10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 14, 2001
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, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________.
COMMISSION FILE NUMBER 0-21180
INTUIT INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0034661
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(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
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(Address of principal executive offices)
(650) 944-6000
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Approximately 208,633,563 shares of Common Stock, $0.01 par value, as of
February 28, 2001
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FORM 10-Q
INTUIT INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE
NUMBER
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 2000 and January 31, 2001............................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended January 31, 2000 and 2001......... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended January 31, 2000 and 2001................... 5
Notes to Condensed Consolidated Financial Statements ............... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 17
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.......... 28
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................... 30
ITEM 5: Other Matters....................................................... 30
ITEM 6: Exhibits and Reports on Form 8-K.................................... 31
Signatures.......................................................... 31
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(1) Includes $7.2 million notes receivable from Venture Finance Software Corp.
as of July 31, 2000.
(2) Includes $6.5 million and $10.7 million loans due from affiliates as of
July 31, 2000 and January 31, 2001, respectively.
See accompanying notes.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. develops, sells and supports small business accounting and
management, tax preparation and consumer finance desktop software products,
financial supplies (such as computer checks, envelopes and invoices), and
Internet-based products and services for individuals and small businesses. Our
products and services are designed to automate commonly performed financial
tasks and to simplify the way individuals and small businesses manage their
finances and businesses. We sell our products and services throughout North
America and in many global markets. Sales are made primarily through retail and
OEM distribution channels, traditional direct sales to customers and via the
Internet.
Basis of Presentation
Intuit has prepared the accompanying unaudited condensed consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial statements. All intercompany balances and transactions have
been eliminated in consolidation. Certain other previously reported amounts have
been reclassified to conform to the current presentation format. We have
included all normal recurring adjustments considered necessary to give a fair
presentation of our operating results for the periods shown. Results for the
three and six months ended January 31, 2001 do not necessarily indicate the
results to be expected for the fiscal year ending July 31, 2001 or any other
future period. All financial statements presented are restated to reflect the
combined results of Intuit and our Rock Financial Corporation ("Rock") and Title
Source, Inc. ("Title Source") subsidiaries that were acquired on December 8,
1999 in a transaction that was accounted for as a pooling of interests. These
statements and accompanying notes should be read together with the audited
consolidated financial statements for the fiscal year ended July 31, 2000
included in Intuit's Form 10-K, filed with the Securities and Exchange
Commission.
Use of Estimates
To comply with generally accepted accounting principles, we make estimates and
assumptions that affect the amounts reported in the financial statements and the
disclosures made in the accompanying notes. Our most significant estimates are
related to reserves for product returns and exchanges, reserves for rebates and
the collectability of accounts receivable. We also use estimates to determine
the remaining economic lives and carrying value of goodwill, purchased
intangibles, fixed assets and deferred tax assets. Despite our intention to
establish accurate estimates and assumptions, actual results may differ from our
estimates.
Net Revenue
Intuit recognizes revenue upon shipment of our shrink-wrapped software products
based on "FOB shipping" terms. Under FOB shipping terms, title and risk of loss
are transferred, and we have no continuing obligations, once our products are
delivered to the shipper. We recognize revenue upon shipment, net of return
reserves based on historical experience. To recognize revenue, it must also be
probable that we will collect the accounts receivable from our customers.
Reserves are provided for returns of excess quantities of current product
versions, as well as previous versions of products still in the distribution
channel when new versions are launched. In some situations, we receive advance
payments from our customers. Revenue associated with these advance payments is
deferred until the products are shipped or services are provided. We also reduce
revenue by the estimated cost of rebates when products are shipped.
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We recognize revenue from Internet products and services when that revenue is
"earned" based on the nature of the particular product or service. For Internet
products and services that are provided over a period of time, revenue is
recognized pro rata based on the passage of the contractual time period during
which the product or service is to be provided or in accordance with agreed upon
performance criteria. However, where the Internet product or service is to be
provided or delivered at one point in time, revenue is recognized once upon
delivery of the product or completion of the service, rather than ratably over
time. For example, we earn advertising revenues from third parties that
advertise on certain of our websites and contract to run such advertisements for
a particular period of time. In this case, the associated advertising revenue is
recognized ratably over the contractual time period during which the advertising
is placed. By contrast, for on-line transactions for which we receive a payment
(such as electronic tax filing), revenue is recognized upon completion of the
transaction, assuming we have no remaining obligations.
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). Costs
incurred for fee for support plans are included in cost of goods sold.
We defer loan origination revenue and the associated commissions and processing
costs on loans held for sale until the related loan is sold. We recognize gains
and losses on loans at the time we sell them, based upon the difference between
the selling price and the carrying value of the related loans sold. We recognize
loan servicing revenue as the related principal is collected. We recognize
interest income on mortgage loans as it is earned, and we recognize interest
expenses on related borrowings as we incur them.
Customer Service and Technical Support
Customer service and technical support costs include the costs associated with
performing order processing, answering customer inquiries through websites and
other electronic means and providing telephone assistance. In connection with
the sale of certain products, Intuit provides a limited amount of free technical
support 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. Short-term investments are
considered available-for-sale debt securities and are carried at amortized cost,
which approximates fair value. Available-for-sale debt securities are classified
as current assets based upon our intent and ability to use any and all of these
securities as necessary to satisfy the significant short-term liquidity
requirements that may arise from the highly seasonal and cyclical nature of our
business. Based on our significant business seasonality, cash flow requirements
within quarters may fluctuate dramatically and require us to use a significant
amount of the short-term investments held as available-for-sale securities.
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The following schedule summarizes the estimated fair value of our cash, cash
equivalents, and short-term investments:
The following table outlines the estimated fair value of Intuit's
available-for-sale debt securities held in short-term investments classified by
the maturity date listed on the security.
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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 equity securities are
carried at fair value and we include unrealized gains and losses, net of tax, in
stockholders' equity. We have designated our investments in At Home Corporation
(which does business as Excite@ Home), VeriSign and 724 Solutions as trading
securities and fluctuations in the market value of these shares are reported in
net income. We held the following marketable securities at July 31, 2000 and
January 31, 2001:
In January 1997, we obtained marketable securities in Checkfree as a result of
selling our online banking and bill payment transaction processing business to
Checkfree Corporation. 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, 2001 was
$55.31 per share. At January 31, 2001, we held approximately 2.4 million shares,
or approximately 2.8%, of Checkfree's outstanding common stock.
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In connection with the sale of selected assets of our Quicken Insurance business
to InsWeb Corp on January 24, 2001, we received approximately 7.0 million shares
of InsWeb's common stock. We account for the investment in InsWeb as an
available-for-sale equity security, which accordingly is carried at market
value. InsWeb common stock is quoted on the Nasdaq National Market under the
symbol INSW. The closing price of InsWeb common stock at January 31, 2001 was
$1.66 per share. At January 31, 2001, we held approximately 7.0 million shares,
or approximately 16.6%, of InsWeb's outstanding common stock.
In May 1999, we purchased approximately 1.0 million shares of common stock of
Security First Technologies. In November 1999, Security First Technologies
changed its name to S1 Corporation. We account for the investment in S1 as an
available-for-sale equity security, which accordingly is carried at market
value. S1 common stock is quoted on the Nasdaq National Market under the symbol
SONE. The closing price of S1 common stock at January 31, 2001 was $10.06 per
share. At January 31, 2001, we held approximately 1.0 million shares, or
approximately 1.7%, of S1's outstanding common stock. During the quarter ended
January 31, 2001, we recorded a loss of $40.2 million to recognize an other than
temporary decline in the value of our S1 shares for the difference between our
original cost of $51.50 per share and $10.06 per share, the fair value as of the
date the other than temporary impairment determination was made. If a further
decline in fair value occurs that is considered other than temporary, we will
record the additional loss in the period when the subsequent impairment becomes
apparent. In connection with the above purchase, we also received an option to
purchase up to 4.6 million additional shares of S1 exercisable at a per share
purchase price of $51.50. We consider these S1 options derivatives. At January
31, 2001 they were valued at $7.2 million using the Black-Scholes model and are
classified as long term investments.
In connection with At Home Corporation's acquisition of Excite in May 1999, our
shares of Excite were converted into Excite@Home (Nasdaq symbol ATHM) common
stock. We have elected to report these converted Excite@Home shares as a trading
security. As a result, we are reporting both positive and negative fluctuations
in the market value of this stock in net income. At January 31, 2001, we owned
approximately 1.9 million shares (less than 1%) of Excite@Home common stock.
From May 1999 through January 31, 2001, we have reported a cumulative recognized
valuation loss of approximately $107.1 million for these 1.9 million shares. The
closing price of Excite@Home at January 31, 2001, was $6.50 per share.
In connection with VeriSign Corporation's acquisition of Signio in February
2000, our shares of Signio were converted into VeriSign common stock. We have
elected to report these converted VeriSign shares as a trading security. As a
result, we are reporting both positive and negative fluctuations in the market
value of this stock in net income. At January 31, 2001, we owned 9,716 shares
(less than 1%) of VeriSign common stock. From February 2000 through January 31,
2001, we have reported a cumulative recognized valuation loss of approximately
$1.7 million for these securities. The closing price of VeriSign (Nasdaq symbol
VRSN) at January 31, 2001, was $73.50 per share.
In connection with 724 Solutions Inc.'s acquisition of eZlogin in June 2000, our
shares of eZlogin were converted into 724 Solutions common stock. We have
elected to report these converted 724 Solutions shares as a trading security. As
a result, we are reporting both positive and negative fluctuations in the market
value of this stock in net income. At January 31, 2001, we owned 37,906 shares
(less than 1%) of 724 Solutions common stock. From June 2000 through January 31,
2001, we have reported a cumulative recognized valuation loss of approximately
$1.2 million for these securities. The closing price of 724 Solutions (Nasdaq
symbol SVNX) at January 31, 2001, was $24.81 per share.
During the six months ended January 31, 2001, we sold 85,000 shares of
Checkfree, 351,865 shares of Homestore.com, and 99,902 shares of 724 Solutions.
In connection with these sales we recognized realized gains of $4.0 million, $
11.1 million, and $0.1 million, respectively. In addition we sold 9,715 shares
of VeriSign and approximately 1.2 million shares of Quotesmith.com. and
recognized realized losses of $0.2 million and $4.9 million, respectively. Total
net gains on sales of marketable securities were $10.1 million for the six
months ended January 31, 2001. This gain was offset by recognized losses of
$30.7 million to reflect a decline in valuations of our trading securities and
S1 options, and a loss of $55.2 million for other than temporary declines in the
value of our marketable securities and other investments. This resulted in
combined net losses on marketable securities and other investments of $75.8
million for the six months ended January 31, 2001.
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All of our marketable securities are stocks of high technology companies that
have been extremely volatile. The market prices of a number of these companies'
stocks have declined substantially. Declines in the market prices of stocks we
hold could continue. These declines have resulted, and could continue to result
in a material reduction in the carrying value of these assets and a negative
impact on our operating results.
Goodwill and Purchased Intangible Assets
We record goodwill when the purchase price exceeds the book value of net assets
acquired. Goodwill is amortized on a straight-line basis over periods ranging
from 3 to 5 years. The cost of identified intangibles is generally amortized on
a straight-line basis over periods ranging from 1 to 10 years. When appropriate,
we perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
Goodwill and purchased intangible assets consisted of the following:
Balances presented above are net of total accumulated amortization of $465.3
million and $541.1 million at July 31, 2000 and January 31, 2001, respectively.
Concentration of Credit Risk
We are subject to risks related to changes in the values of our significant
balances of marketable securities, private equity investments, short-term
investments and the collectability of our trade accounts receivable. At January
31, 2001, we held approximately $168.9 million in marketable securities, as
described in "Marketable Securities", above in Note 1. Fluctuations in the
market value of our shares in Excite@Home, VeriSign and 724 Solutions result in
recognized gains and losses in our statement of operations on an ongoing basis,
since these investments are treated as trading securities. If there were an
other than temporary impairment in any marketable securities held as
available-for-sale, we would report this decline in our statement of operations.
See "Marketable Securities," above in Note 1 for a discussion of risks
associated with our marketable securities. At January 31, 2001, we held
approximately $17.6 million in private equity investments, net of reserves for
potential declines in value that are other than temporary. Our remaining
portfolio is diversified and consists primarily of short-term investment-grade
securities.
To 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. At January 31, 2001, we had one distributor,
Ingram Micro, that accounted for approximately 34% of our accounts receivable
balance.
In the normal course of our mortgage business, we enter into loan commitments to
extend credit in order to meet the financing needs of our customers. Loan
commitments are agreements to lend to a customer as long as all conditions
specified in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses and may require the customer to pay a fee. We
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral we obtain is based on our credit evaluation of the customer.
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Loan commitments subject us to market risks and credit risks. Market risk occurs
if interest rates rise after a loan commitment is made. To offset this risk on
conventional loans that are in process, we utilize mandatory forward sale
commitments and purchase puts and calls on U.S. Treasury securities. At January
31, 2001, we had $150.1 million in mandatory forward sale commitments for future
delivery of FNMA and FHLMC securities and held puts in the amount of $8.0
million. The credit risk associated with these puts and calls on U.S. Treasury
securities is a small fraction of the notional amount of the securities and is
reflected in their fair value. Loan commitments also involve credit risk
relating to the customer, which is not reflected on the balance sheet. We use
the same credit policies for making credit commitments as we do for the
underlying loan product.
Loan commitments to extend credit at July 31, 2000 and January 31, 2001 were as
follows:
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires us to recognize all derivatives as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
It further provides criteria for designating derivative instruments at fair
value, cash flow, or foreign currency hedges, and establishes accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon the date of adoption, August 1, 2000, we recorded the cumulative effect of
the change in accounting for derivatives for our S1 options held. This resulted
in a one-time cumulative effect of $14.3 million, net of taxes totaling $9.5
million, as of August 1, 2000. The one-time cumulative effect created a decrease
of $0.07 per share on the basic and diluted net loss per share for the six month
period ended January 31, 2001. FAS 133 requires the derivatives to be carried at
fair value, so subsequent fluctuations in the fair value of these options will
be included in our net income. For the three and six months ended January 31,
2001 these fluctuations resulted in a loss of $2.4 million and $10.0 million net
of taxes, respectively. The following table shows what adjusted net profit
(loss) and diluted net profit (loss) per share of Intuit would have been as if
we had adopted this standard as of the beginning of fiscal 2000:
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), as
amended in March and June 2000. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements for all public
registrants. We are required to adopt SAB 101 no later than our fourth quarter
of 2001. The adoption of SAB 101 is not expected to have material effect on our
financial position or results of operations.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share is identical since the impact of
common equivalent shares is anti-dilutive.
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3. COMPREHENSIVE NET INCOME
SFAS 130, "Reporting Comprehensive Income" establishes standards for reporting
and displaying of comprehensive net income and its components. However, it has
no impact on our net income as presented in our financial statements. SFAS 130
requires foreign currency translation adjustments and changes in the fair value
of available-for-sale securities to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
4. ACQUISITIONS
On August 30, 2000, we purchased all of the outstanding securities of Venture
Finance Software Corporation ("VFSC") that were not already held by Intuit
(approximately 51%) for approximately $118 million in cash (including
approximately $4.5 million in option exercise and tax payments in connection
with VFSC options exercised immediately prior to the purchase). We accounted for
the acquisition of VFSC as a purchase for accounting purposes and allocated
approximately $113 million to identified intangible assets and goodwill. These
assets are being amortized over periods of three to five years.
Eric Dunn, who was Senior Vice President and Chief Technology Officer of Intuit
through July 31, 2000, as well as VFSC's President and a director of VFSC, was
an option holder of VFSC. He exercised his options immediately prior to the
closing of Intuit's acquisition of VFSC. He received $5.7 million from Intuit
for his VFSC shares, net of the aggregate exercise price for his option ($1.4
million) and withholding taxes ($3.1 million).
Other shareholders of VFSC included venture capital funds managed by Kleiner
Perkins Caufield & Byers, of which L. John Doerr, a director of Intuit, is a
general partner. These funds received approximately $2.4 million from Intuit for
their VFSC shares. The aggregate original purchase price for the shares held by
the Kleiner Perkins Caufield & Byers funds was $1.2 million.
On December 20, 2000 we acquired all of the outstanding stock of
EmployeeMatters, Inc., in exchange for approximately $41.9 million in Intuit
stock, the elimination of approximately $8.0 million in bridge loans we extended
to EmployeeMatters prior to the closing, and the assumption of approximately
$3.4 million of liabilities. We accounted for the acquisition of EmployeeMatters
as a purchase for accounting purposes and allocated approximately $53.3 million
to identified intangible assets and goodwill. These assets are being amortized
over periods of three to five years.
5. DISCONTINUED OPERATIONS AND DIVESTITURES
On January 24, 2001, we sold selected assets of our Quicken Insurance business
to InsWeb Corp. for approximately $10.8 million of InsWeb common stock. As a
result of the divestiture, we recorded a pre-tax gain of $1.6 million and a
related tax provision of $0.6 million in the quarter ended January 31, 2001.
In addition, Intuit and InsWeb entered into a distribution agreement under which
InsWeb became the exclusive consumer insurance aggregator for Intuit's
Quicken.com and QuickenInsurance Web sites and certain Quicken consumer desktop
products. In exchange, Intuit will share in associated revenues, which are
subject to certain minimums, over the 5 year term of the distribution agreement.
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6. BORROWINGS
We have two mortgage lines of credit, which are reflected in escrow liabilities.
Advances under the first line of credit are based on a formula computation, with
interest due monthly. Advances are due on demand and are collateralized by
residential first and second mortgages. Advances may be drawn for working
capital and sub-prime, high loan-to-value and conventional prime mortgage loans.
The maximum outstanding balance permitted under this line is $20 million.
Interest rates are variable and are based on the federal funds rate and prime
rate, depending on the type of advance. The interest rates in effect at July 31,
2000 and January 31, 2001 were 7.69% and 7.53%, respectively. The weighted
average interest rate for the six months ended January 31, 2000 was 6.59%.
During the six months ended January 31, 2001 we had a zero balance outstanding
for the line of credit resulting in a weighted average interest rate of 0%.
Our second line of credit currently provides for up to $50 million principal
amount of demand loans secured by mortgage loans and other assets. Interest
rates on loans vary depending on the type of underlying loan, and the loans are
subject to sub-limits, advance rates and warehouse terms that vary depending on
the type of underlying loan. The interest rates in effect at July 31, 2000 and
January 31, 2001 were 7.89% and 7.05%, respectively, while the weighted average
interest rates for the six months ended January 31, 2000 and January 31, 2001
were 6.69% and 7.60%, respectively. We are required to maintain a minimum
tangible net worth and to satisfy other financial covenants, as outlined in the
line of credit agreements. We were in compliance with the requirements as of
July 31, 2000 and January 31, 2001.
7. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
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8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The following information is provided in accordance with Statement of Financial
Accounting No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way in which
public companies disclose certain information about operating segments in the
Company's financial reports. Since Internet-based revenues and expenses cut
across all of our business divisions, we do not report results of our
Internet-based businesses as a separate business segment in our financial
statements. Instead, each of our business divisions reports Internet-based
revenues and expenses that are specific to its operations and are included in
its results. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. Intuit does
not track assets by operating segments. Consequently, we do not disclose assets
by operating segments. The following unaudited results for the six months ended
January 31, 2000 and 2001 are broken out by our operating segments:
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(1) Common expenses in fiscal 2000 have been reclassified to conform to the
current presentation format.
9. NOTES PAYABLE AND COMMITMENTS
In March 2000, our Japanese subsidiary, Intuit KK, entered into a one-year loan
agreement with Japanese banks for approximately $32.2 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
January 31, 2001, the rate was approximately 1.35%. The fair value of the loan
approximates cost as the interest rate on the borrowings is adjusted
periodically to reflect market rates (which are currently significantly lower in
Japan than in the United States). We are obligated to pay interest only on the
loan through March 2001.
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10. 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, non deductible
acquisition costs and certain foreign losses.
11. LITIGATION
On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the
United States District Court, Central District of California, Eastern Division.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. The
Bruce and Newby lawsuits were consolidated into one lawsuit - In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. A similar lawsuit, Almanza v. Intuit Inc. was
filed on March 22, 2000 in the Superior Court of State of California, San
Bernadino County, Rancho Cucamonga Division. The Almanza complaint was amended
on October 26, 2000. These purported class actions allege violations of various
federal and California statutes and common law claims for invasion of privacy
based upon the alleged intentional disclosure to third parties of personal and
private customer information entered at Intuit's Quicken.com website. The
complaints seek injunctive relief, orders to disgorge profits related to the
alleged acts, and statutory and other damages. Intuit believes these lawsuits
are without merit and intends to defend the litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
Throughout this Form 10-Q, you will find "forward-looking" statements, or
statements about events or circumstances that have not yet occurred. In some
cases, you can identify these statements by forward-looking words such as "may,"
"might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," and other similar terms.
These forward-looking statements include, among other things, the anticipated
future growth of our mortgage revenue, predictions about QuickBooks upgrade
rates, expected trends in cost of revenue, operating expenses and capital needs,
projections of our future financial performance, our anticipated growth and
anticipated trends in our businesses (including trends in product pricing and
seasonality). These statements are only predictions, based on our current
expectations about future events., We cannot guarantee future results,
performance or achievements or guarantee that predictions or current
expectations will be accurate. These forward-looking statements involve risks
and uncertainties, and our actual results, performance or achievements could
differ materially from those expressed or implied by the forward-looking
statements. The important factors that could cause our results to differ are
discussed under "Risks That Could Affect Future Results," at the end of this
Item 2. This Item 2 should also be read in conjunction with the Consolidated
Financial Statements and related Notes in Part I, Item 1 of this Form 10-Q, and
our fiscal 2000 Form 10K.
OVERVIEW
Intuit's mission is to revolutionize how people manage their financial lives and
small businesses manage their businesses. We strive to offer innovative products
and services that drive fundamental changes in how individuals and small
businesses manage their activities - changes so profound that our customers
can't imagine going back to the "old way" of doing things. We offer a variety of
small business, tax preparation and personal finance software products and
related products and services that enable people and small businesses to
revolutionize how they manage their activities. Our products and services
include Quicken(R), QuickBooks(R), Quicken TurboTax(R), ProSeries(R) and
Lacerte(R) desktop software products, as well as an expanding array of
Internet-based products and services, including QuickBooks Deluxe Payroll
service, QuickBooks Internet Gateway services, our Site Builder website tool,
Quicken TurboTax for the Web, Quicken.com(SM) and Quicken Loans(SM).
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of small business and consumer finance
products are typically strongest during the year-end holiday buying season and
the beginning of the calendar year, and therefore our major product launches
usually occur in the fall or early winter to take advantage of these customer
buying patterns. These seasonal patterns mean that revenue is usually highest
during the quarters ending January 31 and April 30. We experience lower revenues
for the quarters ending July 31 and October 31, while our operating expenses to
develop and support products and services continue at relatively consistent
levels during these periods. This can result in significant operating losses in
the July 31 and October 31 quarters. Operating results can also fluctuate for
other reasons, such as changes in product release dates, non-recurring events
such as acquisitions, dispositions, gains and losses from marketable securities,
and product price cuts in quarters that have relatively high fixed expenses.
Acquisitions and dispositions in particular can have a significant impact on the
comparability of both our quarterly and annual results, and acquisition-related
expenses continue to have a negative impact on our earnings.
While desktop software and related products and services provide a majority our
revenue, our Internet-based revenue is continuing to grow rapidly. We use the
term Internet-based revenue to include revenue from both Internet-enabled
products and services as well as revenue generated by electronic ordering and/or
delivery of traditional desktop software products and financial supplies. Since
Internet-based revenues cut across all of our business divisions, we do not
report results of our Internet-based revenues separately in our financial
statements. Instead, each of our business divisions reports Internet-based
revenues that are specific to its operations and are included in its results.
We believe our Internet-based businesses and our other emerging service
businesses provide an opportunity to increase revenue in fiscal 2001 and beyond.
We have made significant progress in several of these businesses over the past
three years. During fiscal 2000, our web-based tax preparation and electronic
filing services achieved
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profitability on a pre-tax basis. During the second quarter of fiscal 2001, the
profitability of our Quicken Loans and payroll businesses improved significantly
from the prior year. During the second quarter of fiscal 2001, we introduced
QuickBooks for the Web, which provides basic accounting functionality on the
web, and QuickBase, a web-based tool that lets customers create, manage and
share data from a browser. In February 2001, we announced the Intuit Developer
Network, a program that gives software developers access to application
programming interfaces (APIs) for various Intuit small business products, so
that they can develop software applications that will be available to Intuit's
small business customers. Despite this progress, investors should be aware that
most of our emerging businesses are still in their initial stages and are not
yet generating either profits or significant revenue. We anticipate increased
spending in an effort to capitalize on new business opportunities. During the
first half of fiscal 2001 we doubled our investments in our emerging businesses
compared to the first half of fiscal 2000, which has contributed to increased
research and development expenses. We expect to continue increasing our
investment in emerging businesses during the remainder of fiscal 2001. See
"Risks That Could Affect Future Results."
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and six months ended January 31, 2000 and 2001. Results for all periods
include activity for Rock Financial Corporation and Title Source, Inc.
(collectively, "Rock"), which were acquired in December 1999. As the acquisition
of Rock was accounted for as a pooling of interests, all prior periods have been
restated to reflect the combined results of Rock and Intuit. See Note 1 of the
financial statements.
NET REVENUE
The following revenue discussion is categorized by our business divisions. The
table below shows each business division's percentage of our net revenue for the
three and six months ended January 31, 2000 and 2001. See Note 8 of the
financial statements for additional information about our business segments.
Small Business Division.
Small Business Division revenue is derived primarily from QuickBooks desktop
products, financial supplies, payroll services, the QuickBooks Support Network
and QuickBooks Internet Gateway services.
Revenue for the Small Business Division increased by 17% for both the three and
six months ended January 31, 2001 compared to the same periods in the prior
year. Our QuickBooks business experienced revenue growth of 6% for the three
months ended January 31, 2001, compared to the same period a year ago. This
growth was the result of higher average selling prices, which partially offset a
9% decline in unit sales. QuickBooks revenue for the six months ended January
31, 2000 was roughly flat, as higher average selling prices were offset by a 12%
decline in unit sales compared to the prior year. These results primarily
reflect a year-over-year decline in the rate at which existing QuickBooks
customers upgraded to a newer QuickBooks product. Historically, approximately
20-30% of our QuickBooks customer base will upgrade in any one year. Year 2000
concerns, however, skewed both the normal seasonal patterns and traditional
upgrade patterns in fiscal 2000. Almost 50 percent of our customers upgraded
last year due to Year 2000 concerns. As a result, we currently expect the
upgrade rate to be in the high teens this fiscal year. The relatively slow
growth of QuickBooks revenue also reflects slower economic growth in the U.S.
and other major markets for our QuickBooks products.
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Our financial supplies business experienced revenue growth of 9% for both the
three and six months ended January 31, 2001 compared to the same periods in the
prior year. This increase is primarily the result of higher average selling
prices.
Payroll services experienced revenue growth of 57% and 54% in the three and six
months ended January 31, 2001, compared to the same periods a year
ago. Significant price increases contributed to this growth for both our Basic
Payroll Service and our online Deluxe Payroll Service. Both services also
experienced solid growth in their customer base. While we believe our payroll
business, and the Deluxe Payroll Service in particular, will provide us with a
significant opportunity to generate recurring revenue in the future, we face a
number of challenges and risks, including operational issues in activating
online payroll customers. See "Risks That Could Affect Future Results."
In December 2000, we completed our acquisition of EmployeeMatters, which is
developing employee administration services that will enable us to provide a
broader set of solutions to our small business customers. See Note 4 of the
financial statements.
Tax Division
Tax Division revenue is derived primarily from Quicken TurboTax federal and
state consumer desktop tax preparation software, ProSeries and Lacerte
professional tax preparation products, electronic tax filing services and
Quicken TurboTax for the Web online tax preparation services.
Overall, Tax Division revenue for both the three and six months ended January
31, 2001 increased by 4% compared to the same periods last year. Revenue from
Quicken TurboTax products for both the three and six months ended January 31,
2001 remained roughly flat, compared to the same periods in the prior year. This
is consistent with our expectations as we continue to bundle electronic filing
and state tax products with certain versions of Quicken TurboTax, which requires
us to defer recognizing a portion of the associated revenue from the second
quarter to the remainder of the fiscal year. In addition, over the past few
years, we have noticed a gradual change in the buying patterns of our customers.
The general shift has been from customers purchasing Quicken TurboTax and
preparing their tax returns throughout our second and third quarters to a
concentration in the third quarter. We attribute this shift in part to an
increasing number of customers using Quicken TurboTax for the Web. This service
is generally not available until mid-January (late in our second quarter), so
almost all of its revenue comes in the third quarter. As Quicken TurboTax for
the Web expands to comprise an increasing proportion of our tax revenue, this
concentration of revenue in the third quarter will become even more pronounced.
The development and launch of our consumer tax products for the 2000 tax year
was completed on schedule, and products reached retail shelves in late November.
However, there are still ongoing risks associated with our tax business,
including intense competition that could potentially result in lower average
selling prices and/or a decline in our share of sales in the retail channel. In
January 2001, H&R Block's TaxCut products were promoted in a manner that
essentially made its basic tax product free for two weeks, while we increased
our desktop product prices by about 5% compared to last year. According to PC
Data, as of February 3, 2001, our share of dollar sales of desktop consumer tax
products in the retail channel had increased to 82%, compared to 76% at the same
time last year, while our share of unit sales had declined to 70%, from 72% in
the prior year. Investors should note that these are early results, and we will
not be able to report revenues and operating results for the entire tax season
until late in the fiscal year.
Our professional tax products experienced revenue growth of 6% for both the
three and six months ended January 31, 2001 compared to the same periods a year
ago. This growth in revenue was the result of higher average selling prices of
our ProSeries and Lacerte unlimited-use products, as well as growth in our
customer base.
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Our web-based tax preparation and electronic filing services have experienced
strong growth during the current tax season. Through January 31, 2001, web tax
preparation revenue more than doubled from the prior year, driven by a 50% price
increase as well as a substantial increase in unit volume. Unit volume for our
electronic filing service doubled from the first half of last year, with a
slight increase in revenue. The faster unit growth reflected an increase in
customers eligible for free electronic filing through our Quicken Tax Freedom
Project]. Despite these encouraging early results, we face the challenge of
maintaining high service levels, particularly during peak volume service times.
The exact level of demand for Quicken TurboTax for the Web and electronic filing
for the remainder of the current tax year is impossible to predict, and we could
experience adverse financial and public relations consequences if these services
are unavailable due to technical difficulties or other reasons. See "Risks That
Could Affect Future Results."
Consumer Finance Division
Consumer Finance Division revenue comes primarily from Quicken desktop products,
Quicken Loans, advertising, sponsorship and placement fees from Quicken.com and
Quicken, and online transactions.
Revenue for the Consumer Finance Division was down 8% for both the three and six
months ended January 31, 2001, compared to the same periods a year ago. Revenue
for our Quicken product line declined 18% and 15% for the three and six months
ended January 31, 2001, compared to the same periods a year ago. Our comparative
results were negatively impacted by strong consumer demand during the prior year
periods as a result of a significant number of customers upgrading due to Year
2000 concerns. In addition, Quicken.com advertising and sponsorship revenue
declined due to reduced advertising spending by potential purchasers of Internet
advertising. Our Quicken product line faces many challenges in the personal
financial software category, including continued competition from Microsoft's
Money product and from other web-based personal finance tracking and management
tools that are becoming increasingly available at no cost to consumers.
The Consumer Finance Division benefited from revenue growth experienced by our
Quicken Loans mortgage business of 27% and 17% for the three and six months
ended January 31, 2001, compared to the same periods a year ago. Online mortgage
revenue (which includes services provided through our website or by telephone)
was up 44% and 34% for the three and six months ended January 31, 2001 over the
prior year periods. Mortgage revenue growth is primarily attributable to lower
interest rates that drove higher demand for loans, as well as the process
efficiencies and infrastructure improvements that we have made that allow us to
capitalize on the interest rate environment. We currently expect mortgage
revenue to increase at least 50% in fiscal 2001 compared to fiscal 2000.
However, we face continuing challenges, including interest rate fluctuations.
See "Risks That Could Affect Future Results."
On January 24, 2001, we completed the sale of certain assets of our Intuit
Insurance Services Inc. subsidiary (which operated our QuickenInsurance
business) to InsWeb Corp. in exchange for common stock of InsWeb. In addition,
we entered into a distribution agreement under which InsWeb is the exclusive
consumer insurance aggregator for our Quicken.com and QuickenInsurance Web sites
and certain consumer desktop products. See Note 5 of the financial statements.
We do not expect this transaction to have a material impact on revenue for the
remainder of fiscal 2001, though it may result in a slight improvement in
operating income.
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Global Business Division
Global Business Division revenues come primarily from small business products in
Japan, QuickBooks, Quicken and tax products in Canada, QuickBooks, Quicken and
consumer tax products in Europe, and QuickBooks and Quicken products in
Southeast Asia.
Overall, the Global Business Division revenue increased 27% and 18% for the
three and six months ended January 31, 2001, compared to the same periods last
year. We experienced more than 70% revenue growth in Canada for both the three
and six months ended January 31, 2001, compared to the same periods in the prior
year. The increases were due in part to higher professional tax revenue as a
result of an acquisition we made earlier in the current fiscal year. In
addition, we were able to release the Canadian version of QuickBooks 2001 in the
second quarter of fiscal 2001 compared to last year when we released the
Canadian version of QuickBooks 2000 in the third quarter. Japan experienced
revenue growth of 25% and 12% for the three and six months ended January 31,
2001 compared to the same periods a year ago. This growth was primarily due to
higher retail sales of our Yayoi small business accounting software. The
increases in revenue in Canada and Japan were partially offset by a decline in
revenue from Europe. Comparative results for Quicken products were negatively
impacted by strong consumer demand during prior year periods as a result of
customers upgrading due to Year 2000 concerns. In addition we experienced an
adverse foreign exchange rate impact for the quarter ended January 31, 2001.
There are two components of our cost of revenue. The larger component is the
direct cost of manufacturing and shipping products and offering services, which
includes data center costs relating to delivering Internet-based products and
services. The second component is the amortization of purchased software, which
is the cost of depreciating products or services obtained through acquisitions
over their useful lives.
Total cost of revenue as a percentage of revenue increased to 24% and 28% for
the three and six months ended January 31, 2001, compared to 23% and 26% for the
same periods in the prior year. These increases are primarily attributable to
the continued growth of our service businesses, such as payroll services,
Quicken Loans and the QuickBooks Support Network, which typically have higher
cost of revenue than our packaged software products. As our service businesses
expand to become a higher portion of total revenue, we anticipate that our cost
of revenue will continue to increase as a percentage of revenue. In addition, we
are experiencing increased costs due to infrastructure investments for our new
and existing service businesses. Also, in fiscal 2001 we reclassified certain
operating expenses of Quicken Loans from selling and marketing expenses in
fiscal 2000 to cost of revenue in fiscal 2001.
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Customer Service and Technical Support.
Customer service and technical support expenses were 10% and 12% of revenue for
the three and six months ended January 31, 2001, compared to 11% and 14% for the
same periods of the prior year. This improvement reflects the continued
efficiency gains in providing customer service and technical support less
expensively through websites and other electronic means, and from the expansion
of the QuickBooks Support Network and our other fee-for-support programs.
Selling and Marketing.
Selling and marketing expenses were 19% and 23% of revenue for the three and six
months ended January 31, 2001, compared to 20% and 26% for the same periods of
the prior year. The decline in selling and marketing costs as a percentage of
revenue for both the three and six month periods is partly attributable to a
reclassification of certain Quicken Loans expenses from sales and marketing
expenses to cost of revenue in fiscal 2001. In addition, in the prior year we
incurred higher than normal selling and marketing expenses to notify customers
of Year 2000 issues and solutions. The year-over year declines also reflect
relatively higher sales and marketing expenses in the first half of fiscal 2000
due to aggressive marketing programs relating to the expansion of our
Internet-based businesses and the extremely competitive consumer tax season, as
well as relatively lower marketing expenditures during the first half of fiscal
2001 for Quicken Loans and QuickBooks Deluxe Payroll Service, as those services
began to more fully leverage the value of the Intuit brands.
Research and Development.
Research and development expenses were 12% and 16% of revenue for the three and
six months ended January 31, 2001, compared to 10% and 14% for the same periods
of the prior year. These increases are primarily attributable to continued
investments in the development of our emerging service businesses, including
QuickBooks for the Web, our online Deluxe Payroll Service, our QuickBase
information management tool, and the Intuit Developer Network. During the first
half of fiscal 2001, we have invested significant amounts in our emerging
businesses - mostly focused in the small business area. During the remainder of
fiscal 2001, we expect to continue significant investments in research and
development, particularly for our emerging service businesses. If such expenses
exceed our current expectations, they may have an adverse effect on operating
results. See "Risks That Could Affect Future Results."
General and Administrative.
General and administrative expenses were 6% and 8% of revenue for the three and
six months ended January 31, 2001, compared to 5% and 7% for the same periods of
the prior year, respectively. For our entire fiscal year 2001, we expect general
and administrative expenses to remain roughly flat as a percentage of revenue
compared to fiscal 2000.
Charge for Purchased Research and Development.
We did not incur any charges for purchased research and development during the
first two quarters for fiscal 2001. During the first quarter of fiscal 2000, we
recorded charges of $1.3 million for purchased research and development as a
result of our Boston Light and Hutchison acquisitions. In connection with these
acquisitions, and with the assistance of third party appraisers, we determined
the value of in-process projects under development for which technological
feasibility had not been established. The total value of these projects at the
time of the acquisitions was determined to be approximately $1.3 million. The
value of the projects was determined by estimating the costs to develop the
in-process technology into commercially feasible products, estimating the net
cash flows we believed would result from the products and discounting these net
cash flows back to their present value. The products related to these charges
were completed during fiscal 2000.
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Other Acquisition Costs.
Other acquisition costs include the amortization of goodwill and purchased
intangible assets, as well as deferred compensation expenses arising from
acquisitions. These costs decreased to $43.1 million and $82.8 million for the
three and six months ended January 31, 2001, compared to $46.2 million and $83.3
million for the same periods a year ago. Amortization expense related to
completed acquisitions will continue to have a negative impact on our operating
results in future periods. Assuming we do not experience any impairment of value
of the intangible assets that would require us to accelerate amortization,
amortization will be approximately $186.4 million, $189.5 million, $165.5
million and $85.1 million for the years ending July 31, 2001 through 2004,
respectively. If we complete additional acquisitions or accelerate amortization
in the future, there would be an incremental negative impact on operating
results. See also "Risks That Could Affect Future Results" for a discussion of
possible accounting changes related to goodwill amortization.
Reorganization Costs.
Reorganization costs reflect the costs associated with our Quicken Loans
subsidiary (formerly Rock) closing numerous branch offices in Michigan in 1999,
as it began to transition its mortgage business from a traditional branch-based
business to an online and call center-based business. These costs totaled $3.5
million in the first quarter of fiscal 2000.
NON-OPERATING INCOME AND EXPENSES
Interest and Other Income and Expense, Net.
For the three and six months ended January 31, 2001, interest and other income
and expense, net, increased to $16.5 million and $32.7 million compared to $7.0
million and $15.5 million, for the same periods a year ago. The increases
reflect higher cash and short-term investment balances due primarily to proceeds
from sales of marketable securities.
Net Loss from Marketable Securities and Other Investments.
For the three and six months ended January 31, 2001, we recorded net losses from
marketable securities and other investments, of $71.9 million and $75.8 million,
compared to $2.8 million and $20.1 million for the same periods a year ago. The
losses incurred during the three months ended January 31, 2001, are due
primarily to declines in the values of certain equity investments held as
trading securities below our cost, as well as charges to reflect other than
temporary declines in the values of certain private equity investments. We
consider our shares of Excite@Home, VeriSign and 724 Solutions common stock as
trading securities. See Note 1 of the financial statements. As a result,
unrealized gains and losses due to market fluctuations in these securities are
included in our net income. Recent volatility in the market has significantly
reduced the value of our trading and available-for-sale securities, and we
expect this volatility to continue for the foreseeable future. If the market
value of these trading securities continues to decline significantly in the
future, it would have a negative impact on our earnings. Other than temporary
decline of the values of our available-for-sale and private equity investments
could result in additional losses.
Income Taxes.
For the three and six months ended January 31, 2001, we recorded an income tax
provision (benefit) of $14.2 million and $(16.7) million, on a pretax gain
(loss) of $40.8 million and $(38.1) million. This compares to an income tax
provision (benefit) of $29.6 million and $(4.6) million, on a pretax gain (loss)
of $86.8 million and $(13.3) million, for the same periods a year ago. At
January 31, 2001, there was a valuation allowance of $11.4 million for tax
assets of our global subsidiaries based on management's assessment that we may
not receive the benefit of certain loss carryforwards.
Cumulative Effect of Change in Accounting For Derivatives, Net
During the first quarter of fiscal 2001, we recorded a cumulative gain of $14.3
million, net of taxes, as a result of a change in accounting principle that
required us to recognize the cumulative effect of the increase in the fair value
of our S1 options as of August 1, 2000. See Note 1 of the financial statements.
Subsequent fluctuations in the fair value of these options will also be included
in our net income or net loss.
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LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001, our unrestricted cash and cash equivalents totaled $377.4
million, a $39.5 million decrease from July 31, 2000. The decline primarily
reflects a shift from cash and cash equivalents to our short-term investment
portfolio.
Our operations provided $68.7 million in cash for the six months ended January
31, 2001. The primary sources of cash provided by operations were increases in
accrued liabilities of $58.9 million, and deferred revenue of $35.6 million. The
increase in accrued liabilities was driven by the seasonality of our business
and the resulting increases in accruals for product returns, customer rebates
and accrued technical support expenses. Increases in deferred revenue were
primarily driven by the deferral of tax product and electronic filing revenues
that will be recognized in our third and fourth fiscal quarters. In addition,
adjustments made for non-cash expenses such as amortization of goodwill and
other purchased intangibles of $79.4 million, depreciation charges of $29.6
million, and losses on marketable securities and other investments, net of $75.8
million, contributed to the cash provided by operations. The primary uses of
cash during the six months ended January 31, 2001 were an increase in accounts
receivable of $185.8 million due to the large volumes of seasonal product
shipments to retailers and distributors that typically occur in our first and
second fiscal quarters and a significant decrease in our income taxes payable of
$57.9 million as a result of the payment of taxes for our fiscal year ended July
31, 2000. In addition to these uses of cash, we also recorded non-cash
adjustments during the six months ended January 31, 2001 for a pre-tax
cumulative accounting gain relating to a change in the method of accounting for
derivatives of $23.9 million and net losses of $7.2 million.
Investing activities used $167.5 million in cash for the six months ended
January 31, 2001. The primary use of cash for investing was the purchase of all
of the outstanding securities of Venture Finance Software Corp. ("VFSC") not
already owned by Intuit for $118 million in August 2000. We also purchased $49.6
million of net short-term investments, which was partially offset by proceeds of
$24.9 million from the sale of our marketable securities. As a result of our
continued investment in information systems and infrastructure for our emerging
businesses, we purchased property and equipment of $46.0 million during the six
months ended January 31, 2001.
Financing activities provided $59.3 million for the six months ended January 31,
2001, primarily attributable to proceeds from the exercise of employee stock
options.
We currently hold investments in a number of publicly traded companies (see Note
1 of the financial statements). The volatility of the stock market and the
potential risk of fluctuating stock prices may have an impact on the proceeds
from future sales of these securities and therefore on our future liquidity. Due
to our reporting of the Excite@Home, VeriSign and 724 Solutions shares as
trading securities, future fluctuations in the carrying values of these stocks
will impact our operating results. If future declines in our other marketable
securities are deemed to be other than temporary, they will also impact our
operating results. Investors should note that many high technology companies,
including Excite@Home, VeriSign and 724 Solutions, have recently experienced
significant declines in their stock prices.
In connection with our acquisition of Computing Resources, Inc. in May 1999, we
are required to pay three annual installments of $25 million, the first of which
was paid in May 2000. In the normal course of business, we enter into leases for
new or expanded facilities in both domestic and global locations. We also
evaluate, on an ongoing basis, the merits of acquiring technology or businesses,
or establishing strategic relationships with and investing in other companies.
Accordingly, it is possible that we may decide to use cash and cash equivalents
to fund such activities in the future.
We believe that our cash, cash equivalents and short-term investments will be
sufficient to meet anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
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RISKS THAT COULD AFFECT FUTURE RESULTS
The factors discussed below are cautionary statements that identify important
factors that could cause actual results to differ materially from those
anticipated in the forward-looking statements in this Form 10-Q. Our fiscal 2000
Form 10-K contains additional details about these risks, as well as other risks
that could affect future results.
We face competitive pressures in all of our businesses, particularly our
consumer tax preparation software business, which can have a negative impact on
our revenue, profitability and market position. During the fiscal 2000 tax
season we reduced prices for our Quicken TurboTax product line in response to
aggressive pricing by H&R Block and Microsoft. This resulted in significantly
lower average selling prices. We have increased our tax products prices somewhat
for fiscal 2001. Although our share of dollar sales of consumer desktop products
in the retail channel has increased compared to the same time last year, we have
seen a slight decline in our share of unit sales in the retail channel. There
are formidable current and potential competitors in the private sector, and we
also face potential competition from publicly-funded government entities seeking
to competitively enter private markets in the United States for consumer
electronic financial services. Accordingly, we expect competition to remain
intense during fiscal 2001, and it is too early to predict results for the full
tax season.
If we fail to maintain reliable and responsive service levels for our electronic
tax offerings, we could lose revenue and customers. Our online tax preparation
and electronic tax filing services face significant challenges in maintaining
high service levels, particularly during peak volume service times. For example,
we have experienced relatively brief unscheduled interruptions in our electronic
filing/and or tax preparation services during fiscal 1999, 2000 and 2001. We do
not believe any prior service outages had a material financial impact, prevented
customers from completing and filing their returns in a timely manner, or posed
a risk that customer data would be lost or corrupted. However, we did experience
negative publicity in some instances. The exact level of demand for Quicken
TurboTax for the Web and electronic filing for the remainder of the current tax
year is impossible to predict, and we could experience adverse financial and
public relations consequences if these services are unavailable for an extended
period of time, or late in the tax season, due to technical difficulties or
other reasons.
Despite our efforts to adequately staff and equip our customer service and
technical support operations, we cannot always respond promptly to customer
requests for assistance. We occasionally experience customer service and support
problems, including longer than expected "hold" times when our staffing is
inadequate to handle higher than anticipated call volume, and a large number of
inquiries from customers checking on the status of product orders when shipments
are delayed. This can adversely affect customer relationships and our financial
performance. For example, during fiscal 2000, some small business customers
(particularly QuickBooks Support Network and payroll services customers)
experienced inconsistent service levels and delays that led to some negative
press attention. In order to improve our customer service and technical support,
we must continue to focus on eliminating underlying causes of service and
support calls (through product improvements and better order fulfillment
processes), and on more accurately anticipating demand for customer service and
technical support.
We hold equity investments that have been very volatile. Our investment
activities can impact our net income. We recorded pre-tax gains and losses from
marketable securities and other investments of $481.1 million in fiscal 2000 and
a loss of $75.8 million for the six months ended January 31, 2001. These amounts
reflect net realized gains and losses on sales of certain marketable securities,
unrealized quarter-to-quarter gains and losses due to price fluctuations in
securities that we account for as "trading securities," and charges to reflect
other than temporary declines in value of our available-for-sale and private
equity investments below our cost (including charges in the second quarter of
fiscal 2001 of $40.2 million related to our investment in S1 Corporation and
$15.0 million related to our private equity investments). Fiscal 2000 and 2001
decreases in the market prices of our trading securities resulted in a
significant reduction in our pre-tax income, and future price fluctuations in
trading securities, and any significant long-term declines in value of other
securities, could reduce our net income in future periods.
A general decline in economic conditions could lead to reduced demand for our
products and services. The recent downturn in general economic conditions had
led to reduced demand for a variety of goods and services, including many
technology products. If conditions continue to decline, or fail to improve, in
geographic areas that are significant to us, such as the United States, Canada
and Japan, we could see a significant decrease in the overall demand for our
products and services that could harm our operating results.
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Actual product returns may exceed return reserves. We generally ship
significantly more desktop products to our distributors and retailers than we
expect them to sell, in order to reduce the risk that distributors or retailers
will run out of products. This is particularly true for our tax products, which
have a short selling season. Like most software companies, we have a liberal
product return policy and we have historically accepted significant product
returns. We establish reserves for product returns in our financial statements,
based on estimated future returns of products. We closely monitor levels of
product sales and inventory in the retail channel in an effort to maintain
reserves that are adequate to cover expected returns. In the past, returns have
not generally exceeded these reserves. However, if we do experience actual
returns that significantly exceed reserves, it would result in lower revenue.
If we do not continue to successfully refine and update the business models for
our Internet-based products and services and other emerging service businesses,
and operationally support these businesses, the businesses will not achieve
sustainable financial viability or broad customer acceptance. Our business
models for our Internet-based businesses and other emerging service businesses
have more complex and varied revenue streams than our traditional desktop
software businesses. For these businesses to become and remain economically
viable, we must continually refine their revenue models to reflect evolving
economic circumstances. These businesses also depend on a different operational
infrastructure than our desktop software businesses, and we must continually
develop, expand and modify internal systems and procedures to support these
businesses. In particular, our web-based tax preparation and electronic filing
services must effectively handle extremely heavy customer demand during the peak
tax season. If we are unable to meet customer expectations in a cost-effective
manner, it could result in lost customers, negative publicity, and increased
operating costs, which could have a significant negative impact on the financial
and market success of these businesses.
We face intense competition for qualified employees, especially for our
Internet-based businesses. Like many of our competitors, we have had
difficulties during the past few years in hiring and retaining employees, and we
expect to face continuing challenges in recruiting and retention.
We face risks relating to customer privacy and security and increasing
regulation, which could hinder the growth of our businesses - particularly our
Internet-based businesses. Despite our efforts to address customer concerns
about privacy and security, these issues still pose a significant risk, and we
have experienced lawsuits and negative publicity relating to privacy issues. For
example, during fiscal 2000 and fiscal 2001, there have been press articles
criticizing our privacy and security practices as they relate to the
connectivity of our desktop software to our web sites. We have faced lawsuits
and negative press alleging that we improperly shared information about
customers with third party "ad servers" for our web sites. A major breach of
customer privacy or security by Intuit, or even by another company, could have
serious consequences for our businesses - particularly our Internet businesses -
including reduced customer interest and/or additional regulation by federal or
state agencies. For example, if a "hacker" were able to overcome the security
precautions we take to protect our customers' personal tax preparation
information, it could have a material negative impact on our operating results
and our relationships with our customers. In addition, mandatory privacy and
security standards and protocols are still being developed by government
agencies, and we may incur significant expenses to comply with any requirements
that are ultimately adopted. For example, under the Gramm Leach Bliley Act
recently adopted by the federal government, by July 1, 2001 Intuit will be
required to provide written notice of its privacy practices to many of its
customers. We must give customers an opportunity to state their preferences
regarding Intuit's use of their non-public personal information, and we must
honor those preferences. If Internet use does not grow as a result of privacy or
security concerns, increasing regulation or for other reasons, the growth of our
Internet-based businesses would be hindered.
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If our QuickBooks Internet Gateway services do not achieve and maintain
acceptance by customers and the third-party vendors who provide these services,
the services will not generate long-term revenue growth or profitability. We
must meet customer and vendor expectations in delivering our QuickBooks Internet
Gateway services. If we do not meet these expectations, we may not be able to
maintain the third party vendor relationships that are necessary to allow us to
provide services desired by customers. If we experience significant failures in
meeting expectations and maintaining important relationships, our ability to
expand our QuickBooks Internet Gateway services will be jeopardized. Intuit is
refining its approach to selecting and working with QuickBooks Gateway vendors.
Although we are seeing encouraging preliminary results for some services, such
as merchant account services, that are more closely integrated with QuickBooks,
we are in the process of ending relationships with most of our smaller alliance
companies where the business results are not meeting our expectations or theirs.
To retain other relationships, we may be required to adapt them in ways that are
less attractive to us, financially or otherwise. In addition, QuickBooks
Internet Gateway Services are currently available only to customers using
QuickBooks 2000 or QuickBooks 2001, so customer adoption of the services is
somewhat dependent on unit sales of newer QuickBooks products to new customers
and to customers upgrading from older versions of the product. Customer upgrade
rates for QuickBooks 2001 have been lower than historical upgrade levels.
Development and/or implementation of certain announced services has not yet been
completed to our satisfaction. Technological difficulties, financial
difficulties and other problems could delay or prevent us from recognizing
contractually committed revenues that are dependent on implementation.
In order to expand our customer base in the payroll services business, we must
continue to improve the efficiency and effectiveness of our payroll processing
operations and streamline customer activations for our Deluxe online payroll
processing service. The payroll processing business involves a number of
business risks if we make errors in providing accurate and timely payroll
information, cash deposits or tax return filings, including our incurring
liability to customers, additional expense to correct product errors and loss of
customers. For our Internet-based services (the Deluxe service, as well as the
online Basic service), we must improve our operations to give customers more
reliable connectivity to our data center to transmit and receive payroll data
and tax tables. In order to expand the customer base for our Deluxe payroll
service, we must continue to focus on streamlining the service activation
process for new customers.
Our mortgage business is subject to interest rate fluctuations and operational
risks that could result in further revenue declines. Increases in mortgage rates
and other interest rates adversely affected our mortgage business during 2000,
contributing to a significant revenue decline from fiscal 1999 to fiscal 2000.
Conversely, declines in mortgage interest rates during fiscal 2001 have had a
positive impact on revenue. If mortgage interest rates rise again, this could
negatively impact the volume of closed loans and applications - particularly our
most interest-rate sensitive products such as conventional loans and refinancing
loans. FHA loans and home purchase mortgages tend to be less mortgage-rate
sensitive. Fluctuations in non-mortgage interest rates also create risks with
respect to the loans on our balance sheet and impact our cost of funds to
provide loans. In addition, our ability to successfully streamline the online
application, approval, and closing process will have a significant impact on our
ability to attract customers to our mortgage service, and on our ability to
continue increasing the percentage of our mortgage revenue generated through the
online channel compared to branch offices. We must also maintain relationships
with certain banks and other third parties who we will rely on to provide access
to capital, and later, service the loans. If we are unable to do so, it could
have a negative impact on our mortgage business and on Intuit's financial
results.
Our ability to conduct business could be impacted by a variety of factors
such as electrical power interruptions, earthquakes, fires and other similar
events. Our business operations depend on the efficient and uninterrupted
operation of a large number computer and communications hardware and
software systems. These systems are vulnerable to damage or interruption
from electrical power interruptions, telecommunication failures, earthquakes,
fires, floods, and other similar events. Recently, electrical power in certain
locations in California has been interrupted for short periods of time in the
form of "rolling blackouts." We have principal facilities (including our
primary data centers) located in California. To date, our business operations
have not been materially impacted by these outages. However, it is possible
that rolling blackouts will continue in the foreseeable future and our
facilities could be significantly affected in the future. We currently have
short-term alternate sources of power (in the form of backup batteries and
generators) at all of our California facilities. However, if rolling blackouts
become more frequent and/or longer in duration, it is possible that our
alternative sources of power would be insufficient to allow us to
-27-
continue our operations without interruption. Other events such as earthquakes,
fires and floods, could also impact our ability to continue our business
operations. For our Internet-based services, the system failures of various
third-party Internet service providers, online service providers and other
website operators could result in interruption in our services to our customers.
Any significant interruptions in our ability to conduct our business operations
could reduce our revenue and operating income. Our business interruption
insurance may not adequately compensate us for the impact of interruptions to
our business operations.
New FASB guidelines relating to accounting for goodwill could make our
acquisition-related charges less predictable in any given reporting period. On
February 14, 2001, the FASB issued a limited revision of its Exposure Draft,
Business Combinations and Intangible Assets that establishes a new standard for
accounting for goodwill acquired in a business combination. It would continue to
require recognition of goodwill as an asset but would not permit amortization of
goodwill as currently required by APB Opinion No. 17, Intangible Assets. Under
the proposed statement, goodwill would be separately tested for impairment using
a fair-value-based approach when an event occurs indicating the potential for
impairment. Any required goodwill impairment charges would be presented as a
separate line item within the operating section of the income statement. The
shift from an amortization approach to an impairment approach would apply to
previously recorded goodwill as well as goodwill arising from acquisitions
completed after the application of the new standard. If the standard is adopted
as described above, our goodwill amortization charges would cease. However, it
is possible that in the future, we would incur less frequent, but larger,
impairment charges related to the goodwill already recorded as well as goodwill
arising out of future acquisitions as we continue to expand our business.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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SHORT-TERM INVESTMENT PORTFOLIO
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet quality
standards consistent with our investment policy. This policy dictates that we
diversify our holdings and limit our short-term investments 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 carried significant balances in marketable equity securities as of January
31, 2001. These securities are subject to considerable market risk due to their
volatility. Fluctuations in the carrying value of our shares of Excite@Home,
VeriSign and 724 Solutions will have an immediate impact on our earnings because
we report these shares as trading securities. See Note 1 of the financial
statement notes for more information regarding risks related to our investments
in marketable securities and the impact of our trading securities on our
reported net income.
INTEREST RATE RISK
Interest rate risk represents a component of market risk to us and represents
the possibility that changes in interest rates will cause unfavorable changes in
our net income and in the value of our interest rate sensitive assets,
liabilities and commitments, particularly those that relate to our mortgage
business. In a higher interest rate environment, borrower demand for mortgage
loans declines, adversely affecting our mortgage loan business. Interest rate
movements also affect the interest income earned on loans we hold for sale in
the secondary market, interest expense on our lines of credit, the value of our
mortgage loans and ultimately the gain or loss on the sale of those mortgage
loans. In addition, interest rate movements affect the interest income earned on
investments we hold in our short-term investment portfolio and the value of
those investments.
-28-
As part of our risk management programs, we enter into financial agreements and
purchase financial instruments in the normal course of business to manage our
exposure to interest rate risk with respect to our conventional loans and our
government-insured loans (together, "Prime Loans"), but not with respect to our
sub-prime loans or home equity lines of credit. We use these financial
agreements and financial instruments for the explicit purpose of managing
interest rate risks to protect the value of our mortgage loan portfolio, and not
for trading purposes.
We actively monitor and manage our exposure to interest rate risk on Prime
Loans, which is incurred in the normal course of business. The committed and
closed pipelines of Prime Loans, as well as the related forward commitments and
derivatives, are valued daily. We refer to the loans, pipeline, commitments and
derivatives together as the "Hedge Position." We evaluate the Hedge Position
against a spectrum of interest rate scenarios to determine expected net changes
in the fair values of the Hedge Position in relation to the changes in interest
rates. We evaluate our interest rate risk exposure daily using models that
estimate changes in the fair value of the Hedge Position and compare those
changes against the fair value of the underlying assets and commitments.
The following table shows the maturity of our mortgage loans and home equity
lines of credit:
PRINCIPAL AMOUNTS BY EXPECTED MATURITY:
(in thousands, except interest rates; Unaudited)
(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 January 31, 2001, we do not believe that short-term changes in interest
rates will have a material effect on the interest income we earn on loans held
for sale in the secondary market, interest expense on our lines of credit or the
value of mortgage loans. See Notes 1 and 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
While the Japanese yen and the Canadian dollar have strengthened during the
first six months of fiscal 2001, the currencies of our other subsidiaries
remained essentially stable. Because we translate foreign currencies into U.S
dollars for reporting purposes, currency fluctuations can have an impact, though
generally immaterial, on our results. We believe that our exposure to currency
exchange fluctuation risk is insignificant primarily because our global
subsidiaries invoice customers and satisfy their financial obligations almost
exclusively in their local currencies. Currency exchange risk is also minimized
since foreign debt is due almost exclusively in local foreign currencies. As of
January 31, 2001, we did not engage in foreign currency hedging activities.
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PART II
ITEM 1
LEGAL PROCEEDINGS
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On March 3, 2000 a class action lawsuit, Bruce v. Intuit Inc., was filed in the
United States District Court, Central District of California, Eastern Division.
Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was
filed on March 8, 2000 in the United States District Court, Southern District of
New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United
States District Court, Central District of California, Eastern Division. The
Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit
Privacy Litigation, filed on July 28, 2000 in the United States District Court
of California, Eastern Division. A similar lawsuit, Almanza v. Intuit Inc. was
filed on March 22, 2000 in the Superior Court of State of California, San
Bernadino County, Rancho Cucamonga Division. The Almanza complaint was amended
on October 26, 2000. These purported class actions allege violations of various
federal and California statutes and common law claims for invasion of privacy
based upon the alleged intentional disclosure to third parties of personal and
private customer information entered at Intuit's Quicken.com website. The
complaints seek injunctive relief, orders to disgorge profits related to the
alleged acts, and statutory and other damages. Intuit believes these lawsuits
are without merit and intends to defend the litigation vigorously.
Intuit is subject to other legal proceedings, as well as demands, claims and
threatened litigation, that arise in the normal course of our business. We
currently believe that the ultimate amount of liability, if any, for any pending
claims of any type (either alone or combined) will not materially affect our
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact. Regardless of outcome,
litigation can have an adverse impact on Intuit because of defense costs,
diversion of management resources and other factors.
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ITEM 5
OTHER MATTERS
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CHANGES IN EXECUTIVE OFFICERS
As of March 14, 2001, Intuit's executive officers were as follows:
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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.
None
(b) REPORTS ON FORM 8-K:
(1) On January 29, 2001, Intuit filed a report on Form 8-K to report under Item
5 that it had completed the sale of certain assets of its Intuit Insurances
Services, Inc. subsidiary.
(2) On February 28, 2001, Intuit filed a report on Form 8-K to report under
Item 5 its financial results for the quarter ended January 31, 2001.
Intuit's balance sheet as of January 31, 2000 and 2001, and statement of
operations for the three months and six months ended January 31, 2000 and
2001 were included in the Form 8-K.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: March 14, 2001 By: /s/ Greg J. Santora
-------------------------------------
Greg J. Santora
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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