result of a change in accounting principle that
recognized the cumulative effect of the fair value of our S1 options as of
August 1, 2000. See Note 1 of the financial statements. Subsequent fluctuations
in the fair value of these options will also be included in our net income or
net loss.
-23-
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, our unrestricted cash and cash equivalents totaled $278.7
million, a $138.2 million decrease from July 31, 2000.
We used $15.2 million in cash for our operations during the three months ended
October 31, 2000. The primary components of cash used by operations were a net
loss of $33.8 million, an adjustment for a cumulative accounting gain of $23.9
million and a significant reduction in our income tax payables of $60.3 million.
These were offset by adjustments made for non-cash expenses such as acquisition
charges of $43.1 million, depreciation charges of $14.6 million and a $32.0
million tax benefit from the exercise of employee stock options. We also
experienced an increase in deferred revenue of $13.6 million as a result of an
increasing number of Internet-related agreements under which we receive payments
from third parties prior to the time that we can recognize them as revenue.
Investing activities used $154.6 million in cash for the three months ended
October 31, 2000. The primary use of cash for investing was the purchase of
Venture Finance Software Corp. ("VFSC") for $118 million. We also purchased
$42.4 million of net short-term investments, which was partially offset by
proceeds of $24.1 million from the sale of our marketable securities. As a
result of our continued investment in information systems and infrastructure for
our Internet-based businesses, we purchased property and equipment of $29.4
million during the quarter.
Financing activities provided $31.5 million for the three months ended October
31, 2000, primarily attributable to proceeds from the exercise of employee stock
options.
We currently hold investments in a number of publicly traded companies (see Note
1 of the financial statements). The volatility of the stock market and the
potential risk of fluctuating stock prices may have an impact on the proceeds
from future sales of these securities and therefore on our future liquidity. Due
to our reporting of the Excite@Home, VeriSign and 724 Solutions shares as
trading securities, future fluctuations in the carrying values of these stocks
will impact our results. If future declines in our other marketable securities
are deemed to be permanent, they will also impact our results. Investors should
note that many high technology companies, including Excite@Home, VeriSign and
724 Solutions, have recently experienced significant declines in their stock
prices.
In connection with our acquisition of CRI, we are required to pay three annual
installments of $25 million, the first of which was paid in May 2000. In the
normal course of business, we enter into leases for new or expanded facilities
in both domestic and global locations. We also evaluate, on an ongoing basis,
the merits of acquiring technology or businesses, or establishing strategic
relationships with and investing in other companies. Accordingly, it is possible
that we may decide to use cash and cash equivalents to fund such activities in
the future.
We believe that our cash, cash equivalents and short-term investments will be
sufficient to meet anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
-24-
<PAGE> 25
RISKS THAT COULD AFFECT FUTURE RESULTS
The factors discussed below are cautionary statements that identify important
factors that could cause actual results to differ materially from those
anticipated in the forward-looking statements in this Form 10-Q. Our fiscal 2000
Form 10-K contains additional details about these risks, as well as other risks
that could affect future results.
If we do not continue to successfully refine and update the business models for
our Internet--based products and services and other emerging business, and
operationally support these businesses, the businesses will not achieve
sustainable financial viability or broad customer acceptance. Our business
models for our Internet-based businesses and other emerging businesses have more
complex and varied revenue streams than our traditional desktop software
businesses. For these businesses to become and remain economically viable, we
must continually refine their revenue models to reflect evolving economic
circumstances. These businesses also depend on a different operational
infrastructure than our desktop software businesses, and we must continually
develop, expand and modify internal systems and procedures to support these
businesses. In particular, our web-based tax preparation and electronic filing
services must 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.
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.
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.
If we cannot fully and successfully implement our 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.
-25-
<PAGE> 26
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 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 experience
significant failures in meeting expectations and maintaining important
relationships, our ability to expand our QuickBooks Internet Gateway services
will be jeopardized. Intuit is refining its approach to selecting and working
with QuickBooks Gateway vendors, and we are in the process of ending
relationships with between three to five of our alliance companies where the
business results are not meeting our expectations or theirs. To retain other
relationships, we may be required to adapt them in ways that are less attractive
to us, financially or otherwise. In addition, QuickBooks Internet Gateway
Services are currently available only to customers using QuickBooks 2000 or the
newly announced QuickBooks 2001. Customer upgrade rates to QuickBooks 2000 were
lower than historical upgrade levels, which 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 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 a 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 closing of our pending transactions with EmployeeMatters and InsWeb are
subject to various conditions, including customary regulatory and other
approvals.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet 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.
-26-
<PAGE> 27
MARKETABLE SECURITIES
We also carried significant balances in marketable equity securities as of
October 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 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:
(in thousands, except interest rates; unaudited)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE (1)
PERIOD ENDING OCTOBER 31, FAIR VALUE
---------------------------------------------------- OCTOBER 31,
2001 2002 2003 2004 2005 TOTAL 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Mortgage Loans .................. $ 67,269 -- -- -- -- $ 67,269 $ 69,199
Average Interest Rate .... 10.36% 10.36%
LIABILITIES:
Lines of Credit ................. $ 3,137 -- -- -- -- $ 3,137 $ 3,200
Average Interest Rate .... 7.80% 7.80%
</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 October 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.
-27-
<PAGE> 28
IMPACT OF FOREIGN CURRENCY RATE CHANGES
While the Japanese yen strengthened during fiscal 2000, the currencies of our
other subsidiaries remained essentially stable. Because we translate foreign
currencies into U.S dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. We believe that our
exposure to currency exchange fluctuation risk is insignificant primarily
because our global subsidiaries invoice customers and satisfy their financial
obligations almost exclusively in their local currencies. For the quarter ended
October 31, 2000, there was an immaterial currency exchange impact from our
intercompany transactions. Currency exchange risk is also minimized since
foreign debt is due almost exclusively in local foreign currencies. As of
October 31, 2000, we did not engage in foreign currency hedging activities.
PART II
ITEM 1
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. The
Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. 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 Almanza complaint was amended
on October 26, 2000. These purported class actions allege violations of various
federal and California statutes and common law claims for invasion of privacy
based upon the alleged intentional disclosure to third parties of personal and
private customer information entered at Intuit's Quicken.com website. The
complaints seek injunctive relief, orders to disgorge profits related to the
alleged acts, and statutory and other damages. Intuit believes these lawsuits
are without merit and intends to defend the litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
-28-
<PAGE> 29
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Intuit's Annual Meeting of Stockholders on December 8, 2000, our stockholders
voted on the following proposals:
1. Proposal to elect directors:
<TABLE>
<CAPTION>
For Withheld
----------- -----------
<S> <C> <C>
Stephen M. Bennett 189,361,684 3,485,812
Christopher W. Brody 189,298,874 3,547,822
William V. Campbell 189,362,661 3,684,835
Scott D. Cook 189,368,897 3,485,799
L. John Doerr 189,359,812 3,486,884
Donna L. Dubinsky 189,361,722 3,484,974
Michael R. Hallman 189,360,910 3,485,786
William H. Harris, Jr 189,327,037 3,519,659
</TABLE>
2. Proposal to amend Intuit's 1993 Equity Incentive Plan to increase the
number of shares of common stock available for issuance thereunder by
9,700,000 shares:
<TABLE>
<S> <C>
For 110,611,523
Against 81,869,148
Abstain 366,083
Unvoted 202
</TABLE>
3. Proposal to amend Intuit's 1996 Employee Stock Purchase Plan to increase
the number of shares of common stock available for issuance thereunder
by 400,000 shares and to change the duration of the offering periods
under the plan:
<TABLE>
<S> <C>
For 189,728,568
Against 2,745,732
Abstain 372,395
Unvoted 1
</TABLE>
4. Proposal to amend Intuit's 1996 Directors Stock Option Plan to increase
the number of shares of common stock available for issuance thereunder
by 125,000 shares:
<TABLE>
<S> <C>
For 130,330,243
Against 62,886,434
Abstain 430,018
Unvoted 1
</TABLE>
5. Proposal to ratify the selection of Ernst & Young LLP as Intuit's
independent auditors for fiscal 2001:
<TABLE>
<S> <C>
For 192,461,612
Against 139,554
Abstain 245,529
Unvoted 1
</TABLE>
-29-
<PAGE> 30
ITEM 5
OTHER MATTERS
CHANGES IN EXECUTIVE OFFICERS
As of December 13, 2000, Intuit's executive officers were as follows:
<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 48 Senior Vice President, Global Business Division
Richard William Ihrie 51 Senior Vice President, Technology
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
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 44 Vice President, Finance & Corporate Controller
Thomas A. Allanson 42 Vice President, Tax Strategy
Caroline F. Donahue 40 Vice President, Sales
Linda Fellows 52 Vice President, Investor Relations and Treasurer
Daniel B. Gilbert 38 Vice President, Quicken Loans
Larry King, Jr. 39 Vice President, Payroll Services Group
Elisabeth M. Lang 43 Vice President, Corporate Public Relations & Marketing Communication
Carol Novello 36 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>
-30-
<PAGE> 31
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT.
10.01(1) Intuit Inc. 1993 Equity Incentive Plan and related documents, as
amended through December 8, 2000
10.02(2) Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
December 8, 2000
10.03(3) Intuit Inc. 1996 Directors Stock Option Plan, and related documents,
as amended through December 8, 2000
10.04* Secured Balloon Payment Note Agreement between Intuit Inc. and
Stephen M. Bennett dated February 17, 2000
10.05* Secured Balloon Payment Promissory Note Agreement between Intuit
Inc. and Dennis Adsit dated September 27, 2000
10.06* Secured Balloon Payment Promissory Note Agreement between Intuit
Inc. and Thomas Allanson dated October 16, 2000
10.07* Secured Bridge Loan Promissory Note between Intuit Inc. and Richard
William Ihrie dated November 28, 2000
10.08* Secured Balloon Payment Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
27.01* Financial Data Schedule (filed only in electronic format)
----------------
* Filed with this Form 10-Q
(1) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51694), filed with the Commission on December 12, 2000 and
incorporated by reference
(2) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51692), filed with the Commission on December 12, 2000 and
incorporated by reference
(3) Filed as an exhibit to Intuit's Form S-8 registration statement (file
no. 333-51698), filed with the Commission on December 12, 2000 and
incorporated by reference
----------------
(b) REPORTS ON FORM 8-K:
(1) On September 13, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that it had entered into a Stock Sale and Purchase Agreement
under which it purchased all of the outstanding securities of Venture
Finance Software Corp. that were not already held by Intuit.
(2) On November 21, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that on November 16, 2000, it entered into a definitive agreement
to acquire EmployeeMatters, Inc.
(3) On November 22, 2000, Intuit filed a report on Form 8-K to report under
Item 5 its financial results for the quarter ended October 31, 2000.
Intuit's balance sheet and statement of operations as of and for the
three months ended October 31, 1999 and 2000 were included in the Form
8-K.
(4) On November 27, 2000, Intuit filed a report on Form 8-K to report under
Item 5 that on November 27, 2000, it entered into a definitive agreement
with Isotope to sell certain assets of its QuickenInsurance business.
-31-
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: December 13, 2000 By: /s/ Greg J. Santora
-----------------------------------
Greg J. Santora
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
-32-
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.04 Secured Balloon Payment Note Agreement between Intuit Inc. and
Stephen M. Bennett dated February 17, 2000
10.05 Secured Balloon Payment Promissory Note Agreement between Intuit
Inc. and Dennis Adsit dated September 27, 2000
10.06 Secured Balloon Payment Promissory Note between Intuit Inc. and
Thomas Allanson dated October 16, 2000
10.07 Secured Bridge Loan Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
10.08 Secured Balloon Payment Promissory Note between Intuit Inc. and
Richard William Ihrie dated November 28, 2000
27.01 Financial Data Schedule (filed only in electronic format) period
ended October 31, 2000
</TABLE>
