UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2003 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.
Delaware | 77-0034661 | |
(State of incorporation) | (IRS employer identification no.) |
Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 211,612,552205,703,236 shares of Common Stock, $0.01 par value, as of April 30, 2002January 31, 2003
FORM 10-Q
INTUIT INC.INDEX
FORM 10-Q | ||||
INDEX | ||||
Page | ||||
Number | ||||
PART I | FINANCIAL INFORMATION | |||
ITEM 1: | Financial Statements | |||
Condensed Consolidated Balance Sheets as of July 31, | 3 | |||
Condensed Consolidated Statements of Operations for the three and | 4 | |||
Condensed Consolidated Statements of Cash Flows for the | 5 | |||
Notes to Condensed Consolidated Financial Statements | 6 | |||
ITEM 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
24 | ||||
ITEM 3: | Quantitative and Qualitative Disclosures about Market Risk | |||
Controls and Procedures | 43 | |||
PART II | OTHER INFORMATION | |||
ITEM 1: | Legal Proceedings | |||
ITEM 2: | Changes in Securities and Use of Proceeds | 45 | ||
ITEM 4: | Submission of Matters to a Vote of Security Holders | 46 | ||
ITEM 5: | Other Matters | |||
48 | ||||
ITEM 6: | Exhibits and Reports on Form 8-K | |||
Signatures | ||||
Certifications from Chief Executive Officer and Chief Financial Officer | 51 |
Intuit, the Intuit logo, QuickBooks, Quicken, TurboTax, ProSeries, Lacerte, QuickBase, FundWare and Track-it!, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Intuit Master Builder, MRI and Intuit Eclipse, among others, are trademarks and/or service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners and should be treated as such.
-2-
July 31, | April 30, | |||||||||||||||||||||||
2001 | 2002 | |||||||||||||||||||||||
July 31, | January 31, | |||||||||||||||||||||||
(In thousands; unaudited) | (In thousands; unaudited) | (In thousands; unaudited) | 2002 | 2003 | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 450,104 | $ | 454,791 | Cash and cash equivalents | $ | 414,748 | $ | 379,915 | |||||||||||||||
Short-term investments | 1,119,305 | 1,297,133 | Short-term investments | 815,342 | 718,437 | |||||||||||||||||||
Marketable securities | 85,307 | 48,469 | Marketable securities | 16,791 | 18,548 | |||||||||||||||||||
Customer deposits | 230,410 | 283,748 | Customer deposits | 300,409 | 259,958 | |||||||||||||||||||
Accounts receivable, net | 27,990 | 69,216 | Accounts receivable, net | 51,999 | 244,437 | |||||||||||||||||||
Mortgage loans | 123,241 | 279,506 | Deferred income taxes | 67,799 | 61,270 | |||||||||||||||||||
Deferred income taxes | 77,948 | 87,816 | Income taxes receivable | 2,187 | — | |||||||||||||||||||
Prepaid expenses and other current assets | 33,617 | 35,091 | Prepaid expenses and other current assets | 49,581 | 39,520 | |||||||||||||||||||
Amounts due from discontinued operations entities | 241,616 | 5,978 | ||||||||||||||||||||||
Total current assets | 2,147,922 | 2,555,770 | ||||||||||||||||||||||
Total current assets | 1,960,472 | 1,728,063 | ||||||||||||||||||||||
Property and equipment, net | Property and equipment, net | 185,969 | 181,442 | Property and equipment, net | 179,122 | 195,990 | ||||||||||||||||||
Goodwill and intangibles, net | 415,334 | 310,949 | ||||||||||||||||||||||
Goodwill, net | Goodwill, net | 428,948 | 583,907 | |||||||||||||||||||||
Purchased intangibles, net | Purchased intangibles, net | 125,474 | 124,289 | |||||||||||||||||||||
Long-term deferred income taxes | Long-term deferred income taxes | 145,905 | 146,020 | Long-term deferred income taxes | 176,553 | 172,835 | ||||||||||||||||||
Investments | 24,107 | 13,149 | ||||||||||||||||||||||
Loans to executive officers and other employees | Loans to executive officers and other employees | 21,270 | 19,968 | |||||||||||||||||||||
Other assets | Other assets | 42,499 | 16,168 | Other assets | 31,854 | 11,512 | ||||||||||||||||||
Net long-term assets of discontinued operations | Net long-term assets of discontinued operations | 4,312 | 4,066 | |||||||||||||||||||||
Total assets | Total assets | $ | 2,961,736 | $ | 3,223,498 | Total assets | $ | 2,928,005 | $ | 2,840,630 | ||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||||||||
Accounts payable | $ | 66,400 | $ | 77,310 | Accounts payable | $ | 71,069 | $ | 107,189 | |||||||||||||||
Payroll service obligations | 205,067 | 256,369 | Accrued compensation and related liabilities | 87,426 | 91,598 | |||||||||||||||||||
Escrow liabilities | 23,373 | 27,335 | Payroll service obligations | 300,381 | 259,958 | |||||||||||||||||||
Drafts payable | 63,518 | 67,005 | Deferred revenue | 147,120 | 170,500 | |||||||||||||||||||
Deferred revenue | 137,305 | 97,509 | Income taxes payable | — | 17,169 | |||||||||||||||||||
Income taxes payable | 82,661 | 104,293 | Short-term note payable | 2,277 | 2,717 | |||||||||||||||||||
Short-term note payable | 38,672 | 17,451 | Other current liabilities | 81,795 | 176,855 | |||||||||||||||||||
Other current liabilities | 170,966 | 255,001 | Net current liabilities of discontinued operations | 7,688 | 4,220 | |||||||||||||||||||
Total current liabilities | 787,962 | 902,273 | Total current liabilities | 697,756 | 830,206 | |||||||||||||||||||
Long-term obligations | Long-term obligations | 12,413 | 11,209 | Long-term obligations | 14,610 | 12,766 | ||||||||||||||||||
Minority interest | 35 | — | ||||||||||||||||||||||
Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||||||||
Stockholders’ equity: | Stockholders’ equity: | Stockholders’ equity: | ||||||||||||||||||||||
Preferred stock | — | — | Preferred stock | — | — | |||||||||||||||||||
Common stock and additional paid in capital | 1,725,490 | 1,753,768 | Common stock and additional paid-in capital | 1,846,707 | 1,877,296 | |||||||||||||||||||
Treasury stock, at cost | (8,497 | ) | (46,488 | ) | Treasury shares, at cost | (126,107 | ) | (393,007 | ) | |||||||||||||||
Deferred compensation | (21,720 | ) | (16,055 | ) | Deferred compensation | (12,628 | ) | (9,263 | ) | |||||||||||||||
Accumulated other comprehensive income, net | 28,180 | 8,996 | Accumulated other comprehensive income (loss) | (3,675 | ) | 3,603 | ||||||||||||||||||
Retained earnings | 437,873 | 609,795 | Retained earnings | 511,342 | 519,029 | |||||||||||||||||||
Total stockholders’ equity | 2,161,326 | 2,310,016 | Total stockholders’ equity | 2,215,639 | 1,997,658 | |||||||||||||||||||
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 2,961,736 | $ | 3,223,498 | Total liabilities and stockholders’ equity | $ | 2,928,005 | $ | 2,840,630 | ||||||||||||||
See accompanying notes.
-3-
Three Months Ended | Nine Months Ended | |||||||||||||||||
April 30, | April 30, | |||||||||||||||||
2001 | 2002 | 2001 | 2002 | |||||||||||||||
(In thousands, except per share data; unaudited) | ||||||||||||||||||
Net revenue: | ||||||||||||||||||
Products | $ | 244,709 | $ | 332,497 | $ | 736,784 | $ | 869,907 | ||||||||||
Services | 161,846 | 198,355 | 273,839 | 381,772 | ||||||||||||||
Other | 18,655 | 14,374 | 59,669 | 49,558 | ||||||||||||||
Total net revenue | 425,210 | 545,226 | 1,070,292 | 1,301,237 | ||||||||||||||
Costs and expenses: | ||||||||||||||||||
Cost of revenue: | ||||||||||||||||||
Cost of products | 29,345 | 35,070 | 118,755 | 141,314 | ||||||||||||||
Cost of services | 39,533 | 38,628 | 108,231 | 112,901 | ||||||||||||||
Cost of other revenue | 8,635 | 6,815 | 21,240 | 19,714 | ||||||||||||||
Amortization of purchased software | 4,375 | 1,565 | 11,220 | 10,442 | ||||||||||||||
Customer service and technical support | 37,538 | 45,807 | 116,068 | 137,899 | ||||||||||||||
Selling and marketing | 68,479 | 89,830 | 215,146 | 256,656 | ||||||||||||||
Research and development | 52,697 | 52,908 | 155,174 | 156,111 | ||||||||||||||
General and administrative | 23,917 | 29,339 | 77,614 | 90,055 | ||||||||||||||
Charge for purchased research and development | 238 | — | 238 | — | ||||||||||||||
Charge for vacant facilities | — | 13,237 | — | 13,237 | ||||||||||||||
Acquisition-related charges | 122,575 | 37,562 | 205,328 | 140,748 | ||||||||||||||
Loss on impairment of long-lived asset | — | — | — | 27,000 | ||||||||||||||
Total costs and expenses | 387,332 | 350,761 | 1,029,014 | 1,106,077 | ||||||||||||||
Income from operations | 37,878 | 194,465 | 41,278 | 195,160 | ||||||||||||||
Interest and other income and expense, net | 15,070 | 8,308 | 47,736 | 28,631 | ||||||||||||||
Gains (losses) on marketable securities and other investments, net | (11,504 | ) | 1,356 | (87,307 | ) | (9,266 | ) | |||||||||||
Gain on divestiture | — | 8,308 | 1,639 | 8,308 | ||||||||||||||
Income before income taxes, minority interest and cumulative effect of accounting change | 41,444 | 212,437 | 3,346 | 222,833 | ||||||||||||||
Income tax provision | 55,294 | 67,938 | 38,566 | 50,893 | ||||||||||||||
Minority interest | 451 | 18 | 598 | 18 | ||||||||||||||
Income (loss) before cumulative effect of accounting change | (14,301 | ) | 144,481 | (35,818 | ) | 171,922 | ||||||||||||
Cumulative effect of accounting change, net of income taxes of $9,543 | — | — | 14,314 | — | ||||||||||||||
Net income (loss) | $ | (14,301 | ) | $ | 144,481 | $ | (21,504 | ) | $ | 171,922 | ||||||||
Basic net income (loss) per share before cumulative effect of accounting change | $ | (0.07 | ) | $ | 0.68 | $ | (0.17 | ) | $ | 0.81 | ||||||||
Cumulative effect of accounting change | — | — | 0.07 | — | ||||||||||||||
Basic net income (loss) per share | $ | (0.07 | ) | $ | 0.68 | $ | (0.10 | ) | $ | 0.81 | ||||||||
Shares used in per share amounts | 208,715 | 211,614 | 207,345 | 211,724 | ||||||||||||||
Diluted net income (loss) per share before cumulative effect of accounting change | $ | (0.07 | ) | $ | 0.67 | $ | (0.17 | ) | $ | 0.79 | ||||||||
Cumulative effect of accounting change | — | — | 0.07 | — | ||||||||||||||
Diluted net income (loss) per share | $ | (0.07 | ) | $ | 0.67 | $ | (0.10 | ) | $ | 0.79 | ||||||||
Shares used in per share amounts | 208,715 | 217,173 | 207,345 | 217,667 | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||||
January 31, | January 31, | ||||||||||||||||||
(In thousands, except per share data; unaudited) | 2002 | 2003 | 2002 | 2003 | |||||||||||||||
Net revenue: | |||||||||||||||||||
Products | $ | 413,096 | $ | 465,130 | $ | 524,169 | $ | 607,033 | |||||||||||
Services | 45,029 | 75,348 | 76,950 | 130,952 | |||||||||||||||
Other | 17,783 | 17,598 | 33,107 | 32,963 | |||||||||||||||
Total net revenue | 475,908 | 558,076 | 634,226 | 770,948 | |||||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue: | |||||||||||||||||||
Cost of products | 71,636 | 71,062 | 102,277 | 99,774 | |||||||||||||||
Cost of services | 28,454 | 39,557 | 52,658 | 76,169 | |||||||||||||||
Cost of other revenue | 6,160 | 5,164 | 11,320 | 9,754 | |||||||||||||||
Amortization of purchased software | 7,171 | 3,518 | 8,877 | 6,495 | |||||||||||||||
Customer service and technical support | 50,289 | 55,591 | 85,985 | 95,221 | |||||||||||||||
Selling and marketing | 74,720 | 97,796 | 131,012 | 172,617 | |||||||||||||||
Research and development | 51,402 | 66,080 | 98,822 | 130,207 | |||||||||||||||
General and administrative | 28,761 | 38,405 | 54,987 | 78,021 | |||||||||||||||
Charge for purchased research and development | — | 1,070 | — | 8,859 | |||||||||||||||
Acquisition-related charges | 62,008 | 9,154 | 102,999 | 18,609 | |||||||||||||||
Loss on impairment of long-lived asset | — | — | 27,000 | — | |||||||||||||||
Total costs and expenses | 380,601 | 387,397 | 675,937 | 695,726 | |||||||||||||||
Income (loss) from continuing operations | 95,307 | 170,679 | (41,711 | ) | 75,222 | ||||||||||||||
Interest and other income | 7,635 | 7,770 | 17,463 | 16,556 | |||||||||||||||
Gains (losses) on marketable securities and other investments, net | 1,632 | 2,827 | (10,622 | ) | 3,080 | ||||||||||||||
Income (loss) from continuing operations before income taxes | 104,574 | 181,276 | (34,870 | ) | 94,858 | ||||||||||||||
Income tax provision (benefit) | 4,678 | 55,905 | (31,460 | ) | 29,936 | ||||||||||||||
Net income from continuing operations | 99,896 | 125,371 | (3,410 | ) | 64,922 | ||||||||||||||
Discontinued operations, net of income taxes (Note 6): | |||||||||||||||||||
Net income from Quicken Loans discontinued operations | 16,740 | — | 26,469 | — | |||||||||||||||
Gain on disposal of Quicken Loans discontinued operations | — | — | — | 5,556 | |||||||||||||||
Net income from Intuit KK discontinued operations | 3,232 | 3,059 | 4,382 | 3,267 | |||||||||||||||
Net income from discontinued operations | 19,972 | 3,059 | 30,851 | 8,823 | |||||||||||||||
Net income | $ | 119,868 | $ | 128,430 | $ | 27,441 | $ | 73,745 | |||||||||||
Basic net income per share from continuing operations | $ | 0.47 | $ | 0.61 | $ | (0.02 | ) | $ | 0.32 | ||||||||||
Basic net income per share from discontinued operations | 0.09 | 0.01 | 0.15 | 0.04 | |||||||||||||||
Basic net income per share | $ | 0.56 | $ | 0.62 | $ | 0.13 | $ | 0.36 | |||||||||||
Shares used in basic per share amounts | 212,520 | 205,682 | 211,780 | 206,823 | |||||||||||||||
Diluted net income per share from continuing operations | $ | 0.46 | $ | 0.59 | $ | (0.01 | ) | $ | 0.31 | ||||||||||
Diluted net income per share from discontinued operations | 0.09 | 0.01 | 0.14 | 0.04 | |||||||||||||||
Diluted net income per share | $ | 0.55 | $ | 0.60 | $ | 0.13 | $ | 0.35 | |||||||||||
Shares used in diluted net income per share amounts | 219,355 | 212,455 | 217,914 | 213,445 | |||||||||||||||
See accompanying notes.
-4-
Nine Months Ended | |||||||||||||||||||||||
April 30, | |||||||||||||||||||||||
2001 | 2002 | Six Months Ended | |||||||||||||||||||||
January 31, | |||||||||||||||||||||||
(In thousands; unaudited) | (In thousands; unaudited) | (In thousands; unaudited) | 2002 | 2003 | |||||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | |||||||||||||||||||||
Net income (loss) from continuing operations | $ | (3,410 | ) | $ | 64,922 | ||||||||||||||||||
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities: | |||||||||||||||||||||||
Net income (loss) | $ | (21,504 | ) | $ | 171,922 | Acquisition-related charges | 102,999 | 18,609 | |||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | Amortization of purchased software | 8,877 | 6,495 | ||||||||||||||||||||
Amortization of goodwill, purchased intangibles and deferred compensation | 213,144 | 153,318 | Amortization of deferred compensation | 1,379 | 1,267 | ||||||||||||||||||
Depreciation | 45,208 | 50,580 | Charge for purchased research and development | — | 8,859 | ||||||||||||||||||
Net loss from marketable securities and other investments | 87,307 | 9,266 | Depreciation | 29,593 | 36,119 | ||||||||||||||||||
Charge for purchased research and development | 238 | — | Net (gains) losses from marketable securities and other investments | 10,622 | (3,080 | ) | |||||||||||||||||
Charge for vacant facilities | — | 13,237 | Loss on impairment of long-lived asset | 27,000 | — | ||||||||||||||||||
Loss on impairment of long-lived asset | — | 27,000 | Loss on disposal of property and equipment | 1,678 | 2,321 | ||||||||||||||||||
Loss on disposal of property and equipment | — | 1,915 | Deferred income tax benefit | 200 | 2,633 | ||||||||||||||||||
Cumulative effect of accounting change | (23,857 | ) | — | Tax benefit from employee stock options | 23,697 | 30,379 | |||||||||||||||||
Minority interest | 598 | 18 | |||||||||||||||||||||
Deferred income tax expense | 1,755 | 43 | Subtotal | 202,635 | 168,524 | ||||||||||||||||||
Gain on divestiture | (1,639 | ) | (8,308 | ) | |||||||||||||||||||
Tax benefit from employee stock options | 48,038 | 30,639 | Changes in operating assets and liabilities: | ||||||||||||||||||||
Changes in operating assets and liabilities: | Customer deposits | (12,470 | ) | 40,451 | |||||||||||||||||||
Customer deposits | (40,266 | ) | (53,338 | ) | Accounts receivable | (229,891 | ) | (187,982 | ) | ||||||||||||||
Accounts receivable | (35,445 | ) | (40,928 | ) | Income taxes receivable | — | 2,187 | ||||||||||||||||
Mortgage loans | (85,634 | ) | (156,265 | ) | Prepaid expenses and other current assets | 3,235 | 10,745 | ||||||||||||||||
Prepaid expenses and other current assets | (10,071 | ) | 4,598 | Accounts payable | 30,510 | 35,557 | |||||||||||||||||
Accounts payable | (14,711 | ) | 10,581 | Accrued compensation and related liabilities | 1,255 | 4,172 | |||||||||||||||||
Payroll service obligations | 20,702 | 51,302 | Payroll service obligations | 12,657 | (40,423 | ) | |||||||||||||||||
Escrow liabilities | 18,879 | 3,962 | Deferred revenue | 21,350 | 16,686 | ||||||||||||||||||
Drafts payable | 52,965 | 3,487 | Income taxes payable | (40,705 | ) | 23,096 | |||||||||||||||||
Deferred revenue | (25,204 | ) | (41,024 | ) | Other current liabilities | 88,497 | 93,591 | ||||||||||||||||
Income taxes payable | (44,369 | ) | 21,632 | ||||||||||||||||||||
Other accrued liabilities | 40,932 | 83,154 | Total changes in operating assets and liabilities | (125,562 | ) | (1,920 | ) | ||||||||||||||||
Net cash provided by operating activities | 227,066 | 336,791 | Net cash provided by operating activities | 77,073 | 166,604 | ||||||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | |||||||||||||||||||||
Change in other assets | 7,738 | (575 | ) | Change in other assets | 1,616 | (2,324 | ) | ||||||||||||||||
Purchases of property and equipment | (58,011 | ) | (48,219 | ) | Purchases of property and equipment | (26,369 | ) | (54,970 | ) | ||||||||||||||
Proceeds from the sale of marketable securities | 25,238 | 7,122 | Proceeds from the sale of marketable securities | 5,094 | 16,371 | ||||||||||||||||||
Purchases of short-term investments | (2,581,316 | ) | (2,085,073 | ) | Purchases of short-term investments | (844,471 | ) | (653,284 | ) | ||||||||||||||
Liquidation and maturity of short-term investments | 2,501,607 | 1,905,812 | Liquidation and maturity of short-term investments | 960,169 | 748,743 | ||||||||||||||||||
Acquisitions of businesses, net of cash acquired | (164,059 | ) | (7,532 | ) | Acquisitions of businesses, net of cash acquired | (7,532 | ) | (185,227 | ) | ||||||||||||||
Purchases of long-term investments | (3,694 | ) | — | ||||||||||||||||||||
Net cash provided by (used in) investing activities | 88,507 | (130,691 | ) | ||||||||||||||||||||
Net cash used in investing activities | (272,497 | ) | (228,465 | ) | |||||||||||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | |||||||||||||||||||||
Principal payments on long-term debt and notes payable | (2,610 | ) | (27,484 | ) | Change in notes payable | (330 | ) | (1,404 | ) | ||||||||||||||
Net proceeds under warehouse line of credit | 1,125 | — | Net proceeds from issuance of common stock | 57,612 | 90,593 | ||||||||||||||||||
Net proceeds from issuance of common stock | 65,086 | 72,586 | Purchase of treasury stock | (74,268 | ) | (423,210 | ) | ||||||||||||||||
Purchase of treasury stock | — | (149,265 | ) | ||||||||||||||||||||
Net cash used in financing activities | (16,986 | ) | (334,021 | ) | |||||||||||||||||||
Net cash provided by (used in) financing activities | 63,601 | (104,163 | ) | ||||||||||||||||||||
Net cash provided by (used in) discontinued operations | Net cash provided by (used in) discontinued operations | (95,923 | ) | 264,539 | |||||||||||||||||||
Effect of foreign currency translation | Effect of foreign currency translation | 1,519 | (1,264 | ) | |||||||||||||||||||
Effect of foreign currency translation | 2,481 | 524 | |||||||||||||||||||||
Net increase in cash and cash equivalents | 20,651 | 4,687 | |||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 54,190 | (34,833 | ) | |||||||||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 416,953 | 450,104 | Cash and cash equivalents at beginning of period | 66,910 | 414,748 | |||||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 437,604 | $ | 454,791 | Cash and cash equivalents at end of period | $ | 121,100 | $ | 379,915 | |||||||||||||
See accompanying notes.
-5-
1. Summary of Significant Accounting Policies
Basis of Presentation
Intuit Inc. (“Intuit”) has prepared the accompanying unaudited condensedThe consolidated financial statements in accordance with generally accepted accounting principles for interim financial statements. The financial statements include the financial statements of Intuit and its wholly-owned subsidiaries. AllWe have eliminated all intercompany balances and transactions have been eliminated in consolidation. CertainWe have reclassified certain other previously reported amounts have been reclassified to conform to the current presentation format.presentation. As discussed in Note 6 , the Quicken Loans mortgage business, which we sold on July 31, 2002, has been accounted for as discontinued operations in accordance with Accounting Principles Board (“APB”) Opinion No. 30. Also as discussed in Note 6, Intuit KK, our Japanese subsidiary, became a long-lived asset held for sale during the second quarter of fiscal 2003 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144. Accordingly, we have reclassified our financial statements for all periods presented to reflect Quicken Loans and Intuit KK as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.
We have included all normal recurring adjustments consideredand the non-recurring adjustments described in Note 6 that we consider necessary to give a fair presentation of our operating results for the periods shown.presented. Results for the three and ninesix months ended April 30, 2002January 31, 2003 do not necessarily indicate the results to be expectedwe expect for the fiscal year ending July 31, 20022003 or any other future period. These consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements for the fiscal year ended July 31, 20012002 included in Intuit’s Form 10-K, filed with the Securities and Exchange Commission on October 5, 2001.September 25, 2002. This Form 10-K reflected Quicken Loans as discontinued operations. We expect to file financial statements reclassified to reflect Intuit KK as a discontinued operation on Form 8-K.
Use of Estimates
To comply with generally accepted accounting principles, weWe make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. Estimates are usedFor example, we use estimates for reserves for product returns and exchanges, reserves for rebates, and to determine the collectibility of accounts receivable and the value of deferred taxes and other amounts.tax assets. We also use estimates to determine the remaining economic lives and carrying valuevalues of goodwill, purchased intangibles, fixed assetsproperty and equipment and other long-lived assets. We also use assumptions when employing the Black-Scholes valuation model to estimate the fair value of stock options granted for pro forma disclosures. See Note 11. Despite our intention to establish accurate estimates and assumptions, actual results may differ from our estimates.
Net Revenue
For our shrink-wrappedWe derive revenues from the sale of packaged software products and supplies, product support, professional services, outsourced payroll services and multiple element arrangements that may include any combination of these items. We recognize revenue for software products and related services in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as modified by SOP 98-9. For other offerings, we follow Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” We recognize revenue when we ship products (which is when title passes) — either to retailers or directly to end user customers. We recognize revenue only if payment is probable andpersuasive evidence of an arrangement exists, we have no significant remaining obligations todelivered the customer. We recognize revenue net of returns reserves based on historical returns experience. product or performed the service, the fee is fixed or determinable and collectibility is probable.
In some situations, we receive advance payments from our customers. RevenueWe defer revenue associated with these advance payments is deferred until we ship the products are shipped or services are provided. We also reduceperform the services.
In accordance with the Financial Accounting Standards Board’s (“FASB’s”) Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” we generally account for cash consideration (such as sales incentives) that we give to our customers or resellers as a reduction of revenue by the estimated cost of rebates when products are shipped.rather than as an operating expense.
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Product Revenue
We recognize revenue from the sale of our packaged software products and supplies when we ship the product (which is when title passes) either to retailers and distributors or directly to end-user customers. We sell some of our QuickBooks and consumer tax products on consignment to a limited number of resellers. We recognize revenue for these consignment transactions only when the end-user sale has occurred.
We reduce product revenue from distributors and retailers for estimated returns that are based on historical returns experience and other factors such as the volume and price mix of products in the retail channel, trends in retailer inventory and economic trends that might impact customer demand for our products. We also reduce product revenue for the estimated redemption of rebates on certain current product sales. Our estimated reserves for distributor and retailer sales incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. End user rebate reserves are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received, historical redemption trends by product and by type of promotional program and the economic value of the rebate.
Service Revenue
We recognize revenue from outsourced payroll processing and payroll tax filing services as the services are performed, provided we have no other remaining obligations.obligations to these customers. We generally require customers to remit payroll and payroll tax liability funds to us in advance of the applicable payroll due date via electronic funds transfer. We include in total net revenue the interest earned on invested balances resulting from timing differences between the collection of these funds from customers and the remittance of suchthe funds to outside parties because this interest income represents an integral part of the revenue generated from our services. We recognize this interest as it is earned.
We defer loan origination revenue and the associated commissions and processing costs on loans held for sale until the related loan is sold.offer several technical support plans. 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 interest income on mortgage loans held for sale in loan revenue as it is earned, and we recognize interest expenses on related borrowings as cost of revenue as we incur them.
Interest income generated from our general cash and cash equivalents balance is included in other income because this interest income does not result from our operating activities.
We also offer several plans under which customers are charged for technical support assistance. For plans where we collect fees in advance, we recognize revenue over the life of the plan, which is generally one year. We include costs incurred for fee-for-supportthese support plans in cost of revenue.
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Service revenue also includes revenue from training, consulting and implementation services. We recognize revenue as these services are performed, provided we have no other remaining obligations to these customers.
Other Revenue
Other revenue consists primarily of fees from other products and services when it is earned based on the nature of the particular product or service. For products and services that we provide over a period of time, weonline advertising agreements. We typically recognize revenue pro rata based on the contractual time period. However,
Multiple Element Arrangements
We also enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence (“VSOE”) of fair value. VSOE is generally the price charged when that element is sold separately.
In situations where VSOE exists for all elements (delivered and undelivered), we provide or deliverallocate the product or service at a specific point in time,total revenue to be earned under the arrangement among the various elements, based on their relative fair value. For transactions where VSOE exists only for the undelivered elements, we allocate and defer revenue based on VSOE of fair value of the undelivered elements, and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. If VSOE does not exist for undelivered items that are services, then we recognize the entire arrangement fee ratably over the remaining service period. If VSOE does not exist for undelivered elements that are specified products or features, we defer revenue until the earlier of the delivery of all elements or the point at which we determine VSOE for these undelivered elements.
We recognize revenue related to the delivered products or services only if: (1) the above revenue recognition criteria are met; (2) any undelivered products or services are not essential to the functionality of the delivered products and services; (3) payment for the delivered products or services is not contingent upon delivery of the productremaining products or completionservices; (4) we have an enforceable claim to receive the amount due in the event that we do not deliver the undelivered products or services; and (5) as discussed above, there is evidence of the service.fair value for each of the undelivered products or services.
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Shipping and Handling Costs
Costs incurred withWe record the amounts we charge our customers for the shipping and handling of our shrink-wrapped software products are recordedas product revenue and we record the related costs as cost of products in our resultsstatement of operations.
Customer Deposits and Payroll Service and Technical SupportObligations
Customer service and technical support costs include the costs associated with performing order processing, answering customer inquiries by telephone and through Web sites and other electronic means and providing free technical support assistance to customers. In connection with the sale of certain products, we provide a limited amount of free technical support assistance to customers. We do not defer the recognition of any revenue associated with sales of these products, since the cost of providing this free technical support and related customer service is insignificant. The technical support is provided within one year after the associated revenue is recognized and free product enhancements are minimal and infrequent. We accrue the estimated cost of providing this free support upon product shipment.
Cash and Cash Equivalents and Short-Term Investments
We consider highly liquid investments with maturities of three months or less at the date of purchase to bedeposits represent cash equivalents. Short-term investments consist of available-for-sale debt securities that are carried at 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 natureheld on behalf of our businesses. Becausepayroll customers. Payroll service obligations consist primarily of payroll taxes we owe on behalf of our significant business seasonality, cash flow requirements may fluctuate dramatically from quarter to quarter and require us to use a significant amount of the short-term investments held as available-for-sale securities. See Note 2 for more information about cash and cash equivalents and short-term investments.
Marketable Securities and Other Investments
Our available-for-sale marketable securities are carried at fair value and we include unrealized gains and losses, net of tax, in stockholders’ equity. We use the specific identification method to account for gains and losses on marketable equity securities. Our other long-term investments are stated at cost. See Note 3 for more information about our marketable securities and other investments.payroll customers.
Goodwill, Purchased Intangible Assets and Other Long-lived Assets
We record goodwill when the purchase price of net tangible and intangible assets we acquire exceeds their fair value. We amortizeIn previous fiscal years, including fiscal 2002, we generally amortized goodwill on a straight-line basis over periods ranging from 3three to 5five years. However, in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” we did not amortize goodwill for acquisitions completed after June 30, 2001, and effective August 1, 2002 we no longer amortize goodwill for acquisitions completed before July 1, 2001. See “Recent Pronouncements”below for more information. We generally amortize the cost of identified intangiblesintangible assets on a straight-line basis over periods ranging from 1one to 1510 years.
We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. The reviewsWe look for facts or circumstances, either internal or external, indicating that indicate thatwe may not recover the carrying value of the asset may not be recovered.
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asset. We measure impairment loss related to long-lived assets based on the amount by which the carrying amountamounts of such assets exceedsexceed their fair values. Our measurement of fair value is generally based on an analysis of the present value of estimated future discounted cash flows,flows. Our analysis is based on available information and reasonable and supportable assumptions and projections. The discounted cash flow analysis considers the likelihood of possible outcomes and is based on our best estimate of projected future cash flows. If necessary, we perform subsequent calculations 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
Stock-Based Incentive Program
We provide equity incentives to our employees (including those we hire as a result of acquisitions) and to our independent Board members through a carefully managed stock incentive program. We maintain four stock option plans and an Employee Stock Purchase Plan for different groups of eligible participants, and we also have outstanding stock options that we assumed in connection with certain acquisitions. We apply the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock-based incentives. Accordingly, we are not required to record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market valuesvalue of the stock when the option is granted. We are also not required to record compensation expense in connection with the Employee Stock Purchase Plan as long as the purchase price of the stock is not less than 85% of the lower of the fair market value at the beginning of each three-month, six-month or 12-month offering period or at the end of each applicable three-month purchase period. See Note 11 for an illustration of the assets were not available,effect on net income (loss) and net income (loss) per share if we would calculatehad applied the fair value using the present valuerecognition provisions of estimated expected future discounted cash flows. The cash flow calculations, including the discount rate, would be based on management’s best estimates, using appropriate assumptions and projections at the time. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting StandardsSFAS No. 142 (SFAS 142),123, “Goodwill and Other Intangible Assets.” In October 2001, the FASB issued SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.Stock-Based Compensation,”We intend to implement both SFAS 142 and SFAS 144 beginning in the first quarter of fiscal 2003. See“Recent Pronouncements”below for more information.stock-based incentives.
Concentration of Credit Risk and Significant Customers and Suppliers
We operate in markets that are highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, the emergence of competitive products or services with new capabilities and other factors could negatively impact our operating results.
We are also subject to risks related to changes in the values of our marketable securities and private equity investments. See Note 3 for a discussionsignificant balance of short-term investments as well as risks associated with these assets.related to the collectibility of our trade accounts receivable. Our remaining investment portfolio is diversified andof short-term investments consists primarily of short-term investment-grade securities.securities that we diversify by limiting our holdings with any individual issuer in a managed portfolio to a maximum of $5 million.
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We sell a significant portion of our products through third-party distributorsretailers and retailers.distributors. As a result, we face risks related to the collectibility of our trade accounts receivable. Due to changes in our distribution relationships during fiscal 2002, we are selling an increasing proportion of products directly to retailers, rather than through distributors. At April 30, 2002, our two largest distributors collectively accounted for about 9% of our accounts receivable balance. By comparison, at April 30, 2001, we had one distributor that accounted for approximately 25% of our accounts receivable balance. At April 30, 2002, two of our major retail customers collectively accounted for approximately 20% of our accounts receivable balance whereas our top two retailers at April 30, 2001 accounted for slightly less than 10% of our accounts receivable balance. To appropriately manage this risk, we perform ongoing evaluations of customer credit. Generally,credit and limit the amount of credit extended as we deem appropriate but generally do not require collateral. We maintain reserves for estimated credit losses and these losses have historically been within our expectations. However, since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.
In the normal courseDue to changes in our distribution arrangements during fiscal 2002, we are selling an increasing proportion of our software products directly to a variety of retailers rather than through a few major distributors. No distributor or individual retailer accounted for 10% or more of total net revenue in the second quarter or first six months of fiscal 2002 or 2003, nor did any customer account for 10% or more of accounts receivable at July 31, 2002 or January 31, 2003.
In connection with the sale of our Quicken Loans mortgage business in July 2002, we enter into loan commitmentsagreed to extendcontinue providing to the purchasing company a line of credit in orderof up to meet$375.0 million to fund mortgage loans for a transition period of up to six months. The line was secured by 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.
Loan commitments subject us to market risks and credit risks. Market risk is the risk that interest rates may rise after a loan commitment is made. To offset this risk on conventionalrelated mortgage loans and government-insured loans that arehad an outstanding balance of $245.6 million at July 31, 2002 and $180.1 million at October 31, 2002. The line was repaid in process, we utilize mandatory forward sale commitments. At April 30, 2002, we had $200.9 million in mandatory forward sale commitments for future deliveryJanuary 2003. As part of mortgages to Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Loan commitments also involve credit risk relating to the customer. We use the same credit policies for making credit commitments as we doconsideration for the underlying loan product.sale of the business, we also held a five-year promissory note in the principal amount of $23.3 million from the purchasing company. The note was repaid in October 2002. See Note 56.
We rely on three third party vendors to perform substantially all outsourced aspects of manufacturing and distribution for more informationour primary retail desktop software products. We also have a key single-source vendor for our financial supplies business that prints and fulfills orders for all of our checks and most other products for our financial supplies business. While we believe that relying heavily on loan commitments.key vendors improves the efficiency and reliability of our business operations, relying on any one vendor for a significant aspect of our business can have a significant negative impact on our revenue and profitability if that vendor fails to perform at acceptable service levels.
Recent Pronouncements
On June 29, 2001, the FASB issued SFAS 141, “Business Combinations,” and SFAS 142, “Goodwill and Other Intangible Assets.”
SFAS 141 supersedes APB Opinion No. 16, “Business Combinations,” and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring that all business combinations be accounted for using the purchase method. The requirements of SFAS 141 apply to all business combinations initiated after June 30, 2001.
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SFAS 142 supercedes APB Opinion No. 17, “Intangible Assets,” and provides that goodwill and other intangible assets that have an indefinite useful life will no longer be amortized. However, these assets must be reviewed for impairment at least annually or more frequently if an event occurs indicating the potential for impairment. SFAS 142The shift from an amortization approach to an impairment approach applies to all business combinationsacquisitions completed after June 30, 2001. For business combinations completed before July 1, 2001, we will adopt SFAS 142 effective August 1, 2002. We are currently evaluatingadopted the impactremaining elements of SFAS 142 on our financial position and statement of operations. We expect the adoption of SFAS 142 to reduce our ongoing quarterly amortization of goodwill expense significantly, commencing withthis new standard in the first quarter of fiscal 2003.2003 and therefore ceased amortizing goodwill for acquisitions made prior to July 1, 2001. However, it is possible that in the future we wouldmay incur less frequent, but larger, impairment charges related to the goodwill already recorded as well asand to goodwill arising out of future acquisitions asacquisitions. In addition, we will continue to expandamortize our business.purchased intangible assets and to assess those assets for impairment as appropriate.
As of the date of adoption of SFAS 142 on August 1, 2002, we had an unamortized acquired intangible assets balance of $123.6 million and an unamortized goodwill balance of $430.8 million. These balances reflect the transfer of $1.9 million in assembled workforce from intangible assets to goodwill in accordance with SFAS 142. In connection with the transitional goodwill impairment evaluation provisions under SFAS 142, we completed a goodwill impairment review as of August 1, 2002 and found no impairment.
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A reconciliation of previously reported net income and net income per share to amounts that would have been reported if the non-amortization provisions of SFAS 142 had been in effect from the beginning of fiscal 2002 is as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
(In thousands, except per share amounts) | 2002 | 2003 | 2002 | 2003 | |||||||||||||
Net income | |||||||||||||||||
Net income, as reported | $ | 119,868 | $ | 128,430 | $ | 27,441 | $ | 73,745 | |||||||||
Goodwill and assembled workforce amortization, net of income taxes | 21,410 | — | 43,581 | — | |||||||||||||
Pro forma net income | $ | 141,278 | $ | 128,430 | $ | 71,022 | $ | 73,745 | |||||||||
Net income per share | |||||||||||||||||
Basic – as reported | $ | 0.56 | $ | 0.62 | $ | 0.13 | $ | 0.36 | |||||||||
Basic – pro forma | 0.66 | 0.62 | 0.34 | 0.36 | |||||||||||||
Diluted – as reported | 0.55 | 0.60 | 0.13 | 0.35 | |||||||||||||
Diluted – pro forma | 0.64 | 0.60 | 0.33 | 0.35 |
In October 2001,July 2002, the FASB issued SFAS 144,146,“Accounting for Costs Associated with Exit and Disposal Activities.”This statement revises the Impairmentaccounting for activities relating to exiting or Disposaldisposing of Long-Lived Assets,businesses or assets under EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”which appliesA formal commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most exit and disposal costs. Instead, companies will record exit or disposal costs when they are incurred and can be measured at fair value, and will subsequently adjust the recorded liability for changes in estimated cash flows. The provisions of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS 146, and liabilities that were recorded under EITF Issue No. 94-3 are not affected. We adopted SFAS 146 effective December 31, 2002 and there was no impact on our financial position, results of operations or cash flows.
On December 31, 2002, the FASB issued SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”This statement amends SFAS 123, “Accounting for Stock-Based Compensation,”to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting and records compensation expense for all stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, “Interim Financial Reporting,”to require disclosure about those effects in interim financial statements. The amendment of the transition and annual disclosure requirements of SFAS 123 are effective for fiscal years ending after December 15, 2002. The amendment of the disclosure requirements of APB Opinion No. 28 is effective for financial reports containing condensed consolidated financial statements for interim periods beginning after December 15, 2001.2002. Since we have not elected to change to the fair value based method of accounting and therefore do not record compensation expense for most stock-based employee compensation, the transition provisions of SFAS 144 supersedes148 had no impact on our financial position, results of operations or cash flows. We adopted the disclosure provisions of this statement in the first quarter of fiscal 2003. See Note 11.
In November 2002, the FASB Statement 121,issued Financial Interpretation No. (“FIN”) 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,”and portions of APB Opinion 30,“Reporting the Results of Operations.”SFAS 144 provides a single accounting model for long-lived assets we expect to dispose of and significantly changes the criteria for classifying an asset as held-for-sale. This classification is important because held-for-sale assets are not depreciated and are stated at the lower of fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of this interpretation apply on a prospective basis to guarantees issued or carrying amount. SFAS 144 alsomodified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods
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ending after December 15, 2002. We are currently evaluating the potential impact of FIN 45. If FIN 45 is applicable to us, our prospective revenue, cost of revenue and operating expenses could be negatively affected.
In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.”FIN 46 requires expected future operating lossesus to consolidate a variable interest entity if we are subject to a majority of the risk of loss from discontinued operationsthe variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be displayedessentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the period(s) in whichfirst fiscal year or interim period beginning after June 15, 2003. Some of the losses are actually incurred, rather thandisclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the amount of the loss is estimated, as presently required.variable interest entity was established. We will adopt SFAS 144 effective August 1, 2002do not currently have any variable interest entities and, accordingly, we do not expect theour adoption of SFAS 144FIN 46 to have a material impact on our consolidated financial statements.position, results of operations or cash flows.
In November 2001, the Emerging Issues Task Force (“EITF”) released Issue No. 01-09,“Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” which applies to annual or interim financial statement periods beginning after December 15, 2001. The release provides that cash consideration (including sales incentives) that we give to our customers or resellers should be accounted for as a reduction of revenue unless we receive a benefit that is identifiable and that can be reasonably estimated. We adopted this new release prospectively to transactions beginning in the quarter ended April 30, 2002. The adoption of EITF Issue No. 01-09 did not have a material impact on our total net revenue.
Foreign Currency
The functional currency of all our foreign subsidiaries is the local currency. Assets and liabilities of our foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at average rates of exchange in effect during the reporting period. We report translation gains and losses as a separate component of stockholders’ equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statement of operations and were immaterial in all periods presented.
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2. Cash and Cash Equivalents and Short-Term Investments
The following schedule summarizes the estimated fair value of our short-term investments as of the dates indicated:
The following table summarizes the estimated fair value of our |
July 31, | April 30, | ||||||||
2001 | 2002 | ||||||||
(In thousands) | |||||||||
Cash and cash equivalents: | |||||||||
Cash | $ | 33,427 | $ | 34,227 | |||||
Certificate of deposits | 5,600 | 5,446 | |||||||
Money market funds | 406,077 | 415,118 | |||||||
Municipal bonds | 5,000 | — | |||||||
$ | 450,104 | $ | 454,791 | ||||||
Short-term investments: | |||||||||
Corporate notes | $ | 63,723 | $ | 61,563 | |||||
Municipal bonds | 1,030,442 | 1,215,312 | |||||||
U.S. government securities | 25,140 | 20,258 | |||||||
$ | 1,119,305 | $ | 1,297,133 | ||||||
The following table outlines the estimated fair value of Intuit’s available-for-sale debt securities held in short-term investments classified by the stated maturity date of the security:
July 31, | April 30, | |||||||||||||||
2001 | 2002 | |||||||||||||||
July 31, | January 31, | |||||||||||||||
(In thousands) | 2002 | 2003 | ||||||||||||||
Due within one year | $ | 215,205 | $ | 249,669 | $ | 230,716 | $ | 160,761 | ||||||||
Due within two years | 221,620 | 216,691 | 141,942 | 103,523 | ||||||||||||
Due within three years | — | 4,000 | — | — | ||||||||||||
Due after three years | 682,480 | 826,773 | 442,684 | 454,153 | ||||||||||||
$ | 1,119,305 | $ | 1,297,133 | $ | 815,342 | $ | 718,437 | |||||||||
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3. Marketable Securities and Other Investments
We held the following available-for-sale securities at July 31, 2001 and April 30, 2002. The cost basis reflects adjustments for other-than-temporary impairments in value as well as sales of securities:
Gross Unrealized | ||||||||||||||||
Cost | Estimated | |||||||||||||||
Basis | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
July 31, 2001 | ||||||||||||||||
Checkfree Corporation common stock | $ | 35,621 | $ | 37,215 | $ | — | $ | 72,836 | ||||||||
S1 Corporation common stock | 7,741 | 2,714 | — | 10,455 | ||||||||||||
$ | 43,362 | $ | 39,929 | $ | — | $ | 83,291 | |||||||||
April 30, 2002 | ||||||||||||||||
Checkfree Corporation common stock | $ | 31,934 | $ | 12,146 | $ | — | $ | 44,080 | ||||||||
S1 Corporation common stock | 4,924 | — | (535 | ) | 4,389 | |||||||||||
$ | 36,858 | $ | 12,146 | $ | (535 | ) | $ | 48,469 | ||||||||
We also held investments in At Home Corporation (which did business as Excite@Home) and 724 Solutions as of July 31, 2001. We designated those investments as trading securities and fluctuations in the market value of these shares were reported in the consolidated statement of operations. We sold all of the shares of these securities during the first quarter of fiscal 2002.
Our remaining marketable securities, which are quoted on the Nasdaq Stock Market, are stocks of high technology companies whose market prices have been extremely volatile and have declined substantially during the past two years. These declines have resulted, and could continue to result, in a material reduction in the carrying value of these assets. This has a negative impact on our operating results. If these securities experience further declines in fair value that are considered other-than-temporary, we will reflect the additional loss in our consolidated statement of operations in the period when the subsequent impairment becomes apparent.
The fair values of our long-term investments (consisting primarily of equity investments in privately held companies) have also declined substantially since our initial investments due to the volatility and economic downturn in the high technology industry.
During the nine months ended April 30, 2002, we sold 280,000 shares of Security First Technologies, now known as S1 Corporation (“S1”), and 250,000 shares of Checkfree Corporation and recognized realized gains of $1.9 million and $1.4 million, respectively. These gains were offset by a realized loss of $1.9 million recorded in connection with the sale of our options to purchase additional shares of S1. In addition, we sold 37,906 shares of 724 Solutions and 1,533,504 shares of Excite@Home and recognized aggregate losses of $1.6 million during the nine months ended April 30, 2002. For our long-term investments, we recorded losses of $3.3 million for other-than-temporary declines in value on our investments recorded at cost and $5.7 million to reflect declines in the market price of our S1 options. This resulted in combined net losses on marketable securities and other investments of $9.3 million for the nine months ended April 30, 2002.
During fiscal 2001, we adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires us to recognize all derivatives as either assets or liabilities on the balance sheet and record those instruments at fair value. In May 1999, we completed a $50 million investment (970,813 shares) in S1. In connection with this agreement, we received options to purchase 4.8 million additional shares of S1 common stock, at a per-share purchase price of $51.50. These options contained a net-exercise feature. In August 2000, we recorded the cumulative effect of the change in accounting for derivatives for our 4.8 million S1 options held in long-term investments. This resulted in a one-time cumulative effect of $14.3 million, net of income taxes totaling $9.5 million, in the first quarter of fiscal 2001. SFAS 133 requires the derivatives to be carried at fair value, so subsequent fluctuations in the fair value of these options were included in our net income (loss) until we sold them. For the three and nine months ended April 30, 2001 these fluctuations resulted in losses of $3.4 million and $13.4 million net of income taxes, which increased the basic and diluted net loss per share for the periods by $0.02 and $0.06 per share. During the first quarter of fiscal 2002, we sold these options and recorded a realized loss of $1.9 million.
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4.3. Goodwill and Intangible Assets
Goodwill and purchasedChanges in the carrying value of goodwill by reportable segment during the first six months of fiscal 2003 were as follows. Our reportable segments are described in Note 7.
Balance | Transfer | Goodwill | Effect of | Balance | ||||||||||||||||
July 31, | Assembled | Acquired/ | Exchange | January 31, | ||||||||||||||||
(In thousands) | 2002 | Workforce | Adjusted | Rates | 2003 | |||||||||||||||
Small Business Products and Services | $ | 159,195 | $ | 1,377 | $ | 150,327 | $ | — | $ | 310,899 | ||||||||||
Consumer Tax | 3,308 | — | — | — | 3,308 | |||||||||||||||
Professional Tax & Accountants’ Solutions | 90,079 | 428 | — | — | 90,507 | |||||||||||||||
Vertical Business Management Solutions | 171,520 | — | (1,725 | ) | — | 169,795 | ||||||||||||||
Other Businesses | 4,846 | 95 | 4,044 | 413 | 9,398 | |||||||||||||||
$ | 428,948 | $ | 1,900 | $ | 152,646 | $ | 413 | $ | 583,907 | |||||||||||
Purchased intangible assets consisted of the following at the dates indicated:
Net balance at | ||||||||||||||||||||||||
Life in | Life in | July 31, | January 31, | |||||||||||||||||||||
Years | July 31, 2001 | April 30, 2002 | Years | 2002 | 2003 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Goodwill | 3-5 | $ | 326,986 | $ | 240,221 | |||||||||||||||||||
Customer lists | 3-5 | 53,423 | 39,508 | 3-7 | $ | 144,379 | $ | 145,957 | ||||||||||||||||
Covenants not to compete | 3-5 | 3,060 | 3,174 | |||||||||||||||||||||
Purchased technology | 1-5 | 24,078 | 21,468 | |||||||||||||||||||||
Assembled workforce | 2-5 | 3,598 | 2,233 | |||||||||||||||||||||
Trade names and logos | 1-15 | 4,189 | 4,345 | |||||||||||||||||||||
Less accumulated amortization | (75,317 | ) | (89,337 | ) | ||||||||||||||||||||
$ | 415,334 | $ | 310,949 | 69,062 | 56,620 | |||||||||||||||||||
Purchased technology | 1-7 | 121,763 | 141,609 | |||||||||||||||||||||
Less accumulated amortization | (79,894 | ) | (86,397 | ) | ||||||||||||||||||||
41,869 | 55,212 | |||||||||||||||||||||||
Trade names and logos | 1-10 | 16,555 | 16,971 | |||||||||||||||||||||
Less accumulated amortization | (6,908 | ) | (8,429 | ) | ||||||||||||||||||||
9,647 | 8,542 | |||||||||||||||||||||||
Covenants not to compete | 3-5 | 7,399 | 9,127 | |||||||||||||||||||||
Less accumulated amortization | (4,403 | ) | (5,212 | ) | ||||||||||||||||||||
2,996 | 3,915 | |||||||||||||||||||||||
Assembled workforce | 2-5 | 4,458 | — | |||||||||||||||||||||
Less accumulated amortization | (2,558 | ) | — | |||||||||||||||||||||
1,900 | — | |||||||||||||||||||||||
Total intangible assets | 294,554 | 313,664 | ||||||||||||||||||||||
Total accumulated amortization | (169,080 | ) | (189,375 | ) | ||||||||||||||||||||
Total net intangible assets | $ | 125,474 | $ | 124,289 | ||||||||||||||||||||
Balances presented above are netThe increase in purchased technology in the first six months of total accumulated amortizationfiscal 2003 was due primarily to our acquisition of $598.1 million at July 31, 2001 and $524.8 million at April 30, 2002. Accumulated amortization declined duringBlue Ocean Software, Inc. in the nine-month period due to the retirement of fully amortized goodwill and intangible assets.
As discussed in Note 1, we regularly perform reviews to determine if there are events or circumstances that indicate the carrying values of our goodwill and intangible assets may be impaired. During the secondfirst quarter of fiscal 2002, events and circumstances indicated impairment of goodwill and intangible assets that we received in connection with our acquisitions of the Internet-based advertising business that we acquired from Venture Finance Software Corp. in August 2000 (part of our Personal Finance business) and the Site Solutions business that we acquired from Boston Light Corp. in August 1999 (part of our Small Business operations).
Indicators of impairment for our Internet-based advertising business included a steep decline in demand for online advertising reflecting the industry-wide decline in Internet advertising spending, as well as management’s assessment that revenues and profitability would continue to decline in the future based on analyses and forecasts completed during the second quarter of fiscal 2002. The primary indicator of impairment for our Site Solutions business was management’s decision to transfer the customer base of Site Solutions and collaborate with a third party to provide the website building service. This collaboration, which began in the second quarter of fiscal 2002, eliminated our use of technology purchased from Boston Light.
In each case, we measured the impairment loss based on the amount by which the carrying amount of the assets exceeded their fair value based on lower projected profits and decreases in cash flow. Our measurement of fair value was based on an analysis of the future discounted cash flows as discussed in2003. See Note 1. Based on our analyses, in the second quarter of fiscal 2002 we recorded charges of $22.6 million ($17.4 million to acquisition-related charges and $5.2 million to amortization of purchased software) to reduce the carrying value of the assets associated with our Internet-based advertising business to zero, and a charge of $4.7 million ($4.6 million to acquisition-related charges and $0.1 million to amortization of purchased software) to reduce the carrying value of assets relating to our Site Solutions business to zero.5.
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We classifysummarize the following expenses ason the acquisition-related charges inline of our consolidated statementsstatement of operations:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
April 30, | April 30, | April 30, | April 30, | January 31, | January 31, | January 31, | January 31, | ||||||||||||||||||||||||||
2001 | 2002 | 2001 | 2002 | 2002 | 2003 | 2002 | 2003 | ||||||||||||||||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||||||||||||||||||
Amortization of goodwill | $ | 37,880 | $ | 29,170 | $ | 106,504 | $ | 93,460 | Amortization of goodwill | $ | 31,534 | $ | — | $ | 64,277 | $ | — | ||||||||||||||||
Amortization of purchased intangibles | 6,458 | 7,140 | 18,184 | 20,946 | |||||||||||||||||||||||||||||
Amortization of purchased intangible assets | Amortization of purchased intangible assets | 6,927 | 8,716 | 13,632 | 16,609 | ||||||||||||||||||||||||||||
Amortization of acquisition-related deferred compensation | 1,233 | 1,252 | 3,563 | 4,336 | Amortization of acquisition-related deferred compensation | 1,541 | 438 | 3,084 | 2,000 | ||||||||||||||||||||||||
Impairment charges | 77,000 | — | 77,000 | 22,006 | Impairment charges | 22,006 | — | 22,006 | — | ||||||||||||||||||||||||
Other | 4 | — | 77 | — | |||||||||||||||||||||||||||||
$ | 122,575 | $ | 37,562 | $ | 205,328 | $ | 140,748 | Total acquisition-related charges | $ | 62,008 | $ | 9,154 | $ | 102,999 | $ | 18,609 | |||||||||||||||||
5. Loan Commitments
TheAt January 31, 2003, we expected annual amortization of our purchased intangible assets by fiscal year to be as shown in the following table summarizes mortgage loan commitmentstable. Future acquisitions could cause these amounts to extend credit at July 31, 2001 and April 30, 2002:increase. In addition, if impairment events occur they could accelerate the timing of charges.
July 31, 2001 | April 30, 2002 | |||||||||||||||
Fixed-rate | Variable-rate | Fixed-rate | Variable-rate | |||||||||||||
(In thousands) | ||||||||||||||||
Conventional prime loans | $ | 303,100 | $ | 72,500 | $ | 473,500 | $ | 143,600 | ||||||||
Sub-prime loans | 4,300 | 1,200 | 4,400 | 2,600 | ||||||||||||
$ | 307,400 | $ | 73,700 | $ | 477,900 | $ | 146,200 | |||||||||
Expected | ||||||||
Amortization | ||||||||
(Dollars in thousands) | Expense | |||||||
Fiscal year ending July 31, | ||||||||
2003 | $ | 45,104 | ||||||
2004 | 30,632 | |||||||
2005 | 23,233 | |||||||
2006 | 18,644 | |||||||
2007 | 13,658 | |||||||
Thereafter | 15,522 | |||||||
Total expected future amortization expense | $ | 146,793 | ||||||
6. Per Share Data
We compute basic income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted income or loss per share 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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7.4. Comprehensive Net Income (Loss)
SFAS 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive net income (loss) and its components in stockholders’ equity. However, it has no impact on our net income or loss as presented in our financial statements. SFAS 130 requires foreign currency translation adjustments andthe components of other comprehensive income (loss), such as changes in the fair value of available-for-sale securities and short-term investmentsforeign translation adjustments, to be included inadded to our net income (loss) to arrive at comprehensive net income (loss). Other comprehensive income (loss). items have no impact on our net income (loss) as presented in our statement of operations.
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The components of accumulated other comprehensive income (loss), net of income taxes, arewere as follows:
Marketable | Short-term | Foreign Currency | ||||||||||||||
Nine months ended April 30, 2001 | Securities | Investments | Translation | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance gain (loss), net of income taxes | $ | 58,561 | $ | — | $ | (2,975 | ) | $ | 55,586 | |||||||
Unrealized loss, net of income tax benefit of $12,932 | (19,398 | ) | — | — | (19,398 | ) | ||||||||||
Reclassification adjustment for realized gain included in net loss, net of income tax benefit of $4,685 | (7,027 | ) | — | — | (7,027 | ) | ||||||||||
Translation adjustment gain | — | — | 2,401 | 2,401 | ||||||||||||
Ending balance, net of income tax benefit of $17,617 | $ | 32,136 | $ | — | $ | (574 | ) | $ | 31,562 | |||||||
Nine months ended April 30, 2002 | ||||||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance gain (loss), net of income taxes | $ | 23,958 | $ | 4,686 | $ | (464 | ) | $ | 28,180 | |||||||
Unrealized loss, net of income tax benefit of $10,759 and $1,823 | (16,139 | ) | (2,734 | ) | — | (18,873 | ) | |||||||||
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $568 | (853 | ) | — | — | (853 | ) | ||||||||||
Translation adjustment gain | — | — | 542 | 542 | ||||||||||||
Ending balance, net of income tax benefit of $13,150 | $ | 6,966 | $ | 1,952 | $ | 78 | $ | 8,996 | ||||||||
Marketable | Short-term | Foreign Currency | |||||||||||||||
(In thousands) | Securities | Investments | Translation | Total | |||||||||||||
Six months ended January 31, 2002 | |||||||||||||||||
Beginning balance, net of income taxes | $ | 23,958 | $ | 4,686 | $ | (464 | ) | $ | 28,180 | ||||||||
Unrealized loss, net of income tax benefits of $14,588 and $915 | (21,882 | ) | (1,372 | ) | — | (23,254 | ) | ||||||||||
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $510 | (766 | ) | — | — | (766 | ) | |||||||||||
Translation adjustment | — | — | 1,317 | 1,317 | |||||||||||||
Other comprehensive income (loss) | (22,648 | ) | (1,372 | ) | 1,317 | (22,703 | ) | ||||||||||
Ending balance, net of income taxes | $ | 1,310 | $ | 3,314 | $ | 853 | $ | 5,477 | |||||||||
Six months ended January 31, 2003 | |||||||||||||||||
Beginning balance, net of income taxes | $ | (4,845 | ) | $ | 2,058 | $ | (888 | ) | $ | (3,675 | ) | ||||||
Unrealized gain, net of income tax provision of $7,285 | 10,927 | — | — | 10,927 | |||||||||||||
Unrealized loss, net of income tax benefit of $578 | — | (867 | ) | — | (867 | ) | |||||||||||
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $1,549 | (2,323 | ) | — | — | (2,323 | ) | |||||||||||
Translation adjustment | — | — | (459 | ) | (459 | ) | |||||||||||
Other comprehensive income (loss) | 8,604 | (867 | ) | (459 | ) | 7,278 | |||||||||||
Ending balance, net of income taxes | $ | 3,759 | $ | 1,191 | $ | (1,347 | ) | $ | 3,603 | ||||||||
The following table summarizes comprehensive net income (loss) for the periods indicated:
Three Months | Nine Months | Three Months | Nine Months | ||||||||||||||
Ended | Ended | Ended | Ended | ||||||||||||||
April 30, 2001 | April 30, 2001 | April 30, 2002 | April 30, 2002 | ||||||||||||||
(in thousands) | |||||||||||||||||
Net income (loss) | $ | (14,301 | ) | $ | (21,504 | ) | $ | 144,481 | $ | 171,922 | |||||||
Other comprehensive income (loss): | |||||||||||||||||
Change in unrealized gain (loss) on marketable securities | (27,129 | ) | (26,425 | ) | 5,656 | (16,992 | ) | ||||||||||
Change in unrealized gain (loss) on short-term investments | — | — | (1,362 | ) | (2,734 | ) | |||||||||||
Change in foreign currency translation adjustments | 1,295 | 2,401 | (775 | ) | 542 | ||||||||||||
$ | (40,135 | ) | $ | (45,528 | ) | $ | 148,000 | $ | 152,738 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands) | 2002 | 2003 | 2002 | 2003 | ||||||||||||
Net income | $ | 119,868 | $ | 128,430 | $ | 27,441 | $ | 73,745 | ||||||||
Other comprehensive income (loss), net of income taxes | 3,641 | 2,227 | (22,703 | ) | 7,278 | |||||||||||
Comprehensive net income, net of income taxes | $ | 123,509 | $ | 130,657 | $ | 4,738 | $ | 81,023 | ||||||||
5. | Acquisition |
On September 13, 2002, we acquired all of the outstanding stock of Blue Ocean Software, Inc. for approximately $177.3 million in cash. We paid $16.5 million of the purchase price into a third party escrow account, to be held for a maximum of 18 months pending the finalization of certain financial calculations that may affect the purchase price. To date, there have been no material adjustments to the purchase price.
Blue Ocean offers software solutions that help businesses manage their information technology resources and assets. We acquired this company as part of our Right for My Business strategy to offer business solutions that go beyond accounting software to address a wider range of management challenges that small businesses face. Blue Ocean became part of our Small Business Products and Services business segment.
With the assistance of a professional valuation services firm, we made a preliminary allocation of the purchase price during the first quarter of fiscal 2003. There have been no material adjustments to the purchase price allocation. We
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8. Acquisition
On November 2, 2001, we acquired substantially allallocated approximately $13.2 million of the assets of OMware, Inc. (“OMware”) for $35.5 million in Intuit stock, approximately $2.6 million in acquisition costspurchase price to purchased technology and up to $8 million in Intuit stock to be issued contingent upon the achievement of certain future performance objectives by the business unit. Pursuant to separate agreements, Intuit will pay up to $2 million in cash over two years as part of a senior management performance program. These amounts will be recorded as compensation expense as amounts are earned. We accounted for the acquisition of OMware as a purchase for accounting purposes and allocated approximately $35.6$150.5 million to identified intangible assetsgoodwill. In addition, $7.8 million was allocated to in-process research and goodwill. The identified intangible assets are being amortized over five years.
9. Loss on Impairment of Long-lived Asset
In connection with the sale of our Quicken Bill Manager business in May 2001, we acquired a $27 million long-term asset relateddevelopment and charged to future consideration from the purchasing company, which was recorded as “other assets” on the balance sheet. We were entitled to cash and/or shares of the purchaser’s common stock beginning in February 2002. As discussed in Note 1, we regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. The reviews look for facts or circumstances, either internal or external, that indicate that the carrying value of an asset cannot be recovered. During the three months ended October 31, 2001, events and circumstances indicated impairment of this asset. These indicators included the deterioration of the purchasing company’s financial position (including cash flows and liquidity) and the decreased likelihood that it would receive future funding. We considered the implied fair value of our investment based on the purchasing company’s most recent round of planned funding, as well as the fair value of our investment if funding were received. Based on our analysis we recorded a charge of $27 millionexpense in the first quarter of fiscal 2003. The purchased technology is being amortized over six years. None of the goodwill acquired in this transaction will be deductible for income tax purposes. Blue Ocean’s results of operations from September 14, 2002 forward have been included in our results of operations and were not material. Blue Ocean’s results of operations for periods prior to reducethe date of acquisition were also not material when compared to our consolidated results.
The preliminary purchase price allocation for the Blue Ocean acquisition was as follows:
Purchase | |||||
Price | |||||
(In thousands) | Allocation | ||||
Tangible assets | $ | 19,738 | |||
Deferred revenue | (6,694 | ) | |||
Other tangible liabilities | (7,013 | ) | |||
In-process research and development | 7,789 | ||||
Purchased technology | 13,220 | ||||
Goodwill | 150,548 | ||||
Acquisition costs | (271 | ) | |||
Total purchase price | $ | 177,317 | |||
6. | Discontinued Operations |
Quicken Loans
On July 31, 2002, we sold our Quicken Loans mortgage business and accounted for the sale as discontinued operations. In accordance with APB Opinion No. 30, the operating results of Quicken Loans have been segregated from continuing operations in our statement of operations for all periods prior to the sale.
As part of the sale transaction, we received a five-year secured promissory note in the principal amount of $23.3 million from the buyer, a newly-created company called Rock Acquisition Corporation. We also retained a 12.5% non-voting equity interest in that company. We accounted for this investment on a cost basis since we did not have the ability to exercise significant influence over Rock. We also agreed to continue providing to Quicken Loans a secured line of credit of up to $375.0 million to fund mortgage loans for a transition period of up to six months. The line was repaid in full in January 2003. Rock also licensed the right to use our Quicken Loans trademark for its residential home loan and home equity loan products and we entered into a distribution agreement with Rock through which it will provide mortgage services on Quicken.com.
In October 2002, we sold our residual minority equity interest in Rock to the majority shareholders of Rock. We also received payment in full of the $23.3 million promissory note and related accrued interest due from Rock. The $5.6 million gain on disposal of Quicken Loans discontinued operations recorded in the first quarter of fiscal 2003 included a gain of $6.4 million for the sale of our residual equity interest, a charge of $0.3 million that was the result of the final audit of the tangible shareholders’ equity balance of Quicken Loans, and $0.5 million in legal and other expenses. We did not record a tax benefit related to the transaction because we cannot be assured that we will realize the tax benefit. The trademark license and distribution agreements that we entered into when we sold Quicken Loans remain in effect and fees under these agreements are being recorded in other income. For the second quarter and first half of fiscal 2003, we recorded $0.9 million under the trademark licensing agreement and $0.4 million under the distribution agreement. Fees due under these agreements are included in amounts due from discontinued operations entities on our balance sheet.
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Intuit KK
On December 23, 2002, we signed a definitive agreement to sell our wholly-owned Japanese subsidiary, Intuit KK, to Advantage Partners, Inc., a private equity investment firm located in Japan. Under the terms of the agreement, Advantage Partners agreed to purchase 100 percent of the outstanding Intuit KK stock for 9.5 billion yen or approximately $79 million as of February 7, 2003, the date the transaction was completed. See Note 14.
In accordance with the provisions of SFAS 144,“Accounting for the Impairment or Disposal of Long-lived Assets,”we determined that Intuit KK became a long-lived asset held for sale during the second quarter of fiscal 2003 because management put a plan in place to sell this asset which met the conditions specified in the pronouncement. SFAS 144 provides that a long-lived asset classified as held for sale should be measured at the lower of its carrying amount or fair value less cost to sell. Since the carrying value of Intuit KK at January 31, 2003 was significantly lower than the fair value, no adjustment to the carrying value of this long-lived asset was necessary during the second quarter of fiscal 2003. Also in accordance with the provisions of SFAS 144, we determined that Intuit KK became a discontinued operation during the second quarter of fiscal 2003. The net assets, operating results and cash flows of Intuit KK have therefore been segregated from continuing operations in our balance sheets, statements of operations and statements of cash flows for all periods presented.
In December 2002, in order to itsminimize the impact of foreign currency exchange rates on the sale proceeds during the period between the announcement of the sale of Intuit KK and the closing of the transaction, we entered into a foreign currency hedge contract to sell 9.5 billion Japanese yen in February 2003. We will reflect the actual loss of $0.2 million for the fluctuation in the fair value of zero.this contract that occurred during the second quarter of fiscal 2003 in the net gain on the sale of Intuit KK that will be recorded in the third quarter of fiscal 2003.
10. ChargeDiscontinued Operations Net Revenue and Income Taxes
Net revenue and income taxes netted against income from discontinued operations for the periods presented were as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
(In thousands) | 2002 | 2003 | 2002 | 2003 | |||||||||||||
Net revenue | |||||||||||||||||
Quicken Loans | $ | 56,493 | $ | — | $ | 96,532 | $ | — | |||||||||
Intuit KK | 14,844 | 16,231 | 25,253 | 26,641 | |||||||||||||
Total net revenue from discontinued operations | $ | 71,337 | $ | 16,231 | $ | 121,785 | $ | 26,641 | |||||||||
Income from discontinued operations before income taxes | |||||||||||||||||
Quicken Loans | $ | 26,158 | $ | — | $ | 41,360 | $ | — | |||||||||
Intuit KK | 2,881 | 5,274 | 3,906 | 5,633 | |||||||||||||
Total discontinued operations before income taxes | $ | 29,039 | $ | 5,274 | $ | 45,266 | $ | 5,633 | |||||||||
Income taxes netted against income from discontinued operations | |||||||||||||||||
Quicken Loans | $ | 9,418 | $ | — | $ | 14,891 | $ | — | |||||||||
Intuit KK | (351 | ) | 2,215 | (476 | ) | 2,366 | |||||||||||
Total discontinued operations income taxes | $ | 9,067 | $ | 2,215 | $ | 14,415 | $ | 2,366 | |||||||||
Net income from discontinued operations | |||||||||||||||||
Quicken Loans | $ | 16,740 | $ | — | $ | 26,469 | $ | — | |||||||||
Intuit KK | 3,232 | 3,059 | 4,382 | 3,267 | |||||||||||||
Total net income from discontinued operations | $ | 19,972 | $ | 3,059 | $ | 30,851 | $ | 3,267 | |||||||||
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7. | Industry Segment and Geographic Information |
We have defined six reportable segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results. In the second quarter of fiscal 2003, we revised our fiscal 2002 reportable segments to reflect the way we currently manage and view our businesses. We determined that the QuickBooks product component of our fiscal 2002 Small Business segment was a separate reportable segment and we combined our fiscal 2002 Employer Services segment with the balance of Small Business to arrive at the fiscal 2003 segment called Small Business Products and Services. We began reporting Vertical Business Management Solutions (formerly Small Business Verticals) as a separate segment in fiscal 2003. Finally, we combined our fiscal 2002 Personal Finance and Global Business segments to arrive at the fiscal 2003 segment called Other Businesses. We have reclassified previously reported fiscal 2002 and first quarter fiscal 2003 segment results to conform to the second quarter fiscal 2003 presentation. All reportable segments except Other Businesses operate solely in the United States and sell primarily to customers located there.
QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks services revenue is derived from QuickBooks Online Edition.
Small Business Products and Services product revenue is comprised of QuickBooks Do-It-Yourself Payroll, financial supplies and software solutions that help businesses manage their information technology resources and assets. Services revenue for this segment is derived primarily from outsourced payroll services and QuickBooks support plans. Other revenue for this segment consists of royalties from small business online transactions such as QuickBooks Merchant Account Service and QuickBooks Online Billing.
Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax preparation products. Consumer Tax services revenue is derived primarily from TurboTax for the Web online tax preparation services and consumer electronic filing services.
Professional Tax and Accountants’ Solutions product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. Professional Tax and Accountants’ Solutions services revenue is derived primarily from electronic filing and training services.
Vertical Business Management Solutions (“VBMS”) revenue is derived from four businesses that we acquired in fiscal 2002 that provide small business management solutions for vertical industries. Those businesses are Intuit Distribution Management Solutions, Intuit MRI Real Estate Solutions, Intuit Construction Business Solutions and Intuit Public Sector Solutions. VBMS product revenue is derived from business management software that is specific to the industries these businesses serve. VBMS services revenue consists primarily of technical support, installation, consulting and training services.
Other Businesses consist primarily of personal finance and Canada. Personal finance product revenue is derived primarily from Quicken desktop software products. Personal finance services revenue is minimal while other revenue consists of fees from consumer online transactions and Quicken.com advertising revenue. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as QuickTax desktop software products. Services revenue in Canada consists primarily of revenue from software maintenance contracts sold with QuickBooks.
Corporate includes costs such as corporate general and administrative expenses that are not allocated to specific segments. Corporate also includes reconciling items such as acquisition-related costs (which include acquisition-related charges, amortization of purchased software and charges for purchased research and development), realized net gains or losses on marketable securities and interest and other income.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Except for goodwill and purchased intangible assets, Intuit does not generally track assets by reportable segment and, consequently, does not disclose assets by reportable segment. The following results for the second quarter and first six months of fiscal 2002 and 2003 are broken out by our reportable segments.
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Small | Professional | Vertical | |||||||||||||||||||||||||||||||
Three months ended | Business | Tax & | Business | ||||||||||||||||||||||||||||||
January 31, 2002 | Products & | Consumer | Accountants' | Mgmt | Other | ||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
Product revenue | $ | 84,084 | $ | 55,008 | $ | 78,477 | $ | 137,099 | $ | 1,950 | $ | 56,478 | $ | — | $ | 413,096 | |||||||||||||||||
Service revenue | 53 | 34,573 | 6,359 | 2,138 | 747 | 1,159 | — | 45,029 | |||||||||||||||||||||||||
Other revenue | — | 935 | 1,274 | — | — | 15,574 | — | 17,783 | |||||||||||||||||||||||||
Total net revenue | 84,137 | 90,516 | 86,110 | 139,237 | 2,697 | 73,211 | — | 475,908 | |||||||||||||||||||||||||
Segment operating income (loss) | 48,189 | 25,745 | 20,909 | 105,254 | (1,134 | ) | 25,717 | — | 224,680 | ||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (60,194 | ) | (60,194 | ) | |||||||||||||||||||||||
Subtotal | 48,189 | 25,745 | 20,909 | 105,254 | (1,134 | ) | 25,717 | (60,194 | ) | 164,486 | |||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (69,179 | ) | (69,179 | ) | |||||||||||||||||||||||
Loss on impairment of long-lived asset | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Realized net gain on marketable securities | — | — | — | — | — | — | 1,632 | 1,632 | |||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 7,635 | 7,635 | |||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 48,189 | $ | 25,745 | $ | 20,909 | $ | 105,254 | $ | (1,134 | ) | $ | 25,717 | $ | (120,106 | ) | $ | 104,574 | |||||||||||||||
Small | Professional | Vertical | |||||||||||||||||||||||||||||||
Three months ended | Business | Tax & | Business | ||||||||||||||||||||||||||||||
January 31, 2003 | Products & | Consumer | Accountants' | Mgmt | Other | ||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
Product revenue | $ | 93,154 | $ | 68,727 | $ | 86,146 | $ | 146,385 | $ | 10,017 | $ | 60,701 | $ | — | $ | 465,130 | |||||||||||||||||
Service revenue | 342 | 47,220 | 8,204 | 4,783 | 13,946 | 853 | — | 75,348 | |||||||||||||||||||||||||
Other revenue | — | 4,704 | 909 | — | 58 | 11,927 | — | 17,598 | |||||||||||||||||||||||||
Total net revenue | 93,496 | 120,651 | 95,259 | 151,168 | 24,021 | 73,481 | — | 558,076 | |||||||||||||||||||||||||
Segment operating income (loss) | 51,423 | 32,983 | 30,222 | 118,746 | (3,465 | ) | 32,405 | — | 262,314 | ||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (77,893 | ) | (77,893 | ) | |||||||||||||||||||||||
Subtotal | 51,423 | 32,983 | 30,222 | 118,746 | (3,465 | ) | 32,405 | (77,893 | ) | 184,421 | |||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (13,742 | ) | (13,742 | ) | |||||||||||||||||||||||
Realized net gain on marketable securities | — | — | — | — | — | — | 2,827 | 2,827 | |||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 7,770 | 7,770 | |||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 51,423 | $ | 32,983 | $ | 30,222 | $ | 118,746 | $ | (3,465 | ) | $ | 32,405 | $ | (81,038 | ) | $ | 181,276 | |||||||||||||||
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Small | Professional | Vertical | ||||||||||||||||||||||||||||||||
Six months ended | Business | Tax & | Business | |||||||||||||||||||||||||||||||
January 31, 2002 | Products & | Consumer | Accountants' | Mgmt | Other | |||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | ||||||||||||||||||||||||||
Product revenue | $ | 108,610 | $ | 103,683 | $ | 81,014 | $ | 142,705 | $ | 1,950 | $ | 86,207 | $ | — | $ | 524,169 | ||||||||||||||||||
Service revenue | 80 | 60,910 | 7,830 | 3,250 | 747 | 4,133 | — | 76,950 | ||||||||||||||||||||||||||
Other revenue | — | 4,150 | 1,478 | — | — | 27,479 | — | 33,107 | ||||||||||||||||||||||||||
Total net revenue | 108,690 | 168,743 | 90,322 | 145,955 | 2,697 | 117,819 | — | 634,226 | ||||||||||||||||||||||||||
Segment operating income (loss) | 48,503 | 44,547 | 3,657 | 87,380 | (1,134 | ) | 29,958 | — | 212,911 | |||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (115,746 | ) | (115,746 | ) | ||||||||||||||||||||||||
Subtotal | 48,503 | 44,547 | 3,657 | 87,380 | (1,134 | ) | 29,958 | (115,746 | ) | 97,165 | ||||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (111,876 | ) | (111,876 | ) | ||||||||||||||||||||||||
Loss on impairment of long-lived asset | — | — | — | — | — | — | (27,000 | ) | (27,000 | ) | ||||||||||||||||||||||||
Realized net loss on marketable securities | — | — | — | — | — | — | (10,622 | ) | (10,622 | ) | ||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 17,463 | 17,463 | ||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 48,503 | $ | 44,547 | $ | 3,657 | $ | 87,380 | $ | (1,134 | ) | $ | 29,958 | $ | (247,781 | ) | $ | (34,870 | ) | |||||||||||||||
Small | Professional | Vertical | ||||||||||||||||||||||||||||||||
Six months ended | Business | Tax & | Business | |||||||||||||||||||||||||||||||
January 31, 2003 | Products & | Consumer | Accountants' | Mgmt | Other | |||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | ||||||||||||||||||||||||||
Product revenue | $ | 130,992 | $ | 127,115 | $ | 90,001 | $ | 152,735 | $ | 15,647 | $ | 90,543 | $ | — | $ | 607,033 | ||||||||||||||||||
Service revenue | 557 | 85,314 | 10,209 | 5,697 | 27,114 | 2,061 | — | 130,952 | ||||||||||||||||||||||||||
Other revenue | — | 8,994 | 1,104 | — | 63 | 22,802 | — | 32,963 | ||||||||||||||||||||||||||
Total net revenue | 131,549 | 221,423 | 101,314 | 158,432 | 42,824 | 115,406 | — | 770,948 | ||||||||||||||||||||||||||
Segment operating income (loss) | 58,638 | 60,676 | 15,152 | 101,840 | (10,677 | ) | 37,591 | — | 263,220 | |||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (154,035 | ) | (154,035 | ) | ||||||||||||||||||||||||
Subtotal | 58,638 | 60,676 | 15,152 | 101,840 | (10,677 | ) | 37,591 | (154,035 | ) | 109,185 | ||||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (33,963 | ) | (33,963 | ) | ||||||||||||||||||||||||
Realized net gain on marketable securities | — | — | — | — | — | — | 3,080 | 3,080 | ||||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 16,556 | 16,556 | ||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 58,638 | $ | 60,676 | $ | 15,152 | $ | 101,840 | $ | (10,677 | ) | $ | 37,591 | $ | (168,362 | ) | $ | 94,858 | ||||||||||||||||
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8. Commitments
Reserve for Vacant Facilities
During the third quarter ended April 30,of fiscal 2002, we concluded that we would not occupy two vacant leased buildings in Mountain View, California and that we would be unable to recover a substantial portion of our lease obligations from sublessors.by subleasing the vacant space. The resulting $13.2 million charge for vacant facilities has been calculated using management’s best estimates and is based uponwas equal to the remaining future lease commitments for these facilities, at April 30, 2002, net of estimated future sublease income. The estimated costs of abandoning these leased facilities werereflected management’s best estimates based on market information and trend analyses compiled by our facilities management team with the help of a commercial real estate brokerage firm retained by Intuit. ActualWe evaluate our assumptions quarterly for any potentially significant change to the reserve. No material change has been necessary to date. Our actual future cash payments may differexceed the total reserve balance at January 31, 2003 by a maximum of $3.7 million from the reserve balance at April 30, 2002 if we are unable to sublease either of the properties.
11. Gain on Divestiture
In March 2002, we paid $12.0 million to terminate a $20.3 million obligation for an interactive services agreement related to our Quicken Bill Manager business, which we sold in May 2001. We wrote offDuring the $27 million asset acquired in connection with that sale in thesecond quarter and first quartersix months of fiscal 2002 (see Note 9). In connection with the termination2003, we made cash lease payments for these two buildings of the interactive services agreement, we recorded a pre-tax gain of $8.3$0.6 million and related tax expense$1.2 million and there was a balance of $2.7$11.3 million in the quarter ended April 30, 2002.
12. Borrowings
Asreserve at January 31, 2003. The short-term portion of April 30, 2002, we had one mortgage line of credit with no amounts outstanding. Advances may be drawn for working capitalthe reserve ($2.1 million) is in other current liabilities and sub-prime and conventional prime mortgage loans, with the maximum amount basedremaining long-term portion is in long-term obligations on a formula computation. Advances are due on demand and are collateralizedour balance sheet. We expect to use the total reserve by residential first and second mortgages. Interest is paid on a monthly basis. The maximum outstanding balance permitted under this line is $20 million.
Drafts payable represent funds we advance for mortgages we originate.
13. Industry Segment and Geographic Information
SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for companies to disclose certain information about operating segments in the company’s financial reports. Consistent with SFAS 131, we have determined our five operating segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results.
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Intuit does not track assets by operating segments. Consequently, we do not disclose assets by operating segments. The following unaudited results for the nine months ended April 30, 2001 and 2002 are broken out by our operating segments. Prior period information has been reclassified to conform to the current period financial presentation for comparability.
Small | Personal | Quicken | Global | |||||||||||||||||||||||||||
Nine months ended | Business | Tax | Finance | Loans | Business | |||||||||||||||||||||||||
April 30, 2001 | Division | Division | Division | Division | Division | Other (1) | Consolidated | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Product revenue | $ | 268,389 | $ | 333,927 | $ | 74,894 | $ | — | $ | 59,574 | $ | — | $ | 736,784 | ||||||||||||||||
Service revenue | 65,986 | 106,395 | 10,134 | 72,206 | 19,118 | — | 273,839 | |||||||||||||||||||||||
Other revenue | 16,719 | 3,066 | 38,031 | — | 1,853 | — | 59,669 | |||||||||||||||||||||||
Total net revenue | 351,094 | 443,388 | 123,059 | 72,206 | 80,545 | — | 1,070,292 | |||||||||||||||||||||||
Segment operating income | 114,908 | 260,915 | 23,613 | 13,728 | 11,388 | — | 424,552 | |||||||||||||||||||||||
Common expenses | — | — | — | — | — | (166,488 | ) | (166,488 | ) | |||||||||||||||||||||
Sub-total operating income (loss) | 114,908 | 260,915 | 23,613 | 13,728 | 11,388 | (166,488 | ) | 258,064 | ||||||||||||||||||||||
Realized net losses on marketable securities | — | — | — | — | — | (87,307 | ) | (87,307 | ) | |||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | (216,786 | ) | (216,786 | ) | |||||||||||||||||||||
Interest and other income and expense, net | — | — | — | — | — | 47,736 | 47,736 | |||||||||||||||||||||||
Gain on divestiture | — | — | — | — | — | 1,639 | 1,639 | |||||||||||||||||||||||
Net income (loss) before taxes, minority interest and cumulative accounting change | $ | 114,908 | $ | 260,915 | $ | 23,613 | $ | 13,728 | $ | 11,388 | $ | (421,206 | ) | $ | 3,346 | |||||||||||||||
Small | Personal | Quicken | Global | |||||||||||||||||||||||||||
Nine months ended | Business | Tax | Finance | Loans | Business | |||||||||||||||||||||||||
April 30, 2002 | Division | Division | Division | Division | Division | Other (1) | Consolidated | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Product revenue | $ | 314,123 | $ | 421,900 | $ | 65,558 | $ | — | $ | 64,627 | $ | 3,699 | $ | 869,907 | ||||||||||||||||
Service revenue | 89,927 | 128,886 | 6,322 | 140,048 | 15,458 | 1,131 | 381,772 | |||||||||||||||||||||||
Other revenue | 3,875 | 2,734 | 39,070 | — | 3,879 | — | 49,558 | |||||||||||||||||||||||
Total net revenue | 407,925 | 553,520 | 110,950 | 140,048 | 83,964 | 4,830 | 1,301,237 | |||||||||||||||||||||||
Segment operating income (loss) | 130,486 | 345,789 | 30,787 | 52,242 | 16,979 | (3,148 | ) | 573,135 | ||||||||||||||||||||||
Common expenses | — | — | — | — | — | (186,548 | ) | (186,548 | ) | |||||||||||||||||||||
Sub-total operating income (loss) | 130,486 | 345,789 | 30,787 | 52,242 | 16,979 | (189,696 | ) | 386,587 | ||||||||||||||||||||||
Realized net losses on marketable securities | — | — | — | — | — | (9,266 | ) | (9,266 | ) | |||||||||||||||||||||
Gain on divestiture | — | — | — | — | — | 8,308 | 8,308 | |||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | (151,190 | ) | (151,190 | ) | |||||||||||||||||||||
Charge for vacant facilities | — | — | — | — | — | (13,237 | ) | (13,237 | ) | |||||||||||||||||||||
Loss on impairment of long-lived asset | — | — | — | — | — | (27,000 | ) | (27,000 | ) | |||||||||||||||||||||
Interest and other income and expense, net | — | — | — | — | — | 28,631 | 28,631 | |||||||||||||||||||||||
Net income (loss) before taxes, minority interest and cumulative accounting change | $ | 130,486 | $ | 345,789 | $ | 30,787 | $ | 52,242 | $ | 16,979 | $ | (353,450 | ) | $ | 222,833 | |||||||||||||||
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14. Notes Payable and Commitments
In March 2001, our Japanese subsidiary, Intuit KK, refinanced its one-year loan agreement with a Japanese bank for approximately $29.2 million. During the third quarterend of fiscal 2002, we elected to pay half the outstanding balance and obtained a three-month extension on the remaining balance of approximately $14.6 million. The loan is denominated in Japanese yen. The interest rate is variable based on the Tokyo inter-bank offered rate or the short-term prime rate offered in Japan. At April 30, 2002, the rate was approximately 0.59%. 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 July 2002.2010.
15.9. Other Current Liabilities
Other current liabilities consisted of the followingwere as follows at the dates indicated:
July 31, | April 30, | |||||||
2001 | 2002 | |||||||
(In thousands) | ||||||||
Accrued compensation and related liabilities | $ | 64,325 | $ | 94,053 | ||||
Reserve for returns and exchanges | 31,510 | 56,073 | ||||||
Future payments due for CRI acquisition | 23,969 | 25,157 | ||||||
Other acquisition and disposition related items | 18,001 | 15,669 | ||||||
Rebates | 10,130 | 30,029 | ||||||
Other accruals | 23,031 | 34,020 | ||||||
$ | 170,966 | $ | 255,001 | |||||
July 31, | January 31, | |||||||
(In thousands) | 2002 | 2003 | ||||||
Reserve for product returns | $ | 32,095 | $ | 69,924 | ||||
Reserve for rebates | 8,169 | 55,463 | ||||||
Future cash payments due for CBS Payroll acquisition | 25,359 | 24,434 | ||||||
Other acquisition and disposition related items | 4,667 | 1,627 | ||||||
Other accruals | 11,505 | 25,407 | ||||||
$ | 81,795 | $ | 176,855 | |||||
16.10. Income Taxes
Intuit computes theWe compute our provision (benefit) for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and other taxable items. OurWe recorded income tax provisions on pre-tax income in the second quarters of fiscal 2002 and 2003 and in the first six months of fiscal 2003. We recorded an income tax benefit on a pre-tax loss in the first six months of fiscal 2002.
The effective tax raterates for the second quarter and first ninesix months of fiscal 2003 were approximately 31% and 32%, respectively. The effective tax rates for the second quarter and first six months of fiscal 2002 differs from the federal statutory rate primarily because ofwere approximately 4% and 90%, respectively. The fiscal 2002 effective tax rates reflected a taxone-time benefit related to a divestiture that became available duringin the second quarter of $34.4 million related to the our sale of Venture Finance Software Corporation and costs from impairment charges in the first and second quarters of $9.0 million and $5.4 million, respectively. Excluding these benefits and charges, the effective tax rates for the second quarter and first six months of fiscal 2002.2002 would have been approximately 32% and 33%.
17.11. Stockholders’ Equity
Stock Repurchase Program
In May 2001, Intuit’s Board of Directors authorized the company to repurchase up to $500$500.0 million of common stock from time to time in the open market over a three-year period. TheIn July 2002, our Board of Directors increased the authorized purchase amount by $250.0 million to a total of $750.0 million. Shares of stock repurchaserepurchased under the program is intended to help offset somebecame treasury shares. From inception of the dilution resulting from the issuance of shares under Intuit’s employee stock plans. During the nine months ended April 30,program through December 4, 2002, we had repurchased approximately 3,744,800a total of 16,602,583 shares of our common stock under this program (which became treasury shares) for an aggregate cost of approximately $149.3$750.0 million. During this period we reissued 2,708,719 shares of treasuryThe stock in connection with employee stock plans, which were valued at $111.2 million (using the average purchase price per Intuit share).
Repurchases through April 30, 2002 have had no significant impact upon our income or loss per share. Intuit intends to continue using its cash and cash equivalents to fund these repurchases.
18. Benefit Plan
Intuit adopted the Executive Deferred Compensation Plan effective March 15, 2002. The plan allows key employees who meet minimum compensation and job responsibility criteria to defer up to 50% of their salaries and up to 100% of their bonuses and commissions. We have agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. We may also make discretionary employer contributions to participant accounts. The timing, amounts and vesting schedules of employer contributions are at our sole discretion. The benefits under this plan are unsecured and are general assets of Intuit. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or upon termination of
-17--20-
their employment with Intuitrepurchase program was concluded in December 2002 when the authorized purchase amount under the program was reached.
The effect of repurchases through the conclusion of the program in December 2002 increased our basic and diluted net income per share by less than $0.01 per share in the second quarters of fiscal 2002 and 2003 and in the first half of fiscal 2002. Repurchases increased our basic and diluted net income per share by $0.01 per share in the first six months of fiscal 2003.
Distribution and Dilutive Effect of Options
We provide equity incentives to our employees (including those we hire as a result of acquisitions) and to our independent Board members through a carefully managed, broad-based stock incentive program. The following table shows option grants to “Named Executives” and to all employees for any reason, including retirement, disabilitythe periods indicated. Named Executives are defined as the company’s chief executive officer and each of the four other most highly compensated executive officers during fiscal 2002.
Six Months | Twelve Months Ended | |||||||||||
Ended | ||||||||||||
January 31, | July 31, | July 31, | ||||||||||
2003 | 2002 | 2001 | ||||||||||
Net option grants during the period as a percentage of outstanding shares | 1.3 | % | 3.2 | % | 4.7 | % | ||||||
Grants to Named Executives during the period as a percentage of total options granted | 10.3 | % | 3.5 | % | 7.3 | % | ||||||
Grants to Named Executives during the period as a percentage of outstanding shares | 0.2 | % | 0.2 | % | 0.4 | % | ||||||
Options held by Named Executives as a percentage of total options outstanding | 10.3 | % | 10.5 | % | 9.0 | % |
We define net option grants as options granted less options canceled or death. Discretionary company contributionsexpired and the related earnings vest completely upon the participant’s disability, death or a change of control of Intuit. During the three months ended April 30, 2002, we made no employer contributionsreturned to the plan.pool of options available for grant. Options granted to our Named Executives as a percentage of the total options granted to all employees will vary significantly from quarter to quarter, due in part to the timing of annual performance-based grants to Named Executives. For example, Named Executive grants as a percentage of total grants during the first six months of fiscal 2003 were higher than we expect for fiscal 2003 as a whole due in part to performance grants to Named Executives during the first quarter of fiscal 2003.
19.Stock-Based Incentive Program
We follow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for these stock-based incentives. See Note 1. In October 1995 the FASB issued SFAS 123, “Accounting for Stock Based Compensation,” and in December 2002 the FASB issued SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”Although these pronouncements allow us to continue to follow the APB 25 guidelines and not record compensation expense for most stock-based compensation, we are required to disclose our pro forma net income (loss) and net income (loss) per share as if we had adopted SFAS 123 and SFAS 148. The pro forma impact of applying SFAS 123 and SFAS 148 in the second quarter and first six months of fiscal 2002 and 2003 does not necessarily represent the pro forma impact in future quarters or years.
To determine the pro forma impact, we have employed the widely-used Black-Scholes model to estimate the fair value of options granted. This valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected stock price volatility. Because our outstanding stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect this estimate, we believe the Black-Scholes model does not provide a reliable single measure of the fair value of our stock options. Inputs used for the valuation model are set forth in the tables below.
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Options | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Expected life (years) | 1.89 - 4.89 | 1.92 - 4.92 | 1.89 - 4.89 | 1.91 - 4.92 | ||||||||||||
Expected volatility factor | 0.74 | 0.77 | 0.74 | 0.77 - 0.78 | ||||||||||||
Risk-free interest rate (%) | 1.23 - 5.47 | 1.03 - 4.43 | 1.23 - 5.47 | 1.03 - 4.43 | ||||||||||||
Expected dividend yield (%) | — | — | — | — |
Employee Stock Purchase Plan | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Expected life (years) | 1.00 | 1.00 | 1.00 | 1.00 | ||||||||||||
Expected volatility factor | 0.74 | 0.78 | 0.74 | 0.78 | ||||||||||||
Risk-free interest rate (%) | 1.80 - 2.70 | 1.23 | 1.80 - 2.70 | 1.23 | ||||||||||||
Expected dividend yield (%) | — | — | — | — |
The following table illustrates the effect on our net income (loss) and net income (loss) per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based incentives using the Black Scholes valuation model. For purposes of this reconciliation, we add back to previously reported net income (loss) all stock-based incentive expense that relates to acquisitions then deduct the pro forma stock-based incentive expense determined under the fair value method for all awards. The pro forma stock-based incentive expense has no impact on our cash flow. In the future, we may elect, or be required, to use a different valuation model, which could result in a significantly different impact on our pro forma net income (loss).
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
(In thousands, except per share amounts) | 2002 | 2003 | 2002 | 2003 | |||||||||||||
Net income (loss) | |||||||||||||||||
Net income, as reported | $ | 119,868 | $ | 128,430 | $ | 27,441 | $ | 73,745 | |||||||||
Add: Stock-based incentive expense included in reported net loss, net of income taxes | 925 | 263 | 1,851 | 1,200 | |||||||||||||
Deduct: Total stock-based incentive expense determined under fair value method for all awards, net of income taxes | (30,475 | ) | (23,997 | ) | (53,882 | ) | (46,871 | ) | |||||||||
Pro forma net income (loss) | $ | 90,318 | $ | 104,696 | $ | (24,590 | ) | $ | 28,074 | ||||||||
Net income (loss) per share | |||||||||||||||||
Basic - as reported | $ | 0.56 | $ | 0.62 | $ | 0.13 | $ | 0.36 | |||||||||
Basic - pro forma | $ | 0.42 | $ | 0.51 | $ | (0.12 | ) | $ | 0.14 | ||||||||
Diluted - as reported | $ | 0.55 | $ | 0.60 | $ | 0.13 | $ | 0.35 | |||||||||
Diluted - pro forma | $ | 0.41 | $ | 0.49 | $ | (0.12 | ) | $ | 0.13 | ||||||||
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12. 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 Rubin case was dismissed on November 19, 2001. 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, Central District of California, Eastern Division. Following Intuit’s successful motion to dismiss several of the claims, an amended complaint was filed on May 2, 2001. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior Court of the State of California, San Bernardino County, Rancho Cucamonga Division. An amended complaint in the Almanza suit was filed on October 26, 2000. These purported class actions alleged 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 Web site. The complaints sought injunctive relief, orders to disgorge profits related to the alleged acts, and statutory and other damages. In August 2001,On January 6, 2003, a settlement between Intuit and the plaintiffs’ counsel in all of the remaining cases except Rubin reached an agreement in principle to resolvewas preliminarily approved by the cases, subject tofederal court with a final approval based onhearing scheduled for June 2003. The proposed settlement terms that are not material to Intuit. The Rubin case was dismissed on November 19, 2001.
Intuit is subject to othercertain routine 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.
20.13. Related Parties
Outstanding loans to executive officers and other employees consisted of the following at the dates indicated. Loans to executive officers have generally been made in connection with their relocation and purchase of a new residence near their new place of work. Consistent with the requirements of the Sarbanes-Oxley legislation enacted on July 30, 2002, we did not make or modify any loans to executive officers after July 30, 2002. We do not intend to make or modify any loans to executive officers in the future.
July 31, | January 31, | |||||||
(In thousands) | 2002 | 2003 | ||||||
Loans to executive officers | $ | 14,865 | $ | 14,891 | ||||
Loans to other employees | 6,405 | 5,077 | ||||||
$ | 21,270 | $ | 19,968 | |||||
One employee with previously outstanding loans totaling approximately $1.2 million became an executive officer during the first six months of fiscal 2003. Loans to executive officers totaling approximately $1.1 million were also repaid during the first half of fiscal 2003.
14. Subsequent Events
On MayFebruary 7, 2002,2003, we entered intocompleted the sale of our wholly-owned Japanese subsidiary, Intuit KK, to Advantage Partners, Inc., a definitive agreement with CBS Employer Services, Inc. (“CBS”) pursuant to which Intuit will acquire all of the outstanding stock of CBS. CBS is a leading provider of full-service outsourced payroll functions for small businesses. Intuit plans to combine its outsourced payroll business with that of CBS under the leadership of CBS’s chief executive officer. Intuit’s payroll processing centerprivate equity investment firm located in Reno, Nevada and CBS’s payroll processing center in San Bernardino, California will be the largest centers for the combined businesses.Japan. Under the terms of the final sale agreement, Intuit will acquire allAdvantage Partners purchased 100 percent of the outstanding Intuit KK stock for 9.5 billion yen or approximately $79 million as of CBSFebruary 7, 2003. We will record a gain on disposal of discontinued operations in the third quarter of fiscal 2003. See Note 6.
Our Premier payroll offering has been marketed and sold by Wells Fargo Bank to its customers under the bank’s brand. On February 12, 2003, we acquired for approximately $74.5$29 million in cash the rights to brand and $3.5 million in Intuit stock. The transaction has been approved bymarket the boards of both Intuit and CBS and is expectedoffering to close in the fourth quarter of fiscal 2002, subject to various conditions, including approval of CBS’s shareholders and customary regulatory and other approvals.Wells Fargo customers who currently use Intuit’s service.
On May 8, 2002, we entered into a definitive agreement with The Flagship Group, the parent company of American Fundware, Inc. (“American Fundware”) pursuant to which Intuit will acquire all of the outstanding stock of The Flagship Group. American Fundware offers financial accounting solutions for nonprofit organizations. American Fundware will be operated as a separate business unit of Intuit led by American Fundware’s chief executive officer and headquartered in Denver, Colorado. Under the terms of the agreement, Intuit will acquire all of the outstanding stock of The Flagship Group for approximately $22 million in Intuit stock and $4 million in cash. The transaction has been approved by the boards of both Intuit and The Flagship Group and is expected to close in the fourth quarter of fiscal 2002, subject to various conditions, including approval of The Flagship Group’s shareholders and customary other approvals.
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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CautionsCaution about Forward LookingForward-Looking Statements
Throughout this Form 10-Q, you will find “forward-looking”Report, we make forward-looking statements or statementsthat are based on our current expectations, estimates and projections about events or circumstancesour business and our industry, and that have not yet occurred.reflect our beliefs and assumptions based on information available to us at the date of this Report. 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, statements about the seasonalityamong other things, projections of our businesses, thefuture financial performance, our anticipated growth, our strategies and trends we seeanticipate in the revenue from our various businesses and in the markets in which we compete,operate and the competitive nature and anticipated growth of those markets.
We caution investors that forward-looking statements are only predictions, based on our projected costs and expenses, the effect of changes in our business model and operational processes and our capital needs. The section “Risks That Could Affect Future Results” also contains forward-looking statements.current expectations about future events. These forward-looking statements involveare not guarantees of future performance and are subject to risks, and uncertainties and ourassumptions that are difficult to predict. Our actual results, performance or achievements could differ materially. We cannot guarantee future resultsmaterially from those expressed or that current expectations will be accurate, and we will not update information in this Form 10-Q if anyimplied by the forward-looking statement later turns out to be inaccurate. Thestatements. Some of the important factors that could impact our future operating results and could cause our results to differ are discussed in this Item 2 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Riskscaption “Risks That Could Affect Future Results,Results.” at the end of Item 2. You should read Item 2 in conjunction with the Consolidated Financial Statements and related Notes in Part I, Item 1 of this Form 10-Q and our fiscal 2001 Form 10-K. We encourage you to read that section carefully. You should carefully consider those risks, in addition to the other information in this Report, in our Form 10-K for fiscal 2002 (filed with the SEC on September 25, 2002) and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We caution investors not to rely on these sections carefully.forward-looking statements, which reflect management’s analysis only as of the date of this Report. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.
Overview
Intuit’s Mission. Intuit’s mission is to revolutionize howtransform the way people run their businesses and manage their financial lives,lives. Intuit is a leading provider of innovative small business and howtax preparation software products and services that are designed for small businesses, consumers and accounting professionals manage their businesses. We are the leading providerprofessionals. Our products and services fall into five principal categories: our QuickBooks line of small business accounting tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers,business management solutions; small businesses and accounting professionals. Our principalbusiness products and services that include Quicken®, QuickBooks®, Quicken TurboTax®, ProSeries®, Lacerte®payroll, financial supplies, technical support and Quicken Loans®.information technology solutions; TurboTax consumer tax products and services; ProSeries and Lacerte professional tax products and services; and our Intuit line of industry-specific vertical business management solutions.
Expanding Customer Segments and Product and Service Offerings. During the last year, we have expanded both the customer segments that we serve, as well as the products and services that we offer our target customers. Historically, we targeted individuals and small businesses with less than 20 employees. We continue to serve those segments with products and services such as QuickBooks, TurboTax and Quicken. In addition, we are now targeting small businesses with up to 250 employees. We are addressing this new customer segment with a number of new products and services under our Right for My Business strategy. We are introducing industry-specific solutions to meet the specialized requirements of small businesses in selected vertical industries by developing industry-specific versions of QuickBooks, and acquiring companies that offer business management solutions to small businesses in selected vertical businesses. In addition, we introduced new versions of QuickBooks for companies that, due to their larger size or complexity, have more demanding accounting needs. We have also introduced business solutions that go beyond accounting software to address a wider range of business management challenges that small businesses face. We expect to continue to expand in these directions over the next several years.
Evolving Distribution Channels. We have been expanding our distribution channels to accommodate the expansion of the customer segments we serve and the range of products and services we offer. In the retail channel, we are selling an increasing proportion of our software products directly to a variety of retailers rather than through a few major distributors. As we offer more complex, higher priced software products than our traditional retail software products, we expect that direct sales will continue to become an increasingly important source of revenue and new customers. The direct channel is also becoming a more important channel for our traditional desktop products, including TurboTax. Finally, as we add products and services that are complimentary to our core products, we are
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focusing on strengthening our cross-selling capabilities. This allows us to generate additional revenue from our existing customers, particularly our small business customers.
Seasonality. Our tax businesses are highly seasonal — particularly our tax business, but also small business and personal finance to a lesser extent.seasonal. Sales of tax preparation products and services are heavily concentrated in the period from November through April. Sales of personal finance and small business products are typically strongest during the calendar year-end holiday buying season and the beginning of the calendar year, and therefore major product launches for these products usually occur in the fall or early winter to take advantage of these customer buying patterns. These seasonal patterns mean that our total net revenue is usually highest during our second and third quarters ending January 31 and April 30. Since fiscal quarters.2000, we have seen an increasing portion of our Consumer Tax annual revenue recognized during the third quarter compared to the second quarter, and we expect that trend to continue during fiscal 2003. We typically report a losslosses in our first and fourth quarters ending October 31 and July 31 when revenue from our seasonaltax businesses is relatively lower than our second and third quarters,are minimal, but operating expenses to develop new products and services continue at relatively consistent levels. Operating
Impact of Acquisitions. Our recent acquisitions of businesses and assets have affected the comparability of our results. We have completed six acquisitions since the beginning of fiscal 2002, which have affected the comparability of revenue between fiscal 2002 and 2003. The impairment and/or amortization of goodwill and other intangible assets we have acquired in connection with acquisitions has had a significant impact on our operating results, can also fluctuate forand on the comparability of results from period to period and year over year. During the second quarter and first six months of fiscal 2002, we recorded amortization of goodwill and other reasons such as changesintangibles and other acquisition-related charges of $62.0 million and $103.0 million, which included a total of $22.0 million in product release dates, occasional events such as acquisitions, dispositions, gainsimpairment charges. Starting with the first quarter of fiscal 2003, we no longer amortize goodwill in accordance with Statement of Financial Standards No. 142. As a result, our acquisition-related charges significantly decreased during the second quarter and losses from marketable securities,first half of fiscal 2003, to $9.2 million and product price cuts in quarters with relatively high fixed expenses.$18.6 million.
Critical Accounting Policies
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. See Note 1 of the financial statements for more information about these critical accounting policies, as well as descriptions of other significant accounting policies.
-19-Net Revenue – Revenue Recognition. Intuit derives revenues from the sale of packaged software products, product support, professional services, outsourced payroll services and multiple element arrangements that may include any combination of these items. We follow the appropriate revenue recognition rules for each type of revenue. See Note 1 of the financial statements,“Net Revenue.”In general, we recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectibility is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether vendor-specific evidence of fair value exists for each element and to determine whether and when each element has been delivered. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Revenue that we cannot recognize in a particular period is reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied. When we acquire a company, we review its revenue recognition policies promptly and bring them into compliance with our revenue recognition policies where necessary.
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In the past, actual returns and rebates have not generally exceeded our reserves. However, actual returns and rebates in any future period are inherently uncertain. If we | ||
• | ||
• | Goodwill, Purchased Intangibles and Other Long-Lived Assets – Impairment Assessments. We make judgments about the recoverability of goodwill, purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate that an other-than-temporary impairment in the remaining value of the assets recorded on our balance sheet may exist. We test the impairment of goodwill annually or more frequently if indicators of impairment arise. In order to estimate the fair value of long-lived assets, we make various assumptions about the future prospects for the business that the asset relates to and typically estimate future cash flows to be generated by these businesses. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses would result in greater impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions would result in smaller impairment charges, higher net income and higher asset values. At January 31, 2003, we had $583.9 million in goodwill and $124.3 million in intangible assets on our balance sheet. See Note 1, “Goodwill, Purchased Intangible Assets and Other Long-lived Assets”and“Recent Pronouncements,”and Note 3 of the financial statements for more information about how we make these judgments. | |
• | Income Taxes |
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Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Our net deferred tax asset as of April 30, 2002 was $233.9 million, net of the valuation allowance of $11.4 million. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets (primarily consisting of certain net operating losses carried forward by our non-U.S. subsidiaries) before they expire. The valuation allowance is based on our estimates of taxable income by the jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or if we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially reduce our net income.
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Management must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our net deferred tax asset as of January 31, 2003 was $234.1 million, net of the valuation allowance of $6.8 million. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets (consisting primarily of certain net operating losses carried forward by our international subsidiaries and certain state capital loss carryforwards) before they expire. The valuation allowance is based on our estimates of taxable income for the jurisdictions in which we operate and the period over which our deferred tax assets will be realizable. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, we cannot assure that we will not be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we make the increase. |
Results of Operations
We have categorizedTotal Net Revenue
Total net revenue of $558.1 million and $770.9 million increased 17% and 22% in the second quarter and first six months of fiscal 2003 compared to the second quarter and first six months of fiscal 2002. The following is a discussion of total net revenue discussion by reportable segment for those periods. In the second quarter of fiscal 2003, we revised our business divisions. The table below shows each business division’s percentagefiscal 2002 reportable segments to reflect the way we currently manage and view our businesses. We determined that the QuickBooks product component of our total net revenue forfiscal 2002 Small Business segment was a separate reportable segment and we combined our fiscal 2002 Employer Services segment with the three-balance of Small Business to arrive at the fiscal 2003 segment called Small Business Products and nine-month periods ended April 30, 2001Services. We began reporting Vertical Business Management Solutions (formerly Small Business Verticals) as a separate segment in fiscal 2003. Finally, we combined our fiscal 2002 Personal Finance and 2002. Information forGlobal Business segments to arrive at the fiscal 2001 has been2003 segment called Other Businesses. We have reclassified previously reported fiscal 2002 and first quarter fiscal 2003 segment results to conform to the second quarter fiscal 2002 financial presentation for comparability.2003 presentation. See Note 137 of the financial statements for additional information about our business segments, which correspond to the business divisions described below.
Total Net Revenue | Q3 | % Total Net | Q3 | % Total Net | Q3 % | YTD | % Total Net | YTD | % Total Net | YTD % | |||||||||||||||||||||||||||||||||
FY01 | Revenue | FY02 | Revenue | Change | FY01 | Revenue | FY02 | Revenue | Change | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||
Small Business | |||||||||||||||||||||||||||||||||||||||||||
Product | $ | 71.8 | $ | 99.9 | $ | 268.4 | $ | 314.1 | |||||||||||||||||||||||||||||||||||
Service | 23.5 | 29.2 | 66.0 | 89.9 | |||||||||||||||||||||||||||||||||||||||
Other | 7.0 | 0.7 | 16.7 | 3.9 | |||||||||||||||||||||||||||||||||||||||
Subtotal | 102.3 | 24 | % | 129.8 | 24 | % | 27 | % | 351.1 | 33 | % | 407.9 | 31 | % | 16 | % | |||||||||||||||||||||||||||
Tax | |||||||||||||||||||||||||||||||||||||||||||
Product | 139.9 | 198.2 | 333.9 | 422.0 | |||||||||||||||||||||||||||||||||||||||
Service | 93.4 | 117.8 | 106.4 | 128.9 | |||||||||||||||||||||||||||||||||||||||
Other | 0.4 | 1.3 | 3.1 | 2.7 | |||||||||||||||||||||||||||||||||||||||
Subtotal | 233.7 | 55 | % | 317.3 | 58 | % | 36 | % | 443.4 | 41 | % | 553.6 | 43 | % | 25 | % | |||||||||||||||||||||||||||
Personal Finance | |||||||||||||||||||||||||||||||||||||||||||
Product | 15.1 | 10.2 | 74.9 | 65.5 | |||||||||||||||||||||||||||||||||||||||
Service | 4.1 | 1.6 | 10.1 | 6.3 | |||||||||||||||||||||||||||||||||||||||
Other | 10.8 | 12.1 | 38.0 | 39.1 | |||||||||||||||||||||||||||||||||||||||
Subtotal | 30.0 | 7 | % | 23.9 | 4 | % | (20 | )% | 123.0 | 11 | % | 110.9 | 9 | % | (10 | )% | |||||||||||||||||||||||||||
Quicken Loans | |||||||||||||||||||||||||||||||||||||||||||
Product | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Service | 35.2 | 43.5 | 72.2 | 140.0 | |||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Subtotal | 35.2 | 8 | % | 43.5 | 8 | % | 24 | % | 72.2 | 7 | % | 140.0 | 11 | % | 94 | % | |||||||||||||||||||||||||||
Global Business | |||||||||||||||||||||||||||||||||||||||||||
Product | 17.9 | 20.5 | 59.6 | 64.6 | |||||||||||||||||||||||||||||||||||||||
Service | 5.6 | 5.1 | 19.1 | 15.5 | |||||||||||||||||||||||||||||||||||||||
Other | 0.5 | 0.3 | 1.9 | 3.9 | |||||||||||||||||||||||||||||||||||||||
Subtotal | 24.0 | 6 | % | 25.9 | 5 | % | 8 | % | 80.6 | 8 | % | 84.0 | 6 | % | 4 | % | |||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||||||||||
Product | — | 3.7 | — | 3.7 | |||||||||||||||||||||||||||||||||||||||
Service | — | 1.1 | — | 1.1 | |||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Subtotal | — | 0 | % | 4.8 | 1 | % | n/a | — | 0 | % | 4.8 | 0 | % | n/a | |||||||||||||||||||||||||||||
Total net revenue | $ | 425.2 | 100 | % | $ | 545.2 | 100 | % | 28 | % | $ | 1,070.3 | 100 | % | $ | 1,301.2 | 100 | % | 22 | % | |||||||||||||||||||||||
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reportable segments.
Small Business DivisionQuickBooks
Small Business DivisionQuickBooks product revenue is derived primarily from QuickBooks desktop software products, financial supplies and our Basic payroll offering. Small Business Divisionproducts. QuickBooks services revenue is derived primarily from our Deluxe and Premier payroll services and from QuickBooks support plans.Online Edition.
Small Business DivisionQuickBooks total net revenue of $93.5 million increased 27%11% in the thirdsecond quarter of fiscal 2003 compared to the second quarter of fiscal 2002. The revenue increase reflected 9% higher unit sales, including unit sales of two new products with enhanced functionality that we did not offer during the second quarter of fiscal 2002 compared– QuickBooks Point of Sale and QuickBooks Enterprise Solutions. These new products were launched at the end of fiscal 2002 as part of our Right for My Business strategy and have significantly higher average selling prices than our traditional line of QuickBooks products. Revenue from our QuickBooks Basic and Pro products increased 9% due primarily to higher average selling prices. Finally, sales of QuickBooks Pro for Mac, which we launched in the thirdsecond quarter of fiscal 2001. Total QuickBooks-related2003, also contributed to revenue (which includes growth.
QuickBooks desktop, QuickBooks Internet Gateway, QuickBooks support plans and QuickBooks fortotal net revenue of $131.5 million increased 21% in the Web) for the quarter increased 36%first six months of fiscal 2003 compared to the same period lastof the prior year. QuickBooks desktop product revenue alone grew much faster, experiencing 65% growth that reflectedThe increase was due primarily to 15% higher unit sales and 17% higher average selling prices that were driven bydue to the November 2001 launchfiscal 2002 introduction of our higher-priced QuickBooks Premier products, as well as higher unit sales. The volume increase was driven by strong upgrade sales, whichproducts. For the full fiscal year, we believe were due in partexpect QuickBooks revenue to our decisiongrow 20 to discontinue technical support30%.
Small Business Products and tax tableServices
Small Business Products and Services product revenue is comprised of QuickBooks Do-It-Yourself Payroll, financial supplies and software solutions that help businesses manage their information technology resources and assets. Services revenue for this segment is comprised of outsourced payroll services during calendar 2002 for customers using certain older versions of QuickBooks. We believe that the availability of a range of Intuit Developer Network offerings to QuickBooks 2002 customers may also have contributed to the stronger upgrade sales. Third quarter QuickBooks-related revenue growth also reflected strong results fromand QuickBooks support plans. In August 2001,Our outsourced payroll services consist of QuickBooks Assisted Payroll Service, a payroll service that is integrated with QuickBooks and handles the back-end aspects of payroll processing, including tax payments and filings; and Intuit Payroll Services Complete Payroll, which provides traditional, full service payroll processing, tax payment and check delivery services. Intuit Payroll Services Complete Payroll encompasses the business of CBS
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Employer Services, Inc. (CBS), which we began offering several higher-end support plans, which resultedacquired in significantly higher average selling prices that more than offset declines in volume compared to the third quarter last year. Revenue growth in QuickBooks-related products and services was partially offset by a decline in QuickBooks Internet Gateway revenue. Revenue for this business decreased due to a sharp decline in upfront fees received from Internet Gateway participants, as well as a decrease in transaction-based fees that reflects lower customer demand for Internet Gateway services. Financial supplies revenue increased modestly during the quarter.
Payroll revenue increased 25% from quarter to quarter, reflecting 38% combined growth for the QuickBooks-branded Basic and Deluxe offerings, with revenue for the Premier service roughly flat. Price increases accounted for a significant portion of the Basic and Deluxe revenue growth, although the number of customers for the combined offerings also increased by approximately 17%. We expect payroll revenue growth to be slower during the fourth quarter of fiscal 20022002. Our outsourced payroll business also includes our Premier Payroll Service. Other revenue for this segment consists of royalties from small business online transactions such as QuickBooks Merchant Account Service and QuickBooks Online Billing.
Small Business Products and Services total net revenue of $120.7 million and $221.5 million increased 33% and 31% in the second quarter and first six months of fiscal 2003 compared to the first halfsame periods of fiscal 2002. See “Risks that Could Affect Future Results” atGrowth in this segment was driven primarily by increases in payroll revenue and the endacquisition of this Item 2.Intuit Information Technology Solutions (IITS), formerly Blue Ocean Software, Inc., in the first quarter of fiscal 2003.
Small Business DivisionPayroll total net revenue increased 33% in the second quarter of fiscal 2003 compared to the second quarter of the prior year. Payroll product revenue increased 22% due to 10% higher unit sales and 11% higher average selling prices driven by price increases. Payroll services revenue increased 44% due almost entirely to our acquisition of CBS. IITS contributed $11.1 million or 37% of segment revenue growth during the second quarter of fiscal 2003. QuickBooks support revenue grew 26% due to a 24% increase in the number of support plans sold and continued strength in the higher-priced support plans for higher-end QuickBooks products, such as QuickBooks Premier, QuickBooks Point of Sale and QuickBooks Enterprise Solutions, that we introduced during fiscal 2002.
Payroll total net revenue increased 36% in the first ninesix months of fiscal 2002 increased 16%2003 compared to the same period of the prior year, due primarily to 25% growth in payroll product revenue because of higher unit sales and higher average selling prices and 48% growth in payroll services revenue due almost entirely to our acquisition of CBS. We expect the CBS component of Intuit Payroll Services Complete Payroll to continue to be a significant source of growth for our payroll business during the remainder of fiscal 2003. IITS contributed $17.1 million or 32% of segment revenue growth during the first ninesix months of fiscal 2001. QuickBooks-related product revenue increased 11%, reflecting higher average selling prices.2003, while QuickBooks support revenue increased 47%grew 31% on strength in support plans for higher-priced QuickBooks products. We expect IITS and QuickBooks support to continue to be important sources of revenue growth for this segment during the period due to higher average selling prices. Payroll had strong revenue growth, primarily reflecting price increases as well as some unit growth for the Basic and Deluxe offerings, and financial supplies revenue increased modestly.remainder of fiscal 2003.
Consumer Tax Division
Consumer Tax Division product revenue is derived primarily from Quicken TurboTax federal and state consumer desktop tax preparation products and ProSeries and Lacerte professional tax preparation products. Consumer Tax Division services revenue is derived primarily from Quicken TurboTax for the Web online tax preparation services and consumer electronic filing services.
Consumer Tax Division total net revenue of $95.2 million and $101.3 million increased 36%11% and 12% in the thirdsecond quarter and first six months of fiscal 2003 compared to the same periods of the prior year. TurboTax for the Web revenue increased $4.9 million or 242% in the second quarter due to 46% unit growth and higher average selling prices for federal tax offerings with advanced functionality. Electronic filing revenue was up 85% in the second quarter of fiscal 2002 compared to the third quarter of fiscal 2001. Revenue from our consumer tax business increased 43%2003. Desktop units were down 8% in the thirdsecond quarter of fiscal 2002 compared to the third quarter of fiscal 2001. Revenue from TurboTax desktop products increased 26%, due in part to higher average selling prices resulting fromour increasing use of retail consignment, for which revenue is not recognized until the introductionend user sale is confirmed. The decrease is also due in part to a new direct marketing program called MyCD that we initiated this year. In this campaign, we shipped TurboTax directly to customers early in the season. This has the effect of a higher-priced premium product as well as a price increase for our Deluxe product. Total units also increased approximately 19% fromdelaying revenue to the third quarter of the prior year. Revenue from TurboTaxtime customers use and pay for the Web moreproduct, rather than doubled, reflectingwhen they purchase it at a significant price increase as well as 84% unit growth. Electronic filing unitsretail store or from Intuit directly. Due to the seasonal nature of our Consumer Tax business, first quarter fiscal 2002 and fiscal 2003 revenue were also up significantly. Fromwas nominal.
Since fiscal 2000, to 2001, we sawhave seen an increasing portion of our Consumer Tax annual revenue growth shift fromduring the third quarter compared to the second quarter, to the third quarter, and we expect that trend continued thisto continue during fiscal year.2003. This trend results in part from more customers using our Web-based tax offerings, for which have revenue peaks later in the tax season. In recent yearsHowever, retail sales have also shifted to later in the tax season, in part because of our increasing use of consignment in that channel. This year, two additional dynamics are contributing to the shift. First, as noted above, our MyCD marketing campaign is delaying revenue to the third quarter. Second, we incorporated product activation technology in certain TurboTax products this year in an effort to curb multiple unauthorized uses of a single product. If a copy is “passed along” to another user, we would not recognize the additional revenue from the second user until that user activates and pays for the product — which would be later in the season.
Revenue fromWe will not have complete results for the entire 2002 tax season until late in the fiscal year. There are ongoing risks and uncertainties associated with our professional tax preparation productsConsumer Tax business, including intense competition that could result in lower average selling prices and/or a decline in our share of desktop software sales, and services increased 19%, with more than halfthe uncertain impact of the growth resulting from our acquisition of Tax and Accounting Software Corporation (“TAASC”) in April 2001 and from higher sales of electronic filing services. Our recent efforts to reduce the unauthorized sharing of professionalproduct activation.
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tax products (by hard-coding the purchasing tax preparer’s name in the software)Professional Tax and higher average selling prices for ourAccountants’ Solutions
Professional Tax and Accountants’ Solutions (“PTAS”) product revenue is derived primarily from ProSeries and Lacerte unlimited-use products also contributedprofessional tax preparation software products. PTAS services revenue is derived primarily from electronic filing and training services.
PTAS total net revenue of $151.2 million and $158.5 million increased 9% in the second quarter and first six months of fiscal 2003 compared to the revenue growth.
Duesame periods of the prior year. The increases are due to price increases related to product enhancements, an increase in cross-sell efforts to the seasonalityexisting tax client base and an increase in the number of the taxcustomers. Our PTAS business is highly seasonal and we will not have complete results for the fullentire 2002 tax season until late in the fiscal year.
Vertical Business Management Solutions
Vertical Business Management Solutions (“VBMS”) revenue is derived from four businesses that we acquired in fiscal 2002 that provide small business management solutions for vertical industries. Those businesses are more meaningful than results for any particularIntuit Distribution Management Solutions, Intuit MRI Real Estate Solutions, Intuit Construction Business Solutions, and Intuit Public Sector Solutions. VBMS product revenue is derived from business management software that is specific to the industries these businesses serve. VBMS services revenue consists primarily of technical support, installation, consulting and training services.
These vertical businesses contributed $24.0 million to second quarter 2003 revenue and results$42.8 million to revenue for the first nine months of a fiscal year are generally indicative of results for the full season. Tax Division total net revenue increased 25% in the first ninesix months of fiscal 2002 compared2003. We expect 10% to 30% revenue growth for these businesses in the first nine months ofaggregate during fiscal 2001. Revenue from our consumer tax business increased 28% on strength from TurboTax desktop products as well as TurboTax for the Web, which experienced combined paid federal unit growth of 20%. Electronic filing revenue also contributed to the year-over-year growth. Revenue from our professional tax preparation products increased 25%, with significant growth resulting from our acquisition of TAASC, electronic filing services, efforts to reduce unauthorized product sharing and higher average selling prices for our unlimited-use professional tax products.
Although we are encouraged by the year-to-date results for our tax business, revenues for the full tax season are still subject to consumer product returns from our retail distribution channels. While we expect our reserves for returned products will be adequate to cover retailers’ returns of unsold products during the fourth quarter of fiscal 2002, higher than expected returns could have a negative impact on2003, over their aggregate revenue for the full season. See “Critical Accounting Policies — Net Revenue — Return and Rebate Reserves” at the beginning of this Item 2.comparable period before we acquired them.
Personal Finance DivisionOther Businesses
Other Businesses consist primarily of personal finance and Canada. Personal Finance Divisionfinance product revenue is derived primarily from Quicken desktop software products. Personal Finance Divisionfinance services revenue is minimal. Otherminimal while other revenue consists of fees from consumer online transactions and Quicken.com advertising revenue and online transactions revenue.
Personal Finance Division total net revenue decreased 20% in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. The decrease reflected continued revenue growth in our online transactions business that was more than offset by a 37% decline in Quicken revenue and a 35% decline in Quicken.com revenue from the third quarter of fiscal 2001 to the third quarter of fiscal 2002. The decrease in Quicken revenue reflected the continuing decline of the personal finance desktop software category as more personal finance functionality becomes available to consumers at no cost on the Internet. The decrease in Quicken.com advertising revenue reflected the industry-wide decline in spending by purchasers of Internet advertising.
Revenue patterns for the Personal Finance Division for the first nine months of fiscal 2001 and 2002 were similar to the third quarter trends described above. Revenue decreased 10%, reflecting declines in Quicken and advertising revenue that were partially offset by an increase in online transactions revenue.
Quicken Loans Division
Quicken Loans Division revenue is derived primarily from gains on the sale of loans and post-closing servicing arrangements in bulk to participating financial institutions, and from loan fees we receive for originating loans. All revenue generated by the division is services revenue.
Quicken Loans Division total net revenue increased 24% in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. The volume of loans sold grew 29%, reflecting increased consumer demand to refinance mortgage loans in light of relatively low interest rates. The volume increase came from conventional loans, as the volume for government-funded loans and alternative sub-prime loans declined. This was partially offset by a 5% decline in the average revenue per loan, reflecting a decrease in both average gains on sales of loans and average loan fees. While revenue per loan from conventional loans increased, this was more than offset by decreases for government funded loans and alternative sub-prime loans which have higher margins than conventional loans. We expect the revenue growth rates for Quicken Loans to be lower in the fourth quarter of fiscal 2002 compared to the first half of fiscal 2002 and on a year-over-year basis. Mortgage rate increases, the impact of the economic climate on the housing market and other factors could negatively impact the volume of applications and closed loans, particularly our most mortgage-rate sensitive products such as conventional refinancing loans. See “Risks that Could Affect Future Results,” at the end of this Item 2 and “Interest Rate Risk” in Item 3 below.
Quicken Loans Division total net revenue increased 94% in the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001, reflecting a 100% increase in sold loan volume. A large increase in conventional loan
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volume more than offset declines in government and alternative sub-prime loan volume. This volume growth was partially offset by a slight decline in the average revenue per loan.
Global Business Division
Global Business Division In Canada, product revenue is derived primarily from Yayoi small business desktop accounting products in Japan,localized versions of QuickBooks and QuickBooks, Quicken andas well as QuickTax desktop software productsproducts. Services revenue in Canada. Global Business Division services revenueCanada consists primarily consists of revenue from software maintenance contracts sold with Yayoi software in Japan.QuickBooks.
Global Business DivisionOther Businesses total net revenue increased 8% in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. Revenue from Canada increased 57% period to period. This reflected strong tax season results for QuickTax, due in part to the preliminary success of our efforts to reduce unauthorized sharing of desktop software. Tax revenue growth$73.5 million and $115.4 million was partially offset by modest revenue declines for QuickBooks and Quicken. Revenue in Japan declined 17% during the quarter compared to the third quarter of fiscal 2001, with increased revenue from Yayoi maintenance contracts more than offset by decreased revenue from Yayoi products and by the effect of discontinuing the QuickBooks product line in Japanessentially flat in the second quarter and first six months of fiscal 2003 compared to the second quarter and first six months of fiscal 2002.
Global Business Division Personal finance total net revenue increased 4%of $40.0 million and $77.2 million decreased 13% and 9% while Quicken product revenue declined 6% and 1%, reflecting the continuing overall lack of growth in the personal finance desktop software category. Aggregate average selling prices in the retail channel were 5% higher due to the second quarter fiscal 2002 introduction of Quicken Premier and price increases for the Home and Business product. Lower unit sales more than offset the higher average selling prices. Personal finance other revenue decreased 14% in the second quarter and first ninesix months of fiscal 20022003 compared to the first nine monthssame periods of fiscal 2001. This increase included 15% growth2002 due to the continuing industry-wide slowness in spending by purchasers of Internet advertising and our exit from certain online businesses in fiscal 2002. We expect the market for our personal finance offerings to continue to decline during the remainder of fiscal 2003. Total net revenue from Canada reflectingof $31.2 million and $33.3 million increased revenue45%and 31% in the second quarter and first half of fiscal 2003 compared to the second quarter and first half of fiscal 2002. The Canadian introduction of Right for Me consumer tax products that was partially offsettargeted at investors, those who maintain home offices and taxpayers preparing for retirement increased average selling prices by lower QuickBooks24% and Quicken revenue.unit sales by 20% in the fiscal 2003 periods.
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Cost of Revenue in Japan decreased 12%, with a decline in QuickBooks revenue that was partially offset by increases for other small business products and services.
Cost of Revenue | Q3 | % of Related | Q3 | % of Related | Q3 % | YTD | % of Related | YTD | % of Related | YTD % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FY01 | Revenue | FY02 | Revenue | Change | FY01 | Revenue | FY02 | Revenue | Change | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Q2 | Related | Q2 | Related | Q2 % | YTD | Related | YTD | Related | YTD % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | (Dollars in millions) | FY02 | Revenue | FY03 | Revenue | Change | FY02 | Revenue | FY03 | Revenue | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue: | Cost of revenue: | Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of products | $ | 29.3 | 12 | % | $ | 35.1 | 11 | % | 20 | % | $ | 118.8 | 16 | % | $ | 141.3 | 16 | % | 19 | % | Cost of products | $ | 71.6 | 17 | % | $ | 71.1 | 15 | % | (1 | %) | $ | 102.3 | 20 | % | $ | 99.8 | 16 | % | (2 | %) | ||||||||||||||||||||||||||||||||||||||||||
Cost of services | 39.5 | 24 | % | 38.6 | 19 | % | -2 | % | 108.2 | 40 | % | 112.9 | 30 | % | 4 | % | Cost of services | 28.5 | 63 | % | 39.6 | 53 | % | 39 | % | 52.7 | 68 | % | 76.2 | 58 | % | 45 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of other revenue | 8.6 | 46 | % | 6.8 | 47 | % | (21 | )% | 21.2 | 36 | % | 19.7 | 40 | % | (7 | )% | Cost of other revenue | 6.2 | 35 | % | 5.2 | 30 | % | (16 | %) | 11.3 | 34 | % | 9.8 | 30 | % | (13 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of purchased software | 4.4 | — | 1.6 | — | (64 | )% | 11.2 | — | 10.4 | — | (7 | )% | Amortization of purchased software | 7.2 | n/a | 3.5 | n/a | (51 | %) | 8.9 | n/a | 6.5 | n/a | (27 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total cost of revenue | Total cost of revenue | $ | 113.5 | 24 | % | $ | 119.4 | 21 | % | 5 | % | $ | 175.2 | 28 | % | $ | 192.3 | 25 | % | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total cost of revenue | $ | 81.8 | 19 | % | $ | 82.1 | 15 | % | 0 | % | $ | 259.4 | 24 | % | $ | 284.3 | 22 | % | 10 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
There are four components of our cost of revenue: (1) cost of products, which includes the direct cost of manufacturing and shipping desktopour software products; (2) cost of services, which reflects direct costs associated with providing services, including data center costs relating to delivering Internet-based services; (3) cost of other revenue, which includes costs associated with providinggenerating advertising and marketing and online transactions;transactions revenue; and (4) amortization of purchased software, which represents the cost of depreciating products or services we obtained through acquisitions over their useful lives.
Cost of products as a percentage of product revenue was roughly flat at 11%decreased to 15% and 16% forin the thirdsecond quarter and the first nine monthshalf of fiscal 2002, compared to 12%2003 from 17% and 16% for20% in the same periods of fiscal 2002. This was primarily due to strong sales of our new higher-priced QuickBooks products: QuickBooks Premier, QuickBooks Point of Sale and QuickBooks Enterprise. These products have higher prices but essentially the same manufacturing costs as our lower-priced QuickBooks products, resulting in lower cost of revenue per unit. We also continued to improve the prior year. We loweredpackaging design for certain products and streamline some of our manufacturing processes during the second quarter and first half of fiscal 2003. This enabled us to reduce the per-unit materials, manufacturing and shipping costs for our shrink-wrap software products, resulting in significant cost savings. These savings were offset by increased costs associated with improvementsWe expect both of these factors to our product distribution function. Duringcontinue during the second quarterremainder of fiscal 2002, we established2003, resulting in slightly lower cost of products as a new third-party retail distribution relationship for our shrink-wrap software products. This distribution relationship enables us to ship a larger percentage of our products directlyproduct revenue for the full fiscal year compared to our retailers and allows us to provide inventory to our retail customers on a more timely basis. By providing better service to our retailers, we are reducing product returns and related costs.fiscal 2002.
Cost of services as a percentage of services revenue decreased to 19%53% and 30% for58% in the second quarter and first six months of fiscal 2003 from 63% and 68% in the second quarter and first six months of fiscal 2002. These decreases were primarily attributable to the growth in our outsourced payroll business during the second quarter and first half of fiscal 2003. As this business grows, we are leveraging our historical investments in data center and other infrastructure to reduce the unit cost and improve the profitability of outsourced payroll services. We expect lower cost of services during the remainder of fiscal 2003 due to this factor and because starting in the third quarter and the first nine months of fiscal 2002, compared2003 we will no longer pay royalties on our Premier payroll business to 24% and 40% forWells Fargo Bank. See Note 14 of the same periods in the prior year. These decreases were attributable primarily to our Quicken Loans Division, which experienced a significantly lower average cost per loan. The decline in average cost per loan reflected greater operational efficiencies, as well as an increase in total loan
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revenue being spread over a fixed cost base that increased only slightly. Our payroll and Web-based tax businesses, which experienced revenue growth over a relatively fixed cost base, also contributed to these decreases.financial statements.
Cost of other revenue as a percentage of other revenue increaseddecreased to 47%30% in the second quarter and 40%first half of fiscal 2003 from 35% and 34% in the same periods of fiscal 2002. In the first quarter of fiscal 2002, we moved a large number of servers that supported Quicken.com from an external hosting company to our own data center and streamlined the infrastructure. Over time, this led to decreased cost of other revenue for this business.
Amortization of purchased software for the thirdsecond quarter and the first ninesix months of fiscal 2002 compared to 46% and 36%included a $5.2 million impairment charge for the same periods in the prior year. These increases were primarily due to increased data center costs related to our Personal Finance Division’s online transaction businesses.
Amortization of purchased software decreased in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001 because of the impairments of purchased softwareintangible assets related to our Internet-basedQuicken.com advertising business and Site Solutions business that were recordedrevenue. Routine amortization charges increased in the second quarter and first six months of fiscal 2002. This resulted in2003 compared to the same periods of fiscal 2002 as a lower baseresult of additional amortization for purchased intangible assets relating to be amortizedthe acquisitions we completed in the thirdfourth quarter of fiscal 2002. Amortization
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Operating Expenses
% Total | % Total | % Total | % Total | ||||||||||||||||||||||||||||||||||||||
Q2 | Net | Q2 | Net | Q2 % | YTD | Net | YTD | Net | YTD % | ||||||||||||||||||||||||||||||||
(Dollars in millions) | FY02 | Revenue | FY03 | Revenue | Change | FY02 | Revenue | FY03 | Revenue | Change | |||||||||||||||||||||||||||||||
Customer service and technical support | $ | 50.3 | 11 | % | $ | 55.6 | 10 | % | 11 | % | $ | 86.0 | 14 | % | $ | 95.2 | 12 | % | 11 | % | |||||||||||||||||||||
Selling and marketing | 74.7 | 16 | % | 97.8 | 18 | % | 31 | % | 131.0 | 21 | % | 172.6 | 22 | % | 32 | % | |||||||||||||||||||||||||
Research and development | 51.4 | 11 | % | 66.1 | 12 | % | 29 | % | 98.8 | 16 | % | 130.2 | 17 | % | 32 | % | |||||||||||||||||||||||||
General and administrative | 28.8 | 6 | % | 38.4 | 7 | % | 33 | % | 55.0 | 9 | % | 78.0 | 10 | % | 42 | % | |||||||||||||||||||||||||
Subtotal | 205.2 | 43 | % | 257.9 | 46 | % | 26 | % | 370.8 | 58 | % | 476.0 | 62 | % | 28 | % | |||||||||||||||||||||||||
Charge for purchased research and development | — | n/a | 1.1 | 0 | % | n/a | — | n/a | 8.9 | 1 | % | n/a | |||||||||||||||||||||||||||||
Acquisition-related charges | 62.0 | 13 | % | 9.2 | 2 | % | (85 | %) | 103.0 | 16 | % | 18.6 | 2 | % | (82 | %) | |||||||||||||||||||||||||
Loss on impairment of long-lived asset | — | n/a | — | n/a | n/a | 27.00 | 4 | % | — | n/a | (100 | %) | |||||||||||||||||||||||||||||
Total operating expenses | $ | 267.2 | 56 | % | $ | 268.2 | 48 | % | 0 | % | $ | 500.8 | 79 | % | $ | 503.5 | 65 | % | 1 | % | |||||||||||||||||||||
Overview of purchased software decreased slightlyOperating Expenses
Total operating expenses were essentially flat in the second quarter and first nine monthshalf of fiscal 20022003 compared to the same periodperiods of fiscal 2001. This reflects an increase due to2002. Core operating expenses (which are subtotaled in the table above) increased 26% and 28% in those periods, while acquisition-related charges decreased dramatically. Acquisition-related charges declined because we no longer amortize goodwill and because there were no impairment charges that were recorded infor goodwill or intangible assets during the second quarter and first six months of fiscal 2002 which was more than offset by the lower third quarter fiscal 2002 amortization. See Note 4 of the financial statements.
Operating Expenses | Q3 | % Total Net | Q3 | % Total Net | Q3 % | YTD | % Total Net | YTD | % Total Net | YTD % | |||||||||||||||||||||||||||||||
FY01 | Revenue | FY02 | Revenue | Change | FY01 | Revenue | FY02 | Revenue | Change | ||||||||||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
Customer service and technical support | $ | 37.5 | 9 | % | $ | 45.8 | 8 | % | 22 | % | $ | 116.1 | 11 | % | $ | 137.9 | 10 | % | 19 | % | |||||||||||||||||||||
Selling and marketing | 68.5 | 16 | % | 89.8 | 17 | % | 31 | % | 215.1 | 20 | % | 256.7 | 20 | % | 19 | % | |||||||||||||||||||||||||
Research and development | 52.7 | 12 | % | 52.9 | 10 | % | 0 | % | 155.2 | 15 | % | 156.1 | 12 | % | 1 | % | |||||||||||||||||||||||||
General and administrative | 23.9 | 6 | % | 29.3 | 5 | % | 23 | % | 77.6 | 7 | % | 90.1 | 7 | % | 16 | % | |||||||||||||||||||||||||
Charge for purchased research and development | 0.2 | 0 | % | — | 0 | % | (100 | )% | 0.2 | 0 | % | — | 0 | % | (100 | )% | |||||||||||||||||||||||||
Charge for vacant facilities | — | 0 | % | 13.2 | 2 | % | — | — | 0 | % | 13.2 | 1 | % | — | |||||||||||||||||||||||||||
Acquisition-related charges | 122.6 | 29 | % | 37.6 | 7 | % | (69 | )% | 205.3 | 19 | % | 140.7 | 11 | % | (31 | )% | |||||||||||||||||||||||||
Loss on impairment of long-lived asset | — | 0 | % | — | 0 | % | — | — | 0 | % | 27.0 | 2 | % | — | |||||||||||||||||||||||||||
Totals | $ | 305.4 | 72 | % | $ | 268.6 | 49 | % | (12 | )% | $ | 769.5 | 72 | % | $ | 821.7 | 63 | % | 7 | % | |||||||||||||||||||||
Customer Service and Technical Support
Customer service and technical support expenses were 8%10% and 10%12% of total net revenue forin the thirdsecond quarter and the first ninesix months of fiscal 2002,2003, compared to 9%11% and 11% of total net revenue for14% in the same periods of the prior year. During both fiscal 2002 comparison periods, we benefited from2002. We continued to improve our efficiency in providingfiscal 2003 by increasing the proportion of customer service and technical support we provide through less expensively throughexpensive methods such as Web sites, online chat, email and other electronic means. However, this benefit was partially offset by higher direct sales andWe benefited from the fiscal 2002 implementation of a number of successful process excellence initiatives that reduced costs while maintaining or increasing service levels. Since support costs in the third quarter and the first nine months of fiscal 2002 associated with converting the customers of Tax and Accounting Software Corporation (“TAASC”), a company thatare to some extent driven by unit sales, we acquired in April 2001,also began to our ProSeries and Lacerte professional tax products. We expect customer service and technicalexperience somewhat lower support expenses to decreasecosts as a percentage of total net revenue duringdue to the remainderaddition to the product mix of fiscal 2002our newer versions of QuickBooks that have higher average selling prices. However, these benefits were partially offset by increased demand for customer service and technical support due to the increasing complexity of our products and to customer questions relating to product activation technology in fiscal 2003 as TAASC conversion costs gradually decline and weTurboTax desktop products. We expect to continue to benefit from lower cost, more scalable electronic customer service and technical support delivery mechanisms.mechanisms and from product mix in the remainder of fiscal 2003.
Selling and Marketing
Selling and marketing expenses were roughly flat as a percentage of revenue between the comparison periods, reflecting 17%18% and 16%22% of total net revenue forin the third quarterssecond quarter and first half of fiscal 20022003, compared to 16% and 2001,21% in the second quarter and 20% of total net revenue for the first nine monthshalf of fiscal 2002 and 2001. The increase in absolute dollars between the third quarter comparison periods was attributable to several factors, including the expansion of our small business marketing programs related to our new QuickBooks products; incremental marketing expenses for our Construction Business Solutions products (which we acquired in November 2001); expansion of our consumer tax and Quicken Loans distribution channels; and our donation of $3.0 million to The Intuit Foundation, which will be used to benefit the community through contributions to selected non-profit organizations. Between the nine-month comparison periods,
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2002. In fiscal 2003, selling and marketing expenses decreasedincreased in absolute dollars and as a percentage of total net revenue for our Quicken Loans and Payroll businesses dueas we continued to significant revenue growth. However, these declines were substantially offset by the expansion ofexpand our small business marketing programs to support the Right for My Business strategy announced in September 2001,2001. Marketing expenses for our new QuickBooks products with advanced functionality increased approximately $8 million or 5% of total selling and marketing expenses in the first six months of fiscal 2003 compared to the same period of fiscal 2002. Marketing expenses also increased as wellwe expanded marketing programs to support our Consumer Tax Right for Me strategy introduced this tax season. Finally, we added selling and marketing expenses for our newly acquired vertical business management operations in the first half of fiscal 2003. These increases were partially offset by a decrease in selling and marketing expenses as the other factors noted above.a percentage of total net revenue for our payroll business due to significant revenue growth in that segment. We expect selling and marketing expenses to increase as a percentage of total net revenue in the remainder of fiscal 2003 as we market continue to expand marketing programs for
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our new QuickBooks products as well as for the other Right for My Business products and services we recently introduced and those we expect to introduce duringin the remainder of fiscal 2002. We also expect selling and marketing expenses for our Quicken Loans business to increase in order to maintain demand as mortgage interest rates increase.2003.
Research and Development
Research and development expenses were 10%12% and 12%17% of total net revenue forin the thirdsecond quarter and the first ninesix months of fiscal 2002,2003, compared to 12%11% and 15% of total net revenue for16% in the same periods of fiscal 2002. Research and development expenses in absolute dollars increased 29% and 32% in the prior year. During the thirdsecond quarter and first half of fiscal 2002, we increased research and development spending in our highest-growth businesses — small business, consumer tax and professional tax — by approximately 10%2003 compared to the thirdsecond quarter and first half of fiscal 2001. In particular,2002. Research and development expenses did not include labor costs capitalized in connection with internal use software projects of $10.5 million for the first six months of fiscal 2003 and $4.6 million for the first six months of fiscal 2002. During fiscal 2003, we continued to invest in new products, particularly those that support our small business Right for My Business strategy, including new QuickBooks Premier products launched in the second quarter of fiscal 2002, the Intuit Developer Network, and other new products that we expect to introduce later in the fiscal year. At the same time, we significantly decreased or stopped spending in less strategic areas and discontinued businesses.Consumer Tax Right for Me strategies. We also benefited from improvements in our development process that resulted in higher quality and shorter development times for our new QuickBooks products. The net result was thatadded research and development expenses in the third quarter and first nine months of fiscal 2002 were flat in absolute dollars and declined as a percentage of total net revenue compared to the same periods of the prior fiscal year.for our newly acquired vertical business management solutions. During the remainder of fiscal 2002,2003, we expect to continue to make significant investments in research and development, particularly in thefor new small business area.and vertical business management solutions products and services.
General and Administrative
General and administrative expenses were 5%7% and 7%10% of total net revenue forin the thirdsecond quarter and the first ninesix months of fiscal 2002,2003, compared to 6% and 7%9% in the same periods of fiscal 2002. General and administrative expenses increased in absolute dollars and as a percentage of total net revenue in the second quarter and first half of fiscal 2003 primarily due to acquisition integration costs, the addition of general and administrative expenses for the same periodscompanies we acquired in the fourth quarter of the prior year. We experienced decreases in bad debt charges for both fiscal 2002 comparison periods comparedand higher insurance costs. We expect general and administrative expenses as a percentage of total net revenue to the same periods a year ago, as we had greater accounts receivable write offs incontinue to exceed fiscal 2001 due to the deteriorating financial condition2002 levels because of many Internet companies with whom we did business. These decreases were offset by increased insurance costs and costs associated with our acquisitions of OMware, Inc. in November 2001 and EmployeeMatters, Inc. in December 2000.
Charge for Vacant Facilities
During the quarter ended April 30, 2002, we concluded that we would not occupy two vacant leased buildings in Mountain View, California and that we would be unable to recover a substantial portion of our lease obligations from sublessors. As a result, we recorded a charge of $13.2 million. See Note 10 of the financial statements.these factors.
Acquisition-Related Charges
Acquisition-relatedIn the second quarter and first half of fiscal 2003, acquisition-related charges includewere $9.2 million and $18.6 million, compared to $62.0 million and $103.0 million in the same periods of fiscal 2002. For the second quarter and first six months of fiscal 2002, acquisition-related charges included the amortization of goodwill, purchased intangible assets and deferred compensation expenses arising from acquisitions, and impairment charges relating to certain acquired assets. These costs decreased to $37.6 million and $140.7 million for the third quarter and the first nine months of fiscal 2002, compared to $122.6 and $205.3 million for the same periods of the prior year. Acquisition-related charges for the first nine months of fiscal 2002acquisitions. They also included impairment charges related to our Internet-based advertising business and our Site Solutions business that were recorded inof $22.0 million. Beginning with the secondfirst quarter of fiscal 2002.2003, acquisition-related charges no longer included amortization of goodwill due to our adoption of SFAS 142. See NotesNote 1,“Recent Pronouncements,”and 4Note 3 of the financial statements. Acquisition-related charges in the first nine months of fiscal 2002 also reflected amortization of intangibles associated with the acquisitions of EmployeeMatters, Inc. in December 2000, TAASC in April 2001 and OMware, Inc. in November 2001. Acquisition-related charges for the third quarter and first nine months of fiscal 2001 included impairment charges related to the disposition of our Quicken Bill Manager Business that totaled $77 million.
Amortization expense related to completed acquisitions will continue to have a negative impact on our operating results in future periods. If we complete additional acquisitions or if we are required to accelerate amortization or take impairment charges in the future, there would be an incremental negative impact on operating results. See Note 1 of the financial statements, “Recent Pronouncements,” and “Risks That Could Affect Future Results” in this Item 2.
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Loss on Impairment of Long-lived Asset
The fiscal 2002 loss on impairment of long-lived asset in the first nine months of fiscal 2002 related to the impairment of assetsthe asset we received in connection withfrom the salepurchaser of our Quicken Bill Manager business in May 2001. See Note 9 of the financial statements. We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. During the first quarter of fiscal 2002, events and circumstances indicated impairment of this asset. Based on our resulting analysis of the asset’s fair value, we recorded a charge of $27$27.0 million in the first quarter of fiscal 2002 to reduce the carrying value of this asset to zero.its estimated fair value of zero, reflecting the deteriorating financial condition of the purchasing company.
Non-Operating Income and Expenses
Interest and Other Income and Expense, Net
ForIn the thirdsecond quarter and the first ninesix months of fiscal 2002,2003, interest and other income and expense, net, decreased to $8.3was $7.8 million and $28.6$16.6 million, compared to $15.1$7.6 million and $47.7$17.5 million forin the same periods a year ago. These decreases were due to a sharp decline inof fiscal 2002. In general, the interest income that we earnedearn on our cash and short-term investment balances reflecting significant decreaseshas been decreasing due in part to a continuing decline in market interest rates compared to the same periods of the prior year. Our interest income has also been decreasing as a result of lower average cash and short-term investment balances during those periods.fiscal 2003 due to our use of cash to fund our acquisitions and our stock repurchase program. Partially offsetting decreases due to these factors was interest income of $1.6 million and $3.8 million we recorded in the second quarter and first six months of fiscal 2003 in connection with the line of credit we extended to the company that purchased our Quicken Loans mortgage business on July 31, 2002. The line of credit was repaid in full in January 2003. See Note 5, Note 6 and Note 11 of
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the financial statements. Interest earned on customer payroll deposits is reported as revenue for our payroll business, and is not included in interest and other income.
Gains (Losses) on Marketable Securities and Other Investments, Net of Taxes
For the third quarter of fiscal 2002, weWe recorded a gain frompre-tax net gains relating to marketable securities and other investments net of taxes, of $1.4$2.8 million compared to a loss of $11.5and $3.1 million in the same periodsecond quarter and first half of fiscal 2003. We recorded a pre-tax net gain of $1.6 million in the prior year. Insecond quarter of fiscal 2002 and a pre-tax net loss of $10.6 million in the first ninesix months of fiscal 2002, we recorded a loss of $9.3 million, compared to a loss of $87.3 million for the same period a year ago. See Note 3 of the financial statements.2002. The $9.3 millionnet loss in the first ninesix months of fiscal 2002 included among other things, acharges of $7.2 million loss attributable tofor declines during the period in the market prices of Excite@Home, 724 Solutionsour trading securities and our S1S-1 options and a loss of $3.3 million for other-than-temporary declines in value relating to write down certain long-term investments recorded at cost.for which the decline in fair value below carrying value was other-than-temporary. We considered our shares of Excite@Home and 724 Solutions common stock as trading securities. As a result, market fluctuations were reflected in our consolidated statement of operations for the period. However, we sold all of our remaining shares of thesetrading securities as well as our S1 options, duringin the first quarter of fiscal 2002. As of April 30, 2002, we continued to hold marketable securities and long-term investments in privately held companies carried at approximately $62 million on our balance sheet, down from approximately $109 million as of July 31, 2001 due to sales and write-downs. We review the values of our investments each quarter and make adjustments as appropriate. If the value of these remaining securities continues to decline significantly in the future, it would have a negative impact on our financial results.
Gain on Divestiture
In March 2002, we paid $12.0 million to terminate a $20.3 million obligation for an interactive services agreement related to our Quicken Bill Manager business, which we sold in May 2001. We wrote off the $27 million asset acquired in connection with that sale in the first quarter of fiscal 2002 (see Note 9 of the financial statements). In connection with the termination of the interactive services agreement, we recorded a pre-tax gain of $8.3 million. See Note 11 of the financial statements. In the second quarter of fiscal 2001, we recorded a pre-tax gain on divestiture of $1.6 million that related to the sale of our Quicken Insurance business.
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Income Taxes
ForIn the thirdsecond quarter and the first ninesix months of fiscal 2002,2003, we recorded income tax provisions of $67.9$55.9 million and $50.9$29.9 million on pretaxpre-tax income from continuing operations of $212.4$181.3 million and $222.8$94.9 million, resulting in effective tax rates of 32%approximately 31% and 23%32%. This compares to income tax provisions of $55.3 million and $38.6 million on pretax income of $41.4 million and $3.3 million for the same periods of the prior year. Our effective tax rate for the first nine months of fiscal 2002 differs from the federal statutory rate primarily due to the tax benefit related to a divestiture that became available duringIn the second quarter of fiscal 2002. Our2002, we recorded an income tax provision of $4.7 million on pre-tax income from continuing operations of $104.6 million, resulting in an effective tax rate of approximately 4%. In the first six months of fiscal 2002, we recorded an income tax benefit of $31.5 million on a pre-tax loss of $34.9 million, resulting in an effective tax rate of 90%. The fiscal 2002 effective tax rates reflected a one-time benefit in the second quarter of $34.4 million related to the our sale of Venture Finance Software Corporation and costs from impairment charges in the first and second quarters of $9.0 million and $5.4 million, respectively. Excluding these benefits and charges, the effective tax rates for the thirdsecond quarter and first ninesix months of fiscal 2001 differ from the federal statutory rate primarily due to impairment losses2002 would have been approximately 32% and 33%.
As of January 31, 2003, we had net deferred tax assets of $234.1 million, which did not create a tax benefit. At April 30, 2002 and July 31, 2001, we hadincluded a valuation allowance of $11.4$6.8 million for tax assets ofnet operating loss carryforwards relating to our globalinternational subsidiaries based onand certain state capital loss carryforwards. The allowance reflects management’s assessment that we may not receive the benefit of certain loss carryforwards.carryforwards of our international subsidiaries and capital loss carryforwards in certain state jurisdictions. While we believe our current valuation allowance is sufficient, it may be necessary to increase this amount if it becomes more likely that we will not realize a greater portion of the net deferred tax assets. We assess the need for an adjustment to the valuation allowance on a quarterly basis.
Cumulative Effect of Change in Accounting For Derivatives, NetDiscontinued Operations
ForOn July 31, 2002, we sold our Quicken Loans mortgage business segment and accounted for the quarter endedsale as discontinued operations. In accordance with APB Opinion No. 30, the operating results of Quicken Loans have been segregated from continuing operations in our statement of operations for all periods prior to the sale. In October 31, 2000,2002, we recordedsold our residual equity interest in the purchasing company and recognized a cumulative gain of $14.3$5.6 million, net of income taxes, as a result of a change in accounting principles that recognizedon the cumulative effect of the fair value of our S1 options as of August 1, 2000.transaction. See Note 36 of the financial statements. Subsequent fluctuations
On December 23, 2002, we signed a definitive agreement to sell our wholly-owned Japanese subsidiary, Intuit KK, for 9.5 billion yen or approximately $79 million as of February 7, 2003, the date the transaction was completed. We will record a gain on disposal of discontinued operations in the fair valuethird quarter of these options were includedfiscal 2003. In accordance with SFAS No. 144, the operating results of Intuit KK have been segregated from continuing operations in our net income or net loss.statement of operations for all periods presented. See Note 6 and Note 14 of the financial statements.
Liquidity and Capital Resources
At April 30, 2002,January 31, 2003, our cash and cash equivalents and short-term investments totaled $1,751.9$1.1 billion, a $131.7 million a $182.5 million increasedecrease from July 31, 2001.2002. The decrease was primarily due to our use of cash for our stock repurchase program, for an increase in accounts receivable reflecting the strong seasonality of our business and for an acquisition.
We generated $336.8$166.6 million in cash from our operations during the ninesix months ended April 30, 2002. The primaryJanuary 31, 2003. One of the principal components of cash provided by operations was an increase of $93.6 million in other current liabilities due mainly to higher reserves for returns and rebates that reflect the seasonality of our business. Other significant components of cash provided by operations were net income from continuing operations of $171.9$64.9 million and
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adjustments made for non-cash expenses, including acquisition-related charges and deferred compensation of $153.3 million, depreciation charges of $50.6$36.1 million and an impairment loss on a long-lived assetacquisition-related charges, charges for purchased research and development and amortization of $27.0purchased software totaling $34.0 million. Other accrued liabilities also increased $83.2 million due to the seasonality of our business. These wereCash generated by these and other operating activities was partially offset by an increase of $156.3$188.0 million in mortgage loans as a result of increased loan volumes for the Quicken Loans division and an increase of $94.3 million in customer deposits and accounts receivable, also due toreflecting the seasonality of our business.
Investing activitiesWe used $228.5$130.7 million in cash for investing activities during the nine months ended April 30, 2002.first half of fiscal 2003. Our primary use of cash for investing activities was for the acquisition of Blue Ocean Software, Inc., which totaled $171.7 million net of cash we acquired. We receivedgenerated cash from short-term investments of $95.4 million during the period, with proceeds of $1,905.8$748.7 million from the sale upon maturity and sale of certain short-term investments which were more thanpartially offset by purchasesreinvestments of short-term investments of $2,085.1$653.3 million. As a result of our continued investment in information systems and infrastructure, we also purchased $55.0 million in property and equipment of $48.2 million during the period.equipment.
We used $104.2$334.0 million in cash for our financing activities forin the ninefirst six months ended April 30, 2002.of fiscal 2003. The primary component of cash used in financing activities was $149.3$423.2 million for the repurchase of treasury stock through our stock repurchase program. See Note 1711 of the financial statements. This was partially offset by proceeds of $72.6$90.6 million we received from the issuance of common stock under employee stock plans.
In May 2001, Intuit’s Board of Directors authorized the company to repurchase up to $500.0 million of common stock over a three-year period. In July 2002, our Board of Directors increased the authorized purchase amount by $250.0 million to a total of $750.0 million. From inception of the program through December 4, 2002, we repurchased a total of 16.6 million shares of our common stock for $750.0 million. The stock repurchase program was concluded in December 2002 when the authorized purchase amount under the program was reached.
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. We may decide to use cash and cash equivalents to fund such activities in the future.
In May 2001,connection with the sale of our BoardQuicken Loans mortgage business in July 2002, we agreed to continue providing to the purchasing company an interest-bearing line of Directors authorized a stock repurchase program coveringcredit of up to $500$375.0 million to fund mortgage loans for a transition period of common stock over a three-year period. Asup to six months. The line was secured by the related mortgage loans and had an outstanding balance of April$245.6 million at July 31, 2002 and $180.1 million at October 31, 2002. The line was repaid in full in January 2003. See Note 6 of the financial statements.
Outstanding loans to executive officers and other employees totaled $21.3 million at July 31, 2002 and $20.0 million at January 31, 2003. Loans to executive officers are primarily relocation loans. Loans are generally interest-bearing, secured by real property and have maturity dates of up to 10 years. All interest payments are current in accordance with the terms of the loan agreements. Consistent with the requirements of the Sarbanes-Oxley legislation enacted on July 30, 2002, none of these loans were made or modified since July 30, 2002 and we had repurchased a total of $157.6 million of common stock sincedo not intend to make or modify executive loans in the inceptionfuture. See Note 13 of the program.financial statements.
We believe that our cash, and 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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The following table summarizes our contractual obligations to make future payments at April 30, 2002:January 31, 2003:
Payments Due by Period | ||||||||||||||||||||||||||||||||||||||||||
Less than 1 | 1-3 | 4-5 | After 5 | Payments Due by Period | ||||||||||||||||||||||||||||||||||||||
year | years | years | years | Total | ||||||||||||||||||||||||||||||||||||||
(In millions) | (In millions) | (In millions) | Less than 1 | 1-3 | 3-5 | More than 5 | ||||||||||||||||||||||||||||||||||||
Contractual Obligations | Contractual Obligations | Contractual Obligations | year | years | years | years | Total | |||||||||||||||||||||||||||||||||||
Restricted cash | Restricted cash | $ | 10.8 | $ | — | $ | — | $ | — | $ | 10.8 | |||||||||||||||||||||||||||||||
Short-term notes payable | Short-term notes payable | $ | 17.5 | $ | — | $ | — | $ | — | $ | 17.5 | Short-term notes payable | 2.7 | — | — | — | 2.7 | |||||||||||||||||||||||||
Long-term debt | Long-term debt | — | 4.3 | 2.8 | 4.1 | 11.2 | Long-term debt | — | 7.4 | 2.3 | 3.1 | 12.8 | ||||||||||||||||||||||||||||||
Operating leases | Operating leases | 30.5 | 52.7 | 45.0 | 40.7 | 168.9 | Operating leases | 30.2 | 43.6 | 29.6 | 19.8 | 123.2 | ||||||||||||||||||||||||||||||
Other obligations | Other obligations | 25.2 | — | — | — | 25.2 | Other obligations | 24.4 | — | — | — | 24.4 | ||||||||||||||||||||||||||||||
Total contractual cash obligations | $ | 73.2 | $ | 57.0 | $ | 47.8 | $ | 44.8 | $ | 222.8 | Total contractual cash obligations | $ | 68.1 | $ | 51.0 | $ | 31.9 | $ | 22.9 | $ | 173.9 | |||||||||||||||||||||
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Restricted cash at January 31, 2003 included $5.8 million that we held in escrow in connection with our fiscal 2002 acquisition of CBS Employer Services, Inc. The following table summarizesescrow period expires in June 2003. Restricted cash at January 31, 2003 also included $5.0 million for product rebates due our commercial commitmentscustomers.
Other obligations at April 30, 2002:
Amount of Commitment Expiration Per Period | |||||||||||||||||||||
Less than 1 | 1-3 | 4-5 | After 5 | ||||||||||||||||||
year | years | years | years | Total | |||||||||||||||||
(In millions) | |||||||||||||||||||||
Other Commercial Commitments | |||||||||||||||||||||
Line of credit | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Loan commitments | 624.1 | — | — | — | 624.1 | ||||||||||||||||
Future sale commitments | 200.9 | — | — | — | 200.9 | ||||||||||||||||
Total commercial commitments | $ | 825.0 | $ | — | $ | — | $ | — | $ | 825.0 | |||||||||||
Reserves for Returns and Rebates
Activity in our reserves for product returns and exchanges and for rebates during the ninefirst six months ended April 30, 2002of fiscal 2003 and comparative balances at April 30, 2001January 31, 2002 were as follows:
Balance | Additions | Balance | Balance | |||||||||||||||||
July 31, | Charged to | Returns/ | April 30, | April 30, | ||||||||||||||||
2001 | Expense | Redemptions | 2002 | 2001 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Reserve for returns and exchanges | $ | 31,510 | $ | 88,451 | $ | (63,888 | ) | $ | 56,073 | $ | 68,654 | |||||||||
Rebates | 10,130 | 92,155 | (72,256 | ) | 30,029 | 30,340 |
Balance | Additions | Balance | Balance | |||||||||||||||||
July 31, | Charged to | Returns/ | January 31, | January 31, | ||||||||||||||||
(In thousands) | 2002 | Expense | Redemptions | 2003 | 2002 | |||||||||||||||
Reserve for product returns | $ | 32,095 | $ | 93,854 | $ | (56,025 | ) | $ | 69,924 | $ | 68,722 | |||||||||
Reserve for rebates | 8,169 | 89,091 | (41,797 | ) | 55,463 | 34,908 |
Reserves for product returns and exchanges were lower as of April 30, 2002slightly higher at January 31, 2003 compared to April 30, 2001 despite fiscalJanuary 31, 2002 because of revenue growth dueand the increased complexity of new QuickBooks products such as QuickBooks Enterprise Solutions, which we reserve at a higher rate than our QuickBooks Basic and Pro products. Reserves for rebates are higher at January 31, 2003 compared to improved distributor and retail channel inventory management and to channel mix shiftsJanuary 31, 2002 because of an increase in QuickBooks sales from retail to direct. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cost of Revenue.”end-user rebates in fiscal 2003.
Recent Pronouncements
On June 29, 2001, the FASB issued SFAS 141, “Business Combinations,” and SFAS 142, “Goodwill and Other Intangible Assets.”
SFAS 141 supersedes APB Opinion No. 16, “Business Combinations,” and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring that all business combinations be accounted for using the purchase method. The requirements of SFAS 141 apply to all business combinations initiated after June 30, 2001.
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SFAS 142 supercedes APB Opinion No. 17, “Intangible Assets,” and provides that goodwill and other intangible assets that have an indefinite useful life will no longer be amortized. However, these assets must be reviewed for impairment at least annually or more frequently if an event occurs indicating the potential for impairment. SFAS 142The shift from an amortization approach to an impairment approach applies to all business combinationsacquisitions completed after June 30, 2001. For business combinations completed before July 1, 2001, we will adopt SFAS 142 effective August 1, 2002. We are currently evaluatingadopted the impactremaining elements of SFAS 142 on our financial position and statement of operations. We expect the adoption of SFAS 142 to reduce our ongoing quarterly amortization of goodwill expense significantly, commencing withthis new standard in the first quarter of fiscal 2003.2003 and therefore ceased amortizing goodwill for acquisitions made prior to July 1, 2001. However, it is possible that in the future we wouldmay incur less frequent, but larger, impairment charges related to the goodwill already recorded as well asand to goodwill arising out of future acquisitions asacquisitions. In addition, we will continue to expandamortize our business.purchased intangible assets and to assess those assets for impairment as appropriate.
As of the date of adoption of SFAS 142 on August 1, 2002, we had an unamortized acquired intangible assets balance of $123.6 million and an unamortized goodwill balance of $430.8 million. These balances reflect the transfer of $1.9 million in assembled workforce from intangible assets to goodwill in accordance with SFAS 142. In connection with the transitional goodwill impairment evaluation provisions under SFAS 142, we performed a goodwill impairment review as of August 1, 2002 and found no impairment.
In October 2001,July 2002, the FASB issued SFAS 144,146,“Accounting for Costs Associated with Exit and Disposal Activities.”This statement revises the Impairmentaccounting for activities relating to exiting or Disposaldisposing of Long-Lived Assets,businesses or assets under EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”which appliesA formal commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most exit and disposal costs. Instead, companies will record exit or disposal costs when they are incurred and can be measured at fair value, and will subsequently adjust the recorded liability for changes in estimated cash flows. The provisions of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS 146, and liabilities that were recorded under EITF Issue No. 94-3 are not affected. We will assess the impact of adoption of SFAS 146 based on the nature of any exit or disposal activities that are ongoing at that time.
On December 31, 2002, the FASB issued SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”This statement amends SFAS 123, “Accounting for Stock-Based Compensation,”to provide
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alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, “Interim Financial Reporting,”to require disclosure about those effects in interim financial statements. The amendment of the transition and annual disclosure requirements of SFAS 123 are effective for fiscal years ending after December 15, 2002. The amendment of the disclosure requirements of APB Opinion No. 28 is effective for financial reports containing condensed consolidated financial statements for interim periods beginning after December 15, 2001.2002. Since we have not elected to change to the fair value based method of accounting for stock-based employee compensation, the transition provisions of SFAS 144 supersedes148 had no impact on our financial position, results of operations or cash flows. We adopted the disclosure provisions of this statement in the first quarter of fiscal 2003. See Note 11 of the financial statements.
In November 2002, the FASB Statement 121,issued Financial Interpretation No. (“FIN”) 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,”and portions of APB Opinion 30,“Reporting the Results of Operations.”SFAS 144 provides a single accounting model for long-lived assets we expect to dispose of and significantly changes the criteria for classifying an asset as held-for-sale. This classification is important because held-for-sale assets are not depreciated and are stated at the lower of fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of this interpretation apply on a prospective basis to guarantees issued or carrying amount. SFAS 144 alsomodified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We are currently evaluating the potential impact of FIN 45. If FIN 45 is applicable to us, our prospective revenue, cost of revenue and operating expenses could be negatively affected.
In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.”FIN 46 requires expected future operating lossesus to consolidate a variable interest entity if we are subject to a majority of the risk of loss from discontinued operationsthe variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be displayedessentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the period(s) in whichfirst fiscal year or interim period beginning after June 15, 2003. Some of the losses are actually incurred, rather thandisclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the amount of the loss is estimated, as presently required.variable interest entity was established. We will adopt SFAS 144 effective August 1, 2002do not currently have any variable interest entities and, accordingly, we do not expect theour adoption of SFAS 144FIN 46 to have a material impact on our consolidated financial statements.position, results of operations or cash flows.
In November 2001, the Emerging Issues Task Force (“EITF”) released Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” which applies to annual or interim financial statement periods beginning after December 15, 2001. The release provides that cash consideration (including sales incentives) that we give to our customers or resellers should be accounted for as a reduction of revenue unless we receive a benefit that is identifiable and that can be reasonably estimated. We adopted this new release prospectively to transactions beginning in the third quarter of fiscal 2002. The adoption of EITF Issue No. 01-09 did not have a material impact on our total net revenue.-36-
Risks That Could Affect Future Results
The factors discussed below are cautionary statements that identify important factorsrisks and trends that could impact our future operating results and could cause actual results to differ materially from those anticipated in the forward-looking statements in this Form 10-Q.Report. Our fiscal 20012002 Form 10-K and other SEC filings contain additional details about these risks, as well as other risks that could affect future results.
Company-Wide Risk Factors
Our revenue and earnings are highly seasonal, which causesseasonal. Seasonality and other factors cause significant quarterly and annual fluctuations in our revenue and net income.Several of our businesses are highly seasonal — particularly our tax business,businesses, but also small business and personal finance to a lesser extent. This causes significant quarterly fluctuations in our financial results. Revenue and operating results are usually strongest during the second and third fiscal quarters ending January 31 and April 30. We typically experience lower revenues, and often significant operating losses, in the first and fourth quarters ending October 31 and July 31. Recently we have experienced an increasing concentration of revenue and net income in the third fiscal quarter. Our financial results can also fluctuate from quarter to quarter and year to year due to a variety of factors, including changes in product release dates, and the timing of acquisitions, dispositions, goodwill and intangible assets impairment charges and gains and losses related to marketable securities.
Fluctuations in interest rates can cause significant quarterly and annual fluctuations in our net income and asset values.Declines in interest rates have resulted in a significant decline in the interest income we earned on our investment portfolio during recent reporting periods, which has had a negative impact on our net income (loss) and net income (loss) per share. Declining interest rates can also reduce the value of our interest rate sensitive assets, such as certain assets that relate to our payroll business.
Business integration of acquired companies can present challenges and we may not fully realize the intended benefits of our acquisitions.During the past few years, we have completed numerous acquisitions. These acquisitions have expanded our product and service offerings, personnel and geographic locations. Integrating and organizing acquired businesses creates challenges for our operational, financial and management information systems, as well as for our product development processes. This can put a strain on our resources and be expensive and time consuming. If we do not adequately address issues presented by growth through acquisitions, we may not fully realize the intended benefits (including financial benefits) of these acquisitions.
Our acquisition strategy entails a number of challenges that could limit our successful implementation of the strategy.A key component of our Right for My Business strategy is to continue to expand our product and service offerings, and we expect that a significant portion of this expansion will result from acquisitions. We could face the following risks relating to our strategy and future acquisitions, in addition to the integration challenges noted above:
• | Increased competition for acquisition opportunities could inhibit our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions. | ||
• | If we are unable to complete acquisitions successfully, we may not be able to develop and market products for new industries or applications with which we may not be familiar. | ||
• | Future acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, which would result in dilution to the equity interests of our stockholders. | ||
• | Despite our due diligence reviews, acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unanticipated expenses. | ||
• | If we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition. |
Acquisition-related costs can cause significant fluctuation in our net income.Our recent acquisitions have resulted in significant expenses, including amortization of purchased software (which is reflected in cost of revenue), as well as charges for in-process research and development, and amortization and impairment of goodwill, purchased
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intangibles and deferred compensation (which are reflected in operating expenses). Total acquisition-related costs in the categories identified above were $100.7 million in fiscal 1999, $168.1 million in fiscal 2000, $263.4$263.0 million in fiscal 2001, (including charges of $78.7$196.0 million to write down the long-lived intangible assets related to three acquisitions), $37.6 million in the third quarter of fiscal 2002 and $140.7$34.0 million in the first nine monthshalf of fiscal 2002. Additional acquisitions, and any additional impairment2003. Fiscal 2003 acquisition-related costs have declined primarily because of the value of purchased assets, could have a significant negative impact on future operating results.
Gains and losses related to marketable securities and other investments can cause significant fluctuationschange in our net income.Our investment activities have had a significant impact on our net income. We recorded pre-tax net gains from marketable securities and other investments of $579.2 million in fiscal 1999 and $481.1 million in fiscal 2000 and pre-tax net losses of $98.1 million in fiscal 2001. We recorded a pre-tax gain of $1.4 million in the third quarter of fiscal 2002 and a pre-tax loss of $9.3 million in the first nine months of fiscal 2002. Any additional significant long-term declines in value of these securities could reduce our net income in future periods.
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Recent changes to Financial Accounting Standards Board guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period.The FASB recently adopted a new standard for accounting for goodwill acquired in a business combination. It continues to require recognition of goodwill as an asset but does not permit amortization of goodwill as previously required. Under the new statement, goodwill is separately tested for impairment using a fair-value-based approach at least annually and also when an event occurs indicating the potential for impairment. The shift from an amortization approach to an impairment approach applies to all acquisitions completed after June 30, 2001. Whengoodwill. However, we adopt the new standard, which we expect will be in the first quarter of fiscal 2003, it will also apply to previously recorded goodwill and our goodwill amortization charges will cease as a result. However, it is possible that in the future, we wouldmay incur less frequent, but larger, impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions as we continue to expand our business. We expect total acquisition-related costs for fiscal 2003 to be approximately $66.0 million, assuming no additional acquisitions or impairment charges. As of January 31, 2003, we had an unamortized goodwill balance of approximately $583.9 million, which could be subject to impairment charges in the future. Additional acquisitions, and any additional impairment of the value of purchased assets, could have a significant negative impact on our future operating results.
If we are required to account for options under our employee stock plans as a compensation expense, it would significantly reduce our net income and earnings per share.There has been increasing public debate about the proper accounting treatment for employee stock options. Although we are not currently required to record any compensation expense in connection with option grants that have an exercise price at or above fair market value, it is possible that future laws or regulations will require us to treat all stock options as a compensation expense. Note 11 of the financial statements shows the impact that such a change in accounting treatment would have had on our net income (loss) and net income (loss) per share if it had been in effect during the reporting periods shown and if the compensation expense were calculated as described in Note 11.
Our acquisitions can result in business integration challenges.Our recent acquisitions have expanded our product and service offerings, personnel and geographic locations. A key component of our “Right for My Business” strategy is to continue to expand our product and service offerings in the small business accounting and management segment, and we expect that a significant portion of this expansion will result from acquisitions. Integrating and organizing acquired businesses creates challenges for our operational, financial and management information systems, as well as for our product development processes. If we do not adequately address issues presented by growth through acquisitions, we may not fully realize the intended benefits (including financial benefits) of these acquisitions.
AThe general decline in economic conditions could lead to reduced demand for our products and services.The recentcontinuing downturn in general economic conditions has led to reduced demand for a variety of goods and services, including manysoftware and other technology products, and we believe the economic decline was partially responsible for slower than expected growth in our Small Business Division during fiscal 2001 and the first half of fiscal 2002. Although we experienced solid revenue growth in most of our businesses during the third quarter of fiscal 2002, the future economic environment remains uncertain.products. If conditions decline, or fail to improve, in geographic areas that are significant to us, such as the United States Canada and Japan,Canada, we could see a significant decrease in the overall demand for our products and services that could harm our operating 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.There are formidable current and potential competitors in the private sector. For example, our primary competitor in the consumer tax preparation market offered its products during part of this tax year at a price of $0 after a rebate. 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. If federal and/or state governmental agencies are ultimately successful in their efforts to provide tax preparation and filing services to consumers, it could have a significant negative impact on our financial results in future years. We expect competition to remain intense during the remainder of fiscal 2002 and beyond.
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 experienced relatively brief unscheduled interruptions in our electronic filing/and or tax preparation services during fiscal 2000 and 2001, and we reached maximum capacity for a short period on April 15, 2002. We do not believe any prior service outages had a material financial impact, prevented a significant number of customers from completingcontinue to successfully develop new products and filing their returnsservices 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 is impossible to predict, and we could experience adverseour future financial and public relations consequences if these services are unavailable in the future for an extended period of time, or late in the tax season, due to technical difficulties or other reasons.
It is unlikely that the revenue and profit growth rates experienced by our Quicken Loans Division duringresults will suffer.Over the past two years, will be sustainable long-term, either onwe have introduced a year-over-year basis or on a sequential quarter basis.Mortgage interest rate increases,number of new desktop software products that are specially designed for specific businesses and consumer needs. We believe that it is necessary to continually develop new products and services and to improve existing products and services to remain competitive in the impact of the economic climate on the housing marketmarkets we serve. Failure to do so may give competitors opportunities to improve their competitive position at our expense and other factors could result in significantly lowerdeclines in our revenue and profit growth forearnings. However, developing and improving our mortgage business. Increasesproducts and services becomes more complex as we increase the number of software products that we offer. The development and enhancement processes involve several risks, including challenges in mortgage interest rateshiring and other interest rates adversely affected our mortgage business during fiscal 2000, contributing to a significant revenue decline from fiscal 1999 to fiscal 2000. Conversely, declinesretaining highly qualified employees, the risk of delays in mortgage interest rates during
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fiscal 2001product and service launches and the first nine monthsrisk of fiscal 2002 had a positive impact on revenue. If mortgage rates rise again, this could negatively impact the volumedefects that hinder performance.
The expansion of applicationsour product and closed loans, particularly our most mortgage-rate sensitive products such as conventional refinancing loans. Fluctuations in non-mortgage rates also createservice offerings creates risks with respectdue to the loans onincreasing complexity and decreasing predictability of our balance sheetrevenue streams. Our expanding range of products and impactservices generates more varied revenue streams than our cost of fundstraditional desktop software businesses. The accounting policies that apply 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 customersthese revenue streams are more complex than those that apply to our mortgage service,traditional products and on our abilityservices. We expect this trend to continue increasing thewith future acquisitions. For example, as we begin to offer additional features and options as part of multiple-element sales arrangements, we could be required to defer a higher percentage of our mortgageproduct revenue generated throughat the online channel comparedtime of sale than we do for traditional products, which would decrease revenue at the time products are shipped, but result in more revenue in fiscal periods after shipment. In addition, some of our newer businesses offer higher-priced business management software products and services. Revenue attributable to branch offices. We must also maintain relationships with certain banksthese higher priced products and other third parties who we rely on to provide access to capital, and later, purchase and service the loans. If we are unable to maintain key relationships, or if the terms of key relationships changeservices tends to be less favorablepredictable than revenue from our traditional desktop products, due to Intuit, it could have a negative impact on our mortgage businesslonger sales and on Intuit’s financial results.
It is unlikely that the revenue and profit growth rates experienced by our Payrollimplementation cycles. These businesses during the past two years will be sustainable long-term, eitheralso tend to rely on a year-over-year basis or on a sequential- quarter basis.We had strong revenue and profit growth during fiscal 2001, especially during the second half of the year, due to significant price increases, a shift toward a mix of higher-priced products and a largerelatively small number of new payroll customers aslarge orders for a resultsubstantial portion of tax law changes for 2000. In the firsttheir revenue in a particular quarter, of fiscal 2002, we again increased prices. We do not expect that future price increases will contribute as significantlywhich could cause our quarterly revenue from these businesses to revenue growth as they have in the recent past.fluctuate.
It is too early to provide any assurance that our “Right for My Business” strategy will generate substantial and sustained revenue growth in the small business accounting and business management segments.Sales to both existing customers and new customersThe expansion of our QuickBooksproduct and service offerings creates risks due to the operational infrastructure required to support our expanded portfolio of products and services.Many of our newer businesses depend on a different operational infrastructure than our desktop products during fiscal 2001software businesses, and early in fiscal 2002 were lower than expected. We cannot rely solely on this source of revenuewe must continually develop, expand and modify our internal systems and procedures – including call center, customer management, order management, billing and other systems – to provide sustainable future growth for our Small Business Division. In September 2001, we announced our “Right for My Business” strategy to better address the broader small business management opportunities beyond accounting for companies with fewer than 25 employees. However, it is too early to provide any assurance that this strategy will generate substantial and sustained revenue growth in the small business accounting and management segments. To the extent that growth will result from acquisitions, we will face business integration challenges. See “Risks That Could Affect Future Results — Our acquisitions can result in business integration challenges” above.support these businesses.
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”waiting times for customers when our staffing is inadequate to
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handle a higher than anticipated call volume and a large number of inquiries from customers checking on the status of product orders when the timing of shipments fails to meet customer expectations. Thisrequests. These situations can adversely affect customer relationships and our financial performance. In order to improve our customer service and technical support, we must continue to focus on eliminating underlying causes of service and support callsrequests through product improvements, and better order fulfillment processes and on more robust self-help tools. We must also improve our ability to accurately anticipatinganticipate demand for customer service and technical support.
We face risks relating to customer privacy and security and increasing regulation, which could hinder the growth of our businesses.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. A major breach of customer privacy or security by Intuit, or even by another company, could have serious consequences for our businesses, including reduced customer interest and/or additional regulation by federal or state agencies. In addition, we have incurred significant expenses to comply with mandatory privacy and security standards and protocols. Additional similar federal and state laws, and/or laws that govern telemarketing activity, may be passed in the future, and the cost of complying with additional legislation could have a negative impact on our operating results.
We face several risks relating to our retail distribution channel.We face ongoing challenges in negotiating favorable terms (including financial terms) with retailers, due in part to the recent trend of declining importance of software as a retail category. In addition, any termination or significant disruption of our relationship with any of our major resellers could result in a decline in our net revenue. Also, any financial difficulties of our retailers could have an adverse effect on our operating expenses if uncollectible amounts from them exceed the bad debt reserves we have established.
We rely on two third-party vendors to handle substantially all outsourced aspects of manufacturing and distribution for our primary retail desktop software product launches and to replenish product in the retail channel after the primary launch.products.To manufacture and distribute our primary retail products at the time of product launches and to replenish products in the retail channel after the primary launch, we have an exclusive manufacturing relationshiprelationships with Modus Media and an exclusiveSony, and a distribution arrangement with Ingram Micro Logistics. While we believe that relying on only twothree outsourcers for product launches and replenishment improves the efficiency and reliability of these activities, relying on any vendor for a significant aspect of our business can have severe negative consequences if the vendor fails to perform at acceptable service levels for any reason.
We rely on one third-party vendorreason, including but not limited to handle all outsourced aspectsfinancial difficulties of our financial supplies business.We have an exclusive contract with John H. Harland Company to print and fulfill supplies orders for all of our checks and most other products for our financial supplies business. Harland fulfilled orders for about 75% to 80% of our supplies revenue in fiscal 2000 and 2001, and more than 80% of our supplies revenue for both the third quarter and the first nine months of fiscal 2002. We believe that relying on one supplies vendor improves customer service and maximizes operational efficiencies for our supplies business. However, if there are significant problems with Harland’s performance, it could have a material negative impact on sales of supplies and on Intuit’s business as a whole.vendor.
We face risks relating to customer privacy and security and increasing regulation, which could hinder the growth of our businesses.Despite our efforts to address customer concerns about privacy and security, these issues still pose a
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significant risk, and we have experienced lawsuits and negative publicity relating to privacy issues. For example, during fiscal 2000 and fiscal 2001, there were 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, including reduced customer interest and/or additional regulation by federal or state agencies. In addition, the federal government has developed mandatory privacy and security standards and protocols, and we have incurred significant expenses to comply with these requirements. Additional similar federal and state laws may be passed in the future, and the cost of complying with additional legislation could have a negative impact on our operating results. 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.
Actual product returns may exceed returns reserves, particularly for our consumer tax preparation software.We ship more desktop software 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 consumer 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Net Revenue — Return and Rebate Reserves.” 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 net revenue. See “Critical Accounting Policies — Net Revenue — Return
Legal protection for our intellectual property is not always effective to prevent unauthorized use or copying.Current U.S. laws that prohibit copying give us only limited practical protection from software “pirates,” and Rebate Reserves” at the beginninglaws of this Item 2.many other countries provide very little protection. Policing unauthorized use of our products is difficult, expensive and time-consuming. Although we incorporate product activation technology in some of our tax preparation products in order to reduce unauthorized sharing of the products, we expect that software piracy will continue to be a persistent problem for our desktop software products. In addition, the Internet may tend to increase, and provide new methods for, illegal copying of the technology used in our desktop and Internet-based products and services. We also face risks relating to our licensing of our intellectual property to third parties. In connection with our sale of our Quicken Loans mortgage business, we licensed the use of the Quicken Loans and Quicken Mortgage trademarks to the purchaser. If the purchaser violates the terms of the trademark license, it could result in serious and irreparable harm to Intuit’s reputation and the value of our Quicken-related brands.
Our ability to conduct business could be impacted by a variety of factors, such as electrical power interruptions, earthquakes, fires, terrorist activities and other similar eventsevents.. Our business operations depend on the efficient and uninterrupted operation of a large number of computer and communications hardware and software systems. These systems are vulnerable to damage or interruption from electrical power interruptions, telecommunication failures, earthquakes, fires, floods, terrorist activities and their aftermath, and other similar events. Other unpredictable events could also impact our ability to continue our business operations. For our Internet-based services, system failures of our internal server operations or those of various third-party service providers could result in interruption in our services to our customers. Any significant
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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.
Specific Factors Affecting Our QuickBooks, Small Business Products and Services and Vertical Business Management Solutions Segments
-34-Despite positive early indicators, it is too soon to provide assurance that we will be able to generate substantial and sustained revenue growth from new products and services in the small business accounting and business management segments.To meet our growth goals, we must generate revenue from a wider range of market and customer segments as well as from new products and services. Although we are encouraged by early results, there are still a number of risks associated with our growth strategy, including the following:
• | Our strategy depends on our successfully completing acquisitions and integrating acquired companies, which presents a number of challenges as described above under “Company-Wide Risk Factors.” | ||
• | Our strategy is resulting in a dramatic increase in the number and complexity of the products and services that we offer. This is placing greater demands on our research and development, marketing and sales resources, as we must develop, market and sell both the new products and services as well as periodic enhancements to an expanding portfolio of products and services. This will also require us to continually develop, expand and modify our internal business operations systems and procedures to support new businesses, including our customer service and technical support contact centers, and our customer management, order management, billing and other systems. | ||
• | Many of the new products and services we are and will be offering are much more complex than our traditional core desktop software products and are being priced accordingly. They will therefore require a more consultative sales process, and a higher level of post-sales support. If we are not able to effectively adapt our marketing, sales, distribution and customer support functions to accommodate these changes, we will not succeed in generating significant or sustained revenue from these new businesses. |
We face a wide range of competitive risks that could impact our financial results.In the small business arena, we face current competition from competitors’ desktop software, as well as from other Web-based small business services products. Many competitors and potential competitors have begun providing, or have expressed significant interest in providing, accounting and business management products and services to small businesses. As we implement our Right for My Business strategy we face increased competitive threats from larger companies in bigger markets than we have historically faced.
Revenue growth for our vertical business management solutions may be hindered by a variety of factors, which could have a negative impact on overall company growth.Revenue growth for our vertical business management solutions is subject to numerous risks, including the negative impact of the current economic environment on customer purchases of the relatively high-priced software solutions offered by our vertical businesses, and the potential disruption to the businesses during the acquisition integration process. In addition, revenue growth in any particular period may be difficult to predict because of the complex revenue streams generated by these businesses, and the corresponding complexity in the accounting policies that apply to them.
Our payroll business faces a number of risks that could have a negative impact on revenue and profitability.For our payroll offerings, we must be able to process customer data accurately, reliably and in a timely manner in order to attract and retain customers and avoid the costs associated with errors. Our outsourced payroll businesses include interest on customer deposits as part of their revenue. If interest rates continue to decline, it would result in less interest revenue for those businesses. In order to generate sustained growth for our Intuit Payroll Services Complete Payroll, we will be required to successfully develop and manage a more extensive and proactive direct field sales operation, which is a different distribution method than those we have historically relied on.
Specific Factors Affecting Our Consumer Tax Segment
We face intense competitive pressures from the private sector in our consumer tax preparation software business.There are formidable current and potential competitors in the private sector, and we expect competition to remain
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intense during fiscal 2003 and beyond. These competitive pressures can have a negative impact on our revenue, profitability and market position.
Our consumer tax preparation business also faces competition from publicly funded government entities. We face current and potential competition from a number of publicly-funded state government entities that are offering individual taxpayers electronic tax preparation and/or filing services, at no cost to individual taxpayers. If state governmental agencies are ultimately successful in their efforts to develop consumer tax preparation and filing services and to gain consumer acceptance of those services, it could have a negative impact on our financial results in future years. The federal government announced a proposal in August 2002 that would mitigate the risk of government encroachment in federal tax preparation and filing services. Under an agreement signed in October 2002, for at least the next three years, a number of private sector companies, rather than the federal government, will provide Web-based federal tax preparation and filing services at no cost to lower income taxpayers and other underserved taxpayers through voluntary public service initiatives such as our Intuit Tax Freedom Project. Despite this positive development, future administrative, regulatory or legislative activity in this area could adversely impact Intuit and other companies that provide tax preparation software and services. Intuit is actively working with others in the private sector, as well as with state government policy makers, to help clarify the appropriate roles for government agencies and the private sector in the electronic commerce marketplace.
The product activation technology that we introduced into certain TurboTax desktop products this season has increased the uncertainty relating to the short-term financial results for our Consumer Tax business. Federal tax versions of TurboTax desktop products for Windows now include product activation technology that helps to prevent unlicensed users from using pass-along and/or counterfeit copies of TurboTax to print or electronically file a tax return. The introduction of product activation has generated negative commentary in the media and in online forums, and has also resulted in a modest increase in the volume of customers contacting our customer service and technical support centers. We believe that product activation is an appropriate measure to protect Intuit’s intellectual property by reducing organized piracy and unauthorized sharing of our product. In turn, this should result in more users of the product purchasing licensed copies. However, in the short-term, there is uncertainty about whether the negative publicity will impact Consumer Tax results this season.
If we fail to maintain reliable and responsive service levels for our electronic tax offerings, we could lose revenue and customers. Our Web-based tax preparation and electronic filing services must effectively handle extremely heavy customer demand during the peak tax season. We face significant challenges in maintaining high service levels, particularly during peak volume service times. The exact level of demand for TurboTax for the Web and electronic filing is impossible to predict. If we are unable to meet customer expectations in a cost-effective manner, we could lose customers, receive negative publicity and incur increased operating costs, any of which could have a significant negative impact on the financial and market success of these businesses.
Specific Factors Affecting Our Personal Finance Business
The long-term viability of our personal finance business will depend on our ability to provide new products and services that can generate revenue growth and enable us to compete effectively. The demand for personal finance software such as Quicken and for Internet advertising on Web sites like Quicken.com has weakened significantly over recent years and revenue for our personal finance business has declined. We must identify and capitalize on additional sources of revenue to provide sustainable future growth for our personal finance business. It is too early to tell whether our recently launched Quicken Brokerage powered by Siebert will generate sustainable revenue growth. Furthermore, it is unlikely that the brokerage service, even if successful, will by itself be sufficient to sustain our personal finance business, so we must identify additional sources for growth. In addition, our personal finance products face aggressive competition that could have a negative impact on revenue, profitability and market position. Our Quicken products compete directly with Microsoft Money and with Web-based personal finance tracking and management tools that are often available at no cost to consumers. Competitive pressures could result in reduced revenue and lower profitability for our Quicken product line.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-Term Investment Portfolio
We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments that meet quality standards consistent with our investment policy. This policy dictates that, for short-term investments, we diversify our holdings and limit our short-term investments with any individual issuer in a managed portfolio to a maximum of $5 million.
Marketable SecuritiesInterest Rate Risk
We carried balances in marketable equity securities as of April 30, 2002 thatOur cash equivalents and short-term investment portfolio are subject to considerable market risk due to their volatility. If our available-for-sale securities experience further declines in fair value that are considered other-than-temporary, we will reflect the additional loss in our net income in the period when the subsequent impairment becomes apparent. See Note 3 of the financial statements for more information regarding risks related to our investments in marketable securities.
Interest Rate Risk
Interest rate risk represents a component of market risk to us and represents the possibility that changes in interest rates will cause unfavorable changes in our net income and in the value of our interest rate sensitive assets, liabilities and commitments, particularly those that relate to our mortgage and payroll businesses. In a higher interest rate environment, borrower demand for mortgage loans generally declines, adversely affecting our mortgage loan business.rates. 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 we earn on payroll customer funds we holdcash equivalents and short-term investments we hold in our short-term investment portfolio, as well asand the value of our short-termthose investments.
As part ofOver the past few years, we have experienced significant reductions in our risk management programs, we enter into financial agreements and purchase financial instruments in the normal course of businessinterest income due to manage our exposure to interest rate risk with respect to our conventional mortgage 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 portfolio of prime loans, including those in the pipeline, and the related forward commitments are valued on a daily basis. We refer to the loans, pipeline, and forward commitments 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 changesdeclines in interest rates. Based on our analysis of our hedge position at April 30, 2002,These declines have led to interest rates that are low by historical standards and we do not believe that short-term changesfurther decreases in interest rates will have a material effect on the interest income we earn on loans held for sale in the secondary market or the value of mortgage loans. See Notes 1, 5 and 12 of the financial statements for more information regarding risks related to our mortgage loans and lines of credit.
A change in interest rates may also potentially have a material impact on the interest income earned on our cash equivalents and short-term investments held at April 30, 2002.
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January 31, 2003.
Impact of Foreign Currency Rate Changes
We translate foreign currencies (primarily Canadian dollars and British pounds) into U.S dollars for financial reporting purposes;purposes. Accordingly, currency fluctuations can have an impact though generally immaterial, on our results.financial results, though the historical impact has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is insignificant primarily because our global subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. For each of the three quarters presentedfiscal years ended July 31, 2000, 2001 and 2002 and for the first six months of fiscal 2003, there was an immaterial currency exchange impact from our intercompany transactions. Currency exchange risk is also minimized since foreign debt is due exclusivelyAlthough the impact of currency fluctuations on our financial results has generally been immaterial in local foreign currencies.the past and we believe that for the reasons cited above currency fluctuations will not be significant in the future, there can be no guarantee that the impact of currency fluctuations will not be material in the future. As of April 30, 2002,January 31, 2003, we did not engage inhad one foreign currency hedging activities.hedge contract that related to the sale of our Japanese subsidiary. See Note 6 to the financial statements.
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ITEM 4
CONTROLS AND PROCEDURES
(a) | Disclosure Controls and Procedures | |
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report (the “Evaluation Date”), concluded that our disclosure controls and procedures were effective for this purpose. | ||
(b) | Changes in Internal Controls | |
There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the Evaluation Date. |
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PART II
ITEM 1
LEGAL PROCEEDINGS
On March 3, 2000, a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was filed on March 8, 2000 in the United States District Court, Southern District of New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United States District Court, Central District of California, Eastern Division. The Rubin case was dismissed on November 19, 2001. 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, Central District of California, Eastern Division. Following Intuit’s successful motion to dismiss several of the claims, an amended complaint was filed on May 2, 2001. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior Court of the State of California, San Bernardino County, Rancho Cucamonga Division. An amended complaint in the Almanza suit was filed on October 26, 2000. These purported class actions alleged 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 Web site. The complaints sought injunctive relief, orders to disgorge profits related to the alleged acts, and statutory and other damages. In August 2001,On January 6, 2003, a settlement between Intuit and the plaintiffs’ counsel in all of the remaining cases except Rubin reached an agreement in principle to resolvewas preliminarily approved by the cases, subject tofederal court with a final approval based onhearing scheduled for June 2003. The proposed settlement terms that are not material to Intuit. The Rubin case was dismissed on November 19, 2001.
Intuit is subject to othercertain routine 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
CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 29, 1998, the Board of Directors adopted a stockholder rights plan designed to protect the long-term value of Intuit for its stockholders during any future unsolicited acquisition attempt, as described in Intuit’s fiscal 2002 Form 10-K. Under the terms of the rights plan, a dividend was paid of one right for each share of Common Stock outstanding as of May 11, 1998, and thereafter, one right is issued with each share of Common Stock that becomes outstanding, until the occurrence of certain defined events under the rights plan. Each right established under the rights plan, upon the occurrence of certain defined events under the rights plan, may be exercised to purchase 1/3000th of a share of Series B Junior Participating Preferred Stock. On January 30, 2003, the Board of Directors amended the rights plan to change the exercise price for the rights from $83.33 per 1/3000th share to $300 per 1/3000th share.
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ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Intuit’s Annual Meeting of Stockholders held on December 12, 2002, our stockholders voted on the following proposals:
1. | Proposal to elect directors: |
For | Withheld | |||||||
Stephen M. Bennett | 182,356,588 | 3,608,573 | ||||||
Christopher W. Brody | 176,722,167 | 9,242,994 | ||||||
William V. Campbell | 179,495,419 | 6,469,742 | ||||||
Scott D. Cook | 184,289,531 | 1,675,630 | ||||||
L. John Doerr | 184,177,405 | 1,787,756 | ||||||
Donna L. Dubinsky | 181,293,841 | 4,671,320 | ||||||
Michael R. Hallman | 176,640,231 | 9,324,930 | ||||||
Stratton D. Sclavos | 183,962,024 | 2,003,137 |
2. | Proposal to amend the Intuit Inc. 2002 Equity Incentive Plan to increase the number of shares of common stock available for issuance under that plan by 4,850,000 shares: |
For Against Abstain Broker Non-Votes | 94,112,418 90,846,567 1,006,176 0 |
3. | Proposal to amend Intuit’s 1996 Employee Stock Purchase Plan to increase the number of shares of common stock available for issuance under that plan by 1,100,000 shares and increase the frequency of offering periods: |
For Against Abstain Broker Non-Votes | 181,154,463 3,800,308 1,010,391 0 |
4. | Proposal to amend Intuit’s 1996 Directors Stock Option Plan to increase the number of shares of common stock available for issuance under that plan by 150,000 shares and to add 5,000-share annual option grants for members of the Nominating Committee of our Board of Directors and reduce the annual option grants to eligible Board members to 15,000 shares: |
For Against Abstain Broker Non-Votes | 155,170,686 29,706,285 1,088,190 0 |
5. | Proposal to adopt the Intuit Inc. Senior Executive Incentive Plan: |
For Against Abstain Broker Non-Votes | 174,303,097 10,572,826 1,089,238 0 |
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6. | Proposal to ratify the appointment of Ernst & Young LLP as Intuit’s independent auditors for fiscal 2003: |
For Against Abstain Broker Non-Votes | 167,280,448 17,706,630 978,083 0 |
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ITEM 5
OTHER MATTERS
CHANGES IN EXECUTIVE OFFICERS
On April 17,In August 2002, we promoted Daniel L. Manack to the position ofGreg J. Santora, Intuit’s then-current Senior Vice President Accountant Business.and Chief Financial Officer, announced his plans to retire from Intuit at the end of calendar 2002. Mr. Manack joinedSantora resigned as an officer of Intuit as Vice President, Professional Products Group inon January 2002. Prior to joining Intuit, he5, 2003.
Robert B. (“Brad”) Henske was appointed as Senior Vice President and Chief Financial Officer of E-Markets Group Operations at Peregrine Systems, Inc. from May 2001 toIntuit on January 2002 and6, 2003. He served as Senior Vice President at Peregrine Solutionsand Chief Financial Officer of Synopsys, Inc., a supplier of electronic design automation software, from JuneMay 2000 to May 2001. Prior to the acquisition of Harbinger Corporation by Peregine Systems, Inc. in June 2000, Mr. Manack was Executive Vice President of Operations at Harbinger Corporation fromuntil January 2000 to June 2000, Senior Vice President — Market Executive of New Clients from February 1999 to January 2000, Senior Vice President of World Professional Services from February 1998 to February 1999 and Vice President & General Manager of Professional Services and Outsourcing Practice from2003. From January 1997 to February 1998.December 1999, Mr. ManackHenske was a partner at Oak Hill Capital Management, a Robert M. Bass Group private equity investment firm. Mr. Henske holds a Bachelor of Science degree in IndustrialChemical Engineering degree from West VirginiaRice University and a Masters Business Administration degreean MBA in finance and strategic management from theThe Wharton School, University of Dallas.Pennsylvania.
Effective May 31, 2002, Catherine L. Valentine resigned as Vice President, General Counsel and Corporate Secretary of Intuit.
ANNUAL MEETING DATE
The date for Intuit’s next Annual Meeting of Stockholders is currently scheduled for December 12, 2002.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
We have filed the following exhibits as part of this report:
Incorporated By Reference | ||||||||||
Filed with | ||||||||||
Exhibit | this | |||||||||
No. | Exhibit Description | Form 10-Q | Form | File No. | Date Filed | |||||
4.01 | Third Amended and Restated Rights Agreement dated as of January 30, 2003 between Intuit Inc. and American Stock Transfer and Trust Company, as Rights Agent | |||||||||
4.02 | Form | |||||||||
000-21180 | 2/18/03 | |||||||||
10.01+ | Separation Agreement dated December 30, 2002 between Intuit | X | ||||||||
10.02+ | Employment Agreement dated December 30, 2002 between Intuit Inc. and Robert “Brad” Henske | X | ||||||||
Intuit Inc. Senior Executive | ||||||||||
000-21180 | 10/23/02 | |||||||||
10.04+ | 1996 Directors Stock Option Plan and forms of Agreement, as amended by the | X | ||||||||
10.05+ | 1998 Option Plan for Mergers and | X | ||||||||
10.06+ | 2002 Equity Incentive Plan, as amended by the Board on January 29, 2003 | X | ||||||||
10.07+ | 1996 Employee Stock Purchase Plan, as approved by the stockholders on December 12, 2002 | S-8 | 333-102213 | 12/26/02 | ||||||
+ Management compensatory plan or arrangement. |
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Reports on Form 8-K filed during the thirdsecond quarter of fiscal 2002 and through the filing date of this Form 10-Q:2003:
1. | On | ||
2. | On | ||
3. | On January 7, 2003, Intuit filed a report on Form 8-K to report under Item 5 that | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTUIT INC. (Registrant) | ||||
Date: | By: | /s/ | ||
Robert B. Henske Senior Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer) |
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CERTIFICATION
I, Stephen M. Bennett, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Intuit Inc.; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 28, 2003 | |
By: /s/ Stephen M. Bennett | |
Stephen M. Bennett President and Chief Executive Officer |
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CERTIFICATION
I, Robert B. Henske, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Intuit Inc.; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 28, 2003 By: /s/ Robert B. Henske Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit Number | Exhibit Description | |||
10.01+ | Separation Agreement dated December 30, 2002 between Intuit Inc. and Greg J. Santora | |||
10.02+ | Employment Agreement dated December 30, 2002 between Intuit Inc. and Robert “Brad” Henske | |||
10.04+ | 1996 Directors Stock Option Plan and forms of Agreement, as amended by the Board on January 30, 2003 | |||
10.05+ | 1998 Option Plan for Mergers and Acquisitions, as amended by the Board on January 29, 2003 | |||
10.06+ | 2002 Equity Incentive Plan, as amended by the Board on January 29, 2003 | |||
+ Management compensatory plan or arrangement. |
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