<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 APRIL 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
-----------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
-------- ----------
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
-------------------------------------------
(Address of principal executive offices)
(650) 944-6000
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Approximately 203,440,410 shares of Common Stock, $0.01 par value,
as of May 31, 2000
<PAGE> 2
--------------------------------------------------------------------------------
FORM 10-Q
INTUIT INC.
INDEX
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PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1999 and April 30, 2000................................ 3
Condensed Consolidated Statements of Operations for
the three and nine months ended April 30, 1999 and 2000........ 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended April 30, 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............................. 17
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.......... 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................... 27
ITEM 5: Other Matters....................................................... 28
ITEM 6: Exhibits and Reports on Form 8-K.................................... 28
Signatures.......................................................... 29
</TABLE>
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<PAGE> 3
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 2000
----------- -----------
(In thousands, except par value; unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 554,230 $ 962,107
Short term investments ..................................................... 305,125 560,398
Marketable securities ...................................................... 431,319 386,261
Customer deposits .......................................................... 145,836 162,824
Accounts receivable, net(1) ................................................ 63,677 128,167
Mortgage loans ............................................................. 84,983 65,185
Deferred income taxes ...................................................... 64,925 64,993
Inventories ................................................................ 4,931 1,890
Prepaid expenses and other current assets(2) ............................... 67,859 45,261
----------- -----------
Total current assets ............................................... 1,722,885 2,377,086
Property and equipment, net .................................................. 119,220 157,223
Purchased intangibles, net ................................................... 98,049 88,199
Goodwill, net ................................................................ 383,102 387,358
Other assets ................................................................. 7,897 11,872
Long-term deferred income taxes .............................................. 76,190 80,222
Investments .................................................................. 45,704 51,267
Restricted Investments ....................................................... 36,028 --
----------- -----------
Total assets ................................................................. $ 2,489,075 $ 3,153,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Mortgage lines of credit ................................................... $ 29,896 $ 18,791
Accounts payable ........................................................... 66,436 93,524
Accrued compensation and related liabilities ............................... 39,996 50,238
Payroll tax obligations .................................................... 131,148 156,757
Escrow liabilities ......................................................... 14,857 8,186
Drafts payable ............................................................. 49,169 29,246
Deferred revenue ........................................................... 65,994 89,128
Income taxes payable ....................................................... 143,181 162,881
Deferred income taxes ...................................................... 136,694 159,623
Other accrued liabilities .................................................. 201,872 256,433
Short-term note payable .................................................... -- 34,658
----------- -----------
Total current liabilities .......................................... 879,243 1,059,465
Long-term notes payable ...................................................... 36,614 513
Long-term deferred income taxes .............................................. 11,615 11,882
Minority interest ............................................................ 215 170
Stockholders' equity
Preferred stock, $0.01 par value
Authorized - 1,345 shares total; 145 shares designated Series A;
250 shares designated Series B Junior Participating
Issued and outstanding - none; none ...................................... -- --
Common stock, $0.01 par value
Authorized - 750,000 shares
Issued and outstanding - 196,350 and 203,245 shares, respectively ...... 1,963 2,032
Additional paid-in capital ................................................. 1,265,114 1,492,216
Acquisition related deferred compensation .................................. -- (28,293)
Accumulated other comprehensive income ..................................... 77,680 110,095
Accumulated retained earnings .............................................. 216,631 505,147
----------- -----------
Total stockholders' equity ......................................... 1,561,388 2,081,197
----------- -----------
Total liabilities and stockholders' equity ................................... $ 2,489,075 $ 3,153,227
=========== ===========
</TABLE>
(1) Includes $0.1 million and $2.2 million due from Checkfree at July 31, 1999
and April 30, 2000, respectively (see Note 11).
(2) Includes $6.7 million and $8.5 million note receivable from Venture Finance
Software Corp. at July 31, 1999 and April 30, 2000 respectively (see Note
11).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1999 2000 1999 2000
--------- --------- --------- ---------
(In thousands, except per share amounts; unaudited)
<S> <C> <C> <C> <C>
Net revenue(1) .................................................. $ 261,492 $ 329,139 $ 772,106 $ 931,566
Costs and expenses:
Cost of goods sold:
Products and services ....................................... 53,802 75,532 163,033 225,038
Amortization of purchased software and other ................ 1,885 2,115 5,586 7,036
Customer service & technical support ........................... 29,580 31,596 101,584 113,554
Selling & marketing ............................................ 50,787 60,173 175,070 216,188
Research & development ......................................... 34,325 40,779 104,346 126,529
General & administrative ....................................... 20,184 20,027 59,118 64,846
Charge for purchased research and development .................. -- -- -- 1,312
Amortization of goodwill and purchased intangibles ............. 20,890 37,266 62,822 118,828
Amortization of acquisition related deferred compensation ...... -- 1,138 -- 2,882
Reorganization costs ........................................... -- -- 2,000 3,500
--------- --------- --------- ---------
Total costs & expenses ......................................... 211,453 268,626 673,559 879,713
--------- --------- --------- ---------
Income from operations .......................................... 50,039 60,513 98,547 51,853
Interest and other income and expense, net ...................... 5,344 14,516 12,642 29,981
Gain from marketable securities ................................. 58,596 422,206 68,684 402,096
--------- --------- --------- ---------
Income before income taxes ...................................... 113,979 497,235 179,873 483,930
Income tax provision ............................................ 38,627 200,204 56,293 195,617
Minority interest ............................................... -- (54) -- (203)
--------- --------- --------- ---------
Net income ...................................................... $ 75,352 $ 297,085 $ 123,580 $ 288,516
========= ========= ========= =========
Basic net income per share ...................................... $ 0.39 $ 1.47 $ 0.65 $ 1.44
========= ========= ========= =========
Shares used in per share amounts ................................ 192,786 202,342 189,328 199,787
========= ========= ========= =========
Diluted net income per share ................................... $ 0.37 $ 1.39 $ 0.62 $ 1.37
========= ========= ========= =========
Shares used in per share amounts ................................ 203,161 214,362 198,261 211,049
========= ========= ========= =========
</TABLE>
(1) Includes $1.6 million and $4.0 million from Checkfree for the three and
nine months ended April 30, 1999 and $1.7 million and $5.3 million from
Checkfree for the three and nine months ended April 30, 2000 respectively
(see Note 11).
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
(In thousands; unaudited) 1999 2000
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 123,580 $ 288,516
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of goodwill and other purchased intangibles ..... 68,408 125,864
Deferred compensation expense ................................ -- 2,882
Depreciation ................................................. 26,945 33,682
Charge for purchased research and development ................ -- 1,312
Gain from marketable securities .............................. (68,684) (402,096)
Changes in assets and liabilities:
Accounts receivable ....................................... (54,742) (64,390)
Inventories ............................................... 1,428 3,041
Mortgage loans ............................................ 10,383 19,798
Prepaid expenses and other current assets ................. (42,340) 21,705
Customer deposits ......................................... 740 8,621
Deferred income tax assets and liabilities ................ (1,097) (3,121)
Accounts payable .......................................... 50,694 27,034
Accrued compensation and related liabilities .............. 10,834 10,077
Escrow funds payable ...................................... (944) (6,671)
Deferred revenue .......................................... 10,677 23,134
Drafts payable ............................................ 6,446 (19,923)
Accrued acquisition liabilities ........................... (19,181) (9,642)
Other accrued liabilities ................................. 96,937 52,166
Income taxes payable ...................................... 46,833 106,535
Minority interest ......................................... -- (45)
--------- ---------
Net cash provided by operating activities ............... 266,917 218,479
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities ....................... 79,900 519,183
Purchase of marketable securities ................................. -- (16,500)
Purchase of property and equipment ................................ (49,974) (71,683)
Principal payments of long-term debt .............................. (40) (3,348)
(Increase) in other assets ........................................ (15,067) (17,050)
Purchase of short-term investments ................................ (232,868) (728,504)
Acquisitions and dispositions, net of cash acquired ............... -- (54,584)
Purchase of long-term investments ................................. (26,214) (7,157)
Liquidation and maturity of short-term investments ................ 135,590 509,259
--------- ---------
Net cash used in (provided by) investing activities ..... (108,673) 129,616
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under warehouse line of credit .......... 6,156 (11,105)
Net borrowings under reverse repurchase agreement ................. 289 --
Net proceeds from issuance of common stock ........................ 62,469 70,887
Rock Financial and Title Source payments of dividends ............. (1,240) --
--------- ---------
Net cash provided by financing activities ............... 67,674 59,782
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 225,918 407,877
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 140,991 554,230
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 366,909 $ 962,107
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), mortgage loans and
Internet-based products and services for individuals, small businesses, and
financial professionals. Our products and services are designed to automate
commonly performed financial tasks and to simplify the way our customers manage
their finances. We sell our products throughout North America and in many
international markets. Sales are made primarily through retail and OEM
distribution channels, traditional direct sales to customers and via the
Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the nine months ended April 30, 2000 do not necessarily
indicate the results to be expected for the fiscal year ending July 31, 2000 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 which were acquired on December 8, 1999 in a
transaction which 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, 1999 included in
Intuit's Form 10K-A, Amendment No. 1, filed with the Securities and Exchange
Commission.
Principles of Consolidation
The condensed consolidated financial statements include all of our accounts and
those of our wholly-owned subsidiaries. We have eliminated all significant
intercompany accounts and transactions. Investments in which management intends
to maintain more than a temporary 20% to 50% interest, or otherwise has the
ability to exercise significant influence, are accounted for under the equity
method. Investments in which we have less than a 20% interest and/or do not have
the ability to exercise significant influence are carried at the lower of cost
or estimated realizable value.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped products based on
"FOB shipping" terms. Because, under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper, we recognize revenue upon shipment, net of reserves
based on historical experience. To recognize revenue, it must be probable that
we will collect the accounts receivable from our customers. Reserves are
provided for returns of excess quantities of current product versions, as well
as previous versions of products still in the distribution channel when new
versions are launched. In some situations, we receive advance payments from our
customers. Revenue associated with these advance payments is deferred until the
products are shipped or services are provided. We also reduce revenue by the
estimated cost of rebates when products are shipped. Warranty reserves are
provided at the time revenue is recognized for the estimated cost of replacing
defective products.
-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
delivered or provided at one point in time, revenue is recognized immediately
upon delivery of the product or completion of the service, rather than over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In that case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is to be placed. By contrast, for on-line transactions for which we receive a
payment, revenue is recognized upon completion of the transaction, assuming
there are no remaining obligations on our part. To recognize revenue, it must be
probable that we will collect the accounts receivable from our customers.
Intuit also offers several plans under which customers are charged for technical
support assistance. Fees charged for these plans are collected in advance and
are recognized as revenue over a period of time (generally one year) at a rate
that is based on historical call volumes for support, which approximates when
these services are performed. Costs incurred for fee for support plans are
included in cost of goods sold.
We defer loan origination revenue and associated incremental direct costs on
loans held for sale until the related loan is sold. We recognize gains and
losses on loans at the time we sell them, based upon the difference between the
selling price and the carrying value of the related loans sold. We recognize
loan servicing revenue as the related principal is collected. We recognize
interest income on mortgage loans as it is earned, and we recognize interest
expenses on related borrowings as we incur them.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries and providing
technical assistance by telephone, fax, email, and the Internet. In connection
with the sale of certain products, Intuit provides limited free telephone
support service to customers. This free service, also referred to as
post-contract customer support, is included in this expense category. We do not
defer the recognition of any revenue associated with sales of these products,
since the cost of providing this free support is insignificant. The support is
provided within one year after the associated revenue is recognized and
enhancements are minimal and infrequent. The estimated cost of providing this
free support is accrued upon product shipment.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents. Both cash equivalents and
short-term investments are considered available-for-sale securities and are
carried at amortized cost, which approximates fair value. Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of these securities as necessary to satisfy the significant
short-term liquidity requirements that may arise from the highly seasonal and
cyclical nature of our business. Based on our significant business seasonality,
cash flow requirements within quarters may fluctuate dramatically and could
require us to use a significant amount of the cash investments held as
available-for-sale securities.
-7-
<PAGE> 8
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 2000
----------- -----------
(In thousands; unaudited)
<S> <C> <C>
Cash and cash equivalents:
Cash .................................. $ 56,548 $ 700
Money market funds .................... 294,190 467,017
Commercial paper ...................... 156,037 43,944
Municipal bonds ....................... 37,455 440,446
U.S. Government securities ............ 10,000 --
Corporate Notes ....................... -- 10,000
----------- -----------
$ 554,230 $ 962,107
=========== ===========
Short-term investments:
Certificates of deposit ............... $ 9,901 $ --
Commercial Paper ...................... -- --
Corporate notes ....................... 19,482 58,943
Municipal bonds ....................... 284,057 468,771
U.S. Government securities ............ 27,713 32,684
Restricted short-term investments ..... (36,028) --
----------- -----------
$ 305,125 $ 560,398
=========== ===========
</TABLE>
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 2000
----------- -----------
(In thousands; unaudited)
<S> <C> <C>
Due within one year ................... $ 735,349 $ 1,365,266
Due within two years .................. 101,784 155,326
Due within three years ................ 1,702 1,213
Restricted short-term investments ..... (36,028) --
----------- -----------
$ 802,807 $ 1,521,805
=========== ===========
</TABLE>
For information about our restricted investments, see Note 8. Realized gains and
losses from sales of each type of security were immaterial for all periods
presented.
-8-
<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
("At Home") and VeriSign 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, 1999 and April 30, 2000:
<TABLE>
<CAPTION>
GROSS UNREALIZED NET REALIZED
COST GAIN LOSS LOSS FAIR VALUE
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
JULY 31, 1999
(In thousands; unaudited)
At Home common stock .............................. $132,060 $ -- $ -- $ 36,856 $ 95,204
Checkfree Corporation common stock ................ 150,081 152,177 -- -- 302,258
S1 Corporation common stock ....................... 49,997 -- 16,140 -- 33,857
-------- -------- -------- -------- --------
$332,138 $152,177 $ 16,140 $ 36,856 $431,319
======== ======== ======== ======== ========
APRIL 30, 2000
(In thousands; unaudited)
At Home common stock .............................. $119,366 $ -- $ -- $ 84,286 $ 35,080
Checkfree Corporation common stock ................ 68,956 168,593 -- -- 237,549
Homestore.com, Inc. common stock .................. 2,769 7,759 -- -- 10,528
MetLife common stock .............................. -- 217 -- -- 217
Mortgage.com, Inc. common stock ................... 5,154 924 -- -- 6,078
Quotesmith.com, Inc. common stock ................. 5,645 -- 1,525 -- 4,120
S1 Corporation common stock ....................... 49,997 2,730 -- -- 52,727
S1 Corporation options ............................ -- 12,879 -- -- 12,879
VeriSign, Inc. (formerly Signio) common stock ..... 49,160 -- -- 22,077 27,083
-------- -------- -------- -------- --------
$301,047 $193,102 $ 1,525 $106,363 $386,261
======== ======== ======== ======== ========
</TABLE>
In connection with At Home Corporation's acquisition of Excite in May 1999, our
shares of Excite were converted into At Home common stock. We have elected to
report these converted At Home shares as a trading security. As a result, we are
reporting both positive and negative fluctuations in the market value of this
stock in net income. At April 30, 2000, we owned approximately 1.9 million
shares (or approximately 0.4%) of At Home common stock and reported a realized
valuation loss of approximately $53.5 million for these securities for the
period between August 1, 1999 and April 30, 2000. The closing price of At Home
(symbol ATHM) at April 30, 2000, was $18.625 per share. The average daily
closing price of At Home between August 1, 1999 and April 30, 2000 was $38.18
per share.
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 April 30,
2000 was $50.8125 per share. At April 30, 2000, we held 4.7 million shares, or
approximately 8.1%, of Checkfree's outstanding common stock.
In August 1999, we acquired 729,165 shares of common stock of Homestore.com,
Inc. ("Homestore.com") upon conversion of our preferred shares in connection
with Homestore.com's initial public offering. We account for the investment in
Homestore.com as an available-for-sale equity security, which accordingly is
carried at market value. Homestore.com common stock is quoted on the Nasdaq
National Market under the symbol HOMS. The closing price of Homestore.com common
stock at April 30, 2000 was $18.25 per share. At April 30, 2000, we held 576,865
shares, or approximately 1.0%, of Homestore.com's outstanding common stock.
-9-
<PAGE> 10
MetLife Insurance, Intuit's dental insurance provider demutualized in September
of 1999. As a policy holder, Intuit obtained 13,130 shares of MetLife common
stock when they began trading publicly in April 2000 (under the symbol MET). The
stock closed on April 30, 2000 at $16.563 resulting in a market value of
$217,472.
In August 1999, we acquired approximately 3.7 million shares of common stock of
Mortgage.com, Inc. ("Mortgage.com") upon conversion of our preferred shares in
connection with Mortgage.com's initial public offering. We account for the
investment in Mortgage.com as an available-for-sale equity security, which
accordingly is carried at market value. Mortgage.com common stock is quoted on
the Nasdaq National Market under the symbol MDCM. The closing price of
Mortgage.com common stock at April 30, 2000 was $1.9375 per share. At April 30,
2000, we held 3.1 million shares, or approximately 7.2%, of Mortgage.com's
outstanding common stock. Subsequent to April 30, 2000, we sold all of our
shares of Mortgage.com common stock.
In February 1999, we purchased one million shares of common stock of
Quotesmith.com, Inc. ("Quotesmith.com"). We purchased an additional 272,727
shares of Quotesmith.com in August 1999 at the time of its initial public
offering. We account for the investment in Quotesmith.com as an
available-for-sale equity security, which accordingly is carried at market
value. Quotesmith.com common stock is quoted on the Nasdaq National Market under
the symbol QUOT. The closing price of Quotesmith.com common stock at April 30,
2000 was $3.4375 per share. At April 30, 2000, we held approximately 1,197,327
shares, or approximately 6.2%, of Quotesmith.com's outstanding common stock.
In May 1999, we purchased 970,813 shares of common stock of Security First
Technologies. In November 1999, Security First Technologies changed its name to
S1 Corporation ("S1"). We account for the investment in S1 as an
available-for-sale equity security, which accordingly is carried at market
value. S1 common stock is quoted on the Nasdaq National Market under the symbol
SONE. The closing price of S1 common stock at April 30, 2000 was $54.3125 per
share. At April 30, 2000, we held 970,813 shares, or approximately 1.9%, of S1's
outstanding common stock. In connection with the above purchase, we also
received an option to purchase up to an additional 4,579,187 shares of S1
exercisable at a per share purchase price of $51.50. We account for these
options as available-for-sale equity securities, and accordingly the options are
carried at market value.
In 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 April 30, 2000, we owned approximately
194,308 shares (or approximately 0.2%) of VeriSign common stock and reported a
realized valuation loss of approximately $22.1 million for these securities for
the period between August 1, 1999 and April 30, 2000. The closing price of
VeriSign (symbol VRSN) at April 30, 2000, was $139.375 per share. The average
daily closing price of VeriSign between August 1, 1999 and April 30, 2000 was
$121.99 per share.
Checkfree, At Home, S1, Mortgage.com, Homestore.com, VeriSign, and
Quotesmith.com are high technology companies whose stock prices are subject to
substantial volatility. Accordingly, it is possible that the market price of one
or more of these companies' stocks could decline substantially and quickly,
which could result in a material reduction in the carrying value of these
assets.
Mortgage Lines of Credit
For mortgage lines of credit we estimate fair value based on the discounted
value of contractual cash flows using interest rates currently in effect for
similar maturities and collateral requirements. The carrying amount of these
lines of credit approximates their estimated fair values since all of the
borrowings have variable interest rates that approximate current market interest
rates for similar types of lines of credit and are due upon demand. We held the
following mortgage lines of credit at July 31, 1999 and April 30, 2000:
<TABLE>
<CAPTION>
(In thousands; unaudited) JULY 31, 1999 APRIL 30, 2000
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lines of credit .......... $ 29,896 $ 30,000 $ 18,791 $ 19,000
</TABLE>
Mortgage Loans
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<PAGE> 11
We carry mortgage loans at estimated realizable value, and we estimate their
fair value using quoted market prices for similar loans, adjusted for
differences in loan characteristics, including credit quality. The carrying
amount of accrued interest receivable approximates the assets' fair value. We
held the following mortgage loans at July 31, 1999 and April 30, 2000:
<TABLE>
<CAPTION>
(In thousands; unaudited) JULY 31, 1999 APRIL 30, 2000
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage loans .......... $ 84,983 $ 86,021 $ 65,185 $ 66,975
</TABLE>
Carrying amounts at July 31, 1999 and April 30, 2000 include an allowance for
credit losses of $1.3 million and $0.3 million, respectively.
As of July 31, 1999 and April 30, 2000, there were approximately $1.8 million
and $0.3 million, respectively of mortgage loans that were greater than 90 days
past due.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
<TABLE>
<CAPTION>
NET BALANCE AT
LIFE IN JULY 31, APRIL 30,
YEARS 1999 2000
------- -------- --------
(In thousands; unaudited)
<S> <C> <C> <C>
Goodwill ...................... 3-5 $383,102 $387,358
Customer lists ................ 3-5 66,934 62,649
Covenants not to compete ...... 3-5 2,492 5,488
Purchased technology .......... 1-5 17,751 12,803
Assembled workforce ........... 2-5 3,972 2,607
Trade names and logos ......... 1-10 6,900 4,652
</TABLE>
Balances presented above are net of total accumulated amortization of $210.1
million and $327.4 million at July 31, 1999 and April 30, 2000, respectively.
Concentration of Credit Risk
Intuit operates in an industry which is highly competitive and rapidly changing.
Many circumstances could have an unfavorable impact on Intuit's operating
results. Examples include significant technological changes in the industry,
changes in customer requirements or the emergence of competitive products or
services with new capabilities.
We are also subject to risks related to our significant balances of short-term
investments, marketable securities and trade accounts receivable. At April 30,
2000, we held approximately $386 million in marketable securities, as described
in "Marketable Securities", above in Note 1. Fluctuations in the market value of
our shares in At Home and VeriSign are treated as realized 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 will need to report this decline
in our statement of operations. See "Marketable Securities,"
-11-
<PAGE> 12
above in Note 1 for a discussion of risks associated with our marketable
securities. Our remaining portfolio is diversified and consists primarily of
short-term investment-grade securities.
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. Implementation is required for fiscal years
beginning after June 15, 2000. Upon adoption, we will report transition
adjustments in net income or other comprehensive income, as appropriate,
reflecting the effect of a change in accounting principle. We have not yet
determined whether adoption of FAS 133 will have a material impact on our
consolidated financial position, results of operations, or cash flows.
Reclassifications
Certain previously reported amounts have been reclassified and restated to
include the results of our Rock and Title Source subsidiaries acquired on
December 8, 1999. Certain other previously reported amounts have been
reclassified to conform to the current presentation format.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
equivalent shares is anti-dilutive.
On September 8, 1999, our Board of Directors declared a three-for-one stock
split, to be effected as a stock dividend of two shares of common stock for each
share of Intuit's common stock outstanding. Stockholders of record on September
20, 1999 were issued two additional shares of common stock for each share of
Intuit's common stock held on that date. The payment date for the stock dividend
was September 30, 1999. We have restated all share and per share amounts
referred to in the financial statements and notes to reflect this stock split.
3. COMPREHENSIVE NET INCOME
SFAS 130, "Reporting Comprehensive Income" provides rules for the reporting and
display of comprehensive net income and its components. However, it has no
impact on our net income or stockholders' equity as presented in our financial
statements. SFAS 130 requires foreign currency translation adjustments and
changes in the fair value of available for sale securities to be included in
comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
---------------------------
1999 2000
--------- ---------
(In thousands; unaudited)
<S> <C> <C>
Net income ..................................... $ 123,580 $ 288,516
Unrealized gain on marketable securities ....... 364,243 33,325
Change in cumulative translation adjustment .... (2,710) (910)
--------- ---------
Comprehensive net income ....................... $ 485,113 $ 320,931
========= =========
</TABLE>
4. ACQUISITIONS
On May 3, 1999, we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services for a combination of
cash and Intuit stock. CRI is one of the country's largest payroll services
companies and a leader in providing payroll services to small businesses. The
purchase price for privately-
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<PAGE> 13
held CRI was approximately $200 million, consisting of approximately $100
million cash and approximately $25 million of Intuit stock that was paid at
closing, and $75 million in cash to be paid in three annual installments of $25
million each beginning in May 2000. We accounted for the acquisition of CRI as a
purchase for accounting purposes and allocated approximately $187 million to
identified intangible assets and goodwill. These assets are being amortized over
a period of three to five years. The following table shows pro forma net
revenue, net income from continuing operations and diluted net loss per share
from continuing operations of Intuit and CRI as if we had acquired CRI at the
beginning of fiscal 1999:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30, 1999
------------------------
AS
PRO FORMA REPORTED
--------- --------
(In thousands, except per share data; unaudited)
<S> <C> <C>
Net revenue .................................... $797,854 $772,106
Net income ..................................... 97,562 179,873
Diluted net income per share ................... $ 0.49 $ 0.62
</TABLE>
On November 30, 1999, we completed the purchase of all of the outstanding common
stock of Turning Mill Software, Inc. ("Turning Mill") for approximately $22
million in stock. Turning Mill is a developer of software and web based products
based in Acton, Massachusetts. We accounted for the acquisition of Turning Mill
as a purchase for accounting purposes and allocated approximately $22 million to
identified intangible assets and goodwill. These assets are being amortized over
periods of three to five years.
On December 8, 1999, we completed the purchase of all of the outstanding shares
of Rock Financial Corporation ("Rock") for approximately 8.6 million shares of
Intuit common stock. Rock is a provider of consumer mortgages and is based in
Michigan. In connection with the acquisition, Intuit assumed all of Rock's
outstanding employee stock options, which were converted into options to
purchase approximately 1.2 million shares of Intuit common stock. In a related
transaction, Intuit also completed the acquisition of Title Source, Inc., an
affiliate of Rock, for approximately 150,000 shares of Intuit stock. Title
Source provides title insurance and escrow services to real estate agents,
lenders, attorneys, corporations and homeowners. We accounted for the
acquisitions of Rock and Title Source as a pooling of interests for accounting
purposes and have restated all previously reported amounts to reflect the effect
of the pooling.
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. Interest rates are variable and are based on
the federal funds rate and prime rate, depending on the type of advance. The
interest rates in effect at July 31, 1999 and April 30, 2000 were 6.29% and
7.25%, respectively. The weighted average interest rates for the year ended July
31, 1999 and quarter ended April 30, 2000 were 6.45% and 8.38%, respectively.
Our second line of credit currently provides for up to $50 million principal
amount of demand loans secured by mortgage loans and other assets. Interest
rates on loans vary depending on the type of underlying loan, and the loans are
subject to sublimits, advance rates and warehouse terms that vary depending on
the type of underlying loan. The interest rates in effect at July 31, 1999 and
April 30, 2000 were 6.37% and 7.50%, respectively, while the weighted average
interest rates for the three month periods ended July 31, 1999 and April 30,
2000 were 5.92% and 7.35%, respectively. We are required to maintain a minimum
tangible net worth and to satisfy other financial covenants, as outlined in the
line of credit agreements. We were in compliance with the requirements as of
July 31, 1999 and April 30, 2000.
Our reverse repurchase agreement entered into in 1997 provided that the lender
will purchase from us, subject to our agreement to repurchase on a specified
date, up to $200 million of conventional prime and sub-prime mortgage loans at
par, as of January 1, 2000. Loans subject to purchase are fixed and adjustable
rate, fully-amortizing first or junior lien residential mortgage loans and home
equity loans that comply with our origination guidelines and conform to
whole-loan sale requirements. The reverse repurchase agreement was not a
committed facility and the lender could elect to discontinue the repurchase
agreement at any time. The terms of the financing under the repurchase agreement
matured and could be renewed on a daily basis. In any event, the arrangement
terminated in March 2000. Interest rates were variable and were based on the
London Interbank Offered Rate, depending on the
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<PAGE> 14
type of advance. The interest rate in effect at July 31, 1999 was 5.75%. The
weighted average interest rate for the year ended July 31, 1999 was 5.92%. There
were no borrowings on this line for the quarter ended April 30, 2000.
Drafts payable represent funds advanced for mortgages originated which have not
yet been drawn against the lines of credit.
6. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 2000
-------- ---------
(In thousands; unaudited)
<S> <C> <C>
Reserve for returns and exchanges .................. $ 73,955 $ 91,941
Future payments due for CRI acquisition ............ 66,314 69,220
Other acquisition and disposition related items .... 10,824 7,181
Rebates ............................................ 18,002 36,500
Post-contract customer support ..................... 3,418 5,112
Other accruals ..................................... 29,359 46,479
-------- --------
$201,872 $256,433
======== ========
</TABLE>
7. SEGMENT 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 are broken out by our operating
segments for the nine month periods ended April 30, 1999 and 2000:
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<PAGE> 15
<TABLE>
<CAPTION>
SMALL CONSUMER
NINE MONTHS ENDED BUSINESS FINANCE TAX INTERNATIONAL
APRIL 30, 1999 DIVISION DIVISION DIVISION DIVISION OTHER (1) CONSOLIDATED
-------------- --------- --------- --------- ------------- --------- ------------
(In thousands; unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net revenue ................... $ 214,169 $ 182,509 $ 324,455 $ 50,973 $ -- $ 772,106
Segment operating
income / loss) ............. 73,846 10,263 166,637 (9,870) -- 240,876
Common expenses ............... -- -- -- -- (71,921) (71,921)
--------- --------- --------- --------- --------- ---------
Sub-total operating
income / (loss) ............ 73,846 10,263 166,637 (9,870) (71,921) 168,955
--------- --------- --------- --------- --------- ---------
Gains / (losses) on
marketable securities ...... -- -- -- -- 68,684 68,684
Acquisition costs ............. -- -- -- -- (68,408) (68,408)
Reorganization costs .......... -- -- -- -- (2,000) (2,000)
Interest income/ expense
and other items ............ -- -- -- -- 12,642 12,642
--------- --------- --------- --------- --------- ---------
Net income/(loss)
before tax ................. $ 73,846 $ 10,263 $ 166,637 $ (9,870) $ (61,003) $ 179,873
========= ========= ========= ========= ========= =========
SMALL CONSUMER
NINE MONTHS ENDED BUSINESS FINANCE TAX INTERNATIONAL
APRIL 30, 2000 DIVISION DIVISION DIVISION DIVISION OTHER (1) CONSOLIDATED
-------------- --------- --------- --------- -------------- --------- ------------
(In thousands; unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net revenue ................... $ 307,606 $ 183,922 $ 365,472 $ 74,566 $ -- $ 931,566
Segment operating income ...... 90,629 135 184,738 11,510 -- 287,012
Common expenses ............... -- -- -- -- (101,601) (101,601)
--------- --------- --------- --------- --------- ---------
Sub-total operating ...........
income / (loss) ............ 90,629 135 184,738 11,510 (101,601) 185,411
--------- --------- --------- --------- --------- ---------
Gains on marketable
securities ................. -- -- -- -- 402,096 402,096
Acquisition costs ............. -- -- -- -- (130,058) (130,058)
Reorganization costs .......... -- -- -- -- (3,500) (3,500)
Interest income/ expense
and other items ............ -- -- -- -- 29,981 29,981
--------- --------- --------- --------- --------- ---------
Net income before tax ......... $ 90,629 $ 135 $ 184,738 $ 11,510 $ 196,918 $ 483,930
========= ========= ========= ========= ========= =========
</TABLE>
----------
(1) "Other" includes acquisition and other common costs not allocated to
specific segments.
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 $34.7 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 April
30, 2000, the rate was approximately 0.8%. 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.
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<PAGE> 16
10. LITIGATION
Intuit was a defendant in a consolidated class action lawsuit in California
which alleged that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant. On October 13, 1999 the court
dismissed the case without leave to amend. In May 2000, plaintiffs were awarded
nominal attorneys' fees. If plaintiffs do not appeal the case dismissal or the
fees award, this case will be over.
On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the
United States District Court, Central District of California, Eastern Division.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. A
similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the
Superior Court of State of California, San Bernadino County, Rancho Cucamonga
Division. 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. To date, the Rubin complaint has not been served.
In addition, on April 19, 2000, Bosch v. Intuit Inc. was filed in the Superior
Court, State of California, County of Los Angeles, Central District. This
lawsuit alleges violations of California statutes for alleged false and
deceptive advertising and unlawful business practices related to QuickBooks
products and purchasing the Tax Table Service. Plaintiff seeks injunctive
relief, an order to disgorge profits, restitution and attorneys' fees.
Intuit is subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
11. RELATED PARTY TRANSACTIONS
As of April 30, 2000, we held approximately 8.1% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported revenues of
$1.6 million and $4.0 million from Checkfree for the three and nine months ended
April 30, 1999 and $1.7 million and $5.3 million for the three and nine months
ended April 30, 2000, respectively. We held receivables due from Checkfree for
$0.1 million and $2.2 million at July 31, 1999 and April 30, 2000, respectively.
As of April 30, 2000, we held a 49% non-voting equity interest in Venture
Finance Software Corp. ("VFSC"). We have entered into agreements with VFSC to
provide them with services related to ongoing development of Web-oriented
finance products and services. We have an option to purchase the equity
interests of the other investors in VFSC between May 4, 2000 and May 4, 2002, at
a price to be determined by a formula. We held receivables due from VFSC for
$6.7 million and $8.5 million at July 31, 1999 and April 30, 2000, respectively.
-16-
<PAGE> 17
--------------------------------------------------------------------------------
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS AND INVESTMENT CONSIDERATIONS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements with words
like "expect," "anticipate," or "believe" and statements in the future tense,
are forward-looking statements. Investors should be aware that actual results
may differ materially from our expectations expressed in this report because of
risks and uncertainties about the future. We will not necessarily update
information in this Form 10-Q if any forward-looking statement later turns out
to be inaccurate. Details about risks and uncertainties that affect various
aspects of our business, and may affect future results and performance, are
discussed throughout this Form 10-Q. This section should be read in conjunction
with the financial statements and notes in Item 1 of this Form 10-Q. Investors
should consider all of these risks carefully, and should pay particular
attention to the following:
- Our revenue and earnings are highly seasonal and our quarterly and annual
financial results fluctuate significantly.
- We face intense competition from many companies in all of our business
areas. Intense competition can have a material negative impact on revenue,
profitability and market position.
- Competition in the personal tax preparation software business is
particularly intense. Although Microsoft ultimately withdrew from the
desktop personal tax market this season, there are other formidable current
and potential competitors in the private sector, and we also face potential
competition from the Internal Revenue Service and state tax agencies.
- In our online mortgage and insurance businesses, we face competition from
many newly public companies that have a narrower business focus, increasing
financial resources and less demanding earnings expectations.
- We must continue to establish and maintain important distribution
relationships for our Internet-based products and services and successfully
market and promote these products and services.
- We must maintain high reliability for our server-based Web services in
order to attract and retain customers. In particular, our web-based tax
preparation and electronic filing services effectively handled extremely
heavy customer demand during the peak tax season this year, but must
continue to successfully do so in future tax seasons.
- If we fail to provide responsive customer service and technical support, we
could lose customers.
- Our Internet businesses face risks relating to customer privacy and
security and increasing regulation that could adversely affect our ability
to offer online services and derive advertising revenue from our Internet
operations.
- Our Internet businesses require significant research and development and
marketing expenditures.
- Page views and reach statistics for our Quicken.com site can vary
significantly from month to month due to seasonal trends, site performance,
the timing of launches, performance of the major stock market indices,
competitors' activities and other factors. Adverse changes in page view and
reach statistics could adversely affect our ability to earn advertising
revenue from our Quicken.com site.
- In order to succeed in the payroll services business, we must continue to
improve the integration of the operations of our payroll processing
subsidiary, streamline customer activations for our online payroll
processing service and focus our traditional payroll service on existing
distribution channels.
- The technology and services of certain alliances for our QuickBooks
Internet Gateway initiative still need to be completed and integrated with
QuickBooks, and are subject to risks and uncertainties involved in the
product development process, including technological difficulties, possible
delays, and possible unavailability of financial resources. Significant
delays in implementing key services, or failure to implement, could delay
or eliminate our ability to recognize contractually committed revenues.
- The anticipated benefits of certain proposed small business services to
Intuit (including the Site Builder website creation tool, Site Solutions
services and QuickBooks Internet Gateway services) will depend on a number
of variables, including the rate at which customers upgrade to QuickBooks
2000 and future versions of the product, customer acceptance of new and
proposed services, and the level of satisfaction of third party
participants. Customer upgrade rates for QuickBooks 2000, which was
released in January 2000, have been negatively impacted by heavier upgrade
activity during 1999 due to Year 2000 concerns.
- The success of the small business alliances will depend on establishing and
maintaining a number of important business relationships, and there can be
no assurance that key relationships will be established and, if
established, will continue.
-17-
<PAGE> 18
- Our Tax and Quicken Internet Gateway initiatives, and related new services
to be offered in these areas, are in very early stages. Success of these
initiatives will depend on establishing and maintaining business
relationships with key participants and completing necessary technology
development and integration, as well as achieving broad customer acceptance
of the services to be offered.
- We offer electronic bill payment and bill presentment services, and the My
Finances web-based personal finance management service, through licensing
arrangements with a joint venture in which we are a participant. The
success of these services for Intuit will depend on a number of factors,
including timely and cost-effective completion of ongoing development
efforts, customer and biller adoption and participation rates, and the
status of the relationship with the joint venture. Intuit has an option to
purchase the interests in the joint venture that it does not currently own
between May 2000 and May 2002, at a formula-driven price that would likely
exceed $100 million. If we do not exercise the purchase option, our rights
to use the technology developed by the joint venture will be subject to
future negotiation.
- We face increasing competition for access to retail and OEM distribution
channels.
- The integration of acquired companies poses ongoing operational challenges
and risks. In addition, our recent acquisitions have resulted in
significant acquisition-related expenses.
- Our mortgage business is subject to interest rate fluctuations, and the
impact of interest rates on Intuit's operating results has become more
significant since the acquisition of Rock Financial was completed. The
recent increase in interest rates is also adversely affecting our mortgage
business.
- We hold investments that have been very volatile.
Additional information about factors that could affect future results and events
is included in our fiscal 1999 Form 10-K/A, our fiscal 2000 Form 10-Qs, and
other reports filed with the Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals, small businesses, and
financial professionals manage their finances. As we execute this mission, our
strategy is to greatly expand the world of electronic finance. "Electronic
finance" encompasses three types of products and services: (1) desktop software
products, such as Quicken(R), QuickBooks(R) and Quicken TurboTax(R), that
operate on customers' personal computers to automate financial tasks; (2) online
products and services, such as Quicken.com(SM), QuickenLoans(SM),
QuickenInsurance(SM) and Quicken TurboTax for the Web(SM), that are delivered
via the Internet; and (3) products and services, such as QuickBooks Online
Payroll(SM) service, that connect Internet-based services with desktop software
to enable customers to integrate their financial activities.
While desktop software and related products and services now provide most of our
revenue, our Internet-based revenue is growing rapidly. For the three months
ended April 30, 2000, Internet-based revenue more than doubled compared to the
same period last year and accounted for approximately 35% of total revenue in
the quarter ended April 30, 2000, compared to approximately 20% in the prior
year quarter. We expect Internet revenues to be approximately 25% of total
revenues for the full fiscal year. We use the term Internet-based revenue to
include revenue from both Internet-enabled products and services as well as
revenue from electronic distribution. Internet products and services include
activities where the customer realizes the value of the goods or services
directly on the Internet or an Intuit server. Internet product revenues include,
for example, advertising revenues generated on our Quicken.com website, online
tax preparation and electronic tax filing revenues, online payroll service
revenue and transaction and processing fees from our online insurance and online
mortgage services. Electronic distribution includes revenues generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies. We also use the Internet to host our technical support
website where we can quickly and cost-effectively provide patches for product
bugs and provide customers with answers to frequently asked questions.
While we believe that the Internet provides an opportunity to increase future
revenue, we also anticipate continued increases in spending in an effort to
capitalize on new business opportunities. While we have made significant
progress in our Internet-based businesses, investors should be aware that many
of these businesses are in their initial stages, and are not yet generating
significant revenue or profit. In particular, we continue to expect increased
research and development expenses due to investments in Internet-based
initiatives. Since Internet-based revenues and expenses cut across all of our
business divisions, we do not report results of our Internet-based businesses as
a separate business segment in our financial statements. Instead, each of our
business divisions reports Internet-based revenues and expenses that are
specific to its operations and are included in its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying
-18-
<PAGE> 19
season, and therefore our major product launches usually occur in the fall to
take advantage of this customer buying pattern. These seasonal patterns mean
that revenue is usually strongest during the quarters ending January 31 and
April 30. We experience lower revenues for the quarters ending July 31 and
October 31, while our operating expenses to develop and manage products and
services continue to be incurred at relatively consistent levels during these
periods. These seasonal trends can result in significant operating losses,
particularly in the July 31 and October 31 quarters when our revenues are lower.
Operating results can also fluctuate for other reasons, such as changes in
product release dates, non-recurring events such as acquisitions and
dispositions, and product price cuts in quarters that have relatively high fixed
expenses. Acquisitions and dispositions in particular can have a significant
impact on the comparability of both our quarterly and yearly results, and
acquisition-related expenses have had a negative impact on earnings.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and nine-month periods ended April 30, 1999 and 2000. Investors should
note that results for the three and nine-month periods ended April 30, 2000
include activity for our CRI subsidiary, which was acquired in May 1999. The
corresponding year ago periods did not include results for CRI (see Note 4).
Results for all periods include results for Rock Financial Corporation and Title
Source, Inc. (collectively, "Rock") which we acquired in December 1999. The
acquisition of Rock has been accounted for as a pooling of interests, so all
prior periods have been restated to reflect combined results of Rock and Intuit.
The inclusion of Rock's results in the comparison periods for both fiscal 1999
and fiscal 2000 had a significant impact on our financial results. Rock's
revenue declined approximately 50% for the comparison periods, due to Rock's
transition from a traditional mortgage business to an online mortgage business
as well as rising interest rates. Although Rock's operating expenses decreased
in absolute dollars between the comparison periods, they increased significantly
as a percentage of revenue and resulted in operating losses for Rock during the
fiscal 2000 comparison periods (compared to operating profits in the fiscal 1999
periods), which partially offset growth in operating income for our other
businesses as a whole.
<TABLE>
<CAPTION>
NET REVENUE Three Months Ended April 30, Nine Months Ended April 30,
(Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue ................... $261.5 26% $329.1 $772.1 21% $931.6
</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 international division. For more
information regarding revenue by division, see Note 7.
Small Business Division. Small business division revenues come primarily from
the following sources:
- QuickBooks product line
- Supplies products (including checks, envelopes and invoices)
- Payroll services
- Support fees for the QuickBooks Support Network
Overall, revenue for the division was up 10% and 44% for the three and
nine-month periods ended April 30, 2000, respectively, compared to the same
periods a year ago. QuickBooks revenue for the third quarter declined compared
to the third quarter of fiscal 1999. However, for the nine-month period, we
experienced significant growth in our QuickBooks product line revenue, driven
primarily by higher unit sales, as well as increased average selling prices as a
result of consumer preferences toward higher priced, greater functionality
products. This unusual quarterly revenue pattern is due to two primary factors.
First, we encouraged owners of older versions of QuickBooks to upgrade prior to
January 2000 in order to minimize Year 2000 issues. Second, we gave over 350,000
online customers free upgrades to bring them into Y2K compliance. These actions
resulted in strong first-half revenue growth, while producing a decline in
customer upgrades and resulting revenue for the third quarter. The third quarter
trend is expected to continue into the fourth quarter.
Domestic supplies revenues, which are part of the small business division, grew
by 7% and 14% for the three and nine-month periods ended April 30, 2000 as a
result of our increasing base of small business customers who use
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QuickBooks and Quicken. In addition, in August 1999, we began charging for
shipping and handling for domestic supplies shipments which also contributed to
our domestic supplies revenue.
QuickBooks Deluxe Payroll Service (launched in October 1998) and CRI's
traditional payroll business (acquired in May 1999) both contributed to
increased revenues during the three-month and nine-month periods ended April 30,
2000. Tax tables service revenue and revenue from our QuickBooks Support Network
also grew in the three and nine-month periods ended April 30, 2000 compared to
the same periods a year ago.
We offer different types of payroll services. Our Basic Payroll Service is a
payroll tax table subscription service for small business customers that need
current tax tables to prepare their own payroll. Our QuickBooks Deluxe Payroll
service, which is integrated with our QuickBooks products, is an online payroll
services that handles all aspects of payroll processing, with our CRI subsidiary
providing the processing services. Our Premier payroll services provides
traditional payroll processing services for former customers of CRI. In
addition, we offer QuickPayroll, a subscription-based payroll service for
customers who do not use QuickBooks. While the payroll processing business
provides us with a significant opportunity to generate revenue, there are
business risks associated with the payroll processing business and the continued
integration of CRI into our existing business model. For example, if we are
unable to provide accurate and timely payroll information, cash deposits or tax
return filings, that failure could be costly to correct and may have a
significant negative impact on our ability to attract and retain customers, who
have a low tolerance for payroll processing errors. The success of our premier
payroll service will depend in part on retaining existing customers and
maintaining relationships with certain banks and other third parties. If we are
unable to do so, it could result in a negative impact on our consolidated
results. While the customer base for the QuickBooks Deluxe Payroll service
continues to expand, the service is not yet generating material revenues and we
must continue to focus on streamlining the customer activation process.
QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected
and integrated electronic services. It is designed to offer small businesses
direct access to business services from third parties, such as electronic
postage and merchant account services, that can help them more easily and
efficiently manage their business. It also features QuickBooks Site Solutions, a
new web site creation and domain name registration tool that enables small
businesses to quickly establish a presence on the Web. These new features are
strategically important to Intuit as a way to expand our customer base and
generate more revenue and profit per customer. While we are encouraged by
preliminary results for these services, future revenues and profits are subject
to a variety of risks and uncertainties. See "Cautions about Forward-Looking
Statements and Investment Considerations," above.
Tax Division. Tax division revenues come primarily from the following sources:
- Quicken TurboTax and MacInTax personal desktop tax preparation
products
- Professional tax preparation products (ProSeries and Lacerte product
lines)
- Quicken TurboTax for the Web electronic tax preparation services
- Electronic filing services
Overall, tax division revenues for the three and nine-month periods ended April
30, 2000 increased by 47% and 13% respectively, compared to the same periods
last year. The increase in revenue for the three-months ended April 30, 2000 was
due primarily to the deferral of significant electronic filing and state product
revenues in our second fiscal quarter which were subsequently recognized in our
third fiscal quarter. These deferrals were significantly higher this year as a
result of the increased popularity of electronic filing and more aggressive free
state product promotions with certain versions of our Quicken Turbo Tax product.
While we experienced significant unit sales growth for the three and nine months
ended April 30, 2000, we also experienced extreme pricing pressures from both
H&R Block's aggressively priced TaxCut product and from Microsoft's TaxSaver
product, including free product offerings from Microsoft. The increased
competition resulted in lower average selling prices in response to these
pricing pressures. We also experienced significantly higher revenues and volume
for Quicken TurboTax for the Web and for electronic filing compared to last
year. Unit sales and revenue from our Quicken TurboTax for the Web increased by
approximately 470% and 120%, respectively, for the nine months ended April 30,
2000 compared to the same period last year. Unit growth was driven in part by
free units offered through our Quicken Tax Freedom Project. Unit sales and
revenue from our electronic filing services increased by approximately 73% and
88%, respectively, for the nine months ended April 30, 2000 compared to the same
period last year. While we are encouraged by 1999 tax season results, we do not
expect comparable growth rates for our web-based offerings in our 2000 tax
season.
In March 2000, Microsoft announced that it would discontinue its TaxSaver
product after the 1999 tax season. However we believe they plan to offer H&R
Block's TaxCut product on the MSN network for the 2000 tax season. Accordingly,
we expect the personal tax market to remain extremely competitive for the
foreseeable future.
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<PAGE> 21
Although we are encouraged by the year-to-date results for our personal tax
products, revenues for the full tax season are still subject to product returns
from our retail distribution channels. While we expect our reserves for returned
products will be adequate to cover retailers' returns of unsold products during
the next two quarters, higher than expected returns could have a negative impact
on revenue for the full season.
Revenues for our professional tax (ProSeries) products and products from our
Lacerte subsidiary increased by 22% and 13% for the three and nine-month periods
ended April 30, 2000 respectively, compared to the same periods last year. This
growth is attributable to a combination of a continued shift to higher priced
products, increased pay-per-return revenues and growth in our customer base due
in part to our acquisitions of Compucraft and TaxByte during 1999. In addition,
we continue to experience a high customer renewal rate.
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
- Quicken product line
- Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
- Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing services
through Quicken and Quicken.com
- Consumer mortgage placement and servicing fees through Quicken Loans
Overall, consumer finance division revenues were down 10% and roughly flat for
the three and nine-month periods ended April 30, 2000, respectively, compared to
the same periods a year ago. These results reflect strong revenue growth for our
Quicken product line and growth in Internet-based revenues, offset by a
significant decline in revenues for Rock's mortgage business from the year-ago
periods. Quicken revenue increased compared to the same periods of the prior
year primarily due to strong consumer demand resulting from aggressive retail
promotions with our tax products. While overall Quicken revenue growth is strong
year-to-date, Quicken revenue in the third quarter this year was relatively flat
compared to the third quarter of fiscal 1999. We believe this is attributable to
a significant number of customers upgrading in the first half of the fiscal
year, due to Year 2000 concerns. We anticipate that this shift will continue to
impact upgrade sales and that Quicken revenue may continue to decline compared
to fiscal 1999 levels for the remainder of our fiscal year.
Our Quicken product line faces many challenges in the desktop personal financial
software market. For example, we continue to face competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the Internet at no cost, which has a negative
impact on desktop product sales. There is also an increasing emphasis on
packaging desktop software with original equipment manufacturers' personal
computers, which results in lower revenues per unit shipped.
Consumer division revenue growth also benefited from an increase in certain
Internet-based revenue compared to the same periods last year. This increase was
largely due to higher advertising, sponsorship and transaction-related revenue
through Quicken.com and Quicken. However, revenue growth was not uniform across
all of our Internet product and service offerings in the Consumer division. For
example, advertising revenue from our Quicken.com site has grown relatively
rapidly. However, revenue from Quicken Loans was substantially lower than in the
same periods a year ago. Quicken Loans now encompasses Intuit's online mortgage
business as well as the online and traditional mortgage businesses of Rock
Financial, which we acquired in December 1999. The decline in mortgage revenue
was primarily due to Rock's decision to close many of its traditional mortgage
branch offices in order to focus resources on Internet-based lending, as well as
increasing interest rates. Revenue from mortgage transaction fees may continue
to be adversely impacted if interest rates continue to rise, and as we continue
to phase out Rock's traditional mortgage business. In addition, the acquisition
of Rock will continue to result in new business risks and integration challenges
common in all acquisitions. For example, our ability to successfully facilitate
the application, approval, and closing process in loan applications on a timely
basis will have a significant impact on our ability to attract customers to our
mortgage service. Our ability to succeed in the mortgage business will depend in
part on maintaining relationships with certain banks and other third parties who
we will rely on to provide access to capital, and later, service the loans. If
we are unable to do so, it could have a negative impact on our consolidated
results.
The revenue growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as At Home Corporation (doing business as "Excite@Home")
and AOL, which have helped to increase traffic to our Quicken.com website. The
Excite@Home agreement calls for us to share revenue generated from our
Quicken.com site and the AOL agreement calls for us to make significant
guaranteed payments to AOL over the term of the agreement. While the Internet
provides a significant opportunity for revenue growth, our financial commitments
to these and other third party providers are significant and we must continue to
increase traffic and revenue in order for our Internet businesses to become
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<PAGE> 22
profitable. Our ability to maintain important relationships with Internet
portals, distributors and content providers will also have an impact on traffic
and revenues. If our website traffic and revenue expectations aren't met, there
could be a significant negative impact on our operating results.
International Division. International division revenues come primarily from the
following sources:
- Japanese QuickBooks and other small business products
- Canadian Quicken, QuickBooks and Tax products
- German Quicken, QuickBooks and Tax products
- United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues increased 67% and 46%
for the three and nine-month periods ended April 30, 2000 compared to the same
periods last year. This increase is a result of stronger sales of Quicken and
QuickBooks in both Canada and the U.K., higher sales of the Yayoi small business
product in Japan, and favorable currency fluctuations in Japan. Partially
offsetting these increases was a decline in revenues in Germany, which
experienced reduced revenue but increased profitability due to a shift in our
German business model from direct participation in the market to a third party
distribution arrangement.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
(Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Product ............................ $ 53.8 40% $ 75.5 $163.0 38% $225.0
% of revenue ....................... 21% 23% 22% 24%
Amortization of purchased software & $ 1.9 10% $ 2.1 $ 5.6 25% $ 7.0
other
% of revenue ....................... 1% 1% 1% 1%
Total .............................. $ 55.7 39% $ 77.6 $168.6 38% $232.0
% of revenue ....................... 21% 24% 23% 25%
</TABLE>
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products and offering services. The second
component is the amortization of purchased software, which is the cost of
products obtained through acquisitions. Total cost of goods sold increased to
24% and 25% of revenue for the three and nine-months ended April 30, 2000
compared to 21% and 23% for the same periods of the prior year. These increases
are primarily attributable to two factors. First, consistent with our growing
Internet-based business, we are experiencing a significant increase in related
hardware and infrastructure costs as we purchase equipment to increase our
Internet capability and capacity. These costs are classified as cost of goods
sold and, as a percentage of revenue, are significantly higher than the costs of
goods sold for our traditional desktop software business. Second, our service
businesses, such as payroll processing and QuickBooks Support Network, generally
have higher cost of goods sold compared to the sale of packaged software. As
these businesses contribute a higher proportion of total revenue, we anticipate
that our cost of goods sold will continue to increase. Note that results from
CRI, our payroll processing subsidiary that we acquired in May 1999, are
included in fiscal 2000 results but not in the fiscal 1999 comparison periods,
which contributed to the year-over-year increase in cost of goods sold.
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<PAGE> 23
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
(Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Customer service & technical support ...... $ 29.6 7% $ 31.6 $101.6 12% $113.6
% of revenue .............................. 11% 10% 13% 12%
Selling & marketing ....................... $ 50.8 19% $ 60.2 $175.1 23% $216.2
% of revenue .............................. 19% 18% 23% 23%
Research & development .................... $ 34.3 19% $ 40.8 $104.3 21% $126.5
% of revenue .............................. 13% 12% 14% 14%
General and administrative ................ $ 20.2 0% $ 20.0 $ 59.1 10% $ 64.8
% of revenue .............................. 7% 6% 8% 7%
Charge for purchased research and
development ............................... $ -- N/A $ -- $ -- 100% $ 1.3
% of revenue .............................. N/A N/A N/A 0%
Other acquisition costs, including
amortization of goodwill and purchased
intangibles ............................... $ 20.9 78% $ 37.3 $ 62.8 89% $118.8
% of revenue ............................. 8% 11% 8% 13%
Other acquisition related costs-
amortization of deferred compensation ..... $ -- 100% $ 1.1 $ -- 100% $ 2.9
% of revenue .............................. N/A 0% N/A 0%
Reorganization costs ...................... $ -- N/A $ -- $ 2.0 75% $ 3.5
% of revenue .............................. N/A N/A 0% 0%
</TABLE>
Customer Service and Technical Support. Customer service and technical support
expenses were 10% and 12% of revenue for the three and nine-months ended April
30, 2000 compared to 11% and 13% for the same periods of the prior year. This
improvement reflects the acquisition of CRI which experiences comparatively
lower customer service and technical support expenses as a percentage of
revenue. We have also benefited from our efforts to provide customer service and
technical support less expensively through websites and other electronic means
and from the expansion of our fee-for-support programs.
Selling and Marketing. Selling and marketing expenses were 18% and 23% of
revenue for the three and nine-months ended April 30, 2000 compared to 19% and
23% for the same periods of the prior year. The decrease in selling and
marketing costs for the three month period is attributable to our acquisition of
CRI, which experiences comparatively lower selling and marketing expenses as a
percentage of revenue. This was partially offset by the aggressive marketing
programs relating to the expansion of our Internet-based businesses and the
extremely competitive personal tax season.
Research and Development. Research and development expenses were 12% and 14% of
revenue for the three and nine-months ended April 30, 2000 compared to 13% and
14% of revenue for the same periods of the prior year. This decline in the
three-month period reflects the acquisition of CRI which experiences
comparatively lower research and development expenses as a percentage of
revenue. We expect to continue significant investments in research and
development due to our efforts to develop our Internet-based businesses and
believe that these expenditures will impact our results for the remainder of
fiscal 2000 and beyond. If such expenses exceed our current expectations, they
may have an adverse effect on operating results. This could occur, for example,
if we were to undertake a costly product development venture in response to
competitive pressures or other market conditions.
General and Administrative. General and administrative expenses were 6% and 7%
of revenue for the three and nine-months ended April, 2000 compared to 7% and 8%
for the same periods of the prior year. For fiscal 2000, we
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<PAGE> 24
expect general and administrative expenses to remain roughly flat as a
percentage of revenue compared to fiscal 1999.
Charge for Purchased Research and Development. For the nine months ended April
30, 2000, we recorded charges for purchased research and development as a result
of our Boston Light and Hutchison acquisitions. In connection with these
acquisitions, we used third party appraisers' estimates to determine the value
of in-process projects under development for which technological feasibility had
not been established. The total value of these projects at the time of the
acquisitions was determined to be approximately $1.3 million and was expensed in
the three months ended October 31, 1999. The value of the projects was
determined by estimating the costs to develop the in-process technology into
commercially feasible products, estimating the net cash flows we believed would
result from the products and discounting these net cash flows back to their
present value. We believe the products related to these charges will be
completed during our fiscal year 2000, and that the risk of these products not
being successfully completed is low.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles and deferred compensation costs that are
recorded as part of an acquisition. These costs increased to $37.3 million and
$118.8 million for the three and nine-months ended April 30, 2000 compared to
$20.9 million and $62.8 million for the same periods of the prior year. These
increases ware primarily attributable to the amortization of intangibles
associated with our acquisition of CRI in May 1999, and our acquisitions of
Secure Tax, Boston Light and Hutchison in August 1999, and Turning Mill Software
in November 1999.
The high levels of non-cash amortization expense related to completed
acquisitions will continue to have a negative impact on operating results in
future periods. Assuming no additional acquisitions and no impairment of value
resulting in an acceleration of amortization, amortization will be approximately
$167.3 million, $148.0 million, $142.8 million and $118.7 million for the years
ending July 31, 2000 through 2003, respectively. If we complete additional
acquisitions or accelerate amortization in the future, there could be an
incremental negative impact on operating results.
Reorganization Costs. Reorganization costs represent the costs associated with
Rock's closure of numerous branch offices in Michigan prior to its acquisition
by Intuit as the mortgage business began to transition from a traditional
branch-based business to an on-line transaction-based business. These costs
increased to $3.5 million for the nine-month period ended April 30, 2000 from
$2.0 million for the same period of the prior year.
OTHER INCOME
For the three and nine months ended April 30, 2000, interest and other income
and expense, net, increased to $14.5 million and $30.0 million compared to $5.3
million and $12.6 million for the same periods a year ago, reflecting increased
cash and short-term investment balances due primarily to the sale of marketable
securities. For the three and nine-months ended April 30, 2000, we recorded
gains from marketable securities of $422.2 million and $402.1 million compared
to $58.6 million and $68.7 million for the same periods a year ago. We have
elected to report our At Home and VeriSign common stock as trading securities
and are required to mark to market the fluctuations in the stock price and
report the fluctuations in our earnings. Recent volatility in the market has
significantly impacted the value of our trading securities and consequently, our
operating results and we expect this to continue as long as we hold these
securities. See Note 1 for additional information regarding our marketable
securities.
INCOME TAXES
For the three and nine-months ended April 30, 2000, we recorded income tax
provisions of $200.2 million and 195.6 million on a pretax income of $497.2
million and $483.9 million, respectively. This compares to income tax provisions
of $38.6 million and $56.3 million on a pretax income of $114.0 million and
$179.9 million, respectively for the same periods of the prior year. At April
30, 2000, there was a valuation allowance of $11.6 million for tax assets of our
international subsidiaries based on management's assessment that we may not
receive the benefit of certain loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, our unrestricted cash and cash equivalents totaled $962.1
million, a $407.9 million increase from July 31, 1999. Liquidity improvement was
the result of net cash provided by operating, investing, and financing
activities. Cash from operating activities is driven by the seasonality of our
business, which typically results in the
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<PAGE> 25
majority of net revenues and cash receipts occurring in the January and April
quarters, though operating expenses are incurred throughout the year.
Our operations provided $218.5 million in cash during the nine months ended
April 30, 2000. Primary sources of cash were net income of $288.5 million, net
income adjustments made for non-cash items such as acquisition charges,
depreciation, gains from the sale of marketable securities and an increase in
liabilities. The increase in liabilities was driven primarily by increased
income taxes payable from our realized gains from the disposition of marketable
securities, such as Checkfree, At Home, and VeriSign Inc. (see Note 1). We also
experienced increased liabilities due to the seasonality of our business and the
resulting increase in accruals for product returns, customer rebates and accrued
technical support expenses. These sources of cash were offset significantly by
an increase of $64.4 million in accounts receivable that is attributable to the
large volume of seasonal product shipments to retailers and distributors that
typically occur in our second and third fiscal quarters.
Investing activities generated $129.6 million in cash for the nine months ended
April 30, 2000. The primary contributor to cash included net proceeds of $519.2
million from the sale of our marketable securities. This was significantly
offset by net purchases of $219.2 million in short-term investments, the
purchase of $71.7 million in property and equipment and the purchase of $16.5
million in marketable securities. Property and equipment purchases were made to
support our ongoing operations, information system upgrades and our growing
Internet-based businesses. We also used $54.6 million in cash for our
acquisitions of SecureTax and Hutchison.
Financing activities provided $59.8 million for the nine months ended April 30,
2000, primarily attributable to proceeds from the exercise of employee stock
options. This was partially offset by the decrease in our line of credit as we
funded new consumer mortgage loans during the period.
We currently hold investments in a number of publicly traded companies (see Note
1). The volatility of the stock market and the potential risk of fluctuating
stock prices may have an impact on our future liquidity. Due to our reporting of
the At Home and VeriSign shares as trading securities, future fluctuations in
the carrying values of At Home and VeriSign will impact our earnings (see Note
1). If future declines in our other marketable securities are deemed to be
permanent, they will also impact our earnings. Investors should note that many
high technology companies, including At Home and VeriSign, have recently
experienced significant declines in their stock prices.
In connection with our acquisition of CRI (see Note 4), we are required to pay
three annual installments of $25 million, one of which was paid in the fourth
quarter of fiscal 2000. In the normal course of business, we enter into leases
for new or expanded facilities in both domestic and international locations. We
also evaluate the merits of acquiring technology or businesses, or establishing
strategic relationships with and investing in other companies. Accordingly, it
is possible that we may decide to use cash and cash equivalents to fund such
activities in the future. For example, if we exercise our option to purchase
VFSC (see Note 11) and elect to pay all or a significant portion of the exercise
price in cash, this would have a negative impact on our liquidity.
We believe that our unrestricted cash, cash equivalents and short-term
investments will be sufficient to meet anticipated seasonal working capital and
capital expenditure requirements for at least the next twelve months.
YEAR 2000
The following is a Year 2000 readiness disclosure under the Year 2000
Information and Readiness Disclosure Act.
Intuit established a Year 2000 Project Office to address the impact of the year
2000 date transition on its operations, products and services globally. We
adopted a five-phase approach for reviewing and preparing the significant
elements of operations, products and services for the Year 2000 date transition.
Through the date of this filing, we have had no major Y2K-related issues. In
addition, all substantive claims in the lawsuits filed against Intuit in
connection with alleged Y2K problems with our products and services have been
dismissed, with only one possible appeal remaining. Customers can find Intuit's
Year 2000 Readiness Disclosure about our products, and order free solutions,
where required, on our Corporate Year 2000 Resource Center at
www.intuit.com/y2k.
Costs directly attributed to our Year 2000 project were approximately $6.5
million in fiscal 1999. We currently anticipate direct costs in the range of $8
to $12 million for fiscal year 2000, including costs associated with ongoing
maintenance and support activity in fiscal year 2000, and including costs
associated with the manufacture and
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<PAGE> 26
distribution of free solutions for products that are not Year 2000 compliant or
in certain cases that were not tested for Year 2000 compliance. For example, we
gave approximately 350,000 of our QuickBooks online customers free upgrades to
bring them into Y2K compliance. We don't know how many of those customers would
have paid for a new product if we had not provided the free upgrade, so we are
unable to precisely quantify the amount of lost revenue due to the free
upgrades. However, this action did lead to a decline in customer upgrades and
resulting QuickBooks revenue for the third quarter of fiscal 2000, and the
third quarter trend is expected to continue into the fourth quarter. We are
experiencing a similar pattern in fiscal 2000 quarterly revenue for Quicken,
due in part to free Y2K upgrades provided to online customers.
--------------------------------------------------------------------------------
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a maximum
of $5 million to any one issuer. Our policy also dictates that all short-term
investments mature in 30 months or less.
MARKETABLE SECURITIES
We also carry significant balances in marketable equity securities as of April
30, 2000. These securities are subject to considerable market risk due to their
volatility. See Note 1 of the financial statement notes for more information
regarding risks related to our investments in marketable securities.
INTEREST RATE RISK
Interest rate risk represents a component of market risk to us and represents
the possibility that changes in interest rates will cause unfavorable changes in
our net income and in the value of our interest rate sensitive assets,
liabilities and commitments. In a higher interest rate environment, borrower
demand for mortgage loans declines. Interest rate movements also affect the
interest income earned on loans we hold for sale in the secondary market,
interest expense on our lines of credit, the value of mortgage loans we hold for
sale in the secondary market and ultimately the gain on the sale of those
mortgage loans. In addition, interest rate movements affect the interest income
earned on investments we hold in our short-term investment portfolio and the
value of those investments.
As part of our risk management programs, we enter into financial agreements and
purchase financial instruments in the normal course of business to manage our
exposure to interest rate risk with respect to our Conventional Loans and our
government-insured loans (together, "Prime Loans"), but not with respect to our
Sub-Prime Loans or Home Equity Lines of Credit. We use these financial
agreements and financial instruments for the explicit purpose of managing
interest rate risks to protect the value of our mortgage loan portfolio.
Management actively monitors and manages our exposure to interest rate risk on
Prime Loans, which is incurred in the normal course of business. The committed
and closed pipelines of Prime Loans, as well as the related forward commitments
and derivatives, are valued daily. We refer to the loans, pipeline, commitments
and derivatives together as the "hedge position." The hedge position is
evaluated against a spectrum of interest rate scenarios to determine expected
net changes in the fair values of the hedge position in relation to the changes
in interest rates. We do not enter into instruments for trading purposes. Our
interest rate risk exposure is evaluated daily using models which estimate
changes in the fair value of the hedge position and compare those changes
against the fair value of the underlying assets and commitments.
-26-
<PAGE> 27
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates; unaudited)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE (1)
PERIOD ENDING APRIL 30, FAIR VALUE
----------------------------------------------------- APRIL 30,
2000 2001 2002 2003 2004 TOTAL 2000
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Mortgage Loans .................... $ 65,480 -- -- -- -- $ 65,185 $ 66,975
Average Interest Rate ...... 9.04% 9.04%
LIABILITIES:
Lines of Credit ................... $ 18,839 -- -- -- -- $ 18,791 $ 19,000
Average Interest Rate ...... 8.38% 8.38%
</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 April 30, 2000, we do not believe that short-term changes in interest
rates would have a material effect on the interest income we earn on loans held
for sale in the secondary market, interest expense on our lines of credit or the
value of mortgage loans that we hold for sale in the secondary market. See Notes
1 and 5 of the financial statement notes for more information regarding risks
related to our mortgage loans and lines of credit.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal 1999, the currency of our Japanese subsidiary strengthened while
the currencies of our other subsidiaries remained essentially stable. As of
April 30, 2000, the currency of our Japanese subsidiary has continued to
strengthen and the currencies of our other subsidiaries have remained
essentially stable since the end of our 1999 fiscal year. Because we translate
foreign currencies into U.S dollars for reporting purposes, currency
fluctuations can have an impact, though generally immaterial, on our results. We
believe that our exposure to currency exchange fluctuation risk is
insignificant, primarily because our international subsidiaries invoice
customers and satisfy their financial obligations almost exclusively in their
local currencies. For the quarter ended April 30, 2000, there was an immaterial
currency exchange impact from our intercompany transactions. Currency exchange
risk is also minimized since foreign debt is due almost exclusively in local
foreign currencies. As of April 30, 2000, we did not engage in foreign currency
hedging activities.
--------------------------------------------------------------------------------
PART II
ITEM 1
LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
Intuit was a defendant in a consolidated class action lawsuit in California
which alleged that certain of its Quicken products have on-line banking
functions that are not Year 2000 compliant. On October 13, 1999 the court
dismissed the case without leave to amend. In May 2000, plaintiffs were awarded
nominal attorneys' fees. If plaintiffs do not appeal the case dismissal or the
fees award, this case will be over.
On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the
United States District Court, Central District of California, Eastern Division.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. A
similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the
Superior Court of State of California, San Bernadino County, Rancho Cucamonga
Division. 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. To date, the Rubin complaint has not been served.
In addition, on April 19, 2000, Bosch v. Intuit Inc. was filed in the Superior
Court, State of California, County of Los Angeles, Central District. This
lawsuit alleges violations of California statutes for alleged false and
deceptive
-27-
<PAGE> 28
advertising and unlawful business practices related to QuickBooks
products and purchasing the Tax Table Service. Plaintiff seeks injunctive
relief, an order to disgorge profits, restitution and attorneys' fees.
Intuit is subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
--------------------------------------------------------------------------------
ITEM 5
OTHER MATTERS
--------------------------------------------------------------------------------
CHANGES IN EXECUTIVE OFFICERS
As of June 9, 2000, Intuit's executive officers are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Sonita J. Ahmed Vice President, Finance
Stephen M. Bennett President and Chief Executive Officer
Scott D. Cook Chairman of the Executive Committee of the Board of Directors
Caroline F. Donahue Vice President, Sales
Eric C.W. Dunn Senior Vice President and Chief Technology Officer
Linda Fellows Vice President, Investor Relations and Treasurer
Daniel B. Gilbert Vice President, Quicken Loans
Alan A. Gleicher Senior Vice President, International Division
Larry King, Jr. Vice President, Payroll Services Group
David A. Kinser Senior Vice President, Service Delivery and Operations
Elisabeth M. Lang Vice President, Corporate Public Relations and Marketing Communications
Daniel T. Nye Vice President, Small Business Division
Carol Novello Vice President, Financial Supplies Group
Enrico Roderick Vice President, Personal Finance Group
Greg J. Santora Senior Vice President, Finance and Corporate Services; Chief Financial Officer
Raymond G. Stern Senior Vice President, Corporate Strategy and Marketing
Catherine L. Valentine Vice President, General Counsel and Corporate Secretary
Larry J. Wolfe Senior Vice President, Tax Products Division
</TABLE>
--------------------------------------------------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<S> <C>
3.01 Restated Certificate of Incorporation as of January 19, 2000
10.01 Separation Agreement between Mark Goines and Intuit Inc. dated
March 9, 2000
10.02 Separation Agreement between James Heeger and Intuit Inc. dated
May 2, 2000
10.03 Commercial lease between Intuit Inc. and Broderick Way Partners,
LLC dated January 31, 2000 (2700 Broderick Way, Mountain View,
CA)
10.04 Office Lease Agreement between Lacerte Software Corporation and
KCD-TX I Investment Limited Partnership dated February 22, 2000
(Plano, Texas)
10.05 Consent to Sublease Agreement among Intuit Inc. as subtenant,
Spieker Properties, L.P. and Franklin Templeton Corporate
Services, Inc. dated March 31, 2000 (Eastgate Mall, San Diego,
CA)
27.01 Financial Data Schedule (filed only in electronic format) period
ended April 30, 2000
27.02 Financial Data Schedule (filed only in electronic format) period
ended April 30, 1999
</TABLE>
----------------
(b) REPORTS ON FORM 8-K:
None
-28-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: June 14, 2000 By: /s/ Greg J. Santora
---------------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
-29-
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.01 Restated Certificate of Incorporation as of January 19, 2000
10.01 Separation Agreement between Mark Goines and Intuit Inc. dated
March 9, 2000
10.02 Separation Agreement between James Heeger and Intuit Inc. dated
May 2, 2000
10.03 Commercial lease between Intuit Inc. and Broderick Way Partners,
LLC dated January 31, 2000 (2700 Broderick Way, Mountain View,
CA)
10.04 Office Lease Agreement between Lacerte Software Corporation and
KCD-TX I Investment Limited Partnership dated February 22, 2000
(Plano, Texas)
10.05 Consent to Sublease Agreement among Intuit Inc. as subtenant,
Spieker Properties, L.P. and Franklin Templeton Corporate
Services, Inc. dated March 31, 2000 (Eastgate Mall, San Diego,
CA)
27.01 Financial Data Schedule (filed only in electronic format) period
ended April 30, 2000
27.02 Financial Data Schedule (filed only in electronic format) period
ended April 30, 1999
</TABLE>
