10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 16, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JANUARY 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
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(Address of principal executive offices)
(650) 944-6000
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Approximately 201,677,034 shares of Common Stock, $0.01 par value,
as of February 29, 2000
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FORM 10-Q
INTUIT INC.
INDEX
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(1) Includes $0.1 million and $2.3 million due from Checkfree at July 31, 1999
and January 31, 2000, respectively (see Note 11).
(2) Includes $6.7 million and $10.6 million note receivable from Venture
Finance Software Corp. at July 31, 1999 and January 31, 2000 respectively
(see Note 11).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Includes $1.3 million and $2.4 million from Checkfree for the three and six
months ended January 31, 1999 and $1.8 million and $3.6 million from
Checkfree for the three and six months ended January 31, 2000 respectively
(see Note 11).
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting, tax
preparation and consumer finance desktop software products, financial supplies
(such as computer checks, envelopes and invoices), mortgage loans and
Internet-based products and services for individuals and small businesses. Our
products and services are designed to automate commonly performed financial
tasks and to simplify the way individuals and small businesses manage their
finances. We sell our products throughout North America and in many
international markets. Sales are made through retail distribution channels,
traditional direct sales to customers and via the Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. We have included all adjustments considered
necessary to give a fair presentation of our operating results for the periods
shown. Results for the six months ended January 31, 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,
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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.
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.
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.
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The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments:
The estimated fair value of cash equivalents and short-term investments
classified by date of maturity is as follows:
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.
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Marketable Securities
As explained in greater detail below, we currently hold several marketable
securities that were acquired in connection with strategic business transactions
and relationships. Our available for sale marketable securities are carried at
fair value and we include unrealized gains and losses, net of tax, in
stockholders' equity. We have designated our investment in At Home Corporation
("At Home") as a trading security and fluctuations in the market value of these
shares are reported in net income. We held the following marketable securities
at July 31, 1999 and January 31, 2000:
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 January 31, 2000 was $59.00 per share. At January
31, 2000, we held 10.2 million shares, or approximately 19.5%, of Checkfree's
outstanding common stock.
In May 1999, we purchased 970,813 shares of common stock of Security First
Technologies. In November 1999, Security First Technologies changed its name to
S1 Corporation ("S1"). We account for the investment in S1 as an
available-for-sale-equity security, which accordingly is carried at market
value. S1 common stock is quoted on the Nasdaq National Market under the symbol
SONE. The closing price of S1 common stock at January 31, 2000 was $90.5625 per
share. At January 31, 2000, we held 970,813 shares, or approximately 3.5%, of
S1's outstanding common stock. In connection with the above purchase, we also
received an option to purchase up to an additional 4,579,187 shares of S1
exercisable at a per share purchase price of $51.50. We account for these
options as available-for-sale equity securities, and accordingly the options are
carried at market value.
In August 1999, we acquired approximately 3.7 million shares of common stock of
Mortgage.com, Inc. ("Mortgage.com") upon conversion of our preferred shares in
connection with Mortgage.com's initial public offering. We account for the
investment in Mortgage.com as an available-for-sale-equity security, which
accordingly is carried at market value. Mortgage.com common stock is quoted on
the Nasdaq National Market under the symbol MDCM. The closing price of
Mortgage.com common stock at January 31, 2000 was $5.4375 per
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share. At January 31, 2000, we held 3.7 million shares, or approximately 8.5%,
of Mortgage.com's outstanding common stock.
In August 1999, we acquired 729,165 shares of common stock of Homestore.com,
Inc. ("Homestore.com") upon conversion of our preferred shares in connection
with Homestore.com's initial public offering. We account for the 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 January 31, 2000 was $97.5625 per share. At January 31, 2000, we held
729,165 shares, or approximately 1.0%, of Homestore.com's outstanding 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 January 31,
2000 was $10.1875 per share. At January 31, 2000, we held approximately
1,272,727 shares, or approximately 6.6%, of Quotesmith.com's outstanding common
stock.
In connection with At Home Corporation's acquisition of Excite in May 1999, our
shares of Excite were converted into At Home common stock. We have elected to
report these converted At Home shares as a trading security. As a result, we are
reporting both positive and negative fluctuations in the market value of this
stock in net income. At January 31, 2000, we owned approximately 2.1 million
shares (or approximately 0.6%) of At Home common stock and reported a realized
valuation loss of approximately $20.1 million for these securities for the
period between August 1, 1999 and January 31, 2000. The closing price of At Home
(symbol ATHM) at January 31, 2000, was $36.0313 per share. The average price of
At Home between August 1, 1999 and January 31, 2000 was $41.49 per share.
Checkfree, At Home, S1, Mortgage.com, Homestore.com and Quotesmith.com are high
technology companies whose stocks are subject to substantial volatility.
Accordingly, it is possible that the market price of one or more of these
companies' stocks could decline substantially and quickly, which could result in
a material reduction in the carrying value of these assets.
Lines of Credit
For lines of credit we estimate fair value based on the discounted value of
contractual cash flows using interest rates currently in effect for similar
maturities and collateral requirements. The carrying amount of these lines of
credit approximates their estimated fair values since all of the borrowings have
variable interest rates that approximate current market interest rates for
similar types of lines of credit and are due upon demand. We held the following
lines of credit at July 31, 1999 and January 31, 2000.
Mortgage Loans
We carry mortgage loans at estimated realizable value, and we estimate their
fair value using quoted market prices for similar loans, adjusted for
differences in loan characteristics, including credit quality. The carrying
amount of accrued interest receivable approximates the assets' fair value. We
held the following mortgage loans and lines of credit at July 31, 1999 and
January 31, 2000.
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Carrying amounts at July 31, 1999 and January 31, 2000 include an allowance for
credit losses of $1.3 million and $0.4 million, respectively.
As of July 31, 1999 and January 31, 2000, there were approximately $1.8 million
and $0.5 million, respectively of mortgage loans that were greater than 90 days
past due.
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their fair
value. Goodwill is amortized on a straight-line basis over periods ranging from
3 to 5 years. The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from 1 to 10 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
Balances presented above are net of total accumulated amortization of $210.1
million and $289.5 million at July 31, 1999 and January 31, 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 January 31,
2000, we held shares of Checkfree common stock representing approximately 19.5%
of Checkfree's outstanding common stock. We also held approximately 0.6% of At
Home's common stock, 3.5% of S1's outstanding common stock, 8.5% of
Mortgage.com's outstanding common stock, 1.0% of Homestore.com's outstanding
common stock and 6.6% of Quotesmith.com's outstanding common stock. If there is
a permanent decline in the value of these securities below cost, we will need to
report this decline in our statement of operations. Fluctuations in the market
value of our shares in At Home are treated as realized gains and losses in our
statement of operations on an ongoing basis, since this investment is treated as
a trading security.
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See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. Our remaining portfolio is
diversified and consists primarily of short-term investment-grade securities.
To reduce the credit risk associated with accounts receivable, Intuit performs
ongoing evaluations of customer credit. Generally, no collateral is required. We
maintain reserves for estimated credit losses and these losses have historically
been within our expectations.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. 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
As of August 1, 1998, Intuit adopted SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
net income and its components. However, it has no impact on our net income or
stockholders' equity as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available for sale securities to be included in comprehensive income.
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The components of comprehensive net income, net of tax, are as follows:
4. ACQUISITIONS
On May 3, 1999, we completed our acquisition of Computing Resources, Inc.
("CRI"), a Reno, Nevada-based provider of payroll services for a combination of
cash and Intuit stock. CRI is one of the country's largest payroll services
companies and a leader in providing payroll services to small businesses. The
purchase price for privately-held CRI was approximately $200 million, consisting
of approximately $100 million cash and approximately $25 million of Intuit stock
that was paid at closing, and $75 million in cash to be paid in three annual
installments of $25 million each beginning in May 2000. We accounted for the
acquisition of CRI as a purchase for accounting purposes and allocated
approximately $187 million to identified intangible assets and goodwill. These
assets are being amortized over a period of three to five years. The following
table shows pro forma net revenue, net loss from continuing operations and
diluted net loss per share from continuing operations of Intuit and CRI as if we
had acquired CRI at the beginning of fiscal 1999:
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.
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5. BORROWINGS
We have two lines of credit. Advances under the first line of credit are based
on a formula computation, with interest due monthly. Advances are due on demand
and are collateralized by residential first and second mortgages. Advances may
be drawn for working capital and sub-prime, high loan-to-value and conventional
prime mortgage loans. Interest rates are variable and are based on the federal
funds rate and prime rate, depending on the type of advance. The interest rates
in effect at July 31, 1999 and January 31, 2000 were 6.29% and 6.83%,
respectively. The weighted average interest rates for the year ended July 31,
1999 and quarter ended January 31, 2000 were 6.45% and 6.58%, respectively.
Our second line of credit currently provides for up to $50 million principal
amount of demand loans secured by mortgage loans and other assets. Loans
interest at rates that vary depending on the type of underlying loan, and the
loans are subject to sublimits, advance rates and warehouse terms that vary
depending on the type of underlying loan. The interest rates in effect at July
31, 1999 and January 31, 2000 were 6.37% and 6.96%, respectively, while the
weighted average interest rates for the three month periods ended July 31, 1999
and January 31, 2000 were 5.92% and 6.64%, respectively. We are required to
maintain a minimum tangible net worth and to satisfy other financial covenants,
as outlined in the line of credit agreements. We were in compliance with the
requirements as of July 31, 1999 and January 31, 2000.
Our reverse repurchase agreement entered into in 1997 provides that the lender
will purchase from us, subject to our agreement to repurchase on a specified
date, up to $200 million of conventional prime and sub-prime mortgage loans at
par, as of January 31, 2000. Loans subject to purchase are fixed and adjustable
rate, fully-amortizing first or junior lien residential mortgage loans and home
equity loans that comply with our origination guidelines and conform to
whole-loan sale requirements. The reverse repurchase agreement is not a
committed facility and the lender may elect to discontinue the repurchase
agreement at any time. The terms of the financing under the repurchase agreement
mature and may be renewed on a daily basis. In any event, the arrangement
terminates in March 2000. Interest rates are variable and are based on the
London Interbank Offered Rate, depending on the type of advance. The interest
rate in effect at July 31, 1999 was 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 January 31, 2000.
Drafts payable represent funds advanced for mortgages originated which have not
yet been drawn against the lines of credit.
6. OTHER ACCRUED LIABILITIES
7. SEGMENTED INFORMATION
Intuit has adopted Statement of Financial Accounting No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS 131
establishes standards for the way in which public companies disclose certain
information about operating segments in the Company's financial reports.
Consistent with SFAS 131, we have determined our operating segments based on
factors such as how our operations are managed and how results are viewed by
management. Since Internet-based revenues and expenses cut across all of our
business divisions, we do not report results of our Internet-based businesses as
a separate business segment in our financial statements. Instead, each of our
business divisions reports Internet-based revenues and expenses that are
specific
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to its operations and are included in its results. The accounting policies of
the operating segments are the same as those described in the summary of
significant accounting policies. Intuit does not track assets by operating
segments. Consequently, we do not disclose assets by operating segments. The
following unaudited results are broken out by our operating segments for the six
month periods ended January 31, 1999 and 2000:
(1) Reconciling items include acquisition and other common costs not allocated
to specific segments.
8. NOTES PAYABLE AND COMMITMENTS
In March 1997, our Japanese subsidiary, Intuit KK, entered into a three-year
loan agreement with Japanese banks for approximately $30.3 million used to fund
its acquisition of Nihon Micom. The loan is denominated in Japanese yen and is
therefore subject to foreign currency fluctuations when translated to U.S.
dollars for reporting
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purposes. The interest rate is variable based on the Tokyo inter-bank offered
rate or the short-term prime rate offered in Japan. At January 31, 2000, the
rate was approximately 0.6%. The fair value of the loan approximates cost as the
interest rate on the borrowings is adjusted periodically to reflect market rates
(which are currently significantly lower in Japan than in the United States). We
have guaranteed the loan and pledged approximately $38.4 million, or 110% of the
loan balance, of short-term investments to be restricted as security for the
borrowings at January 31, 2000. We are obligated to pay interest only until
March 2000. We are currently refinancing this debt for another one-year term.
9. INCOME TAXES
Intuit computes the provision (benefit) for income taxes by applying the
estimated annual effective tax rate to recurring operations and other taxable
items. Our effective tax rate differs from the federal statutory rate primarily
because of tax credits, tax exempt interest income, state taxes and certain
foreign losses.
10. LITIGATION
Intuit was a defendant in two consolidated class action lawsuits (one in
California and one in New York) which alleged that certain of its Quicken
products have on-line banking functions that are not Year 2000 compliant. With
respect to the California litigation, on October 13, 1999 the court dismissed
the case without leave to amend. The only remaining issue relates to a potential
award of attorneys' fees to the plaintiffs. On December 1, 1999, the court
granted our motion to dismiss all the New York actions with prejudice. Although
plaintiffs filed a Notice of Appeal, they failed to perfect the appeal.
Accordingly, this case is also now over.
In addition, a suit was filed in the Contra Costa County, California Superior
Court by an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others,
alleging that these retailers have sold software and hardware products which are
not Year 2000 compliant, including at least one product published by Intuit. One
of the defendants in this action, Fry's Electronics, filed a cross-complaint
against various software publishers and hardware manufacturers, including
Intuit, asserting a claim for indemnity in the main action. In September 1999,
Fry's Electronics reached a settlement with the plaintiffs. All the cross
defendants, including Intuit, then filed a demurrer to the cross-complaint. On
December 7, 1999 the court granted the demurrer and dismissed the case without
leave to amend. If Fry's Electronics does not appeal this ruling by April 4,
2000, this lawsuit against Intuit will also 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.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in the United States District Court, Southern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
violations of federal statutes related to electronic communications. The
lawsuits seek injunctive relief, an order to disgorge profits related to the
alleged acts, and statutory and other damages. As of March 10, 2000, neither
lawsuit had been served on Intuit.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
11. RELATED PARTY TRANSACTIONS
As of January 31, 2000, we held approximately 19.5% of Checkfree's outstanding
common stock. In exchange for providing connectivity between Checkfree's bill
payment processing service and our Quicken products, we reported
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revenues of $1.3 million and $2.4 million from Checkfree for the three and
six-months ended January 31, 1999 and $1.8 million and $3.6 million for the
three and six-months ended January 31, 2000, respectively. We held receivables
due from Checkfree for $0.1 million and $2.3 million at July 31, 1999 and
January 31, 2000, respectively.
As of January 31, 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 a receivable due from VFSC for
$6.7 million and $10.6 million at July 31, 1999 and January 31, 2000,
respectively.
12. SUBSEQUENT EVENTS
On February 18, 2000 we sold 3.0 million shares of Checkfree common stock at a
price of $90 per share and on March 2, 2000 we sold 2.5 million shares of
Checkfree common stock at a price of $92 per share. Gross proceeds from these
transactions were $500 million. These divestitures reduced our ownership in
Checkfree to 4.7 million shares or approximately 9% of Checkfree's outstanding
stock.
On February 29, 2000, Verisign, Inc. ("Verisign") acquired all of the
outstanding securities of privately-held Signio, Inc. ("Signio"). We held an
investment in Signio, and in exchange for our investment, we will receive
approximately 194,000 common shares of Verisign (representing less than 1% of
the outstanding common stock of Verisign subsequent to the acquisition). On
February 29, 2000, the closing stock price of Verisign was $253 per share.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS AND INVESTMENT CONSIDERATIONS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements with words
like "expect," "anticipate," or "believe" and statements in the future tense,
are forward-looking statements. Investors should be aware that actual results
may differ materially from our expectations because of risks and uncertainties
about the future. We will not necessarily update information in this Form 10-Q
if any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect our future results and performance include, but
are not limited to the following:
- - - Our revenue and earnings are highly seasonal and our quarterly and annual
financial results fluctuate significantly.
- - - We face intense competition from many companies in all of our business
areas.
- - - Competition in the personal tax preparation software business is
particularly intense, with Microsoft having entered the market during the
1999 tax season. We are seeing increasing price competition during the
remainder of the tax season (including free products from Microsoft), and
this could have a material negative impact on revenue, profitability and
market position for our personal tax business.
- - - In our online mortgage and insurance businesses, we face competition from
many newly public companies 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
particular, our web-based tax preparation and electronic filing services
must handle extremely heavy customer demand during the peak tax season.
- - - If we fail to provide responsive customer service and technical support, we
could lose customers.
- - - Our Internet businesses face risks relating to customer privacy and
security and increasing regulation.
- - - Our Internet businesses require significant research and development and
marketing expenditures.
- - - Page views and reach statistics for our Quicken.com site can vary
significantly from month to month due to seasonal trends, site performance,
the timing of launches, competitors' activities and other factors. Adverse
changes in page view and reach statistics could adversely affect our
ability to earn advertising revenue from our Quicken.com site.
- - - In order to succeed in the payroll services business, we must continue to
improve the integration of the operations of our payroll processing
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 availability of financial resources. Significant delays in
implementing key services, or failure to implement, could delay or
eliminate our ability to recognize contractually committed revenues.
- - - The anticipated benefits of certain proposed small business services to
Intuit (including the Site Builder website creation tool, Site Solutions
services and QuickBooks Internet Gateway services) will depend on a number
of variables, including the rate at which customers upgrade to QuickBooks
2000 and future versions of the product, customer acceptance of new and
proposed services, and, the level of satisfaction of third party
participants.
- - - The success of the small business alliances will depend on establishing and
maintaining a number of important business relationships, and there can be
no assurance that key relationships will continue.
- - - Our Tax 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 could exceed
$100 million. If we do not exercise the purchase option, our rights to
use the technology developed by the joint venture will be subject to
future negotiation.
- - - We face increasing competition for access to retail and OEM distribution
channels.
- - - The integration of acquired companies poses ongoing operational challenges
and risks. 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.
- - - Our recent acquisition
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of Rock Financial could have a negative impact on Intuit's relationships
with other lenders that participate in the online mortgage service.
- - - 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 and other reports filed with the
Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. As we execute our mission, we have embarked on a strategy
to greatly expand the world of electronic finance. "Electronic finance"
encompasses three types of products and services: (1) desktop software products,
such as Quicken(R), 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. Our revenues come primarily from the
United States, Japan, Canada and the United Kingdom, through retail distribution
channels, direct customer sales and via the Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet-based revenue is growing rapidly. For the three months
ended January 31, 2000, Internet-based revenues grew by approximately 162%
compared to the same period last year and accounted for approximately 21% of
total revenue in the quarter ended January 31, 2000, compared to approximately
10% in the prior year quarter. We use the term Internet-based revenue to include
revenue from both Internet-enabled products and services as well as revenue from
electronic distribution. Internet products and services include activities where
the customer realizes the value of the goods or services directly on the
Internet or an Intuit server. Internet product revenues include, for example,
advertising revenues generated on our Quicken.com website, online tax
preparation and electronic tax filing revenues, online payroll service revenue
and transaction and processing fees from our online insurance and online
mortgage services. Electronic distribution includes revenues generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies. We also use the Internet to host our technical support
website where we can quickly and cost-effectively provide patches for product
bugs and provide customers with answers to frequently asked questions.
While we believe that the Internet provides an opportunity to increase revenue
in fiscal 2000, we also anticipate continued increases in spending in an effort
to capitalize on new business opportunities. In particular, we continue to
expect increased research and development expenses due to investments in
Internet-based initiatives. We also anticipate increased selling and marketing
expenses related to these initiatives and because of more intense competition in
the personal tax market during fiscal 2000. While we have made significant
progress in our Internet-based businesses, investors should be aware many of
these businesses are in their initial stages, and are not yet generating
significant revenue or profit. Since Internet-based revenues and expenses cut
across all of our business divisions, we do not report results of our
Internet-based businesses as a separate business segment in our financial
statements. Instead, each of our business divisions reports Internet-based
revenues and expenses that are specific to its operations and are included in
its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred at relatively consistent levels during these periods. These seasonal
trends can result in significant operating losses, particularly in the July 31
and October 31 quarters when our revenues are lower. Operating results can also
fluctuate for other reasons,
-19-
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 six-month periods ended January 31, 1999 and 2000. Investors should
note that results for the three and six-month periods ended January 31, 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, which we
acquired in December 1999. The acquisition of Rock has been accounted for as a
pooling of interests, so all prior periods have been restated to reflect
combined results of Rock and Intuit. The inclusion of Rock's results in the
comparison periods for both fiscal 1999 and fiscal 2000 had a significant impact
on our financial results. Rock's revenue declined approximately 50% between the
comparison periods, due to Rock's transition from a traditional mortgage
business to an online mortgage business and the closing of the majority of their
traditional mortgage branch offices, as well as rising interest rates. Although
Rock's operating expenses decreased in absolute dollars between the comparison
periods, they increased significantly as a percentage of revenue and resulted in
operating losses for Rock during the fiscal 2000 comparison periods (compared to
operating profits in the fiscal 1999 periods), which partially offset growth in
operating income for our other businesses as a whole.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes.
NET REVENUE
The following revenue discussion is categorized by our business divisions, which
is how we examine results internally. Our domestic supplies business is
considered a part of our small business division while the international
supplies business is considered part of our international division (see Note 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 63% and 64% for the three and six-month
periods ended January 31, 2000, respectively, compared to the same periods a
year ago. The increases were primarily a result of revenue growth for our
QuickBooks products. In addition, CRI (acquired in May 1999) and our QuickBooks
Online Payroll Service (launched in October 1998) contributed to revenues during
the three-month and six-month periods
-20-
ended January 31, 2000, but did not account for material revenue in the three
and six-month periods ended January 31, 1999.
Though they are a smaller component of small business division revenues, tax
tables service revenue and revenue from our QuickBooks Support Network also grew
in the three and six-month periods ended January 31, 2000 compared to the same
periods a year ago.
We launched our most recent version of QuickBooks (QuickBooks 2000) in December
1999. The increased revenue from our QuickBooks product line was attributable to
increased unit sales, as well as an increase in the average selling prices of
the QuickBooks product driven by consumer preferences toward higher priced,
greater functionality products. We believe a significant number of customers may
have upgraded earlier than they otherwise may have, due to Year 2000 concerns.
Accordingly, we expect that some of the fiscal 2000 second quarter strength in
QuickBooks revenue is a shift from the second half of the year, and we expect
the revenue growth rate to decline significantly as the year progresses.
QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected
and integrated electronic services, that is designed to offer small businesses
direct access to services from third parties, such as electronic postage and
merchant account services, that can help them more easily and efficiently manage
their business. It also features QuickBooks Site Builder, a new web site
creation and domain name registration tool that enables small businesses to
quickly establish a presence on the Web. Although these new features are
strategically important for Intuit, it is too early to tell how successful these
services will be, or the extent to which they will generate increasing demand
for QuickBooks 2000.
Domestic supplies revenues, which are part of the small business division, grew
by 11% and 14% for the three and six-month periods ended January 31, 2000 as a
result of our increasing base of small business customers who use QuickBooks and
Quicken. In addition, in August 1999, we began charging for shipping and
handling for domestic supplies shipments which also contributed to our domestic
supplies revenue.
We offer different types of payroll services. Our QuickBooks Online Payroll
service, which is integrated with our QuickBooks products, handles all aspects
of payroll processing with our CRI subsidiary providing the processing services.
CRI also continues to provide traditional payroll processing services for its
customer base. We also offer QuickPayroll, a subscription-based payroll service
for customers who do not use QuickBooks, as well as a payroll tax table
subscription service for small business customers that need current tax tables
to prepare their own payroll. While the payroll processing business provides us
with a significant opportunity to generate revenue, there are business risks
associated with the payroll processing business and the continued integration of
CRI into our existing business model. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who have a low tolerance
for payroll processing errors. Our ability to successfully operate CRI will
depend in part on retaining their existing customers and maintaining
relationships with certain banks and other third parties who we will rely on to
retain existing customers and attract new customers outside of our QuickBooks
customer base. If we are unable to do so, it could result in a negative impact
on our consolidated results. While the customer base for the QuickBooks Online
Payroll service continues to expand, the service is not yet generating material
revenues and we must continue to focus on streamlining the customer activation
process.
Tax Division. Tax division revenues come primarily from the following sources:
- Quicken TurboTax and MacInTax personal desktop tax preparation
products
- Professional tax preparation products (ProSeries and Lacerte
product lines)
- Quicken TurboTax for the Web electronic tax preparation services
and electronic filing services
-21-
Overall, tax division revenues for the three and six-months ended January 31,
2000 declined by 8% and 6% respectively, compared to the same periods last year.
The declines in revenue were due primarily to an aggressive marketing and
pricing strategy for Quicken TurboTax in response to a very competitive market
for desktop personal tax software. We lowered average selling prices, and we
also bundled electronic filing and state tax products with certain versions of
Quicken TurboTax, which required us to defer recognition of approximately $30
million of revenue from the second quarter to the remainder of the fiscal year.
While we have experienced significant unit sales growth for the quarter ended
January 31, 2000, we continue to experience 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 has resulted in lower average selling prices in response to these
pricing pressures.
It is currently too early to predict the final level of demand for the Quicken
TurboTax product line through our retail distribution channels. Although the
number of units sold is currently higher in the current fiscal year to date
compared to the same period a year ago, revenue is lower due to lower average
selling prices. We expect our reserves for returned products will be adequate to
cover retailers' returns of unsold products during the next three quarters,
though higher than expected returns could have a negative impact on revenue for
the season. Because of these and other uncertainties, revenues and operating
results for this tax season will be unknown until late in the fiscal year.
We have experienced significantly higher revenues and volume for Quicken
TurboTax for the Web and for electronic filing compared to last year, as an
increasing number of customers gain Internet access and become more accustomed
to processing transactions on-line. We expect that as the tax filing deadline
nears, we may experience a dramatic increase in demand for both Web tax
preparation and electronic filing services. To deal with the expected increases
in demand, we have increased our capacity and have developed a contingency plan
to provide additional capacity if necessary. However, the exact level of demand
is very difficult to predict, and we could experience significant negative
financial and public relations consequences if our capacity to serve our web tax
preparation and electronic filing customers is insufficient during the peak
filing period, or if the service is unavailable for other reasons such as
technical difficulties at our data center. We have not experienced any service
interruptions thus far in the current tax filing season. However, we did have
some interruptions in our electronic filing services in February 1999 and on
April 11-12, 1999. Although we do not believe those service outages prevented
customers from completing and filing their returns in a timely manner, or posed
a risk that customer data would be lost or corrupted, we did experience negative
publicity.
Revenues for our professional tax (ProSeries) products and products from our
Lacerte subsidiary increased by 10% for the three and six-month periods ended
January 31, 2000 compared to the same periods last year. This growth is
attributable to a combination of a continued shift to higher priced products and
growth in our customer base due in part to our acquisitions of Compucraft and
TaxByte during 1999. In addition, we 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
- On-line consumer mortgage placement and servicing fees through
QuickenLoans
Overall, consumer finance division revenues were up 9% and 5% for the three and
six-month periods ended January 31, 2000 compared to the same periods a year
ago. The increases are due primarily to strong revenue growth for our Quicken
product line and growth in Internet-based revenues, offset in part by a
significant decline in revenues for Rock's mortgage business from the year-ago
periods. Quicken revenue increased compared to the same periods of the prior
year primarily due to strong consumer demand resulting from aggressive retail
-22-
promotions with our tax products and lower than expected product rebate
redemptions related to Quicken 99. We believe some customers may have upgraded
during the second quarter, due to Year 2000 concerns. Accordingly, some of the
fiscal 2000 second quarter strength in Quicken revenue may be a shift from the
third quarter, and we expect the revenue growth rate may decline as the year
progresses.
Our Quicken product line faces many challenges in the desktop personal financial
software market. For example, we continue to face competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the Internet at no cost, which has a negative
impact on desktop 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 QuickenLoans was substantially lower than in the
same periods a year ago. QuickenLoans 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. Growth in 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 the
service. Our ability to successfully operate Rock will depend in part on
maintaining relationships with certain banks and other third parties who we will
rely on to provide access to capital, and later, service the loans. If we are
unable to do so, it could have a negative impact on our consolidated results.
The rapid growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as At Home Corporation (doing business as "Excite@Home")
and AOL, which have helped to increase traffic to our Quicken.com website. The
Excite@Home agreement calls for us to share revenue generated from our
Quicken.com site and the AOL agreement calls for us to make significant
guaranteed payments to AOL over the term of the agreement. While the Internet
provides a significant opportunity for revenue growth, our financial commitments
to these and other third party providers are significant and we must continue to
increase traffic and revenue in order for our Internet businesses to become
profitable. Our ability to maintain important relationships with Internet
portals, distributors and content providers will also have an impact on traffic
and revenues. If our website traffic and revenue expectations aren't met, there
could be a significant negative impact on our operating results.
International Division. International division revenues come primarily from the
following sources:
- Japanese QuickBooks and other small business products
- 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 37% for the
three and six-month periods ended January 31, 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 were declines in revenues, but increased profitability in
-23-
Germany due to a shift in our business model from direct participation in the
market to a third party distribution arrangement.
COST OF GOODS SOLD
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
22% and 26% of revenue for the three and six-months ended January 31, 2000
compared to 19% and 22% 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. 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
grow to 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.
OPERATING EXPENSES
-24-
Customer Service and Technical Support. Customer service and technical support
expenses were flat as a percentage of revenue for the three and six-month
periods ended January 31, 2000 compared to the same periods of the prior year.
We have benefited from our efforts to provide customer service and technical
support less expensively through websites and other electronic means. However,
we increased our investment in customer service and technical support during the
fiscal 2000 comparison periods in anticipation of increased call volumes
relating to potential year 2000 issues, and also to support two major product
launches in the second quarter (QuickBooks 2000 and Quicken TurboTax for the
1999 tax year).
Selling and Marketing. Selling and marketing expenses were 20% and 26% of
revenue for the three and six-months ended January 31, 2000 compared to 19% and
24% for the same periods of the prior year. The increases in selling and
marketing costs are attributable to the aggressive marketing programs relating
to the expansion of our Internet-based businesses and the increasingly
competitive personal tax market. We continue to expect that selling and
marketing costs as a percentage of revenue will increase for fiscal 2000
compared to fiscal 1999 as we continue to aggressively market our Internet-based
businesses and face intense competition in the personal tax market for the rest
of the 1999 tax season.
Research and Development. Research and development expenses were 10% and 14% of
revenue for the three and six-months ended January 31, 2000 compared to 10% and
14% of revenue for the same periods of the prior year. We continue to invest in
research and development due to our efforts to develop our Internet-based
businesses. As a result, we expect our Internet-based businesses will continue
to require significant development expenditures in 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 5% and 7%
of revenue for the three and six-months ended January 31, 2000 compared to 5%
and 8% for the same periods of the prior year. For fiscal 2000, we expect
general and administrative expenses to remain roughly flat as a percentage of
revenue compared to fiscal 1999.
Charge for Purchased Research and Development. For the six months ended January
31, 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
-25-
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 $48.7 million and
$88.2 million for the three and six-months ended January 31, 2000 compared to
$22.9 million and $45.6 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, future amortization will be
approximately $163.7 million, $145.5 million, $140.2 million and $90.9 million
for the years ending July 31, 2000 through 2003, respectively. If we complete
additional acquisitions or accelerate amortization in the future, there could be
an incremental negative impact on operating results.
Reorganization Costs. Reorganization costs represent the costs associated with
Rock's closure of numerous branch offices in Michigan prior to its acquisition
by Intuit as the mortgage business began to transition from a traditional
branch-based business to an on-line transactional-based business. These costs
increased to $3.5 million for the six-month period ended January 31, 2000 from
$2.0 million for the same period of the prior year.
OTHER INCOME
For the three and six-months ended January 31, 2000, interest and other income
and expense, net, increased to $7.0 million and $15.5 million compared to $4.0
million and $7.3 million for the same periods a year ago, reflecting increased
cash and short-term investment balances. We have elected to report our At Home
common stock as a trading security and are required to mark to market the
fluctuations in the stock price and report the fluctuations in our earnings. For
the three and six-months ended January 31, 2000, we reported losses arising from
fluctuations in the share price of At Home of $2.8 million and $20.1 million,
respectively. In the same period a year ago, we did not report a gain or a loss
for changes in the market value of Excite, Inc. ("Excite"), one of the
predecessor companies of Excite@Home in our earnings, since that security was
not classified as a trading security. We did, however, report a realized gain of
$10.1 million for both the three and six-month periods from a year ago from the
sales of Checkfree, Verisign, and Concentric common stock.
INCOME TAXES
For the three and six-months ended January 31, 2000, we recorded income tax
provisions (benefits) of $29.6 million and ($4.6) million on a pretax income
(loss) of $86.8 million ($13.3) million, respectively. This compares to income
tax provisions of $31.2 million and $17.7 million on a pretax income of $124.4
million and $65.9 million, respectively for the same periods of the prior year.
At January 31, 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 January 31, 2000, our unrestricted cash and cash equivalents totaled $377.7
million, a $176.5 million decrease from July 31, 1999. The decrease was a result
of net cash used by investing activities, partially offset by cash provided by
financing and operations activities. Cash from operating activities is driven by
the seasonality of our business, which typically results in the majority of net
revenues and cash receipts occurring in the January and April quarters, though
operating expenses are incurred throughout the year.
Our operations provided $44.3 million in cash during the six months ended
January 31, 2000. Primary sources of cash were an increase of $54.6 million in
accounts payable and $63.9 million in other accrued liabilities. The
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increases in accrued liabilities and accounts payable are driven by the
seasonality of our business and the resulting increases in accruals for product
returns, customer rebates and accrued technical support expenses. In addition,
cash was generated by an increase in deferred revenues of $40.4 million due
primarily to the deferral of state tax product and electronic filing revenues
which will be realized in our third and fourth fiscal quarters. Cash was also
generated by the decrease of $32.2 million in prepaid expenses due primarily to
the completion of acquisitions in the first quarter. Primary uses of cash
included the net loss of $8.6 million, an increase of $185.4 million in accounts
receivable due to the large volumes of seasonal product shipments to retailers
and distributors that typically occur in our second fiscal quarter and a
significant decrease in income taxes payable as a result of the payment of taxes
for our fiscal year ended July 31, 1999.
Investing activities used $242.6 million in cash for the six months ended
January 31, 2000. Uses of cash included net purchases of $110.2 million in
short-term investments and purchases of $51.9 million in property and equipment.
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 $21.8 million in the first quarter, primarily
attributable to proceeds from the exercise of employee stock options. This was
partially offset by a decrease in our line of credit as we funded new consumer
mortgage loans during the period.
We currently hold investments in a number of publicly traded companies (see Note
1). The volatility of the stock market and the potential risk of fluctuating
stock prices may have an impact on our future liquidity. Due to our reporting of
the At Home shares as a trading security, future fluctuations in the carrying
value of At Home will impact our earnings (see Note 1). If future declines in
our other marketable securities are deemed to be permanent, they will also
impact our earnings.
In connection with our acquisition of CRI (see Note 4), we are required to pay
three annual installments of $25 million in each of the next three fiscal years.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. We also evaluate the
merits of acquiring technology or businesses, or establishing strategic
relationships with and investing in other companies. Accordingly, it is possible
that we may decide to use cash and cash equivalents to fund such activities in
the future. For example, if we exercise our option to purchase VFSC (see Note
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
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ongoing maintenance and support activity in fiscal year 2000, and including
costs associated with the manufacture and distribution of free solutions for
products that are not Year 2000 compliant or in certain cases that were not
tested for Year 2000 compliance. Although the provision of free solutions has
probably resulted in some lost revenue for new product upgrades, we believe the
lost revenue will be less than $5 million.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet 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 January
31, 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.
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Based on the carrying values of our mortgage loans and lines of credit that we
held at January 31, 2000, we do not believe that short-term changes in interest
rates would have a material effect on the interest income we earn on loans held
for sale in the secondary market, interest expense on our lines of credit or
the value of mortgage loans that we hold for sale in the secondary market. See
Notes 1 and 5 of the financial statement notes for more information regarding
risks related to our mortgage loans and lines of credit.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
During fiscal 1999, the currency of our Japanese subsidiary strengthened while
the currencies of our other subsidiaries remained essentially stable. As of
January 31, 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 January 31, 2000, there was an
immaterial currency exchange impact from our intercompany transactions. Currency
exchange risk is also minimized since foreign debt is due almost exclusively in
local foreign currencies. As of January 31, 2000, we did not engage in foreign
currency hedging activities.
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PART II
ITEM 1
LEGAL PROCEEDINGS
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Intuit was a defendant in two consolidated class action lawsuits (one in
California and one in New York) which alleged that certain of its Quicken
products have on-line banking functions that are not Year 2000 compliant. With
respect to the California litigation, on October 13, 1999 the court dismissed
the case without leave to amend. The only remaining issue relates to a potential
award of attorneys' fees to the plaintiffs. On December 1, 1999, the court
granted our motion to dismiss all the New York actions with prejudice. Although
plaintiffs filed a Notice of Appeal, they failed to perfect the appeal.
Accordingly, this case is also now over.
In addition, a suit was filed in the Contra Costa County, California Superior
Court by an individual consumer against various retailers, including Circuit
City Stores, CompUSA, Fry's Electronics, Office Depot, The Good Guys and others,
alleging that these retailers have sold software and hardware products which are
not Year 2000 compliant, including at least one product published by Intuit. One
of the defendants in this action, Fry's Electronics, filed a cross-complaint
against various software publishers and hardware manufacturers, including
Intuit, asserting a claim for indemnity in the main action. In September 1999,
Fry's Electronics reached a settlement with the plaintiffs. All the cross
defendants, including Intuit, then filed a demurrer to the cross-complaint. On
December 7, 1999 the court granted the demurrer and dismissed the case without
leave to amend. If Fry's Electronics does not appeal this ruling by April 4,
2000, this lawsuit against Intuit will also 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.
On March 8, 2000 a virtually identical lawsuit, Rubin v. Intuit Inc., was filed
in the United States District Court, Southern District of New York. Both actions
claim that private customer information entered into Intuit's Quicken.com
website was intentionally and secretly disclosed to third-party advertisers. The
two lawsuits allege identical causes of actions for invasion of privacy and
violations of federal statutes related to electronic communications. The
lawsuits seek injunctive relief, an order to disgorge profits related to the
alleged acts, and statutory and other damages. As of March 10, 2000, neither
lawsuit had been served on Intuit.
We are subject to other legal proceedings and claims that arise in the normal
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact.
Regardless of outcome, litigation can have an adverse impact on Intuit because
of defense costs, diversion of management resources and other factors.
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ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
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(a) Not applicable.
(b) Not applicable.
(c) On January 24, 2000, we issued and sold 225,000 shares of our common
stock to Stephen M. Bennett, our recently appointed President and Chief
Executive Officer, pursuant to two Restricted Stock Purchase Agreements.
The purchase price for the shares was $0.01 per share, for an aggregate
purchase price of $2,250. The shares were issued without registration
under the Securities Act of 1993, as amended (the "1933 Act"), in
reliance on an exemption under Section 4(2) of the 1933 Act. The shares
are subject to vesting over periods of up to 10 years. Any unvested
shares may be repurchased by Intuit for the original purchase price if
Mr. Bennett's employment with Intuit is terminated under certain
circumstances.
(d) Not applicable.
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ITEM 5
OTHER MATTERS
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CHANGES IN EXECUTIVE OFFICERS AND BOARD OF DIRECTORS
On January 24, 2000, Stephen M. Bennett was appointed President and Chief
Executive Officer and a member of the Board of Directors. William V. Campbell
stepped down as Acting Chief Executive Officer but remains Chairman of the
Board.
As of March 13, 2000, Intuit's executive officers are as follows:
Stephen M. Bennett President and Chief Executive Officer
Scott D. Cook Chairman of the Executive Committee of the Board of
Directors
Eric C.W. Dunn Senior Vice President and Chief Technology Officer
Alan A. Gleicher Senior Vice President, International
James J. Heeger Senior Vice President, Small Business Division
David A. Kinser Senior Vice President, Service Delivery and Operations
Greg J. Santora Senior Vice President, Finance, and Chief Financial
Officer
Raymond G. Stern Senior Vice President, Corporate Strategy and Marketing
Larry J. Wolfe Senior Vice President, Tax Division
Sonita J. Ahmed Vice President, Finance
Kristen S. Brown Vice President, Corporate Development
Caroline F. Donahue Vice President, Sales
Linda Fellows Vice President, Treasurer and Director of Investor
Relations
Daniel B. Gilbert Vice President, Quicken Loans
Larry King, Jr. Vice President, Payroll Services Group
Elisabeth M. Lang Vice President, Corporate Public Relations and
Marketing Communications
Carol Novello Vice President, Financial Supplies Group
Enrico Roderick Vice President, Personal Finance Group
Catherine L. Valentine Vice President, General Counsel and Secretary
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
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(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.01 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended through
January 19, 2000
10.02 Employment Agreement between Intuit and Stephen M. Bennett dated January
21, 2000
10.03 Intuit Inc. Restricted Stock Purchase Agreements between Intuit and
Stephen M. Bennett dated January 24, 2000
10.04 Confidential Agreement and General Release of Claims between Intuit Inc.
and William H. Harris, Jr., dated September 23, 1999
27.01 Financial Data Schedule (filed only in electronic format) period ended
January 31, 2000
27.02 Financial Data Schedule (filed only in electronic format) period ended
January 31, 1999
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(B) REPORTS ON FORM 8-K:
(1) On January 25, 2000, Intuit filed a report on Form 8-K to report under Item
5 the appointment of Stephen M. Bennett as President and Chief Executive
Officer and a board member.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: March 16, 1999 By: /s/ Greg J. Santora
---------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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